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The Global Forestry Sector: An Industry in Transition

John Earhart GLOBAL ENVIRONMENT FUND. The Global Forestry Sector: An Industry in Transition. An Investor’s Perspective. G LOBAL E NVIRONMENT F UND. Forest Products Industry In Transition. Brief review of Global Environment Fund Group

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The Global Forestry Sector: An Industry in Transition

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  1. John Earhart • GLOBAL ENVIRONMENT FUND The Global Forestry Sector: An Industry in Transition An Investor’s Perspective

  2. GLOBAL ENVIRONMENT FUND Forest Products Industry In Transition • Brief review of Global Environment Fund Group • Global trends in the forestry industry sector from the investor’s perspective- Our assumptions • Global Forest Products- South Africa as case study • Global Emerging Markets Forestry Fund, LP April 2005

  3. GLOBAL ENVIRONMENT FUND Global Environment Fund Group Fund management group seeking superior financial returns through private equity investments in companies that have a positive impact on environmental quality, human health and the sustainable management of natural resources. April 2005

  4. GLOBAL ENVIRONMENT FUND Global Environment Fund Group • Established in 1989 • $400 million under management • Sustainable natural resources, clean energy, clean water, efficient transportation, resource recovery, and pollution prevention • Emerging markets focus- infrastructure • Domestic focus- environmental technologies • $5-20 million deal size, private equity to both listed and unlisted entities • Three new funds under development April 2005

  5. GLOBAL ENVIRONMENT FUND GEF Recent Financial Performance Global Track Record – 1998 to Present As of December 31, 2004 Number of Investments Equity Invested* Fair Market Value* Multiple Gross IRR Realized and Publicly Traded Investments 6 $ 62,851 $ 277,241 4.41x 42.1% Unrealized Private Investments 10 $ 111,687 $ 179,168 1.60x 14.8% 16 $ 174,538 $ 456,409 2.61x 29.4% Total * Amounts in thousands April 2005

  6. GLOBAL ENVIRONMENT FUND Global Environment Fund Group Strategy Key Sectors Carefully Select Targeted Countries Focus on Key Sectors and Opportunities Undervalued Assets Integrated Utility Potential Develop Substantial Local Partners Experienced International Operator and Technology Partners Substantial Opportunity for Value - Added Role Clearly Determine Exit Strategy • Natural Gas • Production, Distribution/Generation • Water Supply • Potable Water Distribution, Wastewater Treatment • Electricity Supply • Distribution and Generation • Mass Transportation • Urban, Commerce and Freight Rail • Waste Management • Solid Waste Collection and Disposal, Industrial Waste Treatment • Clean Energy • Renewable Energy Products & Services, Carbon Credits • Natural Resources • Sustainable Forestry April 2005

  7. GLOBAL ENVIRONMENT FUND Why We Invest in the Forestry Sector? • Good Return- 10-15% over the past 20 years and 7-8% real during the past 70 years. • Negative correlation with overall stock market- gone up in every bear market since 1910. • Inflation hedge-- wood prices generally outpace inflation. • Reasonable levels of cash flow- 6%. • Portfolio diversification. April 2005

  8. GLOBAL ENVIRONMENT FUND GEF Target Companies • Medium-size to smaller companies engaged in sustainable forest management with: • Undervalued assets • Conversion facilities for value-added production • Strong local markets along with export potential • Value proposition with ecosystem services including biodiversity credits, carbon sequestration, watershed management compensation. • Strong commitment to environment and community April 2005

  9. GLOBAL ENVIRONMENT FUND GEF Target Countries to Date • Have undertaken advanced due-diligence in: • Brazil • Argentina • Chile • Indonesia • Bolivia • Costa Rica • Mozambique • Peru • South Africa April 2005

  10. GLOBAL ENVIRONMENT FUND GEF Investment Assumptions • Assumption #1: Growing supply/demand coming from emerging markets and southern hemisphere providing investment opportunities. • Bulk of current supply coming from natural forest (80-85%), but by 2050 45% of industrial round wood from plantations • 60% of total global forest estate in emerging market nations • Plantation area growing by 5MM ha/year, mostly southern hemisphere • Non-native plantations will expand by 50% during next 25 years • Lower cost structure- land, labor and biology • Stricter environmental restrictions in developed economies could create supply constraints • Demand fiber increasing 1-2%/yr, but greatest growth in developing countries • Population growth, economic growth and per capita consumption • Developed markets will grow 1% per year globally, but 2-3% per year in developing economies • Will begin to see much more south-south trade in forest products April 2005

