Feronia Inc. Reports Third Quarter 2012 Results

Marketwired

TORONTO, ONTARIO--(Marketwire - Nov 29, 2012) - Feronia Inc. ("Feronia" or the "Company") (TSX VENTURE:FRN) today released its unaudited financial results for the three and nine months ended September 30, 2012. All amounts in this release are expressed in US dollars unless otherwise indicated.

Q3 2012 Highlights

  • Revenue up 59% to $2.1 million (Q3 2011: $1.3 million)
  • Replanted 991 hectares ("ha") of oil palm (Q3 2011: 729 ha) with 2,786 ha planted year-to-date as of September 30, 2012 (1,768 ha in the same period of 2011)
  • Fresh fruit bunch ("FFB") yield for the nine months to September 30, 2012 of 4.76 tonnes per ha (nine months to September 30, 2011: 2.85 tonnes per ha)
  • Increase in oil extraction rate ("OER") to 18.13% (Q3 2011: 16.51%)
  • Progressed construction of Yaligimba CPO mill
  • Closed two tranches of brokered private placement for aggregate gross proceeds of $7.7 million
  • Cash balance at September 30, 2012 of $6,372,000
  • 3,244 ha of oil palm planted year-to-date as at October 31, 2012 (1,905 ha in the same period of 2011)
  • Subsequent completion of 500 ha of rice planting in October 2012
  • Achieved practical completion of rice mill in November 2012

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.

  • Feronia operates large-scale commercial oil palm plantations and has commenced an arable farming operation in the DRC.

  • The Company, through its subsidiaries, holds concessions on land which is owned by the DRC government and on which its oil palm plantation and farming operations take place.

  • The Company uses modern agricultural practices to operate and develop its oil palm plantations and arable farming. Feronia believes in the immense agricultural potential of the DRC for high-quality edible oils, oil derivatives and foodstuffs given the suitability of its climate and soil and the availability of a skilled workforce.

  • The Company''s management team is comprised of experienced administrative executives and senior agriculturalists with extensive experience in managing both plantations and large-scale mechanized farming operations in emerging markets.

  • Feronia is committed to sustainable agriculture, environmental protection and providing jobs and economic growth for local communities.

  • For more information please see www.feronia.com.

Cautionary Notes

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

Key Metrics:

                    Total  
Nine months ended Sept 30, 2012     (as at and for the nine months ended Sept 30)  
Lokutu     Yaligimba   Boteka     2012     2011     2010  
Immature Hectares   2,867     2,303   1,466     6,636     4,836     2,852  
Producing Hectares   4,809     3,9031   1,501     10,2132     12,753     13,338  
Fruit Production (tonnes)   24,458     -   5,608     30,066     36,362     23,209  
Oil Produced (tonnes)   4,401     -   1,043     5,444     6,212     3,764  
Oil Extraction Rate   17.99 %   -   18.60 %   18.10 %   17.1 %   16.2 %
PKO Produced (tonnes)   335     -   -     335     -     -  
FFB Yield/ha3   5.09     -   3.74     4.76     2.85     1.74  

Notes:

  1. The producing hectares at the Yaligimba plantation are not currently being harvested and as a result are not contributing to FFB or CPO production.
  2. During the years ended December 31, 2010 and 2011, the Company classified palms aged 4 to 30 years as mature and producing. Going forward, management has elected to classify palms aged 4 to 25 years as mature and producing, resulting in a reduction in the number of producing hectares.
  3. FFB yield/ha is for the year to date and is not annualized or seasonally adjusted. Annual FFB yield/ha will reflect seasonal factors, with the highest production typically around May and the lowest production around October.

Key Developments:

  • On a like for like basis, excluding Yaligimba, fruit production decreased by 28.2% and 5.8% for the three and nine months ended September 30, 2012, respectively, compared to the corresponding periods in 2011. This reduction is primarily a result of the following factors:

    • A reduction of producing hectares at Boteka and Lokutu from 8,410 ha to 6,310 ha following the Company''s previously disclosed reclassification of palms aged 4 to 25 years as mature and producing, the clearance of palms older than 25 years for replanting and the cessation of harvesting fruit from palms older than 25 years which have lower fruit yields, lower extraction ratios and require more time to harvest. This has resulted in an improvement in FFB yield per hectare.
    • Adoption of best practice harvesting procedures including fruit quality checks, in-field supervision, training and field transport improvements to ensure only sufficiently ripe fruit is harvested. These practices have resulted in an improvement in CPO extraction rates with an extraction rate of 18.7% achieved in September 2012.

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).

  • Planted 991 ha of oil palms in the third quarter of 2012. As of October 31, 2012, a total of 3,244 ha of oil palms had been planted in 2012 (1,905 ha in the same period of 2011).

  • At Yaligimba, the majority of civil works have now been completed on the mill site and installation of the new CPO mill by the Company''s Malaysian contractors has commenced. Once the new palm oil mill is operational (scheduled for the first quarter of 2013), the Company will have access to an additional 3,903 ha of producing palms. It is expected that the Yaligimba plantation will achieve operating results similar to Lokutu on a per hectare basis.

