October 10, 2007
Cathay Forest Outlines Existing Operations and Growth Strategy
Cathay Forest Products Corp. ("Cathay", or the "Company")(TSX VENTURE: CFZ) today issued an overview of its forestry assets and growth strategy.
Cathay's existing operations are comprised of (1) Fast Growth Poplar Plantations, ("FGPP"); (2) Standing Timber Properties, ("STP"); and, (3) Round Wood Log Importing. Since the inception of forestry operations in 2004, Cathay Forest has been developing fast growth, high-yield poplar plantations as well as managing and harvesting standing timber properties in the People's Republic of China ("PRC"). Through wholly foreign owned enterprises and joint ventures, the Company operates in seven provinces in the PRC: Shandong, Jiangsu, Heilongjiang, Henan, Jiangxi, Hunan, and Guizhou. In addition, Cathay is engaged in importing round wood from Russia into the PRC. Recently, the Company acquired a joint venture interest in a standing timber property, located in the Russian province of Khabarovsk.
The focus of the Company is to build a world class forest products company serving a customer base that includes Chinese-based pulp and paper companies and timber harvesting customers which in turn supply a variety of wood product industries in the PRC.
The following summarizes current operations and holdings. "m3" means cubic metres and "ha" means hectares.
Fast Growth Poplar Plantations
Cathay's fast growth plantations are generally operated through Sino-foreign joint ventures with local partners. These joint ventures are operated under three models. (1) Rental model, whereby land is rented from farmers. In some instances the rental payments are deferred until harvesting commences (Shandong and Henan provinces). (2) Joint development model whereby local partners provide land for planting and Cathay provides advanced silviculture practices to improve plantation management. Under this model, the harvest will be split equally with the local partners (Jiangsu province). (3) Joint ventures for non-farm land along lakeshores and riverbanks (Jiangxi province).
All plantations grow a variety of engineered species of fast growth and high yield poplar trees. The average growth cycle is approximately five years in which the wood grows to a diameter of 20cm which is considered to be commercially harvestable. These poplars are expected to produce an average yield of 135-150 m3 of wood per ha in each five-year cycle. This compares to the PRC average yield for poplars of approximately 80 m3 per ten-year growth cycle. The fast growth poplar is characterized by superior quality wood, more resistant to pests and disease, naturally less conducive to forest fires and able to grow on marginally arable land. Based on an April 2007 study (updated September 2007) prepared for Cathay by Indufor, a forestry consulting company, approximately 180,923m3 will be commercially harvestable in 2009 and approximately 1,106,561m3 in 2010.
Shandong Province, China
In Shandong Province, Cathay manages approximately 11,531 ha of FGPP with a 97% economic interest and a lease term of 25 years. The poplar trees in this region were planted during 2004, 2005 and 2006. Harvesting in this region is scheduled to begin in 2009. The usual sales practice in Shandong is to have the buyer take the responsibility for harvesting after payment. Buyers are typically given a 12 month period to conduct the harvesting. Plantation rights certificates in respect of 2,693 ha have been issued and are held by the Company, and plantation rights certificates with respect to the remaining 8,837 of the total 11,531 ha are being withheld pending payment of rental fees by the Company, due prior to the commencement of harvesting.
Henan Province, China
The Company currently manages approximately 200 ha of FGPP in the Henan region with a 70% economic interest and a lease term of 50 years. The poplar trees in this region were planted in 2005. Cathay expects the harvesting in this region to begin in 2010. The harvest from the Henan plantation is designated for Xinya Pulp and Paper, the joint venture partner for this region.
Jiangsu Province, China
Cathay manages approximately 1,013 ha of FGPP in the Jiangsu region with a 48.5% economic interest and a lease term of 25 years. The poplar trees in this region were planted in 2005 and 2007. Harvesting in this region is expected to begin in 2010. Certifications with respect to 680 ha have been issued by local forestry departments and certifications with respect to the remaining 333 ha are expected to be issued shortly, as the planting of that area was completed this past summer. Plantation rights certificates in respect of the 1,013 ha are expected to be issued upon harvesting. This venture is free of annual lease cost in exchange for a profit-sharing arrangement with the local farmers whose land is being utilized.
Jiangxi Province, China
The Company has a 70% economic interest in approximately 677 ha of FGPP in the Jiangxi region which has a lease term of 15 years. The poplar trees in this region were planted in 2007. Cathay expects the harvesting in this region to begin in 2012. Cathay is able to provide a harvesting service in this region through the use of temporary workers if requested by the customer.
