Cielo Waste Solutions
Ticker: CMC.CN / CWSFF
Listings: Canadian Securitites Exchange / US OTC
Market Cap: 307 MCAD at time of posting
Share price: 0.87 CAD at time of posting
An update on the Desulfurization process was provided by Cielo Waste Solutions on the 6/3 (Saturday) 2021 at the same time of this article being published .
“ Cielo’s lead engineering firm has built a desulfurization lab 1,000 times the size of the lab used at the University of Calgary. Cielo provided to them renewable diesel and they were successful in reducing the sulphur content to 5ppm, well below the required limits. We are very confident in scaling the process and have begun the fabrication work. “
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ESG interviewed famous Small Cap investor Robert McWhirter on the 1st of March 2021 to talk about his largest investment which is Cielo Waste Solutions. Below you will find the transcript of our call.
ESG: To those of our readers who don’t know you could you give us a short summary of your background?
Robert: Over 25 years ago I was a private client fund manager in charge of 100 million CAD. I’ve also worked as a portfolio manager with institutional management and ran a fund with 6.25 billion CAD during the internet era.
Our returns were 70% compounded over 3 years. Seven years ago I decided to start managing my own money exclusively so now I run our family office. It was actually my wife who said ,“Bob you’re great at picking stocks why don’t you do it for us exclusively?”.
Today I get invited to discuss stocks on BNN Bloomberg TV and it is fun to share my insights on small cap Canadian: industrial, technology and healthcare stocks. I do not give recommendations, only insights.
ESG: Could you explain to my readers how you came to the conclusion on the $8 CAD target price and on what time span is that target price made ?
Robert: My insight, it’s NOT a recommendation, is that Cielo could reach $8 CAD within the next 12 months.
ESG comment: This interview was done before Cielo announced the 10 million CAD loan for the new Edmonton facility and also before the update provided above on the Desulfurization process .
Robert Continues: The Aldersyde facility might, by my calculations produce $11 million CAD in EBITDA in 2021 with a run rate by producing 1000 LPH (LPH=Liters per hour , 1 liter = 0.26 gallons) .The potential doubling of capacity at Aldersyde might take that to 2000 LPH for potentially $ 20 million CAD in annual EBITDA.
Cielo has joint venture partners ready to build 5 facilities at $50 million CAD each and $250 million CAD in total. Cielo is expected to receive a 7 % construction royalty on that capex which equates to $8 million CAD per year. Together with the other $20 million we are looking at close to $30 million CAD in potential EBITDA .
With a 15 times EBITDA multiple, on that you get a potential $450 million CAD market cap.
If you then look at the 5 joint venture plants producing 10,000 LPH that’s about 400 million liters a year or 105 million US gallons per year . One gallon of renewable diesel is about $6.68 CAD ($1.67 CAD per Liter) equalling a total potential revenue of $668 million CAD per year. Cielo is expected to receive 30 % of the profit on these 5 plants until they’re paid off and doesn’t have to invest any money since that’s provided by the joint venture partners. After the facility is paid off Cielo is expected to get 50 % of the profit.
We still haven’t taken into account Cielo’s own planned Edmonton facility which is expected to bring in revenues of $55 million CAD per year that Cielo plans to own without joint venture partners.
The demand is clearly there for Cielo’s products. Barclays has stated that there is a demand of close to 700 million liters (185 million gallons) of renewable diesel in Canada alone. That equals 22 potential Cielo plants to put 2 % renewable diesel into Canada’s on road diesel fuel market.
Don (CEO of Cielo) has said he gets calls every day to build plants around the world so clearly there appears to be global demand!
ESG: Do you think Cielo will have analyst coverage soon?
Robert: Yes, I’ve been encouraging an analyst to get this on their radar. Similarly, I had to encourage an analyst to initiate coverage when Xebec was 40 cents a share (currently trading at $7 CAD)
ESG: Do you think someone would want to buyout Cielo?
Robert: Definitely, if so I think it would be done by GFL ,Chevron, Exxon, Shell or BP. Most likely one of the bigger oil companies since they can afford to pay a premium. This might happen within 3 years. Cielo could also be bought out by a big waste management company who would use Cielo’s technology to eliminate the tipping fee paid for landfill. That would be a significant competitive advantage. For a waste management company that could offer this to every municipality would love them! Oil companies could potentially buyout Cielo since they could then potentially offer a green diesel solution where they take all plastic, garbage, all paper and maybe even (soon) human waste and turn into a raw material source for biofuel.
ESG: Why do you believe Cielo a better opportunity than its comparable GEVO?
Robert: The BIGGEST difference is that Cielo’s capex is estimated to be 1/10th that of GEVO’s $700 million USD for their planned South Dakota plant to produce the SAME volume! GEVO uses crops using farmland. Cielo only uses waste material taking care of two problems at the same time, creating renewable fuel while removing waste.
GEVO’s business model appear smart as they describe “we take the corn and take out carbohydrates to produce our fuel and, the rest used for cow food.”
ESG: I’m sure all of my readers would like to know how did you find Cielo Waste Solutions and what made you invest in the company?
