Tribeca: Why decarbonisation is ‘bigger than the industrialisation of China’ – and where to invest next
Link copied to
Pro investor Todd Warren has had a front-row seat to the key macro trends in resources investing over the last 20 years.
China’s industrial development – and the resulting demand for bulk commodities and base metals – was the main game.
“Now we find ourselves looking at the decarbonisation thematic and saying, you know what? This is bigger,” Warren said.
“It’s the most exciting shift to come across our radar for our entire careers.”
Stockhead caught up with Warren – head of research at Tribeca Investment Partners – following the recent launch of the firm’s new 2050 Fund.
With the initial founders share class capped at $50m, the fund is only open to sophisticated investors. But in detailing its strategy, Warren highlighted some interesting trends that are worth noting for all investors.
Along with Tribeca portfolio manager Ben Cleary, Warren said the team’s goal is to leverage their knowledge of industry trends and market structure to find early-stage opportunities.
With a global investment mandate, the fund has pinpointed five focus sectors.
– Green chemicals;
– Green finance;
– Green food;
– Industrial innovation;
– Carbon credits.
While the portfolio is diversified across each of these sectors, the 2050 Fund’s largest exposure is in carbon credits.
It’s also a sector that Warren is particularly excited about, with major long-term potential. So we’ll start there:
Most investors are at least familiar with carbon credits but like any developing market, its progression is non-linear.
The simplest way to assess it is through a dual framework: regulated credits, and voluntary credits.
Regulated carbon credits
These prices are quoted more commonly by the media, and most of the attention is on Europe, Warren said.
Around 10,000 entities are registered in the EU cap and trade system to help reduce emissions.
“The EU has a set limit on carbon emissions, and companies have agreed to reduce them over time at different rates,” Warren said.
“If you do it faster you can get credits you can sell to someone else in the cap and trade system.”
“You can trade carbon credits on your iPhone over there. So it’s a developed market that attracts more participants, and that’s why the price is higher.”
The price of carbon in Europe currently trades at around €60-€65 per tonne.
Locally, the ACCU (Australian Carbon Credit Units) market is off the ground, with direct oversight by the federal government’s Clean Energy Regulator.
Domestically, the price of each ACCU is around $35/tonne. That’s lower than Europe although values “have accelerated quite fast in recent times”, Warren said.
“Each ACCU is equivalent to a tonne of carbon as the European credits are, but the Australian market is smaller and less mature,” he said.
However, it’s the voluntary carbon market where Tribeca is focused.
The voluntary market has emerged for carbon emitters that want to reduce their footprint over and above what current regulations require.
“Microsoft, Amazon and Apple are all significant buyers of voluntary carbon credits,” Warren says.
They largely trade OTC (over the counter) so “it’s difficult to get access and transparent pricing”, he said.
It’s also a smaller market where “the price of carbon credits is far lower”.
At this nascent stage, Tribeca reckons there’s gains to be made by investing in ‘nature-based’ credits, such as projects that avoid deforestation.
“Why give credit to someone just for not clearing a jungle? The answer is that deforestation contributes something like 15-20% of total greenhouse emissions,” Warren said.
To start with, Tribeca has purchased carbon credits associated with the Rimba Raya Biodiversity Reserve – a project to preserve around 65,000 hectares of tropical peat swamp forest in rural Indonesia.
Tribeca acquired its credits in Rimba Raya for around $7/tonne. These same credits would cost you more than $12 today.
“The regulated market in Europe is closer to €60/t, and we think that gap closes,” Warren said.
“More broadly, we think demand for carbon credits will only increase in the years ahead. So acquiring assets below $10/t when the price of carbon needs to push above $100/t – that’s a pretty attractive opportunity.”
Accessing the voluntary market is still a challenge though, and “that’s where we think we’ve got a real edge”, Warren said.
“You need those relationships we’ve established with developers and the primary suppliers of these credits, because it’s still a fairly opaque and illiquid market.”
Tribeca’s investment in carbon credits followed an extensive period of research where it didn’t really want to “fly the flag” as a frontier carbon credits investor until it had established the right relationships and invested in the highest quality credits, Warren said.
