Present review has been based on available documents and written with the intention of giving a comprehensive introduction. However, it shall not be deemed as an official offer-it is solely for information purposes.
Socially responsible 5-8-year forestry/green energy investment opportunity with estimated IRR of ~20.00+%. Forest planted, grown, harvested; then timber turned into charcoal, charcoal sold to steel factories.
This investment is FOR YOU if you…
think bank deposits don’t provide satisfactory returns;
like the idea of having tangible assets at the core of your investment;
prefer to obtain outstanding returns even if the exact investment period and rates of return cannot be exactly specified upfront;
think social responsibility and sustainability are important factors in investing. This investment is NOT FOR YOU if you…
are satisfied with returns offered by bank deposits;
prefer speculative investments to investing in hard assets;
wish to invest for a term shorter than 5 years;
do want to have outstanding returns but with a fixed investment period;
don’t think investments are supposed to be concerned about social responsibility and sustainability. Major Characteristics
Investment Minimum: ~7.7 thousand Euros
Investment Optimum: from 58 thousand Euros
Investment Period: 5-8 years (estimated 7 years)
Return: varied; estimated @ 20.00+% per annum
(depending on future charcoal sales)
Opportunity Type: to be subscribed
Selling before maturity: possible & flexible Analysis
Timber is a precious commodity. It has been used in all over the world by uncorrelated sectors (i.e. construction industry, paper industry, furniture-making, energy production etc.). Even if timber prices were unchanged throughout the lifespan of a commercial forest plantation, trees would still have the great attribute to grow with relatively little human input and expenditure, and together with the trees invested funds could grow as well.
Standing timber has special value during hard times because timber owners can withhold the forest if they find timber prices too low. There is no extra cost of storage and timber value increases. The value of timber is even higher if it is not sold as timber but turned into charcoal and then it is sold to steel plants. Charcoal is considered green energy.
According to the Nature Conservancy, originally well over 15 million km2 of tropical rainforest existed worldwide. As a result of deforestation, only about 6.5 million km2 remain, therefore the role of sustainable forestry has significantly increased.
In this investment opportunity perspective investors are offered to buy into timber on professionally managed forest plantations of one of the fastest growing tree species of the world. The yield of these plantations are highest worldwide for that given tree species. The investment period is for about 7 years; afterwards the timber is harvested, turned into charcoal and sold to regional steel plants.
Profit is thus generated by charcoal sales. Local national legislation has in fact made it mandatory for steel plants to only use charcoal. As this is one of the fastest growing economies of the world-and the steel industry has especially high potential in the country-, there is a solid base for future local charcoal consumption.
Duration and Return
Compared to typical forestry investment durations the estimated 7-year investment period is good.
The investment return is influenced by two major factors: charcoal sales price and the local currency to Euro conversion rate at the time of selling. Let’s take a look at three theoretical scenarios-an estimated worst case, a conservative and a positive outlook.
If the charcoal sales price dropped 10 percent* while the Euro strengthened 50 percent* against the local currency (both of them a negative effect for future gains), net returns** would range between 3.61 and 5.17 percent per annum (compound interest; lot sizes from minimum 2.5 hectares to 20 hectares). In this case the minimum investment of 7700 Euros would increase to 9870 Euros, the optimum investment of 58,000 Euros (20 hectares) would increase to 82,541 Euros.***
If both the sales price and the conversion rate remained the same*, net returns** would range between 13.39 and 14.13 percent per annum (compound interest; lot sizes from minimum 2.5 hectares to 20 hectares). In this case the minimum investment of 7700 Euros would increase to 18,557 Euros, the optimum investment of 58,000 Euros (20 hectares) would increase to 146,294 Euros.***
If charcoal sales prices increased by 40 percent* over the 7-year investment period and the conversion rate remained the same*, net returns** would range between 20.03 and 21.30 percent per annum (compound interest; lot sizes from minimum 2.5 hectares to 20 hectares). In this case the minimum investment of 7700 Euros would increase to 27,639 Euros, the optimum investment of 58,000 Euros (20 hectares) would increase to 224,106 Euros.***
*Compared to levels at the time of investment.
**Company service fees deducted (only applies if gross annual return reaches or exceeds 8 percent); inflation not
***Over the estimated investment period of 7 years; calculated with an average timber yield assessed by an independent expert.
Forest Replant Warranty
All investment opportunities have associated risk factors (see below). The management company uses modern forestry management techniques to prevent any crop loss. However, if within the investment term the forestry crop does fail for whatever reason, the management company will replant the area free of charge. Any lumber that can be salvaged will be sold and 90 percent of the gains will be returned to the investor.
All general costs are covered by the initial investment amount-no further maintenance fees are to be paid by the investor. The management company will deduct a service fee on gross overall gains at the time of closing the investment if annual returns reach or exceed 8 percent per annum. These performance fees are already deducted in the calculations of the scenarios above.
The investor or the investor’s employee is allowed to visit the plantation.
Risks and Weaknesses
Biological and Natural Risks
Fires – the first and greatest risk factor that comes into mind about forestry is fire. According to the United States Department of Agriculture, forest management significantly decreases the risk of forest fires (from about 0.50 percent to about 0.30 percent in North America).
Pests and diseases – there are a few well known pests and diseases that can affect the crops especially in the early years. The forest management teams know exactly what to look out for to minimize the risk of these pests spreading and how to treat any problems as soon as they occur.
Water and drought – water is a vital resource in some areas that do not receive enough yearly rainfall and it is the first consideration when constructing a new forestry plantation within hotter areas. The management firm makes sure that there is always enough water being pumped into these areas to support effective growth.
If within the investment term the forestry crop does fail for whatever reason, the management company will replant the area free of charge. Any lumber that can be salvaged will be sold and 90 percent of the gains will be returned to the investor.
Currency Exchange Rate
The investment is made in Euros while the project is running-charcoal is sold-in the local currency of the managed forestry. This means that the final gain for the investor will be affected by the future currency exchange rate of these currencies.
Three outcomes are possible: either the rate remains practically the same or the Euro will either strengthen or weaken against the local currency. In our case if Euro strengthens against the local currency, financial gains in Euro decrease. If Euro weakens against the local currency, gains in Euro increase.
In the long run currencies strengthen or weaken against each other on the basis of their respective economic performance. This is promising for this investment because the local economy is one of the best performing economies in the world with bright outlook for the future while the eurozone has lately been facing great challenges because of the very wide spectrum of economic performance of its participating countries. This fact allows us to suppose that it is possible but quite unlikely that Euro would considerably strengthen against the local currency in the investment period.
The end product of contracted services is charcoal made of eucalyptus. Local national legislation has restricted steel plants to exclusively use charcoal in steel production.
An official publication reports that a new investment of iron and steel industry is under way resulting from a partnership of multinational corporations to build manufacturing plant of seamless tubes based exclusively on charcoal consumption from planted forests, with production to be started in 2016. This is a good example of the dynamically expanding demand for charcoal in the domestic market.
It is highly unlikely that under such circumstances we would see any significant drop in charcoal prices.
While the plantation land is owned by the management company, the trees grown on the land are owned by the investor. This means that should the management company happen to go into liquidation for any reason, timber can still be sold and proceeds collected by the investor.
The investor has freedom to control and sell the forestry investment and reinvest at any time with fully flexible transferable deeds. As the leaseholder of the land and timber, the investor is also the certified owner of the trees. The investor is entitled to sell the forestry investment to any third party.