Northstar Clean Technologies Inc. (ROOF) Earnings Call Transcript & Summary

Thank you. So welcome to the 1Q 2023 Financial Results and Investor Update. So look, I know we did a kind of a full year '22 an investor presentation on April 20. And I know we've made the commitment to kind of discuss and kind of feedback to investors, investors a lot and regularly through the year. My intention is not that we will do this monthly. But obviously, right in the back of the full year was the Q1. And as part of that presentation, of course, we ran through a lot of information. We run through financing, Calgary capital, Calgary economics, et cetera, et cetera, et cetera. So we decided actually this time to do an investor update, because there was a wave of questions as any of you that were on the call and you went for an hour, and so there were a wave of questions, some of which have come repeatedly since, which is great because the questions are coming in. And so we just thought we take this opportunity, to run through some of the stuff that we did in the last call, but also to kind of add to it and give a bit of an investor update. So I'm joining the call today by Rosemary Pritchard, our CFO; and also by Trenton Kwan, who is from Kin Communications and is helping anchor today's call. So thanks, as always, to [indiscernible] and the team at Kin for supporting us here. Carson Sedun would, of course, be here, but he got married on Sunday, so we actually gave him a week off. So Trenton is filling in for Carson today. As you know, the results have been posted on SEDAR. The press release was issued yesterday as well. And we also have the detailed design press release, which I'll cover a little bit too. The process, as we normally have as Rosemary will run through the financials, I'll run through the corporate update. And then today, Trenton will pull together the Q&A to do at the end. This call, we have disabled the raising your hand up for the Q&A. So the Q&A, you need to type it into the Q&A, we will collect them and then Trenton will be able to ask them at the end. All right. We'll listen with that, let's cover our financial update, and I will hand it over to Rosemary.

Thank you, Aidan. Good afternoon, everybody. So just a quick overview. At the end of Q1, we had $665,000 remaining in cash compared to $1.1 million at year end. The decrease in cash was due to the operating losses during the period, a deposit that we had to pay on the Calgary lease, money spent on equipment and patents and our lease and loan repayments. However, this was offset by us raising $625,000 in convertible debentures. And in addition to the $625,000 that was raised in Q1, we then closed $2.73 million non-brokered private placement subsequent to the quarter, so that will be reflected in the Q2 statements, the additional $2.73 million cash. On the income statement side of things. For the first time, we have revenue. And so this is the first quarter that we generated revenue with about $21,000 in tipping fees, and this was generated at the Empower Delta facility from asphalt shingle collection, and this is increasing each month. Moving on to expenses. We had a significant decrease in both R&D and G&A expenses, which is a direct result of cost-cutting measures being undertaken by the company to preserve capital. Comprehensive loss decreased by roughly the same amount as our expenses, which shows that these measures are working as intended. As always, detailed financial statements can be found on both our website and SEDAR. And I'll now hand it back to Aidan to give us an investor update.

Thanks, Rosemary. And one of the things that we're trying to do is clarify the slides now as well. So you can see that we're trying to get all the financials together on one page. I mean, obviously, as we start to increase revenue and we start to do capital spend, we will talk about that more detail as Calgary starts to get constructive. But, of course, the key issue for everybody is cash on the balance sheet. And as Rosemary said, reflected in Q2 will be the $2.73 million raised in the PP, which, of course, as I challenged about the last time, is supporting treasury through the point as we think about financing for Calgary. Okay, investor update. So this kind of covers a number of different things here. So if you look at the conditional approval that was received in Q1, if you look at the long-term lease, and then if you look at actually the pictures on the right hand side, this is all about the cited Calgary being developed and getting ready. And it all plays into what I'll talk about in a little while, which is the detailed design. If you look at the kind of the Emissions Reduction Alberta award, if you look at the private placement we talked about, I mean, none of that is new lease, we talked about that in detail at the last presentation. But again, the reminder is to build Calgary, we need 3 legs of the stool that will build Calgary. So #1 one is Emissions Reduction Alberta. #2 is the provision of debt and kind of non-dilutive funding debt. And the third leg that we're working on hard is again trying to think about project, equity and other sources of non-dilutive funding. And all of that to say, this is all about minimizing any of the kind of dilutive type equity raise at the Northstar level that we would have to do. All 3 of those are progressing well, and we'll kind of update the market as we go, if anything