Clean Energy Transition Inc. (GDO.F) Earnings Call Transcript & Summary

Great. Okay. Hopefully, everybody's settled now. Sorry, there were just a flurry of people who dialed in as I began. Again, this is Sean Samson from Rogue. Thank you for dialing in. I'm going to work through the slides that were posted on our website yesterday. This is our tenth call with investors. And we want to continue to be transparent and have calls like these, especially when big things happen for us. And today's focus is going to be continue to talk about the Stone business, Rogue Stone, and then also get into a bit more detail about our new debt financing, which we announced earlier this week. So I'm working through the slide deck that was posted. Hopefully, everybody has that in front of them. Slide 2 is the dial-in, so if you hear my voice, that worked out well for you. Next slide, about questions. We have a number of questions that have come in. We'll get to those after we've gone through the material on the slides. [Operator Instructions] Slide 4, that's me on the left, and I'm also joined by my partner, Paul, who's on the call with us today. If you want -- we've been running road for a while now, but our detailed bios are in the appendix, if you're new to the story. Next slide, Slide 5, important legal details there. Please review. Then getting into it. So I'm on Slide 6 of the deck, current Rogue structure and assets. So that provides a snapshot of where things stand, starting top left and where we're trading. We have less than 25 million shares outstanding. We have a very low share price today so we represent deep value. We have pretty significant insider holding. Paul and I are close to 10%. And then more broadly, including friends, families and advisers as well were about 40% of the shares are in those hands. On the right are 2 divisions prior to us getting into the new Stone business. So I'm not going to speak much about our Quartz and our Timmins assets, but Rogue has 2 very interesting Quartz projects. And again, that's high-quality silica dioxide, which will go into -- we anticipate it will go into the production of silicon metal and other specialty applications and then also go into countertops, quartz countertops. And that's a very interesting little business that we're developing. We have a project in Ontario, Snow White, that's permitted, and I hope to be talking about that later in 2020, where we hope to have sales later this year. That's Snow White. And then Silicon Ridge is a very large deposit with excellent economics attached to it in Quebec, which is not permitted. That's our Quartz business. And then to round things out with the other division. Timmins, where we have a couple of noncore assets that are very interesting, especially in this nickel market. Langmuir, where we have close to 15 million pounds in resource. And then we have the Radio Hill Project, which is 1,800 hectare package which is surrounded by GFG's Pen Gold Project. So that's Quartz and Timmins. And then we've been looking for additional assets and businesses for us to get into. That next slide, Slide 7. I won't spend a ton of time on this, but this is the slide we've been putting up because it's been our mission from the beginning with Rogue, where we've been looking for good quality deposits that we could develop a business out of where they have good grade that can withstand the ups and downs of the market. They are advanced stage where we're not just stepping in on cow pasture, where we could get the thing into cash flow within a few years, and then jurisdiction, where it's the kind of place where we want to work and where you can work as people are pulling things out of the ground. So grade, stage and jurisdiction has really been what's been driving us as we've been looking for additional assets for our company. And that has led us to, on the next slide, our third part, the company Rogue Stone. So this is what we're going to spend the majority of the time talking about now. That's Landscape Stone business in Southern Ontario. And there's a couple of projects, one that we own now and one that we hope to buy very soon, and that's what the financing is lined up for. So Bobcaygeon and Orillia. So they're both within a couple of hours of Toronto. They are both permitted for 20,000 metric tons per year, and they both have a history of operations. Bobcaygeon, we've been running it since we bought it last year, so we've been making sales since November. Orillia, when we open up the gate, as soon as we make the final payment, we will be up and running there, and that quarry has been in continuous operation for 25 years. We'll talk a bit more later in this deck about the margin on Orillia and how we think of it more broadly with the economics for our Stone business, but those are our 2 projects, Bobcaygeon and Orillia, both within a couple of hours drive of Toronto. So I'll talk a bit about the Limestone business. Now this is a bit of a repeat from our recent calls, but worthwhile for new people into the story. There are 3 main products that we will be selling out of both of these quarries. So