MAXIMIZING RETURNS THROUGH A DIVERSIFIED BRAZILIAN TIMBER INVESTMENT PORTFOLIO. Timber Invest Europe 2011

Transcription

1 MAXIMIZING RETURNS THROUGH A DIVERSIFIED BRAZILIAN TIMBER INVESTMENT PORTFOLIO Timber Invest Europe

2 Disclaimer This document is for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy and are subject to change without notice. Any comments or statements made herein do not necessarily reflect those of Vision Brazil Investments and/or Brazil Timber, their subsidiaries and affiliates. This document may not be reproduced, distributed or published by any recipient hereof for any purpose. This document includes forward-looking statements and estimates. These forward-looking statements and estimates are based on current expectations and projections about future events and financial trends that affect or may affect our business and results of operations. In addition to the items discussed in other sections of this document, there are many significant factors that could cause our results to differ materially from those set forth in our forward-looking statements and estimates. 2

3 A Winning Combination Unique Expertise on Land Acquisition Unique Expertise on Forestry Management Largest corporate agricultural land owner in Brazil, with direct access to land deals in the best agricultural regions in the country Largest forestry property manager in Brazil Since 2007, strong track record in sourcing, acquiring and developing farm land in Brazil for its funds and co-investors Established track record in Brazilian farm acquisition and management with more than 350,000 ha land ownership First Brazilian property manager to attain a track record of positive returns - first investment vehicle has 4 years, presenting a rate of return of 20% p.a. since inception Over 205,000 ha of forestry under management Nationwide presence, with 8 operating clusters in the best micro-regions for timberland investments in Brazil 3

4 Summary Brazil has become a popular destination to invest in timberlands. However, due to the fragmentation of regional timber markets, land price dynamics and incipient exploration of alternative revenue sources, there is a wide disparity of returns in Brazilian timberlands To maximize returns, investors ought to: Evaluate a broad range of investment types, to understand all the country has to offer Identify a winning investment thesis that uncovers untapped return potential Implement diligently, selecting superior assets and managing the forests smartly The right partner, such as VBI Timberland, can help investors in capturing the opportunity 4

5 Summary Brazil has become a popular destination to invest in timberlands. However, due to the fragmentation of regional timber markets, land price dynamics and incipient exploration of alternative revenue sources, there is a wide disparity of returns in Brazilian timberlands To maximize returns, investors ought to: Evaluate a broad range of investment types, to understand all the country has to offer Identify a winning investment thesis that uncovers untapped return potential Implement diligently, selecting superior assets and managing the forests smartly The right partner, such as VBI Timberland, can help investors in capturing the opportunity 5

6 Different Returns Throughout Brazil Due to fragmentation of regional timber markets and land price dynamics, returns in timber investments in Brazil are very disperse Carajas pig iron cluster Jari 7 Lagoas pig iron cluster MT Teak cluster Divinópolis pig iron cluster Eucatex Impacel Klabin Bento G. furniture cluster Veracel Bahia Sul Linhares (furniture) VCP IP Ubá (furniture cluster) Aracruz Nobrecel VCP Suzano Duratex Klabin Rio Negrinho furniture and sawnwood products cluster Stora Enso (new plant) Aracruz Riocell VCP (new plant) Source: STCP, ABRAF, Panorama Setorial Gazeta Mercantil IRR in different regions of Brazil AMCEL (IP) Several regional markets functioning independently, with little price correlation Regions/consumers with substantial and chronic supply shortages, others with excess supply Buyer power differences Land price dynamics (agricultural commodity tagging) à arbitrage opportunities Incipient exploration of multiple use of forests, HBU, non timber revenues Region 1 Region 2 6

7 Summary Brazil has become a popular destination to invest in timberlands. However, due to the fragmentation of regional timber markets, land price dynamics and incipient exploration of alternative revenue sources, there is a wide disparity of returns in Brazilian timberlands To maximize returns, investors ought to: Evaluate a broad range of investment types, to understand all the country has to offer Identify a winning investment thesis that uncovers untapped return potential Implement diligently, selecting superior assets and managing the forests smartly The right partner, such as VBI Timberland, can help investors in capturing the opportunity 7

