update to shareholders of phaunos timber fund ltd by ... · mata mineira, brazil eucateca, brazil...

Stafford Timberland Limited

Update to shareholders of Phaunos Timber Fund Ltd

by Stafford Timberland Limited, December 2014

2

Stafford Timberland Limited ("Stafford") is distributing this shareholder update in its capacity as manager of Phaunos Timber Fund Limited (the "Company") The Company

is a Guernsey domiciled Authorised Closed-ended investment scheme pursuant to section 8 of the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended

and rule 6.02 of the Authorised Closed-ended Investment Schemes Rules 2008. The Ordinary Shares of the Company are admitted to the Official List of the UK Listing

Authority and to trading on the London Stock Exchange’s main market.

In distributing this update Stafford is relying on the fact that all recipients are qualified investors' within the meaning of section 86(7).of FSMA who are also (i) investment

professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (''FPO"); or (ii) high net worth companies

within the meaning of Article 49 of the FPO; or.(iii) members of the Company within the meaning of Article 43(2) of the FPO; or (iv) certified high net worth individuals within

the meaning of Article 48 of the FPO; or (v) certain sophisticated investors within the meaning of Article 50(1) of the FPO (each a "relevant person"). Persons who do not fall

within any of these definitions should not rely on this document nor take any action upon it. The document is only exempt if it is distributed to the exempt categories of

recipients. This document has not been approved as a financial promotion or otherwise by a person who is authorised under FSMA for the purposes of section 21 of

FSMA and rules made under such legislation or any other applicable securities laws of any other territory. Approval will be required unless the recipient of this promotion is

a relevant person. This presentation has not been, and will not be, reviewed or approved by the Financial Conduct Authority ("FCA") or any other authority or regulatory

body.

Stafford is issuing this shareholder update exclusively as manager of the Company and will not be responsible to anyone other than the Company for providing regulatory

and legal protections afforded to customers (as defined in the rules of the Financial Conduct Authority) nor for providing advice in relation to the contents of this document

on any matter, transaction or arrangement referred to in it. None of Stafford nor the Company, nor any of their respective directors, officers or employees of Stafford makes

any representation or warranty, express or implied, as to the accuracy or completeness of the information or opinions contained in this shareholder update.

Stafford is authorised and regulated by the FCA, but has not authorised the contents of, or any part of, this document. To the fullest extent permitted by law, none of

Stafford nor the Company (nor their respective members, directors, officers, employees, agents or representatives) nor any other person accepts any liability whatsoever

for any errors, omissions or inaccuracies in such information or opinions or for any loss, cost or damage suffered or incurred howsoever arising, directly or indirectly, from

any use of this document or its contents or otherwise in connection with the subject matter of this document. The contents of this shareholder update are not to be

construed as legal, financial or tax advice. This document should not be distributed in whole or in part to other parties.

This shareholder update is being supplied to shareholders solely for their information and does not constitute or contain any invitation or offer to any person to subscribe for,

otherwise acquire, or dispose of any Ordinary Shares in the Company or advise persons to do so in any jurisdiction. This shareholder update does not constitute a

recommendation regarding the Ordinary Shares of the Company.

Some statements contained in this update are or may be forward-looking statements, including without limitation any forecasts or projections. Actual results may differ from

those expressed in such statements, depending on a variety of factors. Any forward-looking information contained in this shareholder update has been prepared on the

basis of a number of assumptions, only some of which are set out in the update, which may prove to be incorrect, and accordingly, actual results may vary.

For the avoidance of doubt, nothing in this shareholder update is intended to constitute a profit forecast.

The value of any investment may fall over time and you may receive back less than you invested.

Disclaimer

1. Summary

2. Financial estimates

3. Management plan – a phased approach

4. Asset Review

Matariki, New Zealand

Mata Mineira, Brazil

Eucateca, Brazil

Aurora, Uruguay

Other Phaunos assets in brief

5. Conclusion

6. Notes and key assumptions

Appendix: Phaunos performance history

Contents

3

1. Stafford has completed its assessment of required operational changes. Implementation of these changes will

take less than a year and are expected to save a further USD 3-4m of costs per year. Management is also

focussing on increasing near-term harvesting revenue.

