Today’s mining industry is not the mining industry of your grandfather – but you wouldn’t know it judging by popular (mis)conceptions and perceptions. The vast majority of companies have invested extensively in technologies allowing cleaner and more profitable operations, and in programs promoting durable economic development in communities near mine sites.

So, if this is the case, why are there so often accusations of “greenwashing” and what the heck is greenwashing anyway?

Simply stated, greenwashing is when a company which isn’t doing very much to transform its operations to a more sustainable and equitable footing wants to pretend otherwise. Greenwashing often is characterized by vague and sweeping statements of intent rather than concrete and specific examples of programs and practices. It is an attempt to convince investors and the public that a company is doing more than it is in the domain of “green.”

Now, there are a couple of important caveats. First, the degree of specificity for a company depends on its stage of development. A junior exploration company, for instance, clearly has far fewer specifics to cite and therefore statements of intent, coupled with the specific examples possible (often involving reduced drill waste and improved post-drilling restoration, for example) are perfectly acceptable. Not so, however, for mature production companies. Second (and applicable throughout the industry) there is an understandable confusion about what is regarded as acceptable investments and program performance to merit the designation of “sustainable green production.”

Some international and regional organizations such as the United Nations and the European Union are diligently working on sustainable mining standards, as do some individual countries. In the US, for instance, the Securities and Exchange Commission is actively working on developing standards which reportedly may resemble those of the EU while incorporating some of the principles of the UN Sustainable Development Goals. Within the UN SDGS, item #12, Responsible Consumption and Production, is of particular relevance to the extractive industries.

Fundamentally, the concept of responsible stewardship is at the heart of sustainable mining, and applies equally to all three elements of ESG – Environmental, Social and Governance.

One possible format for concretely reporting on activities related to being or becoming sustainable has five areas, including:

1. Reduce, Reuse and Rethink mining waste (tailings and beyond);
2. Water (same three R’s as above and incredibly key);
3. Lower CO2 emissions by transitioning to renewable energy supporting operations. Some companies also are exploring carbon credits by, among other options, maintaining more forested areas within concessions;
4. Ensure communities thrive both during and after the life of the mine. This involves extensive consultations and cooperation with expert implementing bodies; and,
5. Restore the land to its natural state at the conclusion of the mine cycle. One useful source working on global standards is the International Organization for Standardization (ISO) in Geneva.

In addition to working on developing standards for producers, governments such as the UK have produced guides for investors to try and determine whether a company is green or is simply greenwashing. The US Securities and Exchange Commission (SEC) proposed similar investor guidelines in June of this year, but so far these apply only to advisors and funds, not extractive companies.

However, the probable intention of the SEC, that such funds and investors in turn will pressure mining companies to be more specific and transparent in their ESG disclosures, apparently is paying off, potentially allowing their goal to be achieved without the need to produce prescriptive and controversial guidelines. Rumors continue to abound, however, that such specific guidance may yet be forthcoming.

The bottom line? To be green in practice likely also is to be green in profit, as investors increasingly will choose true green over greenwashed.

On May 13, H2O Innovations (TSXV: HEO | OTC: HEOFF | FSE: DB: H3O1) announced fiscal third-quarter financial results for the month ending March 31, 2021.

The company started the year off strong with quarterly revenue up 8.6% year-over-year and net earnings hitting C$2.1 million in the quarter, up from a loss of C$3.1 million in the same fiscal period last year.

H2O beat analysts’ consensus revenue and earnings estimates as revenue hit C$39.2 million in the quarter, up from C$36.1 million in the same quarter last year, with revenue increases coming from both organic growth and through acquisitions.

Gross profit margins remained strong at 28%, consistent with the margins last year, and adjusted EBITDA reached C$4.5 million or 11.5% of revenues, compared to C$3.8 million, or 10.5 % of revenues, for the same fiscal period last year.

Most importantly, operational cash flows hit a record C$10.2 million in the quarter up from C$0.9 million in the comparable quarter of the previous fiscal year.

Understanding H2O

H2O is a Canadian wastewater treatment solutions company that designs, builds, and supports facilities based on membrane filtration technologies for municipal, industrial, energy, and natural resources end-users.

