SHOULD YOU GET KOLD THIS SPRING ? KOLD-NYSE–SHORT NATURAL GAS

By
Keith Schaefer
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0

I want to tell you that you HAVE to short natural gas.
 
I want to tell you that the $8.50/mcf natural gas that we saw this week is crazy.  
 
That the price is going to come down hard.  The market is hugely backwardated–meaning prices are much lower in the months farther out on “the strip”.
 
The easy way to get short is through the levered inverse ETF Proshares UltraShort Bloomberg Natural Gas (KOLD – NASDAQ).
 
I want to tell you this because everything I have seen over the last 20 years is telling me this is the perfect setup. I mean $8.50 gas? $8.50 gas!
 
I have lived through 20 years of watching every pop in natural gas come right back down as producers ramp production and flood the market with product.
 
My gut instinct when I see a 8-handle on gas: Sell it All.
 
But I can’t do it. I can’t tell you to short this.
 
I’m not saying be long. I’m just saying don’t short. Sit this one out.
 
Why? Because there are two big reasons that natural gas might not go down this time.
 
I know, I know, I’m really going out on the limb here. Might. Maybe. But again, this is $8 gas we are talking about here. This should be a sure thing. You should buy KOLD like it is a blue light special (sorry, showing my age there).
 
Instead, two big shifts are going on with natural gas. These shifts make it really hard to know the right price for gas. It could be different this time. At least for a while. 
 

PRODUCER CALLS ARE DEPRESSING

 
I just finished listening to my 7th natural gas producer conference call. It is hard to believe that natural gas is $8+ after listening to these execs. You would be hard pressed to find a more dour group.
 
The sour mood is not without reason. These are executives schooled in the era of production growth. Now, with a gas price that should be fueling hyper-growth for their business, most are sitting around with their hands tied.
 
How so? Takeaway capacity. It is just not there. Building it could take years.
 
Consider EQT (EQT – NYSE), which produced 5.1 bcf/d of natural gas in the first quarter (about 5% of US production). CEO Toby Rice basically said they would not, could not, increase production in response to the strong gas price.
 
We’re sticking to maintenance mode. We’ve been pretty vocal about this. Without more pipelines, the prudent thing for us to do is to continue to stay in a maintenance mode. So that’s been our mentality in the past. It’s our mentality until we start getting some more pipelines put in.
 
Instead, EQT will be directing cash to buybacks and dividends.
 
Ditto for CNX Resources (CNX – NYSE), producer of 1.7 bcf/d of natural gas and liquids, almost entirely in the Marcellus and Utica basins. CNX CEO Nick Deluliis had some particularly harsh words.
 
The domestic natural gas, oil and pipeline industries in the nation, they can’t ramp up production to anything close to the levels that the U.S. and the EU is clamoring for anytime soon. And that’s not because of industry unwillingness…
 
No. Instead, it’s simply and starkly because the policy is consciously and methodically looked to strangle infrastructure investments in the pipes and in the processing and the power generation and, yes, in the LNG infrastructure.
 
On top of the regulatory environment CNX sees the capital markets as second constraint. Their solution? Become debt free.
 
We believe access to the capital markets for our industry is going to continue to be more restricted… to manage this risk, we believe the prudent course under our sustainable business model is to maintain a debt level and a maturity schedule on a liquidity level, whereby we never need access to debt markets.
 
Same story from Range Resources (RRC – NYSE). No plans to raise capital expenditures. 
 
Coterra Energy (CTRA – NYSE), the recently merged Cabot and Cimerex play, produced 3.1 Bcf/d of natural gas in Q4. Conterra guided to a decline to 2.7 – 2.85 Bcf/d in 2022.
 
Coterra is actually increasing production, just not natural gas. Coterra’s production is balanced between the Permian and Marcellus. They are putting their capex towards the Permian, which favors oil over gas.
 
Only Southwestern Energy (SWN – NYSE) has offered a glimmer of growth among the mid-cap names. Southwestern produced 1.8 bcf/d of natural gas in Q1, up from 1.7 bcf/d in Q4. Production should reach 2 bcf/d by year-end.
 
What was the reason for the increase? Simple – they can.
 
Southwestern has a large position in the Haynesville – in Louisiana – where regulatory constraints are loose and pipelines are aplenty.
 
With a couple of acquisitions late last year, Southwestern increased their Haynesville land position significantly. The Haynesville is now the focus of their capital spend.
 
But even Southwestern has constraints.  While there is growth in the Haynesville, it will be offset by declines in Appalachia.
 
Comstock, another Haynesville play that produced 1.3 Bcf/d in Q4, is also forecasting modest growth – 4-5% year-over-year. Comstock report Thursday and it will be interesting to see if they adjust that forecast up at all.

THE STORY OF THREE BASINS

 
There are really only 3 basins on the Lower 48 that can put a meaningful dent in natural gas production. 
 
Appalachia, Permian and the Haynesville.
1

Source: Morgan Stanley

Most of those miserable executives talking about capacity constraints produce mainly from the Marcellus/Utica in Appalachia.
 
That leaves the Haynesville and the Permian, where there also appears to be plenty of takeaway capacity.
 
But natural gas is not the reason you drill the Permian. Gas is associated with oil production, and how much natural gas is produced depends more on oil prices than on natural gas.
 
Chevron (CVX-NYSE) has become a big player in the Permian. 
 
It accounts for 20% of their capital budget this year. Chevron sees lots of room for growth (both oil and associated gas):
 
“We don’t flare in the Permian and so we’ve got to be sure we’ve got gas takeaway or we aren’t going to produce any oil. And so it’s a high priority for our midstream tea.  But we don’t see pinch points anytime soon.”
 
Chevron’s US natural gas production grew from 1.7 Bcf/d to 1.8 bcf/d in Q1 largely on the back of the Permian. They expect to grow Permian production 5-10% this year.
 
The other big Permian player, Exxon (XOM-NYSE) produced 560,000 boe/d from the Permian in Q1 and is expecting to grow Permian production 25% this year.
 
Pioneer Natural Resources (PXD-NYSE), another big Permian producer, produced 0.8 bcf/d of natural gas in Q4, which was double the year before.
 
Pioneer CEO Scott Sheffield had been one of the loudest voices saying he would not grow production. 
 
We’ll have to see what he has to say when Q1 results are released Wednesday.
 
Occidental Petroleum (OXY-NYSE) another large Permian and Rocky Mountain producer with 1.3 bcf/d production in Q4, said at the time of their Q4 release: “ we have no need and no intent to invest in production growth this year.”
 

 INCENTIVES NOW AND IN THE FUTURE

 
 What complicates matters this time around is that we are not just incentivizing natural gas demand for next winter. We need to look further ahead.
 
Since the Russian-Ukrainian war, the gas market has taken more of a forward-looking view, realizing that it has to replace Russian gas quickly.
 
