Inherent Features of Timberland Investment why timber? Timber Invest Europe October 2010, London, UK

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1 Inherent Features of Timberland Investment why timber? Timber Invest Europe October 2010, London, UK Olli Haltia

2 Timberland: Value Creation by Doing % % Total Added value 0-10% Leverage 10-20% Certification and quality im provement 10% Free Cash Flow 80% EBITDA Active management of the forest assets using first class forest managers to enhance productivity Utilisation of state of the art genetic improvement and planting technology Adopting sustainability principle throughout the production chain Identifying hidden values and complementary revenue sources: certification potential, High and Better Uses (HBUs)... Securing reliable markets mainly through industrial partnerships % % 40 80% of Total Value Added 60% % 10 20% of Total EBITDA 5% % 5% 0 Total EBITDA Sales Growth (Improved Marketability) Margin Improvement (Improved Productivity) 0 Total Margin Im provement Improved Genetic Material Improved Forest Management More Efficient Harvesting 2

Certified Forest Area Is Growing Globally Certified Forest Area, % Development of Certified Forest Area 2000-09 350 300 250 Million ha 200 150 100 50 0 >50% Europe 10-50% North America 5-10% Oceania

3 Certified Forest Area Is Growing Globally Certified Forest Area, % Development of Certified Forest Area Million ha >50% Europe 10-50% North America 5-10% Oceania North America Western Europe CIS 1-5% LA, CIS -1% Africa, Asia Oceania Af rica Latin America Asia Includes FSC, PEFC, SFI, CSA and ATFS Standards; Source: UNECE/FAO Forest Products Annual Market Reviews 3

4 Balanced Portfolio Brings Cash Flow and Capital Gain Developing timberlands bring potential for capital appreciation, and have higher IRR s Simulated cash flow of combined mature and greenfield investments Mature timberlands bring early and steady cash flow MEUR Year Investment Divestment Dividend 4

Global Timberland Regions and Expected IRRs (Gross) North America: 8% - 12% Western Europe: 6% - 10% Eastern Europe: 7% - 15% Asia: 15% - 22% South America: 10% - 15% Africa: 15% - 25% Australia/NZ:

5 Global Timberland Regions and Expected IRRs (Gross) North America: 8% - 12% Western Europe: 6% - 10% Eastern Europe: 7% - 15% Asia: 15% - 22% South America: 10% - 15% Africa: 15% - 25% Australia/NZ: 8% - 12% Percentage of land area by country Mature timber markets Emerging timber markets Source: Food and Agriculture Organization of the United Nations: State of the World s Forest 2007, Pöyry Group, First Forest, Hancock Timber Group *TIMO denotes for Timberland Investment Management Organization, i.e. a timberland fund or a similar organization 5

6 Historical Sources of Timberland Return Biological growth 65-75% Timber price changes 25-35% Land value changes 2-5% 6

7 Timberland Return Density Function Rt+1= [CFt+1 + (Vt+1 Vt)]/Vt = (Fellings + Value change due to prices + Biological Growth)/Value Value Change due to prices <0 Rt+1 Larger Biological Growth (=> advanced silviculture, tree breeding, species selection etc) 7

8 Biological Growth the Case of Finland Million m Growing Stock 1952 Growing Stock 2008 Felling and drain Source: Dasos, data by Finnish Forest Research Institute 8

9 1 a) Biological Volume Growth Biological volume growth contributes 3%-15% return on capital Finnish Pine ~5 m3/ha/a Spanish Eucalyptus m3/ha/a Ecuadorean Teak Plantation m3/ha/a Brazilian Eucalyptus m3/ha/a 9

1 b) Biological Value Growth (In-Growth)

value products Some European hardwoods and

prices as EUR 250 per m 3 Teak, Oak logs

contributes 2%-10% return on capital Spruce

10 1 b) Biological Value Growth (In-Growth) When a tree grows, it turns into higher value products Some European hardwoods and the best tropicals species reach as high prices as EUR 250 per m 3 Teak, Oak logs /m3 Value Biological value growth contributes 2%-10% return on capital Spruce logs 48 /m3 Energy wood /m3 Spruce pulpwood 17 /m3 Time 10

