The Princess Project Sustainable Timber Investment Opportunity Risk Assessment

The Princess Project
Sustainable Timber Investment Opportunity

Silvatree Investment Returns Module,
Risk Assessment & Market Research

Investment Returns Module
Initial Investment $ 93,600.00 Initial
3 x Units (Hectares) @ $30,000.00 each Investment
Plus 4% Legal Fees (no further charges over
investment period) Currency US Dollars
5 Year Returns (First Harvest) $ 99,000.00

3 x 660 Trees 1,980 Trees Unit
(660 Paulownia Trees per Hectare) (Gross Figure) Investment
Less 60 Trees per Hectare: 3 x 60 = 180 Trees 1,800 Trees
(Harvest, Processing and Transportation) (Net Figure)
Total Commercial Lumber 360 m3
(Growth Projection Figure: 0.2 m3 per tree*)
Contracted Lumber @ $275.00 per m3 ** $ 99,000.00
(Price agreed and AA+ Bank Bonded)

10 Year Returns (Second Harvest) $ 99,000.00 Total
15 Year Returns (Third Harvest) $ 99,000.00 Returns
20 Year Returns (Fourth Harvest) $ 99,000.00
Total Returns $ 396,000.00

400000
350000
300000
250000
200000
150000
100000
50000 cumulative return

0 initial investment
Year 5 Year 10 Year 15 Year 20

* The actual growth projections are 0.33 m3 per tree per 5 years (see Growth Projections by Forest Engineer). This
means that we have been extremely conservative in the above calculation. If the tree indeed produces 0.33m3 per tree,
investors would receive these higher returns. Trees are numbered for this purpose.

** The $275.00 per m3 has been confirmed for the first harvest. Thereafter, the price of the lumber is linked to the
Bureau of Labor - Lumber – Series ID WPU81. As the price of lumber is currently very low due to the global
recession, we expect the price to increase in future. This cannot be guaranteed and is a prediction only.

UK Phone: 0208 457 2924 1 www.silvatree.com


Project Risks Assessment
Silva Tree conducted extensive research before embarking on the Princess
Project. We looked at a variety of trees and crops, as well as alternative
investment opportunities.

Our decision to grow Paulownia was dependent upon a number of factors,
many of which were environmental, and during the decision making process
we amassed a great deal of product comparison information.

As the main investors in the Princess Project, Silva Tree have also undergone
a rigorous risk assessment procedure before going ahead with the project
and we have compiled a basic summary of our findings here for your perusal.

According to our research, the main risks to established timber plantations
are fire, disease, illegal logging and the plantation owners falling into
financial difficulties.

The main risks to new timber plantations were found to be poor quality seeds
or seedlings, insufficient irrigation, poor soil preparation, unsuitable soil type
and badly managed plantations, including soil preparation, lack of
fertilization and overcrowding.

Through careful planning, Silva Tree have overcome all of these risks. As
Panama is not in a hurricane or volcanic zone, we have not included extreme
weather conditions in the assessment.

Fire
The most obvious risk to a timber plantation is that of fire, a natural force
which can wipe out whole forests in a matter of hours. Contrary to popular
belief, however, fire and other disasters damage less than 0.5% of privately
owned forests every year. Moreover, unlike some other trees, Paulownia has
an unusually high ignition temperature of approximately 425 degrees
centigrade (compare to teak with an ignition point of 100 degrees
centigrade)[1].

It is so fire resistant that it actually functions as a natural fire breaker and
has been credited with saving vast areas of forests, farms and homes from
devastation. Panama’s humid climate is another factor which eliminates the
probability of fire, especially in rural areas away from major roads and
factories.

Natural fires are extremely rare in Panama and the country boasted just a
handful of forest fires in 2008 (please see graph on next page in which forest
fires are marked by the yellow bar).[2]



This map shows Panama’s total fire outbreaks in 2008, correlated around the
main highway and away from rural areas. [2]



Disease
The only known disease to have affected Paulownia is called Witches Broom.
A significant problem for the species in the 1960`s, it has since been
eliminated. Research conducted in the late 1980’s has led to the
development of Paulownia seedlings which are resistant to the disease and it
currently has no known threats.[3][4][5]

Logging
Illegal logging can be a major threat to forests, particularly in countries with
low political stability. Unlike many Central and South American countries,
Panama’s legal and environmental departments possess high levels of power
and the country is increasingly active in the crackdown on illegal logging
practices.[6]

Illegal logging generally poses a significant problem in natural forests where
poachers can set up sawmill operations unnoticed. In order for theft from a
private plantation to occur, a great deal of equipment would have to be
transported unnoticed through rough terrain.

Moreover, the Princess Project is very much a community effort, with
permanent staff working and living onsite. Similarly, the local villages and
towns support the project wholeheartedly and benefit from the employment
it provides as well as the humanitarian efforts that form a part of it, thus the
project benefits from the protection of the local community as a whole.

