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20, Apr 2018 -

Obtala exceeds production and sales records in Q1 update

Obtala exceeds production and sales records in Q1 update


Obtala exceeds sales and production records

  • Invoiced sales of $3.9m
  • Quarterly record exceeded for contracted sales - $8m
  • Quarterly record exceeded for export grade timber production - 3,600m3
  • Successful $6.35m equity raise, including 24% subscription from management.
  • Negotiation of external trade finance facility for expansion of timber trading unit ongoing and on track for first draw down during Q2 2018
  • Gabon veneer factory in test phase, production to commence Q2 2018  
  • Mozambique sawmill construction completed on time, ahead of 2018 cutting season.
  • Extension to MOU with NSMS to purchase 100% of NSMS share capital
  • Production plans for 2018 agri business in Tanzania completed, including the return of 200 hectares of agricultural land to local partner


Strong start to 2018


The Group has enjoyed a positive start to 2018, with further operational milestones achieved on the path to our most pressing objective, to become cash-flow positive, and towards our longer-term objective of achieving high levels of sustainable profitability. These milestones include the setting of new records for timber orders received and for volume of production achieved. 2017 saw the group extend its reach to West Africa, acquiring WoodBois, a business with strong management, significant assets and proven production capability. As per our RNS of 30 January 2018, the successful $6.35m equity raise in Q1 2018 was largely earmarked for investment into compelling opportunities presented to the board by the WoodBois management team to accelerate returns from their businesses. The funding of these opportunities commenced immediately upon receipt of funds in February 2018 and we anticipate a rapid return on investment.

Gabon

Our new veneer factory in Gabon has moved into test phase with production anticipated to commence early in Q2 2018. Veneer is expected to be our highest margin business line. Achieving capacity output is a priority for 2018 and resources will be allocated accordingly. Some additional custom-built engineering modifications have been incorporated, which will allow for the addition of a plywood making line to be added in the future, taking us one further significant step along the value chain. Any additional investment will be funded from free cash flow.

On 28 March 2018 we took delivery of two brand new bulldozers and three MAN trucks, financed via the recent equity raise. This new equipment will facilitate the transportation of volumes of timber from our concessions sufficient for the veneer factory to run at capacity.

The achievable volume of sawn timber production from the Group's sawmill in Gabon has, to date, been constrained by the amount of timber received from our concessions, which is a function of available harvesting equipment. The aforementioned, recently purchased bulldozers and trucks, in addition to supplying our veneer factory, will also supply additional timber to our sawmill, sufficient to increase output by ~20%. The level of log extraction required in order for both the veneer factory and the sawmill to operate at capacity is less than 2% of what is sustainably viable and legally permissible from our concessions.

Two new Komatsu Bulldozer Three new MAN trucks
Two new Komatsu Bulldozer Three new MAN trucks 


Mozambique


The sawmill in Nampula, Mozambique came online in Q1 2018, with the arrival of brand new Wood-Mizer processing equipment from South Africa and some older equipment moved to Nampula from the existing sawmill in Uape. No harvesting is permitted in Mozambique from January to March each year but testing of production lines at the new sawmill is being conducted on timber harvested from our concessions during Q4 2017.

An Obtala delegation will travel to Mozambique during Q2 2018 and will continue discussions with FundInvest as per our RNS of 9 January 2018 with the aim of creating a business plan that aligns the mandates and interests of both parties. There is a possibility that no agreement will be reached, but either way, any further infrastructure investment will be focused exclusively on West Africa in the interim until these discussions are concluded.

Sawmill structure complete Setting up the new Woodmizers
Sawmill structure complete Setting up the new Woodmizers


NSMS

As per the announcement of 29 March 2018, we have agreed an extension to our MOU with NSMS in order to complete our due diligence and observe more sample data. Under the terms of the original announcement, Obtala, through Argento, has provided a CFA450m ($845k) loan to NSMS to pre-finance the production of timber in the Ivory Coast, repayable over 9 months from 31 March 2018, in return for exclusivity over this production. Under the extended agreement, at any time up to 1st April 2019, Obtala can serve written notice via Argento to purchase 100% of NSMS' share capital. Should the acquisition not be pursued, the loan becomes repayable in full. Initial deliveries from NSMS have been received, put through the kiln drying process in Abidjan and have already been shipped to North America.

Margins within our trading business are variable, but in general are lower than that of our production business. The trading business can be scaled more rapidly than our production business however, and given that we are currently capturing less than 0.5% of market share, the level to which it can be scaled is substantial.

Timber Trading


The key constraint to growth of the trading business is the amount of capital available.

Our timeline to scale and optimise the trading business is as follows:                                                          

  • close initial $5m trade finance facility                  Q2 2018
  • increase trade finance facility                              H2 2018
  • reduce average cost of trade finance facility        2019


Securing a trade finance facility has taken longer than anticipated but we are now at an advanced stage with an established provider and feel confident that we will be able to satisfy their criteria in full during Q2 in order to secure an initial $5m trading facility.

Since timber is largely a non-perishable product, once a sales contract is in place and the product is 'Free on Board', risk to capital employed is minimal. The $1m facility provided by management at a market rate of 11.5% has been fully deployed, providing multiple example trades as evidence for potential providers. Increasing this facility and driving down the associated cost of capital as providers become familiar with our trading cycles and associated risks will remain a high priority for the management team throughout 2018 and 2019.

The main difference between trade finance and working capital finance is the collateral and the turnover. A factory is easily identifiable by a lender and attracts lower rates.Timber orders are less "visible" and lenders require higher rates despite historically low client default rates. However with a typical customer timber order to delivery taking 3 months we can use this capital 3-4 times per year, covering the higher lending cost.

Mouilla, Gabon Okoume Timber, Gabon
Mouilla, Gabon Okoume Timber, Gabon

Agriculture

2018 will see the start of our Hybrid Orchard Model, with up to 500 hectares of mango saplings planted over future years. We have agreed to return the lease on 200 hectares of land to one of our local partners since we are unable to commit to a timeline to fully cultivate their land. The termination of this agreement in no way inhibits our future plans. Our rate of planting will be dependent on either free cash flow generated via sale of cash crops or on external 'patient capital' funding. With full supply chain logistics and cold chain at 3 degrees from farm to off-taker in Dubai successfully tested in 2017, the agri business has developed into a low-cost, low-maintenance option on future annuity income, without distracting management's attention from the more immediate revenue generating opportunities that we believe exist in the forestry space.

Refrigerated Reefer loading at our Packhouse.  18,200kg Caribbean King Melons bound for Dubai Yellow Honey Dew Melons sold in Nairobi, Dar es Salaam and Dubai
Refrigerated Reefer loading at our Packhouse.  18,200kg Caribbean King Melons bound for Dubai   Yellow Honey Dew Melons sold in Nairobi, Dar es Salaam and Dubai


Source: Obtala

Contact Sawmilling South Africa

  • Roy Southey - Executive Director
  • Email:  
  • Phone:  +27(44) 343 1720
  • Address:  P.O. Box 1118, Sedgefield, 6573
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