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

Okay. Well, listen, now get started. Welcome, everybody, to the Northstar Investors Call, 1st of August 2023. So welcome to August. And today, very excited to host this call. We've got some really interesting stuff to talk about on the back of the 2 press releases that went out yesterday. So I'm going to walk through the details of the TAMKO strategic partner deal. I'm going to talk about where we are with BDC. The execution of the ERA agreement, bit of a chat about Calgary's next steps and then kind of a reflection on the last couple of years and kind of getting to this point. And actually, this is one of the most exciting calls we've done as Northstar Clean Tech, and this is all about in a way you guys as investors should be very happy as to where we are in August 2023. I'm joined, as normal, by Carson Sedun, our Director of Corp Dev; and always, thanks to the Kin team for hosting the call and setting this all up for us. So same protocol as we've used before in the quarterly calls. So please submit any questions into the Q&A. The raise hand [indiscernible] functionality is disabled for this call, so just submit any questions into the Q&A, and Carson will pull those together to answer at the end, we'll go through that session. So let's kick off. So as you know, usual disclaimer on forward-looking statements. And then, look, the most important thing that you guys can take away from this call today is that the Calgary facility is now fully funded. As you know, we've had, as I've been describing this to a lot of the investment forums, I've been kind of saying this is about a 3-legged stool with respect to Calgary. So we announced the Emissions Reduction Alberta grant in February. We had the PR and announced BDC in June, and with the TAMKO strategic equity investment in July and announced yesterday, that completes the 3-legged stool for the funding of Calgary. So talking about that in a little bit more detail. As you know, one of the huge objectives that we had was maximizing non-dilutive funding for Calgary and so really stress in the equity balance -- as little as possible. So if you look at the right-hand side, the structure, of course, was the government grants from Emissions Reduction Alberta, was announced in February 2023. And also this is the Alberta innovates $200,000 in it as well. And obviously, all of that was contingent on us also bringing in debt and kind of the third leg of the stool to complete the funding for the project. The second element, of course, was then adding BDC and adding the debt of $8.75 million. And the term of that debt is over 15 years. It's 2 years of interest only. So a very competitive and excellent loan at 8.35%. And then the last element that was the kind of the first press release that went out yesterday was the investment by TAMKO in strategic equity in Northstar. I'll talk about that -- the elements of that deal in a minute. But of course, that added kind of $8.5 million in Phase 1 of Canadian and that adds to the kind of the 3 legs of the stool. And obviously, all of these things are all by maximizing kind of non-dilutive funding for the business. Obviously, the government grants are infinite on the later funding. The debt is supportive and then the strategic equity with the preferred shares at the level of the [indiscernible] are obviously supportive for the balance sheet as well. So the one thing I would say though, if you add all these funds together, it's $24.55 million and people would be like, well, hold on a minute, like what's all this for. I mean that seems like you've raised too much money for Calgary for the capital that we've talked about. There's no change to the use of funding. We still have a capital estimate of $15 million. We still have associated costs of $5.2 million. And that is all around cost of sales, it's all around the G&A for the site, including the site G&A, the insurance, the lease costs, et cetera, and the Northstar cost as well. So all of those associated costs that are non capital have not changed. And the additional kind of $4.5 million is all around the cost of finance. So that's kind of the interest and working capital. As we've said often, as we've discussed, emissions reduction in Alberta, it's milestone based. So it's not like Emissions Reduction Alberta and our innovatives, right as a check for $7.3 million. It's all spread out during the build and into operation and commissioning -- sorry, commissioning and then operation. And all of that to say that the working capital management of obviously having the CapEx together to anticipate ahead of time, that's what the TAMKO investment helps with in terms of working capital and finance timing and the same as BDC. So all of that to say that now, when we look at all of the cash flows for the project, including capital, including lease costs and including associated costs, including financing, all of this is now delivered by the structure. So then let's have a quick chat about the TAMKO strategic deal. So 2 phases, first phase and an overall USD 10 million investment in the company. So Phase 1 is the phase that's coming in high, and that's the $8.5 million of preferred shares, and that's at $0.29 per preferred share. That is a -- that's a one-to-one conversion rate into common, the TAMKO is [indiscernible] for that. Phase 2 is in the memorandum of understanding, we'll chat about that a little bit in a minute. And that's a binding commitment from TAMKO to purchase 3-year convertible debentures. Now the current