Financial difficulties
In the unlikely event that Silva Tree should fall into financial difficulties,
safety nets have been put into place to ensure that individual investors’
property would not be affected. All the land sold to investors is held in a UK
trust, ensuring that each investor’s plot would remain in their ownership
regardless of the future of Silva Tree.

Similarly, the funds required for the management and harvest of each timber
cycle are held in escrow to ensure that the project would continue to
progress regardless of Silva Tree’s success as a company.

Seedling quality
Silva Tree have sourced their seedlings from the world’s leading Paulownia
authority who have been cloning the species for over 30 years. A seedling
survival rate of 95% is guaranteed by the supplier, and any tree which does
not survive is replanted within 6 weeks, not affecting its overall growth.

Irrigation & soil
Paulownia only requires water in its first few weeks of growth and, in most
cases, Panama’s tropical climate provides sufficient rain for this. The
Princess Project site also contains a natural stream which can be used as a
water supply during dry seasons without affecting the local community’s
drinking water.



The project location has been chosen carefully to meet the requirements of
the Princess Tree. Paulownia does not require particularly fertile soil as it
draws nutrients from deep within the ground so, unlike other trees, it is not
at risk of dying due to malnutrition.

Additional safety nets
Although every care has been taken to ensure the success of the Princess
Project, we take the responsibility of private investment very seriously and
additional project buffers of 30-40% have been set up as an extra
precaution. It is also significant that just 5371 ha of reforestation occurred
in the entire country of Panama in 2008, so the Princess Project represents
nearly 10% of national reforestation over the last year, and over 25% of the
reforestation of 2004.[6] Not surprisingly, the project receives a great deal
of government and community support which helps all involved to maintain
the highest standards of security and care.

Market Research
Timber as an investment
Aside from its obvious environmental benefits, Timber is a low risk, high
return asset which has outperformed stocks, bonds and other
“ During the Great
commodities for the last 30 years. The track record of early investors
Depression, timber
and a surge in modern academic research have shown that timber is a
was up 233% while the
near-perfect asset. [8] As the main investors in the Princess Project,
price of stocks fell
these factors were taken into account by Silva Tree when we decided to
more than 70%. In
take on this large-scale timberland project.
fact, during the three
worst market
downturns of the 20th
century (191120, 1929
41 and 196681),
timber outperformed
the S&P 500 by a wide
margin. The fact is,
managed timber has
actually beaten the
stock market – with
less risk – over the
long run. ”

Stewart Miller [7]

Timber beats every other asset class
Timber has consistently beaten all major asset classes over the last 30 years,
performing better than stocks, bonds and commodities. Timber’s total
compound gain from 1987 to 2002 was approximately 15%. [9] Although
timber prices fluctuate, research indicates that market prices for timber have
risen steadily for over 100 years, performing better than any other
commodity.



The reason is that timber is not sensitive to world events, politics or new
discoveries that expand supply (like oil). Moreover, despite possible timber
substitutes such as steel, plastic and Aluminium, people still want wood and
paper, and an emerging bio-fuel market increases demand even further.

Timber vs. stocks
Not only does timber beat all other major asset classes, but it also does If you had
so with lower volatility. Timber has had just three “down years” in the
last 45 years whilst stocks, comparatively, have had 12 “down years” invested just
over the same period. The last great bear market in stocks began in $10,000 in timber
the late 1960s and lasted until about 1980. An investor in stocks during in 1972, you would
that period lost money due to inflation alone. A timber investor, be sitting on
however, has never had a losing year. Moreover, the returns were in
most cases in the double-digits with a whopping 55% return in 1973
nearly a million
and a 47% return in 1977. [9] dollars today…

Figure 1. US capital market line, showing the returns and volatility Ashish Kellar [9]
among asset classes. Timberland returns are represented by NCREIF
Timberland Index (1990-2008).

Source: NCREIF, Ibbotson Associates

Hedging inflation
Historically, timberland investments have demonstrated significant
correlation with inflation.[8] According to legendary investor Jeremy
Grantham, timber prices have risen at 3.3% above the rate of inflation over
the last century: Grantham himself keeps 20% of his personal portfolio in
timber. [8]



Investing in timber
Until recently, all the advantages of investing in timber have been restricted
to highly wealthy industrial investors. For smaller investors, timber has been
prohibitively costly until late. Over the last few decades, however, primarily
US institutional investors have purchased large areas of timberland,
increasing the level of institutional investment in timberland from $4 billion
in 1981 to over $18 billion by the end of 2005. [8]

Species Selection
Convinced that timber is a good investment, Silva Tree took the task of
choosing a tree species to grow. Costing, practicality, land availability and
environmental factors were all considered. We cannot include all the facts or
tree species which constitute months of research, so just a small selection
has been included here.

