Feronia – a world class palm oil producer in the making

Harry Norman talks with Ravi Sood, Chairman of Feronia, listed on the TSX Venture Exchange, Food Producer sector. Stock ticker FRN, share price 14 cents Canadian, market capitalisation $20.31m Canadian. www.feronia.com.

Harry: How does the global market for palm oil compare to the markets for other food oils, such as soya oil, rapeseed oil, and sunflower oil? And what can you tell us about trends in the palm oil market?

Ravi: There’s two key things to understand about palm oil. First of all it’s the highest yielding of all the vegetable oils, so we could look at over ten times the yield of soya bean oil, on an agricultural basis, and as much as six times the yield of rapeseed or canola oil. As a result it’s the lowest cost oil to produce, and one very important outcome from that is that the price of palm oil has never dipped below the marginal cost of production. At least not for the last thirty years, making it unique among all commodities. That means that if you’re a producer, you’re producing palm oil no matter what the market cycle, pricing etc., based on where it’s been the last thirty years, you would have been making a profit. 

The second key thing about palm oil to understand, is it’s the largest market for vegetable oil. It’s 50m tonnes projected to go to 100m tonnes by 2020, and that’s about a $50bn market going to a $100bn market based on today’s price.

In terms of trends; very high correlation between the price of palm oil and oil. And the reason for that is the phenomena of bio fuels. So for the last six years, we’ve seen a very high correlation between the two because the marginal supply of palm oil is typically going into the production of biodiesel which is naturally priced according to prevailing oil prices. So, very high correlation, we expect that to continue going forward.

Harry: What makes Feronia’s palm oil assets and operations in the Democratic Republic of Congo stand out from the crowd, Ravi?

Ravi: For me these operations are one of a kind. It was the original palm oil plantation, a history going back to 1911. A key thing for us today is twofold; one is the economic consequence of being a replant, and planting on existing areas. We don’t have the same infrastructure requirements that a new of greenfield project would have, as a result our costs are less than half to grow our plantation area. Which has profound differences in terms of potential returns for investors.

The second piece is environmental. Whereas most of the growth of the palm oil industry is happening at the expense of the rainforest, which has very negative outcomes – whether it’s deforestation, displacement of people- our growth requires none of that. We’re planting in areas that were deforested approximately 100 years ago, and we’re replacing all the abandoned agricultural areas with new plantings. So no deforestation, no displacement of people, and really just a rehabilitation of existing areas. So those are the two key differences for Feronia.

Harry: Please would you talk us through Feronia’s palm oil business development model, and plans?

Ravi: Feronia has two operating palm oil mills, and has a third under construction. Once the third is complete, which is expected the fourth quarter of this year, we’ll have excess processing capacity to produce palm oil from palm fruits for almost ten years. The key for us over that time period, is planting new hectares. So we’re currently operating on approximately 17,000 hectares, over 107,000 hectare concession. Previously it was planted to as much as 55,000 hectares, and our plan is currently to plant 5,000 hectares a year to get the total plantation area up to that original 55,000 hectares, and then go beyond that in the subsequent ten years.

That’s the key to our growth, 5,000 hectares is the largest planting programme in Africa, and one of the largest in the world.

Harry: How does the Democratic Republic of Congo compare to Brazil, from an agricultural point of view, Ravi?

Ravi: There are a number of parallels between Brazil and the Congo. First of all they’re both very large nations, they both straddle the equator, they both have huge amount of fresh water – whether it’s through rivers or rainfall – huge amounts of sunshine hours. Basically great conditions for agriculture. Another factor, which is important to the economics of agriculture for our corporate operators, is scale. In both countries we have the ability to farm on a very large scale. 

So we have the potential benefit of economies of scale in Congo that they currently enjoy in Brazil.

Another key comparison again would be infrastructure. We look at whether it’s the Amazon River, or other forms of logistics in Brazil. We similarly have the Congo River in the Congo, and near the Atlantic Port of Matadi, a very good infrastructure of roads and rail.

So key for logistics for us at Feronia is the Congo River, that allows us to move product up and down the river between our locations, through a highway that’s open 365 days a year and does not require any maintenance or expense from us. That is a tremendous advantage for us over almost any other location in Africa.

Harry: Feronia has acquired 10,000 hectares of quality arable land in Bas-Congo province, and has a 10-year arable acquisition and development plan. What can you tell us about the business case for arable in Bas-Congo, Ravi?

Ravi: The plantation farming is very well known in the Congo and throughout Central Africa, whether it was palm or rubber or cocoa, tea and coffee. Arable farming is less well known but the potential is certainly there, again the parallels with Brazil in terms of the potential for scale and the agronomic conditions. But the other key factor for the Congo is, it’s one of the world’s largest food importers, it’s the 11th largest country by land mass, it is projected to become the 10th largest by population by the year 2030 according to the UN. It’s a huge food importer, and its imports are only growing. So our objective is to displace imports through local production, do it a very large scale similar to what’s done in Brazil, and to do it in the areas that have the best logistics already in place so we have minimal cost to do so.

Our other key is, we’re displacing imports, so we’re selling at import parity, which is much higher than export parity. So we have a long runway of selling at higher local prices, in US dollar terms, before we have to compete with large-scale operators in the global arena.

Harry: Ravi, what are your thoughts on doing business in the Democratic Republic of Congo? And what is Feronia’a stance on corporate social responsibility?

Ravi: There are many challenges to doing business anywhere in Africa, and the Congo in particular has a history of political volatility and of course ongoing issues such as logistics and infrastructure. Because the country is so large, and our operations are well established, we are able to pick the locations to start from, which have built in logistics – whether it’s through the river, or existing highway networks, or rail networks, we’re focused on those areas alone and will be for the next many years.

Also, by virtue of being one of the largest employers in the country, and one of its oldest operating companies, we have a huge amount in the country on how to get things done. Whether it’s accounting, finance, logistics, customs – all those things that are barriers to entry for others, are assets for us. So we’re very comfortable doing business there, and we think that’s a key advantage for us. 

In terms of corporate social responsibility, we don’t really view it that way. We’re very tightly interwoven with our communities; we have approximately 4000 employees, in most cases their families live on our plantations. The community in and around our plantations exceeds 40,000 people, we operate 3 full hospitals, and dozens of schools; so we’re very tightly integrated with our community. It is absolutely crucial for us to continue that way, we’ve operated on that basis for decades and we’ll continue to do so going forward.

Harry: For the quarter ending March 31st, Feronia made a net loss of $2.4 million, and held $9.3 million in cash. Please would you talk us through Feronia’s capital structure, and financial situation going forward?

Ravi: Feronia is fully funded for its remaining major capital expenditures, which are the completion of its rice mill, and the completion for its third palm oil mill; both expected this year, 2012. 

Going forward our operating expenses will be funded from cash flow from operations, and to be augmented as necessary – in particular for new plantings of palm. So, to the extent that we can continue to grow our plantings faster, we’ll seek additional financing if, as and when necessary, to finance those. But our current capital expenditures are fully funded by the cash from our balance sheet.

With the completion of our third palm oil mill, expected in Q4 of 2012. We expect to become cash flow positive on an operating basis.

Harry: What can the investment community expect from Feronia over the next 12 to 18 months, Ravi?

Ravi: The key milestones for Feronia in the coming year are completion of the palm oil mill, and the turn from being a cash burner to a cash generator. Also completion of our rice mill, which will facilitate our first commercial sales of staple crops in the DRC, and also proof of concept for the new arable farming business.