TFS anticipates 15% forest area increase

Perth-based grower of Indian Sandalwood, TFS Corporation Ltd has announced an anticipated 15 per cent increase in forest area available for sale in the 2006-07 financial year, along with the purchase of a farm for $18.5 million.

A statement from the company indicates the potential sale increase came as a result of a recent upgrade of the company's Kununurra operations and its sales and marketing network. The upgrade, to approximately 375 hectares of forest, comes after the company boosted its profits by 25 per cent to almost $12 million, when the company had only 326.5 ha available.

TFS chairman Frank Wilson siad the company was confident it could meet the increased sales target for the 2006-2007 financial year following last year's results and positive sample tests.

The company, which has the world's largest farmed Indian Sandalwood forests at 840 ha, also announced that it had entered in to a conditional contract for the purchase of Kingston Rest, an operating hay and cattle farm around 66km south of Kununurra.

The contract for the 6,800 ha property, of which 1,900 ha is suitable for sandalwood, is conditional upon due diligence and the approval of the Environmental Protection Authority.

Mr Wilson said the purchase represented an attractive opprtunity to extend the company land bank.

"The property boasts important attributes, with a significant discrete area of land and ample availablilty of water," he said.

The full text of the TFS announcement is pasted below

TFS Corporation, the Western Australian-based Indian sandalwood grower, is pleased to announce an increase in anticipated sales in FY07 and the company's signing of a conditional contract that, if completed, will materially extend the company's land bank for the purposes of Indian sandalwood cultivation.

Based on the company's improved sales and marketing distribution network, and the recently completed upgrade of its Kununurra operations and related infrastructure, TFS advises that it now anticipates sales of approximately 375 hectares of Indian sandalwood in FY07. This would represent an increase of nearly 15% over the 326.5 hectares of sales concluded in FY06 and compares to previous guidance for FY07 of 325 hectares. As with prior periods, the majority of the sales will occur in the second half of the year.

TFS Chairman Frank Wilson said: "We are confident that we can meet this increased sales target for FY07 given the oversubscribed response to our TFS 2006 Indian sandalwood project, our improved market penetration on the east coast of Australia and the increased capability of our Kununurra operation. We are also encouraged by the recent sample testing of our plantations, as first announced on 9 October 2006, which supports the predicted heartwood yield of our sandalwood trees."

All of the company's existing land bank and plantation operations lie in the Kununurra region of Stage 1 of the Ord River Irrigation Area (ORIA), in Western Australia. This region offers ideal growing conditions for Indian sandalwood, with its tropical climate, abundant water, fertile clay-based soils, absence of natural predators and suitable distance away from cyclone-bearing locations.

TFS currently has 840 hectares under plantation in the ORIA. It also has a further 775 hectares of land available, which it is anticipated will be sufficient for planned new plantings through to the end of calendar 2008.

The company is actively seeking both land leases and land purchases in Kununurra. It has also lodged an expression of interest in acquiring land in Stage 2 of the ORIA, which is currently at the development proposal stage but not expected to be approved in the immediate future.

TFS has today entered into a conditional contract for the purchase of Kingston Rest, an operating hay and cattle farm some 66 kilometres south of Kununurra. The property comprises 2,400 hectares of freehold land, 1,200 hectares of pastoral leasehold land and a 3,200 hectare dam with a current capacity of 65 gigalitres. At least 1,900 hectares of the land has been identified as being suitable for the growth of Indian sandalwood.

Total consideration of $18.05 million includes $0.9 million in respect of plant and equipment and, subject to satisfaction of the attached conditions, will be paid over the following timeframe:

• Deposit payment of $1.5 million, of which $25,000 is payable now and $1.475 million upon the contract becoming unconditional
• $2 million on 28 February 2007
• $3 million on 31 May 2007
• Balance of $11.55 million payable on 1 July 2007

The contract is conditional upon TFS undertaking a full due diligence to its satisfaction on the property, plant and farming operations and being satisfied that the property is suitable for the development of Indian sandalwood plantations. It is also subject to obtaining a number of necessary approvals within 60 days, the most significant of which are Environmental Protection Authority approval of land clearing for sandalwood cultivation and the granting of a water licence by the local water authority.

Whilst it is the company's intention to investigate all options with regards to the land unsuitable for Indian sandalwood, early indications are that income from existing farming operations is sufficient to cover holding costs associated with the purchase.

It is the company's intention to fully debt-fund the purchase of the Kingston Rest property, facilitated by TFS's lowly-geared balance sheet and planned cash flow initiatives. The company will be entering into a partial securitisation of its loan book, which is expected to raise $10 million by March 2007, and has recently reached agreement with external financiers for the financing of its FY07 sales, which is expected to release $10 million of additional cash flow by 31 July 2007.

"This purchase represents an attractive opportunity to materially extend our land bank," said Mr Wilson.

"The property boasts important attributes, with a significant discrete area of land and ample availability of water. We are also acquiring it at a price which compares favourably with both our own past land purchases and, more particularly, current land values in the region."