TIDMPTF
RNS Number : 4659M
Phaunos Timber Fund Limited
30 April 2018
Phaunos Timber Fund Limited
30 April 2018
(the "Company")
Audited Results for the Year Ended 31 December 2017
Phaunos Timber Fund Limited, the authorised closed-ended
investment scheme, today issues its audited results for the year
ended 31 December 2017.
Phaunos Timber Fund Limited (the "Company" or "Phaunos") holds a
portfolio of timber assets located principally in New Zealand,
Brazil and Uruguay. At the 2017 Annual General Meeting on 19 June
2017 a majority of the votes submitted were against continuing the
Company. Shareholders have therefore approved a change to the
Company's investment policy to permit an orderly realisation of its
assets. That process is currently under way. In consequence of the
loss of the continuation vote, the Company's then investment
manager, Stafford Capital Partners Limited (the "Investment
Manager", or "Stafford"), gave notice to the Company of its wish to
terminate its investment management agreement between the parties.
The agreement terminated on 16 February 2018. As a consequence, the
Company is now self-managed by its board of directors, supported by
a number of executives and service providers within the financial,
forestry management and asset sale functions.
2017 Summary
-- At the AGM on 19 June 2017 a majority of shareholders voted
against continuing the Company (the "Continuation Vote").
-- The Board has put forward a plan to realise the assets of the
Company in an orderly manner. Shareholders approved a revised
investment policy at an Extraordinary General Meeting held on 17
August 2017.
-- On 10 July 2017 Stafford tendered its resignation as Manager,
effective 16 February 2018.
-- Following the resignation of Stafford and the previous board
of directors, a new board was constituted to fulfil the revised
Investment Objective.
-- The board has appointed senior management to support it with
financial reporting, operations, investment and forestry management
and assist with the orderly wind down of the Group.
-- Poyry Capital were appointed as sales agents on 28 November
2017.
-- 6.8% decrease in Net Asset Value ("NAV") to US$280.3 million
from US$301.3 million at 31 December 2016 (net of share
buybacks).
-- Decrease in NAV per share from 55 cents to 51 cents.
-- Timber and Investment operating expenses for the period
increased/ from US$7.32 million to US$10.79 million. This increase
is primarily attributable to fees paid to Stafford on termination
of the management agreement and provisions raised under the
'break-up' basis of accounting.
-- The Board consider IFRS reporting measures sufficient and
have not made use of Alternative Performance Measurements developed
previously by the Investment Manager.
Chairman's Statement
Dear Shareholder,
This is the first set of audited consolidated financial
statements ("consolidated financial statements") prepared since
shareholders resolved to put the Company into managed wind down in
July 2017. Since that time, the newly appointed directors of the
Company have been busy preparing the Company's assets for sale and
adapting the Company's operational platform following the cessation
of Stafford's role as investment manager. I take the opportunity
here to provide some details on the outcome of these processes.
Operational Arrangements
As investors will recall, Stafford gave notice to the Company of
the termination of the investment management arrangements shortly
after the Company's EGM in July 2017. That cessation took effect in
February 2018. The board of directors did not seek to replace
Stafford with another investment manager, principally on cost
grounds but also in recognition of the difficulty in hiring a
suitable replacement manager given the Company's managed wind down
status. Accordingly, the Company has been self-managed by its board
of directors since February 2018, supported by a newly recruited
COO/CFO external consulting team and two experienced forestry
managers who are supervising day to day forestry activities at the
Company's wholly owned assets in Brazil and Uruguay. The board
regards these operational arrangements as proportionate and
sufficient to ensure that the Company's portfolio assets are
suitably overseen and that the board receives timely and detailed
reports on risk, operations and financial matters on a regular
basis.
Preparations for Sale
It is common when owners decide to dispose of an asset portfolio
for those charged with governance of those assets to undertake a
number of preparatory processes, principally to ensure that
interested parties receive a comprehensive and detailed investment
memorandum, along with access to a data room of relevant materials,
to enable those parties to carry out a proper appraisal of the
investment opportunity in a timely manner. This preparatory work is
now substantially complete and is supported by ongoing commercial
due diligence and support from our regional forestry specialists.
Initial information materials will be issued to interested parties
shortly after the issuance of these consolidated financial
statements. Alongside this workstream, the board has also
commissioned a legal due diligence process in respect of the
Company's assets located in South America, in order to identify
issues (such as regulatory and legal issues relating to individual
assets) which may inhibit both the ability of the Company to
execute disposals (such as regulatory and legal issues relating to
individual assets) and to seek to identify and ameliorate matters
which may negatively impact on sales values (such as outstanding
litigation, land remediation, etc). The board has now received a
comprehensive legal due diligence report, which has not indicated
the existence of matters which would materially impact exit values,
but which has identified a number of issues which may inhibit the
sales process. Principal amongst these issues are several low value
litigation matters, which have either now been settled by the
Company or are in the process of being so, and certain regulatory
issues which are being mitigated by the partitioning of certain
assets structurally, in order to limit the impact on the sales
process.
Net Asset Value Performance and Range of Expected Outcomes
It is pleasing, given that the Company is executing a sales
process, to note that underlying net asset value per share
performance during the year under review has been satisfactory.
Reported net asset value per share at 31 December 2017 is US$0.51
(31 December 2016 - US$0.55), however it should be noted that the
net asset value per share at 31 December 2017 has been calculated
on a 'break-up' basis, which takes into account discounts applied
to asset values where assets will be sold before their commercial
or biological maturity, alongside provisions for matters such as
tax on repatriation of asset disposals, and certain costs for
completion of the liquidation process. To assist shareholders, the
board estimates that the net asset value per share calculated on a
basis equivalent with that at 31 December 2016 would have been
approximately US$0.57 per share*.
Shareholders will understand that the likely realisation values
of portfolio assets may vary, perhaps significantly, from those
values derived from third party appraisers and as set out in these
consolidated financial statements, given that there are very few
properly comparable transactions in the Company's markets and that,
as yet, the Company has very limited visibility on the likely level
of offers for the Company's assets. Accordingly, the board has to
date provided a range of estimated outcomes on a quarterly basis,
for the guidance of shareholders. The board most recently guided
shareholders in February 2018 to a realisation range of
US$0.42-US$0.52 per share. The audit and third-party valuation
process conducted in support of these audited financial statements,
alongside positive underlying economic performance of certain
assets, has enabled the board to positively reappraise the
Company's expected realisation range to US$0.45-US$0.57 per share.
It is expected that this range will be revised further at the
Company's next quarterly update in July 2018, by which time the
Company anticipates having received evaluated indications of
interest from prospective purchasers of the Company's assets.
* Determined by adding back the envisaged costs of sale, along
with tax repatriation and liquidity and minority discounts
applied
Underlying Portfolio Performance
This performance has been significantly influenced by the
Company's minority interest in the Matariki estate in New Zealand,
which represents 59% of net asset value at 31(st) December 2017.
The Matariki estate is a world class asset, with an appraised net
asset value of the entire estate exceeding US$700 million.
Performance during 2017 benefited significantly from both export
and domestic log prices, relatively low shipping rates and
continued high ongoing demand from Chinese markets in particular.
The board does not expect these dynamics to change significantly
during 2018. Performance in the balance of the Company's portfolio
has been satisfactory, with recent signs of improvement in
eucalyptus log prices.
Limitations Impacting on the Realisation Process
I would like to draw your attention to two important limitations
around the timing of the Company's disposal process. Firstly, the
preparation work for the disposal of the Company's interest in the
Aurora Forestal asset has been impacted by limitations on the
amount of available due diligence information provided by the
majority shareholder, alongside a number of matters of concern
raised by the Company's Uruguayan counsel. This means that the
disposal of this asset will not be subject to the issuance of an
information memorandum to prospective purchasers at present. These
matters have been taken into account in the company's audited net
asset value. The Company has a number of options available to it in
order to extract maximum value from the disposal of this asset and
shareholders will be updated on progress in due course. Secondly,
the disposal of the Company's interest in the Matariki estate is
subject to regulatory approval in New Zealand, by virtue of the New
Zealand Overseas Investment Act 2005 as amended. The relevant
provisions of this act are undergoing significant change at
present, principally driven by change in New Zealand's
administration in October 2017.
Investment Strategy, Objective and Policy
At the Company's Annual General Meeting held on 19 June 2017, a
resolution that the Company continue in business for a further five
years was not approved by Shareholders. As a result of the
resolution not having been passed, the Company was required within
four months to put forward alternative proposals for the future of
the Company. Consequently, Shareholders approved a revised
investment objective and policy of the Company at an Extraordinary
General Meeting held on 17 August 2017. The revised policy states
as follows:
Investment Objective
The Company will be managed with the intention of realising all
remaining assets in the Portfolio, in a prudent manner consistent
with the principles of good investment management with a view to
returning capital to the Shareholders in an orderly manner.
Investment Policy
The managed wind-down will be effected with a view to the
Company realising all of its investments in a manner that achieves
a balance between maximising the value from the Company's
investments and making timely returns of capital to Shareholders.
The Company may sell its investments either to co-investors in the
relevant asset or to third parties, but in all cases with the
objective of achieving the best available price in a reasonable
time scale.
The Company will cease to make any new investments or to
undertake capital expenditure except where necessary in the
reasonable opinion of the Board in order to protect or enhance the
value of any existing investments or to facilitate orderly
disposals.
Any cash received by the Company as part of the realisation
process prior to its distribution to Shareholders will be held by
the Company as cash on deposit and/or as cash equivalents.
The Company will not undertake new borrowing other than for
short-term working capital purposes.
Valuations
At 31 December 2016, the Group accounted for its assets and
liabilities on a going concern basis. In practice, this meant that
the investments made by the Group in timber portfolio assets were
valued by independent third parties on the following basis, using
the following valuation techniques, as judged appropriate on an
asset-by-asset basis.
-- the Cost Approach, based on the sum of components including
the land value and standing timber value;
-- the Income Approach, based on discounted cash flow valuations; and
-- the Sales Comparison Approach based on comparable asset sales
where these are available and pertinent.
As a result of the loss of the Continuation Vote and the
subsequent change to the Company's investment policy as set out on
page 6, the Group no longer accounts for assets and liabilities on
a going concern basis, by virtue of the provisions of IAS1. This
entails valuing all assets at net realisable value, taking account
of a likely sales price that can be attained in the market, along
with accounting for all sales and withholding taxes and all sales
costs.
As a result, the Board of Directors has implemented a revised
valuation policy which seeks to estimate the ultimate gross
realisation value of each portfolio asset, as adjusted for the
costs of disposal, including taxes or other impositions arising
from taxes levied on sales proceeds, professional fees incurred as
part of the positional process and any other relevant realisation
costs.
When making estimates of the gross realisation value of each
portfolio asset, the Directors take into account third party
valuations, the gross realisation values achieved in comparable
transactions, and the advice of their professional advisors.
Nevertheless, given the illiquid nature of the assets to be
disposed of, and the relatively limited price discovery available
at this stage of the disposal process, the board is not in a
position to ascribe likely gross realisation values with precision,
and has thus elected to indicate a range of values which are
anticipated to be returned to shareholders once the Group's
disposal program is complete, which takes into account gross
realisation values of portfolio assets together with anticipated
discounts to value, to account for illiquidity and minority
discount, alongside the costs of winding the Company and its
subsidiaries up. The board currently assesses this range of values
to lie between US$0.45 and US$0.57 per share. As indicated in
earlier public statements, the Directors will update the range of
expected outcomes on a quarterly basis as further relevant
information becomes available.
As a result of the foregoing, the total audited NAV for the
Group at 31 December 2017 was US$280.3 million (31 Dec 2016:
US$301.3 million).
As mentioned in the Chairman's Statement, the board estimates
that the net asset value per share calculated on a basis equivalent
with that at 31 December 2016 would have been approximately US$0.57
per share*.
* Determined by adding back the envisaged costs of sale, along
with tax repatriation and liquidity and minority discounts
applied
Cash Flow
In 2017 Phaunos' cash position improved from US$45.6 million at
31 December 2016 to US$47.4million at 31 December 2017.
Cash inflows during the year related to timber sales from Mata
Mineira, Eucateca and Pradera Roja, with further dividend and
distribution income received from Matariki and Aurora Forestal,
alongside a capital distribution from Matariki.
After considering the Group's cash balance at 31 December 2017,
along with projected cashflow needs to liquidation, the Board
declared a Compulsory Ordinary Share Redemption of US$25m in early
2018. Refer to note 27.
The Board is satisfied cash balances are sufficient to fund a
managed wind-down and expect significant cash inflows as the
portfolio is liquidated during 2018 and 2019.
Portfolio Construction
The Board presents the following information related to the
investment portfolio and operations being wound-down
Minority Positions
The Company holds minority positions in two assets, being
Matariki, a forestry operation in New Zealand and Aurora Forestal,
a vertically integrated forestry and processing operation in
Uruguay.
Timberland
The Company holds timberland assets indirectly, through Mata
Mineira and Eucateca in Brazil and Pradera Roja in Uruguay.
Fund Investments
The Company hold investments in two private equity funds, namely
the GreenWood Tree Farm Fund ("GTFF") and the NTP Timber Plus+ Fund
I, LP ("NTP").
GTFF has three remaining assets and liabilities, comprising:
- an outstanding loan note receivable
- a parcel of timberland known as the Lower Columbia Tree Farm, located in Portland, Oregon
- a pending legal claim payable, substantially settled post- year end
NTP has a single asset remaining, comprising a parcel of
timberland on the outskirts of Houston, Texas
The Fund investments are approaching the end of their lives and
the fund managers are actively seeking to liquidate their remaining
holdings.
ASSET OVERVIEW - MATARIKI
-- Mataraki Forestry Group ("Mataraki") is the third largest
forestry company in New Zealand consisting of sixty seven forests
located in five separate forest management units (FMUs) across the
country, with balanced age class plantations, a stable wood
production profile and an experienced management team
-- Phaunos owns 23.01% of Matariki. Rayonier Inc., a timberland
REIT is the majority shareholder (76.99% of the common shares
outstanding)
-- Rayonier New Zealand, a subsidiary of Rayonier Inc. is the
asset manager of Matariki which has over 1 million hectares of FSC
certified land
-- The Matariki estate has a total area of 118,499ha and a net
stocked area of 113,989ha. Radiata Pine is the dominant species
grown, covering 85% of the total planted area with Douglas Fir
covering 10% and Eucalypts and other softwoods covering the
remaining area
-- Timber is primarily sold domestically to sawmills or to pulp
plants both domestically and to export markets in China, India and
Korea
ASSET OVERVIEW - AURORA FORESTAL
Longstanding business with well-managed pine plantations in
Northern Uruguay integrated with one of the only sawmills in
Uruguay
-- In 1974 the founder of Aurora Forestal purchased 5,000 ha of
land near Rivera from the Uruguay government. The area had been
identified as offering superior soil and climate conditions for
growing trees. In 1976 the first planting of loblolly pine took
place
-- In 1993 a sawmill was built to process harvested wood from
these plantations others in the area. The company's energy plant
was built in 2012
-- Aurora Forestal was incorporated in 2007 in the British
Virgin Islands. The founder contributed the integrated plantations
and sawmill to the company and Phaunos invested $21 m for a 17.3%
stake in the company. It later increased its ownership to
23.57%.
-- Today the company's main commercial activity is the export of
sawn products processed in the company's sawmill to customers all
over the world. Many of the company's most important customers have
bought from the company for over 15 years
Plantation Data
-- The total area of the property is c.19,351 ha, of which 56.5%
is planted with Pinus species
-- Farms consist of pre-merchantable (2,066 ha) and merchantable
timber (9,263 ha)
-- Pinus taeda dominates the Aurora Forestal plantations
covering 95% of the total productive area at Aurora ForestaI
-- Plantations located in regions with soil well suited for pine
supported by a beneficial subtropical climate
EUCATECA OVERVIEW - EUCALYPTUS
Eucalyptus farms in Mato Grosso, totalling over ten thousand
hectares of which c. 70% are productive
-- Phaunos bought the Eucalyptus farms in 2008 - at the same
time as it acquired the Paraiso teak farms which are described
separately
-- There are two productive Eucalyptus plantations, Aruanda and
Graciosa, and one very small non-productive farm, Pianalto.
-- Aruanda and Graciosa are located in Alto Araguaia and
ltiquira municipalities in Mato Grosso.
-- The Eucalyptus farms have a total area of 10,921 ha, of
which:
- Productive (plantable) area: 7,449 ha. Pre-merchantable
planted area (437 ha), merchantable planted area (6,892 ha) and
area available for planting (120 ha)
- Legal reserve area: 2,873 ha. Area restricted from planting
- Permanent preservation area: 214 ha. Also restricted from
planting, for biological diversity protection purposes
- Area for other uses (such as infrastructure): 385 ha
EUCATECA OVERVIEW - TEAK
-- Phaunos originally acquired four teak farms totalling 7,181
ha. Two were sold in 2015, one in 2016.
-- The remaining teak farm, Paraiso, (current only teak farm) is
located in Saito de Ceu, 125 km away from the city of Caceres, and
335 km away from Cuiaba, capital of Mato Grosso
-- Paraiso comprises 2,468 ha of total area, of which:
- Productive (plantable) area: 1,700 ha appropriate for teak
plantations, of which, 876 ha are currently planted, exclusively
with Tectona grandis species (planted in 2009, all at
premerchantable age)
- Tectona grandis is a tropical hardwood, particularly valued
for its durability and water resistance, used for boat building,
exterior construction, veneer, furniture and other projects
- Legal reserve area: 273 ha. Area restricted from planting
- Permanent preservation area: 339 ha. Also restricted from
planting, for biological diversity protection purposes
- Area for other uses (such as infrastructure): 156 ha
MATA MINERIA OVERVIEW
-- Mata Mineira was acquired by Phaunos in 2010 from Suzano
-- Suzano acquired the asset in the late 1980s and managed the
soil preparation and initial planting of Eucalyptus in the area
-- Mata Mineira comprises six eucalyptus farms located in four
municipalities in Minas Gerais
-- The asset has a total area of 19,009 ha, of which:
- Productive (plantable) area: pre-merchantable planted area
(4,877 ha), merchantable planted area (4,567 ha) and area for
reform and unmanaged coppice, available for planting (207 ha)
- Legal reserve area: planting restricted (5,186 ha)
- Permanent preservation area: planting restricted - biological
diversity protection purposes (1,648 ha)
- Area subject to improvements (703 ha)
- Area for other uses such as infrastructure, etc. (1,821
ha)
PRADERA ROJA OVERVIEW
-- Phaunos acquired Pradera Roja in 2007, the majority of the
property as a greenfield investment. Since then, Phaunos has sold
off numerous tracts (including El Bragado farm in 2017)
- Most of the current forest was planted in 2009, 2010 and
2016
-- Pradera Roja consists of four Eucalyptus farms (La Tapera,
Tupambae, Mirador and El Tatu, located in Treinta y Tres) and one
Eucalyptus and Pine farm (San Pedro, located in Cerro Largo)
-- The Tupambae, Mirador and El Tatu plantations are encumbered
with a long term wood supply agreement with UPM that expires by
year-end 2022
-- Total area of 6,870 ha, of which:
- Productive area: 3,089 ha, of which 1,701 ha consist of
landonly rights where UPM owns the harvesting rights
- Non planted area: 3,781 ha devoted to non-productive pasture,
range, roads and native forest
Directors' Report
The Directors present their Annual Report and the Audited
Consolidated Financial Statements of Phaunos Timber Fund Limited
(the "Company") and its subsidiaries (collectively the "Group") for
the year ended 31 December 2017.
THE DIRECTORS
Details of the Directors who held office during the year are set
out below. The Directors are responsible for the determination of
the Company's investment policy and strategy and have overall
responsibility for the Company's activities, including the review
of investment activity and performance.
Richard Boléat (British), aged 54 (Chairman of the Board and
Chairman of the Remuneration Committee). Richard was appointed as a
Director on 31 August 2017. He is a Fellow of the Institute of
Chartered Accountants in England & Wales, having trained with
Coopers & Lybrand in Jersey and the United Kingdom. After
qualifying in 1986, he subsequently worked in the Middle East,
Africa and the UK for a number of commercial and financial services
groups before returning to Jersey in 1991. He was formerly a
Principal of Channel House Financial Services Group from 1996 until
its acquisition by Capita Group plc ("Capita") in September 2005.
