Base Carbon: Filings Review 4/2/24
A review of financial filings and company progress.
Base Carbon (BCBN) has released its annual financials and MD&A. Let’s review.
Financial State
Base currently had cash and cash equivalents of $1.4M as of December 31st, 2023. With an exected cash burn of around $1.1M per quarter, this would imply the company is nearly out of cash. With that said, they should receive payments through new credit issuances from Rwanda and Vietnam shortly.
Nearly all of the capital commitments for the Vietnam cookstove project have been paid out, with around $1.65M remaining. The Rwanda cookstove project has been fully funded, so there’s no capex slated for that any more.
BCBN’s reforestation project in India requires an initial capex spend of $7.3M. As of December 31st, 2023, Base had paid $4.4M. According to previous filings, the additional ~$3M required was set to be spent by the end of Q1 2024. So these requirements should be met by now.
In addition to that $7.3M, the India project eats up $6.3M in maintenance capex over the span of 10 years in regular payments. This means Base will pay approximately $630,000 per year to the project developer.
The value of projects in development is shown at cost until they have their first issuance of credits. So Rwanda and Vietnam (pre-issuance) are valued at cost, the total capital requirements that Base has currently paid out.
On the other hand, the Vietnam project has had its first issuance, so that project was marked up. The valuation is derived from a DCF analysis the company estimated, assuming the cookstove credits outside of the Citigroup offtake agreement (39M credits) will be sold around $9-10.
That credit pricing is only realistic if the Vietnam project is able to get a corresponding adjustment (CA) label under the Paris Agreement. This means that the Vietnam government would have to allow these credits to be used outside of the country, for another country’s national climate commitments. Otherwise, those credits will likely get sold for $5-6.
This has significant implications for cash flow estimates, as Base will have to buy those 39M credits from the Vietnam project’s developer, SIPCO. I assume the price will be for $4. In that scenario, Base would only make a profit of $1-2 per credit. That brings yearly cash flow projections down from $20-25M to $5-10M.
If this happens, then that dramatically lowers the value of the Vietnam project on an NPV basis. I mentioned additional details on this in my write-up on Base.
Credit Generation Projections
As the company noted in previous press releases, they expect to generate approximately 8M credits in 2024 from Rwanda and Vietnam:
6M credits from Vietnam.
2.1M credits from Rwanda.
The Rwanda project had recently been issued around 1.3M credits as of 2/29/24. 815,000 of those credits are attributable to Base’s 250,000 portion of the 400,000 cookstoves involved in the project.
Base should receive those credits shortly, and they’re in active discussions to figure out the implementation of the CA label on those credits. Here’s what they said in their press release from today:
It is currently anticipated each carbon credit tagged with the “Article 6 Authorized Label” will be equal to approximately 1.14 carbon credits for the purposes of the 7.5 million carbon credits subject to the revenue sharing arrangement between the BCCPC and the DelAgua Group. The Company believes that the correspondingly adjusted carbon credits designation will expand the pool of buyers with potential pricing upside for such carbon credits.
In aggregate, the Company expects to receive approximately 2.1 million carbon credits, or 1.85 million correspondingly adjusted carbon credits, from the Rwanda project during 2024 for sale into the market according to the project agreement and revenue sharing arrangement, pursuant to which BCCPC maintains a contractual preferential share of proceeds from the sale of such credits.
So that 2.1M credit production estimate for Rwanda is actually 1.85M credits that are correspondingly adjusted under the Paris Agreement. CA labeled credits currently get priced in the “low teens” so assuming the price is $10— this translates into revenues of $16M after accounting for profit sharing and gross royalties.
Assuming this 1.14 ratio applies to all of the credits that will be issued under the Rwanda project, this means that Base will actually be sharing profits on the first 6.58M credits generated by the project. Not the 7.5M number originally agreed upon.
Either way, both Vietnam and Rwanda should issue several rounds of carbon credits this year, so Base should be good on cash. The promptness of the Rwanda project assumes that these negotiations with the Rwandan government don’t get dragged out. I’m unsure what the likelihood of that might be.
Share Capital
Base bought back 7.3M shares with their first NCIB from June 2022 to June 2023.
The second iteration of their NCIB from June 2023 to June 2024 has been used to purchase 1.9M shares as of December 31st, 2023.
This left the company with a share count of 117,918,182 as of December 31st, 2023. The current number is likely lower than that as we’re now in April.
The company has approximately 7.2M stock options outstanding as of December 31st, 2023, and the stock price is too low to see any of them exercised. So these will continue to get forfeited until market sentiment turns around.
My Thoughts
Overall, we’re cutting it a little close on the cash reserves— otherwise, the future of the company is looking stronger than ever.
Receiving 8M credits this year should put any concerns of dilution behind us for good. That is, unless management sees an opportunity worth diluting for. I assume that situation would be rare, given their insistence on avoiding dilution or debt.
The longer the voluntary carbon markets remain depressed, the longer Base can either buy back more shares or invest in additional projects at sentiment lows.
Will significant cash flows be the turning point for sentiment around the company? Only time will tell.
Disclaimer: I’m long Base Carbon. I hold an equity position that was acquired at an average share price of $0.35. I was not compensated by the company to create this post.
The owner of Green Investing is not a licensed investment professional. Nothing produced under the Green Investing brand should be construed as investment advice. My content is made for entertainment and educational purposes. Do your own research.
Have been watching closely after seeing your videos but never put money in as was always concerned about cash flow and now I'm even more concerned! There's a genuine risk that they go bust or have to dilute, which would be embarrassing given the buybacks...
Also, I'm somewhat confused that they haven't taken a write-down on the Vietnam project given the market price collapse.