8 Broad Range of Investment Strategies There is a broad range of investment strategies that ought to be explored Investment Strategies and Expected Returns* Traditional: 10-15% Expansion: 14-18% Frontier: 15-19% Amazon: 10-30% Niche: 10-20% * Returns in nominal BRL, after local taxes and fees Source: Brazil Timber 8

9 Summary Brazil has become a popular destination to invest in timberlands. However, due to the fragmentation of regional timber markets, land price dynamics and incipient exploration of alternative revenue sources, there is a wide disparity of returns in Brazilian timberlands To maximize returns, investors ought to: Evaluate a broad range of investment types, to understand all the country has to offer Identify a winning investment thesis that uncovers untapped return potential Implement diligently, selecting superior assets and managing the forests smartly The right partner, such as VBI Timberland, can help investors in capturing the opportunity 9

10 Superior Returns Identifying a winning investment thesis is key to achieve superior returns Supply demand imbalance yielding sustainable high wood prices Particular low cost condition that allows better margins than competitors in a particular market Superior Returns Temporary land price depression or imminence of a sustainable land price shift Opportunity for unaccounted value from non-timber revenues, subsidies, new markets 10

11 Winning Strategy Example 1 Minas Gerais State: Treated Roundwood + Charcoal combination Superior Returns Situation The Winning Strategy Chronic supply deficit in the Minas Gerais charcoal region is widely known. However, price of existing forests fully reflect this situation. Purchase existing forests in Minas Gerais at charcoal price and use them partially to sell at treated roundwood price Market for treated roundwood with high growth and able to pay premium for wood (up to R$100/ m3) Complement the investment with greenfield projects for both charcoal and treated roundwood Charcoal market larger, sets the wood price 11

12 Winning Strategy Example 1 (cont d) Minas Gerais State: Treated Roundwood + Charcoal combination (Live Deal) State of Minas Gerais João Pinheiro Capelinha Assets 3 properties in Capelinha / MG: 7,614 ha of land: 4,420 ha of aged eucalyptus forest (4-10 years) and 600 ha of land ready to be planted 2 wood processing plants: Products: treated posts and poles for energy transmission, fencing, etc. 3,000m³/month capacity US$50-60 MM investment 12

13 Winning Strategy Example 2 Low cost in sustainable forest management in the Amazon Superior Returns Situation The Winning Strategy Shift in supply from deforestation to SFM Acquisition of cutting rights to explore existing native forest under SFM in selected regions of Amapá, integrating forest + primary processing (lumber), obtaining low total costs Profitability of activity on average low given scarcity of efficient/ professional players and competition form illegal/informal wood. Logistic costs are the largest cost component, and vary widely from place to place By integrating the operation into sawmilling, buyer quality improves, risk decreases, market radius increase Selected locations in Amapá offer excellent total delivered cost much lower than average, allowing profitability way better than industry average 13

14 Winning Strategy Example 2 (cont d) The location: Amapá State Exceptional Forest & Location Large stock of virgin forest very close to the main roads (no deforestation from agricultural frontier expansion) Excellent road conditions (federal government subsidies for infrastructure), with capacity to haul wood in the rainy season Proximity to export ports (Santana and Belem) Fiscal incentives Exclusive cost advantage of, approximately, USD / m3 in delivering lumber to the export port 14

15 Winning Strategy Example 2 (cont d) Unbeatable Cost Advantages Brazilian avg AMAPA Forest Project Rational R$/m3 Stumpage Cost SFM Plan Elaboration and Approval Harvesting & Tranp to Sawmill Total Log Cost Log- to- Lumber Yield Wood Cost , , Sawmilling Process Cost Freight Management Total Lumber Cost Lumber Price Net Margin Early bird contract Scale: l arger than average Absolutely l egal operation, FSC certification High quality forest - higher e coefficiency Scale Advantage of scale offset the higher cost of being 100% legal and formal Net e xporter ports 8 times closer than brazilian average Cost of qualified professional and formal administration Better forest mix 15