Richard led Capita's financial services client practice in Jersey
until September 2007, when he left to establish Governance
Partners, L.P., an independent corporate governance practice. In
addition to Phaunos Timber Fund Limited, he currently acts as
Chairman of CVC Credit Partners European Opportunities Limited and
Funding Circle SME Income Fund Limited, both of which are listed on
the London Stock Exchange, and Yatra Capital Limited, listed on
Euronext, along with number of other substantial collective
investment and investment management entities established in
Jersey, the Cayman Islands and Luxembourg. He is regulated in his
personal capacity by the Jersey Financial Services Commission and
is a member of AIMA.
Jonathan Bridel (British), aged 53 (Chairman of the Audit and
Valuation Committee). Jonathan was appointed as a Director on 13
September 2017. Jonathan is a Guernsey resident and is currently a
non-Executive Director of the Renewables Infrastructure Group
Limited (FTSE 250), Sequoia Economic Infrastructure Income Fund
Limited (FTSE 250), Starwood European Real Estate Finance Limited,
Funding Circle SME Income Fund Limited and Alcentra European
Floating Rate Income Fund Limited which are listed on the Main
Market of the London Stock Exchange. Other companies for which
Jonathan acts as a Director include DP Aircraft I Limited and Fair
Oaks Income Fund Limited.
Jonathan was previously Managing Director of Royal Bank of
Canada's investment businesses in the Channel Islands and served as
a Director on other RBC companies including RBC Regent Fund
Managers Limited. Prior to joining RBC, Jonathan served in a number
of senior management positions in banking, specialising in credit
and corporate finance and private businesses as Chief Financial
Officer in London, Australia and Guernsey having previously worked
at Price Waterhouse Corporate Finance in London. Jonathan was also
involved in the wind-down of Aurora Russia Limited, from 2013 to
2016.
Jonathan graduated from the University of Durham with a degree
of Master of Business Administration, holds qualifications from the
Institute of Chartered Accountants in England and Wales (1987)
where he is a Fellow, the Chartered Institute of Marketing and the
Australian Institute of Company Directors. Jonathan is a Chartered
Marketer and a member of the Chartered Institute of Marketing, a
Chartered Director and a Fellow of the Institute of Directors and a
Chartered Fellow of the Chartered Institute for Securities and
Investment.
Brendan Hawthorne (British), aged 49 (Chairman of the Management
and Engagement Committee). Brendan was appointed as a Director on
25 July 2017. Based in London, Brendan has more than 20 years'
experience as a specialist in asset recovery. Brendan holds several
directorships in offshore entities based in amongst others the BVI,
the Channel Islands and the Cayman Islands. He has extensive
multi-jurisdictional experience in relation to cross-border asset
recovery, having previously been based in South Africa, the UK, the
UAE, Australia and Singapore and has gained experience of asset
recovery situations on the ground in the following jurisdictions
amongst others: Afghanistan, Australia, Bahrain, Canada, China,
Cyprus, Czech Republic, Djibouti, France, Germany, India, Ireland,
Italy, Kuwait, Malaysia, Oman, Pakistan, Qatar, Russia, Singapore,
South Africa, Spain, Switzerland, Turkey, UAE, UK and USA. Brendan
earned a Bachelor of Commerce degree majoring in accounting and
finance, from the University of Natal in South Africa and has a
post-graduate degree in Accountancy. He is a Chartered Accountant,
registered with the ICAEW in the UK and SAICA in South Africa.
Sir Henry Studholme Bt (British) retired as a Director on 31
August 2017.
Ian Burns (British) retired as a Director on 13 September
2017.
William Vanderfelt (British) retired as a Director on 31 August
2017.
Jane Lewis (British) retired as a Director on 31 August
2017.
PRINCIPAL ACTIVITY AND BUSINESS REVIEW
The Company is a Guernsey domiciled authorised closed-ended
investment scheme pursuant to section 8 of the Protection of
Investors (Bailiwick of Guernsey) Law 1987, as amended, and was
registered under the Companies (Guernsey) Law 2008 on 28 September
2006 as a Limited Company with a premium listing on the London
Stock Exchange. The Company holds a portfolio of timberland and
timber-related investments in New Zealand, North America and South
America, which are being realised, whereafter the Company will be
wound down and liquidated.
A description of the principal activities of the Company and the
Group during the year is given in the Performance Summary on page
2.
INVESTMENT OBJECTIVE AND INVESTMENT POLICY
The investment objective and policy of the Group, which were
revised by shareholder vote on 17 August 2017 are stated on page
4.
NET ASSET VALUE
The audited NAV per Ordinary Share at 31 December 2017 was 51 US
cents per Ordinary Share (2016: 55 cents).
Due to the wind-down status of the Group and the 'break-up'
basis of accounting, the NAV at 31 December 2016 and 31 December
2017 is not directly comparable.
RESULTS
The results for the year are set out in the Consolidated
Statement of Comprehensive Income on page 45.
DIVIDS
A final dividend of 1.6 cents per Ordinary Share was declared
and paid during the year, in respect of the year ended 31 December
2016.
No dividend was declared for the year ended 31 December 2017; on
10 January 2018, the Company announced a compulsory share
redemption of US$25 million, more details of which can be found in
note 27.
For 2018, distributions will be made as assets are realised,
after making allowance for wind down costs.
SHARE PRICE
As at the year-end, Phaunos' closing share price on the LSE was
43.5 cents (2016: 48 cents). This equates to a 15% (2016: 13%)
discount to the NAV, driven primarily by asset valuation
adjustments to net realisable value.
At 31 December 2017, the Company holds 25,685,045 (2016:
24,190,045) Ordinary Shares as Treasury Shares, all of which were
cancelled subsequent to the year end.
SHARE CAPITAL
Details of the Company's issued share capital, purchase of own
shares and granted warrant instrument are provided in notes 22 and
23 respectively.
SUBSTANTIAL SHAREHOLDERS
At 31 December 2017 the Company has been notified that the
following Shareholders had an interest of 5% or more in the
Ordinary Shares of Phaunos Timber Fund Limited:
Number of % Total
Shares Shares
Ordinary Shareholder 31 Dec 2017 in Issue
-------------------------------- ------------- ----------
Legal & General Investment
Management 72,987,654 13.38
LIM Advisors 62,162,337 11.39
Deutsche Asset Management 50,428,845 9.24
Kapan Pensioner 39,788,462 7.29
SIX SIS 33,158,657 6.08
London Pensions Fund Authority 28,975,697 5.31
-------------------------------- ------------- ----------
FINANCING STRATEGY
The Directors ensure that the Company holds adequate working
capital to ensure that it is able to meet its debts as they fall
due.
DIRECTORS AND THEIR INTERESTS
The Directors' details are given on page 17. Directors'
interests in Ordinary Shares at 31 December 2017 are set out
below:
Director Ordinary Shares Percentage of
issued Ordinary
Shares
-------------------- ---------------- -----------------
Richard Boléat Nil Nil
-------------------- ---------------- -----------------
Jonathan Bridel Nil Nil
-------------------- ---------------- -----------------
Brendan Hawthorne Nil Nil
-------------------- ---------------- -----------------
2018 ANNUAL GENERAL MEETING
It is the intention of the Board to convene an AGM; details to
follow in due course.
PRINCIPAL RISKS AND UNCERTAINTIES
The Directors have carried out a robust assessment of the
principal risks facing the Company, with a focus principally on the
risks associated with the realisation of the asset portfolio.
In addition, the Directors review quarterly cash flow forecasts
and NAV estimates to assess the liquidity and solvency of the
Group. These reviews also include quarterly updates on current and
potential litigation and tax uncertainties.
The purpose of the following principal risks table is primarily
to summarise those matters that may materially influence the asset
disposal process and the values which may be achieved through that
process.
Risk Mitigation
---------------------------------------- ---------------------------------------
Valuation uncertainty The Board receives annual independent
Valuations determined by the valuations for all material
board represent their current timber assets to guide valuation
best estimate of the likely assumptions.
range of gross realisation proceeds The board also seeks counsel
from asset disposals. Given from its professional advisors
that the timber assets held and monitors the market in timber
by the Group are illiquid, that assets worldwide in order to
there are few comparable historic inform its ongoing estimation
transactions and that the universe process.
of possible buyers of those
assets is limited to a small
group of market participants
and differentiated asset to
asset, the Board's estimates
of gross realisation proceeds
are inherently uncertain. Valuation
subjectivity is amplified in
the current wind-down scenario.
---------------------------------------- ---------------------------------------
Foreign exchange risk Export orientated timberland
The Company's functional currency investments provide an internal
is US$. Investments are primarily hedge, insofar as depreciation
held in New Zealand Dollar (NZ$) in currency supports increased
and Brazilian Real (BRL). export volumes.
Fluctuation in foreign exchange Currency hedging may be utilised
rates between these currencies where the board determines that
impacts the NAV of the Company. it is in the interest of the
Company to do so, recognising
that more volatile currency
pairs, such as US$ BRL, tend
to attract significant hedging
costs and also require cash
collateralisation.
The Company has not conducted
any currency hedging activities
during the year under review
and does not presently anticipate
doing so.
---------------------------------------- ---------------------------------------
Political, Tax and Regulatory The board reviews the appropriateness
Risk of the Company's legal structure,
Changes in the political, regulatory including the nature of the
and tax status of each subsidiary holding and intermediary companies
or changes in legislation in to minimise potential tax on
investment or home markets could the Group.
impact on the ability of the The board, assisted by its legal
Company to realise its assets representatives, takes a proactive
at their full value on a timely approach to understanding changes
basis. in the political, regulatory
In particular, the disposal and taxation environments within
of the Company's New Zealand the jurisdictions it operates
assets are impacted by the need in to ensure potential risks
for a potential buyer of those are understood and minimised.
assets to comply with the requirements Sale can be structured with
of the New Zealand Overseas onerous guarantees on the buyer,
Investment Office ("OIO") as in order to avoid the potential
discussed elsewhere in this tax.
report.
There is risk of post-sale tax
assessments in Brazil, whereby
buyers and sellers can be held
jointly liable for certain taxes,
even post-sale.
---------------------------------------- ---------------------------------------
Market risk The Board has set an ambitious
There exists a risk of a significant timetable and is determined
market disruption or geo-political to remain on schedule to minimise
event between the time of this the risk of a major geopolitical
report and the eventual sale event affecting the sales process.
of assets.
---------------------------------------- ---------------------------------------
Sale execution risk The Board has contracted a wide
The sale of a diverse portfolio array of parties, with various,
across multiple jurisdictions complementary skillsets.
and geographies presents a complex Legal and tax advice is sought
sales transaction with many in all operating jurisdictions.
variables
---------------------------------------- ---------------------------------------
Timber infestations All contractors previously operating
In the lead-up to sale, an infestation on the various properties have
would prove burdensome been retained and Chief Forestry
Officers employed to oversee
forestry operations.
---------------------------------------- ---------------------------------------
Warranties on sale The Company is marketing the
The jurisdictions in which some investments as widely as possible
of the properties are located and working to resolve any issues
have slow-moving administrative that may preclude a clean exit.
and legal regimes, creating
the possibility of guarantees,
warranties and escrow accounts
---------------------------------------- ---------------------------------------
Please refer note 15 for further information related to risks
faced by the Group.
GOING CONCERN
Following the outcome of the Continuation Vote the Directors
have considered the impact on the basis of preparation of the
Consolidated Financial Statements. The Directors are of the view
that the preparation of the financial statements on a 'break-up'
basis is appropriate, to reflect the wind-down status of the
Company and present the Company's NAV accordingly. The financial
statements should reflect the circumstances existing at the end of
the reporting period and, while there is no material uncertainty
towards the lack going concern assertion, the financial statements
would've been prepared on a going concern basis, should it have
been appropriate. Further detail is available in note 2.1 of the
Consolidated Financial Statements.
It is presently anticipated that the realisation of the Group's
assets will take between fourteen to twenty months from the date of
this report, although there are material uncertainties inherent in
the disposal process which may result in this time period being
extended.
Reporting on a 'break-up basis' entails writing assets down to
their net realisable value based on conditions existing at the end
of the reporting period and providing for contractual commitments
which may have become onerous as a consequence of the decision to
wind-down the entity.
AUDITORS
Ernst & Young LLP ("EY") have expressed their willingness to
continue in office as the Company's Auditors. A resolution
proposing their re-appointment will be submitted at the 2018 Annual
General Meeting. Please refer to pages 34 to 35 of the Audit and
Valuation Committee report for fees paid by the Company to EY
during the year.
PORTFOLIO MANAGER AND ALTERNATIVE INVESTMENT FUND MANAGER
As at 31(st) December 2017, Stafford was the Company's appointed
Portfolio Manager. Stafford also acted as the Company's Alternative
Investment Fund Manager (the "AIFM").
Pursuant to Article 22(1) of AIFMD, an AIFM must, where
appropriate for each AIF it manages, make an annual report
available to the AIF investor.
The Annual Report must contain, amongst other items, the total
amount of the remuneration paid by the AIFM to its staff for the
financial year, split into fixed and variable remuneration,
including, where relevant, any carried interest paid by the AIF,
along with the aggregate remuneration awarded to senior management
and members of staff whose actions have a material impact on the
risk profile of the AIF.
The quantitative AIFM remuneration disclosures for 2017 are
presented below. Comparative information for 2016 has been
disclosed below.
2017 Remuneration Number of Fixed remuneration Variable Total remuneration
beneficiaries (US$) remuneration paid (US$)
(US$)
-------------------------- --------------- ------------------- -------------- -------------------
Total remuneration
paid by the AIFM during
the financial year 14 1,522,248 147,700 1,669,948
-------------------------- --------------- ------------------- -------------- -------------------
Remuneration paid to employees of the AIFM who have a material impact
on the risk profile of the AIF
-----------------------------------------------------------------------------------------------------
Senior management 3 392,702 - 392,702
-------------------------- --------------- ------------------- -------------- -------------------
Other staff 2 370,772 85,433 456,204
-------------------------- --------------- ------------------- -------------- -------------------
Allocation of total remuneration of the employees of the AIFM to
the AIF
-----------------------------------------------------------------------------------------------------
Senior management 1 196,351 75,107 271,458
-------------------------- --------------- ------------------- -------------- -------------------
Other staff 1 59,871 12,017 71,888
-------------------------- --------------- ------------------- -------------- -------------------
2016 Remuneration Number of Fixed remuneration Variable Total remuneration
beneficiaries (US$) remuneration paid (US$)
(US$)
-------------------------- --------------- ------------------- -------------- -------------------
Total remuneration
paid by the AIFM during
the financial year 12 1,343,142 121,589 1,464,731
-------------------------- --------------- ------------------- -------------- -------------------
Remuneration paid to employees of the AIFM who have a material impact
on the risk profile of the AIF
-----------------------------------------------------------------------------------------------------
Senior management 4 606,231 54,332 660,563
-------------------------- --------------- ------------------- -------------- -------------------
Other staff 3 102,040 6,733 108,773
-------------------------- --------------- ------------------- -------------- -------------------
Allocation of total remuneration of the employees of the AIFM to
the AIF
-----------------------------------------------------------------------------------------------------
Senior management 1 386,755 22,641 409,396
-------------------------- --------------- ------------------- -------------- -------------------
Other staff 3 248,115 37,883 285,998
-------------------------- --------------- ------------------- -------------- -------------------
By virtue of the termination of the Company's relationship with
Stafford Capital Partners, the Company became self-managed for the
purposes of AIFMD with effect from 17 February 2018. The relevant
notifications have been made to both the Financial Conduct
Authority in the UK and the Guernsey Financial Services
Commission.
ADMINISTRATOR, COMPANY SECRETARY AND DEPOSITARY
Vistra Fund Services (Guernsey) Limited ("Vistra") is the
appointed Administrator and Secretary of the Company; depositary
services are no longer required.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Annual Report
and Consolidated Financial Statements in accordance with applicable
Guernsey Law and generally accepted accounting principles. Guernsey
Company Law requires the Directors to prepare financial statements
for each financial year which give a true and fair view of the
state of affairs of the Company as at the end of the financial year
and of the profit or loss for that year. They are also responsible
for ensuring that the Annual Report and Consolidated Financial
Statements comply with the provisions of the Listing Rules,
Disclosure and Transparency Rules of the UK Listing Authority
which, with regard to corporate governance, require the Company to
disclose how it has applied the principles, and complied with the
provisions, of the UK Corporate Governance Code applicable to the
Company.
In preparing those Consolidated Financial Statements, the
Directors should:
1. select suitable accounting policies and apply them consistently;
2. make judgements and estimates that are reasonable and prudent;
3. state whether applicable accounting standards have been
followed, subject to any material departures disclosed and
explained in the Consolidated Financial Statements;
4. prepare the Consolidated Financial Statements on the going
concern basis unless it is inappropriate to presume that the
Company will continue in business;
5. confirm that there is no relevant audit information of which
the Company's Auditor is unaware; and
6. confirm that they have taken all reasonable steps which they
ought to have taken as Directors to make themselves aware of any
relevant audit information and to establish that the Company's
Auditor is aware of that information.
The Directors are responsible for keeping proper accounting
records which disclose with reasonable accuracy at any time the
financial position of the Company and to enable them to ensure that
the Consolidated Financial Statements have been properly prepared
in accordance with the Companies (Guernsey) Law, 2008 and
International Financial Reporting Standards as adopted by the
European Union ("IFRS"). They are also responsible for safeguarding
the assets of the Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
RESPONSIBILITY STATEMENT
The Directors confirm that to the best of their knowledge:
-- the Consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards as
adopted by the European Union ("IFRS") and give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole;
-- the Annual Report includes a fair review of the development
and performance of the business and position of the Company and the
undertakings included in the consolidation taken as a whole
together with a description of the principal risks and
uncertainties that they face;
-- the Directors confirm that the Annual Report and Consolidated
Financial Statements, taken as a whole, is fair, balanced and
understandable and provides the information necessary for
Shareholders to assess the Group's performance and strategy;
-- so far as each of the Directors is aware, there is no
relevant audit information of which the Company's Auditor is
unaware and each Director has taken all of the reasonable steps
which he ought to have taken as a director to make himself aware of
any relevant audit information and to establish that the Company's
Auditor is aware of that information; and
-- For the reasons stated in the Director's Report and page 21,
the financial statements have not been prepared on a going concern
basis
By order of the Board:
Richard Boléat Jonathan Bridel
Director Director
27 April 2018
Statement on Corporate Governance
CORPORATE GOVERNANCE
The Board has considered the principles and recommendations set
out in the UK Corporate Governance Code (the "UK Code") issued by
the Financial Reporting Council (the "FRC"). The UK Code is
available in the Financial Reporting Council's website,
www.frc.org.uk and the Company has made its corporate governance
practices publicly available and these can be found at
www.phaunostimber.com.
Throughout the year ended 31 December 2017, the Group has
complied with the recommendations of the UK Code and Guernsey
Financial Services Code of Corporate Governance ("GFSC Code"),
except as set out below.
The UK Code includes provisions relating to:
-- The role of the Chief Executive;
-- Executive Directors' remuneration; and
-- Nomination Committee
-- Senior independent non-executive director
-- Diversity policy
The Board considers these provisions are not relevant to the
position of the Group as it is a self-managed timber company. The
Group has therefore not reported further in respect of these
provisions. The Directors are all independent and the Group does
not have employees, hence no Chief Executive is required for the
Group. The Board is satisfied that any relevant issues can be
properly considered by the Board.
There have been no other instances of non-compliance, other than
those noted above.
AIFM DIRECTIVE
The Alternative Investment Fund Managers Directive seeks to
regulate alternative investment fund managers and imposes
obligations on managers who manage alternative investment funds in
the EU or who market shares in such funds to EU investors. The
Company is now self-managed and, due to its wind-down status, is no
longer marketing its shares and thus falls outside the scope of
AIFMD and no longer has any AIFMD reporting obligations to the
FCA.
GUERNSEY REGULATORY ENVIRONMENT
The Guernsey Financial Services Commission has issued a Finance
Sector Code of Corporate Governance. The Code comprises Principles
and Guidance and provides a formal expression of good corporate
practice against which shareholders, boards and the Commission can
better assess the governance exercised over companies in Guernsey's
finance sector.
