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Guyana Timber Industries, Guyana Timber Industries, LtdLtd
Investing in Sustainable Investing in Sustainable EnterpriseEnterprise
Anupam Narula
Jennifer Schilling
Truman Semans
Emerging Markets Corporate Finance
March 1, 2001
Case BackgroundCase Background
Owner Ashley Churchill granted 25-year concession for 45,000 acre forest tract in Guyana (option for 300,000 acre expansion)
Concession – Good roads and infrastructure– Mixed species (80% lesser known)
Goal – profitable business selling environmentally certified timber, flooring, and charcoal
Churchill, UK citizen, lacks operational experience
Case QuestionsCase Questions
How will potential investors value the venture?
What are viable sources of financing for start up? (initial capital requirement of $1.5 million)
Sustainable ForestrySustainable Forestry
4 10 25
Yield
4 10 25
Price$
m3
Clearcut
Sustainable
500 mm acres deforested 1980-1995, especially in emerging markets
Timber demand growth 20% since 1990– Clearcuts increasing
Certification
– Environmental and social benefits
– Limits short-term revenue, increases costs
– Price premium?
Potential Funding Potential Funding SourcesSources
Commercial banks
Multilateral institutions
Bilateral development agencies
Green or timber venture funds
Carbon offsets
Joint venture
Country RiskCountry Risk
Political– Election Uncertainty
– External Conflicts
Financial– Taxes
– Financial Institutions
Economic– Foreign Exchange
– Low GDP per capita, $860 in 1999
Cash Flow Cash Flow UncertaintiesUncertainties
0
10000
0.8
0.02
50000
0
10000
30
50
25000
0
0.65
130000
0
200000
0.05
90000
100
0.45
80
5
0.08
50000
3
0.08
150000
0.4
50000
70
90
100000
0.08
0.9
250000
0.08
600000
0.25
600000
500
0.75
250
35
(3,000,000) (2,000,000) (1,000,000) - 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000
Max felling
Timber price
Log-to-timber efficiency
Charcoal Price
Cost of silviculture (400ha)
Percent wood used for charcoal
Cost to ship 7200 m3 timber
Growth in timber price
fuel cost at 400 ha
Timber-to-flooring efficiency
Growth in floor prices
SG&A
Materials for charcoal (per ton)
Material for woodfloor (per m3)
Cost to train 112 workers
Guyana Tax
FSC Royalty (one time)
Maintenance Percent
Royalty
First year training
Growth in charcoal price
NPV (Net Income)
Cash Flow Cash Flow UncertaintiesUncertainties
UNCERTAINTY RISK TYPE SOURCES OF INFORMATION
Market Price (certified timber, flooring and charcoal) MARKET
GTIL Monthly spot prices for
non-tropical timber
Harvest Rate OPERATIONAL
COUNTRY
GTIL Industry experts Literature
Production Efficiency (conversion of logs to finished product) OPERATIONAL
GTIL
Price Premium for Certified Product
MARKET
GTIL Industry experts Literature
Tax Rate OPERATIONAL
COUNTRY
Government documents Existing timber companies
in Guyana Cost of Goods Sold (shipping and silviculture) OPERATIONAL
GTIL
Case SolutionCase Solution
ICRG Risk RatingsICRG Risk Ratings
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Jan-
84
Jan-
85
Jan-
86
Jan-
87
Jan-
88
Jan-
89
Jan-
90
Jan-
91
Jan-
92
Jan-
93
Jan-
94
Jan-
95
Jan-
96
Jan-
97
Jan-
98
Jan-
99
Jan-
00
ICRG Political ICRG Financial ICRG Economic ICRG Composite
Cost of CapitalCost of Capital
– typically underestimates risk
– Sovereign yield spread 8%
Beta 1.0 Beta 0.8 ICCRC 26.6 22.3 Exchange Rate -7.8 -6.2 Political Risk +2 +2
Cost of Capital 20.8 16.1
Country Risk Ratings– Institutional Investor rating inferred from
ICRG for ICCRC
ICCRC
Goldman- Integrated-EHV
Valuation: Base CaseValuation: Base Case
Original 45,000 acre concession
Mean NPV: -$934,275
Standard Deviation: 1,405,527
Range: (-$3,615,795 to $4,479,946)
Frequency Chart
Certainty is 23.00% from 0.00 to +Infinity $
.000
.007
.013
.020
.026
0
6.5
13
19.5
26
-3,615,795.33 -2,025,047.33 -434,299.33 1,156,448.67 2,747,196.67
1,000 Trials 14 Outliers
Forecast: NPV (Net Income)
23% positive NPV
Valuation: Real Valuation: Real OptionsOptions
Underlying asset: market price of timber (non-tropical proxy)
Option to shut-down (original concession)– Based on break even market price
Mean NPV: -$876,419
Standard Deviation: 1,279,956
Range: (-$3,294,817 to $3,590,571)
Frequency Chart
Certainty is 22.60% from 0.00 to +Infinity $
.000
.007
.013
.020
.026
0
6.5
13
19.5
26
-3,294,816.49 -1,850,812.16 -406,807.82 1,037,196.51 2,481,200.84
1,000 Trials 12 Outliers
Forecast: NPV (Net Income)
22.6% positive NPV
Valuation: Real Valuation: Real OptionsOptions
Option to Expand and Shut Down (additional 300,000 acre concession)– Based on five year payback of additional
capital expenditures
Mean NPV: $422,531
Standard Deviation: 3,989,345
Range: (-$3,429,844 to $26,560,027)
Frequency Chart
Certainty is 36.40% from 0.00 to +Infinity $
.000
.017
.034
.050
.067
0
16.75
33.5
50.25
67
-3,144,789.68 358,418.57 3,861,626.82 7,364,835.06 10,868,043.31
1,000 Trials 34 Outliers
Forecast: NPV (Net Income)
36.4% positive NPV
Valuation ComparisonValuation Comparison
Shut down option has little value
Expansion option value brings significant upside with little additional downside
BASE CASE SHUT DOWN EXPANSION
Mean NPV -$934,275
-$876,419
$422,531
Standard Deviation 1,405,527 1,279,956 3,989,345
Range Minimum -$3,615,795 -$3,294,817 -$3,429,844
Range Maximum $4,479,946 $3,590,571 $26,560,027
Cumulative Comparison
.000
.250
.500
.750
1.000
-5,000,000.00 -625,000.00 3,750,000.00 8,125,000.00 12,500,000.00
NPV (Expansion)
NPV (Base Case)
NPV (Shut Down)
Overlay Chart
Valuing Sustainable Valuing Sustainable TimberTimber
Sustainability brings value in the long term (over 10 years)
Cost of capital (r=0.16)– Development
decreases risk
Growth (g=0.04)– Price of timber
(certification) ORIGINAL WITH
EXPANSION Annual Revenue $100,000 $250,000 PV (perpetuity) $134,590 $336,470
4 10 25
Yield
4 10 25
Price$
m3
Clearcut
Sustainable
Viable Financing Viable Financing SourcesSources
Marketing and operational assistance
– Joint venture (Jolyka Bolivia)
Organizations that value environmental and development
– IFC, World Bank, Inter-American Development Bank
– Green venture funds – Global Environment Fund, GMO/A2R
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