Robert: I meet many companies, usually around 10 per week. During COVID it’s done with online meetings instead of physical ones. There are not a lot of high profile smallcap investors in Canada today, there’s probably less than 10 of us. If someone wants to raise money it’s a short telephone list. Cielo is not an overnight success, it has been 16 years in the making and the technology has cost 75 million CAD to develop. I have followed Cielo for about 10 years before I recently decided to invest in the company after doing extensive due diligence. I was an early investor in Xebec ($XBC) which takes methane gas out of landfills. I also have a strong technical background and worked 3 years in a machine shop after high school.
Because Cielo wasn’t sure how to resolve some technical issues 10 years ago, there are some people that might have lost money back then. However, that is now history and the recently patented technology has significantly improved.
Cielo solves a worldwide problem with waste and landfills. For example, 3 years ago China and India said they wouldn’t take any more plastic (from Canada and USA). Unfortunately most of the curb side residential recycling in Toronto goes straight into a landfill without any recycling as there is no market for a lot of the material. This is also the truth for many places in USA.
There are 7 different kinds of plastic and Cielo says they can take all types of plastic, cardboard and more which they turn into fuel which could be a revolutionary technology.
ESG: What do you tell people who think Cielo’s technology isn’t working?
Robert: Cielo has many competitors who want to do the same thing, to take plastics and produce some sort of fuel. I reviewed Cielo’s patents last summer and this was after I decided to start investing in Cielo.
The technology to potentially reach the target of 15 parts sulphur per million in the fuel has been developed with University of Calgary over the past 2 years. Don ( CEO of Cielo) had an open house for a lot of politicians last year at the facility in Aldersyde, near Calgary, and showed them the business in all aspects. About a year ago Canadian Pacific Railways said that if the process works that they will deliver 250, 000- 1 million railway ties per year to produce renewable fuels. Cielo is currently waiting for approval to test railway ties on a larger scale. I personally don’t see any technical issues as to why this wouldn’t work.
ESG: How do you normally pick your investments?
Robert: I’m extremely detailed when I conduct my due diligence. When companies try to pitch me new ideas, I go in depth to see if their business plan appears viable. It’s all about management really. Cielo did not have previous success until recently. , Cielo has invested 75 million Canadian dollars into their business so I had to ask myself at what point do I invest? That time was last spring.
ESG: How do you view the close term outlook for Cielo?
Robert: I think 2021 could be the big catalyst year for the company. Management is very hands on and are problem solvers. They know exactly what needs to be done and how to get there in time and are now even ahead of schedule. They’re now planning to double the production capacity at Aldersyde to 2000 litres per hour. Its not rocket science, it is basic science and they know how to get it done. About a year ago, I saw a 10 X bigger opportunity with Cielo than I did with Xebec and so put my profits into Cielo. Cielo is our largest position. Cielo claims to be able to take all plastics, landfill, railroad ties and more which they convert into renewable fuel. If this all works, it would appear to be in the very early days of Cielo’s growth.
ESG: What do you think speaks for Cielo compared to its competitors and how do you think they will be able to finance their expansion of 40 plants in the next 5 years?
Robert: Cielo has 2 outside financers who want to build 5 plants. Don (CEO of Cielo) has told me that they hope to have 35 more plants that would built on the same terms within 5 years. After the facilities are paid off Cielo is expected to receive 51% of the profit. The Edmonton site might be a bit more expensive as Cielo will likely need to build railway spur lines to get the feedstock delivered.
The Aldersyde facility expansion is expected to cost about $8 million CAD to upgrade from 1000 LPH ( 264 gallons / hour) to 2000 LPH (528 gallons/hour). Construction of Cielo’s Edmonton plant could begin as early as spring of this year (2021) (site preparation). There appears to be enough garbage in Edmonton to support 3 plants so the feedstock should not be a problem. There is also a close supply of railroad ties. Edmonton appears to be a great place for this facility since it’s a hub for petrochemicals and refineries.
ESG: What do you think is the biggest risk with an investment in Cielo and are you confident they will solve the desulphurization process?
Robert: The number one risk occurs if they cannot get the sulphur level down to less then 15 PPM. However, jet fuel can have much higher sulphur content so there could be demand for a higher sulphur content product. I do not expect Cielo will fail with the process since the desulphurisation has been lab tested BUT this needs to be scaled up to a much larger size. The total addressable market is significant. Blending biodiesel for Canadian road use needs 680 million litres of diesel per year (180 million gallons). At a price of about $1,7 CAD per litre = $1,1 billion CAD market in Canada alone. The main advantage of Cielo’s solution is you can use the existing diesel fuel delivery infrastructure. Other catalysts other than the desulphurisation is getting more raw materials to be approved as feedstock.
ESG: Thank you for joining us Robert and we hope to have you with us soon again!
Robert: Thank you, my pleasure!
ESG comment: Cielo Waste Solutions remain our largest position in the portfolio and I’m confident that the company is on a positive path towards commercial success.
This is not to be considered financial advise, always do your own research!