NON-MAINSTREAM POOLED INVESTMENTS
On 1 January 2014, certain changes to the FCA rules relating to
restrictions on the retail distribution of unregulated collective
investment schemes and close substitutes came into effect.
Due to the current portfolio realisation process, the Company
believes its shares are no longer suitable for retail
investors.
BOARD OF DIRECTORS
The Board consists of three independent Directors. In accordance
with the UK Code, all Directors are independent of the previous
Investment Manager, which resigned with effect from 16 February
2018. The Chairman, Richard Boléat , met the independence criteria
of the Code upon appointment and has continued to meet this
condition throughout his term of service. Being independent, none
of the Directors have a service contract with the Company.
The current independent Directors, namely Brendan Hawthorne,
Richard Boléat and Jonathan Bridel, were appointed on 28 July 2017,
31 August 2017 and 13 September, respectively.
Brendan Hawthorne was appointed by shareholders and confirmed at
the EGM, while an executive search was undertaken to appoint
Richard Boléat and Jonathan Bridel, who will be submitting
themselves for re-election at the upcoming AGM, in accordance with
the UK Code
An executive search firm, Trust Associates, was engaged to
procure the right skills to oversee the managed wind-down of the
Group. The firm has no other connection to the Company.
Independent directors are appointed on a contract basis.
The Board benefited from an extensive six-month hand-over period
from the previous Manager, Stafford.
William Vanderfelt, formerly a Senior Independent Director with
the Company, resigned during 2017. It was decided a replacement was
not needed for this role, as it was adequately covered by the
current independent Board.
Given the wind-down status of the Group, the Board has not
considered a diversity policy, believing that the balance of
skills, experience and knowledge of the current Board is
appropriate for the wind-up of the Company.
The Board regularly reviews its structure, size and composition,
including its skills, knowledge and experience. The Board prepares
a description of the role and capabilities required for a
particular appointment and engages with external advisers to
facilitate the search. Appointments to the Board are made on merit,
against objective criteria in line with its current and future
requirements, reflect the international activity of the Group and
with due regard for the benefits of diversity on the Board. Any new
Director appointed to the Board will undergo an induction
process.
Under the Articles of Incorporation, one third of the Board is
subject to retirement by rotation each year, such that all
Directors are required to submit themselves for re-appointment at
least every three years. Directors who have served for nine years
or more will be subject to annual re-appointment.
Richard Boléat and Jonathan Bridel will be submitting themselves
for election at the forthcoming AGM.
Members of the Board engage regularly with major shareholders,
through face-to-face meetings and presence at the annual AGM, to
develop an understanding of shareholders views in the context of
the managed wind-down of the Group.
The Board meets at least monthly and there is weekly contact
with external finance, operations and forestry teams, the Company
Secretary and the Company's Brokers, consistent with a wind-down
process. The Directors are kept fully informed of investment and
financial controls, and other matters that are relevant to the
business of the Company that should be brought to the attention of
the Directors.
The Directors also have access, where necessary in the
furtherance of their duties, to independent professional advice at
the expense of the Company. Such professionals have no connection
to the Company other than through these business relationships.
Attendance at each committee below.
Director Board Audit & Valuation Management Remuneration
Meetings Committee Engagement Committee
Committee
--------------------- ---------- ------------------ ------------ -------------
Richard Boléat 4 1 1 2
--------------------- ---------- ------------------ ------------ -------------
Jonathan Bridel 4 1 1 2
--------------------- ---------- ------------------ ------------ -------------
Brendan Hawthorne 5 2 1 2
--------------------- ---------- ------------------ ------------ -------------
Sir Henry Studholme
Bt 6 3 - -
--------------------- ---------- ------------------ ------------ -------------
Ian Burns 7 3 - -
--------------------- ---------- ------------------ ------------ -------------
William Vanderfelt 6 3 - -
--------------------- ---------- ------------------ ------------ -------------
Jane Lewis 6 3 - -
--------------------- ---------- ------------------ ------------ -------------
All Directors attended all required board meetings and
committees during the year.
PERFORMANCE EVALUATION
The directors of the Company were all appointed during the year
under review. As a result, no formal evaluation process has been
undertaken during 2017. The board intends to conduct a
self-assessment process during the course of 2018.
The Board continues to monitor training for Directors. The
Directors consider and report regularly their training needs and
their continuing professional development and training carried out.
The Board receives regular feedback from investors and sector
analysts. The Board continues to have a focus on risk management
and controls.
The independence of each Director has been considered and each
has been confirmed as being independent
The members of the Board strive to challenge each other
constructively to make sure all issues are examined from different
angles.
DIRECTORS' REMUNERATION
A schedule detailing director's remuneration paid during the
year is listed below.
Director Base fee Base fee Additional Total
pro-rata fees
for the
year
--------------------- --------- ---------- ----------- ----------
Richard Boléat
(Chairman) 80,000 26,740 15,146 GBP41,886
--------------------- --------- ---------- ----------- ----------
Jonathan Bridel 65,000 19,411 18,885 GBP38,296
--------------------- --------- ---------- ----------- ----------
Brendan Hawthorne 55,000 23,959 - GBP26,137
--------------------- --------- ---------- ----------- ----------
Sir Henry Studholme
Bt 55,000 36,466 - GBP36,466
--------------------- --------- ---------- ----------- ----------
Ian Burns 30,000 20,959 - GBP20,959
--------------------- --------- ---------- ----------- ----------
William Vanderfelt 30,000 19,890 - GBP19,890
--------------------- --------- ---------- ----------- ----------
Jane Lewis 30,000 19,890 - GBP19,890
--------------------- --------- ---------- ----------- ----------
Included in the base fee above, Richard Boléat receives a fee of
GBP5,000 per annum for serving as Chairman of the Remuneration
Committee, Jonathan Bridel receives a fee of GBP10,000 per annum as
Chairman of the Audit and Valuation Committee and Brendan Hawthorne
GBP5,000 as Chairman of the Management Engagement Committee and
Remuneration Committee.
The current Board is appointed on an independent basis. Hours
incurred above an agreed maximum are paid on a time-spent
basis.
The aggregate remuneration of the Directors in respect of the
year ended 31 December 2017, did not exceed GBP350,000 (2016 -
GBP350,000).
DELEGATION OF RESPONSIBILITIES
Vistra Fund Services provides accounting, administration and
Company Secretarial Services as required.
BOARD COMMITTEES
Due to the size of the Board, the Company currently does not
have a separate Nomination Committee. The roles and
responsibilities of Nomination Committee are currently undertaken
by the full Board.
The Board has established the following Committees and approved
their Terms of Reference, copies of which can be obtained from the
Administrator.
Audit and Valuation Committee
The Audit and Valuation Committee comprises all of the Directors
of the Company, with Jonathan Bridel serving as Chairman. All
members are independent of the external auditors and the former
Investment Manager.
The purpose of the Audit and Valuation Committee is to ensure
that the Group maintains high standards of integrity, financial
reporting and internal controls. The Audit and Valuation Committee
reviews the Interim Reports, the Annual Report and Consolidated
Financial Statements of the Group, the internal controls pertinent
to the preparation of accurate financial statements and the
management of the Group, the Auditors' remuneration and engagement,
as well as the Auditors' independence and any non-audit services
provided by them.
The Audit and Valuation Committee also receives information from
the Auditors as to the objectivity of their audit and their
independence.
The Audit and Valuation Committee met on four occasions during
the year and the Auditors attended two of the meetings. It is
intended that the Committee will continue to meet on a quarterly
basis.
Management Engagement Committee
The Management Engagement Committee comprises all of the
Directors of the Company with Brendan Hawthorne being the
Chairman.
The purpose of the Management Engagement Committee was to ensure
that the terms of engagement with the Company's service providers
are operating satisfactorily to ensure the safe and accurate
management and administration of the Company's affairs and
business, that the terms of their appointment are competitive and
reasonable for the Shareholders and to make appropriate
recommendations to the Board. The board does not intend to appoint
a manager to replace Stafford Capital Partners, and thus the
mandate of the Management Engagement Committee ceased on 17
February 2018.
Poyry Capital were appointed as selling agents for the portfolio
on 28 November 2017.
The Management Engagement Committee met on one occasion in
2017.
Remuneration Committee
The Remuneration Committee comprises all of the Directors of the
Company with Richard Boléat being the Chairman. The role of the
Committee is to evaluate and set the levels of remuneration and
benefits of the Directors. The Company has no employees.
Details of director's remuneration can be found on Page 27 to
28.
The Terms of Reference of all committees are available on
request from the Company Secretary.
INTERNAL CONTROLS
The Board is ultimately responsible for establishing and
maintaining the Group's system of internal financial and operating
control and for maintaining and reviewing its effectiveness. The
Group's risk matrix continues to be the core element of the Group's
risk management process in establishing the Group's system of
internal financial and reporting control. The risk matrix is
reviewed regularly by the Board, which initially identifies the
risks facing the Group and then collectively assesses the
likelihood of each risk, the impact of those risks and the strength
of the controls operating over each risk. The system of internal
financial and operating control is designed to manage rather than
to eliminate the risk of failure to achieve business objectives and
by their nature the controls can only provide reasonable and not
absolute assurance against misstatement and loss.
These controls aim to ensure that assets of the Group are
safeguarded, proper accounting records are maintained and the
financial information for publication is reliable. The Board
confirms that there is an ongoing process for identifying,
evaluating and managing the significant risks faced by the
Group.
This process has been in place for the year under review and up
to the date of approval of this Annual Report and Consolidated
Financial Statements and is reviewed by the Board and is in
accordance with the internal controls: Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting.
The Board has evaluated the systems of internal controls of the
Group. In particular, it has prepared a process for identifying and
evaluating the significant risks affecting the Group and the
policies by which these risks are managed.
The Board has delegated the day to day responsibilities for the
provision of administration, registrar and corporate secretarial
functions including the independent calculation of the Group's NAV
and the production of the Annual Report and Consolidated Financial
Statements which are independently audited.
Formal contractual agreements have been put in place between the
Group and providers of these services.
Even though the Board has delegated responsibility for these
functions, it retains accountability for these functions and is
responsible for the systems of internal control. At each quarterly
Board meeting, compliance reports are provided by the
Administrator, Company Secretary and Portfolio Manager. The Board
also receives confirmation from the Administrator of its
accreditation under its Service Organisation Controls 1 report.
The Group's risk exposure and the effectiveness of its risk
management and internal control systems are reviewed by the Audit
and Valuation Committee at its quarterly meetings and annually by
the Board.
The Board believes that the Group has adequate and effective
systems in place to identify, mitigate and manage the risks to
which it is exposed.
The Group does not have an internal audit department as most of
its day-to-day operations are delegated to third parties, all of
whom have their own internal control procedures. However, the
creation of an internal audit department is considered regularly by
the Audit and Valuation Committee under its Terms of Reference.
VIABILITY STATEMENT
Assessment of prospects
In accordance with provision C.2.2 of the UK Code, the Directors
have assessed the prospects of the Group over its expected
realisation timeframe.
Given the outcome of the 2017 Continuation Vote, the Board has
prepared the viability statement under the assumption that the
assets will be realised and the Company wound down within a period
of twenty-four months from the date of this report.
Consequently, financial forecasts have been prepared for the two
year period to 31 December 2019, representing a reasonable period
for the realisation of the Group's illiquid assets. The first year
of the annual financial forecast forms the Group's operating budget
and is subject to quarterly re-forecasting. The second year has a
similar level of detail and is flexed based on the actual results
in year one.
The key assumptions in the financial forecasts, reflecting the
overall strategy, include:
-- Asset disposals, including value and timing
-- The current expense burden of the Group alongside contracted timber revenues
-- Continued Shareholder support notwithstanding an economic or
natural event reducing the liquidity or solvency of the Group
Assessment of viability
Although the strategic plan reflects the Directors' best
estimate of the future prospects of the business, they have also
tested the potential impact on the Group of a number of scenarios
over and above those included in the plan.
These scenarios, which are based on aspects of principal risks
(pages 20 to 21), represent 'severe but plausible' circumstances
that the Group could experience, individually or combined.
The Company and its wholly owned subsidiaries do not have any
external debt and the scenarios tested mainly represent those which
would pose serious threats to the Group's solvency and liquidity
which include:
- A significant increase in operational expenditure to cover
sales, legal fees and liquidation costs
- Forecasting a cashflow position with no further investment
income earned over a twenty-four month period
- Delayed asset sales
In assessing the viability of the Company, the Directors have
considered each of the Company's principal risks and uncertainties
which are set out on pages 20 to 21.
Liquidity needs, at holding company and operating company level,
have been assessed and found to be adequate, with the Group being
able to fund all costs as they become due over a twenty-four month
period, even in a stressed scenario.
The results of this stress testing showed that, due to the
available cash and in the absence of any debt, the Group would be
able to withstand the impact of these scenarios occurring over the
period of the financial forecast by making adjustments to its
operating plans.
Viability statement
The Directors confirm that they have a reasonable expectation
that the Group will be able to continue in operation and meet its
liabilities as they fall due over the two year period ending 31
December 2019, subject to earlier liquidation should the Company
have exited its investments sooner than anticipated.
SOCIAL AND ENVIRONMENT POLICY
As a result of the realisation process being conducted by the
Directors, the operational aspects of the Group's social and
environmental policies have been suspended.
Phaunos does not tolerate bribery or corruption in relation to
its business, anywhere or in any form and complies with
anti-bribery and anti-corruption laws in the countries in which it
operates. As such, this policy is consistent with legislation and,
in particular, the UK Bribery Act.
By order of the Board:
Richard Boléat Jonathan Bridel
Director Director
27 April 2018
Audit and Valuation Committee Report
The Audit and Valuation Committee (the "Committee") has been in
operation since the inception of the Company. Chaired by Jonathan
Bridel, it operates within clearly defined terms of reference and
comprises all of the Directors. It is also the formal forum through
which the auditor reports to the Board of Directors and it met four
times in 2017 (it meets at least three times annually).
ROLES AND RESPONSIBILITIES
The main duties of the Committee are:
-- giving full consideration and recommending to the Board for
approval the contents of the half year and annual Consolidated
Financial Statements and reviewing the external auditor's report
thereon including consideration of whether the Consolidated
Financial Statements are overall fair, balanced and
understandable;
-- agreeing with the auditor the external audit plan including
discussing with the external auditor the key risk areas within the
Consolidated Financial Statements;
-- considering and understanding the key risks of misstatement
of the Consolidated Financial Statements and formulating an
appropriate plan to review and manage these risk areas;
-- reviewing the Viability and Going Concern Statements;
-- reviewing the draft valuation of the Company's investments
prepared and making a recommendation to the Board on valuation;
-- reviewing the scope, results, cost effectiveness,
independence and objectivity of the external auditor as well as
reviewing the effectiveness of the external audit process and
making any recommendations to the Board for improvement of the
audit process;
-- reviewing and recommending to the Board for approval the
audit, audit-related and non-audit fees payable to the external
auditor or their affiliated firms overseas and the terms of their
engagement;
-- reviewing the appropriateness of the Company's accounting policies;
-- ensuring the standards and adequacy of the internal control systems;
-- to consider any reports or information received in respect of whistleblowing; and
-- reporting to the Board on how it has discharged its duties.
None of the members of the Audit Committee have any involvement
in the preparation of the Consolidated Financial Statements of the
Group, as this has been contracted to the Investment Manager
initially and the external finance team latterly.
The Audit Committee meets the external auditor before and on
substantial completion of their audit and has discussed with the
auditor the scope of their annual audit work and also their audit
findings.
The auditor attends the Audit Committee meetings at which the
annual Consolidated Financial Statements are considered and at
which they have the opportunity to meet with the Committee. The
Committee has direct access to the auditor and to key senior staff
of the Group and it reports its findings and recommendations to the
Board which retains the ultimate responsibility for the
Consolidated Financial Statements of the Company.
MEMBERSHIP
The Chair of the Committee, Jonathan Bridel, is a fellow of the
Institute of Chartered Accountants in England and Wales and in
addition serves as chairman of the audit committee for other listed
investment companies. Previously Jonathan worked in senior
positions in investment, corporate finance and commercial banking
and was CFO of two private multinational businesses. The Board is
satisfied that Jonathan has recent and relevant financial
experience as required under the UK Corporate Governance Code. The
other members of the Committee are Richard Boléat and Brendan
Hawthorne. The qualifications of the Committee members are outlined
in the Director's Biographies.
SIGNIFICANT ISSUES CONSIDERED
The Committee assesses whether suitable accounting policies have
been adopted and whether estimates and judgements used have been
appropriate. The Committee also reviews reports by the external
auditors which highlight any issues with respect to the work
undertaken on the audit.
The principal issues considered by the Committee in relation to
the Consolidated Financial Statements were:
-- The effect of the result of the Continuation Vote on the
application of the going concern basis. It is the Committee's view
that the Consolidated Financial Statements be prepared on a
'break-up' basis, entailing carrying all assets at their net
realisable value and providing for all expected liquidation and tax
charges.
-- Market quotations are not available for the Group's
biological assets, land and financial assets, and as such, their
valuation is undertaken using the methodologies outlined on page 7.
This requires a series of material judgements to be made as further
explained in note 14 to the financial statements. The valuation
process and methodology were discussed by the Committee prior to
the year-end valuation process. The Committee met with the auditors
when it reviewed and agreed the audit plan and also at the
conclusion of the audit of the Consolidated Financial Statements,
in particular discussing the valuation process. The Company engaged
third party valuation experts to provide net realisable value
appraisals.
-- The Company owns assets in a number of jurisdictions around
the world often with unique legal frameworks which increases the
risk that the Company does not have legal title to all biological
assets, investments or land and could be a potential obstacle to
and delaying the wind-down process. The Committee also reviewed
actions taken to control and monitor the titles held by the Group
with the Manager and the external auditors.
Following a review of the presentations and reports from the
Administrator and consulting where necessary with the external
auditor and appraisers, the Committee is satisfied that the
Consolidated Financial Statements appropriately address the
critical judgements and key estimates (both in respect to the
amounts reported and the disclosures). The Committee is also
satisfied that the significant assumptions used for determining the
value of assets have been appropriately scrutinised, challenged and
are sufficiently robust.
RISK MANAGEMENT AND INTERNAL CONTROL
The Board considers the nature and extent of the Group's risk
management framework and the risk profile that is acceptable in
order to achieve the Group's strategic objectives. As a result, it
is considered that the Board has fulfilled its obligations under
the Code.
The Committee continues to be responsible for reviewing the
adequacy and effectiveness of the Group's ongoing risk management
systems and processes. Its system of internal controls, along with
its design and operating effectiveness, is subject to review by the
Audit and Valuation Committee.
In the event of any deficiencies or breaches reported, the Board
would consider the actions required to remedy and prevent
significant failings or weaknesses.
Given the scale and nature of the Group's activities, the
Committee has determined that a separate internal audit function is
unnecessary.
FRAUD, BRIBERY AND CORRUPTION
The Committee continues to monitor the fraud, bribery and
corruption policies of the Company. The Board receives a
confirmation from its key service providers that there have been no
instances of fraud, bribery or corruption.
The Committee considered the adequacy and security of its
arrangements for its independent contractors and service providers
to raise concerns, in confidence, about possible wrongdoing in
financial reporting or other matters. The Committee is satisfied it
has the ability and resources to investigate any such matters which
may arise and to follow up on any conclusion reached by such
investigation.
The Committee has also reviewed the Company's whistleblowing
policy and confirmed that the correct communication channels are in
place.
CRIMINAL FINANCES ACT
The Board of the Company has a zero tolerance commitment to
preventing persons associated with it from engaging in criminal
facilitation of tax evasion. The Board has satisfied itself in
relation to its key service providers that they have reasonable
provisions in place to prevent the criminal facilitation of tax
evasion by their own associated persons and will not work with
service providers who do not demonstrate the same zero tolerance
commitment to preventing persons associated with it from engaging
in criminal facilitation of tax evasion.
EXTERNAL AUDITORS
The Committee has responsibility for making a recommendation on
the appointment, re-appointment and removal of the external
auditors. EY has been the external auditor from the date of the
initial listing on the London Stock Exchange in 2006 and were
reappointed Auditors of the Company at the Annual General Meeting
held in 2017.