Standing Timber Properties in China
In 2005, Cathay initiated a strategy of acquiring, managing and harvesting standing timber properties to expand and diversify its sources of revenue. Harvesting standing timber is expected to provide immediate cash flow with low overhead costs. Moreover, the land from the standing timber forests can be replanted with fast growth poplars to enhance future yields. Our current standing timber plantations are mainly comprised of Chinese fir and to a lesser extent, Chinese bamboo.
The Company manages approximately 3,775 ha of standing timber in Jiangxi Province with lease terms from 32 to 49 years. Cathay has a 100% economic interest in these assets. Harvesting is expected to commence in the last quarter of 2007 subject to approval of an Annual Allowable Cut ("AAC") by the local forest bureau. The usual sales practice in Jiangxi is to have the buyer take responsibility for harvesting after payment. Buyers are typically given a 12 month period to conduct the harvesting.
Cathay manages approximately 1,398 ha of standing timber in Hunan province with lease terms from 25 to 35 years. Cathay owns a 100% economic interest. Harvesting is to commence in 2008 subject to the approval of the Company's AAC by the local forest bureau. The usual sales practice in Hunan is to have the buyer take the responsibility of harvesting after payment. Buyers are typically given a 12 month period to conduct the harvesting.
In February 2007, Cathay announced the signing of a mutual co-operation agreement with Hanfang Forestry Group ("Hanfang"), a Guizhou-based plantation operator, to jointly acquire and develop standing timber plantations with lease terms of 50 years. Cathay will have a 51% ownership interest in the joint venture. Phase 1 of the joint venture project will be the acquisition of 6,996 ha of standing timber under a 50 year lease. Cathay will pay approximately US$7.3 million or USD$2,091 per ha for its 51% ownership interest. The joint venture is currently in the process of being registered and Cathay expects the transaction to close in November 2007.
Cathay commissioned a field study by Indufor of the 6,996 ha to be acquired as Phase 1 of the joint venture agreement. Indufor classified the plantation as semi-natural forest with approximately 500,000m3 of growing stock. The productivity of the plantation is estimated at 15m3 per ha annually with favourable climate and soil conditions in the region. Approximately 85% of the area was planted in 1990 to 1996 and the forests are generally healthy and growing well. Two additional planned phases of the joint venture project, when and if implemented, are expected to significantly grow the hectares under management. Cathay will contribute modern forestry management expertise and 51% of the funding while Hanfang will be responsible for sourcing acquisitions for Phases 2 and 3 and 49% of the funding.
Cathay has engaged Indufor to conduct a full scale operations study for Phase 1, which is expected to begin in November. The operations study will include a Sustainable Forestry Management plan to be submitted to the Guizhou forestry bureau for approval. If and when approved, Cathay would harvest the Guizhou plantation according to its planned Sustainable Harvest Schedule ("SHS") and be relieved from the requirement to apply for an annual cutting quote. SHS are developed with the local forestry bureau in accordance with modern forestry management techniques to harvest more efficiently and economically than traditional methods.
Cathay has an agreement with the local forest bureau for the right to acquire 53,705 ha of standing timber as part of the privatization program of state-owned forests in Heilongjiang. The privatization program was initiated last year and a forestry development plan was completed by Indufor in December, 2006. Cathay is awaiting additional details of the privatization program from the Central government.
Round Wood Log Importing
Since 2006, Cathay has imported round wood (fir, pine, spruce and larch) from Russia into China, using railcars, for sale to local timber brokers and traders. In 2007 Cathay began shipping lumber from Russia to China via barge, which improves the ability to move large quantities of lumber economically. Cathay's customers in these transactions are primarily based in northern China. The buyers are responsible for delivery from the rail cars and ports. Currently, Cathay imports approximately 150,000m3 into China annually. The trading operation in 2006 counted for approximately 89% of total revenue, and had a steady average turnover of approximately 45 days. The largest supplier of round wood to Cathay is Finmashineri Co. Ltd.. Cathay's trading activities are conducted by Raohe Songlin Economic and Trading Co. Ltd., a Chinese domestic joint venture 60% owned by Cathay.
Standing Timber Plantation in Russia
In August 2007, Cathay acquired a 51% controlling interest in DalEuroLes Co. Ltd., a Russian company that owns a 271,100 ha concession in Khabarovsk, Russia, for US$2.7 million and 800,000 Cathay common shares, subject to TSX Venture approval. In addition, Cathay will provide a demand loan to DalEuroLes of up to US$15 million. The exact amount of the loan is to be determined based on a capital expenditure analysis being conducted by Indufor. The demand loan will carry a 4% rate of interest, with quarterly principal payments of 5% over a 5 year period. DalEuroLes has the option to repay the loan at anytime but is restricted from issuing dividends while the loan is outstanding.
