Can't see the carbon for the trees CRITERION: Tim Boreham August 05, 2009 Article from: The Australian
AS a word, biosequestration is both poetic and tongue twisting, hinting at an obscure scientific ritual. It's also a term investors will become much more familiar with in the next few years.
Biosequestration is a fancy word for carbon sinks: growing trees not for harvesting but for absorbing harmful greenhouse gases in perpetuity.
Two biosequestrators -- CO2 (COZ) and Carbon Conscious (CCF) -- already grace the exchange. And sub-1c a share minnow m2m (MCL) plans to merge with unlisted Carbon Planet, which measures carbon footprints and plays in the developing rainforest credit sector.
More are bound to follow ahead of the introduction of the government's Carbon Pollution Reduction Scheme in July 2011.
The CO2-Carbon Conscious business model is simple enough: grow trees on degraded farmland on behalf of the client, who can claim each year's increase in biomass as an offset against their polluting activities.
As for the farmers, they get a wedge as well and improve the quality of their paddocks.
Carbon Conscious signed a deal last month (headline value $26 million) to grow mallee eucalypts for Origin Energy, the biggest such transaction under the CPRS.
However, CO2 (rightly) claims to be the industry pioneer, with 20,000 trees already planted.
In late 2007 it struck a $100m deal with Woodside to plant 23,000ha of mallee forests in NSW and Western Australia. The deal was required to win state environmental approval for its $12 billion Pluto liquefied natural gas project.
Other CO2 clients include NSW utility Orion Energy, Newmont Mining, Impex and Wannon Water. Then there's a host of companies and organisations who aren't big-name polluters, but have adopted a policy of offsetting their everyday activities.
CO2 gained accreditation under the NSW gas abatement scheme -- expected to morph into the new regime -- in 2005.
"Our business focus is largely on the compliance market and the big emitters," chief executive Andrew Grant says.
Grant adds that the projects shouldn't depend on the scheme going ahead.
"We are in a very healthy position regardless of what happens with the scheme," he says.
"We just have to plan for a variation in timing."
For investors, a reasonable assumption is that the carbon abatement is unproven when it comes to the profitability of the business model. Grant disagrees.
"The beauty of forestry biosequestration is that it is proven, scalable and low-cost," he says.
"You are working with land which has been degraded or overcleared."
Through a mix of up-front and ongoing management fees, there's also stable earnings on offer.
Grant expects to be able to sign deals with reliable counter-parties for as long as 30 to 50 years, which would be unheard of in most other industries.
Carbon Conscious doesn't yet make money, but hopes to do so when the benefits of the Origin deal -- effective immediately -- kick in.
Last year CO2 made $1.7m.
"We have no debt and are in a strong cash position," Grant says.
Befitting its less-developed status, Carbon Conscious has a sub-$10m market cap, compared with CO2's circa $50m.
So it's a case of trading off CO2's relative earnings certainty with Carbon Conscious's potential for capital gains.
The m2m-Carbon Planet play sounds like it has potential, but the investment merits are opaque at this stage.
Criterion views the sector as appealing but risky.
Arguably, anyone can plant a few trees, so expect failed fish hatcheries or tin explorers to reinvent themselves as Acme Biosequestrators overnight.
But you can't hurry tree growth and that's where the two listed incumbents enjoy a first-mover advantage.