it's limestone going into Armour Stone, which we have across the top there on Slide 9. So those are the large boulders, flat on the top and bottom, and we'll talk a bit about more specifically what that looks like when we get into the geology and our drilling later. But we have the Armour Stone and then we have the more narrow layers that go out as limestone step and then we have the thinnest layers, which go out as flagstone. And those are layers in the equivalent of the non-geologists what I call a layer cake. And both quarries are stacked layers of limestone which come out depending on the order and the basic geology across those 3 products. So we have Armour, Step and Flag. And then -- and I'll talk about this a little later on the later slide, then those can go out as either a bulk where it goes straight on to a flatbed truck, like you'd see in the product in the top left which is the Bobcaygeon inventory, or it gets skidded to put on to wooden pallets, which you see in the bottom right, which is palletized flagstone material from the Orillia Quarry. So we have 3 products, and then there's 2 modes that they get packaged into. So it's Armour, Step and Flag and it's either bulk or it goes out on skids. Next slide, Slide 10 shows you specifically for landscape application what that stone looks like out in the real world. So on the left, you have the Armour product -- on the front there, you see the boulders integrated into that landscaping. Then you have the limestone step pieces and ordinarily those would go deeper beneath the ground, deeper back in from the actual -- the pad of the step itself. And then up at the top at the yellow is flagstone placed in. So looking more broadly than just basic landscape application on the next slide, where we've been seeing a lot of business since we've had Bobcaygeon in November primarily around Armour Stone going out. So there have been big market movements in demand in terms of specifically Armour. I talked a bit about this on the last call. Specifically, you have -- we've had historic shifts in the water levels on the Great Lakes. There's been significant swings. And that, as a result, has had that plus the higher water levels have compounded storm activity, which the whole thing has been snowballing to really have devastating effect on shore lines of the Great Lakes. So photos there of the greatest impact, and there's a lot of work right now as people are trying to rebuild and buttress shores, and that has driven a lot of the demand for Armour Stone. So the exact product that we're pulling out for 1 of our 3 products from these quarries. So the next slide, I'll talk just a bit about the extraction. So I'm on Slide 12 now. So again, these quarries come out as layer cakes. Now Paul will get a little more technical when he's talking about ore a little later. But it's a very simple extraction process for this. There's no drilling or blasting. And basically, what we do is we'd pick off the natural layers within the limestone and we pop them off with an excavator or sometimes using a loader with forks. So on the top left there, you see a photo of a hydraulic excavator which is basically working one of the layers, where they are popping off what looks to be of either thin Armour or perhaps limestone step. Now larger pieces at that point are broken apart into the desired shape. The piece that you see on the forks in the middle of the top would be a very large bulk piece that's likely going to be shaped and then either shipped as bulk, so flat on to the -- straight on to the flatbed or broken down further and palletized, as you see across the bottom on the left side on this slide. So the important things include no drilling and blasting. It's a simple picking it out. And all of the anticipated production is going to come from limestone beds which are within a few meters of the current quarry floor. So we're not going deep into the deposits. So that's a quick overview of sort of what limestone is. Now as I get into -- I'm going to talk a bit now about the business we're trying to build. And it really is a predictable business that we're quite comfortable with the pieces of it. And I want to walk through a bit of the work that's gone in for us to be really comfortable and excited about the Rogue Stone business. So there's 4 things we're going to spend a bit of time on. One is the stone itself. Secondly, we're going to talk to you about where we're at currently with developing the customer base and really understanding the customer base, and much of this went into our due diligence prior to making the acquisitions. Then we're going to talk to you a bit more detail about how the operations are set up, and we will be able to compare how we plan to run these quarries versus how they were run before. And then finally, we're going to spend a bit of time on the financing, the pieces of the financing puzzle, part of which we announced earlier this week with the debt financing, and we'll spend a bit more time on that. So it all starts with the stone. So let me hand off to Paul now, and we'll go through the next couple of slides.

