A bunch of readers have asked me about the latest Marin Katusa pitch about decarbonization and a new carbon-credit economy, so we’ll dig into that a little bit today.
Marin Katusa has talked up carbon credits and taxes before, I recall… back when he was still Doug Casey’s mining newsletter guy, a decade ago, he was certain that President Obama would be implementing a carbon tax. And I guess that was the last heyday for carbon credit investing ideas, before the current surge in interest.
This new “presentation” is quite different, though, cheerleading the profit potential for investors who can benefit from this move to cut carbon emissions and “green” the planet. The ad I saw appears to be built mostly on top of an interview that Katusa did with his old Casey colleague Olivier Garret at Mauldin’s Strategic Investment Conference a couple weeks ago (there are notes here from one of the conference attendees, if you’re curious, I didn’t go to this confab).
He makes some good arguments for the future value of carbon credits in the pitch, essentially arguing that we’re finally reaching the tipping point where companies are beginning to invest heavily and make real climate plans, and where consumers and governments are pushing for faster movement to meet the Paris Climate Accord limits on emissions and whatever other “ratcheting up” of emission limits we agree to next.
I’d generally agree, though I don’t know specifically what the best plan or technique for helping us reduce emissions is. My general thinking is that the clearest path to getting to lower emissions is to engage global capitalism by putting a much higher price on emissions… and therefore heavily incentivizing the next generation of businesses, inventors and entrepreneurs to develop new ways to reduce atmospheric carbon or otherwise clean up the planet. Self interest and profit tend to drive change a lot faster than big-picture thinking and the impulse to “do good.”
But I digress… there must be an investment idea in here somewhere, right?
Here’s a little taste of the ad, which is selling subscriptions to Katusa Resource Opportunities (currently $2,500/yr, limited partial refund policy):
“The Global Race to Net Zero is Just Getting Started:
“If You Missed Amazon in 2012… or Bitcoin in 2017… DO NOT Miss Being Early in This Sector….
“We’re on the brink of an all-out, no-holds-barred, Global War on Carbon Emissions.
“Relive the Dotcom Boom Play by Play by Investing in a Whole New Global Economy…
“World War III begins in November 2021…
“With a conference called ‘COP 26’.”
Perfect for a newsletter tease… you get the big picture FOMO (don’t miss Bitcoin in 2017!), and you get to throw in a deadline with that November 2021 “World War III” reference. FOMO and urgency are what drive speculation, and that’s not wasted on the best ad copywriters. And yes, the next UN Climate Summit, called COP26 (“COP” is “Conference Of the Parties,”) will be in Glasgow in November.
More from Katusa, to give a little context:
“The Paris Agreement is the Geneva Convention of the 21st century. Only instead of protecting soldiers… it’s protecting the planet.
“And countries that violate the agreement will be met with similarly harsh penalties.
“Two things are going to happen at the conference that is a global first.
“It’s the first ‘global’ for the Paris Agreement. Every member state will have to re-evaluate their progress against their commitments.
“Current estimates are that they’ll find out they’re not even on track to limit global heating to 3 degrees Celsius (but you already knew that).
“Bottom line: Most countries are in a war against time.”
And he paints a dire picture for those who aren’t prepared:
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“Countries that fall behind will be unable to catch up… so like all other major wars, this one will completely change the shape of the globe.
“Entire countries will rise and fall based on the rise and fall of their carbon emissions.
“This isn’t a race to the top… it’s a race to the bottom.
“Every country in the world will fight with whatever it takes to be the first to ‘net zero.'”
So… what’s he teasing? We get very few clues, but the idea is basically that he has found a “Carbon Reduction Royalty” company, here’s how he puts it:
“Well, I’ve discovered a company in the net-zero space that’s like a royalty and a streaming company… on steroids….
“Back in 2007, I participated in the financing of Sandstorm Gold (another royalty company I was among the first to publish on).
“Within five years, the company returned over 1,800% to early shareholders.
“The royalty business is a proven model that routinely hands early investors 2x, 5x, and even 10x long-term gains.
“And no one else but the company I’ve identified is doing it in this market.
“As the company CEO said…
‘There’s Nobody Playing in Our Sandbox Yet'”
Katusa also says that “I’m putting a significant amount of my own money into this particular play.”
And, interestingly enough, that it’s not actually public yet. More from the pitch:
“This Carbon-War Stock Is Going Public
“I will release a special alert the day immediately before that happens
“The company I’ve identified is the planet’s largest financier of a net-zero world.
“Their goal is an annual production of 100 million carbon credits per year.
“You can do the math… that’s well over $1 billion in revenue a year.
“And that’s before carbon credits start their price climb mentioned above.
“Right now, they are at 10% of that production goal and trading at less than 1x revenue.”
