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

All right. Well, good morning, everybody. I'm excited today just to think this is one of the most exciting calls that I've had to do in the Northstar role. Today, I'm going to take you through the presentation on the transaction that we've just completed with CVW. As always, thanks to the Kin team, who are hosting the call, and usual admin, so post your questions. Carson is on the call, too, so we'll get -- he'll kind of collect those and answer the questions at the end. And I'm happy to be hosted in the Kin offices actually in Vancouver today. So I was at the Delta site yesterday and in Vancouver today, so good to be here on the -- good be here in the West Coast. Okay. So let's go through -- before we kind of jump into the slides, I would like to chat -- kind of provide a bit of context for the transaction. Look, I mean, as I've often presented, I believe that we have a very strategic business in Northstar and that the market opportunity is huge, the support level we've got and the demonstration of the technology is great, and that we're right at the cusp of our first commercial plant being constructed right now. And one of the things that's been really important to us is, and I've talked about often, is our focus on strategic partners. I mean, yes, we're a market participant, but we've often talked about the importance of a business of this size having major strategic partners. So as we -- as all of you guys know, the first thing we did and the first strategic partner we had in the business was McAsphalt. Strategic partner, offtake partner for Calgary, engage with them, discussing other facilities, a huge amount of R&D. The second strategic partner, we actually added at about this time last year, which was obviously TAMKO, supported our U.S. entry, $10 million worth of investment, but also the offtake. And today, I'm going to talk about CVW and again, with respect to them being a strategic partner. And in my perspective, and this is from the time that I obviously spent at BP and Goldman, et cetera, the important thing about a strategic partner is it's not just about the dollars that they add. So it's not just about the market transaction, it needs to add an additional strategic capability to the business. And that's really important. And that I'll talk about a little bit later. And so that's what the strategic partners -- and sometimes, the strategic partners don't invest money McAsphalt didn't invest money at the beginning, but they actually add a significant strategic component of the business. And I'll talk about that with respect to this deal. So we believe we've got a major strategic partner for Northstar now with CVW. And this transaction will deliver another kind of 4 big things. So the first thing, obviously, is $14 million worth of capital in the 2 tranches, so the $1.5 million now and the $12.5 million to come. This is no equity dilution. So there's no dilution in immediate equity issued or warrants or anything like that with respect to the stock. And even though it's a royalty transaction, some of the criticisms that you get about royalty transactions is, "Oh, this is going to affect cash flow," et cetera. But the most important thing about that from a partnership perspective is that the partner shares in us delivering that cash flow. So they only get paid when we are actually profitable and we deliver the cash flow that the business is going to have from the facilities that get built. So you share in the delivery of -- CVW share in us delivering the business, which is really important. And the fourth thing is kind of like, and I'll discuss this a bit later, this offers huge potential for us going forward. And that's the strategic element of this transaction, not just the $14 million upfront. So let me also chat a little bit about the process. So the process, we embarked on adding an additional strategic partner to this business late last year. The process was led by Ford Capital and [ Steve Boone ] at Ford and -- has a very strong team, had a very robust process and led us through that, which was excellent. We identified over 50 companies to reach out -- for Ford to reach out to. We didn't have shingle manufacturers in that, of course, because that's where -- that's our relationship with TAMKO, that's already established. But we had a range of companies, from oil companies through waste management companies through industrials through financial players, et cetera. We had clean techs. We had some stand-alone finance players in there. And CVW was a very important part of that process. We had strong interest through the process, and -- but then I'll discuss why later that, through the bidding process, that CVW came through, and ultimately we did the transaction with them. So let me just -- sorry. Okay. So let's go through the transaction in a bit of detail here. So $14 split into 2 transactions essentially. So $1.5 million has already been received. That's convertible into a royalty in the next facility after Calgary, 10% interest in total conversion and unsecured. And then the second