Price plunge challenges sandalwood

Facing challenging market conditions, Quintis Sandalwood has brought in KPMG to review the future prospects of managed investment schemes under its umbrella.

Sandalwood prices have collapsed more than 50 per cent in the past three years, hampered by pandemic-related logistics challenges and a Chinese ban on Australian timber.

As a result of this, and other issues such as rising volumes and harvest costs, Quintis has appointed KPMG to conduct an in-depth analysis of the TFS MIS Sandalwood Projects from 2007 to 2016 to provide an independent evaluation of the schemes' prospects.

Now owned by institutional investors, Quintis itself has seen falling revenue in recent years, with the latest available figures showing its sales were also in decline for much the same reasons.

In the year ending June 30 2022, Quintis sales fell more than 30 per cent to $33.1 million from $47.3 the previous corresponding period.

“The bottom line is we had some very good product sales in calendar 2021 but in 2022 and 2023 product sales have been flat,” Quintis chief executive Richard Henfrey told Business News.

“That is certainly not in line with our business plan.”

According to the notes to the accounts, Quintis revenue from the sale of its own products increased by 41 per cent in 2021-22 from the year prior, but total revenue fell due to $26.7 million in losses on the revaluation of contract assets, which are primarily lease and management fees from the MIS scheme investors who have deferred payment to Quintis in and instead granted the company a set percentage of gross harvest proceeds.

Mr Henfrey added that there had been some signs of improvement in the market lately, especially with the prospect of returning business with China after new trade protocols and biosecurity measures were put in place. The company has been taking a more conservative approach to valuing its 'biological assets', as trees are known, bring their value more in line with unprocessed timber prices.

It made a $289 million loss for the 2021-22 year, compared to being $334.4 million in the red the year prior. Significant impairments and an intended downward revaluation of its plantation assets had been a big part of those results.

The total asset base has fallen to $395 million, a 34 per cent drop in a year from $597.1 million, but even more significantly, from $937.5 million at June 30 2020. Net assets have flipped in two years from almost $300 million to a net liability of $275 million by June 30 2022. 

Quintis has also confirmed it had recently sold land in the Kununurra region, taking advantage of keen prices in the area.

Mr Henfrey said land had been leased back and the plantations remained part of the Quintis estate.

He said it was premature to guess the outcome of the KPMG report, but said the problems were significant.

Quintis has its origins in the tax-effective MIS products which allowed individual investors to become growers of a small part of a much bigger plantations, paying up-front a big part of the long-term cost of managing the trees to maturity. They received a big tax deduction for their investment but had to wait years, or even more than a decade in the case of sandalwood, to learn if there was a pay off.

These days, though, Quintis has less reliance on MIS growers for its business. For instance, it manages plantations on behalf of institutional investors. The company's focus is to process the wood for oil, chips or powder for burning as scent, and specialist wood for carving, products which it sells directly to buyers around the world, from perfume makers in France to those who supply religious users in markets such as India.

Exacerbating the current problem for MIS growers, who invested in the former Tropical Forestry Services schemes, are shortages of the labour in Kununurra and the increasing volumes of trees reaching the mandated age for harvest as TFS had much greater sales volumes in the latter half of the first decade of this century.

“At current prices and the quantity of resource harvested, and the cost of bringing that resource to market, there is a big challenge,” Mr Henfrey said.

Harvest costs are passed on to investors and, with the various schemes' rules requiring that harvest takes place within a certain timeframe, the poor prices mean many growers are being charged fees rather than receiving a return from their retirement nest egg.

Quintis arose from the collapse of TFS, a listed financial services and agribusiness player. It manages the growers’ trees through the full lifecycle and then arranges sandalwood sales on their behalf.

Some growers are unhappy to find that investments of a decade and half ago are not realising profits.

Sandalwood Growers Co-op director Barry Thompson is critical of the company’s transparency around harvesting and other operational matters including the recent sale of land.

“I am personally amongst the greater majority of growers receiving accounts, not dividends after 14 to 15 years of investment,” said Mr Thompson.

Mr Thompson, who claims to represent hundreds of investors, was concerned that the appointment of KPMG would result in Quintis abandoning growers.

Mr Thompson cites prices falling to as low as $20,000 a tonne from a high of $130,000t.

Quintis has publicly disputed the validity of such numbers, but acknowledges the slump is at least 50 per cent, a drop borne out by an examination of the previous reports to growers.

In its June 2023 Tender & Market Update to growers, Quintis said the tender held in November last year achieved disappointing results, with prices averaging $28,000t for the core part of the sandalwood tree known as heartwood, and then $29,000t at a further tender in January.

These prices are down from $78,000t Quintis reported to growers in January 2020.

Perhaps more alarming for growers is further news that an April tender brought bids for only 57 per cent of the sandalwood on offer, all of which was passed in as the prices were too low.