The concession currently has a lease life of 25 years. The minority joint venture partner of DalEuroLes is Finmashineri Co. Ltd. a member of the Business Marketing group of companies and Cathay's largest supplier of round wood for commercial timber trading. Business Marketing is a Russian-based forestry group that has been operating in the Khabarovsk region since 1998. The DalEuroLes concession currently has an annual harvest quota of 300,000m3 with harvesting scheduled to commence in 2008. Approximately 80,000m3 is expected to be harvested in 2008 increasing to 300,000m3 in 2009.
DalEuroLes is currently arranging to export its harvest through Business Marketing to Japan and China. DalEuroLes is also negotiating a supply agreement with Amur Forest, also owned by Business Marketing, which has a sawmill under construction. Business Marketing has been approved by the Khabarovsk Ministry of Natural Resources to be among a list of Russian-based forestry companies that would qualify for an exemption from future increases in roundwood export tariffs pursuant to a policy referred to as the Priority Investment Program ("PIP"). The PIP and the associated tariff exemption have yet to receive the required approval of the Russian federal government. If approved by the Russian federal government, the tariff exemption period is expected to cover the design and construction phase of the Amur Forest sawmill. The maximum volume of exempted export is expected to be equivalent to the input requirements of Amur Forest, which is 600,000m3 at capacity. Russian processed wood products are currently exported tariff-free. Cathay is in discussions with Business Marketing regarding arrangements to export Amur Forest's processed wood products into China.
Cathay expects to generate harvesting revenue starting in 2008. In addition to completing the three phases of acquisitions in Guizhou and developing the Russian concession, Cathay plans to continue its growth by adding valuable forest assets to its portfolio. In order to carry out these business plans, the Company will require new funding.
On August 21, 2007, the Chinese government announced favourable policies for forestry companies in China. Major highlights include the full or partial exemption on corporate income tax for companies in the forestry sector; an initiative to increase investment in fast growth high yield and precious tree species development projects; and the removal of the Forestry Levy (26% of gross revenue) currently charged to most timber companies (to be gradually exempted nationwide).
Currently, China is experiencing a significant round wood supply shortage, and is now the world's largest importer of raw logs, having imported approximately 32 million m3 of logs in 2006, of which 69% came from Russia. This supply shortage is being exacerbated by restrictions on the harvesting of natural forests, and limited organic growth in Chinese fibre supply. China's import of Russian logs has grown at a dramatic rate, having recorded a compound annual growth rate of 22% since 2001. Currently, Russia is the world's largest exporter of logs, and represents approximately 40% of global softwood exports.
Because all of the Company's properties and operations are located in China and Russia, its activities are subject to local and national regulations in such countries as well as various risks that are associated with those industries and those countries. For more information on the Company's risk factors, please refer to the item entitled Risk Factors in the Company's management discussion and analysis date June 30, 2007, which is available on SEDAR at www.sedar.com. The list of risk factors is not exhaustive, and, in particular, does not include risks associated with doing business in Russia.
About Cathay Forest Products
Cathay Forest is a forest products company managing standing timber properties and developing fast-growth, high-yield poplar plantations in the Peoples Republic of China and Russia. Cathay Forest is building a world class forest products company through a customer base that includes the domestic Chinese pulp and paper industry and harvesting customers serving a variety of wood product industries.
Supersedes Prior Releases
This press release and the information contained herein, supersedes any and all prior press releases issued by the Company to date with respect to the matters contained herein.
All statements, other than statements of historical fact, in this news release are forward-looking statements that involve various risks and uncertainties, including, without limitation, statements regarding the future plans and objectives of the Company. We caution readers not to place undue reliance on these statements as a number of important factors could cause actual results and future events to differ materially from the plans, objectives, expectations and intentions expressed in such forward looking statements. The Company assumes no obligation to update forward-looking statements should circumstances or management's estimates or opinions change.
The TSX Venture Exchange has not reviewed and does not accept responsibility for the adequacy of this release.
Contacts: Cathay Forest Products Corp. Ermo Ou Vice President (416) 226-7269 Email: [email protected] Cathay Forest Products Corp. Anthony Ng Chief Executive Officer (416) 226-7269 Email: [email protected] Website: www.cathayforest.com
SOURCE: Cathay Forest Products Corp.