tranche is the $12.5 million. We expect that to be received by the end of September, and that's what CVW are currently raising funds for, for that $12.5 million, and -- as you know from -- per their press release yesterday as well. And both of those then convert into a $14 million debenture, again, 10% interest. Northstar has the right to capitalize that interest. And then that converts into the royalty. As you can see, the royalty conversion rate is about 1.7% for every $1 million converted. And so from a kind of top line perspective or 10,000 foot perspective, that would convert into a 12% royalty in Empower 3 and a 12% royalty in Empower 4. And just so everybody can kind of align, Calgary is Empower 2. So Empower 3 and 4 are the 2 facilities after the Calgary facility. Now the security for this, it's a second lien. So that's really important because it's structured to enable the first lien debt provider to come in, and that -- so that can be added for Empower 3 and 4. And again, we have discussions ongoing, but we haven't announced who those debt providers for those facilities are. And then the ultimate fallback in the contract is that if Empower 3 or Empower 4 conversion doesn't proceed, then there's the fallback that CVW can choose to apply the royalty to Calgary. And that's really important for -- that was obviously important for CVW to have a degree of backup. But that's also why in the press release you'll see the reference to BDC. As you guys all know, BDC are the lender for the Calgary facility. And so they've reviewed the transaction and they've approved the ability for CVW to apply that royalty to Calgary. So really important from an investor perspective is that we've had BDC, one of the major institutions, actually go through this deal, look at the royalty, look at how the set-up works and approve it. So that's fantastic because it gives us another set of eyes on the transaction, obviously, as well as kind of the Ford Capital guys who are supporting us. And then the last part of the transaction is the roofer. So I'll discuss that in a little bit more detail now. So the roofer is for a royalty structure for the next 5 facilities. And why this is really important is, so CVW are a strategic partner as we go forward, and if we decide -- so after we've done the Empower 3 and Empower 4 transactions, if we decide in any of the facilities that follow, the next 5 facilities that follow, to do a royalty transaction, CVW have a roofer to do that. But it's at Northstar's choice. So it's not mandatory. And that's the real beauty of this. So as we think about the kind of the strategic kind of opportunity going forward. So the long-term investment is really important, because if you think about what this could actually do is, so let's assume, for example, a new plant is going to cost $15 million. In all our discussions with the debt providers, we believe that this should be debt of approximately kind of 65% loan-to-value, so about $10 million. What this transaction does is, this offers us the opportunity -- again, it's going to depend on the cost of capital, the effectiveness, all that kind of good stuff -- but we have the opportunity to add a royalty transaction to each one of those facilities. And that's what this deal offers us. So it gives us a financial partner and a potential lever to actually deliver a facility using debt and royalty and requiring no project equity, which is really important in terms of having that tool to be able to deploy as a long-term investment tool. And again, it's not mandatory. We don't have to do it. It has to be competitive. It has to work with all the other options. But it gives us the choice to have the potential to have no project equity as we move forward. So the other thing, so -- and kind of as you look at the strategic rationale side, that's the long-term investment, obviously, kind of working our way back up, dilution impact, as I've said, this doesn't have any dilution, of course, on the share structure. I mean, look, today, I continue to hear about our peers struggling, I continue to hear about how tough it is to raise dollars in this market, or raises have to be done at significant discounts, and that is not the case here. Even from the adviser perspective, the Ford Capital guys, that's -- their remuneration is based on cash, not stock, and so no dilution impact. And again, although people will say, well, look, there is dilution because when you enter a royalty, you're going to delete your earnings. Well, that is true, but CVW share in the success of the business. So we have to generate the cash first before any dilution occurs, and they share in the success of the business through the royalty structure. So the other thing that's really important about this -- there are two other things to add -- so number one is around additional funding for Calgary and Northstar. So as we've talked about often, Calgary is fully funded. Two of the elements of the funding for Calgary, of course -- or really 3 of the elements of the funding to build Calgary. So number one, equity, of course, that goes into the structure to pay for