LNG, LNG, LNG. The world needs more LNG. It is about to get it.
 
When the company reported two weeks ago, Baker Hughes (BKR – NYSE) CEO Lorenzo Simenilli put out an extremely bullish LNG forecast to 2030.
 
“Given the current LNG price environment and the quickly changing dynamics, we believe that global LNG capacity will likely exceed 800 MTPA by the end of this decade to meet growing demand forecast. This compares to the current global installed base of 460 MTPA and projects under construction totaling almost 150 MTPA.”
 
That works out to almost 50 Bcf/d of new installed capacity in the next 8 years.
 
In February Shell (SHEL-NYSE) gave their annual LNG outlook. 
 
Near the end of the conference call, they gave us their estimate of the supply gap that was developing.
2

Source: Shell 2022 LNG Outlook Presentation

 
This was before the Russian invasion of Ukraine.
 
What Baker Hughes is now telling us is that this supply gap, which already looked pretty bad, has grown – potentially by a lot – and we are going to need a lot more gas over the next 5-10 years in order to fill it.
 

 WHERE IS THE GROWTH GOING TO COME FROM?

 
When I step away from all these company calls and consider how much gas we will need if Baker Hughes and Shell are right and I weigh that against how much we can get from our big basins given the constraints… well, I just find it hard to be too bearish.  
 
Producers in the Appalachian are telling us they can’t grow–but I’m not convinced that’s true. What certainly is true is that there is no more LNG exports for a couple years–so any big demand increase is capped.  
 
Producers from the Permian can grow, and some of them will grow, but others are reluctant, and anyway the growth depends far more on oil prices than gas. The Haynesville can certainly grow, as can the second-tier basins, but at what price will they grow enough?
 
And remember–they are growing production now for the hope of big LNG prices when the next US LNG train comes online–not for another couple years.
 
That is the question that the market is trying to figure out. What price of natural gas do we need to get ready to meet all this LNG demand?
 
In other words, $7 gas is incentivizing the marginal basins to produce more gas now so the gas is there where the LNG comes.
 
We know that more gas will come as prices rise. Sentiment of these execs be damned. When a wildcatter sees $$$’s they will pick up the drill bit. 
 
Now is $7-$8 the right price to incentivize production? I still think its too high. It could be $5. It could be $6. It probably isn’t $4, and it definitely isn’t $3.
 
But a finger-waving guess that $7 is too high is far from a good reason to go short natural gas. 
 
There are times to be long and times to be short and times to just step aside. Let the market figure this one out first. This is one of those times.
 
One smart way to get long this trade (and short natgas) via KOLD is to do it as a paired trade where you go long a natgas producer. Because multiples are low, the world still has to figure out how to replace Russian molecules—sentiment could keep these stocks higher than the highly backwardated natgas curve.
 
(I just bought a big position in a fast growing natgas play this week)

Keith Schaefer
Publisher, Investing Whisperer 

Our Oil Reliance On Putin Is Scary — Our Food Reliance Even More Concerning

By
Keith Schaefer
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0

As I’m sure you noticed———the world has just changed.

For years now we’ve ignored the fact that Putin’s Russia is a threat. 

Reality has hit home.  Reliance on Russia for anything important is now a major concern for every Western Country.

The obvious problem is energy, but the role that Russian and Ukraine play in feeding the world is huge. 

Russia/Ukraine combine for a third of the world’s wheat and barely exports…….while Russia is the world’s single largest supplier of FERTILIZER.

No surprise then that fertilizer prices have skyrocketed since the invasion broke out.

Food prices are headed the same way.  Bloomberg indicates that wheat has traded between $3 and $6 per bushel for decades…..it is now over $13.

This is going to hurt us here in North America.  For developing countries the problem is much bigger——people are going to be priced out of the food market and human beings are going to starve.

If you think energy security and independence is important then how big of a deal to you think FOOD INDEPENDENCE is going to be going forward?

This invasion is going to continue to pressure prices of everything but beyond that the West had already realized that we need to have our own supply chain IN ALMOST EVERYTHING.

We need to get every ounce of food that we possible can out of our productive land but we can’t continue to blast that land with chemicals that are also destroying it.

Thus we come to our solution.
 

Bio-Fertilizers Are The Future



Microbial activity is essential to the soil.

Though we can’t see them in action without a microscope, beneficial soil bacteria are an active part of nutrient absorption and are spread within the soil. Without these microbes, the organic cycles that allow plants to naturally use nutrients will not work properly.

The use of synthetic fertilizers, fungicides, and pesticides destroys these bacteria over time.
Bio-Fertilizers do not.

Bio-Fertilizers are designed to restore the soil’s beneficial bacteria and microbial health. These biological fertilizers contain beneficial bacteria cultures and nutrient solutions to support both plant and soil health.

They are ideal substitutes for conventional fertilizers that have been causing soil degradation.

Bio-Fertilizers are substances that contain living micro-organisms, which colonize in the soil or interior of the plant.

Working with natural systems, rather than against, natural fertilizers feed the plant by feeding the soil. Think of using traditional fertilizers as a body-building steroid for the plant for that one season—but steroids can be harmful for human body builders (addiction/hair growth/mood changes/higher risk of infection).

Bio-Fertilizers are more like eating super healthy every day, and not using any steroids. Bio-Fertilizers leverage the soil’s biology help unlock nutrients that are tied up in the ground, improving ROI for farmers.

It works!  The key being the biochemical reaction that mimics the conventional fertilizer production process to deliver nutrients to the plant.

Regenerative fertilizer is the future.

The opportunity here is huge and it is an inflection point in the world of agriculture. 

Western countries simultaneously need to produce as much food as possible, domestically source as much fertilizer as possible and IMMEDIATELY find a replacement for the fertilizers that have massively degraded our essential topsoil.

My #1 junior stock is a fast growing fertilizer PRODUCER that comes complete with offtake agreements for every bit of BioFertilizer they can make for the next 5 years.

That means that as fast as they can produce it customers have already committed to buy it.

What an opportunity.  Insatiable demand for what you produce.  All that this company needs to do is ramp-up that production.
 
To get the name and symbol CLICK HERE

WE’RE KILLING OUR SOIL WHEN WE NOW NEED IT MOST HERE IS THE SOLUTION

By
Keith Schaefer
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0
Fertilizer stocks have been on a tear.
 
This is just the start of a major move. These stocks are going to have a long runway.
 
There multiple tailwinds behind these companies——each of which are going to be supportive for years to come.
 
It all starts with a problem here at home.
 
In the quest for ever-greater productivity from our farmland — using traditional fertilizers, herbicides, pesticides — is KILLING our soil. 
 
I’m not kidding. And it’s polluting our water bodies too.
 