pricing indicative in that is at $0.29 per unit with a [ $0.450 ] and that's for 3 years. Of course, these don't convert -- or sorry, these don't -- TAMKO doesn't have to acquire these until later on in the project. So this is where in the discussions with TAMKO, we are fully aligned with them with respect to delivery, performance and objectives. So the first debenture TAMKO, I've got the timely obligation to buy is an ERA milestone 3. And ERA milestone 3 is the commissioning of the project. So when the project commissions, TAMKO buy the first debenture. And then the second gets bought at milestone 4 which is operations. So what it means is we have the reward with respect to the TAMKO investment as Northstar perform and deliver with respect to the project. So it means that the first investment is from TAMKO is fantastic [indiscernible] -- at the Calgary level enables Calgary to go forward. And then the second investment kind of Phase 2, the $3.6 million or CAD 4.7 million comes in along with the milestones for the project, which again, supports our delivery and performance and meets our objectives. So TAMKO will be able to nominate one director to the Board. And the pro forma ownership of this investment, assuming a one-to-one conversion is at 18.75% from Phase 1. Obviously, that would increase with the Phase 2 debentures. But because those have not been -- because those are future looking, those are not included in the 18.75% today. The strategic alliance [ avenue ] we'll talk about that in a minute. And there's also an investor rights agreement which has some classic kind of customary minority rates for TAMKO, and the investor rights agreement will be part of the SEDAR submission. And TAMKO, one of the biggest U.S. shingle manufacturers, private company and have been fantastic to work with and not just for this deal. So when I talked to our Board about why TAMKO and I talked to the TAMKO guys about this too, when we started the strategic equity discussions. From the very beginning, as you know, on these calls, I've talked about customers who have been helpful and insightful with respect as we've developed this process. So that's been from a testing perspective and feedback on what the product looks like, et cetera. And TAMKO being an absolute leader there. So we have fantastic in insight, fantastic in R&D and have been a great partner to deal with from the time we started dealing with them with respect to the potential supply. So I think that sets us up really well. If we look at the strategic MOU. So now we have exclusivity with TAMKO for the construction of 3 over -- the first 3 facilities in the U.S. The exclusivity goes 3 years past the Calgary commissioning or the construction of the operation of the first 3 facilities. We can extend the exclusivity depending on how the build of facility 3 goes, but also by retail extension. And from a strategic perspective, essentially -- from an Northstar perspective, it secures the first 3 facilities in the U.S., which is huge for us from a supply and offtake perspective. Canadian development, so what we can perceive with any of the Canadian developments we've talked about without any consultation from TAMKO. Phase 1 debenture -- sorry, I split the MOU here so the binding terms are on the left-hand side and nonbinding on the right-hand side. So yes, Phase 2 debentures we talked about are binding in the MOU, and Northstar will terminate the existing U.S. letter of intent that we have in place. So the nonbinding terms, so this is the -- and how do we progress each one of the individual assets. So we've agreed and so -- we've agreed and this will be confidential, so not shared, but we've agreed a set of selection criteria to determine the optimal locations for the facilities. Obviously, we've got a view on locations with respect to asphalt price and tipping fee. TAMKO have got an outline of their view of like how to view their sites, cities that work for them, et cetera, et cetera. So the next step for TAMKO Plant 1 will essentially being going through that selection criteria and come up with a common objective of where the first TAMKO 1 site could be. We've also agreed indicative terms, confidential. And again, this will be commercially confidential, but we've agreed indicative terms on the offtake agreements. And so volume, price, quality, commitment level, et cetera. And each site will have definitive agreement. So the next steps as we kind of think about the engagement for TAMKO Plant 1 will be going through site selection, and then negotiating the definitive offtake agreement. Look, one of the things that's huge for us is understanding this sector as we think about the 10,000-foot level again. We've always talked about 3 sectors. So that's paving flat roofing and single manufacturing. And with this deal, not only do we get the first 3 U.S. facilities kind of exclusivity to work with a [ super ] partner. But actually, TAMKO are going to provide us with ongoing support. So that's not only the R&D, which they've been doing already with the kind of development work and feedback on our product, but also will help with the Calgary facility engineering, commissioning, development of our operational processes as we move forward and very importantly, process improvement. As I've always said, we really want Plant 5 to be better than Plant 4 and Plant 10 to be better than Plant 9. And TAMKO have got a real excellence in process improvement. So learning from them as to how they do that, I think will be super important. And then the last thing is, and