The objectivity of the external auditor is reviewed by the
Committee which also reviews the terms under which the external
auditor may be appointed to perform non-audit services. The
Committee reviews the scope and results of the audit, its cost
effectiveness and the independence and objectivity of the auditor,
with particular regard to any non-audit work that the auditor may
undertake.
In order to safeguard auditor independence and objectivity, the
Committee ensures that any other advisory and/or consulting
services provided by the external auditor does not conflict with
their statutory audit responsibilities.
Advisory and/or consulting services generally only cover reviews
of interim financial statements and tax compliance. Any non-audit
services conducted by the external auditor outside of these areas
which are above US$50,000 in aggregate in any period require the
consent of the Audit Committee before being initiated. The external
auditor may not undertake any work for the Company or the Group in
respect of the following matters - preparation of the Consolidated
Financial Statements, valuations used in Consolidated Financial
Statements, provision of investment advice, taking management
decisions or advocacy work in adversarial situations.
The Committee reviews the scope and results of the audit, its
cost effectiveness and the independence and objectivity of the
audit-related services, with particular regard to the level of
non-audit fees. Total fees paid amounted to US$258,626 for the
period ended 31 December 2017 of which US$184,020 related to audit
services provided by EY Guernsey, US$67,726 related to other EY
offices in respect of group audit services and US$6,881 related to
non-audit services to the Company and its subsidiaries.
Notwithstanding such services the Committee considers EY to be
independent of the Company and its subsidiaries and that the
provision of such non-audit services is not a threat to the
objectivity and independence of the conduct of the audit.
To fulfil its responsibility regarding the independence of the
external auditor, the Committee considered:
-- changes in audit personnel in the audit plan for the current period;
-- a report from the external auditor describing their
arrangements to identify, report and manage any conflicts of
interest; and
-- the extent of non-audit services provided by the external auditor.
To assess the effectiveness of the external audit process, the
Committee reviewed:
-- the external auditor's fulfilment of the agreed audit plan and variations from it;
-- reports highlighting the major issues that arose during the course of the audit; and
-- the effectiveness and independence of the external auditor
having considered the degree of diligence and professional
scepticism demonstrated by them.
The Committee is satisfied with EY's effectiveness and
independence as auditor having considered the degree of diligence
and professional scepticism demonstrated by them. As such, and
given the Company is in wind down, the Committee has not considered
it necessary during this period to conduct a tender process for the
appointment of its auditor for the year ended 31 December 2018.
The Committee intends to conduct a full review of EY following
the issue of these Consolidated Financial Statements as it did in
2017 to ensure that the Committee considers all aspects of the
auditor's service and performance. The outcome of the review in
2017 was positive and led to no material concerns over the
performance of the auditor.
Having satisfied itself that the external auditor remains
independent and effective, the Audit Committee has recommended to
the Board that EY be reappointed as auditor for the period ending
31 December 2018.
AUDIT COMMITTEE PERFORMANCE EVALUATION
Due to the appointment of the board in late 2017, no evaluation
was held during the year; an evaluation will be held during
2018
The external auditor reported to the Committee that no material
misstatements were found in the course of their work. The Committee
confirms that it is satisfied that the external auditor has
fulfilled its responsibilities with diligence and professional
scepticism.
Jonathan Bridel
Chairman, Audit and Valuation Committee
27 April 2018
Independent Auditor's Report to the Members of Phaunos Timber
Fund Limited
Opinion
We have audited the consolidated financial statements
("financial statements") of Phaunos Timber Fund Limited (the
'Company') and its subsidiaries (together the 'Group') for the year
ended 31 December 2017, which comprise the Consolidated Statement
of Comprehensive Income, the Consolidated Statement of Financial
Position, the Consolidated Statement of Changes in Equity, the
Consolidated Statement of Cash Flows and the related notes 1 to 27,
including a summary of significant accounting policies. The
financial reporting framework that has been applied in their
preparation is applicable law and International Financial Reporting
Standards as adopted by the European Union ("IFRS"). The financial
statements have been prepared on a break-up basis as as disclosed
in note 2.
In our opinion the financial statements:
-- give a true and fair view of the state of the Group's affairs
as at 31 December 2017 and of its loss for the year then ended;
-- have been properly prepared in accordance with IFRS; and
-- have been properly prepared in accordance with the
requirements of the Companies (Guernsey) Law, 2008.
Basis for Opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) ('ISAs (UK)') and applicable law. Our
responsibilities under those standards are further described in the
"Auditor's responsibilities for the audit of the financial
statements" section of our report below. We are independent of the
Group in accordance with the ethical requirements that are relevant
to our audit of the financial statements in the UK, including the
FRC's Ethical Standard as applied to listed entities, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Emphasis of matter - basis of accounting
We draw attention to note 2 which describes the basis of
accounting. Our opinion is not modified in respect of this
matter.
Use of our report
This report is made solely to the Company's members, as a body,
in accordance with Section 262 of the Companies (Guernsey) Law,
2008. Our audit work has been undertaken so that we might state to
the Company's members those matters we are required to state to
them in an auditor's report and for no other purpose. To the
fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the Company and the Company's
members as a body, for our audit work, for this report, or for the
opinions we have formed.
Conclusions relating to principal risks, going concern and
viability statement
We have nothing to report, other than that set out in the
'Emphasis of matter - basis of accounting' section above, in
respect of the following information in the annual report, in
respect of the following information in the annual report, in
relation to which the ISAs (UK) require us to report to you whether
we have anything material to add or draw attention to:
-- the disclosures in the annual report set out on pages 20 to
21 that describe the principal risks and explain how they are being
managed or mitigated;
-- the directors' confirmation set out on pages 20 in the annual
report that they have carried out a robust assessment of the
principal risks facing the entity, including those that would
threaten its business model, future performance, solvency or
liquidity;
-- the directors' statement set out on pages 21 in the financial
statements about whether they considered it appropriate to adopt
the going concern basis of accounting in preparing them, and their
identification of any material uncertainties to the entity's
ability to continue to do so over a period of at least twelve
months from the date of approval of the financial statements;
-- whether the directors' statement in relation to going concern
required under the Listing Rules is materially inconsistent with
our knowledge obtained in the audit; or
-- the directors' explanation set out on pages 30 in the annual
report as to how they have assessed the prospects of the entity,
over what period they have done so and why they consider that
period to be appropriate, and their statement as to whether they
have a reasonable expectation that the entity will be able to
continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or
assumptions.
Overview of our audit approach
Key audit matters
* Valuation of biological assets, land and financial
assets at fair value through profit or loss
* Existence and ownership of biological assets and land
------------------ -------------------------------------------------------------
Audit scope
* We have performed an audit of the complete financial
information of two components, which represent 69% of
the Group's total equity, and audit procedures on
specific balances, where we considered the risk of
material misstatement to be higher, for a further
four components of the Group.
------------------ -------------------------------------------------------------
Materiality
* Overall materiality of $5.6 million (2016: $6.0
million) which represents 2% (2016: 2%) of total
equity.
------------------ -------------------------------------------------------------
Key audit matters
Key audit matters are those matters that, in our professional
judgment, were of most significance in our audit of the financial
statements of the current period and include the most significant
assessed risks of material misstatement (whether or not due to
fraud) that we identified. These matters included those which had
the greatest effect on: the overall audit strategy, the allocation
of resources in the audit; and directing the efforts of the
engagement team. These matters were addressed in the context of our
audit of the financial statements as a whole, and in our opinion
thereon, and we do not provide a separate opinion on these
matters.
Risk Our response to the risk Key observations
communicated
to the Audit and
Valuation
Committee
-------------------------- --------------------------------------------------------------- -------------------------
Risk that the carrying We have performed audit We confirmed that there
value of biological procedures over this risk were no material matters
assets and land might area in two locations, Brazil arising from our audit
be misstated due to (Vale and Eucateca) and work on the inputs
application of Uruguay (Pradera Roja), used and the judgments
inappropriate which covers 100% of the made by the Specialists
methodologies or inputs Group's biological assets that we wished to bring
to the valuations and/or and land. to the attention of
inappropriate judgemental Audit procedures performed the Audit and Valuation
factors. ($46 million; were: Committee.
2016 - $70 million) * We documented our understanding of the processes, We confirmed that there
The valuation of policies and methodologies used by management for were no material
biological valuing biological assets and land, and performed instances
assets and land requires walkthrough tests to confirm our understanding of the of use of inappropriate
specialist expertise systems and controls implemented; policies or
and the use of methodologies
significant and that the valuation
estimates and judgements * We agreed the values reported by the Group's of biological assets
giving rise to a higher independent valuation experts ("Specialists") as an and land was not
risk of misstatement. input to the directors valuations; materially
Refer to the Audit misstated.
and Valuation Committee
Report (page 32); * We agreed a sample of the significant inputs used by
Accounting the Specialists to value biological assets and land,
policies (page 50); to the Group's records. The most significant inputs
and Note 14 of the include growth stage of plantations, land acreage and
Group Financial amounts of merchantable and pre-merchantable timber.
Statements
(pages 64 to 69).
* We agreed the acreage amounts recorded in the Group's
records relating to biological assets and land, to
relevant records of title, on a sample basis;
* We physically inspected samples of merchantable and
pre-merchantable timber;
* We tested the arithmetical accuracy of the
calculations performed by Specialists by
re-performing a sample of their calculations;
* We engaged our internal valuation specialist to:
o use their knowledge of
the market to assess and
corroborate the market related
judgements and valuation
inputs (including timber
prices, discount rates,
EBITDA and cash flow forecasts
and assessment of terminal
value) used by the Specialists
by reference to our specialist's
knowledge of comparable
transactions and independently
compiled databases;
o assist us to determine
whether the methodologies
used by the Specialist to
value biological assets
and land were in accordance
with methods usually used
by market participants for
these types of assets;
o assist us in determining
whether the Specialists
were appropriately qualified
and independent; and
o search for corroborating
market observable transaction
pricing in the relevant
markets to support the level
of discounts applied by
the directors to the valuations
provided by the Specialists.
* We engaged our internal tax specialists to use their
knowledge of the tax legislation in the respective
jurisdictions to determine:
o whether the estimated
taxes on realisation of
assets included in the recoverable
amounts are reasonable;
and
o whether management had
properly taken account of
the tax effects of disposing
of investments.
* We assessed whether management's assumptions in
respect of costs of realisation and other factors
affecting the carrying amount as a result of applying
the break-up basis of accounting were appropriate and
properly calculated.
-------------------------- --------------------------------------------------------------- -------------------------
Risk that the carrying We have performed audit We confirmed that there
value of investment procedures over this risk were no material matters
in associates and other area relating to GTFF, Aurora arising from our audit
financial assets at and Matariki (full scope work on the inputs
fair value through audit) which covered 100% used and the judgments
profit or loss might of the land and biological made by the Specialists
be misstated due to assets of Aurora, Matariki that we wished to bring
the application of and GTFF as these balances to the attention of
inappropriate are the main driver of the the Audit and Valuation
methodologies fair value of these investments. Committee.
or inputs to the These procedures were: We confirmed that there
valuations * We documented our understanding of the processes, were no material
and/or inappropriate policies and methodologies used by management and instances
judgemental factors. performed walkthrough tests to confirm our of use of inappropriate
($185 million; 2016 understanding of the systems and controls policies or
- $181 million) implemented; methodologies
The valuation of and that the valuation
associates of associates and other
and other financial * We instructed our component teams to perform the same financial assets at
assets at fair value procedures on valuation of biological assets and land fair value through
through profit or loss owned by associates as described in the key audit profit or loss was
requires Specialist matter above; not materially
expertise and the use misstated.
of significant estimates
and judgements giving * Matariki engaged a Specialist to value the biological
rise to a higher risk assets and land owned. EY New Zealand engaged their
of misstatement. internal valuation specialist and performed the same
Refer to the Audit procedures as listed below. The results of the
and Valuation Committee procedures performed by the component team were
Report (page 32); communicated to the primary audit team as part of the
Accounting group audit reporting and were used to support the
policies (page 50); directors' assumption that the Group's share of
and Note 14 of the Matariki's net asset value less cost of realisation
Group Financial approximates to the recoverable amount of the Group's
Statements investment;
(pages 64 to 69).
* The Board of Directors engaged a Specialist to value
the biological assets and land, and, (as a business)
certain plant and equipment owned by Aurora. The
results of the procedures performed by the Primary
team as set out below were used to support the
directors' assumption that the Group's share of
Aurora's net asset value approximates to the fair
value of the Group's investment;
* GTFF engaged a Specialist to value the biological
assets and land owned. The Primary team performed the
same audit procedures as for biological assets and
land owned by the Group as described in the key audit
matter above;
* We engaged our internal valuation specialist to:
o assist us in determining
whether management's Specialists
were appropriately qualified
and independent;
o use their knowledge of
the market to assess and
corroborate the directors'
market related judgements
and valuation inputs (including
timber prices, discount
rates, EBITDA and cash flow
forecasts and assessment
of terminal value) by reference
to our specialist's knowledge
of the market and independently
compiled databases;
o assist us to determine
whether the methodologies
used by the Specialists
to value the plant and equipment
were in accordance with
methods usually used by
market participants for
these types of assets; and
o search for corroborating
market observable transaction
pricing in the relevant
markets to support the level
of discounts applied by
the directors to the valuations
provided by the Specialists.
* We agreed a sample of the significant inputs used by
the Specialists to the Group's records. The most
significant inputs included sales, operating expenses
,
discount rates, EBITDA, timber prices, discount rates
,
cash flow forecasts and assessment of terminal value
which formed the basis for the forecasts used in the
valuation;
* We engaged our internal tax specialists to use their
knowledge of the tax legislation in the respective
jurisdictions to determine:
o whether the estimated
taxes on realisation of
the assets included in the
recoverable amounts are
reasonable; and
o whether management had
properly taken account of
the tax effects of disposing
of investments;
* We assessed whether management's assumptions in
respect of costs of realisation and other factors
affecting the carrying amount as a result of applying
the break-up basis of accounting were appropriate and
properly calculated.
-------------------------- --------------------------------------------------------------- -------------------------
Risk that the Group We confirmed that,
does not have legal * We documented our understanding of the processes, other than pending
title to biological policies and methodologies used by management with title updates awaiting
assets and land. respect to existence and ownership of assets and local government
($46 million; 2016 performed walkthrough tests to confirm our geo-referencing
- $70 million) understanding of the systems and controls approvals for certain
Due to the significance implemented. assets with a combined
of the carrying value carrying amount of
of these assets, and US21 million, there
the uncertainties * For a sample of land, including land owned by were no matters
associated associates, we obtained copies of title documents or identified
with obtaining legal agreed the Group's title to government or local during our audit work
title in some authority land registers to confirm the Group's on existence and
jurisdictions, ownership of land; and ownership
there is a risk that of biological assets
if the Group does not and land that we wished
have the title and * For a sample of biological assets we physically to bring to the
right of ownership inspected the assets and agreed the amounts to the attention
of these assets, and Group's records. of the Audit and
hence the carrying Valuation
value of investments Committee.
in the financial
statements
could be materially
overstated.
Refer to the Audit
and Valuation Committee
Report (page 32);
Accounting
policies (page 50);
and Note 14 of the
Group Financial
Statements
(pages 64 to 69).
-------------------------- --------------------------------------------------------------- -------------------------
In the prior year, our auditor's report included a key audit
matter in relation to a material uncertainty over going concern. In
the current year, there is no material uncertainty with regards to
going concern and as the Company is in a managed wind down, the
consolidated financial statements have been prepared on a break-up
basis, therefore going concern is not deemed to be a key audit
matter.
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and
our allocation of performance materiality determine our scope for
the Group audit. This enables us to form an opinion on the
financial statements. We take into account size, risk profile, the
organisation of the Group and effectiveness of controls, including
controls and changes in the business environment, when assessing
the level of work to be performed.
In assessing the risk of material misstatement to the financial
statements of the components of the Group, and to ensure we had
adequate quantitative coverage of significant accounts in the
financial statements, we selected entities within Guernsey, New
Zealand, Brazil and Uruguay (comprising six components), which
represent the principal business units and risks within the Group.
The Primary audit team also engaged with internal timber valuation
Specialists to assess the valuation of biological assets and land
for the same components. In the current year we have also engaged
with internal tax specialists to assess whether management had
properly taken account of the tax effects of disposing of
investments in deriving the recoverable amount of these assets.
Of the six components selected, which includes the parent
company, we performed an audit of the complete financial
information of two components ("full scope components") which were
selected based on their size and risk characteristics.
For the remaining four components ("specific scope components"),
we performed specific audit procedures on specific accounts within
those components that we considered had the potential for the
greatest impact on the significant accounts in the consolidated
financial statements, either because of the size of the accounts or
their risk profile. For those specific accounts selected, as part
of our specific scope components, the extent of our audit work on
those accounts was the same as that for a full scope audit.
The components selected, in addition to the parent company which
is a full scope component, together with the allocated performance
materiality, were as follows:
Component Location Investment type Scope Performance
Name materiality
$ million
------------------ ------------- ----------------- ---------------- -------------
Phaunos Guernsey Guernsey Parent Full 1.2
================== ============= ================= ================ =============
Matariki New Zealand Associate Full 2.9
================== ============= ================= ================ =============
Wholly owned Specific audit
Vale Brazil subsidiary procedures 1.8
------------------ ------------- ----------------- ---------------- -------------
Wholly owned Specific audit
Eucateca Brazil subsidiary procedures 1.2
------------------ ------------- ----------------- ---------------- -------------
Wholly owned Specific audit
Pradera Roja Uruguay subsidiary procedures 1.2
------------------ ------------- ----------------- ---------------- -------------
Specific audit
Aurora Forestal Uruguay Associate procedures 1.2
================== ============= ================= ================ =============
The reporting components where we performed audit procedures
accounted for 95% (2016: 95%) of the Group's total equity, 100%
(2016: 100%) of the Group's revenue and 99% (2016: 99%) of the
Group's total assets. For the current year, the full scope
components contributed 69% (2016: 58%) of the Group's net asset
value. The specific scope components contributed 26% (2016: 37%) of
the Group's net asset value and 100% (2016: 100%) of the Group's
revenue.
Of the remaining components that together represent 5% of total
equity, there was only one component greater than 1% of the Group's
total equity on which the Primary audit team performed specific
audit procedures on specific accounts within that component and
that we considered had the potential for the greatest impact on the
significant accounts in the consolidated financial statements,
either because of the size of the accounts or their risk profile.
For those specific accounts selected, the extent of our audit work
on those accounts was the same as that for a full scope audit.
For the remaining components we only performed analytical
procedures as there were no additional risks identified that could
indicate the consolidated financial statements might be materially
misstated.
Involvement with component teams
Team structure
The overall audit strategy is determined by the signatory, Chris
Matthews, who is based in the Channel Islands. Since the majority
of the Group's operations are based in Brazil, New Zealand and
Uruguay, the audit team includes EY teams from Brazil and New
Zealand, and non-EY firms (Deloitte and Grant Thornton) in Uruguay.
We focused our time on the significant risks and judgemental areas
for these components.
Involvement with component teams
In establishing our overall approach to the Group audit, we
determined the type of work required to be performed at each
component by the Primary audit team, or by component auditors from
other EY global network firms and non-EY firms operating under our
instruction. For the specific scope components, where the work was
performed by component auditors, the Primary audit team determined
the appropriate level of involvement to enable us to be satisfied
that sufficient audit evidence had been obtained as a basis for our
opinion on the Group as a whole. The Primary audit team, assisted
by internal valuation and tax specialists, performed procedures on
the valuations of land, biological assets and associates at fair
value through profit or loss.
The Primary audit team has historically undertaken visits to
ensure that locations which are deemed to be significant are
visited by the Primary audit team on a rotational basis. The most
recent visit was to Brazil during the 2015 audit cycle.
No visits were undertaken during the 2017 cycle due to the
reduced risk profile of the Group assets and operations following
the disposal of the higher risk assets and the significant
reduction in revenues from 2015 to 2017. Also the Primary audit
team perform the audit procedures on all key audit areas to address
the associated risk.