All right. Thanks, Sean. We're currently on Slide 14. And this is pictures of quarry that we've drilled back in July as part of our due diligence process on the Bobcaygeon Quarry. It was important for us to understand what to expect in the quarry as we went deeper. In the past, there really hasn't been any drilling completed in most quarries, I think, in Ontario and they take out whatever layer they happen to be on and whatever product they get. As you can see on Slide 14 here from the holes distributed throughout that license, that we see different layers give you different products. Hole number one there at the top, the top of it looks like it is either a Step or a nice Armour layer, but then you get into jumbo Flag, which is a thinner layer that's used for your patio stones or driveways and then into a nice Armour Stone layer that's thicker, above 8 inches of thickness for the bed. Similarly, you see on hole 2 and hole 4, we have a similar distribution, and you can trace these layers across the entire quarry. So you know exactly what to expect and our plan is really to open up different levels to get different products as we move through the quarry. Moving on to the Orillia Quarry on Slide 15. you can see again, similarly, the area has a combination of Step, Armour Stone and Flag as well, of varying colors, of varying -- that have different appeals to different customers. You can see at hole number one, a very nice mocha-looking color. These are the active layers that have been mined or quarried at Orillia for the past probably 15 to 20 years, large area of this has opened up, and I see that we can get right in on these and it will start to generate a fair amount of Step and Armour Stone products fairly quickly from Orillia. I'll pass this back to Sean for further discussions.

Thanks, Paul. So that's an important point that Paul made earlier where ordinarily on these limestone quarries, in our experience in Ontario, people don't drill them off. So what we made sure we did through the due diligence process, maybe because we're miners, but probably because we want to make sure we were very confident in the business, was we invested the money to get the diamond drilling. So as Paul said, we could really predict out and model the quarry. So we know what's going to -- we have an excellent idea of what's going to come as we move down through the layers. So that's an important part that really understanding the stone was where we started with all of it. Then we transitioned into really understanding the customers. So I moved to the next slide, Slide 16. So it's interesting. We're in Southern Ontario, but the value of this stuff is that it can go on a flatbed and it can travel. So about 3/4 of our sales so far of the stone from Bobcaygeon have been down into Michigan and the U.S. Midwest. So going more broadly than that, there is a very large market which is a day or two's drive from where these quarries are located and the Limestone business exports that far. So it's not just a play on the Toronto housing market, it's a play on landscaping that's done much more broadly than that in addition to infrastructure plays as well. So infrastructure, as we were talking about before, we got fluctuations on the Great Lakes. But just generally speaking, when there's large infrastructure projects, whether it's park build-outs or road build-outs, there is oftentimes a natural wall-building component and limestone for those projects has to come from somewhere. And the Southern Ontario limestone resource is very strong, and it does go as far as up to 1,000 miles away with exports. So there are a lot of potential customers. And then the way this product is priced, Slide 17 is just an illustrative. Again, coming back to our 3 broad product categories down the left side, Armour, Step and Flag and then the 2 different ways that they're packaged, if you will, both bulk and skidded. So we have very detailed price lists for each piece of that. So buy the 3 products, buy the 2 ways that it's packaged. And I don't get into the detail here, but if anybody wants to buy 41 metric tons of stone to open to all investors, and I can get you that price list. But we have very clear price list set out for a quarry price, which is how much a truck cost if you are a smaller buyer of ours or if you are a new buyer from us. And then we have the preferred partner list. So the preferred partners who we've talked about before are those that have signed the intent to purchase agreements. So these are groups that are going to buy more than 2,000 metric tons per year. That's our benchmark. And for those, they have a slightly discounted price list but it's all agreed. So we have 2 price lists, quarry and then the preferred partners price list. And it's quite simple by product and then by packaging. And each of those has a very clear price attached to them. So I'll move to the next slide. We really understood our customers by spending a lot of time with the large buyers of stone. And as we have announced before, we signed intent to purchase agreements with 8 large buyers. And in those intent agreements, they may sign on to a certain volume that they plan to buy. And that totaled up to 32,000 metric tons, which, by the math of our 2 permits is 80% of our permitted production or licensed production. So the groups that signed those agreements, they ranged across Ontario and down into the U.S. Midwest, and we've had conversations with groups further than that. So a couple of slides earlier out in those concentric circles, we were talking to people in Eastern Canada and then down into the U.S. Southeast. Again, this product will travel. The agreements that these 8 groups signed, they confirmed an annual volume with Rogue, so how much they would be buying a stone. And again, they