Spruce Capital is a ‘short focused research firm’. This kind of research firm profits by finding poorly run, sometimes fraudulent companies and taking a short position (making a bet with the market that the price of the company will go down) before publishing their findings.

Oatly, which makes an alternative milk product, was floated on the stock market recently at what many people, including Bartalks, thought was a ridiculous valuation.

As the allegations made by Spruce Capital cover a number of topics, a large part of them focuses on the company’s track record with respect to sustainability, in particular with the way that it is managing its wastewater. As well as that, I was quite interested to observe that the company’s use of Olam was also mentioned as a problematic aspect.

Oatly uses Olam to source cocoa, and Spruce focused on this relationship to attack the company’s environmental credentials further, writing in their report that Olam has had multiple allegations of contributing to deforestation in Africa. See an excerpt from the report below.

The points made by Spruce are valid, especially when it comes to the poor management of Oatly and the excessive valuation.  Nevertheless, regarding the criticism of Olam, they make a tenuous argument and fail to provide any substantive reasons why Olam might be a toxic relationship for Oatly.

Spruce’s interest in pushing a negative narrative may be related to its desire to see a stock price decline. I would like to see that narrative supported by solid research.

Report Extract

Spruce Point has unearthed Oatly’s first detailed sustainability report and takes issue with how Oatly presents its progress to investors as the first slide of its Investor Presentation (June 2021). The analysis is based on a 2013 study (updated in 2016) which doesn’t include its recent expansion into the U.S. and Asia, which we believe have been poorly planned and executed. In addition, we believe Oatly has “cherry-picked” the study’s results by failing to show that its impact on water consumption is worse than dairy milk.

Through a FOIA request, we learned that Oatly’s production process also generates dangerous volumes of wastewater that requires it to build its own treatment facilities. Oatly is even out of compliance with EPA regulations in NJ. Oatly’s first study discusses the importance of transportation costs, accounting for nearly 1/3rd of its environmental impact.

Yet, in Oatly’s quest for rapid business growth and its race to IPO, we believe it has recklessly disregarded these costs and also sought to obscure the impact of shipping costs in its financial statements. Oatly also says 49% of its current climate impact comes from ingredients, with 73% of this ingredient impact tied to oats. It stands to reason that Oatly should be locating its facilities as close as possible to its oat supply.

However, we find evidence that Oatly has not only located production facilities thousands of miles from its oat sources but also massively overpaid and run wildly overbudget in its capital planning. Now as a public company, we believe Oatly is asking investors to pour nearly $1.0 billion into existing and expansionary CAPEX to fix management’s blunders.

We estimate cost per liter of new capacity will cost upwards of 77% more than Oatly’s historical cost and continue to make its business non-economical. Oatly took flack for the investment it received from Blackstone in 2020 when an activist pointed out a connection to the deforestation of the Amazon. However, Spruce Point also points out the Oatly uses Olam International for its supply of Cocoa. Olam has often been criticized for not being transparent and contributing to deforestation and endangerment of species in Africa.

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