However, the Primary audit team participated in key discussions,
via conference calls and correspondence with all full and specific
scope locations. The Primary audit team interacted regularly with
the component teams, where appropriate, during various stages of
the audit, reviewed key working papers and were responsible for the
scope and direction of the audit process. This, together with the
additional procedures performed at Group level, supports our
opinion on the Financial Statements.
Our application of materiality
We apply the concept of materiality in planning and performing
the audit, in evaluating the effect of identified misstatements on
the audit and in forming our audit opinion.
Materiality
Materiality is the magnitude of omissions or misstatements that,
individually or in the aggregate, could reasonably be expected to
influence the economic decisions of the users of the financial
statements. Materiality provides a basis for determining the nature
and extent of our audit procedures.
We determined materiality for the Group to be $5.6 million
(2016: $6.0 million), which is approximately 2% (2016: 2%) of total
equity. We believe that total equity provides us with an
appropriate basis for audit materiality as it is a key published
performance measure and is a key metric used by management in
assessing and reporting on overall performance.
Performance materiality
Performance materiality is the application of materiality at the
individual account or balance level. It is set at an amount to
reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our
assessment of the Group's overall control environment, our
judgement was that performance materiality was 75% (2016: 75%) of
our planning materiality, namely $4.2 million (2016: $4.5 million).
We set performance materiality at this percentage due to limited
identification of audit findings in the previous period.
Audit work at component locations for the purpose of obtaining
audit coverage over significant financial statement accounts is
undertaken based on a percentage of total performance materiality.
With regards to the Group audit, the performance materiality set
for each component is based on the relative scale and risk of the
component to the Group as a whole and our assessment of the risk of
misstatement at that component. In the current year, the range of
performance materiality allocated to components was $1.2 million to
$2.9 million (2016: $1.0 million to $3.0 million). This is set out
in more detail in the section above.
Reporting threshold
The reporting threshold is an amount below which identified
misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report to them
all uncorrected audit differences in excess of $0.28 million (2016:
$0.30 million), which is set at 5% of planning materiality, as well
as differences below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the
quantitative measures of materiality discussed above and in light
of other relevant qualitative considerations in forming our
opinion.
Other information
The other information comprises the information included in the
annual report set out on pages 1 to 35 and pages 80 to 81 other
than the financial statements and our auditor's report thereon. The
directors are responsible for the other information.
Our opinion on the financial statements does not cover the other
information and, except to the extent otherwise explicitly stated
in this report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the financial statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the financial statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of the other information, we are required to report that fact.
We have nothing to report in this regard.
In this context, we have nothing additional to report in regard
to our responsibility to specifically address the following items
in the other information and to report as uncorrected material
misstatements of the other information where we conclude that those
items meet the following conditions:
-- Fair, balanced and understandable [set out on page 23 - the
statement given by the directors that they consider the annual
report and financial statements taken as a whole is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Group's performance, business model and
strategy, is materially inconsistent with our knowledge obtained in
the audit; or
-- Audit committee reporting set out on page 32-35 - the section
describing the work of the audit and valuation committee does not
appropriately address matters communicated by us to the audit
committee is materially inconsistent with our knowledge obtained in
the audit; or
-- Directors' statement of compliance with the UK Corporate
Governance Code set out on page 25 - the parts of the directors'
statement required under the Listing Rules relating to the
Company's compliance with the UK Corporate Governance Code
containing provisions specified for review by the auditor in
accordance with Listing Rule 9.8.10R(2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance
Code.
Matters on which we are required to report by exception
We have nothing to report in respect of the following matters in
relation to which the Companies (Guernsey) Law, 2008 requires us to
report to you if, in our opinion:
-- proper accounting records have not been kept; or
-- the financial statements are not in agreement with the accounting records; or
-- we have not received all the information and explanations we require for our audit.
Responsibilities of directors
As explained more fully in the directors' responsibilities
statement set out on page 23, the directors are responsible for the
preparation of the financial statements and for being satisfied
that they give a true and fair view, and for such internal control
as the directors determine is necessary to enable the preparation
of financial statements that are free from material misstatement,
whether due to fraud or error.
In preparing the financial statements, the directors are
responsible for assessing the Group's ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Company or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial
statements
Our objectives are to obtain reasonable assurance about whether
the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an
auditor's report that includes our opinion. Reasonable assurance is
a high level of assurance, but is not a guarantee that an audit
conducted in accordance with ISAs (UK) will always detect a
material misstatement when it exists. Misstatements can arise from
fraud or error and are considered material if, individually or in
the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these financial
statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council's website at
https://www.frc.org.uk/auditorsresponsibilities. This description
forms part of our auditor's report.
Christopher James Matthews, FCA
For and on behalf of Ernst & Young LLP
Guernsey, Channel Islands
27 April 2018
Notes:
1. The maintenance and integrity of the Phaunos Timber Fund
Limited web site is the responsibility of the directors; the work
carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for
any changes that may have occurred to the financial statements
since they were initially presented on the web site.
2. Legislation in Guernsey governing the preparation and
dissemination of financial statements may differ from legislation
in other jurisdictions.
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2017
31 Dec 2017 31 Dec 2016
Notes US$'000 US$'000
Revenue from timber operations 6 6,948 2,479
Cost of sales 7 (5,506) (1,703)
------------ ----------------
Gross profit 1,442 776
Other operating income 52 313
Timber operating expenses 8 (2,451) (3,312)
------------ ----------------
Timber operating loss (958) (2,223)
Investment income 9 7,424 7,029
Investment operating expenses 10 (8,335) (4,007)
Operating (loss)/profit (1,868) 799
Net gain on financial assets at
fair value through profit or loss 14 14,390 8,280
Revaluation and impairment of biological
assets and land 14 (11,863) 1,849
Net realised (loss)/gain on disposal
of assets 11 (1,442) 7,840
Finance costs (5) (1)
(Loss)/profit before tax (789) 18,767
Income tax expense 12 (3,464) (439)
(Loss)/profit for the year (4,254) 18,328
============ ================
Other comprehensive income/(loss)
Other comprehensive income/(loss)
to be reclassified to profit or
loss in subsequent years (net of
tax):
Exchange differences on translation
of foreign operations (90) 11,237
Other comprehensive (loss)/income
not to be reclassified to profit
or loss in subsequent years (net
of tax):
Revaluation/(reversal) of revaluation
of land 14 (4,549) 2,303
Other comprehensive (loss)/income, net
of tax (4,638) 13,540
============ ================
Total comprehensive (loss)/income,
net of tax (8,892) 31,868
============ ================
Basic and diluted (loss)/earnings Cents Cents
per Ordinary Share for the year 13 (0.78) 3.29
The notes on pages 50 to 77 form an integral part of these
Consolidated Financial Statements.
Consolidated Statement of Financial Position
as at 31 December 2017
31 Dec 2017 31 Dec 2016
Notes US$'000 US$'000
Assets
Non-Current Assets
Financial assets at fair value
through profit or loss 14 - 180,579
Biological assets 14 - 29,298
Land 14 - 40,739
Other assets - 172
Trade and other receivables 19 - 615
- 251,403
Current Assets
Financial assets at fair value
through profit or loss 14 185,323 -
Biological assets 14 15,254 -
Land 14 30,713 -
Cash and cash equivalents 18 47,448 45,582
Trade and other receivables 19 7,261 5,812
Other assets 67 -
Inventories 8 17
286,074 51,411
TOTAL ASSETS 286,074 302,814
============ ==========
Equity and Liabilities
Equity
Issued capital 22 443,866 443,866
Treasury shares pg 47 (11,397) (10,707)
Retained earnings pg 47 (209,343) (196,362)
Other components of equity pg 47 57,197 64,520
TOTAL EQUITY 280,323 301,317
------------ ----------
Current Liabilities
Trade and other payables 20 1,823 1,497
Provisions 21 3,928 -
----------
5,751 1,497
------------ ----------
TOTAL LIABILITIES 5,751 1,497
------------ ----------
TOTAL EQUITY AND LIABILITIES 286,074 302,814
============ ==========
Ordinary Shares in Issue 22 545,529,832 547,024,832
US cents US cents
Net Asset Value Per Ordinary
Share 51 55
The Consolidated Financial Statements on pages 45 to 77 were
approved by the Board of Directors on 27 April 2018 and signed on
its behalf by:
Richard Boléat Jonathan Bridel
Director Director
The notes on pages 50 to 77 form an integral part of these
Consolidated Financial Statements.
Consolidated Statement of Changes in Equity
for the year ended 31 December 2017
Attributed to equity holders of the parent
-----------------------------------------------------------------------------------
Foreign
currency Land Warrant
Issued Treasury Retained translation revaluation Other Instrument Total
Note capital Shares earnings reserve reserve reserves reserve Equity
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
As at 1
January 2016 443,866 (3,176) (212,780) (65,676) 4,001 110,418 2,109 278,761
Profit for the
year - - 18,328 - - - - 18,328
Other
comprehensive
income - - - 11,236 2,303 - - 13,539
-------- --------- ---------- ------------ ------------ --------- ----------- --------
Total
comprehensive
income - - 18,328 11,235 2,303 - - 31,868
Adjustment 14 - - (712) - - - - (712)
Disposal of
land 14 - - 445 - (445) - - -
Buy back of
Ordinary
Shares 22 - (7,531) - - - - - (7,531)
Warrants
Issued 23 - - - - - - 574 574
Dividends paid 24 - - (1,643) - - - - (1,643)
As at 31
December 2016 443,866 (10,707) (196,362) (54,440) 5,859 110,418 2,683 301,317
======== ========= ========== ============ ============ ========= =========== ========
As at 1
January 2017 443,866 (10,707) (196,362) (54,440) 5,859 110,418 2,683 301,317
Profit/(loss)
for the
year - - (4,254) - - - - (4,254)
Other
comprehensive
income/(loss) - - - (90) (4,549) - - (4,638)
-------- --------- ---------- ------------ ------------ --------- ----------- --------
Total
comprehensive
income/(loss) - - (4,254) (90) (4,549) - - (8,892)
Dividends paid 24 - - (8,728) - - - - (8,728)
Buyback of
Ordinary
Shares 22 - (691) - - - - - (691)
Buyback of
warrants 23 - - - - - - (2,683) (2,683)
As at 31
December 2017 443,866 (11,397) (209,343) (54,530) 1,309 110,418 - 280,323
======== ========= ========== ============ ============ ========= =========== ========
The notes on pages 50 to 77 form an integral part of these
Consolidated Financial Statements.
Consolidated Statement of Cash Flows
for the year ended 31 December 2017
Note 31 Dec 2017 31 Dec 2016
US$'000 US$'000
Operating activities
Net (loss)/profit before tax (789) 18,769
Adjustments to reconcile net (loss)/profit
before tax to net cash flows Pg 49 (628) (19,931)
(1,417) (1,162)
Working capital adjustments
Increase in trade and other receivables (1,388) (1,166)
Increase/(decrease) in trade and
other payables 508 (1,117)
Decrease/(increase) in inventories 9 (14)
(871) (2,297)
Income tax paid 12 (2,548) (239)
------------ ----------------
Net cash outflow from operating
activities (4,836) (3,698)
------------ ----------------
Investing activities
Net cash inflow from investing
activities pg 49 18,463 36,756
------------ ----------------
Financing activities
Payment of dividend 24 (8,728) (1,643)
Payment for buy back of shares (691) (7,531)
Payment for buy back of warrants 10,23 (2,683) -
------------ ----------------
Net cash outflow from financing
activities (12,102) (9,174)
------------ ----------------
Net increase in cash and cash equivalents 1,525 23,884
Cash and cash equivalents at beginning
of year 45,582 25,617
Effect of foreign exchange rate
changes on cash and cash equivalents 341 (3,919)
Cash and cash equivalents at end
of year 18 47,448 45,582
------------ ----------------
The notes on pages 50 to 77 form an integral part of these
Consolidated Financial Statements.
Explanatory Notes to the Consolidated Statement of Cash Flows
for the year ended 31 December 2017
The following details all non-cash items for operating activities
and net cash inflows for
investing activities as summarised in the Consolidated Statement
of Cash Flows:
---------------------------------------------------------------------------------
Note 31 Dec 2017 31 Dec 2016
US$'000 US$'000
Adjustments to reconcile profit/(loss)
before tax
to net cash flows
Depletion 7 5,028 75
Dividends and distributions received 9 (6,586) (6,002)
Interest income 9 (838) (1,027)
Loss on disposal of assets 14 1,442 430
Gain on disposal of investments - (8,273)
Net loss/(gain) on biological assets
and land (including foreign exchange) 14 11,863 (1,849)
Net gain on financial assets at
fair value through profit or loss
(including foreign exchange) 14 (14,390) (8,280)
Buy-back of warrants/Share-based
management fee 10,23 - 574
Movement in provisions 21 2,830 -
Adjustments to land and biological
assets during the year 14 - 1,595
Other adjustments 23 2,826
------------- ------------
Adjustments for non-cash items Pg 48 (628) (19,931)
Investing activities
Return of capital and disposal of
assets:
Dividends and distributions received 9 7,140 6,187
Interest income 9 838 1,027
Return of capital financial assets 14 9,647 18,088
Proceeds from disposal of land 14 1,330 5,077
Proceeds from sale of investments - 8,273
18,955 38,652
Purchase of assets and silviculture
costs:
Silviculture and other biological
asset costs 14 (492) (1,896)
(492) (1,896)
Net cash inflow from investing activities Pg 48 18,463 36,756
------------- ------------
Notes to the Consolidated Financial Statements
for the year ended 31 December 2017
1. CORPORATE INFORMATION
The Audited Consolidated Financial Statements of Phaunos Timber
Fund Limited (the "Company" or "Phaunos") and its subsidiaries
(collectively, the "Group") for the year ended 31 December 2017
were authorised for issue in accordance with a resolution of the
Directors on 27 April 2018.
Phaunos Timber Fund Limited is a limited company incorporated
and domiciled in Guernsey and whose shares are publicly traded on
the London Stock Exchange. The registered office is located at 11
New Street, St Peter Port, Guernsey, GY1 2PF.
Phaunos is an authorised closed-ended, investment scheme and was
managed by Stafford Capital Partners Limited (the "Manager" or
"Stafford").
On 10 July 2017 Stafford submitted its resignation as Manager,
with effect from the Company's EGM held on 17 August 2017,
triggering a six month notice period. Poyry Capital were appointed
as sales agents in November 2017 and the Group became self-managed
on 17 February 2018.
2. ACCOUNTING POLICIES
2.1 Basis of preparation
The Consolidated Financial Statements of the Group for the year
ended 31 December 2017 have been prepared in accordance with
International Financial Reporting Standards, as adopted by the
European Union ("IFRS") together with applicable and regulatory
requirements of Companies (Guernsey) Law, 2008, and the listing
rules of the London Stock Exchange Main Market. The Consolidated
Financial Statements give a true and fair view of the Group's
affairs and comply with the requirements of the Companies
(Guernsey) Law, 2008.
The Consolidated Financial Statements have been prepared under a
'break-up' basis and amended to reflect the fact that the going
concern assumption is not appropriate. This involves writing assets
down to their net realisable value based on conditions existing at
the end of the reporting period and providing for contractual
commitments which may have become onerous as a consequence of the
decision to wind-down the entity.
Under the 'break-up' basis, all assets are measured at net
realisable value, provisions are made for estimated liquidation
costs and all assets have been reclassified from non-current to
current.
The Directors deem it appropriate to adopt a break-up basis in
preparing the Consolidated Financial Statements given the fact they
believe that the biological assets, land and financial assets held
by the Company may be fully realised and the Company put into
liquidation in the next twenty months from the date of approving
the Consolidated Financial Statements in line with the Company's
managed wind-down strategy. Please refer to page 3 for detail
regarding the Group's revised Investment Objective and Investment
Policy
Ordinary Shares are classified as equity in accordance with IAS
32 - "Financial Instruments: Presentation" as these instruments
include no contractual obligation to deliver cash and the
redemption mechanism is not mandatory. Any redemption of shares is
the choice of the Company and not of the Shareholder. Costs
directly attributable to the issue of new Ordinary Shares are shown
in equity as a deduction from the proceeds.
The accounting policies applied by the Group are consistent with
those used in the most recent annual financials as at 31 December
2016, with the exception of certain policies disclosed in Note 3,
which have been applied as a result of the Shareholders' decision
for the Company not to continue.
The Consolidated Financial Statements are presented in US
Dollars and all values are rounded to the nearest thousand US
Dollars (US$'000), except where otherwise indicated.
Although the Company qualifies as an investment scheme under
Guernsey regulations, it does not meet the definition of an
investment entity under IFRS 10 Consolidated Financial Statements,
primarily due to the fact the investments are not passive and
revenue is earned from timber sales.
2.2 Basis of Consolidation
The Consolidated Financial Statements comprise the financial
statements of the Company and its subsidiaries as at 31 December
2017.
Consolidation of a subsidiary begins when the Group obtains
control over the subsidiary and ceases when the Group loses control
of the subsidiary. Assets, liabilities, income and expenses of a
subsidiary acquired or disposed of during the year are included in
the Consolidated Financial Statements from the date the Group gains
control until the date the Group ceases to control the
subsidiary.
When necessary, adjustments are made to the financial statements
of subsidiaries to bring their accounting policies into line with
the Group's accounting policies. All intra-group assets and
liabilities, equity, income, expenses and cash flows relating to
transactions between members of the Group are eliminated in full on
consolidation.
Control is achieved when the Group is exposed, or has rights, to
variable returns from its involvement with the investee and has the
ability to affect those returns through its power over the
investee. Specifically, the Group controls an investee if, and only
if, the Group has:
Power over the investee (i.e. existing rights that give it the
current ability to direct the relevant activities of the
investee);
Exposure, or rights, to variable returns from its involvement
with the investee; and
The ability to use its power over the investee to affect its
returns.
Generally, there is a presumption that a majority of voting
rights results in control. To support this presumption the Group
considers all relevant facts and circumstances in assessing whether
it has power over an investee, including:
The contractual arrangement(s) with the other vote holders of
the investee;
Rights arising from other contractual arrangements; and
The Group's voting rights and potential voting rights.
The Group re-assesses whether or not it controls an investee if
facts and circumstances indicate that there are changes to one or
more of the three elements of control.
If the Group loses control over a subsidiary, it derecognises
the related assets (including goodwill), liabilities and other
components of equity, while any resultant gain or loss is
recognised in the Consolidated Statement of Comprehensive Income.
Any investment retained is recognised at net realisable value.
2.3 Summary of significant accounting policies
(a) Fair value measurement
Following the Continuation Vote, the Group now accounts on the
'break-up' basis. As such, all assets are measured at net
realisable value, provisions have been raised for expected
liquidation costs and all assets have been reclassified from
non-current to current assets.
Up to the 31 December 2016 reporting date, financial instruments
were measured at fair value through profit or loss.
Following the adoption of 'break-up' basis of accounting,
biological assets are valued at net realisable value.
Disclosures related to net realisable value are included in Note
14.
(b) Revenue recognition
Revenue is recognised to the extent that it is probable that
economic benefits will flow to the Group and the revenue can be
reliably measured, regardless of when the payment is received.
Revenue is measured at the fair value of the consideration received
or receivable, taking into account contractually defined terms of
payment and excluding taxes or duty. The Group has concluded that
it is the principal in all of its revenue arrangements as it is the
primary obligor in all the revenue arrangements, has pricing
latitude, and is also exposed to inventory and credit risks.
The specific recognition criteria described below must also be
met before revenue is recognised.
Sale of standing timber
-- the Group has transferred to the buyer the significant risks and rewards of ownership;
-- the Group retains neither continuing managerial involvement
in the standing timber to the degree usually associated with
ownership nor effective control over the timber sold;
-- the amount of harvesting revenue can be measured reliably;
-- it is probable that the economic benefits associated with the
transaction will flow to the Group; and
-- the costs incurred or to be incurred in respect of the transaction can be measured reliably.
(c) Investment Income
Dividends, distribution income, and interest income are included
in the Group's investment income and are recognised when the
Group's right to receive the income is established. In the case of
dividends, this is generally when Shareholders approve the
dividend.
(d) Taxes
Current income tax
Current income tax assets and liabilities are measured at the
amount expected to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to compute the amount
are those that are enacted or substantively enacted at the
reporting date in the countries where the Group operates and
generates taxable income.
