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

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Page 2 Overview Previous funds operated by management Input Capital Corporation (“Input”), headquartered in Regina, Saskatchewan, was founded in October 2011, and started operations in late 2012. Management claims Input is the world’s first agriculture streaming company. Through streaming contracts, Input advances funds to farm operators, and in return, receives the right to purchase a fixed tonnage of canola, for no payment or a low fixed price, for a term of 5-7 years. Input engages in a number of mitigating strategies to limit the volatility of farming and non-delivery by the farmer. As of June 30, 2013, management states Input has raised $24.35 million through private placements, and deployed $19 million. Input’s shares started trading on the TSX Venture Exchange on July 22, 2013. Management of Input Capital also currently runs Assiniboia Capital Corp., which is a Regina based investment company. Assiniboia Capital Corp. was founded in 2005, with the launch of the Assiniboia Farmland Limited Partnership. The Farmland LP is one of the largest farmland fund in Canada, and has approximately 115,000 acres owned and under management. According to management, the farmland fund has returned a 20.2% IRR (net of fees) since inception. Assiniboia consisted of four separate LPs that were combined into a single entity in 2009. The December 31, 2010, audited statements for Assiniboia reported a Net Asset Value (“NAV”) of $30.30. The December 31, 2012 statements showed the NAV increased to $51.75. Management has previously operated three Limited Partnership (“LP”) private funds that invested in canola. These businesses had a very different model than Input. They were one year joint ventures with farmers, where the fund received a percentage of the crop yield for that year. This exposed the fund to volatility in yield due to weather, harvest, etc. The three LPs were formed in 2009, 2010 and 2011, and raised a total of $7.1 million. Returns data for the LPs are not available as they were private funds. However, as discussed below, the high percentage of investors who transferred their units to Input Capital, we believe, indicates they were satisfied with their investment. LP unit holders were given the opportunity to convert their LP units into Input Capital shares in November 2012. At this time, the LPs had no business operations, their assets consisted only of cash and receivables. The majority of the investors in LP2 (87.1%), and LP3 (90.8%), transferred their units into Input Capital. LP1, however, transferred only 25% of units into Input Capital, which is due to one large investor who controlled over 70% of the fund not transferring their shares. For LP 2 and 3, the cash and receivables held by the LPs were transferred to Input Capital. Cash and receivables of LP1 will be transferred as LP1 is still in the winding down process. Streaming business model Management states that the ‘streaming structure’ concept was derived from their experience operating the three previous canola funds, and the business model of established metals streaming businesses. Some of the key factors for creating a streaming public company are: • Farm operators prefer long-term capital commitments. • Management wanted to establish a permanent capital base instead of a partnership/fund structure where investors could redeem. © 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 3 • Public company status gives better access to capital. • There was more operational involvement for management in the joint ventures. With a streaming contract, management takes no operational control in the farm. The streaming business model and the differences between agriculture and metal streaming are discussed below. What is streaming There are many notable streaming companies in the metals industry as it is a popular way for companies to raise capital without taking on a large degree of debt or diluting shareholders through equity financings. Due to the high capital expenditure requirement for mines, metal streaming contracts allow for upfront payments in exchange for a portion of the metal mined in the future. Notable streaming companies in the mining industry include Silver Wheaton (NYSE: SLW; market capitalization - US$8 billion), Franco-Nevada Corporation (NYSE: FNV; market capitalization - $7 billion), Sandstorm Gold (TSX: SSL; market capitalization - $640 million), etc. These metal streamers trade at high P/E ratios, and P/CF, because of their high earnings and cash flow projections in the future. They also have very strong EBIT margins, as shown in the table below. Company Ticker Price Price/ Diluted EPS before extra P/CF Revenue (mm) EV ($, mm) EBIT Margins Sandstorm Gold TSX: SSL $ 6.11 43.7 15.6 55.9 547.6 37.9% Silver Wheaton TSX: SLW $ 23.73 17.2 12.0 886.2 8,989.5 70.6% Franco - Nevada Corp TSX: FNV $ 44.42 41.8 22.2 445.4 5,200.7 34.4% Royal Gold Nasdaq: RGLD $ 50.59 35.6 20.6 292 2,635.4 60.1% * Stock prices as of July 29, 2013 * Revenue and EBIT margins for year ended December 31, 2012 * P/Diluted EPS based on FY2013 estimate - Source: Capital IQ The following lists some of the benefits Input has over metal streamers. • Once capital is deployed, Input receives a return in the first year. For most metal streaming contracts, once capital is deployed, a mine and/or necessary infrastructure needs to be constructed, which can take years before the project sees cash flows. • Crop insurance provides protection against yield volatility. Metal streams have no insurance to guarantee a set amount of product. • Input Capital deploys their capital within the western provinces of Canada. Mining streamers, listed above, deploy capital worldwide, which increases political risks. The major downside to agriculture streaming is the life of the contract. For the initial payment, mining contracts are usually for the life of the mine, which can be 20+ years. Input has short-term contracts that need to be renewed every 5-7 years. Despite this, we feel that the relationships Input will build with their operators (during the 5-7 year term) should lead to high renewal rates. Mines also have a finite life, where farms can continually produce, leading to good long term renewal prospects for Input. © 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: Siddharth Rajeev, B.Tech, MBA, CFA
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
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Page 25: Page 25 Fundamental Research Corp.

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