And we learn a bit about the people behind the company:
“This management team has significant experience in the royalty sector and the clean energy market.
“The executive team on this company sold their last public company for a deal worth more than $500 million.
“They openly admit they expect this one to be worth an order of magnitude more.
“Some of the biggest owners of the company are smart, well-connected investors…
“Like a billionaire who is focused on clean energy, and one of the world’s smartest financing outfits that only invests in projects that deliver 90%+ margins.
“The company has $50 million in cash and zero debt.”
There are a lot of carbon capture investments and carbon credit trading schemes out there in the world, to be sure, and many more “green energy” projects that aim to cut down on carbon emissions. Which one is Katusa pitching?
Well, he doesn’t provide many more clues beyond the fact that it’s not yet publicly traded — and he doesn’t specify what that means to him, but for some editors it means that a company is genuinely private, and they’re either waiting for an IPO or trying to get in on a private placement, for others it might just mean “not listed on a major US exchange” … so we may not be able to be 100% certain of the match here.
But with that uncertainty out of the way, I can tell you that the Thinkolator sez Carbon Streaming Corp. (MXVDF OTC, more on that in a minute) is our best match. That is a new company focused on turning carbon credit investing into something like the streaming/royalty deals that miners have traditionally used — which makes sense, given the background of the folks involved (most of the leaders came from Cobalt 27, which tried to build a royalty business based on Cobalt — and, in a match for the clues, did sell out — at not a great time, angering a lot of their shareholders — for about C$500 million), and they also have a seed investment from Osisko Gold Royalties (OR), one of the more flexible midsize mining royalty companies.
And what about that “$50 million in cash and no debt” clue?
There was a private placement in December for about 4.8 million shares at five cents (plus as many warrants with 12.5 cent strike price), then 14.7 million shares at 25 cents in January (with five year 75 cent warrants attached), another 43.3 million shares at 75 cents in March, with $1.50 warrants attached (that one actually had 700 accredited investors involved, mostly from the US and Canada, the other ones went to far smaller numbers of people, so I’d bet that Katusa helped to distribute that info and perhaps get his readers into that deal and bought shares himself… but that’s just a guess)… and there was yet another after that, for 11.6 million shares at a dollar in mid-May (no mention of warrants on that one, but Osisko participated). That brings us to a total of about 90 million shares outstanding, by my count (there were 15 million shares out after the original reverse merger deal, when they started to put the company together last year), and at least 63 million five-year warrants at various strike prices from 12 cents to $1.50.
They had about $600,000 in available cash at the end of last year, so given the money raised in those subsequent private placements, yes, they should have something very close to C$50 million in cash on hand to start building their portfolio…. so that’s a solid match as well. They haven’t yet filed a quarterly update for March 31, but I assume the financials will begin to get clearer in the next couple quarters… and it’s also very likely that they’ll be relisting on the Venture exchange in Toronto sometime soon.
The stock does appear to be available for some limited trading now, since OTC trading was not blocked when the previous company that they used for the reverse merger, Mexivada Mining Corp, was kicked off the Toronto and Venture exchanges for failing to pay their fees. They are no longer blocked from the Venture exchange, but nor have they been officially relisted and opened for trading, so perhaps, if this is the correct answer, that’s what Katusa means when he says an “IPO” is coming… but some investors have already begun reading between the lines and buying up the old OTC shares of Mexivada, now with the name change to Carbon Streaming Corp. but still with outdated data otherwise on most platforms (like share count and corporate profile), and with still the old OTC ticker MXDVF. The price has moved with all the new attention, so it was generally in the $2 range for the past few weeks but shot up to $3-4 over the past couple days, as I type it’s right at about $3.
But that’s probably largely because there’s been a lot of attention and there aren’t all that many shares to trade — those who bought in the big recent private placements at 75 cents or a dollar should not be able to sell yet, I expect, so these are the shares that existed for what was effectively a shell company last year, and they’re probably mostly being traded back and forth by folks who are excited about Carbon Streaming and Katusa’s possible coverage of the stock, whether they’ve joined and learned that’s actually the company he’s recommending, or they’re just making an educated guess like yours truly. MXVDF generally traded a couple hundred shares a day going into May, but that jumped up to now an average of 10-15,000 a day. Which is still absolutely tiny, and it’s a supremely illiquid stock, so that means roughly $30-50,000 worth of shares are changing hands in a day and the price is extremely unpredictable.
What does it mean that those stub shares are trading at ~$3 each OTC in the US? Well, it means that you can sort of buy “pre-IPO” if you want to… but it also means, with 90 million shares outstanding (not to mention the 60+ million in-the-money warrants), you’re assessing the value of the company to be about $270 million. And all we have to justify that valuation is a total asset base and business value of one investment so far (at a cost of $2 million, with $4 million more committed), and cash on hand of about $40 million (I’m switching back to US$, now, those numbers above were in Canadian dollars). That’s a big premium to pay for an idea, a management team, and a pile of cash.