While the United States has some of the richest soils in the world, decades of agricultural abuse have taken their toll. The soil has been depleted of essential nutrients and bacteria and fungi. The organic material essential to plants is being depleted.
 
What happens is that the current herbicides and pesticides are like chemotherapy for cancer. It isn’t targeted——it kills the good bugs as well as the bad bugs. All of the fungi in the soil gets targeted. But the fungi and bacteria are essential.
 
The result has been soil degradation. Farmers are left with unhealthy soils that are less productive———which in turn makes them use even more chemicals to enhance their crop yield.
 
The world grows 95% of its food in the uppermost layer of the soil. Because of conventional farming practices, half of the most productive soil in the world has disappeared over the past 150 years. (1)
 
In the United States soil on cropland is eroding 10 TIMES FASTER than it can be replenished. The UN Food and Agriculture Organization have warned that the world could run out of topsoil in 60 years. (2)
 
Conventional fertilizer changes the pH of the soil, leaving it more acidic, more susceptible to disease, and less able to withstand changing moisture conditions.
 
Those conventional Chemical fertilizers known as Urea, MAP, DAP and AMSare all salt based and pH altering. They are soil bio-diversity’s worst enemy.
 
I want you to think about this issue in another way—Vitamin C is essential and important to your health. But if you chew it in tablet form to get it in your body, it erodes the enamel on your teeth.
 
So they are nutrients, yes, but if not applied properly it can have some harmful side effects.
 
The global annual application of Chemical fertilizer is equivalent to dumping 460 billion litres of bleach into the world’s soils. This is a global issue, not just North America.
 
Half of all applied phosphorous and two thirds of applied nitrogen is NOT used by crops – so it ends up in ground water contaminating natural environments.
 
To appreciate how big of a problem this water contamination is all you need to do is learn about the Gulf of Mexico “DEAD ZONE”. This is an area of low oxygen that can kill fish and marine life near the bottom of the ocean——and now measures 6,340 square miles!
 
 
Sources: https://www.epa.gov/ms-htf/northern-gulf-mexico-hypoxic-zone
 
That equates to more than four million acres of now uninhabitable ocean for fish and bottom species. If you understand the Butterfly Effect you will appreciate how worrisome and ecological impact like this is.
 
The cause of the Dead Zone is what the Mississippi River is dumping into the Gulf of Mexico. The Mississippi is like the drainage system for your street, but it connects 31 U.S. States and even parts of Canada. The excess fertilizer/herbicide/pesticide pollution from farm fields all along the Mississippi is now all getting dumped into the same place.
 
What happens from this massive pollution dump in the ocean is called hypoxia, where oxygen in the water becomes so low it an no longer sustain life.
 
We have a growing disaster both in the water and on land where the productivity of the soil is cratering. Food production takes up 38% of the world’s land surface and fears of global food shortages grow each day with the world’s population about to crest 8 billion—making this a very big deal.
 
We need to stop the destruction of the topsoil and pollution of our water.
The world can no longer choose between yield and soil health—fortunately we don’t have to.
 
Salt-less fertilizer is one of, if not THE fast growing sector of the global fertilizer market. The stock market is buying up these stocks like crazy—look at the chart of Verde Agritech, NPK-TSX:
 
 
I’m not buying Verde right now—I’m buying the next fertilizer stock to move. It too is growing incredibly quickly…
 
And their stock trades for less than 50 cents a share! I just completed a full report on the company—and you can get it risk-free by clicking HERE. 
 
Get the name, symbol, and my take on the upside that this incredibly cheap stock has—right now!
 
 

BANK WEAKNESS BODES WELL FOR GOLD STOCKS

By
Keith Schaefer
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0

Gold stocks look like they might be, just maybe, on the verge of a breakout. Maybe…

Can we believe it this time?

Any breakout in gold stocks needs to be taken with a healthy dose of skepticism. We have been through this before. It has been a decade of pain.

But… this time could be different. We have had a long consolidation. Central bank policy are at their backs. Valuations are very undemanding.

As well, one of my favorite contra-sectors to gold stocks – the banks – are breaking down hard.

Bank stocks are acting VERY sick right now. The SPDR Regional Banking ETF (KRE – NYSE) has taken it on the chin. It has failed to recover even as the market has put together a nice rally

Source: Stockwatch.com

Since putting in a top in early January, the KRE has stumbled hard. 

That only accelerated in the past couple of weeks.

Canadian banks are following suit. The Horizons Canadian bank ETF (HEWB – TSX) has also slipped – putting in an ominous head and shoulders pattern followed by a similar move down.

Source: Stockwatch.com

HOW DOES THIS IMPACT GOLD?

Banks and gold stocks do not always run-in opposition. In fact, on bear market bottoms both banks and gold often rally together. 

In 2016, after the market bottomed in February, both GDX and KRE rallied together for 8 months. After the COVID bottom of March 2020, banks and gold stocks rose together until the late summer.

But these are exceptions not the rule. More often these sectors move in opposition.

Past breakdowns in gold stocks have foretold big moves in the banks. This happened after the 2011 peak in gold stocks. It happened again after the 2016 bear market rally in gold stocks and again after the COVID rally.

Source: Stockcharts.com

What we have today is the opposite. If we are on the verge of a breakdown in the banks, could this forecast run in gold stocks?

There are a lot of reasons to think so.

THE WAR RALLY IS ON ITS LAST LEGS?

In my last blog post I gave you my view that this is a war rally.

This is not a fundamentally driven rally.  But it is also not driven by your usual bear market dynamics.

The stocks that have taken off are the same-ole names – meme, SaaS, momentum.

But the stocks that do depend on economic strength have hardly rallied at all!

The most economically relevant sectors are TAKING IT ON THE CHIN even as the market has rallied. Industrials, trasnports – especially trucking – have all been weak.

The banks have been most concerning of all.

In the United States the most comprehensive bank index is the S&P Regional Banking Index, which is the index the KRE tracks.

That is a broad ETF of 141 banks. None of these banks has more than 1.8% weighting in the index.

These are not too-big-to-fail banks. Citigroup (C – NYSE), Bank of America (BAC – NYSE), Goldman Sachs (GS – NYSE) that generate profits from trading and deal making: none of these are in the index.

The KRE is made up of its namesake – regional banks. These are the banks that do the heavy lifting for the United States – the job of making loans to businesses, developers, and homeowners.

Source: S&P Global

That makes the index a measure of the health of lending in the economy. 

Yet the KRE has been in free-fall the last two weeks. We saw a nasty reversal down off the inflation report Tuesday.  That means it is slipping on good news. Never a good sign.

WHAT IS DRIVING THE WEAKNESS IN THE BANKS?

Bank stocks are falling as investors question how they are going to make money.

Banks borrow short (deposits) and lend long (loans). That means that they need short term rates to be less than long term rates.

