Input Capital (TSXV: INP) â Initiating Coverage - First ... - Baystreet.ca

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Page 10 Expected cash flows from the above contract: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Initial Investment $ (1,000,000) Canola Produced by the farm (tonnes) 1,200 1,200 1,200 1,200 1,200 Canola to Input (base tonnes) 838 838 838 838 838 Cash flow to input $ 335,000 $ 335,000 $ 335,000 $ 335,000 $ 335,000 The above cash flows would return an IRR of 20%. Benefits of streaming contracts Currently, farmers use traditional farm financing options, the most notable being Farm Credit Canada, The Canola Cash Advance from Agriculture Canada, institutional lenders such as large banks / credit unions, equipment leasing companies and loans through manufacturers (such as John Deere (NYSE: JD) etc. The Canola Cash Advance is a low cost financing method available from the advance payment program offered by Agriculture Canada. The cash advance is available at different parts of the harvest cycle, but mainly right before seeding or at the completion of seeding. The cash advance has a maximum of $400,000, which does not provide for enough capital for larger farms. We feel that Input offers an attractive offering for farm financing over traditional sources because it does not require the farmer to give up equity or incur additional debt. A few other key benefits of the streaming model, for farmers, are discussed below. • Maximize output Input’s streaming contracts allow farmers to expand their asset base, and optimally farm their acreage. Funds must be used for farming related expenses including purchase new equipment, seed more acreage, hire more staff, hire an agrologist, etc. • Long-term agreements Input offers a long-term financial solution for farmers looking to expand their operations. Financing from competitors are usually for one year or the life of the harvest. With a long-term contract, farmers can focus on growing and maximizing their operations without worrying about securing financing every year. We feel this is a significant advantage over other financing options. • Can buy inputs (fertilizer, pesticides, etc.) at off-market times The inputs used for farming such as fertilizer and pesticides are produced year around and due to seasonal lows in demand, inputs are often discounted up to 30% to entice purchases and keep inventory moving. This typically occurs near the end of the growing season, when most farmers have utilized their available cash on the current crop. The cost savings is significant, approximately 25%-40% of the total farm’s operating expenses are from input costs (Source: Ministry of Agriculture, Food and Rural Affairs, Ontario). This translates into up to a 12% savings on total operating costs if the farmers are able to purchase inputs at a discount. Management states that farmers also save by receiving discounts on inputs by paying cash, which could be as much as 3%. • Optimize sale time Canola prices are cyclical – prices tend to be the lowest right after harvest. Holding on to the canola and timing the sale can yield significant price improvements. The graph © 2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 11 below shows the seasonality of canola prices - prices are highest near May/June, and lowest in October/November. The price fluctuations are primarily due to seasonal supply levels. Most financing companies require payment once the crop is harvested, leading farmers to sell during the lower price period. Input Capital allows farm operators to sell at optimal times because they do not have to pay cash at harvest. Source: The Progressive Farmer We feel that the benefits offered by Input Capital would be very appealing to farmers who have limited capital available. The operator can save through discounted farming inputs, cash discounts, and no interest charges. They can also increase their cash flow through yield enhancements and better timing of sale. Overall, we believe, the effective cost of capital for Input’s financing is likely to be much lower than traditional forms of financing for famers with inadequate working capital. Limiting risks of farming Due to the volatile nature of farming, Input has put in place a number of conditions on the farmer to help ensure they get their required yield. Factors to mitigate risks/ enhance crop yield • Farms must use a third party agrologist, which helps to enhance crops through scientific means like soil sampling, productivity assessments, etc. The farmer pays for the agrologist, with costs starting at around $5 per acre. The increase in yield will vary from farm to farm, depending on a variety of factors, but using professional services limits crop risk. • Input is looking to diversify its streaming contracts throughout Western Canada. By diversifying farm locations, it reduces the risks of weather and other conditions that could lead to a poor harvest. • Farmers must purchase crop insurance that covers 70% of the long-term average crop yield. The farmer covers the payment for the crop insurance. Input aims to keep their claim on the canola crops below 70%. If there is a poor crop, the farmer receives the insurance and can cover what is owed to Input with those funds. Since © 2013 Fundamental Research Corp. “10 Years of Bringing Undiscovered Investment Opportunities to the Forefront “ www.researchfrc.com PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT
Page 1 and 2: Siddharth Rajeev, B.Tech, MBA, CFA
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Page 5 and 6: Page 5 Gord Nystuen - Vice-Presiden
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Page 15 and 16: Page 15 Canola cash receipts (in $1
Page 17 and 18: Page 17 Source:Barcharts We believe
Page 19 and 20: Page 19 million (EPS: 0.06) in FY20
Page 21 and 22: Page 21 Input Comparable Input's FV
Page 23 and 24: Page 23 Cash Flow Statement 2012 20
Page 25: Page 25 Fundamental Research Corp.

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