And yes, I did say they’ve made one investment — that’s what has been announced so far, and it was just announced recently… Here’s how they sum up the first deal they made, in which they invested $6 million ($2 million up front, then four $1 million milestone payments) to participate in the MarVivo carbon capture project in coastal Mexico:
“US$2.0 million initial investment into MarVivo Corporation, paid in cash on closing, followed by four separate US$1.0 million investments at specific project milestones during development, implementation, validation and verification by Verra. These investments will be funded by the Company’s cash-on-hand. Closing is conditional on completion of customary conditions precedent.
* Each year, CSC will have the right to purchase the greater of 200,000 credits or 20% of the annual
verified carbon credits from the MarVivo Blue Carbon Project.
* CSC will make ongoing payments to MarVivo Corporation equal to 40% of CSC’s net revenue from the sale of the carbon credits from the project.
* The MarVivo Stream agreement will run for a term of 30 years starting on date of the first delivery
of carbon credits, which is expected to occur in H1 2023.”
So they’re buying 20% of the carbon credits from the project, and paying back to MarVivo 40% of the proceeds from selling those credits. That’s a lot like a mining streaming deal, it’s kind of similar to buying 20% of the copper from a project and also agreeing to pay the miner 40% of the market price for that copper as it’s sold and produced (royalties and streaming deals are similar ways to finance projects, but usually a royalty is for a smaller percentage and just gives a net return with no further payment, while a streaming deal is usually for a larger percentage and includes paying some below-market price for the resource on an ongoing basis).
The upside for the streaming/royalty company, assuming the price paid was rational for both parties, comes from either greater-than-expected production, or higher-than-expected prices — so if the project generates more carbon credits than is currently assumed, that’s a benefit for CSC, and if carbon credit prices are higher than they are today, maybe dramatically higher in a decade or two, they also benefit from those higher prices in the future. The risk is that the buyer pays up front, they’re spending at least $2 million and maybe up to $6 million for a project that hasn’t yet been completed, and are counting on the project working as planned and on a market for carbon credits being robust a decade from now to generate real tail profits from the deal… so we should keep in mind that although the world is showing signs of wanting to tackle climate change more seriously, such impulses can shift or drift — the regulatory framework or the market for carbon is not at all certain to move in exactly the way Katusa expects.
Katusa hints at some of the financials of his company’s streaming deals, as well, which also either means he’s got more of the info from the company than I’ve seen… or he’s teasing a different company:
“Current IRRs using $10/tonne carbon are 400% higher than the average precious metal royalty streaming sector using $1,800 gold.
“That’s absolutely insane.
“If you use $20, that’s less than a three-year payback.
“It’s simply unheard of.”
Maybe that’s true, and that would be a much higher rate of return for a streaming deal than we often see for gold projects, but I can’t match that to any public information from this particular company. Either that’s an aspiration they have for their deals, which are described as being in negotiations or in a pipeline but not actually completed (with the exception of the one announced deal last week), or Katusa’s referring to somebody else.
So it’s certainly an interesting startup of a company, I like the general idea of applying the “streaming” strategy to a new asset class and the potential fantastically levered returns in future decades if you end up being right about carbon offset pricing in the future, or about how carbon emissions are priced or taxed in general, but there’s also a lot of uncertainty. And it’s going to be a massive market if this shakes out as Katusa presents in his ad… but it’s also going to have a lot of players. Already the push for ESG investing is very strong, and for “Green Bonds,” and there was reportedly more than $200 billion in turnover for “global carbon trading” in 2019 so any little royalty startup is going to be facing a massive market with a lot of huge players and a lot of uncertainty — I expect their opportunities will be with very small companies, much like a startup precious metals royalty company would probably have to begin building a portfolio by dealing with tiny junior miners that can’t get the attention of Franco-Nevada (FNV).
The big way in this this fails to match Katusa’s tease is that reference to the return on their portfolio, and their revenue — Katusa in the ad says that “they are at 10% of that production goal (100 million credits) and trading at less than 1x revenue,” which would mean that they have more than $100 million in revenue already… and that doesn’t match any published information that I see. They do not have any revenue right now, and I’m sure they have some more detailed presentations for investors that they used to recruit private placement subscribers, maybe including more speculative details about the potential deals they were pursuing, but their basic investor presentation right now doesn’t say anything about their return targets or revenue projections.