We are on the verge of the opposite – a negative yield curve. A negative yield curve means short term rates are higher than long-term rates – something that happened a couple weeks ago. While the spread has reverted back, it is still narrow, meaning a tough lending environment for banks.

Second, banks have recession risk. Recessions equal more bad loans, more charge-offs, and lower earnings.

No surprise that bank performance has gone south since the start of the Russian invasion and has not really recovered since.

Source: Bank of America Global Research

WHAT IS BAD FOR THE BANKS

IS GOOD FOR GOLD STOCKS

Gold stocks thrive on this environment. Uncertainty in geopolitics is good for gold. Recessions – or slow economic growth – is also good for gold stocks, as long as the risks don’t escalate to being systemic.

But it is real rates that are the big driver the yellow metal. While the short-term gyrations of gold are hard to make sense of, over the longer-term gold moves inversely with real rates.

Source: Bank of America Global Research

WITH GOLD STOCKS – NOTHING IS A SURE THING

Gold ALWAYS marches to its own drum. If you think it is about to break out – it won’t. If it looks like a sure short – it’s not.

It has been a VERY LONG TIME since we have had a strong rally in gold stocks.

Take another look at that chart at the beginning of the post. Since 2012 the gold miners have basically done nothing. While bank stocks have rallied some 300%!

Keep a healthy skepticism! But there are several factors lining up right now.

Looking at gold supply, one overlooked fact is that Russia produces a lot of gold. China produces even more.

Source: Bank of America Global Research

Gold company insiders are acting like something is up. According to Ink Research, gold insider activity remains “in a strong bullish pattern”.

Gold companies face the same inflation headwinds as everyone else. But most mines operate outside of the United States. While revenue is in US dollars, operating costs are in local currency. The US dollar has been relentless the last year, which has helped keep costs down. 

Finally, the charts sure look good. The chart of the largest gold stocks looks primed to break out. The Van Eck Gold Miners ETF (GDX – NASDAQ) looks primed to break out after consolidating at highs last seen in May.

Source: Stockwatch.com

Where am I looking for ideas? At mid-tier miners.  The mid-tier miners trade at a big discount to the seniors, even though in many cases they have better growth prospects.

Mid-tier miners are trading at just about net asset value (NAV). Senior miners are 70% higher!

Source: Bank of America Global Research

That gives A. room for catch-up and B. room for take-over premiums.

It has been 10 years – 10 YEARS! – since the last true gold bull market. 

We’re due! Maybe, just maybe this move in the banks is signalling an end to the drought.

EDITORS NOTE: I have an incredible gold stock coming to you very soon. It has The Dream Team geologically, and in raising money. Financed by billionaires. Explosive share structure. STAY TUNED!

HOW TO FERTILIZE YOUR PORTFOLIO

By
Keith Schaefer
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0

When I see a bullish trend in the markets (like rising commodity prices) I go look for the most highly levered (or high “beta”) play to that trend.

Generally, I say the lowest cost intermediate producer in any commodity is the best beta. There are lots of junior gold, copper & oil producers. There is only ONE junior phosphate producer: Itafos (IFOS-TSX/MCNB-NASD)

So early in this year, I bought a position at $1.50. Within three months, I was able to sell half at $3 and now I’m riding for free. I love free–especially in a cyclical industry.

Today, I’m sending you my initial report on Itafos from back then–so it’s dated now. While there is still a lot of upside in Itafos in the coming 12 months–paying down debt, re-negotiating debt, asset sales ($$$$), reducing the 70% shareholder–I’m just watching now.

I have now found a new junior fertilizer producer, with stunning growth and offtake deals with the majors that could see it increase production 500% in the coming 3-4 years and become one of the biggest successes in the history of my newsletter.

I have a report just like this one below–on my new #1 fertilizer stock. Fertilizer prices have skyrocketed as Russia banned exports. Itafos was just a double for me. I think this new pick–which trades under 50 cents a share–will be my biggest win of 2022.

This report gives you a flavour of how I write up my investments for my subscribers. I would urge you quickly download my report on my next fertilizer stock, where I lay out all the information in a similar manner.

 

COMPANY ANALYSIS

ITAFOS INC.

IFOS-TSX / MBCF-NASD

 

Itafos is the only junior fertilizer producer I see–and that’s where The Big Beta is. As you will read, the large and expensive debt they carry is a big drag here, but commodity prices and asset sales can remedy that in the next couple quarters.

The 70% controlling shareholder means the stock will never be liquid, but experienced management who also understand finance to me says the business will improve over time. Actually, the business is doing GREAT now, it’s just the finance picture that will improve.

I do own a small bit of stock here—20,000 shares at $1.50. But the lack of liquidity says I can’t really own much more.

I see 4 Big Catalysts in 2022—#1 being asset sales that de-lever the company. And #2 is re-negotiate the debt package. Then #3 is just continued high cash flow from the bull market in phosphate will be a catalyst over time. Number 4 is in Q3 when their Idaho mine should get its permit for Life-Of-Mine extension. But from here, the stock could do nothing until one of these things happens.

This bull market is also happening in grain prices, which is helping farmers pay for higher phosphate prices. 

 

QUICK FACTS

 

Trading Symbols:                                     IFOS

Share Price Today:                                   $1.35

Shares Outstanding:                                185 million*

Market Capitalization:                              $250 million

Net Debt:                                                  $225 million

Enterprise Value:                                     $475 million

* fully diluted

 

POSITIVES

 

– MANAGEMENT—former Potash Corp exec

– Cheapest valuation of a fertilizer producer in the public markets

– Cash cow right now. Will continue to generate A LOT of free cash if prices hold up (big de-lever)

– Top line is directly tied to the price of phosphate fertilizer

– US asset—located in Idaho

 

NEGATIVES

 

– BIG debt and it is not priced cheap

– Need to see permits granted for mine life extension

– Minimal float on stock/Castlelake owns 70% (so this will forever be a retail stock)

– Small fish in big pool competing against Nutrien (NTR-NYSE) and Mosaic (MOS-NYSE)

 

The Investment Thesis

 

At less than 3x next year’s EBITDA, Itafos is the cheapest valuation fertilizer play on the market.

At current phosphate prices, FCF (Free Cash Flow) could reach nearly half the market cap next year.

Itafos is so cheap for a couple of reasons.

First, no one has heard of this stock. Limited analyst coverage. No institutional ownership. 

Second, Itafos has no float. Float is what stock is available to trade (usually considered as all the stock NOT owned by management or 10% + shareholders). Itafos trades by appointment; it has no liquidity. And it may never have any because…

70% of the company is held by a private equity fund called Castlelake LP. Castlelake is a not a big player in the Ag business; far from it. And they also don’t appear in a hurry to divest their shares.