had in front of them our agreed price list for the preferred buyers. So they know exactly what the product price will be and they've signed up for volume. And then importantly, we have agreed that on an annual basis, we will have a binding purchase order, and that's one of the things we're working on right now with those preferred partners is pulling together those purchase orders really so we can plan out the season. And the timing there is we'll have those by the end of April each year. So those are agreements and the purchase orders will be agreements in which, obviously, if the quality of the goods don't meet or exceed their technical specs, then that's -- the way we will roll is we're going to sell them good stone. But we're partnering up with these buyers. And together, we will build up this business where they will get a predictable product that they will really like for the price point. And we will be able to, based on these purchase orders, plan out our business. And that was an important part of this predictable business we've been trying to develop. So once we're confident that we have the customers, we've spent the time in really figuring out what our operations are going to look like. So for both Bobcaygeon, which we're running right now, and Orillia, we have an operations setup which our plan is to get in there for both quarries in terms of the equipment. There will be 4 pieces of large equipment, which are going to range from each quarry having a large hydraulic excavator and also a midsized rubber-tired loader and then a smaller loader and a smaller excavator. And importantly, we have a rock breaker on the smaller excavator in addition to having a large excavator breaker as well. So equipment-wise, that is what we're going to have. In terms of the operators at the site, we're going to have 4 operators in the equipment, that's not rocket science, in addition to having 2 laborers. So our ideal setup is going to be 4 pieces of equipment and 4 operators with 2 laborers and the 2 laborers that primarily are going to be responsible for stacking material onto the wooden pallets. So again, that's going to be the operations set up that we are going to have at both of the quarries. And using our operations setup, we think we're going to get ourselves up to about 20,000 tonnes per year of production. And we think it's very achievable and it's very straightforward in terms of how we have that resource. So that's on the operations. Now let's step into the financing part. So based on having cash flow from these businesses, it allows us to tap into the nontypical way to finance in our type of business by going after debt. So we're on Page #20 as we're going through the details of the debt financing. So I'll start off with discussing how we have this original term facility which we have lined up with a major Canadian bank, that was announced last year. And that was very interesting for us on the Orillia Quarry. We, as part of due diligence with the bank to the third-party appraisal, which appraised the value of the quarry at $5.8 million. Based on that appraisal, the bank signed up to loan us $850,000. That was a difficult potential financing though because that would have left us with a large hole to get us up to the value -- the amount required to do the acquisition at Orillia. So we chose not to finalize on that loan because we wanted to limit dilution. And since then, we've been working on other options. This week -- earlier this week, we announced our new term facility. So that's us borrowing $1.8 million from a leading nonbank lender, which will be secured against Orillia plus the company's remaining assets. And the terms on that, we have a 12-month term, it's extendable out to 18 months. That's making interest-only payments, which are 12% interest if prime stays where it is or will move up if prime moves. So it's relatively expensive debt and it's relatively short-term debt. In addition, we are granting the lender bonus shares. But using this new term facility, it allows us to make the full Orillia purchase in addition to closing off a second mortgage, which we had on Bobcaygeon. So that really sets us up to be able to then execute on this model. In addition, we are working very hard on equipment finance options. So I referred earlier to how we're going to have 4 pieces of equipment at each of the 2 quarries. So we are right now working on various options for us to secure the 8 pieces of equipment that we require, where we shift from the base case we currently have in our model where we're renting a majority of that fleet, those 8 pieces, and we're hopefully going to move to lower-cost lease arrangements. That's on the equipment financing. But in combination, that new term facility plus the equipment financing gets us the Orillia acquisition and then the second mortgage on Bobcaygeon being taken out. Alongside that, we are doing a small private placement where we're selling some equity and, again, trying to limit dilution, which is a theme here, where we're selling $300,000 through a non-brokered private placement. Now the thing we're trying to do by going to the new term facility, and I've discussed this with a number of investors, the team we've had discussions over the past couple of days, the new term facility is a larger principal amount and it's a shorter term, and it's more expensive. But the whole plan here is to prove out the model. And if the model works as effectively as we think, if the Stone business has the profitability that we feel it does, and I'll talk a bit about that in a couple of slides, is this thing. If it holds together, then we will look to be refinancing for cheaper debt and an amount that is a higher percentage of that third-party appraisal. So we'll have a third-party appraisal. We'll