H2O operates through three main business segments:

1. Water Technologies and Services (WTS), which designs and builds custom water, wastewater, and water reuse systems and treatment plants, with more than 750 systems installed in North America;
2. Specialty Products (SP), which develops specialized chemicals and consumables from its subsidiaries, such as Maple, PWT, Genesys, and Piedmont, and distributes through a network of over 100 partners; and,
3. Operation and Maintenance (O&M), which operates more than 275 facilities in 12 states in the U.S. and two Canadian provinces.

Figure 1: Three main business segments – Water Technologies and Services (WTS), Specialty Products (SP), and Operation and Maintenance (O&M)

Source:

Solid Pipeline of New Sales and Renewals

Earlier this month, H2O announced winning two new projects and renewed four operation and maintenance contracts in the O&M business segment, with a total value of C$3.3 million. With these contracts, the total O&M backlog increased to C$63.5 million.

The new contracts comprise the operation, maintenance, and management of a Municipal water treatment facility in Texas and the operation and maintenance of an effluent treatment facility at an agriculture-food processing plant in Alberta, Canada.

H2O also renewed four municipal O&M contracts in Vermont with the first contract renewed for over five years, the second and third contracts extended for five years, and the fourth contract was renewed until March 2022.

M&A Driving Growth

As part of its 3-year strategic plan announced in December 2020, H2O commented that it intended to complete between two to four acquisitions within the next 30 months.

In February 2021, the company closed the acquisition of the remaining 76% of Genesys Membrane Products (GMP) in Spain that it originally had taken a 24% ownership stake in through the acquisition of Genesys in the United Kingdom in 2019.

GMP reported revenue of approximately €5.00 million (C$7.75 million) in 2020 of which 24% was already accounted for in H2O financials.

GMP expands the company’s specialty chemical products and laboratory services to an international distributor network that focuses on Latin America, primarily within the mining industry.

In July 2020, H2O announced a C$3.7 million acquisition of Gulf Utility Service (GUS), a U.S. water utilities company. GUS booked revenue of approximately US$5.0 million and EBITDA of US$0.6 million in 2019.

In the recent quarter, over 95% of the revenue growth was from its recent M&A activity; the GUS acquisition contributed C$1.3 million in additional revenue and the acquisition of GMP in February contributed an additional C$1.5 million in revenue.

Biden’s Infrastructure Plan Adding Billions to a Hundred-Billion-Dollar Market

In April, the U.S. legislators passed the “Drinking Water and Wastewater Infrastructure Act of 2021” that authorizes almost US$35 billion over five years to a variety of programs focused on safe drinking water, wastewater treatment, sewer overflows, and stormwater management.

This Act is only the first part of President Biden’s US$111 billion plan for water infrastructure improvements as a component of the American Jobs Plan.

In H2O’s recent quarterly conference call, CEO Frédéric Dugré stated, “we want to reiterate that we welcome very positively the $30 billion water-related infrastructure plan announced earlier by President Biden at the end of April. We believe many opportunities will emerge from this stimulus plan, notably for new water reuse projects in order to fight back the growing water scarcity mode in Southern states.”

Even without these new U.S. government funding initiatives, the global water market is expected to grow from US$854.0 billion this year to US$914.9 billion by 2023, according to the latest report published by Global Water Intelligence (GWI).

GWI’s Global Water and Wastewater Treatment market consist of both operating and capital expenditures by utilities and industrial water users on water and wastewater.

The Water and Wastewater Treatment market experienced renewed activity and high growth due to declining water qualities and growing demand for cost-efficient and environmentally friendly water technologies and services.

However, several challenges hinder the Water and Wastewater Treatment market, including high capital costs for equipment, outdated and inefficient water infrastructures. Companies such as H2O benefit as governments look to reduce costs by shifting operations to third-party Water and Wastewater Treatment companies.

Final Thoughts

As Environmental, Social, and Governance (ESG) investing causes a shift towards finding long-term financial returns that are aligned with social values, H2O remains an attractive water pure-play with a strong balance sheet, a large sales backlog, and profits.

H2O’s stock is currently trading at C$2.40 per share, up almost 140% in the past twelve months. Seven analysts cover the company, all with a “Buy” rating, and price targets ranging from C$3.25 to C$4.00. Currently, H2O has a market cap of C$197.4 million.