gets obviously executed. And then the third thing, and we've talked about this before, but that is the definitive offtake, so the McAsphalt agreement went definitive. I mean, of course, that's absolutely essential to be able to secure debt, because it underpins the full offtake. But again, that has a certain percentage of resale capability in the contracts. So in the discussion on the project equity level, whether that's with strategics or with others, we're talking about the potential for leveraging third-party sales as well as to McAsphalt. And McAsphalt completely supportive of that because that's actually part of their business model as well. So the last time we talked about we kind of ran through the Calgary facility CapEx. I think there was a little bit of -- there was kind of a lot of questions that came in back after that and kind of said, "Well, listen, where you kind of run through this again." So the high level number of course says that the capital has gone from $11.8 million to $15 million. And so that's a $3.2 million increase. But I think -- and also, this is -- again, I'll remind you, this is a management estimate, not an independent estimate, it's done by BBA. But if you look at where the cost estimates have increased or where the estimate has gone up, it's kind of really our land on the right hand side here, which says the equipment cost changes are $2.2 million. As I said last time, there's 3 things that we -- that have enabled us to both change this and change the economics. And that's all the work that we did at Delta last year. So #1, we ran Delta. #2, we talk to customers about the Delta output, and #3, we work for the vendors. Now this is working with the vendors on exactly what was happening at Delta, any inefficiencies that we're seeing, any efficiencies that we're seeing that we wanted to repeat in the Calgary facility. And so as we look at the 3 stages of our process, all of those stages needed vendor kind of redesign and vendor cost estimate changes. But really importantly about that is the vendors are not ready to move right into detail design. And the numbers that we have for them are firm. And so whilst the number has gone up in terms of equipment, the confidence level of surety, the design has also gone up as well. So that's why the contingency number at the bottom, as you can see, went from 2 down to 1.3 because of our surety around those figures. And that equipment cost changes are all the vendor work we've done for the major pieces of equipment. The second one down, which is scope changes, again, kind of 6 -- nearly $700,000. That was where -- when we work with vendors, when we work with designers, we identified areas where pieces of equipment that we're missing that would increase the efficiency of the system as a whole. So that is the add of pieces of equipment. Customer scope changes down [ $500, ] so that is the McAsphalt lending system. So we had originally the asphalt roof [indiscernible] and that's where it would stop. Because, of course, we're working with McAsphalt who are blending their product to bring out as kind of final sales product, that's the scope that includes their capital. However, that is also reflected in an infrastructure charge for some of the facilities and the offtake agreement. So that kind of -- I guess, it's kind of -- we put the capital in and that gets you paid later. But ultimately, that's what that [ $500 ] is. Other indirect charges is engineering. So that's the increased scope for engineering that we will have from now to completion. U.S. dollar impact is the [ $260 ], that's just the CAD to USD and reduction in contingency should actually be a negative -- sorry, reduction in contingency kicks it down to $15 million. So that roll-through out, of course, the majority is in equipment and minimal amount on labor and materials, a little change of indirects and contingency coming down to bring us to a level of $15 million. Again, I would describe the level of confidence in this number as high. I think we have defined from front to back the equipment and the major pieces of equipment as the vendors have given us is, we think has got -- we've got a lot more certainty. And project economics. I mean, I'll take a quick one through this, less questions came back and this then came back on the capital. Again, this is based on delta production experience, it's based on kind of the fundamentals pricing that we now know because of the McAsphalt contract has gone firm. And it's also based on a change of asphalt yield actually to be more conservative down from 25% to 22.5% of yield. And so, when I described how much in every single tile is asphalt, I always kind of say 25%. We've brought that down to 22.5% because we think that's conservative. So that would have an effect of reducing the economics, but as you can see, because of the operational time and pricing, that has -- that's improved overall. The most important thing, though, from kind of like -- on the last slide, I'll talk about the kind of the blue sky here. But the most important thing is like we continue to believe that this is a conservative case. So #1, if you look at heavy oil and if you look at WCS pricing and you look at the pricing effect of asphalt, the TMX pipeline, which opens in Canada, as we know, kind of towards the end of the year or Q1 next year. I mean, that will divert heavy oil away from the U.S. Gulf Coast and away from the