Third, Itafos is cheap because fertilizer stocks are cheap

Source: Company Disclosures

None of these companies trade at lofty multiples. In a market where stocks are far from “cheap”, here is a sector where you can say they are.

Investors are playing wait-and-see on the sector. Fertilizer prices have gone through the roof. Phosphate, which is the fertilizer of choice for Itafos, has seen an incredible price rise the last year, with DAP NOLA up 86% ytd 2021 ($400/st to $745/st) (DAP=Di-Ammonium Phosphate/NOLA=New Orleans Louisiana price hub)

Source: BMO Capital Markets

The question is, can prices stay here?

The work I’ve done says yes. Prices may not be going a lot higher, but I also don’t think they are going a lot lower, at least for another year or so.

The phosphate market is being driven by demand from India and reduced exports from China and Russia. This will continue for at least the first half of 2022. Strong US grain markets are keeping farmer affordability in line despite the current increases in the price of phosphate fertilizer.

Itafos is led by veterans. I spoke with their CEO David Delaney and Chief Strategy Officer David Brush a couple weeks ago. Delaney worked for Potash Corp for 30+ years, including 5 as COO. Brush has an equally long history in private equity.

The wind is at their back with fertilizer prices at multi-year highs. There should be plenty of cash to bring down debt. When they do the market should start to notice.

 

CONDA MINE AND PROCESSING FACILITY

 

Itafos main asset is Conda, a phosphate mine and processing facility located in Idaho.

Conda can produce up to 600,000 tonnes of fertilizer, or about 7% of production in the United States.

Two mines, Rasmussen Valley and Lanes Creek, deliver phosphate rock into the processing facility. Two additional mines, collectively referred to as H1/NDR, are at the permit stage and are expected to begin mining in 2024.

Source: Itafos Investor Presentation

Reserves at Rasmussen/Lanes Creek are enough to feed the plant until mid-2026. By that time, H1/NDR will be operating with enough ore for another 10+ years of production.

They are in the process of permitting H1/NDR. They submitted an Environmental Impact Statement (EIS) in October. They expect permits to be granted early next year.

Source: Itafos Investor Presentation

The Conda facility produces monoammonium phosphate (MAP), superphosphoric acid (SPA), and ammonium polyphosphate (APP).

MAP is the standard granulated phosphate fertilizer.  It contains about 10% nitrogen and 50% phosphate.

SPA is a very high (~70%) phosphate concentrated liquid. It is an ingredient in APP, which is used in fertilizers, flame retardants and as a food additive.

By tonnage, Conda produces about 70% MAP, 25% SPA and 5% APP.

The MAP is sold to Nutrien through a long-term offtake agreement. This agreement is up for renewal in 2023. 

The selling price is tied to the posted DAP fertilizer price (DAP is just a slightly different mix of phosphate/nitrogen than MAP). As you can see below, Conda’s revenue per ton follows closely to MAP prices.

Source: Itafos Filings

SPA and APP that is produced is sold directly to retail/blenders via an Itafos brand.

The facility requires a combination of phosphate rock, sulfuric acid and ammonia as inputs.

Ammonia is sourced from another long-term agreement with Nutrien. Like the MAP agreement, it comes up for renewal in 2023.

About 40% of the sulfuric acid is produced internally. The other 60% come from the Rio Tinto Kennecott mine, just southwest of Salt Lake City Utah.

Sulfuric acid supply has proven itself to be risk. Twice in the last two years, they have experienced “significant disruption” of the sulfuric acid supply, including Q4 21.

In September the Kennecott smelter was shutdown following the release of “molten copper materials”. Sulfuric acid shipments to Itafos were stopped until mid-November. The disruption will impact Q4 results, but not enough to keep the company from raising guidance when they announced Q3.

 

FOREIGN ASSETS FOR SALE

 

A few years ago the strategy was to become a global player in the fertilizer market. As part of that, Itafos purchased assets in South America.

But the debt burden became too much and with fertilizer prices in the dumps for the last decade, Itafos struggled to just keep them up to date. Now they plan to take advantage of the improved landscape and sell the international assets:

 

Source: Itafos Investor Presentation

Of the four, Arrais and Farim are the most likely near-term sales. Both are an EBITDA drain on the company ($4 million and $2 million respectively) and need larger capital to get back to full operation.

 

 

 EXPECT DEBT BURDEN TO COME DOWN

 

 

As Itafos builds cash, expect that cash to go towards paying down some very expensive debt they are carrying.

Itafos has $250 million of debt. Most of the debt comes from a $206 million term loan (paying 8%) and a $42 million promissory note that is held by Castlelake.

The $42 million note is killing Itafos with interest. The loan pays 15% interest (increasing to 18% next year) with 4% of that paid in stock.

Sadly, Itafos can’t pay down the promissory note without first paying off the term debt. When I talked with Delaney and Brush, they said that one way around this would be to restructure the entire debt load in one swoop.

That would be ideal, but given that they just refinanced their term loan in August (it has a 3-year term) I’m not sure how easy it will be. Given that uncertainty, I have not modeled in any significant reduction in interest costs over the next year.

 

STOCK CHART

 

 

CONCLUSION

 

Itafos is a cash cow right now, but the stock in the last year reflects that—up 5x. (Many good commodity producers are up that much in the last 12 months)

Arguably, the stock will not have another Big Move up until that debt comes down, either by re-negotiating the terms or selling assets–or both.

But at current phosphate prices, this stock has big leverage–and a great operational team.  It’s the ONLY junior phosphate producer. It’s in the US. 

Part of it will come with results. Itafos should be able to cut debt by US$100 million next year if phosphate prices stay at this level.

In the last 3-quarters, 65% of EBITDA has translated to free-cash-flow. If that continues and if prices stay at the current level, debt should be under $50 million by YE 2023.

Source: Itafos Disclosures, Our Forecast

Another Big Catalyst–but not likely until Q2/Q3–is the permitting of the mine-life extensions at H1/DNR. That will check another box.

Firming up the mine extension will bring on new lenders, which will lower the cost of their debt. Another check.

Itafos has 185 million shares outstanding. Let’s assume the market gives them no multiple expansion over the next year.

If that happens (eg. A flat Enterprise Value) the debt reduction alone should give you a 50% gain on the stock.

A more bullish case is that the market recognizes Itafos and gives it a market multiple (maybe 4x EBITDA). If that happens, you are looking at more than a double.

The very bullish case is the market starts revaluing the fertilizer stocks overall. Instead of Mosaic trading at 4x EBITDA and a price to earnings of 7x, maybe the market gives them 6x and 12x. The same thing happens to Itafos and it is a triple from here.

You get the picture.

Nowhere am I talking about fertilizer prices moving higher.

Buy Itafos on where fertilizer prices are today. Watch the news and make sure they are staying there. As long as we remain at these levels, the stock has legs to go far higher.