2. Cash low point is forecast at approximately USD 6m towards the end of 2015, (down from a projected USD

13m YE 2014) and based, inter alia, on the assumption that no investments are sold.

3. Year end NAV is expected to be lower and in the range USD 330-360m (approximately 58-63 cents per share)

reflecting foreign exchange losses and the Manager’s considered assessment of the value of some of the

higher risk properties.

4. Selective disposals will continue to be targeted but only at appropriate prices.

5. By the end of 2015, Phaunos is expected to be operationally cost efficient. Subject to market development,

harvesting revenues have the potential to provide surplus revenues available for distribution to shareholders

but at this stage we can give no guidance as to the timing or size of distributions.

Summary

4

Management plan – a phased approach

5

2014 – Phase I 2015 – Phase II 2016 – Phase III

CostsIdentification of cost control

measuresImplementation

Maintenance of low cost

operations

Revenues Identify key markets Increase market accessRegular harvesting in line

with increasing volumes

Asset sales

(high risk assets)

Focus on existing interested

partiesTarget buyers Target buyers

NAV

Provision against higher risk

assets & focus on appraisal

assumptions

NAV Consolidation Base NAV annual growth

Management Review structures & controls Implement change Maintain & adapt as required

Primary focus Cost reductionCost reduction and revenue

generationSustainable yields

-

5.0

10.0

15.0

20.0

25.0

30.0

2013

2014f

2015f

US

D m

Costs One-off/Remaining capital costs

Excluding one-off and restructuring items, costs are forecast to reduce by 46% from USD 22m to USD 12m over

the 2 years between 2013 and 2015

Management plan a phased approach - 2014

6

Phaunos budgets: 2013, 2014f, 2015f

7

Financial estimates

2014 and 2015 Financial Estimates

USD millions calendar year to Dec 2013Dec 2014

Estimate

Dec 2015

EstimatesComment

NAV at 31 December (Manager’s Estimates) 419 330-360FX and prudent assessment of high risk

assets

NAV per share 0.78 0.58 – 0.63

Cash inflows from operations 12 9 8 a Conservative estimate based on 2014

Cash outflows from operations (22) (16) (12) b

One-off / restructuring costs (6) (3)Includes remaining capital commitments

and other one-off costs

Other cash adjustments 7 - -Assumes no property sales in 2014 and

2015

Net cash outflows from operations (9) (7) (7)

Net cash inflow from investing activities 2

Equity placement 12

Cash held at start of FY 15 8 13

Cash held at end of FY 8 13 6

*Indicative estimates subject to variation

a, b – see notes page, Appendix

Stafford & Phaunos portfolio locations

USA

Uruguay

Brazil

New Zealand

China

Tanzania

Mozambique

Matariki

Mata Mineira

EucatecaUganda

Green Resources

GTTF

Aurora

Pradera Roja

Green ChinaNTP

Asset review

8

As detailed in the July 2014 Stafford shareholder presentation, the Phaunos portfolio includes

A relatively high percentage of higher risk assets (36%)

A large proportion of greenfield ‘venture capital’ style investments

Cashflows are reliant on a few mature assets and these assets are subject to single product and export market

risk….. as evident in the recent decline in New Zealand’s export log prices to China

The first 5 months of management have strengthened our views regarding the productivity risks, market risks,

cashflow risks, sovereign risks and liquidity risks associated with the higher risk assets. We expect that this will

be reflected in a lower combined year end December 2014 NAV for these assets.

Asset review

9

Phaunos portfolio risk summary June 2014 (by NAV) New Zealand A grade sawlog prices (USD/m3) a

Medium Risk 28%

Aurora Forestal

Mata Mineira

Pradera Roja

Higher Risk 36%

Eucateca

Green Resources

Green China

GTFF

Lower Risk 36%

Matariki

-

20

40

60

80

100

120

140

160

180

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Mar-

05

Se

p-0

5

Mar-

06

Se

p-0

6

Mar-

07

Se

p-0

7

Mar-

08

Se

p-0

8

Mar-

09

Se

p-0

9

Mar-

10

Se

p-1

0

Mar-

11

Se

p-1

1

Mar-

12

Se

p-1

2

Mar-

13

Se

p-1

3

Mar-

14

NZ

D/M

3 F

OB

Volu

me (

mill

ion c

bm

)