Midwest to Asia for export. So that will have a major effect on heavy oil pricing. And the view is that the differential for WCS will tighten. The second thing that's happening is the Mexican refining that's come online as well as now diverting heavy Mexican crude away from the U.S. Gulf Coast as well, which will also have the effect of tightening the differential. And the last thing is, and it's interesting as we talk to the shingle manufacturers, one of their concerns is that have hard asphalt, the asphalt that we make or the asphalt that gets oxidized in their process after it's come from refining is getting more and more scarce, especially as refineries repositioned for biofuels. Refiners are always concerned about gasoline and distillate and Jet. They're not that concerned about asphalt in general. And so as they think about repositioning for biofuels, they're thinking about repositioning for biodiesel for renewable aviation fuel and for ultra-low sulfur diesel and renewable gasoline. They're not concerned about the effect on asphalt. Asphalt is kind of a fifth order derivative of what comes through a refinery. And the shingle manufacturers are generally worried about that. These operational number -- these numbers are based on an operational base case of 150 tonnes a day. That is -- and remember, so that is essentially us running 15 tonnes an hour for 10 hours. So our design case is 15 tonnes an hour, the capacity of the system is 20 tonnes ever. So if we're able to run for longer, as you see in #3, that number can obviously increase significantly from 150 tonnes a day, but that's what the economics are run out today. We have the economics running at 10 hours a day, 6 days a week. As you know, the back end is a hypercarbon back end, like any refinery, that really wants to run 24/7. But 24/7 depends on shingle supply and it depends on availability of labor, and it depends on maintaining et cetera. So we need to run at this conservative level first before we start to expand, but that's where the upside lies. We are not having 24 -- we do not -- the economics of 24/7 would be so strong that we could be significantly challenged on being able to deliver them. So let's make sure we've got a conservative case to start. And the fourth thing is that this excludes carbon credit revenue, but it excludes environmental credit revenue as well from diversion from landfill. We, of course, intend to do the work to determine exactly what that looks like. But in the commercial model for this facility, we have 0 carbon credit revenue coming in. It's really important for people to think about this business as an infrastructure business where we get paid for the feedstock and we get paid for the product that comes out the back end. This is not dependent on carbon credits. It's not dependent on environmental credits that provides upside on both cases. And then the last thing is the conservative municipal landfill fees. I mean, we've seen in Delta that Metro Vancouver has gone from $122 a tonne to $132 -- sorry $120 a tonne to $132 a tonne in the last 2 years. Municipal tipping fees are under pressure. They will continue to rise. Municipalities do not want shingles in their landfill. GTA, the majority of the shingles that are due to go into GTA landfills or bearing landfill in Michigan. They've been transported by 18 wheelers in Michigan for landfilling there. So just to be absolutely clear, we think that, that has upside with respect to pressure from landfill. So all of the 5 on the right-hand side are not reflected in the model. And one of the things that actually we got up, we get a chunk of questions and we got a chunk after we run through the economics of last time, and that was, how does this offer together with volumes and revenue streams and how does that offer together? So if you look at the right hand side of the slide, so 100% of shingles come in gets split up now, of course, I just contradicted myself with the liquid asphalt is in here at 25% and not 22.5%. But if you assume at a high level, the 25% of the output is McAsphalt, 50% is aggregate and 25% is fiber. So then if you look at the left-hand side for the tipping fees, for the input for that 100% of asphalt shingles, our revenue split is about 36%. For the products coming out the back end, the revenue split is about 64%, and all that 64%, 95% is asphalt, up by 4% disaggregate and 1% is fiber. Now that's not to say that fiber and aggregate are not important. They are. Because if you look at the side that 75% of the volume of the facility, but the key underpinning value for this facility is the liquid asphalt and that's why we focused in -- in every facility, that's why we focus in essentially on their long-term asphalt agreement as the underpinner of the economics. That's why the McAsphalt agreement with respect to Calgary is absolutely essential. It's essential for the underpinning of the economics. It's essential because of this risk management built into it, and it's essential for debt provision because it's secure. And then one of the other things that we thought was worth doing is so Delta has started correcting. First quarter of revenue ever reported by the company of a massive $21,000. But one of the things that, again, that Delta has been able to do with this is being able to demonstrate or be able to show us what we expect in Calgary on all the rest of the Canadian municipalities as to what we can expect