Base Carbon: Investor Call Notes 4/23/24
Notes from the Base Carbon investor call that took place on 4/23/24
Note: All monetary figures are denominated in USD.
General Notes
Cash flow this year, including Rwanda credits that might not be sold, could total up to $50M. This theoretically underpins the company's entire market cap in one year. $30M of that is essentially guaranteed from Vietnam.
Emphasized no need for much additional capex spending on any of the existing projects, no need to dilute the company or take on debt.
NCIB was previously renewed in June 2023 and will be renewed again. The company continues to buy back shares as cash flow is ramping up.
Costa commented on how the current carbon market situation can be compared to the bottom of the mining downturn in the 2000s. Firms were likely to acquire top talent before anything else, so he is potentially alluding to focusing on bringing in additional executives or team members.
Costa sees a significant opportunity in establishing “platforms” right now, the first example of this being the STX Group venture. This is a way to gain access, scale their team, and enhance their competitive advantages as a team.
Given the comments on acquiring talent and focusing on platforms, it sounds to me like they’re currently more focused on buying back shares and bringing in additional talent rather than entering new projects. But we’ll see how things shake out.
Management thinks the upside of the company is going unnoticed right now. Particularly, the potential upside in carbon credit pricing.
CORSIA is an industry-specific compliance scheme for airlines involving 126 countries and 30 global airlines. One condition for CORSIA-eligible carbon credits is that they have a corresponding adjustment label. Only 2021 and beyond vintages can be used in CORSIA’s system, which invalidates 70% of the existing supply on its own. This presents a favorable backdrop for potential credit sales.
Base has seen indicative pricing for CORSIA credits north of $50 in some instances, which doesn’t mean Base would get that. This just goes to show how much potential upside there can be for the credits Base is generating.
Projects
Vietnam (cookstoves)
2.2M credits have been issued recently, 1.9M from cookstoves, and around 320,000 from water purifiers. This generates $12.5M in revenues for Base. $10.7M has been received; the rest will settle in the next 1-2 weeks.
The 7.4M credit offtake with Citi has now been split into two tranches:
Tranche one: $20.8M (initial capital deployed)/$4 (agreed prepurchase price for credits) = 5.2M credits in tranche one of the Citi offtake. Base gets 100% of the proceeds for tranche one.
Tranche two: For the remaining 2.2M credits in tranche two of the offtake with Citi, Base splits the offtake proceeds 50/50 with SIPCO.
Vietnam’s offtake agreement with Citi on the first 7.4M credits generated is phase one of the project. Phase two is where Base has a call option to purchase an additional 25M credits for $5 per credit from the project if they want to. Base could be “called away” on 75% of those credits if they did opt to buy them, for a price in the low double digits. This could limit the upside a bit in the situation where carbon credit pricing really takes off. Regardless, Vietnam could generate Base a potential 33M credits in total.
Base also has the option to spend additional capital, later on, to expand this project further. They could purchase approximately ~600,000 additional cookstoves and water purifiers (weighted more to water purifiers than the current transaction).
Initial expected issuances from Vietnam totaled up to 45M credits but were revised down to 33M after the project adopted new methodological standards from Verra.
In Q3 2024 and Q1 2025, Base expects to receive the third and fourth credit issuances from Vietnam.
Management is cautiously optimistic that the Vietnam project will receive a corresponding adjustment label, just like Rwanda. This would have a dramatically positive impact on the project's economics.
Rwanda (cookstoves)
First issuances of 717,558 credits recently, with a corresponding adjustment (CA) label. This is the first CA label ever given to a project from Verra.
10% of credits must go to the Rwanda government, and 2% are set to be retired by the project developer for their own commitments. 5% of net proceeds must be remitted to the United Nations’ Global Adaptation Fund (GAF).
The expected GAF fee is $0.20 per credit; that’s because the prepayment agreement for these credits is, again, like Vietnam, set at $4. The fee will actually be higher because Base expects to sell these credits for significantly higher prices.
Indicative pricing for credits from Rwanda, thanks to the CA label, is upwards of $10 or more.
India (reforestation)
6.5M trees in total, 5.3M trees have been planted so far.
They anticipate capital expenditures of $7.4M by the end of 2024. $4.4M has already been committed, so another $3M will be committed this year.
Expected first credit issuances are expected to begin in late Q1 2025.
STX Group Collaborative Fund
STX Group is a leading global environmental commodity trader. As of last year, they represented approximately 20-25% of the market share in the VCMs.
They have over 2000 clients trading and retiring credits through them.
STX will originate the projects and conduct marketing efforts for the fund; Base is the portfolio and asset manager, and no investment is required by Base.
Base will operate the fund using the typical 2 and 20 fee structure regularly seen in the hedge fund space. Of course, this will require significant tonnage before this generates significant revenue for Base.
The fund should launch in late Q2 or early Q3, so more news flow at that time
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.