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INTERIM FINANCIAL REPORT For the six months ended 30 June 2011 (Unaudited)
PHAUNOS TIMBER FUND LIMITED
CONTENTS
Interim Management Report 1
Responsibility Statement 10
Interim Condensed Consolidated Statement of Comprehensive Income 12
Interim Condensed Consolidated Statement of Financial Position 13
Interim Condensed Consolidated Statement of Cash Flows 15
Interim Condensed Consolidated Statement of Changes in Equity 17
Notes to the Interim Condensed Consolidated Financial Statements 19
Schedule of Investments 32
Shareholder Information 33
Directors and Service Providers 34
Front cover: Eucalyptus canopy, Mata Mineira, Brazil.
This report is printed on paper from sustainable sources. Designed and printed by The Partnership Advertising and Marketing Agency.
Thinning of loblolly pine, Aurora Forestal, Uruguay.
01 PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT
Phaunos Timber Fund Limited (“Phaunos” or the “Company”) is pleased to present its Interim Financial Report (“interim financial report”) for the six months to 30 June 2011 (the “period”). The Company is an Authorised Closed-ended, Guernsey based, investment scheme managed by FourWinds Capital Management (the “Investment Manager”) established to invest in timber and timber related assets on a global basis.
HIGHLIGHTS
30 June 2011(unaudited)
31 Dec 2010(audited)
30 June 2010(unaudited)
Net Asset Value US$621.6 million US$594.9 million US$560.5 million
Unadjusted NAV per Ordinary Share US$1.16 US$1.11 US$1.04
Profit/(Loss) for the period/year US$27.7 million US$20.7 million (US$8.2 million)
Earnings/(Loss) per Ordinary Share 5.15 cents 3.98 cents (1.64 cents)
• TheCompanypaiditsfirstdividendforthetwelvemonthsended31December2010ofUS$0.02grossperordinaryshareoftheCompany(“OrdinaryShare”)on15July2011.AccordinglyatotaldividendofUS$10.7millionhasbeenaccruedat30June2011inrespectofthatpostperiod-endpayment.
FINANCIAL RESULTS FOR THE PERIOD
ThetotalunauditedNAVoftheCompanyat30June2011wasUS$621.6million(31December2010:US$594.9million).Thisequates toaNAVofUS$1.16perOrdinaryShare (31December2010:US$1.11perOrdinaryShare).
AsummaryofthemajordriversinthemovementoftheCompany’sNAVfortheperiodisasfollows:
1. Unrealisedgainsontherevaluationoffinancialassets,excludingforeignexchange,forMatarikiForestryGroup of US$16.8million. Unrealised gains on the revaluation of land and biological assets, includingforeign exchange, forMataMineira of net US$5.7million.Other investments such as Aurora Forestal,GreenwoodTreeFarmandPraderaRojaalsohadmodestvaluationgains.
2. Totalforeignexchangegains,bothrealisedandunrealised,fortheperiodofUS$30.0millionwereattributabletothecontinuousweakeningoftheUSDollaragainsttheNewZealandDollar,theNorwegianKroneandtheBrazilianReal,whichpositively affected the valuation of investments inMatariki,GreenResources,EucatecaandMataMineira.
3. Operatingexpenses totallingUS$23.3million are in linewith expectationsgiven thedifferent stagesofthe plantations’ development and life cycle. These include an accrual ofUS$8.2million for a potentialperformancefee,ifthecurrentperiod’sresultsaremaintainedinthe2011auditedyear-endNAV,aswellasfundlevelexpensesandoperatingexpensesattributabletosomeplantationoperations.DiscussionshavebegunbetweentheBoardandtheInvestmentManagertoexplorewhetheradifferentfeebasiswouldalignbetterfortheinterestsofallstakeholders.
02PHAUNOS TIMBER FUND LIMITED
Eucalyptus, Green Resources, East Africa.
03 PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUED
1 TheBoardhasreviewedtheloantoMasarangFoundation(“Masarang”)andconcludeditprudenttokeeptheprovisionagainstthefullvalue,giventheuncertaintysurroundingtheabilityofMasarang
torepay.Asaresult,theinvestmentinMasarangisvaluedatnilat30June2011andhasbeensince31December2009.Theloanisnotyetdueandisthereforenotyetindefault.
2 IncludesthefinancialresultsforCaldreySA,ForestEnterprisesdoo,SCRomforTimberSRL(“Romfor”)andBaltForTimberOU(“BaltFor”)fortheperiod.ThemajorityofRomfor’scapitalwasreturned
toPhaunosduringtheperiodasitisintendedtoliquidatethesubsidiaryby31December2011.TheliquidationandreturnofcapitalforBaltForwillcompleteinQ32011.
FIN
AN
CIA
L R
ES
ULT
S F
OR
TH
E P
ER
IOD
CO
NT
INU
ED
ThefollowingtablepresentsasummaryofthemovementintheunauditedNAVduringtheperiod:
Co
mp
any
NA
V O
rdin
ary
Acq
uisi
- U
nrea
lised
Gai
n/(L
oss
) Fo
reig
n
N
AV
Ord
inar
y
Sha
res
tio
ns/
Exc
hang
e R
ealis
ed
Mo
vem
ent
Sha
res
% o
f N
AV
31 D
ec 2
010
(Ret
urn
Bio
log
ical
Fo
reig
n Tr
ansl
atio
n Fo
reig
n in
ret
aine
d
30 J
un 2
011
30 J
un 2
011
(a
udit
ed)
of
fund
s)
Valu
atio
n La
nd
Ass
ets
Exc
hang
e D
iffer
ence
s E
xcha
nge
earn
ing
s (u
naud
ited
) (u
naud
ited
)
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
PhaunosTimberFund
Lim
ited
40,175
3,693
––
––
28
(10)
(23,121)
20,765
3.34
Tota
l Pha
uno
s
Tim
ber
Fun
d L
td
40,1
75
20,7
65
MatarikiForestryGroup
147,142
–16,751
––
10,300
––
–174,193
28.02
GreenResourcesAS
96,058
––
––
8,225
––
–104,283
16.78
GreenWoodTreeFarm
FundLP
35,843
818
608
––
––
––
37,269
6.00
AuroraForestalLimited
33,830
–717
––
––
––
34,547
5.56
NTPTimberPlus+
FundI,LP
10,807
–114
––
––
––
10,921
1.76
Tota
l Min
ori
ty-o
wne
d
inve
stm
ents
32
3,68
0
36
1,21
3
MasarangFoundation1
––
––
––
––
––
–
Tota
l Lo
ans
and
D
epo
sits
MataMineira
Investimentos
96,435
1,200
–(1,715)
7,435
–6,248
–(682)
108,921
17.52
FlorestaisLtda
EucatecaSA
65,526
––
–(296)
–4,093
–(1,570)
67,753
10.90
PraderaRojaSA
31,050
850
–(58)
1,078
––
12
(221)
32,711
5.26
GreenChinaForestry
CompanyLtd
19,929
––
–(189)
–(66)
89
(653)
19,110
3.07
Oth
er o
pera
ting
subsidiaries2
18,128
(6,561)
––
––
1,225
(119)
(1,555)
11,118
1.79
Tota
l Op
erat
ing
S
ubsi
dia
ries
23
1,06
8
23
9,61
3
NA
V o
f O
rdin
ary
S
hare
s 59
4,92
3 –
18,1
90
(1,7
73)
8,02
8 18
,525
11
,528
(2
8)
(27,
802)
62
1,59
1 10
0.00
Tota
l Fo
reig
n E
xcha
nge
Gai
ns
30,0
25
04PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUEDP
OR
TF
OL
IO S
UM
MA
RY
3 TheBoardhasreviewedtheloantoMasarangandconcludeditprudenttokeeptheprovisionagainstthefullvalue,giventheuncertaintysurroundingtheabilityofMasarangtorepay.
4 IncludescashreservesheldattheCompanylevelandbyRomforTimberandBaltForTimber.
Co
mp
any
Des
crip
tio
nG
eog
rap
hy%
of
Ow
ners
hip
% o
f N
AV
30
Jun
e 20
11
(una
udit
ed)
1.MatarikiForestryGroup
Mixedagepineplantations,sixestates,currentlywith
183,000hectares
NewZealand
Minorityholding
28.0
2
2.MataMineiraInvestimentos
FlorestaisLtda
MatureandmixedageeucalyptusplantationsinMinas
Gerais,Brazil,currentlywithover19,000hectares
EastCentralBrazil
100.