this is the same as that we had agreed with McAsphalt is working together on understanding the carbon of environmental benefits of not only the Northstar facilities, but how that fits into the TAMKO processes and kind of a high-level agreement to work together on that. So that's a bit of an overview of the TAMKO deal. And so classically, whenever you get funding put in place for an asset, people are like, okay, now what's happening. And so what next for Calgary. If you look at the picture on the left-hand side, that's the Calgary site today. So this is a really good example. I mean the work did not stop with respect to the facility as we put this line out in place. The lease agreement that we have for Calgary, the improvements that we had from the landlord, meant that they could start straightaway on the grading, et cetera. So if you look at -- that's the site -- the light gray area is the recycled concrete base, which is being added. And then the black area to the right-hand side is the recycled asphalt, which is being added for the surface material. Weighing scale foundation is in and the electrical conduit is being installed as well. So it kind of shows that there's been a lot of engineering work and a lot of kind of the site work that's been going on in parallel. As we've talked about the other 2 things that have -- we've been progressing as we've talked about before, is the work with customers, of course, time [indiscernible] with McAsphalt -- being the truly customer's eye, but also with vendors. So the delta processing facility and pilot plant, we've been working with the vendors on taking the delta equipment and upgrading it and getting it ready for Calgary. So we see the next step for Calgary is engineering and procurement. You'll be glad to know the meeting to kick that off today as at 2:00 p.m. today, Calgary time. So -- not a lot of wasting time. And I expect long-lead equipment orders to go at 3 p.m. or well, somewhere close to that. I mean, the customers, the vendors that we've been working with are waiting for the orders to be placed for the long-lead equipment. And anything that they need to input into detailed engineering, and so that is literally ready to go. Look, one of the things that we talked about as a team internally with respect to this presentation was actually take a bit of a step back and kind of discuss, well, look what have we actually done now that we've come to this kind of milestone of funding and pulling all funding together for Calgary. You'll be glad to know I'm not going to go through each one of these, but obviously, the presentation will be available on the website to have a look at it. But I think one of the things to say is this slide just shows you how much that we've actually achieved as we've gone through this journey. It's also a bit of a thank you to investors that are on the call, right? So -- this is a TSXV company. It was in a -- we've been in a period of pre-revenue been developing the technology. The technology that was not proven 2 years ago, before we started to run the pilot plant and the market in the last 2 years has been nothing but kind of risk off. So not rewarding pre-revenue TSX free companies. So as I've always said, as an ESG company or a clean tech company, there's kind of 3 things that you need to do. The first thing is you need to prove the technology works, the second thing is you need to scale it up, and the third thing is you need to be able to roll it out. Well, look, if you look at the major accomplishments, we've done, not only have we derisked the design of Calgary by operating, getting the vendor and customer feedback for the pilot in Delta last year. But also we have a technology that grants technology patents [indiscernible] to one of the process, follow-on, going on and obviously Canadian fast track for green technology, patent application going on too. So all of that not only proves that it works, but that it's patented. But if you think about the 2 major strategic partners we have, both in kind of McAsphalt and paving in now TAMKO and shingles. I mean if people want a question, does the technology work? Those are the people to talk to you. I mean multibillion dollar companies like that don't make an investments in technology that they do not think is going to work. I keep on saying that with respect to -- that's the best evidence that we have with respect to technology support. And then if you think about the scale-up, now we have the McAsphalt agreement for Calgary and now we have it fully funded. So step 2 in any processes I keep on saying is about can we scale it up. Well, now we have the funding and the offtake to be able to do that. And TAMKO with the first 3 plants in the U.S., that's our first step for rolling it out. So we have somebody who is not only a partner to help us support the rollout of the first 3 U.S. plants, but has actually also invested as equity investor, so still has kind of huge investment, both at the kind of the equity and the bench level, but also in the offtake. So that's a phenomenal way to take the first rollout steps in the U.S. We're a strong partner. And so I think from a 10,000-foot level, if you look at the technology, our ability to fund Calgary and put the first commercial plant in and a secure rollout program, I think we're in a really, really, really good shape. I'm very, very excited with pulling this all together and very excited with respect to the next steps for Calgary. So Carson, I think that's my 20-minute drive by. So if you want to throw up any questions.