Arable Farm Operations

Key Metrics:

  As at and for the nine months ended Sept. 30
Arable 2012 2011
Land Available (ha) 10,000 10,000
Land Cleared (ha) 2,000 -
Land Prepared (ha) 1,700 200
Land Planted (ha) - 1 -

Note:

  1. The harvests were completed in August and September 2012 and there were no plantings as at September 30, 2012.

Key Developments:

  • In October 2012, an additional 500 ha of rice were planted. The Company planted NERICA-4® (New Rice for Africa-4), an upland rice variety suited to African soil and weather conditions which is expected to be harvested and processed in February 2013, and subsequently sold into the domestic market.

  • Subsequent to the end of the period, the Company''s rice mill was completed and commissioned. It is the only large-scale rice mill in the region and will allow the Company to process its own crop and that produced by other local small-holder farmers.

  • Earlier in the year civil works and the drying facilities were completed 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.

Outlook

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:

  1. advancing construction of the palm oil mill at the Yaligimba plantation, thereby enabling the Company to harvest and  process fruit grown at that location;

  2. completing up to 5,000 ha of re-planting across its oil palm plantations; and

  3. proving commercial yields at its arable farming division.

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

(Expressed in thousands of US dollars)   Three months ended Sept 30,     Nine months ended Sept 30,  
                                     
    2012     2011     % Change     2012     2011     % Change  
                                     
                                             
Palm Oil   $ 2,056     $ 1,189     73 %   $ 5,796     $ 4,113     41 %
Other     87       156     (44 )%     305       325     (6 )%
                                             
Revenues   $ 2,143     $ 1,345     59 %   $ 6,101     $ 4,438     37 %
Cost of Sales     1,801       678     166 %     4,454       2,435     83 %
                                             
Gross Margin PHC1,2   $ 342     $ 667     (49 )%   $ 1,647     $ 2,003     (18 )%
                                             
Gross Margin PHC %1,2     16 %     50 %   n/a       27 %     45 %   n/a  
                                             
Arable operating expense   $ 360     $ 223     61 %   $ 1,648     $ 628     162 %
                                             

Notes:

  1. Gross margin is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below.
  2. Gross margin is impacted in the short term by improved harvesting practices which management believes are in the long-term interest of better profitability.

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:

    Three months ended Sept. 30,     Nine months ended
Sept. 30,
 
    2012     2011     % Change     2012     2011     % Change  
Fruit production (tonnes)   7,148     11,608     (38.4 %)   30,066     36,362     (17.3 %)
Oil produced (tonnes)   1,296     1,917     (32.4 %)   5,444     6,212     (12.4 %)
Oil extraction rate   18.1 %   16.5 %         18.1 %   17.1 %      

Cash generated by (used in) operating activities

(Expressed in thousands of US dollars)   Three months ended Sept 30,     Nine months ended Sept 30,  
                                     
    2012     2011     % Change     2012     2011     % Change  
                                     
Cash generated by (used in) operating activities   $ (2,724 )   $ (7,429 )   63 %   $ (4,820 )   $ (12,106 )   60 %

Operating Costs

(Expressed in thousands of US dollars)   Three months ended
Sept 30,
    Nine months ended
Sept 30,
 
                                 
    2012     2011   % Change     2012     2011   % Change  
                                 
Selling, general and administrative     2,912     $ 2,181   34 %     8,234     $ 7,757   6 %
Other gains and losses     (95 )     122   (178 )%     (62 )     70   (189 )%
                                         
Operating costs   $ 2,817     $ 2,303   22 %   $ 8,172     $ 7,827   4 %

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:

  • Salary costs of $455,000 reallocated from cost of sales to operating costs in Q3 2012, which did not occur in Q3 2011.

  • An increase in professional fees during Q3 2012 of $148,000 being primarily an increase in legal fees of $66,000 and tax consultancy fees of $65,000. Professional fees for the nine months ended September 30, 2012 were $500,000 lower than the same period in 2011 due to additional costs for the year-end audit, IFRS transition and work on the equity offering incurred during the first six months of 2011.

  • An increase in amortization cost for Q3 2012 of $192,000 and $616,000 for the nine months ended September 30, 2012 compared to the same periods in 2011, resulting from increased investment in plant and equipment during 2011 and 2012.

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:

  1. the construction and completion of the new oil palm mill at Yaligimba (approximately $4,500,000), with expected completion in the first quarter of 2013;

  2. the completion of the rice mill to service Feronia Arable (approximately $150,000), which was completed in November 2012; and

  3. the completion of storage facilities to service the current arable operations (approximately $100,000), with expected completion in the first quarter of 2013.

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.

Contact:
Feronia Inc.
Ravi Sood
Executive Chairman
(416) 907-2026
Ravi.Sood@feronia.com
Feronia Inc.
Bill Dry
CEO
44 (0) 7887 525 046
Bill.Dry@feronia.com
www.feronia.com

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