To dilute, is naturally to weaken.
A glass of juice, liquid soap, or a cocktail, for example, all become less potent when water is added.
The same is true of publicly-traded companies. Issuing more outstanding shares dilutes each existing stockholder’s
ownership stake across the board.
Companies do this for a number of reasons; as for instance, to raise additional capital or offer new shares in exchange for acquisitions or services. However, seeing their shares diluted can be one of the biggest frustrations for investors.
Besides, while diluting shares might be commonplace nowadays on Bay Street, not every company adopts such practice. With Cristiano Veloso, its long-term Chief Executive Officer at the helm, Verde AgriTech is certainly going against the grain when it comes to that trend. Verde AgriTech is an ESG driven fertilizer producer company. whose primary focus lies in the production and sale of the multinutrient potassium fertilizer. This fertilizer, marketed in Brazil under the brand K Forte and internationally as Super Greensand, is one of Verde’s sustainable products. This way, the nature-driven technology company helps improve soil microbiome.
Overseeing all of this from the beginning is Veloso, also the company’s founder and president. In the top job since the age of 24, three years before Verde hit the exchange and went public, makes the 40-year-old Veloso possibly the longest-serving millennial CEO of a public company. Veloso, who has a certificate in Sustainable Business Strategy from Harvard Business School (USA), prides himself and his company on the fact that Verde has minimized share dilution over the years, while prioritizing the fortunes of its shareholders.
Rather than spread itself too thin, Verde AgriTech started small in order to generate cash flow to fund expansions. Veloso has overseen the building of two plants and , along with taking on a small amount of debt, the company is capable of generating enough cash flow to keep growing with greater momentum. Always conscious of its shareholders, Verde might be the most shareholder-friendly company on the TSX today.
“What we’re doing is actually allowing shareholders to make money, because they don’t when there’s that much dilution, which you usually see in resource stocks,” says Veloso, who also points to singular focus and ability to prioritize as another reason for success.
“You have a few CEOs out there on the TSX, they run different companies and they have other things on the go, so you can’t do them all right.”
A company will dilute shares for any number of reasons, and shareholders are left to deal with the outcome.
Yet it doesn’t have to be so.
“When you’re developing a project, the causes for dilution are often a lack of imagination when it comes to [a company’s] CAPEX (capital expenditures) and about how to fund CAPEX or how to develop the project to minimize dilution,” explains Veloso.
“So perhaps instead of building a mine that will do one-million tonnes and dilute everyone completely, you can start with 100-thousand tonnes and use cashflow to grow, that way shareholders are protected.”
Investors need look no further than Verde AgriTech for a perfect example of how to grow steadily , without the need for dilution in order to force-feed expansion.
Verde has a
scalable project that can be developed with accumulated cash flow and debt, and so far that has been validated by the company’s profitable growth.
“Over the years, the company has raised over C$60 million, which was invested in project development to expand production. And nowadays it trades at 10 per cent less than the money raised.”
The deliberate, incremental approach has allowed the company to reach financial independence from the capital market and has minimized the need to dilute existing shares.
The scalable project mentioned is the company’s
Cerrado Verde Project in Brazil. Having a Net Present Value (NPV) of USD $2-billion, it represents 43.85 per cent of the Brazilian potash market. That equates to an NPV per share of C$53.81 for each of Verde’s 48,444,803 outstanding shares, as of September 30, 2020.
A company’s NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. NPV can be seen as the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Part of the reason for the company’s state of affairs being in good kilter is its ability to deal with difficulties without resorting to share dilution, a common tactic to come up with quick cash.
“What can also dilute shares are crises,” says Veloso, highlighting how Verde managed to get through the 2008-2009 financial crisis, as well as a potash market calamity that started in 2013, without major share dilution.
“What often happens is that management is incapable of cutting costs and being as bold as necessary to navigate crises. We see that all the time. It’s the beginning of a crisis and management is incapable of making difficult decisions, reducing costs, getting rid of offices, dismissing advisors, etc,” explains Veloso.
To develop the (Cerrado Verde) project, Verde conceived it in such a way as to be shareholder-friendly. So instead of building a sizeable mine straightaway and diluting shares, a pilot plant was its foundation. Then a small operation was developed, before it was doubled. Now it expands from accumulated cash flow and some debt.
The Company has issued few shares over time and has shown it is able to continue consistently growing, even when crises hit. Whether Verde be able to maintain its growth pace and what results the company will deliver in the coming months is yet to be seen. Yet, as the FY and Q4 2020 results will be filed on SEDAR on March 31, 2021, the wait will not be long.
FULL DISCLOSURE: Verde Agritech is a client of Stockhouse Publishing.