get the both assets appraised over the coming year, especially as we prove out the model. And then based on that, I hope we're out financing and being able to tap into existing cheap debt and that will refinance the existing debt that's on the project. And then it will also potentially set us up, again, if we've proven out the Stone business, for going after additional assets. So to sum up on 21, that was sort of the 4 pieces that we tried to pull together, really starting with the stone, understanding the stone, knowing what we had; secondly, getting in deep to customers and partnering up with them; then spending the time on really thinking through the operations and I'll come back to that at the next slide but understanding what was the right setup we needed to get up to that permitted rate; and then finally, based on that whole model, how could we finance that and trying to be as -- with little dilution as possible. So we've really focused on developing a predictable and profitable business for Rogue Stone. Now how profitable? Let's jump to the next slide and touch a bit on that. So we're in a funny spot as a mining company because we do not have a feasibility study, full feasibility studies done on both quarries. Now Paul mentioned earlier how people who run quarries in Ontario don't even diamond drill. So we've gone pretty far in terms of how well we understand the stone. And I can guarantee you, we've gone very far on how much we've modeled this thing up internally. But we are somewhat constrained on what we can say publicly based on that. Again, because we're a mining company and we don't have a 43-101 feasibility. And for folks who have seen our news releases, they know the details of what we put in our disclosure there because when we're talking about our business, we're very careful in not getting into the details of what we have for our internal forecasts. But here on Slide 22, I can speak a bit about something that's real. Now that's the Orillia Quarry that we're buying. So as part of the due diligence, we have from the vendor the details of how that quarry has done over the past 5 years. So that quarry averaged $131 per tonne in revenue, and it costs close to $70 to produce those tonnes in terms of operating expense. Now that was off a very small base because over those 5 years, they averaged less than 3,000 tonnes of production per year. But the margin that they had was about $60 per tonne of stone. And they did that with 2 pieces of equipment and a single operator. So they had a loader, a loader with a scoop and with forks, and then a small excavator as we show here which had a scoop, had a bucket on it in addition to a breaker. And using those 2 pieces of equipment, that single operator, who will come on to our staff as well after we buy Orillia, he was producing less than 3,000 tonnes a year, but at that margin. So again, when we think about the Stone business, we are going to equip with 4 pieces of equipment at each quarry and staff, so the intention being 4 operators and 2 additional labor, and we are going to manage multiple working phases, which we spent a bit of time talking about on the last call, which allows us to better secure continuous supply of the various products. And in combination, that planning is going to allow us, we anticipate, to produce and sell 40,000 metric tons per year out of the Stone business. So to sum up on Slide 23, talking about the current value opportunity as we see it for Rogue. First and foremost, we think the stone is a predictable business. We've tested out. We've tested out what we have in the ground. We're confident that we have years of production ahead of us. We know our customers. We've already had these intent to purchase agreements for 80% of our production, where we're really partnering up with those preferred buyers, and we have the proper setup. We're going to resource and make that permitted tonnage. That's our plan. So we really think from the Stone business, we have a predictable business which will be able to earn profits for shareholders. If you think about stone as well is there are very positive fundamentals within the space. So if I think about what's happening with limestone, the second point there, Southern Ontario stone is now something that the Ontario government is trying to focus in exploration work on. And we see as a growing market demand as folks concentrate on green construction practices and they're veering now more towards natural stone versus the poured and the precast. Also, if you think about what we're sitting on, we have -- we will have 2 quarries that have their licenses in place. And new licenses are difficult to secure. So owning that is a real asset in an area with excellent limestone geology. Third point, I would think of about Rogue more broadly is that we have less than 25 million shares outstanding. We have a good, tight share structure and one that hopefully will have good share price appreciation based off of. It's been a long way to get here, but we're now on the verge of a tight share structure with one cash-flowing project and another one that we're soon to close on. So the combination of tight share count and then that last point where we now have cash flow. We've acquired the one, we're getting another. And again, when you have cash flow, it opens up creative opportunities for non-dilutive financing. So that in combination is how we think about the current value with Rogue. And I think it's a very compelling time. If you're a new person to the story, and I know we have a number of new participants on this call, it's a very interesting time where we've got the pieces in place and we're looking to build from this. Having the cash flow is a big differentiator as far as I can tell. So now we'll jump into some questions.