11 Biological Value vs. Volume High Biological Volume Growth Eucalyptus in Brazil Eucalyptus in Uruguay Spruce in Romania Spruce, Pine in Baltics Teak in Cambodia Beech in Romania Acacia in Malaysia Teak in Brazil Low Spruce, Pine in Finland Low Biological Value Growth High 11

12 2. Wood Prices - Extra Returns Through Opportunistic Timing 100 Korean War Vietnam War begins First Oil Crisis Second Oil Crisis Soviet Union collapse, W.E. mkt recession Russian export tariffs, first bioboom %/a /m3 Softwood logs, real prices (2009 prices) 12

13 Wood Prices Recent Cycle Announcements and gradual implementation of Russian export tariffs for roundwood Bear Stearns collapse Lehman Brothers bankruptcy; Fannie Mae & Freddie Mac Copenhagen Climate Conference Energy Policy Act of 2005 signed by Bush Ethanol industry to get additional boost from Bush Bush to commit to renewable energy for climate change Bush bioenergy program -> Softwood Log Prices OMX Helsinki Pine pulpwood 13

14 3. Land Prices Robust Track as an Inflation Hedge Buy land, they re not making it anymore. - Mark Twain +3.6%/a 150 Index NCREIF Farmland Index (real) 14

15 Key Investment Features of Timberland 1) Forest investments generate relatively stable, usually predictable cash flow. 2) Timberland has an excellent track as an inflation hedge and has the capacity to preserve value. 3) Biological growth is not dependent on business cycles: therefore, timberland performs low correlation with most other asset classes. => see next slides Dasos Study: Austria, Brazil, Estonia, Finland, Indonesia, Uruguay Forestland Index (portfolio): above countries with equal weight Typical species in each country Normal Forest as model for forest asset applied separately for each species in each country to neutralize the impact of age class distribution to wood supply (with steady state rotation age of T*xy for species X in country Y there are 1/T*xy forest age classes in country Y for species X) Prices and costs represented by real data 15

16 International Timberland Correlation to Stock Market (1) Correlation of Returns to Major Stock Market Indexes: USD Returns

17 International Timberland Correlation to Stock Market (2) Correlation of Returns to Major Stock Market Indexes: Local Currency Returns

18 Forestland Investments: USD Returns Finland Austria Estonia Index=100 -> Brazil Uruguay Indonesia Forest investment portfolio Index Average

19 Timberland in Investment Portfolio: Risk/Return Impact 30,0% Efficient Frontiers ,0% Expected Return 20,0% 15,0% 10,0% 5,0% 0,0% With timberland towards lower risk (standard deviation) whilst no compromise in portfolio returns 0,0% 5,0% 10,0% 15,0% 20,0% 25,0% 30,0% 35,0% 40,0% 45,0% Standard Deviation Equities + Forestland Portfolio USD Equities + Forestland Assets USD Equities 15 % maximum asset weight limitation; Source: Dasos 19

20 Where does the demand for wood come from? 20

21 Thesis All wood bits and pieces including cones will increase in value Kaikki risut ja kävyt nousevat kyllä arvoonsa. Jorma Ollila Chairman of Board, Royal Dutch Shell Suomen Kuvalehti 18/

22 GDP and Paper Consumption Per Capita USA Consumption, kg per capita China, India and many others still close to origo GDP per capita, USD 2007 prices China Finland Germany India Japan Korea, Republic of Sweden United States of America United Kingdom 22

Long-term Paper Demand, GDP and World Population Long-term Paper and Paperboard Demand Growth by Region through 2025 World GDP Growth Outlook (Deflated to 2000 Prices) and Estimated World Population

