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

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

Case Questions 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)

Sustainable Forestry Yield Price $ m3m3 Clearcut Sustainable  500 mm acres deforested , 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?

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

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

Cash Flow Uncertainties

Case Solution

ICRG Risk Ratings

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

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

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

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

Valuation Comparison  Shut down option has little value  Expansion option value brings significant upside with little additional downside

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) Yield Price $ m3m3 Clearcut Sustainable

Viable Financing Sources 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