I should apologise for the apparent radio silence since my previous update but those of you reading this are probably used to it by now… apologies nonetheless.

 

With regards to what I thought would be our salvation (see previous update) that went sideways as one perhaps might have predicted. It’s a familiar tale of a group which was ostensibly one thing in terms of size and market reach; but apparently something less when put to the test. I have not fought shy of a fire sale for this long for others to try and manipulate a scenario wherein we are left with Hobson’s Choice.

 

I have been working on personal projects outside of and far removed from forestry in order to generate the funding required to finish “project agarwood”. Given that the company “survives” on no billable income and thus funds all its activities via almost certain to be entirely written-off interest free loans from its Directors, me being the last man standing, this highly inefficient model of operation is all we were left with short of declaring bankruptcy and watching the prescribed processes that would follow such an event take place. As bad as things may finish up… they will be better than that as an alternative. 

 

The missing link for us has, for some time now, been a lack of sales for our end product. I have had dealings with a number of organisations in a variety of locations and universally they state that our product is of a lower quality (than we were led to expect going back to the origins of the investments) and thus will command lower-end wholesale prices. When one tries to move towards conversations about retail possibilities one comes up against unreasonable terms and problems over guaranteeing supply / control over processing.

 

For some time therefore our options have been: 

 

  1. Process ourselves and then either try and market ourselves or sell wholesale to a marketeer.
  2. Hand over processing to a group that has vertical integration and proven sales capabilities. 

 

We could not take option (1) without funding in place. We had been unable to find a sensible suitor in respect of option (2) after several hopefuls had to eventually be discounted.

 

Were I retired and financially secure I would honestly suggest that we should do it all ourselves. The market is controlled in the main by, in relative terms, a select few parties who are entrenched in perpetuating the myth over the worth of this commodity… and it is valuable… when poached illegally. 

 

Plantation produced agarwood simply is not “there” yet in terms of wider market acceptance regarding its value. There is a huge opportunity to create new brands and product lines very specifically plantation based and to create and supply new markets for the same, but the viability is questionable unless significant economies of scale can be achieved. Serious investment would be required to set up a properly vertically integrated and scaleable business.

 

The myths remain… and I see capital raising in this space ongoing that is ultimately doomed to failure. Hindsight is a wonderful thing.

 

I reviewed (as part of an external consultancy) an investment recently which was to be backed out by agarwood plantations in Indonesia and Cambodia. They were looking at Thailand too. In order for the investment in question to work, the underlying needs to be producing 20% net of all fees and charges. 

 

When questioning the principals on their exit with a very natural interest in where that might be – they simply could not show me substantive proof of any ability to lock in pricing that will achieve the investment goals. It’s all based on what the “market” says they should be able to sell for. That, I dare say, is where Touchwood got it wrong. Aequus were a tad smarter and had agreements in place with Touchwood – a group with diverse forestry activities so not wedded solely to agarwood – these agreements to protect our viability at a fund level. Had Touchwood honoured their commitments then those reviewing and writing this email would be in a much, much better place irrespective of the problems we have now encountered on the back of the efficacy and commercial viability of the Minnesota technology. 

 

With Touchwood gone we have had to deal with the reality of the market rather than the headlines. It is totally possible that our naivety with regards to what lay beyond our initial scope of responsibility has damned us to the situation in which we now sit; but we can only deal with what is in front of us as best any of us can and hope that it survives the judgement of history.

 

I have agreed a deal (signature still pending at time of writing) with an increasingly vertically integrated grower, producer and marketer of agarwood products. We have had previous dealings with them and whist the terms are perhaps short of perfect, of all the counterparties with whom we have dealt or explored relationships this is the only one that has delivered anything. 

 

The deal is designed to see all remaining stored wood processed and then assessed and sold. It includes sale of existing stocks of oil and it allows for a variety of approaches to be taken (blending oil, adulterating oil, selling straight, selling wholesale and selling retail). 

 

The idea of the agreement is that – if at all possible – the bulk of sales (or as much as is practical) will be driven down the retail route. This markedly improves our price per kilo even with “low end” pricing in play. 

 

Monthly reporting encompassing sales, pipeline and a market and pricing overview is within the agreement and hence, as this rolls on I will be able to monitor and report regularly instead of the current (frustrating) ad hoc approach. 

 

This is not ideal by any stretch of the imagination but it genuinely represents the best option we have – unless anyone reading this wants to swing in with a substantial investment in infrastructure and marketing to facilitate doing this ourselves? 

 

Knowing what I now know, I would not want to be heading up such a venture. In my view we still don’t know what we don’t know no matter how much more clued in one might feel.  If this deal is not adjudged by those reading this as the best option we have… It is, for now, the best that I can do personally and on the basis that forgiveness is often easier sought than permission I am pushing to get a signature on the deal this side of the weekend.

 

There will still be choices going forwards and it may well be that these come down to a shareholder vote on matters but for now we need to get all trees into processing without any more delays as if we do not do so then we are repeating history from three years ago. To some extent, we already are, and that is a constant source of stress. This will also start to generate internal cash flow and with that, choices become more manifold rather than fewer. On that basis, I don’t see how anyone would argue with this course of action.

 

As ever, comments are welcomed and I now look forwards to this not being a false dawn but something now totally deliverable. In theory it’s already there… I just need to get the signature on the document and then arrange delivery of the trees / powder/ oil that we have in storage in the various locations.

 

Once the deal is signed and the delivery organised I will update again… hopefully that should be within the next few weeks and, just for once, I am confident of that. As a side note… if this deal falls through at the eleventh hour (as so many have before) then I now have the budget to go ahead and process on our own account. I regard that as in inferior course of action but at least it would be physical action that leads towards a final solution as opposed to the various machinations of the last year which have left us no further forwards.

 

Sincerely,