0017
.52
3.GreenResourcesAS
Mixedage,mixedspeciesplantations,currentlywith
21,300productivehectaresandrightstoplantmorethan
200,000hectares
Eas
t Afri
caMinorityholding
16.7
8
4.
Euc
atec
a S
AGreenfieldteakandeucalyptusplantationsinMatoGrasso,
Brazil,currentlywith17,150hectares
WestCentralBrazil
100.
0010
.90
5.GreenWoodTreeFarm
FundLP
Threemixedagehybridpoplartreefarmswith35,000
acresintegratedwithanewsawmill
NW
US
AMinorityholding
6.00
6.AuroraForestalLimited
Jointventureinasawmillandmixedagepineplantations,
currentlywith19,500hectares
Nor
ther
n U
rugu
ayMinorityholding
5.56
7.PraderaRojaSA
Greenfieldplantationprojectforfastgrowingeucalyptus,
currentlywith12,000hectares
Sou
ther
n U
rugu
ay10
0.00
5.26
8.GreenChinaForestry
CompanyLtd
Mixedagepineandfirplantations,currentlywith6,500
hect
ares
China
100.
003.
07
9.NTPTimberPlus+FundI,LP
“Higher-and-better-use”timberlandconversion
SE
US
AMinorityholding
1.76
10.ForestEnterprisesdoo
Pelletfuelplantusingwastewood
Serbia
100.
001.
29
11.CaldreySA
Timberharvestingcompany
Sou
ther
n U
rugu
ay10
0.00
0.42
12.MasarangFoundation
Loan:commercialforestryprojectwithsocialand
environmentalgoals
Indonesia
100.
00–3
13.
Oth
er4
Cashreservesheldforcommittedprojectsandworking
capi
tal
Eur
ope
100.
003.
42
Tota
l Po
rtfo
lio V
alue
100.
00%
05 PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUED
PORTFOLIO SUMMARY CONTINUED
The InvestmentManager,FourWindsCapitalManagement, ispleased to reportonPhaunos’achievements,activitiesanddevelopmentsduringthesixmonthsended30June2011.
Matariki Forestry Group (“Matariki”):TheCompanyownsasignificantminoritypositioninMatariki.ThevalueoftheCompany’sinvestmentinMatarikiwasup18.38%at30June2011,includingtheeffectofforeigncurrencyvaluation, but excluding incomedistributions received byPhaunos fromMatariki.Harvesting operations areon-goingfortheproperties,andPhaunosreceivedtotaldistributionsofUS$1.4millionfromMatarikiduringtheperiod.MatarikiisintheprocessofcompletingitsForestStewardshipCouncil(“FSC”)certification.Itiscurrentlyat38%certificationandanticipates100%certificationbyyearend2011.Since30June2011,PhaunoshasreceivedanadditionaldistributionfromMatarikiofUS$2.5million.
Mata Mineira Investimentos Florestais Ltda (“Mata Mineira”):TheCompanyowns100%ofMataMineira.ThevalueofMataMineirawasup11.56%at30June2011,includingtheeffectofforeigncurrencyvaluation.TheBrazilianRealvalueofMataMineira’sproperty,inMinasGerais,Brazil,wasupby6.23%at30June2011.Harvestingoperationsareon-goingfortheproperties,whicharegeneratingcashflowforimplementingcapitalimprovementsontheproperty, includingimprovementoftimberland.MataMineirahasbeguntheprocessofFSCcertification.
Green Resources AS (“Green Resources”):TheCompanyownsasignificantminorityinvestmentinGreenResources,whichconsistsofmixedage,mixedspeciesplantationswithasawmillandtwopoleplantsinEastAfrica.GreenResourcesconsistsofbothcash-generatingoperationsandsignificantgreenfieldopportunities.AggressiveplantingandtighteningcapitalmarketshaveledtoashorttermcashshortfallatGreenResources.GreenResources is in theprocessofsecuring interimand longtermfinancingtominimiseanydisruption inoperations.
ThevalueoftheCompany’sinvestmentinGreenResourceswasup8.56%at30June2011,dueentirelytotheeffectofforeigncurrencyonrevaluationoftheinvestment.GreenResources’plantationsareroughlyone-thirdFSCcertified,withplansfor100%certification.
Eucateca SA (“Eucateca”): TheCompanyowns100%ofEucateca, agreenfieldproject inMatoGrosso,Brazil.Harvestingoperationsareexpectedtocommence in2015,anddiscussionshavealreadybegunwithpotentialbuyers.MatoGrosso,whereEucatecaislocated,hasexceptionalconditionsforgrowingtrees:highrainfallrates,abundantsunlight,andhighlyproductivesoil.Newgeneralmanagementonthegroundisfocusedoncostcontrolandimprovedsilviculturalpractices.Newrailroadtracksandfacilitieshavebeenbuiltadjacentto our largest property, which we anticipate will help reduce shipping costs. Eucateca plans to seek FSCcertificationbeforeharvestingbegins.
ThevalueoftheCompany’sinvestmentinEucatecawasup3.4%at30June2011,includingtheeffectofforeigncurrencyvaluation.TheBrazilianRealvalueofEucateca’spropertywasupby4.8%at30June2011.LandvaluesatEucatecaheldstableandbiologicalgrowthincreasedbyUS$4.5million.Thiswasoffsetbyincreasedsilviculturalexpenses required tocorrect theperformanceof the formermanager,APServicosAgronomicosLTDA(“APServicos”).
NetreservesagainstamountsduetotheCompanyfromAPServicoshavebeenincreasedbyUS$242,000at 30 June 2011.However, as part of the court-ordered reorganization plans, Eucateca has recoveredR$3.9millionworthofmachineryandisdiligentlyfollowingupontheequipmentwhichhasnotyetbeenreturned.
Aurora Forestal SA (“Aurora Forestal”): TheCompany owns a significantminority investment in AuroraForestal,whichconsistsofmixedagepineplantationswhichare100%FSCcertifiedandasawmillinnorthernUruguay. Harvesting operations are on-going on the properties, and generate regular distributions to the
06PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUED
Company,typicallyinthesecondhalfoftheyear.Aco-generationplant,fuelledbywasteproductsgeneratedbyAuroraForestal’ssawmill,isinthefinalstagesofconstructionandisscheduledtocomeonlinefirstquarter2012withalmostallofitscapacityalreadysold.AuroraForestalhasaggressivelydiversifieditsclientbasesincetheglobalfinancialcrisis,especiallyincreasingitssalesinChina.ThevalueoftheCompany’sinvestmentinAuroraForestalwasup2.12%inlocalcurrencyat30June2011.TheUSDollarvalueofAuroraForestal’spropertywasup2.20%at30June2011.
Pradera Roja SA (“Pradera Roja”): The Company owns 100% of Pradera Roja, a greenfield project inSouthernUruguay,andhascompleteditsplantingprogramofeucalyptusplantations.Theplantationscontinuetogrowwell,respondingpositivelytosilviculturalregimenslikeweedcontrolandfertilization.SinceMarch,thebeginningof the rainyseason,PraderaRojahashadgood rainandmoderate temperatures. InJune,cattlegrazingbeganontheplantations,whichreduceweedsandfirerisk.Limitedharvestingisanticipatedin2012,andthinningoperationsareexpectedtocommencein2013.Fullrotationharvestingisexpectedin2023.
The valueof theCompany’s investment inPraderaRojawasup2.54% in local currencyat30June2011. TheUSDollarvalueofPraderaRoja’spropertywasup4.67%at30June2011.
Greenwood Tree Farm Fund LP (“GTFF”):TheCompanyownsasignificantminoritypositioninGTFF,whichconsistsofmixedagepoplarplantationsintheNorthwesternUS.Harvestingoperationsareon-going,andtheproject includesastateoftheartsawmill.Marketconditionsare improvingandthesawmill isoperatingonefullshift.InJune2011,lumberpricesforproductsoldfromthemillreachedarecordhigh,6%higherthantheprevious record set in July 2010. Additionally, recentwetweather conditions significantly reduced irrigationcosts.ThevalueoftheCompany’sinvestmentinGTFFwasup1.66%at30June2011.