“At the same time, doing that sort of research led us to realising that this is a massive opportunity.”
“And as a result of that, we started to dig deeper into associated investment themes centred around the decarbonisation thematic.”
Here’s some quick numbers from a recent Tribeca presentation:
Food agriculture accounts for about a quarter of the world’s greenhouse gas emissions. At the same time, the global population will require about 50% more food over the next 30 years.
In the near term, Tribeca’s pick to capitalise on the green food shift is the Nasdaq-listed Oatly Group (NSDQ:OTLY).
Founded in Sweden, Oatly is the world’s largest producer of oat-based milk drinks.
At the ground level, the company has gained “a head start on their competitors”, Warren said.
“They’ve also managed to gain distribution access through some of the biggest food companies including Starbucks and McDonalds”.
And the macro dynamics for plant-based milk make it a sector that should be on every investor’s radar, Tribeca says.
Around two-thirds of all plant-based milk consumers have only joined the category in the last two years.
It’s a “total addressable market US$600bn, while penetration to date is only around US$20bn,” Tribeca said.
The prevalence of ESG ETFs on the ASX is evidence of the growing interest in sustainable investments.
But how should investors take a bottoms-up company approach within such a large top-down transition?
Tribeca’s pick is Iris Energy, an Australian-owned company that runs Bitcoin mining operations powered by hydro-electricity in Canada.
The Iris founders are eyeing off a Nasdaq listing at the end of this year.
Bitcoin mining has come under scrutiny for the amount of power it consumes. But like green food, this is a sector with an expanding addressable market, Tribeca says.
With its clean energy mining platform, Iris is aiming to expand its hash rate – the computations required to mine new BTC blocks – from 0.7EH/s to 15.2EH/s.
(EH/s is the highest hash rate denomination, equivalent to one quintillion hashes per second)
Assuming a Bitcoin price of US$40,000, Iris is targeting near term revenue growth from ~US$90m to US$2bn, Tribeca said.
Chemicals is a US$6tn sector globally, and it contributes around 20% of the global greenhouse emission total.
Like green food, there’s a market incentive and as that shift plays out, Warren’s near-term pick is the NYSE-listed Danimer Scientific (DNMR: NYSE).
DNMR is a pure-play developer of biodegradable PHA plastics, sourced from plant-based oils. The sector has been in the development stage for a number of years, and Tribeca reckons its time has come.
“Every piece of plastic that’s been produced and hasn’t been manually burned still exists,” Warren says.
“So the advent of bioplastics is a significant opportunity.”
In DNMR’s case, the company has an early competitive advantage through its IP, with more than 150 patents in 20+ countries, Tribeca said.
Industry contracts are also typically ‘take or pay’ from blue-chip clients such as Walmart and GenPak, which helps guarantee cash flow.
With a strong sales pipeline, the company’s near-term growth opportunity is mainly by virtue of its expanding production base to meet that demand, Tribeca says.
DNMR shares currently trade for ~US$20, after reaching a high above US$60 in February 2021.
The fifth and final sector in Tribeca’s investment framework, industrial innovation relates to new technologies such as AI, robotics and the Internet of Things (IoT) that mining and construction companies can deploy to reduce their carbon footprint.
Tribeca’s pick in this space is the Chrysos Corporation, which is another Australian investment opportunity at the pre-IPO stage.
Chrysos’ specialty is in PhotonAssays – high energy x-rays that allow for the enhanced analysis of assay results for gold, silver and other elements.
The PhotonAssay technology was developed at the CSIRO, which remains a major shareholder.
And Tribeca says it’s “cheaper, faster, safer, and cleaner than traditional methods” of assay testing.
Chrysos “offers a unique solution to a range of operational, economic and ESG challenges facing mining and exploration companies”, Tribeca said.
And “with no direct competitors, the environmental benefit will grow in tandem with uptake of the technology”.
Tribeca joined the company’s share register as part a $50m raise in September.
The funds will go towards the construction of another nine assay units, with Chrysos targeting a global distribution reach of 80 units as it eyes an ASX listing in 2022.