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12 Nov 2008 16:59
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InterimΒ ManagementΒ Statement
The crop of oil palm fresh fruit bunchesΒ ("FFB")Β to endΒ OctoberΒ 2008Β wasΒ 367,803Β tonnes against a budget ofΒ 336,663Β tonnesΒ and a crop for theΒ corresponding period of 2007 ofΒ 301,292 tonnes.Β Β Rainfall to endΒ OctoberΒ amounted to an averageΒ ofΒ 2,509Β mm across the operations.Β Β This was significantlyΒ lowerΒ than theΒ rainfallΒ for the corresponding period of 2007 of 3,841 mm but still more than sufficient forΒ oil palm cultivation.
Following the slightly disappointingΒ crude palmΒ oil ("CPO")Β extraction rate reportedΒ in theΒ group'sΒ half yearly report, measures have been taken to ensure thatΒ harvesting operations are optimised andΒ only fully ripe fruitΒ is harvested. Whilst the CPOΒ extraction rate for theΒ ten months to end October 2008 atΒ 23.13Β per centΒ remainedΒ below theΒ budgetedΒ 24.00 per cent,Β extraction rates have improvedΒ in recent weeksΒ and the rateΒ forΒ the month ofΒ October was 24.02 per cent.Β Β Previously reported modifications to theΒ palm kernel extractionΒ process continue to be reflected in improved palm kernel extraction with the rate achieved for the ten months to end October 2008 amounting to 4.54 per cent against a budget rate of 4.07 per cent and the rate for the corresponding period of 2007 ofΒ 3.98 per cent.
ItΒ appears increasingly likelyΒ that the budgeted FFB cropΒ for 2008 of 421,000 tonnes will be exceeded and the group expects to budget for a further increase in crops in 2009. The group's operational progress is therefore encouraging. Regrettably, the same cannot be said for the external environment in which the group operates.
As previously announced, on 22 August 2008,Β the company's wholly owned subsidiary,Β REAΒ Finance B.V.Β ("REAF"),Β issued Β£15,000,000 nominal of 9.5 per cent guaranteed sterling notes 2015/17 for cash at a subscription price of 99.8682 per cent of par. These notes rank pari passu and form a single series with the Β£22,000,000 nominal of 9.5 per cent guaranteed sterling notes 2015/17 previously issued byΒ REAF. As a result of this issue,Β the group is in a strong financial position with limited bank debt and substantial cash resourcesΒ (held primarily in US dollars), amounting at 31 October 2008 to, respectively,Β US$15Β million andΒ US$40Β million.
Recent weeks have, however,Β seen sharp falls in the world market price of CPO which currently stands atΒ about US$500Β per tonne CIF Rotterdam,Β againstΒ the peak of just underΒ US$1,400 per tonne reached only a little over six months ago. The impactΒ on the groupΒ of thisΒ fall has been mitigated to aΒ limitedΒ extent byΒ a reduction in the rate at whichΒ duty is payable on Indonesian exports of palm oilΒ (which is assessed on aΒ sliding scaleΒ related to prevailing CPO prices)Β from a peak of 25 per centΒ to a present level ofΒ nil. Nevertheless, the fact remains thatΒ aΒ materialΒ fall in CPO pricesΒ willΒ significantly reduce the group's revenues and profitability.
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Against this background, the directorsΒ considerΒ that the group should be cautious andΒ theyΒ are taking measures to scale back the group's expansion at least until the outlook for CPO prices becomes clearer.Β For the time being, no material new funds will be committed toΒ land acquisitionsΒ for oil palm plantingΒ and oil palmΒ extensionΒ developmentΒ will be limited to completing the planting of areas in which development has already been initiated and to carrying such areas and theΒ existing immatureΒ areas to full maturity. As a resultΒ andΒ untilΒ circumstances change for the better, the previously announced target of a totalΒ area under oil palm or in course of development of 45,000 hectares by the end of 2009 will be reduced to about 30,000 hectares.
In the expectationΒ that funding for smallholder programmes can be obtained from Indonesian government supported loan schemes, the groupΒ intends to utilise the managementΒ capacity that will be released byΒ theΒ curtailment of extension planting to expand smallholder oil palm development in areas adjacent to the group's operations. Such expansion will provide an immediate outlet for nursery seedlings that will not now be needed to meet the group's own development programme and will help discharge the group's social obligations to local communities within the areas in question. It will be a term of such smallholderΒ oil palmΒ development thatΒ the resultantΒ FFB will be processed inΒ theΒ group's oil millsΒ whichΒ will be of long term benefit to the group.
Prior to implementing theΒ directors'Β new policy on land acquisition and as previously announced, the group on 11 July 2008 acquired the whole of the issued share capital of PT Putra Bongan Jaya ("PBJ") for a cash consideration ofΒ US$3.5Β million, settlement of which was completed on 27 August 2008. PBJ holds a land allocationΒ which is subject to final survey but is now estimated atΒ some 16,000 hectares. It is intended to make arrangements for local Indonesian minority participation in the ownership of PBJ.
Also during the period since 1 July 2008, the group has completed the acquisition,Β for a total consideration of someΒ US$3.5 million,Β of rights in respect ofΒ twoΒ coal concessionsΒ locatedΒ in the southern part ofΒ East Kalimantan. Work is now in hand to establish an appropriate structure for the exploitation of these rights,Β which it isΒ intended,Β will involve Indonesian minority participation in revenues fromΒ theΒ coal extracted.Β Β The group isΒ alsoΒ currently engaged in discussions regardingΒ theΒ possibilityΒ of contracting outΒ miningΒ operations in respect ofΒ one of theΒ concessionsΒ on a basis thatΒ should provide a goodΒ cashΒ return on the monies investedΒ whileΒ reducingΒ the further capital required from the group for development of theΒ rightsΒ acquired.
GivenΒ current financial instabilities, the directorsΒ are uncertainΒ as to the likely short termΒ evolution ofΒ CPO prices. The directors have previously commented that they believe that the prices of all commodities are inherently cyclical and they haveΒ noΒ reason to modify that view. While high prices have led to lower prices,Β theΒ directorsΒ are confident that the converse will in due course also be the case and that the fundamentalsΒ ofΒ supply and demand in the vegetable oil complex will not alter. Vegetable oil is an essential commodity and will continue to be consumed with growthΒ in consumptionΒ driven by world population growth and economic development inΒ ChinaΒ andΒ India. Ultimately, low vegetable oil prices will lead to reduced plantingsΒ of the annual oilseed crops of soybean, oil seed rape and sunflower seed, world vegetable oil production will be reduced, the supply demand balance will tighten and prices will recover.
At current prices, the group'sΒ operating cash flow remainsΒ positiveΒ and the recent fall in the international priceΒ ofΒ petroleum oilΒ may well leadΒ to lowerΒ prices forΒ fertiliser and dieselΒ oil which are significant components of the group'sΒ operatingΒ costs. The current weakness of theΒ IndonesiaΒ rupiah, which has declined in recent weeks from Rp 9,100 to the US dollar to RpΒ 11,000Β to the USΒ dollar,Β should also be beneficial to margins. Moreover, the group has substantial areas of immature plantings which offer the prospect of increasing crops for several years to come. Accordingly, whilst the decision temporarily to curtail new development must inevitably reduce the rate at which the group expands, the directors remain optimistic that the groupΒ canΒ continue toΒ growΒ albeit at a more modest rate than had previously been planned.
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