Green China Forestry Company Limited (“Green China”): TheCompany owns 100%ofGreenChina,whichconsistsofmixedagepineand firplantations.Harvestingand resin-tappingoperationsareon-goingon the properties. This is Phaunos’ first year of full operation (including timber and resin selling) in Jiangxi.TheCompanyhasadoptedacautiousapproachwithlessthan5%ofPhaunosinvestedinthehighestqualityassetsavailableinChineseforestry.Timberandresinpricesarebetterthananticipatedwithvolumeslowerthanforecast.ThevalueoftheCompany’sinvestmentinGreenChinawasdown4.11%at30June2011,includingtheeffectofforeigncurrencyvaluation.TheUSDollarvalueofGreenChina’spropertyinsouthernJiangxiwasdown1.93%at30June2011.Thelossismainlyattributabletocostlevelsrelativetothescaleoftheoperations.TheInvestmentManagerisworkingwithin-countryserviceproviderstorestructureandreducecosts.
UnlikeoneofitsmainforestrycompetitorsinChina,GreenChinadoesnotuseanythirdpartyentitiesoutsideofthecontrolofthePhaunosgrouptosellitsproducts.AsaresultallrevenuecontractsheldbytheGreenChinaoperatingsubsidiaryaretransparenttotheparentcompany,Phaunos,whichallowsacompleteaudittrailforalltransactions.AllForestryResourceCertificates(forestryownershipdocuments)arecentrally locatedintheBeijingofficewithelectroniccopiesinBoston.
FULL INVESTMENT
TheCompanyisfullyinvested,andhastransitionedtoitsoperationalphase.Phaunosowns100%ofalmost55,000hectares,andownsapartialinterestinoverhalfamillionadditionalhectaresviaitsminorityholdings.Worldwide,portfoliocompaniesemployalmost6,000people,mostlyonapart-timeorconsultingbasis.Manymore people are employed as contractors to the portfolio companies.
TheCompanyisnowfocusedongeneratingcashflow,cuttingcosts,andmaximisingefficiency.Tothisend,itisimplementingaForestryInformationManagementSystem(“FIMS”)acrosstheportfolioinordertostandardisereportingandbettermanagetheportfolio.TheInvestmentManagerexpectsimplementationofthesysteminfirstquarter2012.
07 PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUED
FUTURE OUTLOOK
TheCompanyisinvestedinproductive,tangibleforestassets;ithasnoborrowingsattheholdingCompanylevelanditsforestsarelongterminvestments.Astheworldeconomiesworkunevenlytowardrecovery,theInvestmentManagerbelievestheCompany’sportfoliowillcontinuetobenefitfromitsbroaddiversificationanditsexposuretofastergrowingeconomies.Forinstance,somegradesofNewZealandradiatapinelogsareathigherpricesthanbeforethefinancialcrisis(source:NewZealandMinistryofAgricultureandForestry).ChipsandpulpwoodpricesareupinthemarketsthataffectourSouthAmericancompanies(sources:WoodResourcesQuarterly,InternationalTropicalTimberOrganization).Pricingforresin,eucalyptus,andChinesefirsawtimbercontinuetotrendupandinsomecasesreachrecordhighpricing(source:WoodResourcesInternational).TheUShousingmarketremainsdepressed,thoughsomewoodpricesarerising.Thevalueofholdingassetsacrossbroadlydiversemarketsshouldsustaintheportfolio’scashflowandNAVovertimeanddespiteturbulentmarkets.
Additionally,theCompanyhasbeenabletorealisesomeofthecarbonvaluewhichtreesnaturallystoreastheygrow.GreenResources,whichholdsourassetsinAfrica,continuestobreakgroundinthecarbonmarketplace.InJune,itsKachungForestProjectinUgandabecameGreenResources’firstCleanDevelopmentMechanism(“CDM”)projecttoberegisteredbytheUnitedNationsFrameworkConventiononClimateChange(“UNFCCC”),a rigorousandexactingvolume-drivenprocesswhich takesyears to fulfil. Itwasonly thefifthAfforestation/Reforestation CDM project to be registered in Africa and is the first registered large-scale CDM project inUganda.InJuly2011,GreenResourcessignedanewsalesagreementwiththeCarbonNeutralCompanyforthesaleofcarboncreditsfromitsTanzanianUchindileandMapandaplantations.InNewZealand,theMatarikiForestryGrouphassuccessfullysoldover285,000NewZealandUnits(eachunitisametrictonofcarbon)undertheNewZealandEmissionsTradingSchemesincetheendofDecember2010,forapproximatelyNZ$5.7million.
TheCompany’ssharescontinuetotradeatadiscounttothenetassetvalueperOrdinaryShare.TheBoardofDirectorshasbeenengagedforsometimeinexploringhowthediscountmightbereducedandhasdiscussedpossibleactionswiththeCompany’sbrokersandshareholders.Amajorityofshareholdershaveindicatedtheywouldprefer theCompany to remain listed.Sharebuybackshavebeen triedandhadno impact.Now theCompany is fully invested, there is no spare cash to fund buybacks and borrowing for this purpose is noteconomicallyviable.DailydealingsintheCompany’ssharesremainlow.
Whenthecurrenteconomicsituationstabilises,theDirectorsbelievecontinuingtheCompany’sgoodperformancewithNAVgrowth,togetherwithcashinflowfromharvestingwillsupportthepaymentofsustainabledividends.This,combinedwithacontinuedpublicrelationsprogrammetoemphasisethevalueintheCompany’sassetsshouldlogicallyattractnewinvestorsandleadtoareductioninthediscountovertime.
FOREIGN EXCHANGE
TheCompany isUSdollar-denominated.Thecurrencies inwhichour largest investmentsareheld (theNewZealandDollar, theBrazilianReal,andtheNorwegianKrone)allstrengthenedagainst theUSDollarovertheperiod.ForeignexchangemovementcontributedUS$30.0milliontotheCompany’sNAVat30June2011.TheInvestmentManagerbelievesthataportfoliobroadlydiversifiedinarangeofcurrencieswillbeself-hedgingoverthelongrun.Timberlandinvestingisalong-terminvestment.UnderthesecircumstancestheDirectorsbelievethatanybenefitsofhedgingtheportfolioareoutweighedbythecostsandconsequentlytheCompanydoesnothedge.Theresultsat30June2011reflectthebenefitofthispolicy.However,investorsneedtobeawarethatwhiletheCompanyhasbenefitedfromaweakeningUSDollar,astrengtheningoftheUSDollarwouldseethesegainsreversed.
08PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUED
CASH FLOW
Thecashheldat30June2011wasUS$46.7million.ThetotaldividendofUS$10.7millionwaspaid inJuly2011.OfthebalanceUS$9.7millionisheldwithinoperatingsubsidiaries.WhiletheCompanyisatfullinvestmentit is not forecast that thegreen fieldplantationsof theportfoliowill be cashgenerativewithin the next twoyears.TheDirectorsaremindfuloftheneedtominimisecashreserveswhileatthesametimeensuringthattheCompanymaintainssufficientliquiditytomeetitsliabilitiesinordertobringtheportfoliotomaturity.
ENVIRONMENTAL STEWARDSHIP
TheCompanyiscommittedtothehighestenvironmentalstandards.WearesystematicallypursuingcertificationunderFSCguidelines.Twopropertiesare100%certified,andathirdisexpectedtobebyyearend.Afourthisscheduledtobecertifiedin2011-2012.Wehavefocusedoncertifyingplantationswithstandingtimberandarerollingoutaprogramwiththeyoungerplantationsthatwill,weplan,achievecertificationwellbeforeprojectedharvesting.
EFFECT OF IFRS ON REPORTED RESULTS
Itisimportanttonotethat,consistentwithIFRSguidelines,wholly-ownedoperatingcompanyexpenses(thatis,costsassociatedwithworkontheplantations)areincludedintheInterimCondensedConsolidatedStatementofComprehensiveIncome,inadditiontotheCompanylevelexpenses.Thiscanbemisleadingwhenonetriesto compute the total expense ratio of theCompany, since those expenses are, in fact, notCompany levelexpensesandshouldnotbeincludedinananalysisofCompanylevelexpenses.Theaccountshavebeensplitintotwosections inNote3of the InterimCondensedConsolidatedFinancialStatements inordertoprovideinvestorswith amore transparent viewof actual costs associatedwithmanaging theCompany, aswell ascostsassociatedwithoperatingthewholly-ownedinvestmentprojects.TheCompanylevelexpenses,includinganaccrualforapotentialperformancefeeaftertheyearendauditatDecember2011,areUS$14.0million,or2.25%ofassetsundermanagement.