EDITORS NOTE: I HAVE A NEW FERTILIZER STOCK PICK–and it has everything I could ask for

  1. a management team who has built and sold one agriculture related company already.
  2. They have a unique science, technology, and product–
  3. and it’s so good, they have offtake deals for up to 5x their current production.
  4. They did over $15 million in revenue last year and are growing quickly.

To get this company’s name and symbol before the institutions rush in, CLICK HERE

THE WAR THAT SAVED THE MARKET

By
Keith Schaefer
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The market is flying.  Meme stocks are back.  It is good times again. 

But I have not been a big buyer.

Instead, I have taken the opportunity to reduce my positions – particularly in oil – and regroup.

I am not convinced that what we have here is a sustained bull market run.  So I still have a huge cash position, and have been doing mostly…nothing.

Instead, I think this is a market that has lost its roots.

Here’s my thinking (caveat: after making A LOT of money from late 2019 – mid 2021, I have been wrong a lot lately).  A month ago, I was sure that we were on the road to a much larger move down.  The S&P was headed to a 3-handle.  The micro-cap stocks that I work with would have been that much worse. 

Then the Russian invasion of Ukraine—war–happened.

The war changed everything.   But front and center is that it changed the narrative.

The S&P had been falling for two months.  Most stocks had been dumping since the summer.  The narrative accompanying the fall was a world of rising rates and the demise of a 30-year bond bull market.

But then – BOOM!  An about face: war, shortages, fear of escalation.

It was scary.  It IS scary.

But here’s the thing.   This new narrative – war – it follows a whole new set of rules.

These rules aren’t nearly as bad for stocks as endlessly rising rates, particularly for the stocks that had been going down the most.

BUT – and why I am being cautious–the war narrative will be transitory.  Fundamentals – the economy, inflation, the Fed tightening – they will come into play again.

The economy sure looks like it is rolling over to me.  There are an awful lot of headwinds once we get past any moment of triumph.
 

THE NEW WAR NARRATIVE

 
Do you remember that we had sky-high natural gas prices in Europe as far back as November?  I do.
Doesn’t matter.  Natural gas was now up because of the war.

Same with oil, same with coal, corn, soybeans, steel, metals and rates.  Every move up and down was now because of the war.

That laid the seeds for a rally.  A boomer!   A positive development on the war front, any positive development, is now a reason for the market to rally.

Do you really think that unprofitable tech and meme stocks like Gamestop (GME – NASDAQ) could have rallied as the 10-year note took off to 2.5% absent the war?


Source: CNBC

No way!  Rising rates are the sworn enemy of these stocks.

But if rates are rising because of war?  Especially if we are winning?  Bullish!

It is no surprise that the best performers have been those stocks that were shorted the most – meme stocks and unprofitable tech. 

Check out the biggest winners since March 11th (only 11 trading days ago!):

  • Gamestop (GME – NASDAQ) up 143%
  • AMC (AMC – NYSE) up 116%
  • Kodak (KODK – NYSE) up 67%
  • Virgin Galactic (SPCE – NASDAQ) up 44%
  • Tesla (TSLA – NASDAQ) up 43%
  • Bed Bath (BBBY – NYSE) up 37%
  • Beyond Meat (BYND – NASDAQ) up 36%

See a theme?  Former darlings, beaten down for months, now back with a rocket-ship-like rise.
It’s a war rally – driven by the euphoria of winning the war.  Worrying about rates is for another day.
 

CAN THIS GO ON?

 
Because this is a war rally, it is hard to know how far it will go.  We know how far bear market rallies go – they would normally be ending right about now.  War rallies are more uncertain.

But I doubt this is a new bull market.  We almost never see a new bull market led by the winners of the last one.

What’s more, the craziest moves have been in the most heavily shorted stocks.   Short-selling rallies run out of steam when there are no more shorts to cover.

Given the pain, we may be getting there soon.

Morgan Stanley put out an interesting piece this week.  They pointed out that as of last Tuesday, almost 80% of the shorts established in the first quarter had been covered.

They called last week the biggest week of short covering since they started following the data!

That number has surely only gotten higher as we have continued to grind up since then.

The moves we have seen in the most shorted names have been remarkable.  Stocks up 50% or more in the matter of a couple of weeks.

It is hard to ignore that this is the hallmark of a bear market rally.  They don’t call it a ‘rip-your-face-off’ rally for nothing.
 

COMMODITY STOCKS –
RISKS TO THE LEFT, RISKS TO THE RIGHT

 
Two weeks ago, I told my subscribers I was selling all my oil stocks. The reason? I just didn’t see enough upside left.

“I sold all my oils this morning.  Everything.  All of it… I’m not worried about missing A Big Trade in oil now. “

That turned out to be a good call.  It has been a rollercoaster ride for oil since then.  All commodities rocket up and down on each new promise of or failure to resolve the war.

But if you zoom out a bit further, oil stocks, all commodity stocks, aren’t doing much of anything.
There are good reasons.  Commodity stocks have multiple headwinds.

First, there is the news cycle.  Every indication of some sort of deal means that oil, coal, steel, grains – they all take a hit.

Anyone that has bid up these stocks over the past month has now been thrice burned by the news flow.  Investors are getting more reluctant to hit the ask going forward.

While no one really knows what is in Putin’s mind, what does seem clear is that Russia is not winning this war.  Putin’s only out – to save-face – is through a negotiated settlement.

That will be great for the world – but it would be less great for commodities.

The other headwind to commodities is the economy.

If and when an agreement is signed – what then?

A lot of evidence is pointing to a weakening economy.

A classic sign of a coming recession, the inversion of the yield curve, is already on us.

Source: Bloomberg

Consumer confidence is plunging and at levels typical of recessions.


 

Source: Federal Reserve

The consensus for first quarter Real GDP estimates has decline from 3.7% in late December to 1.7% now.   

The more-accurate Atlanta Fed data driven model (GDPNow) predicts only 0.9% GDP.   We are getting REAL close to negative numbers.

Source: Bank of America Capital Markets

Maybe most concerning – retail sales is starting to teeter.  Headline retail sales were flat in February (meaning Real or inflation adjusted retail sales fell).

Source: U.S Census Bureau

Restoration Hardware (RH – NYSE) shocked the market this week with the dour outlook CEO Gary Friedman gave on their quarterly call.

Friedman said that RH had seen demand soften in Q1.  But he was even more uncertain going forward – in fact he said he has never been more uncertain about the outlook in his 22 years in the business.

I don’t think anybody really understands what’s coming from an inflation point of view, because either businesses are going to make a lot less money or they’re going to raise their prices. And I don’t think anybody really understands how high prices are going to go everywhere.

Central banks are marching ahead and tightening right into this.

