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Input Capital: Streaming for Canola
05/31/2017 2:50 am EST
My latest recommendation is something unique. Input Capital (INPCF) (Toronto: INP), is the world's first and only agricultural streaming finance company, notes international investing expert Global Investing's Vivian Lewis, along with contributing editor and Canadian stock expert Martin Ferara.
Input borrowed the concept from the mining industry where such financing is common. Its streaming contracts fund canola producing farms in the Canadian prairie provinces.
Streaming means Input pays upfront to get a set amount of canola at a fixed discount price, giving farmers access to cheaper finance than they can get from banks to pay for seeds, fertilizer, and other inputs when the price is at a seasonal low, and allows them to fund capital spending to boost yields.
Unlike mine streaming, farm streaming is ore secure because a farm which gets into difficulty can always be repossessed and the crop will always have some value.
At the same time, Input can sell the canola on futures markets when prices are high. A traditional bank loan would force canola-growers to sell at the end of the season to pay it back, when prices are lower. So both farmers and Input get higher prices with the streaming system.
Input concentrates on canola (a form of rapeseed which was developed in Manitoba in the 1970s by removing the anti-nutritional parts of the original plant) because it is Canada's largest export crop for which there is growing demand. It has no plans to operate in the US farm belt.
Canola is used for cooking and its meal fed to cows increases their milk yield. Apart from funding, Input gives agronomy advice to its farmers and gets a share of any increased crop yield. It also uses Canadian and provincial crop insurance to cover as much as 70% of losses from weather or catastrophes.
The company has strong security in place to make sure it gets paid in cases where farms file for bankruptcy. This was tested 18 months ago when 3 farmers went bust and Input foreclosed and ultimately recovered 100% of its loans.
This history has hurt the stock which still has not reached earlier price levels despite having grown bigger and stronger. It changed its policy to sign only smaller streaming contracts after the court battles.
So the stock is cheap compared to where it was. It also has $28 million (Canadian) in cash at hand plus $25 million in bank credit lines, and therefore is hardly leveraged at all, unlike other specialty finance businesses. It doesn't depend on fickle depositors or bank loans to expand.
Insiders have been buying. The two founding families, the Emsleys and Farquhars bought from XL Value Offshore LLC 4.25 million shares of Input this year, amounting to 5.2% of the shares out, for C$1.80/share so far this year. Value Offshore still owns 11% of the stock.
The Farquhars own over 9% of the shares. Input stock is higher now, but still hobbled below the $2.20 it commanded before the foreclosures. The market cap is $118 million US so this is a tiny stock.
Agri-businesses cannot be judged quarter to quarter but season to season. But there is no doubt that Input volume increased at a better average price.
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