China South Korea India

Japan Other FOB price (RHS)

a – see notes page, Appendix

0

20

40

60

80

100

120

140

160

180

Cost

2010

2011

2012

2013

Jun

-14

US

D m

0 20 40 60 80 100 120 140 160 180

NTP

Phaunos

Green China

Pradera Roja

Aurora

GTFF

Green Resources

Eucateca

Mata Mineira

Matariki

10

Matariki

Asset Description

Location: North & South Island, New Zealand

Species: Predominantly pine

Rotation: 27+ years harvest

Markets: Domestic & export sawlogs, pulpwood

Planted area: 123,000 hectares

Risk profile: Lower risk timberland asset

Key Issue: Volatility of key export markets

Matariki (Phaunos) NAV Evolution (USD m) a

Matariki (Phaunos) NAV June 30 2014 (USD m)

Phaunos Cashflow

(USDm)2012 2013 2014f

Revenue - dividend 1.9 1.7 1.9

Dividend 1.6% 1.2% 1.2%

a, – see notes page, Appendix

11

Matariki

Age distribution and prescribed harvesting

Harvesting

Projected woodflow supply (000 m3) a

0

500

1000

1500

2000

2500

3000

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Volu

me (

000)

m3

0

1000

2000

3000

4000

5000

6000

7000

1 3 5 7 9

11

13

15

17

19

21

23

25

27

29

31

33

35

37

39

41

Hecta

res

Harvest

Matariki is a mature even aged estate with a relatively steady harvest forecast

New Zealand continues to be the lowest cost producer of logs into China (including Russia)

Operating results lower in Q3 as prices declined due to high log inventories in China

Asian log demand expected to remain strong over the long term

Debt levels are currently under review. Lower debt would reduce yield volatility


0 20 40 60 80 100 120 140 160 180

NTP

Phaunos

Green China

Pradera Roja

Aurora

GTFF

Green Resources

Eucateca

Mata Mineira

Matariki

12

Mata Mineira

Asset Description

Location: Minas Gerais state, Brazil

Species: Eucalyptus

Rotation: 7-10 years short rotation, no thinning

Markets: Charcoal, wood pulp


Risk profile: Medium risk timberland asset

Key Issue: Market supply exceeds demand

Brazil

Mata Mineira NAV Evolution (USD m)

NAV June 30 2014 (USD m)

Cashflow (USDm) 2014f 2015f a Potential b

Revenue 4.1 4.4 7 -10

Costs (3.1) (3.2) (3) - (4)

Net Cashflow 1.0 1.2 4 - 6

Indicative yield 1.6% 2.0% 7% -10%

0

20

40

60

80

100

120

Cost

2009

2010

2011

2012

2013

Jun

-14

US

D m


0

200

400

600

800

1000

1200

1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Hecta

res

0

100

200

300

400

500

600

700

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Vo

lum

e (

000 m

3)

Budget Forecast 2013 Valuation Forecast

Relatively even aged estate with 50% less than 4 years of age

Current supply of ~400,000m3/pa exceeds market demand of ~225,000 m3/pa

Ongoing flat market demand a reflection of low domestic and export demand for charcoal produced pig iron

Current net yield of 2% with potential yields going forward of up to 10% assuming full market access

Management focus on increasing market share and developing new wood supply contracts

13

Mata Mineira


0

500

1000

1500

2000

2500

0 1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

Hect

are

s

Harvest



Brazil

0 20 40 60 80 100 120 140 160 180

NTP

Phaunos

Green China

Pradera Roja

Aurora

GTFF

Green Resources

Eucateca

Mata Mineira

Matariki

14

Eucateca – Eucalyptus & Teak

Asset Description

Location: Mato Grosso state, central Brazil

Species: Eucalyptus and Teak

Rotation: 7-10 years Euc., 22-25 years Teak

Markets: Biomass-Euc., Sawlogs-Teak

Planted area: 7,502 hectares Euc., 2,351 hectares Teak

Risk profile: High risk – markets, cashflow, liquidity

Key Issues: Biomass markets still to be developed

Poor early survival and variable growth

High cost operations

Eucateca NAV Evolution (USD m)