  11. GLOBAL ENVIRONMENT FUND GEF Investment Assumptions • Assumption #2: Will need to control the conversion assets until stumpage markets develop unlike northern TIMO model. • Will need to create value at local level • Capital will drive industrial efficiency and scale to get production costs to levels of northern industry • Export with value-added products will provide opportunity/ currency hedge • Assumption #3: Favorable government policies • Privatization • Community forests • Revise concession structure • Assumption #4: Potential for value proposition from monetization of ecosystem services • Biodiversity credits • Carbon sequestration • Watershed protection April 2005

  12. GLOBAL ENVIRONMENT FUND GEF Investment Assumptions • Assumption #5: Greater emphasis on environmental excellence. • Wood certification • Protected area management • Industrial impact • Assumption #6: Greater involvement of local communities • Job Creation • Access to non-timber products and traditional uses • Local Ownership • Health related issues April 2005

  13. GLOBAL ENVIRONMENT FUND GEF Forestry Investment Approach GFP Pic Global Forest Products-South Africa April 2005

  14. Assumption #1: More Supply/ Demand From Emerging Economies • GLOBAL ENVIRONMENT FUND April 2005

  15. GLOBAL ENVIRONMENT FUND Industrial Plantations in Emerging Markets will Dominate Supply Growth • By 2050 45% of industrial supply from plantations • Land values much less- $500/ hectare vs. $3-5k/hectare • Silviculture costs much lower– $14/m3 to mill. • Biological growth greater- 20-35m3/ha/yr vs. 6-10m3/ha/yr • Labor costs significantly less • CAPEX will squeeze additional efficiencies • Major Players: • Chile- 2MM has. • Brazil- 7MM has. • Indonesia- 10MM has. • China- 45MM has. • South Africa- 1.5MM has. • India- 30MM has. April 2005

  16. GLOBAL ENVIRONMENT FUND Increasing Supply In Emerging Economies Projected Global Supply-Demand Dynamics Global Industrial Demand Probable Global Timber Supply Cubic M (million) Cubic M (million) Supply Growth by Region Cubic M (million) 1995 2030 Source:Hagler, 1998 April 2005

  17. GLOBAL ENVIRONMENT FUND Increasing Demand In Emerging Economies • Large increases in demand coming from Asia, especially China • Asian demand growth grew 5.9% pa between 1980-2000 • Pulp and paper demand will lead the charge • Emerging market annual growth 3.9% vs. 1.3% in mature markets in industrial segment • Consumption rates exceed GDP growth in emerging markets April 2005

  18. Emerging Growth Markets Demand growth %/a 5 Eastern Europe China Asia excl.Japan & China 4 Latin America Africa 3 Average 2.2 %/a Oceania 2 Traditional Strongholds Western Europe Japan 1 North America 0 0 20 40 60 80 100 Source: Jaakko Poyro Growth of Paper and Paperboard Demand Most of the growth will take place in more volatile emerging markets. April 2005

  19. International Log Costs U.S. South East Canada Chile Brazil Eastern Europe European Russia April 2005

  20. GLOBAL ENVIRONMENT FUND GEF Forestry Investment Approach GFP Pic Global Forest Products-South Africa April 2005

  21. GLOBAL ENVIRONMENT FUND Global Forest Products- South Africa Located in Northeastern South Africa April 2005

  22. GLOBAL ENVIRONMENT FUND GFP- Investment Summary • Global Environment Fund Group • US-based international investment group • 70% controlling interest • $30 million total equity • Industrial Development Corporation- RSA • 30% South African development bank • $35 million debt and equity • Local investor allocation • 2005 Revenues: $120 million • EBITDA: $20 million • Revenue growth $30mm to $120mm since 2000 April 2005

  23. GLOBAL ENVIRONMENT FUND Global Forest Products Assets • 64,000 hectares of FSC-certified plantations producing high-quality, pruned logs • 28,000 hectares of protected area • Three conversion facilities • Company nursery producing 10 million seedlings/ year • Seed orchards and breeding program • 2200 employees April 2005

  24. GLOBAL ENVIRONMENT FUND Global Forest Products Silviculture • Planting 3MM/ yr from company nursery stock • Average growth rate 18m3ha/yr • Pruned 4 times during the first ten years--2, 3, 5 and 7 meters • Thinning at years 10 and 15 • Final harvest at years 22-25 • Supplies 75% of fiber needs April 2005