Current income tax relating to items recognised directly in
equity is recognised in equity and not in the Statement of
Comprehensive Income. Stafford periodically evaluates positions
taken in the tax returns with respect to situations in which
applicable tax regulations are subject to interpretation and
establishes provisions where appropriate.
Estimated withholding and repatriation taxes related to the
anticipated disposal of investments have been provided for at year
end.
(e) Foreign currencies
The Group's Consolidated Financial Statements are presented in
US Dollars which is also the parent company's functional currency.
Each entity in the Group determines its own functional currency and
items included in the financial statements of each entity are
measured using that functional currency.
Transactions and balances
Transactions in foreign currencies are initially recorded at the
functional currency spot rate ruling at the date of the
transaction. Monetary assets and liabilities denominated in foreign
currencies are retranslated at the functional currency rate of
exchange ruling at the reporting date. All differences are included
in operating profit before taxation in the Consolidated Statement
of Comprehensive Income.
Group companies
On consolidation, the assets and liabilities of foreign
operations are translated into US Dollars at exchange rates
prevailing on the reporting date. Income and expense items are
translated at the average exchange rates for the year. Exchange
differences arising on translation are recognised as other
comprehensive income ("OCI") in the Consolidated Statement of
Comprehensive Income. OCI is eventually included in the Group's
foreign currency translation reserve disclosed in the Consolidated
Statement of Changes in Equity.
(f) Financial instruments
Financial assets at fair value through profit or loss
In accordance with the exception within IAS 28 Investments in
Associates and Joint Ventures, alongside the adoption of the
'break-up' basis of accounting, the Company does not account for
its investments in associates using the equity method. Instead, the
Company measures its investments in associates at fair value
through profit or loss. The fair value is adjusted for expected
liquidation costs, realisation taxes and minority discounts to
derive its net realisable value.
The Company elected to designate investments in associates and
minority investments as financial assets designated at fair value
through profit or loss in accordance with IAS 39. Initially,
financial assets should be measured at fair value. Subsequently,
financial assets should be measured at fair value, being the amount
for which an asset could be exchanged between knowledgeable,
willing parties in an arm's length transaction.
Under the 'break-up' basis, these investments are valued at net
realisable value.
Further disclosures relating to the subsequent measurement of
financial assets at fair value through profit or loss are also
provided in Note 14.
Investments are derecognised on disposal when the rights to
receive cash flows and all risks and rewards have expired or are
transferred to a third party through an executed agreement.
Transaction costs associated with an investment are recognised
immediately in the Consolidated Statement of Comprehensive Income
as an expense.
Financial liabilities
Financial liabilities include trade payables which are held at
amortised cost using the effective interest rate method. Financial
liabilities are recognised initially at fair value, net of
transaction costs incurred and are subsequently carried at
amortised cost using the effective interest rate method.
Financial liabilities are derecognised when the obligation
specified in the contract is discharged, cancelled or expires.
Associates
IAS 28 Investments in Associates outlines the accounting
treatment for investments in associates. An associate is an entity
over which an investor has significant influence, being the power
to participate in the financial and operating policy decisions of
the investee (but not control or joint control).
A holding of 20% or more of the voting power (directly or
through subsidiaries) will indicate significant influence unless it
can be clearly demonstrated otherwise. If the holding is less than
20%, the investor will be presumed not to have significant
influence unless such influence can be clearly demonstrated. The
existence of significant influence by an investor is usually
evidenced in one or more of the following ways:
-- representation on the board of directors or equivalent governing body of the investee;
-- participation in the policy-making process;
-- material transactions between the investor and the investee;
-- interchange of managerial personnel; and
-- provision of essential technical information.
As at 31 December 2017 Phaunos has a 24% holding in Aurora
Forestal Limited and a 23% holding in Matariki Forest Group, which
constitutes significance influence and hence investments in
associates.
IFRS 10 establishes that an investor controls an investee if and
only if the investor has all of the following elements:
-- power over the investee, i.e. the investor has existing
rights that give it the ability to direct the relevant activities
(the activities that significantly affect the investee's
returns);
-- exposure, or rights, to variable returns from its involvement with the investee; and
-- the ability to use its power over the investee to affect the
amount of the investor's returns.
In assessing the above criteria, it has been determined that
Phaunos does not have control over either entity. Accordingly, both
entities are reported as associates as per IAS 28. In accordance
with IAS 28, when an investment in an associate or a joint venture
is held by, or is held indirectly through, an entity that is a
venture capital organisation, or a mutual fund, unit trust and
similar entities including investment-linked insurance funds, the
entity may elect to measure investments in those associates and
joint ventures at fair value through profit or loss in accordance
with IAS 39. For the purposes of IAS 28 Phaunos is classified as a
venture capital entity.
(g) Biological assets
Biological assets for newly established plantations are
initially recognised at cost, which includes silviculture costs for
establishing the plantation. The establishment period is generally
assumed to be up to three years, consistent with IAS 41:
Agriculture ("IAS 41"). Biological assets for established
plantations are initially recognised at cost, which is the contract
value for the purchased standing timber.
Up to the 31 December 2016 reporting date, biological assets
were measured at fair value through profit or loss.
Following the adoption of the 'break-up' basis of accounting,
biological assets are valued at net realisable value.
Further disclosures relating to the subsequent measurement of
biological assets are provided in Note 14.
(h) Land
Land held for use in production or administration is initially
stated at acquisition cost in accordance with IAS 16: Property,
Plant and Equipment. As no finite useful life for land can be
determined, related carrying amounts are not depreciated.
Up to the 31 December 2016 reporting date, land was measured at
fair value adjusted for valuation changes and impairment loss
recognised after the date of the revaluation.
Following the adoption of the 'break-up' basis of accounting,
biological assets are valued at net realisable value.
Any increase in value under the revaluation model are credited
to OCI and accumulated in equity under the heading Land Revaluation
Reserve. A decrease arising as a result of a revaluation is
recognised in Operating Expense as an impairment to the extent that
it exceeds any amount previously credited to the Land Revaluation
Reserve.
When a revalued asset is disposed of, any revaluation surplus is
transferred directly to Retained Earnings. The transfer to Retained
Earnings is not made through the Consolidated Statement of
Comprehensive Income (that is, there is no "recycling" through
profit or loss), but the gain or loss relative to carrying value is
recognised in income.
(i) Cash and short-term deposits
Cash on hand, cash held on account and short-term deposits in
the Consolidated Statement of Financial Position comprise cash at
banks and on hand and short-term deposits with a maturity of three
months or less, which are subject to an insignificant risk of
changes in value.
For the purpose of the Consolidated Statement of Cash Flows,
cash and cash equivalents consist of cash and short-term deposits,
as defined above.
(j) Treasury Shares
Own equity instruments that are reacquired (Treasury Shares) are
recognised at the cost of acquisition and deducted from equity. No
gain or loss is recognised in profit or loss on the purchase, sale,
issue or cancellation of the Group's own equity instruments. Any
difference between the carrying amount and the consideration, if
reissued, is recognised in equity.
The buy-back programme was discontinued in 2017 and all
outstanding Treasury shares were cancelled post year end.
(k) Share-based payments
The Manager was previously entitled to receive a share-based
payment for management services rendered in the form of an
equity-based warrant instrument. The instrument entitled the
Manager the right to subscribe for Ordinary Shares in the Company
pursuant to the terms of the warrant instrument.
The cost of the equity-settled transaction was determined by the
fair value at the date when the grant was made using an appropriate
valuation model.
The share-based payment was discontinued in 2017 and all
outstanding warrants were cancelled. Refer to Note 23 for further
details.
(l) Dividend distributions
Dividend distributions are at the discretion of the Company. A
dividend distribution to the Company's Shareholders is accounted
for as a deduction from retained earnings and shown in the
Consolidated Statement of Changes in Equity. Dividends which have
been declared but not paid are recognised as a liability in the
period in which they are authorised and declared.
2.4 New standards and amendment
New standards, amendments and interpretations to existing
standards that become effective in the current accounting period
and have been adopted by the Group
Effective for
annual
periods beginning
International Financial Reporting Standards (IFRS) on or after
Amendment to IAS 7 - Statement of Cash Flows - 1 January 2017
amendments as a result of the Disclosure initiative
("IAS 7")
IAS 7 introduces additional disclosure explaining movements in
liabilities arising from changes in liabilities from financing
activities, including both cash and non-cash movements.
The Group does not have any liabilities from financing
activities therefore the application of the amendment to IAS 7 does
not impact the Consolidated Financial Statements.
New standards, amendments and interpretations to existing
standards that become effective in future accounting periods and
have not been adopted by the Group
Effective for
annual
periods beginning
International Financial Reporting Standards (IFRS) on or after
IFRS 9 - Financial Instruments ("IFRS 9") 1 January 2018
IFRS 15 - Revenue from Contracts with Customers 1 January 2018
("IFRS 15")
The Board does not anticipate that the adoption of standards or
interpretations currently in issue but not yet effective will have
any material impact on the Consolidated Financial Statements of the
Group in future periods. The Board has only disclosed those new
standards, amendments and interpretations to existing standards
that become effective in future which are relevant to the
Group.
IFRS 9, Financial Instruments
IFRS 9 "Financial Instruments" replaces IAS 39 "Financial
Instruments: Recognitions and Measurement" and is effective for
annual reporting periods beginning on or after 1 January 2018. It
specifies how an entity should classify and measure financial
assets and liabilities, hedging, and a new expected credit losses
model for calculating impairment of financial assets. The standard
also contains the new hedge accounting rules. The Group intends to
adopt the standard once it becomes mandatory.
Classification of Financial Assets and Financial Liabilities
IFRS 9 contains three principal classification categories for
financial assets: measured at amortised cost, fair value through
other comprehensive income ("FVOCI") and fair value through profit
or loss ("FVTPL"). IFRS 9 classification is generally based on the
business model in which a financial asset is managed and its
contractual cash flows.
Based on the Group's initial assessment, this standard is not
expected to have a material impact on the classification of
financial assets and financial liabilities of the Group. This is
because:
a) Other financial instruments currently measured at FVTPL under
IAS 39 are designated into this category because they are managed
on a fair value basis in accordance with a documented investment
strategy. These investments are not expected to meet the SPPI
criterion (solely payments of principal and interest) and
accordingly, these financial instruments will be mandatorily
measured at FVTPL under IFRS 9; and
b) Financial instruments currently measured at amortised cost
are: cash and cash equivalents, receivables and payables. These
instruments meet the SPPI criterion and are held in a
held-to-collect business model. Accordingly, they will continue to
be measured at amortised cost under IFRS 9.
Impairment of Financial Assets
IFRS 9 replaced the "incurred loss" model in IAS 39 with an
"expected credit loss" model. The new impairment model also applies
to certain loan commitments and financial guarantee contracts but
not to equity investments. Under IFRS 9, credit losses are
recognised earlier than under IAS 39.
Based on the Group's initial assessment, changes to the
impairment model are not expected to have a material impact on the
financial assets of the Group. This is because:
a) the majority of the financial assets are measured at FVTPL
and the impairment requirements do not apply to such instruments;
and
b) the financial assets at amortised cost are short-term (i.e.
no longer than twelve months) and/or assets considered to be of
high credit quality; accordingly, the expected credit losses on
such assets are expected to be small.
Hedge Accounting
The Group does not apply hedge accounting; therefore, IFRS 9
hedge accounting-related changes do not have an impact on the
financial statements of the Group.
IFRS 15, Revenue from Contracts with Customers
The new IFRS 15 standard requires entities to recognise revenue
to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services.
This core principle is achieved through a five step methodology
that is required to be applied to all contracts with customers.
The new standard will also result in enhanced disclosures about
revenue, provide guidance for transactions that were not previously
addressed comprehensively and improve guidance for multiple-element
arrangements.
The standard is effective on or after 1 January 2018. The
Directors believe that the application of IFRS 15 will not have a
significant impact on the amounts reported and disclosures made,
but will revise the revenue recognition policy to reflect the
changes in IFRS 15 as noted below.
When measuring and recognising revenue, the entity will apply
the following five-step model in relation to harvesting
contracts:
1) Identify the contract(s) with a customer;
2) Identify the performance obligations in the contract;
3) Determine the transaction price;
4) Allocate the transaction price to the performance obligations in the contract; and
5) Recognise revenue when (or as) the entity satisfies a performance obligation.
Smaller volume timber sale contracts may involve upfront payment
in full, whereas contracts involving large volumes to be harvested
over a period exceeding a year will often have a number of interim
payments associated with the contract.
Timber sale contracts do not generally comprise work in progress
and all performance conditions must be met before the contract
takes effect. According to Management's assessment there is no
significant impact on the Group and the Consolidated Financial
Statements are not expected to be significantly.
There are certain other current standards, amendments and
interpretations that are not materially relevant to the Group's
operations.
3. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the Group's Consolidated Financial Statements
requires management to make judgements, estimates and assumptions
that affect the reported amounts of revenues, expenses, assets and
liabilities, and the disclosure of contingent liabilities.
Uncertainty about these assumptions and estimates could result in
outcomes that require a material adjustment to the carrying amount
of assets or liabilities affected in future periods.
Judgements
In the process of applying the Group's accounting policies,
Management has made the following judgements, which have the most
significant effect on the amounts recognised in the Consolidated
Financial Statements:
Going concern
Due to the outcome of the Continuation Vote the Directors have
considered the impact on the basis of preparation of the
Consolidated Financial Statements. The Directors are of the view
that the preparation of the Consolidated Financial Statements on a
'break-up' basis is appropriate and that the Consolidated Financial
Statements should reflect the circumstances existing at the end of
the reporting period.
It is anticipated that the realisation of the assets will take
between fourteen to twenty months from the date of this report,
although there are material uncertainties inherent in the disposal
process which may result in this time period being extended.
Despite the Group's accounts being prepared on a 'break-up'
basis, the Group is able to meet its obligations as they fall due
within a minimum period of twelve months from the date of this
report.
Assessment of fund investments as structured entities
The Company has assessed whether the funds in which it invests
should be classified as structured entities. The Company has
considered the voting rights and other similar rights afforded to
investors in these funds, including the rights to remove the fund
manager or redeem holdings.
The Company has concluded as to whether these rights are the
dominant factor in controlling the funds, or whether the
contractual agreement with the fund manager is the dominant factor
in controlling these funds.
The Company has concluded that none of their fund investments
are classed as a structured entity.
Estimates and assumptions
The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date, that have a
significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year,
are described below. The Group based its assumptions and estimates
on parameters available when the Consolidated Financial Statements
were prepared, including making allowance for the net realisable
value of Group assets held. Existing circumstances and assumptions
about future developments, however, may change due to market
changes or circumstances arising that are beyond the control of the
Group. Such changes are reflected in the assumptions when they
occur.
Determining fair values and net realisable value of assets
The fair value of financial assets are based on the NAV of the
underlying investment which approximates the fair value of the
investments, due to the underlying funds accounting for investments
on a fair value basis. Investments in unquoted companies are not
actively traded, hence valuations are more uncertain than those of
more widely traded securities. Changes in the fair value of
financial assets are subject to the fair value of the underlying
land and biological assets.
Financial assets were assessed at year end, to account for
changes from fair value to net realisable value.
Land and biological assets at the reporting date are valued at
net realisable value, also reflecting all costs expected to be
incurred to realise the assets, along with all taxes to be paid, on
the disposal proceeds and the repatriation of cash balances.
Valuation techniques applied in determining the net realisable
value of financial assets, biological assets and land are subject
to significant estimates and assumptions. Note 14 includes details
of the valuation process and valuation techniques applied.
The December 2017 independent valuations have been utilised as
the starting basis for determining the fair value of the assets,
minority control and liquidity discounts and changes in foreign
exchange, estimated selling costs and applicable taxes being
further applied, as a result of the Consolidated Financial
Statements being compiled on the 'break-up basis'.
Estimated Taxation
As a result of the decision by the Shareholders not to continue
the Company the Board has commissioned tax specialists to calculate
the possible direct and indirect tax impact of the realisation of
the Group's assets, repatriation of funds and intercompany loan
forgiveness, based on certain assumptions. For the purpose of
providing estimates it was assumed that all companies are tax
resident in the territory in which they are incorporated and that
the underlying assets will be sold at their carrying value.
Provision for wind-down costs
Given the anticipated wind-down of the Group, a provision has
been made for the costs to liquidate and deregister all wholly
owned subsidiaries, along with Phaunos Timber Fund Limited
itself.
The provisions have been recorded in Note 21.
4. SEGMENT INFORMATION
In accordance with IFRS 8, the Board, as a whole, has been
determined as constituting "the chief operating decision maker" of
the Group. The key measure of performance used by the Board in the
capacity as chief operating decision maker is to assess the Group's
performance and to allocate resources based on the total return of
each individual investment within the portfolio.
In assessing how the Board reviews the Group's performance, it
is the view of the Board that the Group is engaged in one revenue
generating segment of business, being investment in timber and
timber-related investments. The asset categories referred to
elsewhere in the 2017 Annual Report are not indicative of segments
reported by the Group and how the Board makes decisions and reviews
Group performance.
The following summarises the Group's revenue from timber
operations by geographic location.
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Geographic information
Revenue from timber operations
South America 6,948 2,479
6,948 2,479
====== ======
The non-current asset and revenue information is based on the
place of incorporation of the relevant portfolio investee
entity.
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Major customers
Revenue from timber operations
Mata Mineira 6,535 145
Eucateca 388 2,268
Pradera Roja 25 66
6,948 2,479
====== ======
A major customer represents revenue generated by a Portfolio
investee entity that is greater than 10% of the Group's total
revenue from timber operations.
5. GROUP INFORMATION
The Consolidated Financial Statements of the Group include the
following subsidiaries and minority investments:
Name of entity Purpose Place of % holding % holding
incorporation 31 Dec 31 Dec
17 16
------------------------------------ ----------- ---------------- ---------- ----------
Holding
Alzamendi Participacoes SA Co Brazil 100 100
==================================== =========== ================ ========== ==========
Caldrey SA Dormant Uruguay 100 100
==================================== =========== ================ ========== ==========
Cottage International Group Holding British Virgin
Limited Co Islands 100 100
==================================== =========== ================ ========== ==========
Eucateca SA Operating Brazil 100 100
==================================== =========== ================ ========== ==========
Holding British Virgin
Exclusive Technologies Limited Co Islands 100 100
==================================== =========== ================ ========== ==========
Green China Forestry Company Holding
Limited Co Hong Kong 100 100
==================================== =========== ================ ========== ==========
GreenWood Tree Farm Fund Operating USA 17 17
==================================== =========== ================ ========== ==========
Holding British Virgin
Hamar Holding Limited Co Islands 100 100
==================================== =========== ================ ========== ==========
Mata Mineira Investimentos Holding
Florestais LTDA Co Brazil 100 100
==================================== =========== ================ ========== ==========
Holding
Nora Timber Cyprus Limited Co Cyprus 100 100
==================================== =========== ================ ========== ==========
Holding
Nortimber BV Co Netherlands 100 100
==================================== =========== ================ ========== ==========
NTP Timber Plus+ Fund I, LP Loan USA 9 9
==================================== =========== ================ ========== ==========
Phaunos Boston Incorporated Dormant USA 100 100
==================================== =========== ================ ========== ==========
Phaunos Brazil Investimentos Holding
Florestais LTDA Co Brazil 100 100
==================================== =========== ================ ========== ==========
Holding
Phaunos China Limited Co Hong Kong 100 100
==================================== =========== ================ ========== ==========
Holding
Phaunos Norge AS Co Norway 100 100
==================================== =========== ================ ========== ==========
Holding
Phaunos US Incorporated Co USA 100 100
==================================== =========== ================ ========== ==========
Pradera Roja S.A. Operating Uruguay 100 100
==================================== =========== ================ ========== ==========
Holding
Romfor Timber (Cyprus) Limited Co Cyprus 100 100
==================================== =========== ================ ========== ==========
Holding
Terrific Plan Limited Co Hong Kong 100 100
==================================== =========== ================ ========== ==========
Holding British Virgin
Tura Holding Limited Co Islands 100 100
==================================== =========== ================ ========== ==========
Vale do Jequitinhonha Silvicultura
e Participacoes LTDA Operating Brazil 100 100
==================================== =========== ================ ========== ==========
Holding
Waimarie Forests Pty Ltd Co Australia 100 100
==================================== =========== ================ ========== ==========
Holding
WoodNRG Limited Co Cyprus 100 100
------------------------------------ ----------- ---------------- ---------- ----------
The Consolidated Financial Statements of the Group include the
following Associates:
Name of entity Purpose Place of % holding % holding
incorporation 31 Dec 31 Dec
17 16
------------------------- ----------- ---------------- ---------- ----------
Aurora Forestal Limited Operating Uruguay 24 24
========================= =========== ================ ========== ==========
Matariki Forest Group Operating New Zealand 23 23
------------------------- ----------- ---------------- ---------- ----------
6. REVENUE FROM TIMBER OPERATIONS
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Income - standing timber
sales 6,948 2,479
6,948 2,479
============ ============
7. COST OF SALES
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Depletion 5,028 75
Cost of sales - standing timber 461 1,424
Cost of sales - other 17 204
5,506 1,703
============ ============
8. TIMBER OPERATING EXPENSES
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Direct timber costs
Property management fees 738 795
Property, repairs and maintenance 156 92
894 887
------------ ------------
Indirect timber costs
Liquidation and deregistration 291 -
costs
Professional fees 284 267
Other taxes 256 567
Accounting fees 250 233
Foreign exchange losses 163 188
Legal fees 150 147
Other timber costs 79 148
Fees paid to auditors 43 52
Transaction costs 40 823
1,557 2,425
------------ ------------
Total timber operating expenses 2,451 3,312
============ ============
9. INVESTMENT INCOME
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Distribution income 6,031 4,893
Interest income 838 1,027
Dividend income 555 1,109
7,424 7,029
============ ============
10. INVESTMENT OPERATING EXPENSES
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Portfolio management fees* 3,120 838
Liquidation and deregistration 2,539 -
costs
Administration fees 701 641
Professional fees 594 153
Fees paid to auditors for audit
services 332 247
Directors' remuneration 307 201
Other expenses 221 836
Legal fees 211 187
Corporate advisory fees 111 79
Travel expenses 43 68
Accounting fees 33 30
Directors' expenses 30 25
Occupancy expenses 27 32
Commission expenses 23 32
Appraisal fees 22 -
Directors', Officers' and other
insurance 20 28
Foreign exchange losses 1 36
Share-based management fee - 574
8,335 4,007
============ ============
*In accordance with the amended Portfolio Management Agreement
("PMA"), which came into effect from 1 December 2016, the outcome
of the Continuation Vote mandated an additional payment as
compensation for Stafford's rights under the warrant instrument.