0

10

20

30

40

50

60

70

80

Cost

2008

2009

2010

2011

2012

2013

Jun

-14

US

D m

Cashflow (USDm) 2014f 2015f a Potential b

Revenue 0.0 0.0 3-6 (Euc only)

Costs (2.1) (2.9) (2) - (3) (50:50 Euc:Teak)

Net Cashflow (2.1) (2.9) 1 – 3

Indicative yield 0% 0% 2% -5% (Euc & Teak)

6%-13% (Euc only)


0

200

400

600

800

1000

1200

1400

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Volu

me (

000' m

3)

Teak Eucalyptus

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

0 1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

Hecta

res

Teak Eucalyptus

Eucalypts: Large planted areas in concentrated age class – volumes will have to be smoothed over time

Potential for substantial harvesting over next few years but markets need to be developed

Delay in market development, smoothing of woodflows and low biomass market prices likely to impact NAV

Teak: High cost plantations, limited external interest for acquisition

Management to focus on market development for eucalypts and lowering Teak management costs. In

addition there remains several time consuming legacy matters that need attention

15

Eucateca – Eucalyptus & Teak


Teak

Harvest


Indicative smoothed harvesting volumes

Subject to market development

Teak

biomass

Euc

Harvest

Teak

Thin


0 20 40 60 80 100 120 140 160 180

NTP

Phaunos

Green China

Pradera Roja

Aurora

GTFF

Green…

Eucateca

Mata Mineira

Matariki

0

5

10

15

20

25

30

35

40

45

Cost

2008

2009

2010

2011

2012

2013

Jun

-14

US

D m

16

Aurora

Asset Description

Location: Northern Uruguay

Species: Pine, includes sawmilling infrastructure

Rotation: 22-25 years long rotation with thinning

Markets: Mouldings, sawn timber, electricity poles


Risk profile: Medium market risk and low growing risk

Key Issues: Capital required for sawmill expansion

Performance linked to export markets

Aurora NAV Evolution (USD m)


Cashflow (USDm) 2014f 2015f Potential a

Dividend revenue 1.5 1.5 2.5 – 3.5

Costs 0 0 0

Net Cashflow 1.5 1.5 2.5 – 3.5

Indicative yield 5% 5% 8-11%


0

200

400

600

800

1000

1200

1 2 3 4 5 6 7 8 9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

Hecta

res

0

50

100

150

200

250

300

350

400

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

Volu

me (

000' m

3)

Budget Forecast 2013 Valuation Forecast

High quality pine plantation estate with maturing age classes

Potential for yield to increase above current levels of 5% subject to capital investment into sawmill

Managing partner focusing on mill expansion and improving marginal returns

17

Aurora

Age distribution and prescribed harvesting Projected woodflow supply (000 m3) a

HarvestThinThin


18

Other Phaunos assets in brief

Green Resources

NAV June 14: USD 49m, 11% of total NAV

Location: Uganda, Tanzania & Mozambique

Species: Eucalyptus and Pine

Rotation: 7-10 years Euc, 18-22 years Pine & Euc

Markets: Wood pulp, poles, sawn timber


Risk profile: High risk – growth, markets, cashflow, liquidity

Key Issues: Greenfield plantation development liquidity risks

Cashflow and high variability around NAV

GTFF


Location: Oregon and Washington, USA

Species: Irrigated hybrid Poplar plantations

Rotation: 10-12 years

Markets:Lumber from integrated sawmill, veneer supply

agreement, pulp chips and residuals


Risk profile: High risk – markets, cashflow

Key Issues: Improving profitability of sawmill

High cost plantation management & operations

Green China


Location: Jiangxi province, China

Species: Predominantly Pine

Rotation: 23-25 years

Markets: Resin, sawlogs


Risk profile: High risk – markets, cashflow, sovereign risk

Key Issues: Very high management costs

Assets held for sale – low liquidity

Pradera Roja


Location: Eastern Uruguay

Species: Eucalyptus

Rotation: 7-10 years Euc, 18-22 years Euc

Markets: Wood pulp, poles, sawn timber


Risk profile: Medium risk – growth, markets

Key Issues: Greenfield plantation development risks

1. The portfolio includes a high percentage of higher risk assets. Selective disposals will continue to be targeted

but only at appropriate prices.