SHARE CAPITAL
At30June2011,theCompanyhad537,149,832issuedOrdinarySharesand4,065,045OrdinaryShareswereheld in treasury.
PRINCIPAL RISKS AND UNCERTAINTIES
TheprincipalrisksfacingtheCompanyrelatetotheCompany’sinvestmentactivities.Theserisksaremarketrisk(comprisingcurrencyrisk,interestrateriskandotherpricerisk),liquidityriskandcapitalmanagementrisk.
Anexplanationof theserisksandhowtheyaremanaged iscontained inNote30of theCompany’sAnnualReportandConsolidatedFinancialStatementsfortheyearended31December2010(“2010AnnualReport”).
TheprincipalrisksanduncertaintiestowhichtheCompanyisexposedto,havenotsignificantlychangedsincethepublicationofthe2010AnnualReport.However,thefullimplicationsoftheeconomicuncertaintiesexposedin the summer of 2011 are yet to unfold.
The2010AnnualReportisavailableontheCompany’swebsiteatthefollowinglink:http://www.phaunostimber.com/documents/2010_Annual_Report_and_Financial_Statements_with_Notice_of_AGM.pdf
GOING CONCERN
TheDirectorsconfirmtheuseofthegoingconcernbasisinthepreparationoftheinterimfinancialreport.Inthisregardtherearenoneweventsorcircumstancessincethe2010AnnualReport.
09 PHAUNOS TIMBER FUND LIMITED
INTERIM MANAGEMENT REPORT CONTINUED
DIVIDENDS
TheBoardofPhaunosispleasedtoreportthaton15July2011,theCompanypaiditsfirstdividendofUS$0.02grossperOrdinaryShareinrespectofthetwelvemonthsended31December2010.ThisdividendpaymentwaspursuanttotheresolutionapprovedbytheshareholdersattheannualgeneralmeetingoftheCompanyon9June2011.Theex-dividenddateforthedividendwas15June2011andtherecorddatewas17June2011.Giventhedividendwasdeclaredpriorto30June2011,theCompanyhasaccrueddividendsofUS$10.7millionat that date.
PERFORMANCE FEES
TheCompanyhasaccruedat30June2011itsfirstpotentialperformancefeeofUS$8.2millionorUS$0.0152perOrdinaryShare(basedonthetime-weightedaveragenumberofOrdinarySharesinissuesincetheinitialadmissionoftheCompany’ssharestotheAlternativeInvestmentMarket),astheunauditedNAVperOrdinaryShareatthatdate,asadjustedforthefollowingitems,exceededthehurdlerateofUS$1.08:
(i) anyincreaseinNAVarisingfromtheissueofOrdinarySharesasapremiumorbuybackofOrdinarySharesatadiscounttoNAV;
(ii) dividendsdeclared,announcedoranyundistributednetrevenuenototherwiseincludedintheNAVcalculation;
(iii) alreadyaccruedperformancefees;and
(iv) otheradjustmentstheAuditCommitteeandManagementCommitteeoftheBoardandtheInvestmentManageragreeareappropriate.
TheadjustedNAVperOrdinaryShareforthepurposeofcalculatingtheperformancefeeaccrualat30June2011wasUS$1.1619.
Pursuanttotheinvestmentmanagementagreement,aperformancefeewillonlybecomedueandpayabletotheInvestmentManagerasat31December2011andonlyiftheauditedNAVperOrdinaryShare(adjustedasdescribedabove)asat31December2011exceedsUS$1.08.
Whilstaperformancefeeaccrualhasbeenmadeintheinterimconsolidatedfinancialstatements,discussionshavebegunbetweentheBoardandthe InvestmentManager toexplorewhetheradifferent feebasiswouldalignbetter for the interestsofallstakeholders.Thepresentbasiswasdetermined in2006wheneconomicconditionsweremoreoptimisticandsuchstructuresmorecommon.Shareholderswillrealisethesediscussionsarecomplicatedandhavefarreachingconsequences.Theyareatanearlystage.Theoutcomeofdiscussionswillbereportedassoonastheyhavebeenconcludedanditisunlikelytobebeforetheendoftheyear.
RELATED PARTIES
Therewerenosignificantrelatedpartytransactionsduringtheperiodnoranymaterialchangetorelatedpartytransactionsdescribedinthe2010AnnualReport.PleaserefertoNote16fordetails.
VOTING RIGHTS FOR PORTFOLIO INVESTMENTS
TheInvestmentManagercarefullyconsiderstheexerciseofvotingrightsinrelationtotheCompany’sportfolioandvotes,orrefrainsfromvoting,basedonacasebycaseexamination,usingitsbestcommercialandfinancialjudgment,ofthebestlong-terminterestsoftheCompanyanditsshareholders.
TypicallytheInvestmentManagerwill,whenmakingvotingdecisions,examinethestrategicfocusandoperatingperformanceoftherelevantportfoliocompany,itscorporategovernanceandremunerationframeworkanditscommunicationsandreportingstructures.PleasenotethatPhaunosdoesnotholdanyinvestmentsinpubliclytraded companies.
10PHAUNOS TIMBER FUND LIMITED
RESPONSIBILITY STATEMENT
TothebestoftheknowledgeoftheDirectors:
TheInterimFinancialReportforthesixmonthsended30June2011givesatrueandfairviewoftheassets,liabilities, financial position and profit or loss of the Company and has been prepared in accordance withInternationalAccountingStandards(IAS)34InterimFinancialReporting.
TheInterimManagementReportincludesafairreviewoftheinformationrequiredby:
(a) DTR4.2.7of theDisclosureandTransparencyRules,beingan indicationof importanteventsthathaveoccurredduringthefirstsixmonthsofthefinancialyearandtheirimpactonthecondensedsetoffinancialstatements;andadescriptionoftheprincipalrisksanduncertaintiesfortheremainingsixmonthsoftheyear;and
(b) DTR4.2.8oftheDisclosureandTransparencyRules,beingrelatedpartytransactionsthathavetakenplaceinthefirstsixmonthsofthecurrentfinancialyearandthathavemateriallyaffectedthefinancialpositionorperformanceof theenterpriseduring thatperiod;andanychanges in the relatedparty transactionsdescribedinthelastannualreportthatcoulddoso.
SignedonbehalfoftheBoardby:
SirHenryStudholme IanBurns Director Director
30 August 2011
11 PHAUNOS TIMBER FUND LIMITED
Mature eucalyptus, Mata Mineira, Brazil.
12PHAUNOS TIMBER FUND LIMITED
Note 30 June 2011 30 June 2010 Unaudited Unaudited US$’000 US$’000IncomeNet gain on financial assets designated fair atfairvaluethroughprofitorloss 8 36,715 4,002Revaluationofbiologicalassets 5 8,028 904Operatingincome 2 6,292 5,379
51,035 10,285ExpensesOperatingexpenses 3 (23,305) (18,470)
Operating profit/(loss) before taxation 27,730 (8,185)
Taxchargeonordinaryactivities (74) (2)
Profit/(loss) for the period 27,656 (8,187)
Other comprehensive income/(loss)Revaluationofland 4 (1,773) 1,356Exchangedifferencesontranslationofsubsidiaries’netassets 11,528 (7,735)
9,755 (6,379)
Total comprehensive profit/(loss) for the period 37,411 (14,566)
Profit/(loss) for the period attributable to:Equityholdersoftheparent 27,656 (8,187)
Net profit/(loss) for the period attributable to Ordinary Shareholders 27,656 (8,187)
Other comprehensive income/(loss) attributable to:Equityholdersoftheparent 9,755 (6,379)
Net profit/(loss) for the period attributable to Ordinary Shareholders 9,755 (6,379)
Earnings/(loss)perOrdinarySharefortheperiod– BasicandDiluted(inUScentspershare) 5.15 (1.64)
(BasedonweightedaveragenumberofOrdinaryShares537,149,832(2010:503,078,650))
Inarrivingattheoperatingresultsfortheperiod,allamountsaboverelatetocontinuingoperations.
