Q3 2012 Highlights
Bill Dry, CEO of Feronia Inc. commented: “Feronia’s oil palm planting programme continues apace with more hectares planted in the ten months to the end of October than in the whole of 2010 and 2011 combined. This is a key value driver for our palm oil business and testament to the skill and dedication of our workforce. We are confident that our target of planting 5,000 hectares a year is achievable in 2013.
“Completion of the rice mill in November was a major milestone in the development of Feronia’s arable farming business as it allows us to process not only our own crops, but those grown by local small-holder farmers. Civil works and the drying facilities were completed earlier in the year and the Company is in the process of completing construction of its associated storage silos. Storage of dried paddy rice is currently undertaken using a grain bag storage system which is an acceptable interim solution for storing current volumes and allows the Company to continue to dry and mill crop. The current installed capacity at the mill will also allow us to expand our rice production substantially once we have proven commercially compelling yields.”
About Feronia Inc.
Except for statements of historical fact contained herein, the information in this press release constitutes “forward-looking information” within the meaning of Canadian securities law. Such forward-looking information may be identified by words such as “anticipates”, “plans”, “proposes”, “estimates”, “intends”, “expects”, “believes”, “may”, “will” and include without limitation, statements regarding proposed capital expenditure; the Company’s plan of operations and comparative advantages; plans regarding sowing rice and replanting oil palms; improvements in harvesting and collection; and positive trends regarding OERs. There can be no assurance that such statements will prove to be accurate; actual results and future events could differ materially from such statements. Factors that could cause actual results to differ materially include, among others: risks related to foreign operations (including various political, economic and other risks and uncertainties), the interpretation and implementation of the Agriculture Law, termination or non-renewal of concession rights or expropriation of property rights, political instability and bureaucracy, limited operating history, lack of profitability, lack of infrastructure in the DRC, high inflation rates, limited availability of debt financing in the DRC, fluctuations in currency exchange rates, competition from other businesses, reliance on various factors (including local labour, importation of machinery and other key items and business relationships), the Company’s reliance on two refining factories and one major customer, lower productivity at the Company’s plantations and arable farming operations, risks related to the agricultural industry (including adverse weather conditions, shifting weather patterns, and crop failure due to infestations), a shift in commodity trends and demands, vulnerability to fluctuations in the world market, the lack of availability of qualified management personnel and stock market volatility. Most of these factors are outside the control of the Company. Investors are cautioned not to put undue reliance on forward-looking information. Except as otherwise required by applicable securities statutes or regulation, the Company expressly disclaims any intent or obligation to update publicly forward-looking information, whether as a result of new information, future events or otherwise.
Operational Summary and Key Metrics by Division
Palm Oil Operations
Management believes that these improved practices are in the long-term interest of better profitability but affect gross margin in the short term (see “Results of Operations” below).
Arable Farm Operations
The Company’s strategy for its oil palm plantations business continues to be to maximize returns from existing plantings while investing in new plantings and the required processing capacity. Commissioning of the new palm oil mill at Yaligimba is expected to provide the Company with immediate access to an additional 3,903 ha of mature oil palms for the production of CPO, an increase of 62.1% from the area currently accessible. Once the Yaligimba palm oil mill is completed, there are no major capital expenditures currently anticipated in the Company’s oil palm plantations business for the next several years, excluding fertiliser costs associated with immature palms.
The Company’s primary objective with respect to its arable farming business for the remainder of 2012 is to prove commercially viable yields at its operation in Bas Congo, DRC. The Company does not intend to expand the arable farming operation until commercially compelling yields have been achieved on a scale of up to 2,000 hectares. Once such yields have been achieved, the Company will consider expanding the scale of the planting programme.
In summary, the key objectives of the Company in 2012 are as follows:
As previously disclosed by the Company, on December 24, 2011, the government of the DRC promulgated a new law, “Loi Portant Principes Fondamentaux Relatifs a L’Agriculture” (the “Agriculture Law”), for the stated purposes of developing and modernizing the country’s agricultural sector. Feronia continues to seek clarification on the implications of this legislation from local counsel and government in the DRC. If the Agriculture Law is interpreted by the DRC government to apply to the existing concession rights held by the Company and the Agriculture Law is not amended, it could have a material and substantial adverse effect on the value of its business and its share price. In such case, Feronia may be required to sell or otherwise dispose of a sufficient interest in its operating subsidiaries so as to ensure that it meets local ownership requirements. There is no assurance that such a sale or disposition would be completed at fair market value or otherwise on acceptable terms to Feronia.
RESULTS OF OPERATIONS – Three and nine months ended September 30, 2012
Revenue and Gross Margin
Revenues for Q3 2012 were $2,143,000, a 59% increase from Q3 2011. This increase is due to both the higher quantity of CPO sold in Q3 2012 and lower realized revenues in Q3 2011 as a result of increasing CPO stock levels in that period.
The reduction in gross margin for Q3 2012 to 16% (Q3 2011: 50%) is due to an increase in cost of sales arising because of the need to partially satisfy sales in Q3 2012 from the Company’s stock of CPO. This was necessary due to the reduced level of CPO production during the quarter. As detailed above, the lower CPO production during Q3 2012 is primarily a result of there now being less producing hectares than previously and the adoption of best practice harvesting procedures. Management believes that the short term impact on gross margin is in the long-term interest of better profitability.
The following table provides a summary of palm fruit production and CPO:
Cash generated by (used in) operating activities
Selling, general and administrative costs increased by $731,000 for Q3 2012 and $477,000 for the nine months ended September 30, 2012 when compared to the corresponding periods of 2011. These increases are mainly due to:
CASH FLOWS AND LIQUIDITY
The cash balance at September 30, 2012 was $6,372,000, compared to $13,521,000 as at December 31, 2011. The decrease in cash balance of $7,149,000 was a result of net loss (excluding non-cash items) of $7,311,000 and capital expenditure of $9,216,000, partially offset by an increase in working capital of $2,492,000 and the issue of shares for cash of $6,886,000.
For the first nine months of 2012, working capital movements resulted in cash inflows of $2,492,000 (cash outflows of $6,218,000 for the first nine months of 2011), driven by increases in payables of $402,000 and decreases in inventory of $808,000, receivables of $699,000 and prepaid expenses of $583,000.
Investing activities resulted in cash outflows of $9,216,000 for the first nine months of 2012 (cash outflows of $4,856,000 in the first nine months of 2011).
Cash inflows from financing activities were $6,886,000 in the first nine months of 2012 (cash inflows of $27,493,000 in the first six months of 2011).
Major outstanding anticipated cash requirements are related to:
Non-Executive Director Compensation
Due to various factors including the dilution that shareholders of the Company would suffer at current share price levels, the board of directors of the Company has determined for the foreseeable future to compensate non-executive directors and committee members in cash instead of stock options. The anticipated annual fees are expected to be approximately $137,500 which are in line with a relative comparator group. The Company continuously reviews its compensation policies with a view of minimizing the impact to shareholders and increasing the alignment of all parties with the share price.
Non-GAAP Financial Measures
Gross margin is not a financial measure recognized by IFRS and does not have a standardized meaning prescribed by IFRS. The Company’s method of calculating gross margin may differ from other methods used. Gross margin is presented in this press release as additional information regarding the Company’s financial performance. Gross margin has been calculated by deducting cost of sales from revenue.
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