I guess I have less questions that have been e-mailed in than the last time we did a call, and I guess which is natural because we only had the last call recently. First call from an American investor. How do you think the coronavirus is going to potentially impact this business as you try to ramp up this spring? That's an interesting question. We -- I guess it's tough to tell sort of what's going to happen more broadly with the coronavirus. I guess we're seeing the impact of it these days on the financial markets. But the fundamentals of our business, we do intend to have a big heap of exports. We could export all the stone if we wished, but that's probably not our strongest model. So we will have exports going by road, primarily over the Canadian -- the Ontario-Michigan border. So if I think about coronavirus, there's the cataclysmic scenario in which we're probably all doomed. But if I take a couple of steps back from that because I don't think that's going to occur, if we have some tightening or some constraints at border crossings, that could potentially be an impact on us, but I anticipate that people movement is going to be the thing that really gets clamped down on prior to bulk shipments going across the Ontario-Michigan border with flatbeds filled with limestone, but that's how I think of the coronavirus thing. Second question from an Ontario investor. How are you planning to staff up? So the question is about the labor base. That's a great question. That's an important part of how we're planning for the stone-carved quarries. I could speak a bit from our experience so far with running Bobcaygeon, where we have a tight team who's working very effectively up at Bobcaygeon. And again, we anticipate growing that up from the 4 -- 3 or 4 men that we have there now to be a total of 6 once we're hitting all of our tons. They're drawn from the local community. They are -- at least half of them are certified equipment operators who are really excited about having a good, predictable business located in Bobcaygeon. So they're excited no longer to be traveling to jobs, and we've been able to attract that core group who, frankly, have worked together before and at least a couple of them have experience at that exact quarry in the past. So the response to how we're going to staff this up is we're going to draw from qualified local tools which are in place in both of these markets. So they're an hour apart, Bobcaygeon from Orillia, but we've had good success so far at Bobcaygeon and we are -- we pay them and well. And I think that we represent, I hope, a good, steady, predictable employer, which seems to be worth a lot. So we will do similar for Orillia. It's a different pool of folks that we'll come to with a similar application. We are inheriting the single operator who was there before and we will be building the team out with him. But again, our value proposition to potential employees, to potential staff is that this is an opportunity for you to hopefully stay in your community as opposed to getting on a plane or driving to Toronto for work. And that's how we'll attract folks. And we are training people up and they like the safety focus and the steady nature. A couple of questions here. What next, yes, what's your bigger picture plan? Let me talk about that. So the bigger picture plan, and I did touch on it with the voice-over earlier, is that we prove out the stone model over this coming year. So we want to have both these quarries up and running. And on the operations side, that we keep things tight and we deliver on our model. On the sales side, that we're really effective at getting the stone out to service these customers. And then based on our success with the operations and our success with delivering good stone to the customers, we'll go out and we'll potentially look for more quarries. And hopefully, as well by the time we are refinancing this new debt that we're talking about, we're able to draw in the funds to go after additional quarries where ideally we're borrowing from a bank or a bank-like lender. So our bigger picture plan is to prove out the model, get really good at running 4- to 6-man operations and really good at delivering stone out to stone yards and then we'll grow up that Stone business. We think there's a lot of potential within Rogue Stone. Looking at the other divisions of the company. I mentioned earlier, on the Quartz business, I want to make a sale from Snow White and then we'll be up and running, I hope, within the Quartz business. And there's very interesting economics within the Quartz business. People can see our PEA study in Quebec. I want to get permitted in Quebec or I want to get somewhere with the Quebec government. And then as I think more broadly across Rogue, bigger picture plan for the Timmins Group would be nickel price continues to rise, then maybe Langmuir comes into the money. And hopefully, we can do something with Radio Hill as well because I think it's a very valuable piece of land west of a very prolific town with Timmins, especially with gold production. So that's how I think about things from the bigger picture. We'll build off the stone. And again, coming back to the theme that when you have cash flow, it opens up more creative opportunities for you. Super. So that's probably it for now. We will post this audio file as we have with past calls. If anybody has questions, as we've mentioned before, that e-mail is always open, and that is actually one of the ways we end up developing back and forth with investors. So we are always at the end of that e-mail or by phone. And very interested in keeping you up-to-date as to what's going on within your company. And then also, I'm already in touch with a number of you regarding the private placement. Again, I think it has a very appealing value potential at this level because we're building something real and we're really not priced for that yet. So if anybody wants to get in touch with me about private placement, I'd love to have that conversation. So again, thank you very much for dialing in or listening to this recording. And we're trying our hardest here to build something with your company. And we think we're on to something with Stone. And hopefully, the Quartz will begin to click and we'll start seeing some nice returns. Thanks, everyone.

Thank you.