Bank of America is still saying the Fed is behind the curve.  They believe that we will see faster rate hikes and a “higher terminal rate”.  They see 50bp rate hikes in both June and July with 25bp hikes each of the other meetings.

The result – a Fed funds rate over 3% by May of next year.
 

NOT A BEAR MARKET RALLY – A WAR RALLY

 
Yeah, I know, the market is brushing this off like it does not matter.

It could be that the market is telling us we worry too much.  That the economy will be fine.  Don’t ever underestimate Mr. Market!

But it might not be saying that at all.  What if this is a war rally–not be confused for a bear market rally or cyclical upturn.

A war rally doesn’t care about rate-tightening or 3rd quarter GDP.  It is looking for stocks that outperform, for momentum, for exuberance!  We’re winning!

It is massacring complacent shorts in the process.

To be blunt, while war is not really “good” for anyone, it is not necessarily bad for stocks.  There are plenty of examples of a flat or up market during war-time periods, particularly if things on the front lines are going well.

Yet I’m being extremely careful here.  At some point this war rally will have run its course.  When it does, I think it’s quite possible that the market gives its head a shake and remembers what it was before the war.

I don’t want to be all-in when that happens. So I continue to sit on a huge cash pile.  My only real purchase of size was a tiny but fast growing fertilizer producer just hitting positive EBITDA.  I think it has a chance of being my biggest winner of 2022.

The move down in January and February was not about the fear of invasion.  It was about pricey equities, unprofitable equities, running into a freight train of rising rates.

It was about a slowing economy at a time of rising inflation.

It was about COVID still rearing its head and throwing a wrench in the supply chains again and again.
All those worries?  Still here. Worse now.

Right now, the market doesn’t care.  The post-war victory run is in full force.

But that will end.  All things do.  Reality will set back in.

When it does, I’m not so sure it won’t come crashing down on us.

EDITORS NOTE: To get Keith’s fast growing fertilizer stock CLICK HERE

IS THE GREEN TRADE ABOUT TO BLOOM? Renewables Look Like They’re Bottoming

By
Keith Schaefer
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While the overall market took it on the chin yesterday, there was one big breakout.  No, not oil.  Renewables.  The renewable sector has formed a long bottom and looks about to break out of its range.

Source: Stockwatch.com

Bigger renewable names like Plug Power (PLUG – NASDAQ), Enphase (ENPH – NASDAQ), and Solar Edge (SEDG – NASDAQ) were all up 10% on the day.

What is driving the move?

While one day doesn’t make a rally, if it holds up, I think we can chalk it up to energy security.

I don’t know where the oil top is.  I think these talking heads calling for $200 or $300 oil don’t understand the market.  Oil might go higher, but but I don’t think it goes much higher.

But Europe and the United States are learning a painful lesson of being dependent on energy from foreign, unfriendly sources.

It is abundantly clear that we are going to move to energy imdependence.  BUT… this doesn’t mean we get a flood of new pipelines and LNG infrastructure or see moves that incentivize oil and gas production. 

President Joe Biden laid it out very clearly yesterday.


Source: Twitter

This crisis will be used as a reason to direct more money to renewables and clean energy sources.

With Democrats in control and with Europe already beholden to green policies, the events of the last few weeks have – in all likelihood – actually shrunk the window to renewable dominance.

How so?

We are going to see a mobilization of dollars towards renewables that will dwarf what we’ve seen so far.

This is war.  In war governments have the power to enact extraordinary measures that would be balked at during peace times.  They can justify deficits and spending that they could not otherwise.

This time, instead of spending on tanks, bombs and guns (though in Europe I am sure there will be plenty of that too), the wartime chest is going to be spent on energy independence.

We are already starting to see the announcements, and this is just two-weeks in.  From Reuters:

Germany announced plans to rapidly accelerate solar and wind deployment to reduce reliance on Russian gas and plans to achieve 100% renewables by 2035 (including 200GW of deployed solar), vs 45% renewable demand today and against ~60GW of installed solar in Germany as of December 2021.

Expect more expedited targets, high renewable goals and more dollars allocated.

At the same time, renewable producers are going to be flush with cash.  Renewable power plants are the only electricity producers that aren’t seeing cost inflation.

Names like Transalta Renewables (RNW – TSX) and Altius Renewables (ARR – TSX) – both producers of renewable power – have seen their stocks soar.

Source: Stockwatch.com

Energy independence in this new world is not oil or coal and it probably isn’t even natural gas.  It is wind, solar, batteries and maybe nuclear but that one I’m still not sure about.

Will it work?  For now, it doesn’t matter.  As an investor I mean.

All that matters is that dollars are likely going to pour into the sector.  Subsidies and grants and freebies and you name it.  Just get it done. 

That is what I think the market is sniffing out this week
 
My favourite renewable stock trades at 5o cents a share. They don’t just produce one renewable energy form, they produce THREE–hydrogen, Renewable Natural Gas (RNG) and a biochar that replaces coal in steel plants.

And they have early adopters who have signed contracts in each of them.

This company is funded, and is racing towards revenue on three fronts. I see it as one of TWO potential 10-baggers in my portfolio. Get the report, name and symbol of this company right HERE. 

ABAXX TECHNOLOGIES ABXX-NEO SPINS OUT BASE CARBON BCBN-NEO TWO BIG ENERGY PLAYS FOR INVESTORS

By
Keith Schaefer
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0

The disaster unfolding in Europe this week is unearthing a whole host of problems with our energy system.

Not the least of these is that we clearly need more Liquified Natural Gas (LNG) capacity.

Oil has grabbed the headlines this week, but for the last 4 months LNG had taken center stage. The dependence of the EU on Russian gas has limited sanctions and forced Europe to sit idly by as Putin does what he wishes.

It is clear we need alternatives and renewables are not there yet. The only way to fill the gap is with LNG. The world needs LNG even more if 7 million barrels a day of Russian oil gets embargoed!!!

Abaxx Technologies (ABXX – NEO) is looking to create the world’s first LNG contract that gets settled in physical gas; not an accounting ledger. It will be out of Singapore and has high profile backers like Kyle Bass and Robert Friedland.

These commodity exchanges are more profitable than stock exchanges. If CEO Josh Crumb has bet right and LNG is The Next Big Fuel, then Abaxx will be a cash cow for investors.

Think of Abaxx as trying to do for LNG what Brent crude did for oil.

Now, that’s enough upside, but TODAY, their spin-out Base Carbon (BCBN-NEO) has its IPO, and Abaxx owns 19.7% of BCBN. Depending on how that stock trades, it will add a lot of value to Abaxx.

 

QUICK FACTS

 

Trading Symbols:                                     ABXX

Share Price Today:                                   $2.50

Shares Outstanding:                                71 million

Market Capitalization:                              $205 million

Net Debt:                                                  -$30 million

Enterprise Value:                                     $175 million

There was a time, not so long ago, when Brent crude was not a thing. There were local benchmarks – WTI was the biggest and most liquid – but if you wanted to peg the value of seaborne crude oil you needed to place a call to the traders on either end.