So I come down quite cautious on this, whether or not it is Katusa’s pitched stock. Even if it’s an appealing business idea, which it seems to be in the abstract, at the current OTC valuation it feels sort of like buying shares of a $10 blank check SPAC for $60. There is a price at which any idea seems silly, and I’d say we’re there for Carbon Streaming Corp. — that doesn’t mean it can’t go higher, but when those 90 million shares become available for trading and the stock is re-listed in Canada and probably gets quite a bit more attention, I would guess that the larger volume trades will probably be at more rational prices. No guarantees, we’ve certainly seen a lot of crazy in just the past six months, but I wouldn’t pay 6X asset value for a carbon streaming startup which hasn’t yet proven it can build a portfolio. I can see paying a premium for an experienced management team, and of course you’re going to pay more than the 5-25 cents the insiders paid, or even more than the 75 cents Katusa probably paid if he participated in the private placement… but you have to really count on some far-in-the-future projections to be reasonably confident that a $270 million valuation for this company that has $40 million in cash, no revenue, and one $2-6 million streaming deal in hand makes sense.
I’ll keep an eye on it, sure, and I don’t really know if Marin Katusa is really pushing this as his future recommendation, but it strikes me as the most likely one… and it might well become interesting once the dust settles, they’ve got a few deals done, and the price hopefully becomes more closely tethered to their asset value. If you’ve got other ideas in this space, particularly if they actually have revenue, I’d be delighted to hear about them.
If you’re interested in scoping out some more ideas in this space which are a little bit more accessible at the moment, here are some other stories I’ve come across that perked up my ears a little bit…
Star Royalties (STRR.V, STRFF) is mostly a gold royalty company, but is also aiming to have 20% of its portfolio in carbon credit royalties of some sort. They came public in March on the Venture exchange — they have a tiny bit of cash flow from one gold royalty, and a few others that could start paying in the next couple years, including one forest carbon sequestration project associated with offsets for a gold miner… per their Investor Presentation. They’re at about a $35 million market cap, also have a bunch of warrants outstanding, but should have $15-20 million in cash to make some royalty deals (that’s all Canadian) — like any growing royalty company, they’ll probably issue a lot of shares to use as currency to build their portfolio.
Aker Carbon Capture (ACC.OL, AKCCF) is one publicly traded company contracting out to build carbon capture projects (latest presentation here), and I’m sure there are others I haven’t come across, there are lots of different kinds of carbon capture technologies (including semi-permanent ones, sealing carbon into concrete or plastics, or injecting it into wells, as well as temporary ones like reforestation and planting trees… which will probably eventually be harvested (or, if things get ugly, become pollution problems as forest fires release all that carbon again)).
There’s also an established market for carbon credits and offsets, including futures markets where most of those hundreds of billions of dollars get traded, and plenty of companies who facilitate purchases of carbon offsets for individuals or corporations… and there are dozens of ETFs that either buy carbon credits directly or invest in “transition” or “low carbon” companies.
The KraneShares Global Carbon ETF (KRBN) is the purest play on carbon credits, they actually buy exposure through carbon credit futures contracts, but there’s also the iShares Low Carbon Target ETF (CBRN), the similar SPDR Low Carbon ETF (LOWC), Van Eck’s Low Carbon Energy ETF (SMOG, mostly green energy companies), and Blackrock’s Carbon Transition Readiness ETF (LCTU), to run through a few of the ETFs that include the word “carbon” to get your attention. All of those will be lower risk than speculating on a startup, of course, since you won’t have that same concentration risk in a single team, but they’ll probably also be a bit more boring. And in some cases, just silly — CBRN, LOWC and LCTU all follow the same MSCI “low carbon” index, so when you buy those you’re basically just getting the S&P 500 without the energy and heavy industry companies, a lot of big well-known stocks that seem well prepared and talk about clean energy goals (Apple, Microsoft, Facebook, JP Morgan, etc.)… maybe those ETFs work out fine, or even get a boost from stricter climate rules, but they’re far from being “pure plays” on anything like clean energy or carbon offsets.
It’s a fascinating sector, and maybe Marin Katusa’s right and we’ll use capitalism to save us all, incentivizing carbon capture and pollution control through credits and offsets and taxes, and the already solidly established trade in carbon credits, at least in Europe, will become far larger and a more important part of corporate planning and investment, building on a lot of the voluntary “carbon offset” investing that individuals and companies are doing today (taking a flight? Spend a few dollars to plant some trees and help offset your jet fuel!). It makes sense to me that this will all grow and become more institutionalized, though I can’t claim any great expertise.
So with that, I’ll leave you to throw out your opinions and suggestions… ready to invest in carbon trading? Royalties? Sequestration projects? Where do you think the money will be made as we try to cut emissions? Have a better match for Katusa’s tease? Please share your thoughts with a comment below.