the capital, et cetera. The second is BDC and the third is Emissions Reduction Alberta. So BDC and Emissions Reduction Alberta all pay you back after you have put the cash out the door,right? So it doesn't -- they don't pay upfront. You have to demonstrate that you've spent the capital and then you draw down against the DBC loan. And similarly, Emissions Reduction Alberta 4 milestones, you demonstrate you've done the milestone and then they pay you the money, like we did earlier this year with the detailed design. So cash flow under management is a really important thing for us to do to manage that cash flow. And so what this does, of course, is this provides working capital support for that cash flow management. Which is great from a working capital perspective. So there's no additional -- as I've said, Calgary is fully funded, but what this cash does is to help that working capital support. So that's really important at the Calgary and Northstar. And then secondly, so as we think about the acceleration of Empower 3 and Empower 4, so we could actually deploy capital for the long-lead items for Empower 3 and Empower 4 in 1Q. So of course, we won't deploy any of that capital until we have the -- until the full funding is received at the end of September. But this gives us the ability to order long-lead items at the beginning of next year. So we do not have to complete Calgary, bring it online, bring revenue in and then decide, okay, well, we're going to do an equity raise or decide to do something else to order long-lead items, we can order the long-lead items now. And if you remember, whenever we did the Calgary project, we ordered the long-lead items last October for delivery essentially in kind of July and August this year. And so -- all of these items take time to come because they are complex pieces of kit, and we can -- this now enables us to do this in first quarter 2025 for the next 2 facilities, which is fantastic. So I chatted a bit that kind of the key to the strategy of the new plants in terms of the capital and our ability then to deploy this going forward -- and again, not an obligation for us to deploy the royalty going forward -- but fantastic opportunity with having a strategic partner that shares the vision. And one of the other things, I think, that's really important about this too is, if you look at the strength of the CVW team, from an investor perspective, all of these processes involve significant due diligence. So it was the same with the McAsphalt deal, the same with the TAMKO deal. There is a significant amount of independent due diligence, there's a significant amount of financial due diligence, technical due diligence, operational due diligence that are done by counterparties to enter a deal like this. So as investors, you can be pretty reassured that whether it was the government of Alberta, whether it was TAMKO or whether it is this deal in CVW, there's a significant amount of due diligence that we've been through to complete the transaction by independents looking at it. And when you have a company with a level of sophistication of CVW completing a transaction like this, you can be pretty reassured they've had a really solid look at the business, which is good. So let's chat a little bit about CVW. So the things that are very interesting to us in the way that their existing business looks like. So obviously, CVW are creating a portfolio of royalty-based cash flow streams by partnering with clean technology firms. So we're the first one that they've done this with, which is fantastic. It's good to be the kind of -- the first across the line as they think about deploying this -- the strategy. But if you look at their current technology, which is obviously focused on Alberta Oil Sands, which near and dear to my heart, obviously, having worked for MEG, so the way that they describe it is that they are creating value from waste. So this is completely in line with the strategy that Northstar has. We're often described by the investors and the investment companies that we are in a -- we're a waste-to-value proposition, which is exactly what CVW's base technology does. And so for our Board and my view, this is a huge synergy with respect to the strategic direction of the company. Look, and the investment thesis that CVW has is very aligned with where we are, too. One of the things that's really important about this slide is -- I mean, I think this is one of the key slides in this whole presentation. So Northstar investors should look at this thesis, because it's exactly what matches the way and the direction that we are going. So let's step through these. So if you look at strong macro tailwinds, I mean, we've got facilities that divert shingles away from landfill. So landfills are filling up and diversion potential is increasing, costs for landfill are filling up. And all municipalities, I mean, almost to a tee, are asking for diversion capability to take waste away from their landfills. And so that macro tailwind is absolutely huge. Secondly, as I've talked about before, and it kind of goes to the commodity exposure, which is