Thenotesonpages19to31formanintegralpartoftheseinterimconsolidatedfinancialstatements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the six months ended 30 June 2011
13 PHAUNOS TIMBER FUND LIMITED
Note 30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000Non-Current AssetsFinancialassetsdesignatedatfairvaluethroughprofitorloss 8 361,213 323,680Land 4 93,013 90,486Biologicalassets 5 126,868 108,774Plantandequipment 6 4,262 3,043Prepaidlandlease 7 1,620 1,617Loansreceivable 9 363 528Intangibleassets 1 1
587,340 528,129
Current AssetsCashandcashequivalents 46,657 68,486Receivables 8,334 2,742Inventoriesandworkinprogress 244 210
55,235 71,438
Assetsclassifiedasheldforsale 10 8,224 9,547
TOTAL ASSETS 650,799 609,114
Current LiabilitiesDividendspayable 14 10,743 –Accrualforpotentialperformancefee 16 8,189 –Payables–duewithinoneyear 9,820 13,446
28,752 13,446
Liabilitiesclassifiedasheldforsale 10 456 745
TOTAL LIABILITIES 29,208 14,191
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION at 30 June 2011
14PHAUNOS TIMBER FUND LIMITED
INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION at 30 June 2011
EquitySharecapital 11,13 432,101 –Sharepremium 13 – 432,101Retainedearnings 47,763 30,850Foreigncurrencytranslationreserve 33,133 21,605Landrevaluationreserve 1,201 2,974Distributablereserves 13 110,418 110,418Purchaseofownshares(TreasuryShares) 12 (3,025) (3,025)
TOTAL EQUITY 621,591 594,923
TOTAL EQUITY AND LIABILITIES 650,799 609,114
OrdinarySharesinIssue 13 537,149,832 537,149,832
US$ US$Net Asset Value per Ordinary Share 1.16 1.11
Thenotesonpages19to31formanintegralpartoftheseinterimconsolidatedfinancialstatements.
15 PHAUNOS TIMBER FUND LIMITED
Note 30 June 2011 30 June 2010 Unaudited Unaudited US$’000 US$’000Operating activitiesNetprofit/(loss)fortheperiodattributableto OrdinaryShareholders 27,656 (8,187)Add: Depreciationandamortisation 2,208 340 Movementinaccrualforpotentialperformancefee 16 8,189 – Impairmentofinventory 3 – 464 Impairmentofloansreceivable 3 442 – Taxation 74 2Less: Netlossonfinancialassetsdesignatedat fairvaluethroughprofitorloss 8 (36,715) (4,002) Revaluationofbiologicalassets 5 (8,028) (904) Movementininventories (234) (784) Movementinreceivablesexcludingaccruedincome (5,592) (694) Movementinpayables (3,576) (1,171) Investmentincome 2 (2,151) (4,756) Prepaidlandlease(noncurrent) 7 (3) –
Net cash outflow from operating activities before income (17,730) (19,692)
Investmentincomereceived 2 2,151 4,673Taxationpaid (50) (484)
Net cash outflow from operating activities (15,629) (15,503)
Investing activitiesPurchaseoffinancialassets 8 (818) (118,208)Disposalsofplantandequipment 6 174 12Purchaseofbiologicalassets 5 (6,007) (61,010)Purchaseofland 4 (60) (32,222)Purchaseofplantandequipment 6 (503) (129)Repaymentofloans 403 251
Net cash outflow from investing activities (6,811) (211,306)
Cash and cash equivalents at beginning of period 68,486 331,032
Decreaseincashandcashequivalents (22,440) (226,809)Effectofforeignexchangeratechanges 611 (1,380)
Cash and cash equivalents at end of period 46,657 102,843
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS for the six months ended 30 June 2011
Thenotesonpages19to31formanintegralpartoftheseinterimconsolidatedfinancialstatements.
16PHAUNOS TIMBER FUND LIMITED
Eucateca Forest, Brazil.
17 PHAUNOS TIMBER FUND LIMITED
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 30 June 2011
A
ttri
but
ed t
o e
qui
ty h
old
ers
of
the
par
ent
P
urch
ase
Fore
ign
of
ow
n
cu
rren
cy
Land
D
istr
i-
shar
es
Sha
re
Sha
re
Ret
aine
d t
rans
lati
on
reva
luat
ion
but
able
(T
reas
ury
Tota
l
cap
ital
p
rem
ium
ea
rnin
gs
rese
rve
rese
rve
rese
rves
S
hare
s)
Eq
uity
(N
ote
11,
13)
(N
ote
13)
(No
te 1
3)
U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0
As
at 1
Jan
uary
201
1–
432,101
30,850
21,605
2,974
110,418
(3,025)
594,923
Profitfortheperiod
––
27,656
––
––
27,656
Othercomprehensiveincome
––
–11,528
(1,773)
––
9,755
Tota
l co
mp
rehe
nsiv
e in
com
e
for
the
per
iod
–
– 27
,656
11
,528
(1
,773
) –
– 37
,411
Dividends(Note14)
––
(10,743)
––
––
(10,743)
Transferofsharepremiumto
sharecapital(Note13)
432,101
(432,101)
––
––
––
At
30 J
une
2011
(una
udit
ed)
432,
101
– 47
,763
33
,133
1,
201
110,
418
(3,0
25)
621,
591
Thenotesonpages19to31formanintegralpartoftheseinterimconsolidatedfinancialstatements.
18PHAUNOS TIMBER FUND LIMITED
A
ttri
but
ed t
o e
qui
ty h
old
ers
of
the
par
ent
Pur
chas
e
Fore
ign
of
ow
n
curr
ency
La
nd
Dis
tri-
sh
ares
S
hare
S
hare
C
Sha
re
Ret
aine
d t
rans
lati
on
reva
luat
ion
but
able
(T
reas
ury
Tota
l
cap
ital
p
rem
ium
cl
ass
earn
ing
s re
serv
e re
serv
e re
serv
es
Sha
res)
E
qui
ty
(No
te 1
3)
U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
US
$’00
0 U
S$’
000
As
at 1
Jan
uary
201
0–
390,547
41,554
10,136
14,749
10,659
110,418
(3,025)
575,038
Lossfortheperiod
––
–(8,187)
––
––
(8,187)
Othercomprehensiveloss
––
––
(7,735)
1,356
––
(6,379)
Tota
l co
mp
rehe
nsiv
e lo
ss
for
the
per
iod
–
– –
(8,1
87)
(7,7
35)
1,35
6 –
– (1
4,56
6)
Adj
ustm
ent t
o pr
ior
perio
d
treasurysharevalue
––
–(216)
––
–216
–Csharesconvertedto
OrdinaryShares
–41,554
(41,554)
––
––
––
At
30 J
une
2010
(una
udit
ed)
– 43
2,10
1 –
1,73
3 7,
014
12,0
15
110,
418
(2,8
09)
560,
472
Thenotesonpages19to31formanintegralpartoftheseinterimconsolidatedfinancialstatements.
INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 30 June 2010
19 PHAUNOS TIMBER FUND LIMITED
1. ACCOUNTING POLICIES
(a) Basis of Preparation
The unaudited interim condensed consolidated financial statements (“interim consolidated financialstatements”) of Phaunos Timber Fund Limited (the “Company” or “Phaunos”) have been prepared inaccordancewith International Accounting Standard (“IAS”) 34: Interim Financial Reporting. The interimconsolidated financial statements do not include all the information and disclosures required in annualfinancialstatements,andshouldbereadinconjunctionwiththeCompany’sAnnualReportandConsolidatedFinancialStatementsfortheyearended31December2010(“2010AnnualReport”),whichwerepreparedinaccordancewithInternationalFinancialReportingStandards(“IFRS”)asadoptedbytheEuropeanUnionandapplicableGuernseylaw.
TheinterimconsolidatedfinancialstatementsarepresentedinUSDollars,beingthecurrencyoftheprimaryeconomicenvironmentinwhichtheCompanyandentitiescontrolledbytheCompany(itssubsidiariesaslistedinNote13ofthe2010AnnualReport(“subsidiaries”))(the“Group”)operate.
TheinterimconsolidatedfinancialstatementsareroundedtothenearestthousandUSDollars(US$’000)exceptwhereotherwiseindicated.
The interim consolidated financial statements have not been audited or reviewed by the auditors inaccordance with the Auditing Practices Board guidance on Review of Interim Financial InformationPerformedbytheIndependentAuditoroftheEntity.
(b) Significant Accounting Policies
The same accounting policies, presentation and methods of computation are followed in the interimconsolidatedfinancialstatementsaswerefollowedinthepreparationofthe2010AnnualReport.