Those days are long gone and now Brent is by far the bigger contract. Two-thirds of all oil is priced in Brent.

Today, we have a similar set-up in LNG.  

Source: Abaxx November Investor Presentation

We have local prices and benchmarks that are cobbled together from traders. But there is not a true LNG exchange traded market.

Abaxx is looking to change all that.

 

BUILDING AN LNG EXCHANGE

 

Building an exchange isn’t easy. Abaxx has spent 3 years and $25 million getting together the regulatory licenses, arranging clients, and building the software.

Abaxx has a system that is ready to trade right now. The last, remaining step is getting integrated with a prime broker. These are the banks that will act as the intermediary in the exchange and facilitate the trades.

It is this final step that has been holding Abaxx back. They need to coordinate multiple global banks to be ready to launch.

That means getting large, monolithic banks to prioritize IT changes, integration of the exchange to their backend, and do the myriad of assurance and acceptance testing. It takes time.

The other time hog has been their vision. Abaxx is building more than an exchange – they are putting together both the front and back end , and that means a clearinghouse too.

Getting a clearinghouse approved means more regulatory and more hoops. Abaxx received notification that their clearinghouse was approved in principle by the Monetary Authority of Singapore in August.

Building the clearinghouse is a barrier to entry and creates a moat for Abaxx.  It means that for every transaction done, Abaxx does not have to defer to a third party for clearing.  They can do that themselves.

What will set Abaxx apart from other exchanges that trade LNG futures is that Abaxx products will be physically settled rather than cash settled contracts.

It is a big difference for an end user or producer. One is an accounting settlement where cash exchanges hand. The other is physical delivery of the gas.

On their update call on February 22nd, Abaxx was asked in the Q&A when they would be up and running. They didn’t give a date. It tells me there is still work to be done.

 

COMMODITY EXCHANGES ARE

VERY LUCRATIVE

 

What we do know is that once the exchange is in operation, it should be a cash cow.

Exchanges make money off volume. Every transaction through the system, Abaxx will take a tiny cut.

The LNG market is BIG.  Abaxx estimates that by 2030 the LNG physical market will be about 320 million tonnes per year (this is an estimate from Morgan Stanley).

At $10 per mmbtu that works out to an addressable market of $150 billion in gross volume.

From that level of trade, Abaxx estimates their addressable market in terms of revenue potential at about $500 million

Source: Abaxx November Investor Presentation

Exchanges typically get nice multiples. Abaxx highlights that the average P/E for exchanges is about 21x 2021 earnings.

Source: Abaxx November Investor Presentation

Taking a closer look at some of the North American exchanges, CME Group (CME – NYSE) trades at 31x P/E, the Intercontinental Exchange (ICE – NYSE) trades at 21 x P/E and Nasdaq (NDAQ – NASDAQ) trades at 20x P/E.

Each of these exchanges is a cash cow – their free-cash-flow yield range from 4-6%.

Of course, these are all established and far, far larger names. The market cap ranges from $25 billion for the Nasdaq to $85 billion for CME Group. Abaxx has a market cap of $200 million.

That difference is telling you that Abaxx still has a long road ahead. But the prize – being the first to market with exchange traded LNG – sure looks attractive.

 

LNG AS A STEPPING STONE TO CARBON

 

Getting the exchange and clearinghouse off the ground is really just Step One. The bigger picture here is to introduce new contracts for a wide range of commodities.

On their February 22nd investor call Abaxx described how much easier it will be to launch subsequent products once they have their own exchange and the clearinghouse operating.

“This [exchange clearinghouse] will allow us to move quickly and control that whole process, the marginal efforts to launching our next products are so much less than getting a whole ecosystem off the ground.”

One of those next-to-market products will almost certainly be carbon.

Abaxx just finished the distribution of 5 million shares of their subsidiary Base Carbon to shareholders. 

Base Carbon is putting together a voluntary carbon market contract.

The idea evolved from Abaxx’s own potential customers. Being involved with LNG, many of them are worried about global warming and (more personally) what it means for their business. 

A time will come, probably not too long from now, where imports of an LNG cargo into Japan or the EU will require an offset to its carbon footprint at the same time.

Hearing these concerns, Abaxx looked at the options and quickly realized they were limited.

They identified the problem – there weren’t enough reforestation projects out there to make a dent.

Abaxx set to work to put together a standardized carbon offset. Basically, it’s a carbon contract that represented a set tonnage of carbon being removed from the atmosphere; a contract that could be used to offset carbon producing assets.

Out of this recognition, Abaxx created their Base Carbon subsidiary.

After the share distribution Abaxx still holds 19.7% ownership in the business.

In addition, Abaxx shareholders will participate in Base Carbon through royalties. Abaxx will get a 2.5% royalty on carbon credits that Base Carbon sells.

 

WHY SPIN-OUT BASE CARBON

 

If Base Carbon fits so well with the exchange, why sell it?

There are a few reasons.

First, Abaxx believes that Base Carbon could generate a lot of excitement from investors.  They don’t want that muddled with the mechanics of getting an exchange up and running.

Second, the business is bound to be capital intensive. Abaxx expects that to get to scale Base Carbon will be raising $100’s of millions in capital. They don’t want to dilute the LNG business as they do this.

Third, Abaxx wants to keep their stock a pure play on the exchange. Base Carbon complicates the structure and, once everything is operating, the financials as well.

Base Carbon was cashed up in November when Abaxx did a $50 million offering of shares. Abaxx owns 19.7%.

 

TIMING FOR LNG EXCHANGE

COULD NOT BE BETTER

 

Over the last couple of weeks the world has changed – maybe forever.

Abaxx is one of the few companies that are on the right side of it. We need more LNG.

Even before Russia invaded Ukraine, LNG forecasts were being ratcheted up. Shell’s LNG outlook, released late last year, estimated that LNG demand would nearly double by 2040.

Their forecast was mainly based on increasing demand from Asia. You can add Europe to that mix now.

Germany did a 360° just this week, announcing they want 2 LNG import projects built as soon as possible. Other countries will follow the lead.

At the end of the third quarter Abaxx had $30 million of cash and equivalents available. They spend around $1 million a month. Now they will have just under 20% of BCBN’s market cap that they can mark to market each quarter.

It’s a very low burn rate and it gives them enough cash runway to get the exchange up and running.

I like the space and I like the progress Abaxx has shown so far. My only question is when does the exchange start generating cash?

I don’t have an answer for that. It looks like there are still some hurdles to overcome. 

I’ll be watching this one closely to see if they can clear them.

DISCLOSURE—I AM LONG ABAXX AND BASE CARBON

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