the next point down, we produce asphalt at the back end of our facility. That asphalt is tied to oil price. So we provide commodity exposure for 60 -- over 60% of our revenue is pegged to oil price exposure. And so it has the commodity exposure that CVW is seeking, but it also has commodity exposure as we think about the product, because increasingly, as refineries switch to low carbon fuels and biofuels, the less asphalt that will be available. So the -- fundamentally the macro tailwind for that and the macro support for that is reduced product, and we provide hard asphalt that is available out of every single one of the facilities. And an infinite number -- or an infinite production of that because we have feedstock that comes in all the time. So it's a bit like an infinite oil field because of the feedstock that's coming in the front end. As we think about growth in yield, so one of the real strong fits between the CVW model of supporting royalty kind of asset by asset is that it fits exactly our growth strategy. So as you know, we -- our belief is, we can deploy 3 sites per year. We can deliver those, we believe, for $15 million worth of CapEx per site. And if we're only operating 24/7 at 40,000 tonnes a year, we think that's going to generate a revenue of $10 million-plus depending on kind of oil price and tipping fee, et cetera. So that is a deployable model which we believe -- and with the shingle amount going to landfill in North America, that's over 400 facilities, as I've often said, and so that is a growth model and a deployable model that the CVW royalty fits incredibly well with, and their strategic partnering with us also fits very well with as we roll these facilities out. So then diversification and optionality. We have that now with respect to our view of diversification. We have locational diversification, we have market diversification, and we believe it's -- our business is completely scalable as we've chatted about. And again, this commercial structure offers us optionality going forward which is really, really strong. I mean this is the CVW slide, but as you know, we have an experienced incentivized team with slightly under 20% ownership in the company. And then, of course, the last point from a CVW investment thesis is sustainability. And with our low carbon product, that's exactly what we do, too. So it is very interesting because this is a slide I could literally have written for Northstar in pretty much the same way. So it shows you the strategic fit between the CVW strategy and their investment thesis and what you guys as investors should be thinking about with respect to Northstar. You can literally tick all these boxes with respect to Northstar. So let's call it the risk of this transaction. So people will be like, "Oh, no, you tried a royalty -- you tried a royalty deal before and it didn't work". So I'm not going to do that kind of left-hand to right-hand comparison between the counterparties here. I'm not an oil -- I'm an oil and gas guy, you guys know, I'm not a mining guy. But if you have a look at the CVW team and you have a look at who is supporting this team, literally just with the 3 names on the top of this slide, I can tell you this is exactly why the Board was comfortable with this transaction. This is exactly why I'm comfortable with this transaction. And we believe that, of course, risk of rating funds always exists. But we're the first across the line for the CVW royalty strategy in the clean tech space, and we think that's really important. That was very important to me and very important to the Board, and we believe the risk is -- of this transaction and the $12.5 million being raised is very low. So -- let's run through -- I mean this is kind of our kind of summary slide in terms of my view as you saw on the PR and Akshay's views you saw in the PR from the CVW perspective. We've run a really strong investor process. Ford has done a great job to get us across the line here. And we think that this has delivered a partner that I'm very, very happy with. It meets the criteria that we set out, it met the criteria that the board set out. And I think it's broader, and as I've said, it adds to McAsphalt, it adds to TAMKO, it adds to BDC, it adds to Emissions Reduction Alberta and adding another strong partner to the Northstar investment support. There is no dilution that's going to come as part of this. Any dilution that comes from earnings dilution is absolutely predicated on our success and our performance. So it's completely within our control. It enables first lien debt holders to come in and provide support for Empower 3 and Empower 4. It gives us the ability to accelerate Empower 3 and Empower 4 by essentially adding long-lead items and having the capital to pay for long lead-items literally in Q1 and it gives us flexibility for capital going forward where we may actually be in a position to not require any project equity requiring to be raised for us that's going forward going forward. So I think for that, that's probably -- that's probably the summary of where we're at with the deal. Carson, over to you.