2. OPERATING INCOME
30 June 2011 30 June 2010 Unaudited Unaudited US$’000 US$’000Investmentincome 2,151 4,756Incomefromsalesandservices 3,570 605Reversalofimpairmentofloansreceivable(a) 442 –Sundry income 129 18
6,292 5,379
(a) PleaserefertoNote9fordetailsonthereversalofprioryearimpairmentstoloansreceivablerelatingtoEucateca.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the six months ended 30 June 2011
20PHAUNOS TIMBER FUND LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the six months ended 30 June 2011
3. OPERATING EXPENSES
30 June 2011 30 June 2010 Unaudited UnauditedHolding Company Expenses US$’000 US$’000Performancefees(a) 8,189 –InvestmentManager’sfees 4,759 3,932Foreignexchangeloss 28 9,134Otheroperatingexpenses 1,023 1,190
13,999 14,256
Operating Subsidiary ExpensesSettingupexpenses – 375Directoperatingcosts 3,860 855Otheroperatingexpenses(b) 5,446 2,984
9,306 4,214
23,305 18,470
(a) Performance fees for the period are accrued not paid (see Note 16).
(b) Please refer toNote9 fordetailsoncurrentperiod impairmentsandwrite-offs toplantandequipmentrelating to Eucateca.
ConsistentwithIFRS,operatingexpensesassociatedwithwholly-ownedsubsidiariesareincludedinNote3,alongwithexpensesassociatedwithholdingCompanyactivities.HoldingCompanyexpenses, including theaccrualforapotentialperformancefee,totalUS$14.0million,or2.25%ofassetsundermanagement.
21 PHAUNOS TIMBER FUND LIMITED
4. LAND
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000CostOpeningcost 78,845 46,238Additions 60 32,607
Closing cost 78,905 78,845
Revaluation of landOpening 2,974 10,659Revaluationfortheperiod/year (1,773) (7,685)
Closing 1,201 2,974
Depreciation on land improvementsOpeningdepreciation (20) –Chargefortheperiod/year (12) (20)
Closing depreciation (32) (20)
Reclass as Held for Sale (278) (278)
Exchange differences 13,217 8,965
Closing carrying value 93,013 90,486
Land valuation
TheInvestmentManager’svaluationsat30June2011forEucatecaandPraderaarebasedontheBrazilianRealperhectareunitvaluesandtheUSDollarperhectareunitvaluesrespectivelyfromtheexternalappraisalofthatlandat30September2010andappliedtotheupdatednumberofhectaresat30June2011.
LandpurchasedbyMataMineira isbasedonaBrazilianRealvaluedeterminedbyan independentexternalappraisaldated30June2011.
ConsistentwithIFRS,Note4includesonlytherevaluationoflandinwholly-ownedsubsidiaries.LandvaluationsinminorityholdingsareincludedintheFinancialAssetcalculationasdemonstratedinNote8.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
22PHAUNOS TIMBER FUND LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
5. BIOLOGICAL ASSETS
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000Cost:Openingcost 102,691 20,755Costsincurredduringtheperiod/year:Silviculturecosts 5,543 13,105Treatmentcosts 508 2,086Plantationsacquired – 67,727Other costs (44) 54Depletionoftimber (1,511) (1,023)Resinamortisation (129) –Disposals – (13)
4,367 81,936
Closing cost 107,058 102,691
Revaluation of plantations:Openingbalance (198) (1,133)Revaluationfortheperiod/year 8,028 935
Closing balance 7,830 (198)
Exchange differences 11,980 6,281
Closing carrying value 126,868 108,774
Biological assets valuation
The InvestmentManager’svaluationsat30June2011forEucatecaandPraderaarebasedontheBrazilianReal per hectare unit values and the US Dollar per hectare unit values from the external appraisal of thebiologicalassetsat30September2010andappliedtotheupdatednumberofhectaresforeachageclassofpre-merchantabletimberinexistenceat30June2011.
BiologicalassetspurchasedbyMataMineiraarebasedonaBrazilianRealvaluedeterminedbyanindependentexternalappraisaldated30June2011.
GreenChina’s biological assets located in southern Jiangxi,China are based on the InvestmentManager’svaluationat31December2010whichisanupdateoftheacquisitionappraisalofthatpropertyacquiredduring2010.GreenChina’sbiologicalassetslocatedinnorthernJiangxi,Chinaarevaluedatcostat30June2011asitwasacquiredlessthan12monthsago.
ConsistentwithIFRS,Note5includesonlytherevaluationofbiologicalassetsonwholly-ownedsubsidiaries.BiologicalassetvaluationsinminorityholdingsareincludedintheFinancialAssetcalculationasdemonstratedin Note 8.
23 PHAUNOS TIMBER FUND LIMITED
6. PLANT AND EQUIPMENT
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000CostOpeningcost 13,292 10,650Additions 503 3,116Disposals (174) (24)Impairment (565) (450)
Closing cost 13,056 13,292
DepreciationOpeningdepreciation (1,166) (491)Chargefortheperiod/year (303) (687)Disposaladjustments 24 12
Closing depreciation (1,445) (1,166)
Reclass as Held for Sale (6,992) (7,796)
Exchange differences (357) (1,287)
Closing carrying value 4,262 3,043
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
24PHAUNOS TIMBER FUND LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
7. PREPAID LAND LEASE
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000
Openingcost 1,790 –Landleaseprepaymentsduringtheperiod/year – 1,790
Closing cost 1,790 1,790
Lease amortisation:Openingbalance (41) –Amortisation for the period/year (53) (41)
Closing balance (94) (41)
Exchange differences (25) 56
Closing carrying value 1,671 1,805
Summaryofprepaymentsdue:Prepaymentsduetoexpirewithinoneyear 51 188Prepaymentsduetoexpiremorethanoneyear 1,620 1,617
Closing cost 1,671 1,805
ThroughtheCompany’swhollyownedsubsidiary,GreenChina,prepaymentsweremadeduringtheperiodfortimberlandleasesforpropertylocatedintheJiangxiprovince,China.Allleasesaretobeamortisedoverthelifeoftheremainingleasetermswhichvariesfrom30to50years.
25 PHAUNOS TIMBER FUND LIMITED
8. INVESTMENTS
FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS 30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000
OpeningPortfoliocost 264,253 127,959Netadditionsatcost: 818 136,294
Closing Portfolio cost 265,071 264,253
Unrealisedappreciationonvaluationbroughtforward 46,761 15,492Unrealisedappreciationonvaluationfortheperiod/year 18,190 31,269Unrealisedforeignexchangemovementbroughtforward 11,922 (486)Unrealisedforeignexchangemovementfortheperiod/year 18,525 12,408
Unrealisedappreciationandforeignexchangemovement onvaluationcarriedforward 95,398 58,683Exchangedifferencesontranslationofassets offoreignsubsidiariesbroughtforward 744 –Exchangedifferencesontranslationofassets offoreignsubsidiariesfortheperiod/year – 744
Closing valuation 361,213 323,680
Unrealisedappreciationandforeignexchangemovement onvaluationfortheperiod/year 36,715 43,677Exchangedifferencesontranslationofassetsofforeignsubsidiaries – 744
Net gain on financial assets designated at fair value through profit or loss 36,715 44,421
Thenatureoftheinvestmentsdesignatedatfairvaluethroughprofitorlossisasfollows:
GreenWoodTreeFarmFundLP TimberoperationAuroraForestalLimited JointownedtimberoperationNTPTimberPlusFundILP Higher-and-better-useconversionloansGreenResourcesAS TimberoperationMatarikiForestryGroup TimberoperationMasarangFoundationAssetLinkedEuroNote09/2012 Loan
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
26PHAUNOS TIMBER FUND LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
8. INVESTMENTS CONTINUED
Fair value analysis
IntheopinionoftheDirectorsthereisnomaterialdifferencebetweenthebookvaluesandthefairvaluesofotherfinancialassetsandliabilities.
Financialassetsandfinancial liabilitiesrecordedatfairvalueareanalysedbyusingafairvaluehierarchythatreflectsthesignificanceofinputs.Thefairvaluehierarchyhasthefollowinglevels:
• Level1:Quotedprices(unadjusted)inactivemarketforidenticalassetsorliabilities.• Level2:InputsotherthanquotedpricesincludedwithinLevel1thatareobservablefortheassetorliability,
eitherdirectly(thatis,asprices)orindirectly(thatis,derivedfromprices).• Level3:Inputsforassetsorliabilitiesthatarenotbasedonobservablemarketdata(thatis,unobservable
inputs).
TheGroup’sunlistedsecurities,classifiedasfinancialassetsdesignatedatfairvaluethroughprofitorlossandvaluedatUS$361.2millionat30June2011(31December2010:US$323.7million),werecategorisedasLevel3inputsinaccordancewiththefairvaluehierarchy.
