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Guyana Timber Industries, Ltd Investing in Sustainable Enterprise

Guyana Timber Industries, Ltd Investing in Sustainable Enterprise. Emerging Markets Corporate Finance March 1, 2001. Anupam Narula Jennifer Schilling Truman Semans. Case Background.

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Guyana Timber Industries, Ltd Investing in Sustainable Enterprise

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  1. Guyana Timber Industries, LtdInvesting in Sustainable Enterprise Emerging Markets Corporate Finance March 1, 2001 Anupam Narula Jennifer Schilling Truman Semans

  2. Case 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

  3. Case Questions • How will potential investors value the venture? • What are viable sources of financing for start up? (initial capital requirement of $1.5 million)

  4. Sustainable Forestry • 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? $ Price 4 10 25 Yield m3 Clearcut Sustainable 4 10 25

  5. Potential Funding Sources • Commercial banks • Multilateral institutions • Bilateral development agencies • Green or timber venture funds • Carbon offsets • Joint venture

  6. Country Risk • Political • Election Uncertainty • External Conflicts • Financial • Taxes • Financial Institutions • Economic • Foreign Exchange • Low GDP per capita, $860 in 1999

  7. Cash Flow Uncertainties

  8. Cash Flow Uncertainties

  9. Case Solution

  10. ICRG Risk Ratings

  11. Cost of Capital • typically underestimates risk • Sovereign yield spread 8% • Country Risk Ratings • Institutional Investor rating inferred from ICRG for ICCRC • ICCRC • Goldman- Integrated-EHV

  12. Valuation: Base Case • Original 45,000 acre concession • Mean NPV: -$934,275 • Standard Deviation: 1,405,527 • Range: (-$3,615,795 to $4,479,946) 23% positive NPV

  13. Valuation: Real Options • 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) 22.6% positive NPV

  14. Valuation: Real Options • 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) 36.4% positive NPV

  15. Valuation Comparison • Shut down option has little value • Expansion option value brings significant upside with little additional downside

  16. Valuing Sustainable Timber • 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) $ Price 4 10 25 Yield m3 Clearcut Sustainable 4 10 25

  17. Viable Financing Sources • 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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