in terms of what is coming in. So what's coming in as we are seeing now is, the majority of the shingles that we're getting are fiberglass, I mean, probably greater than 95% are fiberglass. So that suggests that the historic -- so we have designed this facility to run on paper, which is the toughest thing to process. Running in fiberglass, we believe is easier. And so -- and the U.S. would probably be 99.9% fiberglass. They switched from paper way before Panama. So this is very representative of what we expect to see. Of that 100% of the tonnes coming in, about 9% of it is waste. Of that 9%, 3% is wood and metal, so it's recyclable, and we actually get -- we got value for recycling that and 6% of the mine that we're bringing in is kind of actuals. So this is kind of in line with where we expected the collection to be, but at least it gives us a bit of an update as to what to expect. Now, of course, the way to address any of this is to work with the manufacturer -- sorry, is to work with the collectors to say, well, guys, we really don't want wood, we really don't want metal, we really do want risk. Can you give us the loads as clean as you possibly can. And this is a good result from the start of the process because this is just the start of the process where people bring us whatever is in the bin, and we are having to sort it. So ultimately, where you want to get to with each one of these facilities as you have educated [ bin holes ] and providers who take that 6% number down and minimize an additional stuff that we got. Okay, so one of the PRs is -- recently was around our undetailed engineering. So we're basically ready to go into detailed engineering. So we've chatted about the vendor testing, and that's not reflected in the capital estimate. One of the inefficiencies that we had identified through the operation of Delta. And again, it was back to the learning that we had through the operation of Delta was the mixing system. And so that's the system after the sand separation. And that was not running as efficiently as we wanted it to. And so that has being redesigned. And so -- sorry, that's the -- sorry, inefficiencies design. So that is -- that's being redesigned. Coanda as we outlined in the -- a division of Tetra Tech. They're a leading kind of engineering design firm, and that's designed out and is ready to go into detailed engineering. However, the other thing that we are doing is, we will also build a kind of a Delta style testing system to be put into Delta, so that we can run it from front to back before we go into detail design to prove out that redesign that Coanda has given us. So the Coanda design goes into detailed design, so that's great, but we are going to test it. And we're not going to test the design principles, but we're going to test it to make sure that when we set up the operational parameters for Calgary, that we have experience of running the system in exactly the same way we have experience of running the back-end system, exactly the same way that we've got experience of running the front-end system and we're running in front of that. So sorry, I said the mixing system design. So the mixing system is the back-end system that takes the -- it's our asphalt and mixes it with the McAsphalt product to provide the final sales product. This is McAsphalt's expertise, of course. They have -- and they are working with us on the detailed design of the system, that's essentially a proven operation and ready to go. And then as you see at the bottom of the site, work has already commenced, debris and topsoil is off, grading and compacting has started. And then we're going to be bringing in the granular material, paving the parking lot and starting to install some of the foundations with respect to the past. And so all -- and again, that's not -- we've already paid the lease deposit, but that -- and the lease payments start in the middle of the year here, but that is -- those are all -- that's all landlord capital that is being spent, and that is part of our lease rate. One of the other questions we've got since the last presentation was, hey, there seem to be lots of people announcing competition for you guys, like GAF and IKO have started a plant? And what are Owens Corning doing? And like is your technology falling behind? So I wanted to paint a little bit of a perspective as to how big this problem is. So the Asphalt Roofing Manufacturers Association, they came out with their goals that said they want to divert 50% of all shingles that are going to landfill by 2035, and 100% by 2050. If there was no other technology just Northstar's technology, and we solve this with Northstar plants only, by 2035, we would have to build 206 and 412 by 2050. I think we're a very capable company, and I think we can deploy resources very well to build these facilities. But even I think the 206 plants by 2035 is a bit of a stretch. So this market is absolutely huge. And whenever you hear major companies talking about technology development, the assumption should not be that they have ruled us out, all of the people that are coming out with technology development we're talking to as well. So we may -- they may have a different technology solution than we have, but that's fine, because it's going to need a number of different technologies to solve this problem. And the question is, where are they in their development side? To a number of these technologies