Stafford became entitled to an increased base fee payment of 1%
(2016: 0.35%) from 1 July 2014 (the Commencement Date of the PMA)
to the date of the Continuation Vote, equivalent to an increase of
65 basis points (0.65%) of Phaunos' Market Capitalisation.
Included in the management fee is the penalty payment to cancel
the contract over the fair value of the warrants of $1.7 million,
derived from the cash payment of $4.4 million and the reversal of
the warrants reserve of $2.7 million.
11. REALISED (LOSSES)/GAINS ON DISPOSAL OF ASSETS
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Realised gain on disposal of investments - 8,273
Realised loss on disposal of land (1,305) (430)
Realised loss on disposal - other (137) (3)
(1,442) 7,840
============ ============
12. INCOME TAX EXPENSE
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Current income tax:
Accounting (loss)/profit before
income tax (789) 18,767
--------- --------
Accounting profit in non-tax paying
jurisdictions 15,157 20,871
Accounting loss in tax paying jurisdictions (15,947) (2,104)
At weighted average income tax rate
of 34% (2016: 34%) for tax paying
jurisdictions (5,422) (715)
========= ========
Adjustments:
Revaluation of biological assets
and land 4,034 685
Entity taxed on revenue no profit 1,910 (367)
Non-deductible expenses 1,102 -
Repatriation taxes 1,098 -
Depletion adjustments 376 -
Other adjustments 270 836
Provisions raised 96 -
At the effective income tax rate
of
(21.7)% (2016: 20.9%) of the accounting
profit/(loss) before income tax 3,464 439
========= ========
Reported in the Consolidated Statement
of Comprehensive Income:
Income tax 3,464 439
Deferred tax - -
3,464 439
========= ========
The weighted average income tax rate is calculated by applying
the local jurisdiction statutory income tax rate to the net
accounting profit/(loss) for wholly owned subsidiaries in taxpaying
jurisdictions. The effective income tax rate is calculated by
dividing the effective income tax charge by the net accounting
profit/(loss) in taxpaying jurisdictions. Taxation for subsidiaries
operating in jurisdictions outside Guernsey is calculated at the
rates prevailing in the respective jurisdictions.
Under the 'break-up' basis of accounting, all potential
repatriation taxes have been raised, along with taxes from
continuing operations.
The Group has been granted exemption from Guernsey Income Tax
under the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989,
and is charged an annual fee of GBP1,200 (2016: GBP1,200). As a
result, the taxation charge for the year relates solely to the
Company's subsidiaries. The principal reason for the tax charge is
profitability of some of the Group's subsidiaries.
13. (LOSS)/EARNINGS PER SHARE
The basic and diluted loss per Ordinary Share is based on the
net loss for the year attributable to Ordinary Shareholders of
US$4.3 million (2016: US$18.3 million profit) and 545,911,791
(2015: 557,162,732) Ordinary Shares, being the basic weighted
average number of Ordinary Shares in issue during the year.
During the prior years (2016, 2015 and 2014) the Company issued
warrants to Stafford to subscribe for an aggregate of 30 million
shares in the Company as part of the Portfolio Management
Agreement, as disclosed in note 22. At no point between the issue
of the warrants and the date on which they lapsed had the share
price of the Company been above the strike price of the warrants.
As such, these warrants were anti-dilutive and have not impacted
the basic earnings per share. The warrants have now lapsed as a
result of the 2017 AGM and the Shareholders ordinary resolution not
to continue the Company.
14. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
14.1 Valuation process
The fair value of financial assets, land and biological assets
are determined as follows for each class:
i. Valuation of financial assets designated at fair value
through profit or loss ("financial assets")
The Directors use their judgement in selecting an appropriate
valuation technique for Level 3 financial assets. The Directors
consider that the valuation methods applied are appropriate for
estimating the fair value of the financial assets.
Investments in associates are measured at fair value based on
the NAV of the associate, as reported by the underlying manager.
Such NAVs are prepared on a fair value basis in accordance with
IFRS. The NAV of each associate includes assets valued by an
independent external appraiser.
These appraisals, which are reviewed by the Directors, use the
methods described in ii) below. Phaunos adjusts the NAV with the
fair value of land and biological assets for the associates and, in
the case of Aurora Forestal, also for the sawmill and co-generation
plant.
Other financial assets are measured at fair value based on each
underlying company's NAV in accordance with IFRS, as reported by
the underlying manager. The NAV includes assets valued by an
independent external valuer at year end and reviewed by the
Directors. The Directors review the main assumptions of market
price, land prices, timber prices, growth rates and discount rates
and utilise more updated information if applicable and, where
relevant, will recommend adjustments to determine fair value. Any
adjustments are subject to approval by the Board.
At 31 December 2017 the carrying value of the Group's financial
assets designated at fair value through profit or loss have been
adjusted to incorporate estimated direct and indirect taxes, sales
commission, liquidity and minority discount and other costs
anticipated on the realisation of these financial assets which is
in line with the break-up basis.
A minority discount of 50% was applied to the value of the
Company's holdings in Aurora Forestal at year end.
ii. Valuation of land and biological assets
Land is held at fair value through profit or loss adjusted for
sales at 31 December 2017. Biological assets held by operating
subsidiaries are carried at fair value less cost to sell at 31
December 2017. In line with common industry practice, the fair
value is based on the value determined by independent external
valuers and, where appropriate, adjusted by the Directors.
The external valuers are independent third-party firms with
significant experience in the asset class and membership of a
valuation industry organisation. The Group requires its valuations
to meet the Uniform Standards of Professional Appraisal Practice of
the Appraisal Standards Board or similar standards established by
equivalent institutions.
Valuations are carried out annually as at 31 December and
valuers have previously been rotated after a three-year period.
The Audit and Valuation Committee of the Board has elected to
retain all current appraisers, due to the wind-down status of the
Company.
The first valuation in each three-year cycle is based on a full
detailed assessment of all available information including a
property visit and inspection. It is Group policy that, in the
first year, the valuer inspects the asset with the property manager
and, in the case of timberland, the valuer is required to visit
multiple tracts on the property. In the two subsequent years, the
same valuer performs an update valuation which replicates the full
valuation process, but without a property inspection.
Independent valuations are based on a reconciled value using a
combination of up to three valuation methodologies. These
include:
-- the Cost Approach, based on the sum of components including
the land value and standing timber value;
-- the Income Approach, based on discounted cash flow valuations; and
-- the Sales Comparison Approach based on comparable asset sales
where these are available and pertinent.
-- Furthermore, the Board, along with the previous Managers,
have considered further discounts to the appraisal, on the basis of
minority discounts and the net sales price that could be
realised.
Under the 'break-up' basis of accounting, assets have been
valued at net realisable value to reflect the expected outcome of
the sales process, including liquidity and minority discounts.
As denoted above, there are several different valuation
methodologies and each valuation methodology has a number of key
inputs.
The cost-based approach valuation looks at an area and
determines what it costs to buy the land, clear it, prepare it for
planting, and maintain it until grown until a certain stage.
The income approach takes into account the productive area,
current and forecast log prices, current and forecast costs, market
and harvesting constraints, growth rates and standing timber
volumes as derived from detailed timber inventories. While growth
can be used as a measure for the change in value it is only one of
a number of key inputs into one of the three methodologies often
used to define value. In practice, growth increases can often be
offset by changes in log prices, as well as changes to discount
rates or operational costs. It is the appraiser's responsibility to
derive what they see as a reasonable discount rate to apply when
preparing an income-based valuation. The appraisers conduct their
valuation from the perspective of a potential buyer and build a
Weighted Average Cost of Capital ("WACC") using input parameters
that are reflective of the broader investor market.
The sales comparison approach is typically used for mature
timberland markets or regions where there is a reasonable turnover
of properties each year which are comparable to owned property. The
appraiser is able to compare similarities between the properties to
determine value per hectare.
The key considerations in valuing timber assets include the
market price of timber, land values, growth rates and discount
rates. The underlying assumptions of each of the independent
appraisals are that there is a competitive market for the
timberland asset with willing sellers and willing buyers and that
end product markets will materialise for greenfield plantation
developments in emerging or frontier regions.
The assumptions concerning the key considerations mentioned
above at the reporting date, which have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are updated by the
valuers annually.
Due to the number of detailed inputs used within biological
valuations the Board relies upon annual valuations.
The carrying value of the Group's biological assets and land at
31 December 2017 have then been adjusted for the estimated direct
and indirect taxes, sales commission, and other costs anticipated
on the realisation of these assets which is in line with the
break-up basis.
14.2 Fair Value Hierarchy
Financial assets designated at fair value through profit or loss
(including investments in associates), biological assets and land
recorded at fair value are analysed by using a fair value hierarchy
that reflects the significance of inputs. The fair value hierarchy
has the following levels:
Level 1 inputs are quoted prices (unadjusted) in active markets
for identical assets or liabilities that the entity can access at
the measurement date.
Level 2 inputs are inputs other than quoted prices included
within Level 1 that are observable for the asset or liability,
either directly or indirectly.
Level 3 inputs are unobservable inputs for assets or liabilities
that are not based on observable market data (that is, unobservable
inputs).
As at 31 December 2017 the net realisable value of the assets is
based on the 31 December 2017 NAV adjusted for liquidity and
minority discounts, sales commission expense, estimated sales tax
and other costs to sell the assets.
The Group held the following assets at net realisable value,
which are all categorised as Level 3 in accordance with the fair
value hierarchy in IFRS 13:
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Associates 176,083 165,922
Other financial assets 9,240 14,658
185,323 180,579
Non-financial assets
Biological assets 15,254 29,298
Land 30,713 40,739
------------ ------------
45,967 70,037
Net realisable value at end of year 231,290 250,616
------------ ------------
For assets that are recognised in the Consolidated Financial
Statements at fair value on a recurring basis, the Group determines
whether transfers have occurred between levels in the hierarchy by
re-assessing categorisation (based on the lowest level input that
is significant to the fair value measurement as a whole) at the end
of each reporting year. There were no transfers between Levels
during the year.
Other financial assets and liabilities
For all other financial assets and liabilities, including trade
and other receivables; cash and cash equivalents; and trade and
other payables, the carrying value is an approximation of fair
value due to its short-term nature.
The below tables reflect the movements in assets designated as
Level 3 during the course of the year.
14.3 Reconciliation of recurring fair value measurements
categorised within Level 3 of the fair value hierarchy
As at 31 December Other financial Biological
2017 Associates assets assets Land Total
US$'000 US$'000 US$'000 US$'000 US$'000
------------------------ ----------- ---------------- ----------- -------- ---------
Opening fair value 165,922 14,658 29,298 40,738 250,616
------------------------ ----------- ---------------- ----------- -------- ---------
Total gains or
losses for the
year:
------------------------ ----------- ---------------- ----------- -------- ---------
Unrealised gain/(loss)
included in profit
or loss:
Revaluation and
impairments 16,345 (5,418) (8,600) (2,927) (600)
Foreign exchange
translation 3,463 - (162) (174) 3,127
------------------------ ----------- ---------------- ----------- -------- ---------
19,808 (5,418) (8,762) (3,101) 2,527
------------------------ ----------- ---------------- ----------- -------- ---------
Unrealised gain
included in other
comprehensive income:
Revaluation - - - (4,549) (4,549)
Foreign exchange
translation - - - (90) (90)
------------------------ ----------- ---------------- ----------- -------- ---------
- - - (4,639) (4,639)
------------------------ ----------- ---------------- ----------- -------- ---------
Purchases, issues,
sales and other
movements:
Purchases and other
costs - - 492 - 492
Disposals - - (454) (2,183) (2,637)
Depletion - - (5,028) - (5,028)
Return of capital (9,647) - - (9,647)
Other - - (292) (103) (395)
(9,647) - (5,282) (2,286) (16,875)
------------------------ ----------- ---------------- ----------- -------- ---------
Closing fair value 176,083 9,240 15,254 30,713 231,290
------------------------ ----------- ---------------- ----------- -------- ---------
The following is a reconciliation of the beginning and ending
balances for recurring fair value measurements of assets and
liabilities that utilise significant unobservable inputs (Level 3)
at the reporting date and the prior year-end.
As at 31 December Other financial Biological
2016 Associates assets assets Land Total
US$'000 US$'000 US$'000 US$'000 US$'000
------------------------ ----------- ---------------- ----------- -------- ---------
Opening fair value 152,908 38,191 23,352 35,421 249,872
------------------------ ----------- ---------------- ----------- -------- ---------
Total gains or
losses for the
year:
------------------------ ----------- ---------------- ----------- -------- ---------
Unrealised gain/(loss)
included in profit
or loss:
Revaluation and
impairments 13,270 (6,748) 1,152 697 8,371
Foreign exchange
translation 1,758 - - - 1,758
15,028 (6,748) 1,152 697 10,129
------------------------ ----------- ---------------- ----------- -------- ---------
Unrealised gain
included in other
comprehensive income:
Revaluation - - - 2,303 2,303
Foreign exchange
translation - - 6,659 4,577 11,236
------------------------ ----------- ---------------- ----------- -------- ---------
- - 4,397 6,880 13,539
------------------------ ----------- ---------------- ----------- -------- ---------
Purchases, issues,
sales and other
movements:
Purchases and other
costs - - 1,896 - 1,896
Depletion - - (75) - (75)
Disposals - - (3,248) (1,814) (5,062)
Return of capital (1,303) (16,785) - - (18,088)
Reclassified on
disposal of land - - - (445) (445)
Adjustment to cost (712) - (438) - (1,150)
(2,015) (16,785) (1,865) (2,259) (22,924)
------------------------ ----------- ---------------- ----------- -------- ---------
Closing fair value 165,922 14,658 29,298 40,739 250,616
------------------------ ----------- ---------------- ----------- -------- ---------
14.4 Significant unobservable inputs and sensitivity
analysis
IFRS 13 requires that quantitative information be provided about
significant unobservable inputs used in the fair value measurement
for each class of Level 3 asset and liabilities. The following data
as at 31 December 2017 and 31 December 2016 summarises the
valuation methods and information about fair value measurements and
related significant unobservable inputs (Level 3) where, if
changed, could significantly increase or decrease the valuation of
an asset (e.g. NAV per share, timber and land prices, discount
rates).
Asset Fair Fair Valuation Valuation Significant Range (1) Sensitivity Inter-relationship
Value Value Method Source Unobservable Rate (2) between significant
31 Dec 31 Dec Inputs unobservable inputs
17 16 and fair value
US$'000 US$'000 measurement
------------- ---------- ---------- ---------------- ---------------- ------------- ------------------- --------------- ---------------------
The net realisable
value , profit
for the year and
equity value of
the Group would
Average log price increase /
change(3) of (decrease)
+/-5% if the NAV of the
(2016: +/-5%) associate increased
or decreased due
Average to:
production +/-8% (2016: -- estimated log
cost change of +/-7%) prices being
+/-5% higher/(lower)
(2016: +/-5%) -- the
+/-4% (2016: risk-adjusted
Discount rate +/-4%) discount rates
change being
of +/-1% lower/(higher)
(2016: +/-1%) +/-6% (2016: -- estimated future
NAV based +/-4%) overheads being
on average Average land lower/(higher)
log prices, price -- land prices
discount change(4) of +/-1% (2016: being
NAV at Underlying rates, +/-5% +/-1%) higher/(lower)
fair value, manager land prices (2016: +/-5%) -- minority
adjusted based and discount
for minority on independent minority Minority discount +/-1% (2016: being
Associates 176,083 165,922 discounts appraisals discount of +/-10% n/a) higher/(lower)
------------- ---------- ---------- ---------------- ---------------- ------------- ------------------- --------------- ---------------------
The net realisable
value, profit for
the year and equity
value of the Group
would increase
/ (decrease) if
the value of the
under-lying land
increased/(deceased)
Underlying
manager
Other based
Financial NAV at on independent Land price change <+/-1% (2016:
assets(4) 9,240 14,658 fair value appraisals NAV of +/- 5% +/-1%)
at fair
value (2016: n/a)
------------- ---------- ---------- ---------------- ---------------- ------------- ------------------- --------------- ---------------------
The net realisable
value, profit for
the year and equity
value of the Group
would increase
/ (decrease) if:
Average log price -- estimated log
Combination change(3) of prices were
of the +/-5% higher/(lower)
income Timber (2016: +/-5%) +/-1% (2016: -- the risk-adjusted
and cost prices +/-1%) discount rates
capitalisation per m Discount rate were lower/(higher)
and change -- estimated future
Biological comparative Independent Discount of +/- 1% <+/-1% (2016: overheads being
assets 15,254 29,298 sales approach appraisal rates (2016: +/-1%) +/-1%) lower/(higher)
------------- ---------- ---------- ---------------- ---------------- ------------- ------------------- --------------- ---------------------
The net realisable
value, profit for
the year and equity
Average land value of the Group
Income price would increase
and cost change(3) of / (decrease) if:
capitalisation Independent Land prices +/-5% <+/-1% (2016: -- land prices
Land 30,713 40,739 approach appraisal per hectare (2016: +/-5%) +/-1%) were higher/(lower)
------------- ---------- ---------- ---------------- ---------------- ------------- ------------------- --------------- ---------------------
(1) All discount rates shown in the table are real rates as
opposed to nominal rates. All timber and land price ranges are
those used by the valuer in determining the biological assets and
land valuations
(2) This is the expected maximum change, positive or negative,
in NAV of any of the Group which could be incurred as a result of a
shift in the unobservable input
(3) Log and land prices have been adjusted for growth rates,
transport costs and liquidity
(4) RISK MANAGEMENT OBJECTIVES AND POLICIES
The Group's principal financial assets are investments in
associates and other financial assets, along with direct
investments in timberland through its wholly-owned subsidiaries.
The Group has receivables, payables and cash and cash equivalents
that arise directly from its operations.