Sure. Thanks, Aidan. A couple of questions in so far. First question, do you expect to have the first potential TAMKO U.S. site chosen by the end of 2023?

Yes. I think as we kind of look at the things that we need to do with respect to -- so Calgary, obviously, into design engineering, the other kind of things that will be happening with respect to -- for the company. So one, of course, is timing for the next Canadian plant, which is we have nominated is, Toronto. And secondly is working with TAMKO on the first U.S. plant. I think end of the year is -- end of the year is a reasonable target. But of course, that's going to depend on kind of sitting down and doing a site selection with the TAMKO team. There's certainly a lot of appetite on both sides to get that moving because then we can start site selection and permitting, et cetera, et cetera, so that we can build that facility faster after Calgary getting built. So that timing is reasonable. But again, it's kind of subject to just sitting down with the TAMKO team and kind of agree on that over the second half of the year.

Okay. Second one, how many plants would TAMKO need for 100% Asphalt sourcing from Northstar?

I do not know the answer to that question. Yes, I don't know the answer to that question. I mean, I think some of the TAMKO facilities, so -- I would say that from a 10,000-foot level, the -- our Asphalt, no matter what application it goes into, it needs to be blended. So when it goes into paving, it needs to be blended when it goes on the flat roof systems, it needs to be blended and exactly the same as shingles, as shingle manufacturing. And so as you know, the development work that's been going on by the shingle manufacturers, including TAMKO is to look at the asphalt that comes from Northstar and say, well, why do you put it into the process. How does it blend in, what does the blending ratio look like. So I think that will be a different answer per facility depending on what the process is and it will also be -- it also may be a slightly different answer per manufacturer just because manufacturers are often -- will have slightly different ways that they add blending components into the production. So kind of hard to answer from a technical perspective and very difficult to answer from a volume perspective because it depends on the blending ratio that the manufacturer is comfortable with. So all of that can be proven as we kind of work together. And that's the good thing about the first -- plant #1, but also production coming out of Calgary 2, is that, now we'll have no pilot plant production, but now we'll have production for TAMKO to work with. And really understand what the unapplied to integrate and as they think about their production processes, how they integrated into their production.

Is exit 2024 a reasonable guess as to when Calgary can start production?

I mean, reasonably, I think that's probably a reasonable -- a kind of a reasonable target. Yes, I mean, as we've talked about the milestones for Emissions Reduction Alberta, 2024 is obviously kind of construction, commissioning and in operations. So end of '24 is a reasonable estimate.

So now that Calgary is fully funded, what are some of the other milestones that we can look forward to in moving forward in the near-term?

Well, I think the -- as we kind of -- as I answered in the earlier question, I think site selection with TAMKO and kind of the development of TAMKO Plant 1 for the U.S., I think that's definitely a milestone we want to be driving towards this year. I think, secondly, the development of the Toronto facility. As we've talked about before, both [indiscernible] are kind of in parallel. And so I think that's another milestone to look forward to. And I think as we step through the -- our commitment as always is to continue to kind of brief the market on where we are in the Calgary development and how that progress is going. And then obviously, it's a construction of Calgary. I mean we've always talked about the steps in ESG. The first one, of course, is actually proving the technology work. So that's the biggest step that you can take. The second biggest step is building the commercial plan, and that's obviously not ongoing with Calgary, and we'll keep the market and form the [ map ]. And then the third step to start to rule it out because Calgary at that point in time will be proven and operating and delivering the cash flow we expect it to, then that's just a series of small steps. So I think the 3 things that we expect to see in the next year are: Toronto, the first U.S. plant and then Calgary demonstrating as it's going on kind of -- on the update on the build.