that have been announced are 2 or 3 years behind us in terms of development cycle, and we can either be complementary to that company or we can run in parallel. The other thing I would say, if you read the announcement carefully, it's often partial processing. So they are partially processing the recycled shingle to put it back into the mix. Yes, it could work, but nobody today is splitting the products into their individual component parts, so do you essentially have refinery asphalt that's harder -- but harder as that comes out right of our process or fiberglass or sand. So that's my kind of 10,000 foot level and that is #1, we welcome it. #2, it shows that given the ARMA -- given the ARMA strategy statement, it needs a number of different solutions, and #3, we continue to believe, we're the only people that can spread it into the end of our deal component parts. And of course, we have the patent for the first step of that from the patent holders. So actually, if you look at that number by 2035 to reach the ARMA goals, we need 2006, Here's the last slide, which is my blue sky slide. So if we build Calgary in '24, Toronto and potentially the Pacific Northwest or a plant that we have a U.S. partner for that switches somewhere else from the Pacific Northwest and those 3 in 2025. Then from 2026 on, we think we can build 3 plants a year. We think we can likely license 2 plants a year. And for licensing, we've been asked a number of different questions about licensing on these calls. But licensing, we think we probably need [ really to 5 ] plants that we have built ourselves such that we have the technology that is mature enough to give a licensee comfort, but it will be exactly the same as the Northstar plants. So as we've said, these are marginal, they look exactly the same. All the construction will be done using BBA as the engineering company. They'll be the anchor engineer. All the data will go back into BBA as we've talked about their set up to do process optimization for us. And if we need to change pump through it across the fleet, that's what they will sign up for, and from a licensing perspective. And so that's as we think about markets that we wouldn't necessarily go to our markets can be deployed in more quickly. And if you look to the far right of that slide, that gets us to 31 facilities by 2030. So how is a lot shyer than the 208 by 2035 that we would need to be on track for the market diversion. But we think that's a realistic figure. And just to be clear, if you think about that from the perspective of what that would generate, the facilities alone from Northstar perspective take that $18 million and multiply it by the $5.3 million and you're getting to a very, very healthy EBITDA from a Northstar facility and not even ignoring the licensing fees that are coming from the 13 plants above. So I would say, in summary, the takeaways from this is, #1, we're ready for detailed design. The Delta from -- the Delta testing from the land perspective, from the design and the redesign, we're looking good. #2, the funding is progressing well. #3, the economics remain strong with a chunk of upside. And #4, not only is the market huge, but kind of very strong growth trajectory potential for Northstar. So Trenton, I think I'm going to hand it over to you for questions. I think that's me done.

Excellent. Thanks, Aidan. First question here. Are you planning on completing Calgary and having it be fully operational before taking steps forward on a greater Toronto area facility or a Pacific Northwest facility? And would you look at running multiple builds concurrently?

So that's a great question, actually. So the way I see this running is I think we start detailed design in Calgary kind of September this year. I think with the build program, we will be completed and running by the middle of next year. I think we need to take -- so, I think we would likely be up to almost full capacity or full capacity in plan by the end of Q3. I think at that point in time, in Q4, we need to look at the detailed design for the next facility such that we're ready to start constructing at the beginning of 2025. Now, to be able to do that, you'll also need to be able to permit the land. And you -- and of course, given the success that we've had with ERA, we would want to be talking to provincial government -- back to federal government, talking to provincial governments and state governments in the U.S. to see if there's any government support, whether grants available. So what that actually means from my perspective is that we could likely have catalyst by the end of this year, whereby we've secured offtake agreements and potential land to start the permitting process and to start the kind of the government engagement funding process through 2024. So we would essentially be doing that as we build Calgary. Calgary gets built -- gets up and operating, we did a look back at -- okay, was that the right arm? Any issues with this around commissioning, what did we have to change? Was there anything that we learned? Such that we're ready for construction in 2025. And I think we would expect to construct both the U.S. plant and Toronto together. So I think we will parallel build, but we would have to have them fully permitted and financed by the end of next year.

Excellent. Second question here. How are you thinking about carbon credits? And would you be looking to monetize them in the future?