The Group is exposed to market risk (including interest rate
risk, foreign exchange risk), credit risk and liquidity risk.
The Board oversees the management of these risks. The Audit and
Valuation Committee provide assurance to the Board that the Group's
financial risk-taking activities are governed by appropriate
policies and procedures and that financial risks are identified,
measured and managed in accordance with group policies for
risk.
The Board regularly reviews and agrees policies for managing the
risks which are summarised below:
(a) Market Risk
Market risk is the risk that the fair values of financial
instruments will fluctuate because of changes in market prices. Log
prices and land prices change in response to quality, supply and
demand and a range of external factors e.g. markets, geographical,
political etc.
A decrease in market conditions for timber and land between the
date of report and the date of disposal would have an impact on the
sales price achievable.
A price sensitivity to log and land prices is provided in note
14.4.
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values of
financial instruments. During the year the Group held cash and cash
equivalents in US Dollars, Euro, Brazilian Real, New Zealand
Dollars, Uruguayan Peso, Norwegian Krone, and Chinese Renminbi, the
returns on which vary with market rates.
The weighted average effective interest rate for cash and bank
balances at 31 December 2017 was 1.8% (2016: 2.88%).
The impact of changes in interest rates is immaterial to the
Group's net profit and NAV.
Foreign Exchange Risk
Currency risk is the risk that the value of a financial
instrument will fluctuate due to changes in foreign exchange rates.
The Group has significant exposure to the New Zealand Dollar and
Brazilian Real.
The Directors consider that the foreign exchange exposure to the
NZD is mitigated due to a good mix of local and export sales, with
log prices predominantly priced in USD.
Ceteris paribus a 10% strengthening/weakening in the NZD would
increase/decrease the Group NAV by 5.9%.
Likewise, a 10% strengthening/weakening in the BRL would
increase/decrease the Group's NAV by 1.5%.
Cash and cash equivalents
The Group's major foreign currency exposure in cash and cash
equivalents is to the Brazilian Real ("BRL"). The equivalent of
US$9.9 million (2016: US$7.4 million) in Brazilian Real was
invested in short term investment accounts for working capital
needs. An increase or decrease by 15% in the foreign exchange rate
would result in an increase or decrease of approximately US$1.5
million. As at 31 December 2017 the closing BRL exchange rate
utilised was 3.21368.
(b) Liquidity Risk
Liquidity risk is defined as the risk that the Group will
encounter difficulty in meeting obligations associated with
financial liabilities that are settled by delivering cash or
another financial asset. With the Company in wind-down there is
liquidity risk in that the timing of an eventual sale is uncertain
and the Group requires funding until that date.
The Board regularly evaluates the Group's cash position against
its trade payable. In the event that the Group would suffer cash
flow delays, it is sufficiently able to raise cash through the sale
of harvesting rights.
At 31 December 2017 the Group had cash reserves of US$47 million
and trade payables and wind-down provisions of US$5.8 million. The
Group, therefore, has sufficient cash resources to minimise any
liquidity risk.
(c) Credit Risk
Credit risk is the risk that the counterparty to a financial
instrument will cause a financial loss for the Group by failing to
discharge an obligation. The Group is exposed to credit risk by
holding cash and bank deposits with banks worldwide.
Credit risk on liquid funds is limited because the
counterparties are banks with high credit-ratings of at least Aa1
assigned by international credit-rating agencies or higher rated
banks for longer term deposits. The Board monitors credit ratings
to ensure that cash and bank deposits held by the Group are
maintained with institutions that have the appropriate credit
rating.
At 31 December 2017 and 31 December 2016, the Group had no loans
receivable. The Group's trade and other receivables excluding
prepayments due at those dates, subject to credit risk were as
follows:
Within 45 45 to 180 Over 180 days Total
days days
US$'000 US$'000 US$'000 US$'000
31 Dec 2017 5,555 1,470 236 7,261
31 Dec 2016 615 4,111 1,700 6,426
Phaunos' normal contractual terms require customers to pay a
deposit prior to commencing harvesting activities and payments for
each stand are required within 30 to 45 days from the date of
commencement of harvesting. Terms are considered for sale
transactions and disposals but mitigated by retaining ownership
until payments are received. Phaunos regards amounts receivable
after 180 days as higher risk due to an increased uncertainty in
factors which may affect amounts receivable e.g. foreign exchange
movements.
There are receivables that are past due but not impaired. The
Group has provided US$150,000 (2016: Nil) in respect of these
overdue debts, which the Group believes is the maximum current
expected loss.
The maximum exposure to credit risk in relation to financial
assets is represented by the carrying amount of financial assets
that is recognised in the Consolidated Statement of Financial
Position. The Group monitors its exposure through quarterly reviews
of financial and operational information to identify and monitor
risk.
15. CAPITAL MANAGEMENT
The Ordinary Share buy-back program was discontinued during the
year, the Warrant instruments related to the previous Manager have
been cancelled and the Treasury shares held at 31 December 2017
have been cancelled post year end.
The Company is not subject to externally imposed capital
requirements.
The Company's objectives for managing capital are to distribute
the proceeds of asset sales to shareholders as soon as is prudently
possible, after allowing for sufficient cash reserves to continue
operating and liquidate the Group holding structures and
Company.
The Group holds sufficient levels of cash and cash equivalents
for working capital requirements. Surplus resources are invested in
bank deposits of high credit quality with a low risk of adverse
changes in value.
16. INVESTMENT IN ASSOCIATES
Matariki Forestry Group
At 31 December 2017, the Company had 23.01% (2016: 23.01%)
ownership and voting rights in Matariki, a forestry company which
owns and leases forestry assets in New Zealand, where the company
is incorporated.
The following is a summary of distributions received by the
Company from Matariki, significant balances obtained from
Matariki's Consolidated Financial Statements for the year ended 31
December 2017, and a reconciliation of the fair value of Matariki,
which is included in the total value of financial assets designated
at fair value through profit or loss:
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Distributions
Distributions received* 15,678 6,196
============ ============
Summary of Consolidated Income Statement
for the year ended 31 December 2017
Gross timber revenue 376,908 277,406
Profit from continuing operations 168,580 83,701
Other comprehensive income 7,042 12,704
-------- ----------
Total comprehensive income 175,622 96,405
-------- ----------
Summary of Consolidated Statement
of Financial Position at 31 December
2017
ASSETS
Non-current Assets
Biological assets 677,766 504,768
Property, plant and equipment 97,889 95,967
Other non-current assets 49,406 42,770
Total non-current assets 825,062 643,505
-------- ----------
Total current assets 43,242 31,800
-------- ----------
Total Assets 868,303 675,305
-------- ----------
LIABILITIES
Non-current Liabilities
Deferred tax liability 123,082 52,646
Other non-current liabilities 637 897
-------- --------
Total non-current liabilities 123,719 53,543
-------- --------
Current Liabilities
Shareholder loans 14,720 81,517
Bank borrowings - -
Other current liabilities 20,254 19,821
-------- --------
Total current liabilities 34,975 101,338
Total Liabilities 158,694 154,881
-------- --------
Total Net Assets 709,609 520,424
======== ========
Fair Value of Associate
23.01% Share of Total Net Assets
(2016: 23.01%) 163,281 119,748
23.01% Share of Shareholder Loans
(2016: 23.01%) 3,387 18,757
-------- --------
166,668 138,505
Selling costs and realisation taxes (1,393) -
-------- --------
Net realisable value** 165,275 138,505
======== ========
*refers to dividends received and return of shareholder loan
** translated at USD/NZD 1.40499
Aurora Forestal Limited
The Company has 23.57% (2015: 23.57%) ownership and voting
rights in Aurora Forestal Ltd, a company incorporated in the
British Virgin Islands, which has mixed aged pine plantations and a
fully integrated sawmill and co-generation plant in Uruguay. The
following is a summary of dividends received by the Company from
Aurora Forestal and significant balances obtained from Aurora
Forestal's Consolidated Financial Statements for the year ended 31
December 2017, and a reconciliation of the fair market value of
Aurora Forestal, which is included in the total value of financial
assets designated at fair value through profit or loss:
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Dividends
Dividends received 555 1,109
============ ============
Summary of Consolidated Income Statement
for the year ended 31 December 2017
Gross timber revenue 23,685 21,906
Loss from continuing operations (13,216) (17,996)
Other comprehensive loss (1,604) (949)
Total comprehensive loss (14,820) (18,946)
Summary of Consolidated Statement
of Financial Position at 31 December
2017
ASSETS
Non-current Assets
Biological assets 46,204 47,712
Property, plant and equipment 72,852 85,865
Other non-current assets 1,859 1,827
Total non-current assets 120,915 135,404
------------ ------------
Total current assets 7,995 10,442
------------ ------------
Total Assets 120,910 145,846
------------ ------------
LIABILITIES
Total non-current liabilities (11,866) 11,594
Total current liabilities (16,269) 17,946
Total Liabilities (28,134) 29,540
------------ ------------
Total Net Assets 100,776 116,306
============ ============
Fair Value of Associate
23.57% Share of Total Net Assets
(2016: 23.57%) 23,753 27,413
Selling costs, realisation taxes
and minority discount (12,945) -
------------ ------------
Net realisable value 10,808 27,413
============ ============
The functional currency of Aurora Forestal Limited is US Dollars
and no foreign exchange conversions are therefore required.
17. CASH AND CASH EQUIVALENTS
For the purpose of the Consolidated Statement of Cash Flows,
cash and cash equivalents comprise of the following:
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Cash at bank and in hand 45,047 45,148
Short-term deposits 2,371 399
Cash held by third parties 30 35
------------ ------------
47,448 45,582
============ ============
The following table provides a breakdown of the Cash and Cash
Equivalents held in each jurisdiction:
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Guernsey 32,853 12,465
Brazil 9,916 7,392
United States 2,955 16,793
Uruguay 683 267
China 590 579
Norway 190 7,895
Cyprus 122 156
Netherlands 91 25
Australia 48 10
47,448 45,582
============ ============
The intention of the Board is to distribute cash to Shareholders
in a timely and orderly manner. It is recognised that certain
jurisdictions have legal and regulatory protocols that must be
adhered to and completed before the cash can be remitted to
Guernsey.
Whilst the process is underway to repatriate cash in a timely
manner, the administrative nature of the repatriation processes
takes time which is not always within the control of the Board.
It should further be noted that funds will be retained in the
local jurisdictions to cover operational expenses and the
anticipated deregistration cost.
18. TRADE AND OTHER RECEIVABLES
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Amounts falling due within one year:
Trade receivables 4,748 251
Amounts due from third parties on
disposal of assets 1,470 3,932
Dividend receivable from associates 555 1,109
Tax receivables 286 400
Other receivables 233 120
7,261 5,812
Amounts falling due after one year:
Amount due from third parties on disposal
of assets - 615
7,261 6,427
19. TRADE AND OTHER PAYABLES
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Amounts falling due within one year:
Other payables 875 640
Portfolio management fees payable 596 274
Taxes payable 254 439
Trade payables 56 113
Deferred revenue 42 31
1,823 1,497
20. PROVISIONS
31 Dec 2017 31 Dec 2016
US$'000 US$'000
Amounts falling due within one year:
Provision for legal litigations 2,000 -
Provision for liquidation and deregistration
costs 830 -
Provision for withholding tax on repatriation
of funds 1,098 -
3,928 -
A provision has been raised for litigation expenses, to cover
expected settlement costs and legal fees. There is significant
uncertainty pertaining to the total provision raised and timing of
any payments, due to the uncertain nature of under-lying legal
items.
Further provisions have been raised for expected liquidation
costs, along with expected withholding tax on repatriation of cash
balances. Timing of any liquidation costs and taxes payable are
likewise uncertain, as these are dependent on the timing of the
under-lying asset sales.
21. ISSUED CAPITAL AND RESERVES
Authorised shares
At 31 December 2016 and 31 December 2017: US$
Unlimited Ordinary Shares of no par value -
Ordinary Shares issued and fully paid
31 Dec 2016 Movement 31 Dec 2017
US$'000 US$'000 US$'000
Share Capital - Ordinary Shares 571,758 - 571,758
Less: Issue costs of Ordinary
Shares (17,474) - (17,474)
Less: Transfer to other reserves (110,418) - (110,418)
Total Share Capital - Ordinary
Shares 443,866 - 443,866
No. of Ordinary Shares 547,024,832 (1,495,000) 545,529,832
31 Dec 2015 Movement 31 Dec 2016
US$'000 US$'000 US$'000
Share Capital - Ordinary Shares 571,758 - 571,758
Less: Issue costs of Ordinary
Shares (17,474) - (17,474)
Less: Transfer to other reserves (110,418) - (110,418)
Total Share Capital - Ordinary
Shares 443,866 - 443,866
No. of Ordinary Shares 566,099,832 (19,075,000) 547,024,832
Treasury Shares
31 Dec 2016 Movement 31 Dec 2017
US$'000 US$'000 US$'000
Total Treasury Shares 10,707 691 11,397
No. of Treasury Shares 24,190,045 1,495,000 25,685,045
During the 2017 financial year, the Company purchased a total of
1,495,000 Ordinary Shares of no par value at a weighted average
price of 46 cents per share, held in treasury at 31 December 2017
and subsequently cancelled post year end.
The Authorised Share Capital of the Company is an unlimited
number of Ordinary Shares of no par value and 1,556,490,000 C
Shares of no par value.
A Member is a registered holder of a share and any person
entitled on death, disability or insolvency of a member.
22. WARRANT INSTRUMENT RESERVE
The Company had, in prior year, issued warrant instruments to
the Manager as part of the consideration for services to be
rendered. All warrants issued were cancelled upon the Manager's
resignation during the year.
31 Dec 2017 31 Dec 2016
'000 '000
Opening warrants 30,000 20,000
Warrants issued - 10,000
Warrants repurchased (30,000) -
Closing warrants - 30,000
23. DISTRIBUTIONS MADE AND PROPOSED
The Company is committed to returning all sales proceeds from
asset sales and distributions received during the year, after
allowing for cash reserves to wind-down the Group.
A dividend of US$0.016 cents per Ordinary Share (total dividend
of US$8.7 million) was paid to holders of fully paid Ordinary
Shares in July 2017.
A dividend of US$0.003 cents per Ordinary Share (total dividend
of US$1.6 million) was paid to holders of fully paid Ordinary
Shares in 2016.
Future distributions are planned in a timely manner, to follow
asset sales during the year.
24. CAPITAL COMMITMENTS
The Group does not have any outstanding capital commitments at
the year-end.
25. RELATED PARTY DISCLOSURES
The following table provides the total amount of transactions
that Phaunos Timber Fund Limited has entered into with related
parties and key management personnel during the year ended 31
December 2017 and 2016, as well as balances with related parties as
at 31 December 2017 and 2016. There were no sales or purchase
transactions entered into between related parties during the
current or prior financial years.
Related Party Year Nature of related Amounts received
party transaction from/(paid Amounts
to) related owed by/(to)
parties related parties
US$'000 US$'000
Transactions with related parties:
Dividend / distribution
Associates 2017 income 6,586 555
2016 4,893 1,109
Redemption of redeemable
2017 shares 9,647 -
2016 1,303 -
Key management personnel of the Group:
Directors within Directors' remuneration
the Group 2017 and expenses 307 6
2016 226 44
Phaunos Boston Inc. 2017 Compensation 160 -
2016 239 -
Stafford Capital Portfolio Management
Partners 2017 fees 1,531 596
2016 838 274
Stafford Capital Share-based
Partners 2017 management fee 4,382 -
2016 574 -
26. EVENTS AFTER REPORTING YEAR
On 10 January 2018, the Company announced a compulsory
redemption of 47,169,715 Ordinary Shares at US$0.53 per share,
representing 8.647% of the Ordinary Shares in issue prior to the
redemption.
All Treasury Shares held at 31 December 2017 have been cancelled
post year end.
Depositary services, being no longer required, were cancelled on
17 February 2018.
Investor Information
COMPANY INFORMATION
PTF is a Guernsey-domiciled authorised closed-ended investment
scheme, authorised by the Guernsey Financial Services Commission
under section 8 of The Protection of Investors (Bailiwick of
Guernsey) Law, 1987 (as amended) and the Authorised Closed-ended
Investment Schemes Rules 2008 made thereunder. The Company's
Ordinary Shares are traded on the Main Market of the London Stock
Exchange.
The Ordinary Shares are admitted to the Official List and are
traded on the Main Market of the London Stock Exchange. The
Ordinary Shares may be dealt in directly through a stockbroker or
professional adviser acting on an investor's behalf. The buying and
selling of Ordinary Shares may be settled through CREST.
The issued share capital of the Company at 31 December 2017 was
545,529,832 Ordinary Shares (2016: 547,024,832) and 25,685,045
Ordinary Shares (2016: 24,190,045) were held in treasury (Treasury
Shares), subsequently cancelled after year end.
The ISIN, SEDOL and the LSE mnemonic of the Ordinary Shares
are:
ISIN SEDOL LSE mnemonic
GG00BFX4LT97 BFX4LT9 PTF
SHAREHOLDER ENQUIRIES
The Company's CREST compliant registrar is, as at the date of
publication of these Consolidated Financial Statements, Link Asset
Services (Guernsey) Limited, who maintains the Company's registers
of Shareholders. They may be contacted by telephone on +44 (0)1534
847 445.
For information about investing in the Company contact:
info@phaunostimber.com
Directors and Service Providers
Registered Office
11 New Street
St Peter Port
Guernsey
GY1 2PF
Directors Auditors
Richard Boléat (appointed 31 Ernst & Young LLP
August 2017) PO Box 9
Jonathan Bridel (appointed 13 September Royal Chambers
2017) St Julian's Avenue
Brendan Hawthorne (appointed 25 July St Peter Port
2017) Guernsey
Sir Henry Studholme Bt (resigned GY1 4AF
31 August 2017)
Ian Burns (resigned 13 September
2017)
William Vanderfelt (resigned 31 August
2017)
Jane Lewis (resigned 31 August 2017)
Administrator, Company Secretary Depositary
Vistra Fund Services (Guernsey) Limited Vistra Depositary Services
11 New Street (Guernsey Limited
St Peter Port 11 New Street
Guernsey St Peter Port
GY1 2PF Guernsey
GY1 2PF
UK Transfer Agent Registrar
Link Asset Services Limited Link Asset Services (Guernsey)
The Registry Limited
34 Beckenham Road Mont Crevelt House
Beckenham Bulwer Avenue
Kent, England St Sampson
BR3 4TU Guernsey
GY2 4LH
Advocates to the Company Solicitors to the Company
(as to Guernsey Law) (as to English Law)
Ferbrache and Farrell Herbert Smith LLP
Somers House Exchange House
Rue Du Pre Primrose Street
St Peter Port London
Guernsey England
GY1 1LU EC2A 2HS
Corporate Broker Sales Agent
Winterflood Investment Trusts Poyry Capital
The Atrium Building Portland House
Cannon Bridge House Bressenden Place
25 Dowgate Hill London
London SW1E 5BH
England
EC4R 2GA
Enquiries:
Phaunos Timber Fund Limited (Chairman)
Richard Boléat
+44 (0)1534 625522
Vistra Guernsey (Company Secretary)
Chris Bougourd
+44 01481 754 145
Valerie Goodwin
+44 01481 732 153
Winterflood Investment Trusts (Corporate Broker)
Neil Morgan
+44 (0)20 3100 0000
Notes to Editors
Established in 2006, Phaunos Timber Fund Limited ("PTF" or "the
Company") invests in a concentrated, but diversified portfolio of
timberland and timber-related investments. It was announced on 19
June 2017 that the Company's continuation resolution had not been
passed. The Board is now conducting an orderly realisation of the
assets of the Company.
PTF is a Guernsey-domiciled authorised closed-ended investment
scheme, authorised by the Guernsey Financial Services Commission
under section 8 of The Protection of Investors (Bailiwick of
Guernsey) Law, 1987 (as amended) and the Authorised Closed-ended
Investment Schemes Rules 2008 made thereunder. The Company's
ordinary shares are traded on the Main Market of the London Stock
Exchange. www.phaunostimber.com
The Company's ticker is PTF. www.phaunostimber.com
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SEMFMWFASEFL
(END) Dow Jones Newswires
April 30, 2018 02:00 ET (06:00 GMT)
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