16 Winning Strategy Example 3 Small market with very favorable wood price in Bahia State Superior Returns Situation The Winning Strategy Chronic supply deficit in a small timber market, isolated by distances to any other market. Purchase young forests and bare land for afforestation in the region Demand growing for energy wood. Lack of local sources of supply, keeping prices high in the last 5 years Land with agriculture aptitude to be purchased just outside the current frontier Demand for treated roundwood possible alternative Lock-in part of the wood into long-term contract to secure a high price Land located at the fringe of soybean/ agriculture zone. A modest expansion of the agricultural acreage in the region would shift land prices up 16

17 Winning Strategy Example 3 (cont d) West of Bahia combines extraordinary wood and land returns Acquisition of circa 11,000 hectares of land in West of Bahia for eucalyptus greenfield plantation and harvesting of existing forests (about 2,800 ha of 4-5 year old trees) Contiguous land plot located in a region with very clear land up-conversion potential within the agricultural development frontier, neighbouring large soy farms The project is well located to serve the historically growing and supply-deficient firewood market serving the enormous grain and animal protein processing industries located in the area and dependant on timber for heat generation This region also offers the opportunity to explore two booming secondary markets: eucalyptus sawn wood and treated timber for fence poles (used in agriculture and cattleraising) and posts (used in rural electricity distribution) The deal requires an investment of circa USD 50mm and allows for extremely attractive returns with low risk (nominal IRR of 18-22%, net of local fees and taxes) The project will establish a platform for future expansion in a region of high quality available land with very high appreciation potential 17

18 Winning Strategy Example 3 (cont d) State of Bahia Target Region LEM Barreiras - Baianópolis: Average altitude around 800 meters with annual rainfall of around 1,300 mm Completely flat land with clay levels from 15-25%, presenting obvious technical aptitude for agricultural conversion Price of land: R$ 1,300-1,800/ha (new land for clearing) 18

19 Winning Strategy Example 4 Elliotis Pine conversion to resin production Superior Returns Situation The Winning Strategy Pine has been losing ground to eucalyptus as source of energy, with pine thinnings selling at a large discount. Consequently, price of young pine forests depressed Purchase young elliotis pine forests (in resin producing age 8-14 yrs) in an area where resin extraction is not done regularly and sell resin Resin prices at a historical high, with no signs of short-term relief Resin extracted in a few pine regions, where productivity is very high (>3kg/tree/year) 19

20 Summary Brazil has become a popular destination to invest in timberlands. However, due to the fragmentation of regional timber markets, land price dynamics and incipient exploration of alternative revenue sources, there is a wide disparity of returns in Brazilian timberlands To maximize returns, investors ought to: Evaluate a broad range of investment types, to understand all the country has to offer Identify a winning investment thesis that uncovers untapped return potential Implement diligently, selecting superior assets and managing the forests smartly The right partner, such as VBI Timberland, can help investors in capturing the opportunity 20

21 Successful Forest Implementation in Brazil Superior Asset Selection and Smart Management are the key factors for a successful forest implementation in Brazil Superior Asset Selection Smart Management Number 1: regions, not properties Number 5: hillbilly sourcing DO worry about demand Pick micro-region by IRR Take advantage of recurring land price arbitrage Number 2: proprietary pipeline Number 3: cluster formation Number 4: predefined tax model Number 6: obsession for economics in land utilization and plantation Number 7: HBU and non-timber revenues "tupiniquim" Number 8: "dual control" harvesting Number 9: sales among equals Number 10: the law, no shortcuts, (with local interpreter) Number 11: social license Number 12: smart financing 21

22 DO Worry about Demand Learning Rule Many advisors saying "Don't worry about demand here, things are booming, it will come " Demand is not guaranteed on a local basis. Do study local demand/ supply quantitatively While demand for timber in Brazil in indeed booming, several regions have established chronic supply deficits, others have strong demand potential (well located for growth of consuming industry) But others have short-term deficits that may easily become surpluses Potential for demand growth relies more on developments of the consuming industries not on forestry potential Example Some regions of MT eucalyptus Very good silvicultural conditions but Can it really attract large consumers - far from local demand and points of export? If demand comes, will prices be high? PR/SC pine Source: STCP, ABRAF, Panorama Setorial Gazeta Mercantil 22