2. Year end NAV is expected to be lower, USD 330-360m (58-63 cents per share) reflecting foreign exchange

losses and the Manager’s considered assessment of the value of some of the higher risk properties.

3. A number of the Fund’s assets have increasing projected wood flow supplies over the next few years. Subject

to market development, harvesting revenues have the potential to provide surplus revenues available for

distribution to shareholders in the near term (1-3 years).

4. Stafford’s long term objective for Phaunos is to create a low cost, efficient fund producing consistent yields

based on harvesting revenues. The current focus on cost reduction and revenue generation is fully aligned

with long term improvements in the Fund’s NAV. This is no easy task given the Fund’s relatively high

percentage of higher risk, greenfield assets. In accordance with Stafford’s phased approach to management, a

key focus for 2015 will be the implementation of cost control measures, changes to management and

increasing market access for revenue generation.

Conclusion

19

Financial Guidance a: cash flow projections assume no dividend from Matariki in 2015 and no harvesting revenue from Eucateca

b: includes USD 4m of cost reductions. Replanting costs will increase should harvesting levels increase

Slide 8: Asset Review a: NZ A grade log prices sourced from the New Zealand Ministry of Forestry

Slide 9: Matariki a: The Matariki values detailed relate solely to the Phaunos percentage ownership of Matariki

Slide 10: Matariki a: The projected woodflow supply is based on 2013 valuation

Slide 11: Mata Mineira a: revenue assumes an indicative 10% increase in harvesting levels in 2015 compared with 2014

b: assumes full demand in-line with potential supply volumes and current market prices. Costs will vary depending

on the level of harvesting and replanting required

Slide 12: Mata Mineira a: The projected woodflow supply is based on 2013 valuation

Slide 13: Eucateca a: assumes no revenue from harvesting in 2015. Costs will vary subject to the level of harvesting/replanting required

b: revenue based on minimum harvesting levels of 200,000m3 per annum of eucalypt and no teak harvests in the

medium term. Different yields are provided on the basis of the teak and eucalypt costs and the eucalypt costs alone

Slide 14: Eucateca a: The projected woodflow supply is based on the 2013 valuation. The indicative smoothed harvesting volumes are

subject to market development with a wide range of outcomes possible based on market access

Slide 15: Aurora a: The potential revenue and yield is based on the successful processing of the increased woodflow supply by the

Aurora sawmill and cogeneration plant. Capital and mill augmentation is required to achieve this outcome

Slide 16: Aurora a: The projected woodflow supply is based on the 2013 valuation

Appendix – Notes and key assumptions

20

0

0.2

0.4

0.6

0.8

1

1.2

1.4

Dec-0

6

Mar-

07

Jun-0

7

Sep-0

7

Dec-0

7

Mar-

08

Jun-0

8

Sep-0

8

Dec-0

8

Mar-

09

Jun-0

9

Sep-0

9

Dec-0

9

Mar-

10

Jun-1

0

Sep-1

0

Dec-1

0

Mar-

11

Jun-1

1

Sep-1

1

Dec-1

1

Mar-

12

Jun-1

2

Sep-1

2

Dec-1

2

Mar-

13

Jun-1

3

Sep-1

3

Dec-1

3

Mar-

14

Jun-1

4

Sep-1

4

Phaunos

share

pri

ce a

nd N

AV/sh

are

LSE Share Price NAV

0

100

200

300

400

500

600

700

2009

2010

2011

2012

2013

Jun

e2014

US

D m

Cash Matariki Green Resources Aurora

GTFF NTP Mata Mineira Eucateca

Pradera Green China Other

Appendix: Phaunos performance history

21

USD 536m closed ended listed (LSE) timberland investment fund, raised in 2006/07

USD 433m Net Asset Value, 30 June 2014

USD 24m dividend to date

USD 12m raised in September 2014 in a placing of 30 million shares at 40 cents per share

USD 238m market capitalisation, 1 December 2014

Phaunos Share Price & NAV/Share Phaunos funds raised and year end NAV

update to shareholders of phaunos timber fund ltd by ... · mata mineira, brazil eucateca, brazil...

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