23 Long-term Paper Demand, GDP and World Population Long-term Paper and Paperboard Demand Growth by Region through 2025 World GDP Growth Outlook (Deflated to 2000 Prices) and Estimated World Population in 2050 by Region USD billions Rest of the World United States European Union Japan India China Europe 7,0 % NA 4,4 % Oceania 0,5 % Africa 19,8 % LA and Caribbean 9,1 % Asia 59,1 % Source: Pöyry 2009 Source: IMF and UN World Population Prospects

24 GDP and Wood-based Panel Consumption Per Capita USA Consumption, kg per capita China, India and many others still close to origo GDP per capita, USD 2007 prices China Finland Germany India Japan South Korea Sweden United Kingdom USA 24

Global Consumption of Industrial Roundwood, 1965 2030 Forecast => 2500 Amount in Mm3 2000 1500 1000 Africa W. & Cent.

25 Global Consumption of Industrial Roundwood, Forecast => 2500 Amount in Mm Africa W. & Cent. Asia Asia & Pacific Latin America North America Europe 500 Soviet Union Collapse Source: FAO 2009, Unpublished Draft 25

26 Green Housing Buildings as CO 2 Sink Buildings, their construction and raw materials used in construction are a significant source of carbon dioxide emissions in developed countries Environmental Impacts of Different Raw Materials in Construction in Finland in 2007 and 2010 after New Regulations Take Effect (Viljakainen 2009) EU is moving towards greener building E.g. UK mandates all new homes to be zero-carbon by 2016 Germany, France to follow Green building focused real estate funds have been introduced Concrete Concrete 2010 Steel Steel 2010 Wood Wood 2010 Consumption of the non-renewable natural resources (kg/m2) Total consumption of the natural resources (kg/m2) Consumption of non-renewable manufacturing energy (MJ/m2) Total consumption of manufacturing energy (MJ/m2) CO2-emissions (kg/m2) 26

27 Examples of Wood Buildings Concert Hall Sibelius in Lahti, Finland University Library in Skellefteå, Sweden Confidential Stadthaus in London, UK The tallest timber residential building, opened in

28 EU Renewable energy accounts for 6.5% of final energy consumption in EU27 Solar 0,7 % Wind power 5,5 % Geothermal 5,5 % Woody biomass 53,7 % Other biomass 12,4 % Hydroelectric power 22,2 % Replacing only one percent of the total primary energy consumption in EU27 (about 1,800 million tons of oil equivalent) would require over 90 million m3 of wood corresponding to about 1/8 of the Net Annual Increment (NAI) of Europe s forests Source: UNECE/FAO 28

29 Biofuels Two Plants/Refineries for Finland by 2020? Fischer-Tropsch Biodiesel Plant Concept Forest biomass 2 Mm 3 of wood Gasification plant 200 kt of diesel wax Petrol refinery 200 kt of diesel fuel Two 200kt plants would be able to produce enough biodiesel to account for about 9% of road traffic fuel consumption in Finland, closely matching the EU biofuel target of 10% by > 7-8% of the average domestic wood use by the forest industries 29

30 Global Process of Climate Change, Carbon and Forests Current Carbon Market Carbon Market in 2030 Forestry credits 1 % Reforestation 13 % Other credits 99 % Total: EUR 120.2bn Copenhagen/Mexico and the rest of process Other credits 66 % Total: about 2 X the current volume Reduced deforestation 21 % Forestry Credits EUR 39bn * Potential for substantial additional forest revenue, especially in the emerging market Forest project IRRs up by 2-3% with wide scale of projects, new investment opportunities *Assumes carbon price of EUR 15 per ton. Source: UNFCCC

31 Thank you! Olli Haltia CEO, Senior Partner

Private Financial Markets and Climate Change - forestry perspectives University of Helsinki

Private Financial Markets and Climate Change - forestry perspectives University of Helsinki Olli Haltia 17.8.2010 Thesis All wood bits and pieces including cones will increase in value Kaikki risut ja