23 Pick Micro-region by IRR Learning Rule Even within a certain region under the same "investment thesis", IRR may vary basis points, depending on the price of land, distance to main log demand points, road/railway infrastructure Even within a certain region under the same "investment thesis", IRR may vary basis points, depending on the price of land, distance to main log demand points, road/railway infrastructure Example: IRR of different regions 14.5% 12.8% 14.6% 13,2% 15.3% 15.7% 14.8% Sete Lagoas Belo Horizonte Source: STCP, ABRAF, Panorama Setorial Gazeta Mercantil 23

24 Take Advantage of Recurring Land Price Arbitrage Learning Rule Land prices follow the profitability of the main agricultural commodity if the region which is usually not timber Demand is not guaranteed on a local basis. Do study local demand/supply quantitatively Example This creates an opportunity to buy land during crisis of agricultural commodities, or sell them during booms 2006 Land lease prices follow a macro-regional logic, different to land sales price, creating additional opportunity to maximize returns Crisis of dairy farmers 2007 Bought properties in São Paulo for R$ 1.9 tsd and R$ 2.3 tsd/ha Boom of sugar cane Crisis of cattle General crisis Purchased 15 thousand/ha of pasture land for conversion Source: STCP, ABRAF, Panorama Setorial Gazeta Mercantil 24

25 Number 2: Proprietary Pipeline Learning Rule Regions with optimal returns in forest investments cover less than 3% of the Brazilian territory. Land deals from "the market" are almost never within the good regions Develop a proprietary pipeline of properties, by actively identifying forest and land owners and reaching out to them for purchase/ lease deals Land and forest deals which have gone public" are usually overpriced and constrained by agents and intermediaries Reaching out to forest and land owners within the desired microregions ensures best location and often provide unexpected bargains Example 100% of the properties we purchased over the last 2 years came from "active pipeline development" (reach out to owners) 25

26 Successful Forest Implementation in Brazil Superior Asset Selection and Smart Management are the key factors for a successful forest implementation in Brazil Superior Asset Selection Smart Management Number 1: regions, not properties Number 5: hillbilly sourcing DO worry about demand Pick micro-region by IRR Take advantage of recurring land price arbitrage Number 2: proprietary pipeline Number 3: cluster formation Number 4: predefined tax model Number 6: obsession for economics in land utilization and plantation Number 7: HBU and non-timber revenues "tupiniquim" Number 8: "dual control" harvesting Number 9: sales among equals Number 10: the law, no shortcuts, (with local interpreter) Number 11: social license Number 12: smart financing 26

27 Number 5: Utilize Trusted Local Scouts as Property Sources Learning Rule Lack of public market information makes property prices extremely sensitive to "deep pocket" investors Which buyer should you use? Use local people to source land/forests Sophisticated instruments (such as paid options, auctions, etc.) are not common practice "Price anchoring process" often needed Example Our pipeline (as previous example) 27

28 Number 7: HBU and Non Timber Revenues Brazilian Style Learning Rule Traditional sources of HBU or non-timber revenues (hunting licenses, etc.) are very rare Look for areas where agricultural commodity likely to shift to higher value (e.g., MG, PI) Main HBU opportunity is agricultural land use change Study market for forestry replacement" and carbon credits (e.g., TO) No use cattle forest Develop activities to explore legal reserves soy/corn sugarcane Example Curauá Increased value of land Non timber revenues are also "typical from Brazil": use of legal reserves, forestry replacement credits, etc. 28

29 Summary Brazil has become a popular destination to invest in timberlands. However, due to the fragmentation of regional timber markets, land price dynamics and incipient exploration of alternative revenue sources, there is a wide disparity of returns in Brazilian timberlands To maximize returns, investors ought to: Evaluate a broad range of investment types, to understand all the country has to offer Identify a winning investment thesis that uncovers untapped return potential Implement diligently, selecting superior assets and managing the forests smartly The right partner, such as VBI Timberland, can help investors in capturing the opportunity 29

30 A Good Partner Can Help Achieve Better Returns Expected Return (%) WORLD BRAZIL Investment Thesis Specialized implementation 600 bp gap from choosing the right partner! 30

31 We re ready to help you invest in Forestry in Brazil Thank you!!! Henrique Rodrigues Alves Aretz Managing Partner, VBI Timberland