Okay. How much is this deal with TAMKO a product of the previously announced manufacturing testing kind of ties into the earlier questions as well, but...

Well, look, I mean, it kind of comes back to the same -- I mean, TAMKO could answer that question probably better than I could. And exactly the same way McAsphalt would answer the question better than I could with respect to how much testing did McAsphalt do and the questions we've been asked in the past on this. I mean, ultimately, 2 years ago, we didn't have -- when I joined, we had an interesting idea and a good concept and manufacturers didn't -- haven't even heard of. So really the whole of the last 2 years has been demonstrating that we have product, demonstrating that we had a technology that worked and obviously demonstrating that, that product could improve as we started to understand what our manufacturing was doing and how the pilot plant was working and how the vendor equipment was working and the feedback from customers. So all of that process, which is essentially just like R&D support has been phenomenal. So the good thing from an investor perspective is it shows there is a huge appetite to solve this problem. I mean 16 million tons, I mean, I always come back to the numbers that has startled me when I first joined, but 16 million tons going in the landfill, more than 400 Northstar facilities would need to be built to solve that problem. But that doesn't matter if the product at the back end doesn't work. And to get the product out the back end to work, there's no point in me standing and waving my arms and asserting that it works. It actually needs industry players who have experience in using sophisticated asphalt materials to tell us that it works and to support us and kind of give us the -- give the investors but also give us as a company, kind of feedback that they think that product works and really all the R&D testing we've been doing over the last couple of years has kind of culminated in this from a shingle perspective. But also in the McAsphalt agreement from the roofs' perspective. So companies -- multibillion dollar companies do not make investment decisions, whether it's offtake or an investment without being convinced the technology works. So that's kind of my -- kind of feedback as there's been so much appetite for this. We've been crazily blessed with the R&D that's going on. I keep on saying we're a $20 million market company with a multibillion dollar R&D division because of the support that we got from our customers. So yes, that's kind of -- it's all been part of the 2-year R&D test anything.

Okay. 2 quick questions. Market's opening now. So one question is, are the next facilities of the same scale as the Calgary facility or will they be larger?

Absolutely. So the plan is always to have every single facility the same size. So that's how we think we can get process improvement from plant to plant to plant is have exactly the same for -- nominally 40,000 tons per annum of shingles diverted from landfill and that's everyone is the same, and that's where the process improvement will come.

Okay. And last question, so we'll wrap up here after this. How does TAMKO as a partner help U.S. expansion with municipality relationships, roofer relationships, et cetera?

Look, I think they're a major industry player. So I think that has influenced and every -- where they are as every municipality that they're in. And it gives that -- most importantly, it gives real credibility to Northstar. I mean we're -- essentially a Canadian start-up that has a very good idea on diverting shingles, and we're going to build our first plant, and we can bring municipalities to show the map plan, and we can demonstrate government support and our ability to do the diversion away from landfill. So we will have track record. But at the end of the day, the TAMKO understanding of the municipalities they're in, is huge. And that's part of the site selection and [indiscernible] that we think about, which is how do we [indiscernible] of relationships that either we have established in some businesses already or obviously, TAMKO have in their areas of strength. So I think it's huge because it gives validation to Northstar in terms of credibility in the U.S. and a very, very strong partner.

Okay. Well, I think that concludes the Q&A there and perhaps we'll wrap up.

Excellent. Well, listen, thanks all for attending the call. My team will say, I'm generally much better in the afternoon than I am first thing in the morning. So hopefully, that was helpful and insightful. We don't have the final Kin slide up, but same contact as always, to get in contact with us through Kin Communications. Thanks to the Kin team for hosting us. And I think this has been -- this is phenomenally exciting great set of PRs yesterday. We have a fully funded facility in Calgary and design work, as I said, will essentially clicking today. And I think we have a phenomenal support now for the commercialization and rollout of this technology across the U.S. with a really, really strong partner in TAMKO. And that's been -- that's a great thing to bring that transparency to you guys as investors. Thank you very much, as always, for your investment in the company, and look forward to bring in good news as we get after Calgary facility and [indiscernible] like the U.S.