Gmelina
A relatively fast growing tree with high rates of Carbon absorption, Gmelina
represented a very attractive option. Its weaknesses are that it requires
very fertile soil, regular irrigation and temperatures no higher than 26
degrees centigrade to grow well. [10] It may die from age 10 onwards and it
does not regenerate from its roots. These factors made Gmelina an
impractical and extremely costly tree to grow, requiring highly specific
conditions and premium priced land which could arguably be better used to
grow food crops.

Palm
One of the best known trees in the world, the Palm tree is grown for its oil
and fruit across the Tropics. Although relatively easy to grow, the Palm tree
is sensitive to insect damage and disease and its lumber is practically
worthless.

Eucalyptus
This tree is fast growing, robust and abundant in Australia and North
America. It grows in the Tropics and is resilient to difficult weather and soil
conditions. The main problem with Eucalyptus is that, because it is so rich in
oil, it is extremely flammable and highly sensitive to forest fire (it has even
been known to spontaneously explode). It is only harvestable in years 12-25
and its wood is mostly used for pulpwood & simple fuel production, which are
Carbon releasing products and therefore not in line with our green ethic.[11]
[12]

Teak
Teak was the strongest contender for the project aside from Paulownia and
remains our project’s biggest rival. Known as “the king of trees”, Teak is
reputed to have a high market value, weather resistant timber properties
and tough, durable lumber. Here’s why we chose Paulownia:



Despite its popularity, little is publically known about Teak’s Paulownia Teak
negative effects on the environment and the saturation of the Achievable 50 GBP 50 GBP
Teak timber market. Travelling through Central America today, price per tree
one will see a landscape littered with thousands of hectares of
Supply Minimal High
abandoned Teak plantations, some of which are more than twenty
years old. If Teak is really the valuable asset it is advertised to Demand Growing Saturated
be, one is inclined to wonder why so much of it remains Year of 5 25
abandoned and unsold. harvest
Carbon 38 CO2e 26 CO2e
A slow growing hardwood, Teak requires good quality topsoil and
absorption
considerable maintenance, including regular thinning and pruning, (ha)
which incurs ongoing costs. In addition, financial returns are not
Soil High None
achieved for several years, with top grade Teak only harvestable
fertilisation
in its 25th year. Paulownia, in contrast, is first harvested in year value
5 and requires little maintenance, thus costs to grow it are very
Ignition point 425 ºC 100 ºC
low and returns can be made in record time.
Weight 280 kg 875 kg
Environmentally, fallen Teak leaves are one of the main causes of
Water High High
soil erosion and forest fires in Panamanian plantations; their high resistance
oil content means they act as tinder for fires during the dry
seasons. Moreover, when the leaves fall to the ground they serve
no useful function either as a natural fertilizer or as feed for Information taken from A comparative
analysis of the advantages of growing
animals. Paulownia leaves in contrast are used in many parts of paulownia vs. teak, David Morris, Enoch
the world as animal feed due to their high nutritional value. Olinga College (ENOCIS). Panama and
Indigenous Education Fund.
Paulownia also increases land fertility due to its rapidly
decomposing leaves which feed natural grasses, and in turn
prevent the erosion of top soil.

By far the most significant factor, however, is simply that too much Teak has
been planted in recent years. Globally, there are more offers to sell teak
than to buy it. The market is flooded, with a negative effect on prices and,
although the demand for timber is growing, high priced Teak is no longer a
competitive product. Paulownia is a product with cultural significance as well
as versatility. Demand for it is so high that a buyer was found for the entire
plantation‘s timber before the project had even begun. There are few
Paulownia growers in the world as well as an emerging biofuel market and,
by becoming one of the world’s first large-scale Paulownia producers, Silva
Tree is securing its position in the global market, a position which is not
available in the Teak industry.

References
1: MORRIS, David, A Comparative Analysis of the Advantages of Growing Paulownia vs. Teak, 2005.
2: ANAM, Compendio Estadístico Ambiental, 2004-2008.
3: CAF, IDRC, Agroforestry Systems in China, 1991.
4: Chinese Academy of Forestry, Paulownia in China: Cultivation and Utilization, 1986.
5: XIONG, Yao Guo, Final Technical Report of Paulownia Project (Phase II), 1990.
6: ANAM, Autoridad Nacional del Ambiente, 2009.
7: MILLER, Stewart, Investment U White Paper Report, 2009.
8: STURM, Paul, SmartMoney Magazine, .
9: KELKAR, Ashish, Timber stocks should outperform in an inflationary market, .
10: DEHRADUN SANTOS, Robert L., GAMHAR (Gmelina Arborea), 1997.
11: CALSTATE, The Eucalyptus of California, 1997.
12: R.L. Dickson, C.A. Raymond, W. Joe and C.A. Wilkinson, Forest Ecology and Management, Volume 179, July 2003.


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