  25. GLOBAL ENVIRONMENT FUND GFP- Plantation Development April 2005

  26. GLOBAL ENVIRONMENT FUND GFP- Plantation Development April 2005

  27. GLOBAL ENVIRONMENT FUND GFP- Stand Development April 2005

  28. GLOBAL ENVIRONMENT FUND GFP- Contract Logging April 2005

  29. Assumption #2: Must Control the Conversion Assets • GLOBAL ENVIRONMENT FUND April 2005

  30. Value-Added Production for Both Local Markets and Export • GLOBAL ENVIRONMENT FUND April 2005

  31. GFP Export of Certified Boards April 2005

  32. GLOBAL ENVIRONMENT FUND CAPEX for Industrial Efficiencies April 2005

  33. Assumption #3: Favorable Public Policies in Key Countries • GLOBAL ENVIRONMENT FUND • Privatization- South Africa • Revising concessions- Bolivia, Mozambique, Brazil • Returning forested areas to communities and tribal groups- 15% tropical forest in community hands • Opening markets for FDI • Free trade regions and export promotion • Ex: Komatiland Forest Industry- South Africa • Government privatization won by Global Forest Products- $80MM bid • 200,000 total hectares • 135,000 plantation hectares • 2 Sawmills • 2000 employees April 2005

  34. GLOBAL ENVIRONMENT FUND Komatiland Forestry Assets April 2005

  35. GLOBAL ENVIRONMENT FUND Komatiland Forestry Assets April 2005

  36. GLOBAL ENVIRONMENT FUND Assumption #4: Expanding Market for Ecosystem Services • Looking into potential for biodiversity and carbon credits • Longer-term possibilities with watershed • May be several year off • Promoted by groups such as Forest Trends April 2005

  37. GLOBAL ENVIRONMENT FUND Can These Become Profit Centers? April 2005

  38. Assumption #5: Greater Emphasis on Environmental Excellence • GLOBAL ENVIRONMENT FUND • Global Forest Products Gives Particular Focus to Environment • All forests are FSC certified, including new properties- total of 300,000 hectares • 28,000 hectares set aside for conservation in original purchase • 65,000 hectares with Komatiland acquisition • Maintenance of 7 natural heritage sites • Company actively supports research, education and environmental NGOs • Water and weed control projects • C-O-C certification ensures total compliance April 2005

  39. GLOBAL ENVIRONMENT FUND Global Forest Products Protected Areas April 2005

  40. Global Forest Products FSC Certification • GLOBAL ENVIRONMENT FUND April 2005

  41. Assumption #6: Greater Involvement of Local Community • GLOBAL ENVIRONMENT FUND • Global Forest Products Lives or Dies Through Local Community Involvement • One of community’s largest private employers with 2200 employees or 15% local population. Soon to add another 2000. • Developed forest services contractor program into 35 small contracting companies with 1400 employees • Multiplier effect of 7X for every GFP job • Supports medical clinics, full-time AIDS educator with team of nurse practitioners • Sponsors primary school for local children • Full-time community forester to assist with public access of company lands for fuel wood, thatch, poles, grazing, bee keeping, medicinal plants, mushrooms, and manual labor activities for unemployed woman. • Forest products industry supports 3million South Africans or 7.5% January 2004

  42. GLOBAL ENVIRONMENT FUND Simile Township, South Africa April 2005

  43. GLOBAL ENVIRONMENT FUND GFP’s Commitment to Community April 2005

  44. Forestry Enterprises Must Be Triple Bottom Line • GLOBAL ENVIRONMENT FUND Community, conservation, cash flows April 2005

  45. Global Emerging Markets Forestry Fund • GLOBAL ENVIRONMENT FUND • Initial fund will be $250 million with 4-6 deals • Shooting for first closing 12/31/05 • Team in place • John Earhart • Dr. Clark Binkley • Industrial specialist • Forestry/Private equity-MBA/CFA • Focus on rapidly developing emerging market economies • Shooting for returns in the 18-25% range April 2005

  46. Global Emerging Markets Forestry Fund, LP • GLOBAL ENVIRONMENT FUND • Deals in the $20-50 million range • Minimum of 20,000 hectares of forest at value • Most likely plantations • Conversion assets in place or a robust local stumpage market- create the value added • Existing local market share, with potential for export program • Focus on solid wood and panels • Interest in controlling shareholding and active day-to-day management • Certified or committed April 2005

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