InputsforthedeterminationofthefairvaluesoffinancialassetsdesignatedasLevel3includevaluationsprovidedbythemanagersofalltheunderlyinginvestmentsattheperiodend.TherewerenotransfersoffinancialassetsbetweenLevelsduring theperiod.The tablebelowreflects themovements inassetsdesignatedasLevel3during the course of the period.
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000
Fairvalueatbeginningofperiod/year 323,680 142,965Acquisitionsatcost 818 136,294Unrealisedappreciation 36,715 43,677Exchangedifferencesontranslationofforeignsubsidiaries – 744
Fair value at end of period/year 361,213 323,680
27 PHAUNOS TIMBER FUND LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
9. LOANS RECEIVABLE
At30June2011thebalanceoftheloanreceivablefromAGNGestaoFlorestalLTDAisUS$493,000(R$769,000)(31December2010:US$592,000(R$983,000)).InrespectoftheloanreceivablefromAPServicosAgronomicosLTDA(“APServicos”)thebalanceat30June2011isUS$2.0million(R$3.1million)(31December2010:US$2.3million(R$3.8million)).
Duringtheperiod,EucatecaassessedtherecoverabilityofthereorganisedloantoAPServicos.ItwasdecidedbytheInvestmentManagertoreinstatetransferequipmentvaluedatR$400,000,whichwaspreviouslyreservedbyEucatecaat31December2010.AdditionallyAPServicosrepaidR$313,073againstthereorganisedloan.As a result the reorganised loan and related reservewere reducedby a total ofR$713,073 (US$442,000). ThisrepresentsareversalofprioryearimpairmentstoloansreceivablewhichisshowninNote2.
Alsoduring theperiod, the InvestmentManagerdetermined total impairments toequipment received in theloan reorganisation of R$882,498 (US$565,342) and total losses to write-off of R$193,154 (US$119,823). The impairmentstoequipmentrepresentadjustmentstofairmarketvalueforequipmentreceivedduringtheperiodandreservesforequipmentnotyetreceivedfromAPServicos.Thewritten-offlossesrelatetoadjustmentstothecorrectpurchasepriceandequipmentdeemedinoperable.TheseimpairmentsandlossesareincludedinotheroperatingexpensesforsubsidiariesinNote3.
10. ASSETS/LIABILITIES CLASSIFIED AS HELD FOR SALE
ForestEnterprisesiscurrentlyheldforsalefollowingthestrategicdecisionin2010bytheInvestmentManagertodivestofnon-coreassets.However,duringtheperiodtheInvestmentManagerdecidedtocontinueoperatingCaldreyasagoingconcern.Asaresultthefollowingbalancesreportedat30June2011relatesolelytoForestEnterprises:AssetsclassifiedasheldforsaleUS$8.2million(31December2010:US$9.5million)andLiabilitiesclassifiedasheldforsaleUS$456,000(31December2010:US$745,000).
Forest Enterprises d.o.o. (“FE doo”)
FEdoo is thewholly-ownedsubsidiaryofForestEnterpriseB.V. (“FEBV”),which in turn isawholly-ownedsubsidiaryofPhaunos.AfterFEdooissold,FEBVwillbeliquidated.InNovember2010,FEBVhiredCitadelFinancialAdvisoryd.o.o,Beograd(the“FinancialAdvisor”)totakeallnecessarystepstomanageandexecutethesaleofFEdoo.Todate,interestedpartieshaveexecutedaNon-DisclosureAgreement.TheFinancialAdvisorhasinvitedbidsfromalimitednumberofinterestedpartiesandreceivedonenon-bindingofferwhichisunderconsideration.Attheendoftheperiod,weareunabletopredictthesalepriceorfeepayabletotheFinancialAdvisorforsuccessfullycompletingtheFEdoosaletransaction.
Caldrey
As of 31December 2010 the InvestmentManager anticipated the sale ofCaldrey as a private transactionandPhaunoswasinnegotiationswithanindividualinterestedinpurchasingCaldrey.Thepotentialbuyerwasunabletoobtainfinancing;thereforetheInvestmentManagerintendstocontinueoperatingCaldreyasagoingconcern.Duringnegotiations,Caldreycontinuedoperationsatfullproduction,whichisreflectedintheperiod’sconsolidatedfinancialstatementsasoperatingactivity.
28PHAUNOS TIMBER FUND LIMITED
Thinning of slash pine, Green China, China.
29 PHAUNOS TIMBER FUND LIMITED
11. SHARE CAPITAL
Authorised, issued and fully paid
Asat30June2011and31December2010: US$UnlimitedOrdinarySharesofnoparvalue –
Number Amount of shares US$’000
At30June2011:OrdinaryShares 541,214,877 559,758PurchaseofOrdinaryShares(nowheldinTreasury) (4,065,045) (2,819)
537,149,832 556,939
TheholdersoftheOrdinaryShareswill,undergenerallaw,beentitledtoparticipateinanysurplusassetsinawinding-uponlyinproportiontotheirshareholdingsintheappropriateclass.
On8June2010,43,510,000CShareswereconvertedinto38,815,271OrdinarySharesandwereadmittedtotheOfficialListoftheUKListingAuthority,totradingontheLondonStockExchangeandtolistingontheChannel IslandsStockExchange.TheCShareswereconvertedtoOrdinarySharesataconversionratioof0.8921basedontheauditedNAVoftherespectiveshareclassesat31December2009,andinaccordancewiththeArticlesofAssociationoftheCompany.
12. PURCHASE OF OWN SHARES
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000
Treasury shares reserve at end of period/year 3,025 3,025
TheTreasuryShares reserveat theendof theperiod represents4,065,045OrdinaryShares (31December2010:4,065,045OrdinaryShares)purchasedinthemarketatvariouspricespersharerangingfromUS$0.64toUS$0.80andheldbytheCompanyinTreasury.Thesesharesmaybereissuedorcancelled.
At the Annual GeneralMeeting of the Company held on 9 June 2011, it was resolved that the Companybeauthorised tomakemarketpurchasesofOrdinaryShares,provided that thenumberofOrdinarySharespurchaseddoesnotexceed14.99%ofthenumberofOrdinarySharesinissueonthedatetheresolutionwaspassed.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
30PHAUNOS TIMBER FUND LIMITED
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
12. PURCHASE OF OWN SHARES CONTINUED
ThenumberofOrdinarySharesinissueatthedatetheresolutionwaspassedwas537,149,832.ThenumberofOrdinarySharesheld in treasuryby theCompanyat thedate the resolutionwaspassedwas4,065,045representing0.75%oftheOrdinarySharesinissueatthedatetheresolutionwaspassed.
TheCompany’sauthoritytomakepurchasesofitsissuedOrdinaryShareswillexpireattheconclusionofthe2012AnnualGeneralMeeting.ArenewalofsuchauthoritytomakepurchasesofOrdinaryShareswillthereforebesoughtfromshareholdersatthe2012AnnualGeneralMeeting.Undersuchauthority,theDirectorsonlyintendtopurchaseshareswheretheybelievesuchpurchaseswillresultinanincreaseintheNAVperOrdinaryShareandwillassistinnarrowinganydiscounttotheNAVperOrdinaryShareatwhichthesharesmaybetrading.WhenOrdinarySharestradeatasubstantialdiscounttotheNAVperOrdinaryShareanddonotcoincidewithtradingvolumesinthemarket,theDirectorsmayfeelthatitisappropriatetoexercisesuchauthority.
13. DISTRIBUTABLE RESERVES
TheCompany’sArticlesofIncorporationwereamendedduringtheperiodtoreflectchangesintheCompany(Guernsey)Law,2008asamended(the“Law”)relatingtodistributablereserves.AsaresultofthechangeintheLaw,thereisnolongerarequirementtoseekcourtapprovaltomakedistributionsfromthesharepremiumaccount; therefore, the balance held to this account is now eligible for distribution together with existingdistributablereserves.
Thebalanceof thesharepremiumaccountasat1January2011ofUS$432.1millionand thedistributablereservesasat thatdateofUS$110.4millionareall available fordistributionsubject tomeeting the relevantsolvencytestsintheLaw.Theexistingbalanceonthesharepremiumaccounthasbeentransferredtosharecapitalas theLawnowrequiresproceedsofshares issuedtobecredited tosharecapital.Thisbrings totaldistributablereservesat30June2011toUS$542.5million.