If there are any questions, please feel free to submit them in the chat or the Q&A box. At this point in time, I don't see any questions. One question just came in, Aidan. Is this a perpetual royalty?

Yes, perpetual royalty on -- when the royalty gets applied to both Empower 3 and Empower 4, yes, it will be perpetual. There is one element of buyout actually, and we described that in the press release. So if there's a change of control, by a strategic for Northstar. So if Northstar gets acquired by strategic counterparty, then there is a prenegotiated buyout level that -- and it can either be a multiple of the capital that CVW put in or an IRR return. So that is -- was added to the transaction. Obviously, if it's not a strategic or -- then the royalty would stay in place. But if it's a strategic, there's a buyout mechanism that's been pre-agreed.

Okay. Another question is what's the term of the debenture and how long do we pay the interest?

Actually, that's a good question that I forgot to mention. So the term of the debenture, we set a debenture at exactly the same rate as the TAMKO debenture. So it's 10%. We have -- that will -- the interest continues to be paid until the royalty conversion happens, and we can capitalize the interest that will -- as we move through the duration until the royalty clicks in. And that's where the -- and that capitalization can happen for 3 years.

Any expectations on announcements regarding Toronto? The Toronto facility.

facility? Yes. So with -- for both Toronto and the U.S. facility proceeding well, and we should be in a position to provide some more guidance to the market in -- as we come into September here.

How is the Calgary construction coming along and have any more of the long-lead items arrived?

No, long-lead items are all in construction at the vendors' facilities. Yes, and -- as I think actually, as a number of you've seen from the paparazzi outside the facility, you can see that it is proceeding. But look, as we always described, this is not like building a refinery. So you will not see columns go up and stick build going on. So basically, everything is proceeding in the vendors' facilities for all of the items. And yes, I mean it's proceeding well, we're well -- kind of like we're well driving towards the delivery of the equipment to site.

Will some of the long-lead items also be produced faster because it isn't the first time they're being made?

Certainly for Empower 3 and Empower 4, as we think about the next facilities, absolutely. So there's kind of 3 things that are really important about the next set of facilities. So number one, there will be minimal engineering. So we don't need to do high-level engineering. We don't need to do feed. We don't need to do detailed engineering, because it's already been done. The process in engineering or process in instrumentation drawings have already been done. The stat sheets have already been done. And that's really important because, as part of detailed design, you then need to take your design and then go and talk to the manufacturers about it. And then the manufacturers have to do their design for their construction, et cetera. And so that time shortens incredibly. The other thing that will shorten is obviously the commissioning time. So when we commission Calgary, we will go unit by unit by unit by unit, in the same way that we did when we were doing the testing at the power plant in Delta. And -- you determine for every unit, well, what's the process, what's the pressure, what's the flow, what's the set point, how do we ramp it up, et cetera, et cetera. And that takes time. So commissioning on the first facility always takes time. But when you come to the second facility, you're like, well, just put in the set point that we know works in Calgary. So that will mean that that process is faster as well. And also when we go to the manufacturers and say, well, can we please have the same thing as you did for Calgary, but we want two of them, then that gives them manufacturing efficiencies as well. So there's a real benefit of ordering 2 a year for the next x number of years, because it's literally -- because every piece of kit is not necessarily an off-the-shelf piece of kit and has needed to be engineered by the manufacturers, then you don't have to do that. You basically just go and buy one that you got for Calgary. So yes, that's a great question because the efficiencies will be absolutely clear and it should be also more cost effective as well.

When is the transaction expected to close?

September -- Sorry. So the first tranche, the $1.5 million, has already been received. So that's already done, and the full transaction is expected to close in September.

And what's the update on finalizing sites for Empower 3 and 4?

Yes, progressing well. We'll be able to update the market on that hopefully by the end of September.

Is the 12% royalty on net earnings?

No, gross revenue.

And last question here, what's the update on timing for commissioning of Calgary?

Yes, progressing. We will -- we're moving forward with -- as we said earlier, the construction, as people have seen from the paparazzi pictures, the building construction has commenced. And so yes, we'll again update the market as we kind of come out of - come out of the summer and into September, we should be able to give a more detailed update of where we're going to be in terms of the date of hitting the big green button.

Okay. Awesome. That's all the questions for now. Thanks, everyone, for participating. Thanks for listening in.

Thanks all.