Sunday, February 14, 2016

Input Capital (INP.V) an agricultural streaming company

Recent price drop gives investors another bite at the apple

Regular readers might remember my various musings on why I like royalty companies. Basically I like to have the exposure to gold, silver, base metals, etc... while minimizing the risk that goes along with mining. The streaming companies basically give a mining company up front money and are given the right to purchase mined metal at a substantial discount to the current market price. The streaming company then sells the metal into the market at the current price and captures a profit.

 The streaming companies that I currently own Sandstorm Gold and Altius Minerals fit this bill quite nicely. They both have been taking advantage of the recent bear market in metals to create additional metal streams at advantageous terms. Both companies should be able realize the increased cash flow from their streams to increase investor returns (dividends and buybacks) and I intend on holding both companies as investments for some time.

I have followed Input Capital (INP.V) for a long time time and I like their business model which is creating canola streams with Canadian farmers. The explanation on how this works is outlined on the company website.

Basically the farmer is paid upfront for a portion of his future production. Input puts various protections in place to protect their capital and at harvest Input Capital collects its share of the canola and realizes cashflow from the stream when it sells. Rinse and repeat by redeploying the cash from maturing streams into new streams (page 16 of presentation shows this). Here is a link to the company presentation. I have been watching Input Capital for several years as the company continues to build its concept with farmers and it has grown its streaming contracts to 77. I believe the concept is proven and is understood by farmers and adds value to them by allowing a large cash infusion into their operation which enables them to purchase inputs off season at a discount. They can also pay cash for large purchases like equipment and negotiate discounts.

Input also adds value by assigning an agronomist to the farmer to assist him with applying modern techniques to his operation in order to help improve yield.

The reason I am adding Input Capital is because they have had a couple things happen recently that have driven the price stock down. The first issue is hurting all Canadian stocks and that is the fall of the Canadian dollar which has weighed down these companies in US dollar terms. The other issue if that Input decided to terminate three streaming contracts with a farmer. This will entail Input enforcing the security guarantees that are associated with the contracts. The company believes they will fully recover their funds. In addition because of the termination of these contracts the company was forced to reduce the number of forecasted canola tonnes to be sold in FY2016 from 80k to 60k.

I believe this is a one off problem and the company already made a decision eighteen months ago to reduce the size of its contracts in order to lower risk.

I consider Input a great business that has quite a bit of runway in Canada just with canola farmers. The company believes the concept could also be applied to other types of farming. I think this is a business you just buy put into the coffee can and let management compound your capital. Open up the can  in 10 years and it will be substantially higher in price.

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