14. DIVIDENDS
ThefollowingdividendsweredeclaredbytheCompanyandapprovedbyshareholdersduringtheperiodandpaidaftertheendofthereportingperiod.Thedividendshavebeenaccruedat30June2011.
30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000
Dividend for the year ended 31 December 2010
US$0.02 per Ordinary Share (2010: US$ Nil) 10,743 –
15. CAPITAL COMMITMENTS
At the period end, the Group has outstanding non-contractual commitments of up to US$4.3 million (31December2010:US$5.0million),whicharesubjecttoduediligence.
31 PHAUNOS TIMBER FUND LIMITED
16. RELATED PARTIES
LianeLukeisaseniorconsultantintheInvestmentManager’sgroup.KimberlyTaraisadirectorandshareholderoftheInvestmentManager.AsLianeLukeandKimberlyTaraarealsoDirectors,itistheCompany’spolicythattheyarenotmembersoftheManagementEngagementCommitteeortheAuditCommitteeoftheBoard.
US$4.8million (30June2010:US$3.9million)ofcostswere incurredby theCompanywith the InvestmentManagerintheperiod,ofwhichUS$Nil(31December2010:US$Nil)wasoutstandingtothisrelatedpartyasat30June2011.Givenmanagementfeesarepaidinadvanceonaquarterlybasisduringtheperiod,theCompanyhadpaidnetUS$2.2million(31December2010:US$Nil)totheInvestmentManagerat30June2011.TheBoardhasagreedtopaytheInvestmentManagerUS$36,400inrespectoffinancialreportingandconsolidationworkfortheCompany.
Under the terms of the investment management agreement with the Investment Manager, the InvestmentManager is entitled to receive abase fee togetherwith reimbursementof reasonable expenses incurredbyit intheperformanceof itsduties.Thebasefeeisequalto0.375%perquarteroftheNAVoftheCompany,calculatedquarterlyandpayableinadvance,usinganimpliedstraight-lineincreaseinNAVof10%perannumonabasiswhichincreasesat2.5%perquarter.
AsthequarterlycalculationisbasedonanestimatedNAV,followingthecalculationoftheauditedNAVattheendofeachfinancialperiod,thebasefeepayableoversuchfinancialperiodwillberecalculatedandanydeficiencywillbepayablebytheCompanytotheInvestmentManager.Totheextentthatsuchpost-auditrecalculationdemonstratesthatanexcessfeehasbeenpaid,anysuchamountwillbedeductedfromthepaymentduetotheInvestmentManagerinrespectofsubsequentperiods,upuntiltheamountequaltotheexcesshasbeenrepaid.
TheCompanyhasaccruedat30June2011itsfirstpotentialperformancefeeofUS$8.2millionorUS$0.0152perOrdinaryShare(basedonthetime-weightedaveragenumberofOrdinarySharesinissuesincetheinitialadmissionoftheCompany’ssharestotheAlternativeInvestmentMarket),astheunauditedNAVperOrdinaryShareatthatdate,asadjustedforthefollowingitems,exceededthehurdlerateofUS$1.08:
(i) anyincreaseinNAVarisingfromtheissueofOrdinarySharesasapremiumorbuybackofOrdinarySharesatadiscounttoNAV;
(ii) dividends declared, announced or any undistributed net revenue not otherwise included in the NAVcalculation;
(iii) alreadyaccruedperformancefees;and
(iv) otheradjustments theAuditCommitteeandManagementCommitteeof theBoardand the InvestmentManageragreeareappropriate.
TheadjustedNAVperOrdinaryShareforthepurposeofcalculatingtheperformancefeeaccrualat30June2011wasUS$1.1619.Pursuanttotheinvestmentmanagementagreement,aperformancefeewillonlybecomedueandpayabletotheInvestmentManagerasat31December2011andonlyiftheauditedNAVperOrdinaryShare(adjustedasdescribedabove)asat31December2011exceedsUS$1.08.
17. EVENTS AFTER THE BALANCE SHEET DATE
• On1August2011,PhaunosreceivedadistributionofUS$2.5millionfromMatariki.
• On15July2011,PhaunospaidatotaldividendofUS$10.7milliontotheOrdinaryShareholdersoftheCompany.
NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011
32PHAUNOS TIMBER FUND LIMITED
SCHEDULE OF INVESTMENTS
30 June 2011 31 Dec 2010 Unaudited Audited
Total Net Total Net Nature of Fair Value Assets AssetsName of investment investment US$’000 % %
MatarikiForestryGroup Timberoperation 174,193 28.02 24.73
GreenResourcesAS Timberoperation 104,283 16.78 16.15
GreenwoodTreeFarmFundLP Timberoperation 37,269 5.99 6.02
AuroraForestalLimited Timberoperation 34,547 5.56 5.69
NTPTimberPlus+FundI, Higher-and-better-useLP conversion 10,921 1.76 1.82
MasarangFoundationAssetLinkedEuroNote09/2012 Loan – – –
Total financial assets designated at fair value through profit or loss 361,213 58.11 54.41
Othernon-currentassets 226,127 36.38 34.36Othernetcurrentliabilities (12,406) (2.00) (0.28)Cashandcashequivalents 46,657 7.51 11.51
Total NAV 621,591 100.00 100.00
33 PHAUNOS TIMBER FUND LIMITED
SHAREHOLDER INFORMATION
The Ordinary Shares are traded on the Main Market of the London Stock Exchange and on the Channel Islands Stock Exchange. The Ordinary Shares may be dealt in directly through a stockbroker or professional adviser acting on an investor’s behalf. The buying and selling of Ordinary Shares may be settled through CREST.
TheISIN,SEDOLandtheLSEmnemonicoftheOrdinarySharesare:
ISIN SEDOL LSE mnemonic GG00B1G3RS66 B1G3RS6 PTF
SHAREHOLDER ENQUIRIES
TheCompany’sCRESTcompliantregistraris,asatthedateofpublicationoftheseinterimconsolidatedfinancialstatements, Capita Registrars (Guernsey) Limited, whomaintains the Company’s registers of shareholders. Theymaybecontactedbytelephoneon+44(0)1534847445.
ForinformationaboutinvestingintheCompanycontactinfo@fourwindscm.com
34PHAUNOS TIMBER FUND LIMITED
Registered OfficeArnoldHouseStJulian’sAvenueSt Peter PortGuernsey GY13NF
DirectorsKeithOates–ChairmanIanBurns–Appointed1March2011LianeLukeMartinRicketts–Appointed5January2011SirHenryStudholme–Appointed5January2011KimberlyTaraSarahEvans–Resigned5January2011PeterNiven–Resigned5January2011
Investment ManagerFourWindsCapitalManagementScotiaCentrePOBox268GTGeorgeTownGrandCaymanCaymanIslands
Corporate Broker (to 5 January 2011)CollinsStewartEuropeLimited88 Wood StreetLondonEC2V7QREngland
Joint Corporate Broker (from 5 January 2011)VSACapitalLimited14AustinFriarsLondonEC2N2HEEngland
AuditorsErnst & Young LLPPOBox9RoyalChambersStJulian’sAvenueSt Peter PortGuernseyGY14AF
AdministratorHSBCSecuritiesServices(Guernsey)LimitedArnoldHouseSt.Julian’sAvenueSt Peter PortGuernsey GY13NF
Sponsor to CISX ListingMourantOzannesSecuritiesLimitedPOBox1861LeMarchantStreetSt Peter PortGuernseyGY14HP
RegistrarCapitaRegistrars(Guernsey)LtdLongueHougueHouseSt. SampsonGuernsey GY24JN
Joint Corporate Broker (from 5 January 2011)WinterfloodInvestmentTrustsTheAtriumBuildingCannonBridgeHouse25DowgateHillLondonEC4R2GAEngland
DIRECTORS AND SERVICE PROVIDERS
35 PHAUNOS TIMBER FUND LIMITED
Advocates to the Company(astoGuernseyLaw)MourantOzannesPOBox1861LeMarchantStreetSt. Peter PortGuernseyGY14HP
Solicitors to the Company(astoEnglishLaw)HerbertSmithLLPExchangeHousePrimrose StreetLondonEnglandEC2A2HS
UK Transfer Agent CapitaRegistrarsLtdTheRegistry34BeckenhamRoadBeckenhamKentEnglandBR34TU
DIRECTORS AND SERVICE PROVIDERS CONTINUED
PHAUNOS TIMBER FUND LIMITED
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