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US carmakers, Brazil soy farmers drive timber fund fortunes

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US automobile production may have risen at its fastest in five years last month.

But it is not enough to help out struggling Phaunos Timber Fund, for which a wet Brazilian soybean harvest, would also help reverse its somewhat disappointing performance.

The first public report by forestry consultancy Stafford Timberland of Phaunos's assets, which recommends the sale of at least one of the investments, has revealed the breadth of the influences on the performance of the portfolio.

These include well-recognised drivers, such as the performance of China's construction industry, a well-documented, major timber consumer, likes its peer in the US, but whose slowdown prompted a 16% drop in lumber imports in the January-to-March period, compared with the quarter before.

The impact, thanks to raised log inventory levels at Chinese ports, has been a 20-30% slump in log prices in the April-to-June quarter in New Zealand, a major timber exporter, where Phaunos Timber Fund owns 35% of forestry group Matariki.

Still, Matariki - valued at $450m, which owns 184,000 hectares of timberland – faces somewhat better times to come, with Stafford forecasting "small increases" in log prices over the second half of 2014.

Auto driver

Other factors influencing Phaunos's fortunes include the fate of the soybean harvest in Brazil, where it owns outright Eucateca in the major corn and soybean growing state of Mato Grosso.

Eucateca, besides owning teak plantations, which it has failed in an effort to sell, provides eucalyptus as a biomass fuel for drying crops.

And US auto production is also a driver, through its consumption of pig iron which has, historically, been largely sourced from Brazil.

Phaunos's 19,000-hectare Mata Mineira operation in Minas Gerais, a state better known for coffee production, provides eucalyptus logs for converting into charcoal, in turn a major component of pig iron.

"[Brazilian] pig iron produced from charcoal has declined by approximately 33% since 2007, due in part to decreasing US demand and unfavourable exchange rates," Stafford said.

While the important demand source of the US car industry "has rebounded since 2009", seeing a 10.1% jump in output last month on Federal Reserve figures, "Brazil's market share of US pig iron imports is yet to recover".

'Disposal is desirable'

Stafford gave its insight into the Phaunos portfolio as it recommended the sale of some investments deemed "higher risk", including some which comprised immature trees too young to harvest.

"The company is carrying too many of these investments and they represent too high a proportion of the total portfolio value," the consultancy said.

"At least one disposal is desirable and this will be actively pursued."

Phaunos, which is planning an emergency share sale to bolster its cash reserves and ensure it remains a "going concern", reported a net operating loss of $3.3m for the first half of the year.

Its net asset value per share as of the end of June rose was pegged at $0.81, up $0.03 from the value at the close of 2013, by down from the $0.85 at the close of June 2013.

Sir Henry Studholme, the fund's chairman, said that the support of the cash raise would be "sufficient to move the company to operating profitability, based on the current revenue levels, within the next 18 months".

Phaunos shares stood at $0.36 in lunchtime deals in London, down 2.6% on the day.

The shares touched a record low of $0.305 earlier this month.


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