TFS Corporation

Excerpt from TFS Corporation email to Advisers 27 May 2010

VIP Adviser Update – ASX Announcement and Your Questions Answered

Please find attached our ASX release covering our second institutional / wholesale contract and today’s media coverage for your interest.

	AAA RATED US BASED INSTITUTION COMMITS TO TFS SANDALWOOD PLANTATIONS_26052010.pdf (126kb)
	West Australian_27052010_TFS_Survivor Unveils $120M Land Deal.pdf (1.29mb)

Over the past weeks we have been asked many similar questions from advisers as they evaluate TFS and our 2010 Indian Sandalwood Project. Please find the answers to these questions detailed below from Quentin Megson, our CFO.

Q	If TFS falls over (as we have seen with FEA and Rewards), how would a new RE gain appointment to manage the project for investors going forward and what steps would be required by the new RE and the role of the existing growers in this scenario?
A	The Constitution for the project has provision for the growers to appoint a replacement responsible entity to undertake and provide the appropriate services for the remainder of the project. The real issue however is whether there would be an incentive for another party to take on that responsibility. We believe the structure of our Indian sandalwood project provides this incentive as the power remains with the growers to pay annual fees. A reasonable amount of annual fees would ensure that in a worst case scenario there is enough funds to continue the project to harvest. Our structure also provides a direct benefit for the grower by paying their annual fees as they effectively attain a greater share of the end produce. Furthermore the accumulated right of the RE to the deferred fees on harvest is an asset that a replacement RE would potentially have rights to and therefore would provide a further incentive for a new RE to take on the role. In short, without needing to make any change to the structure of the project the growers will ultimately have the power to ensure that the project gets to harvest regardless of the financial stability of TFS.
Q	How can growers be assured that they will receive a fair value for their trees given that TFS will be paying for them at the farm gate and the price will be determined by TFS who will be the only major player (worldwide) in the market?
A	We are fully aware of the perceived conflict of interest that exists in this situation and have been working with the compliance committee (who represent the growers) to advise them of the various alternatives. In summary, there are a number of ways to arrive at a market value and more importantly prove to the growers that it is a bona fide market value. The most obvious is to equate the purchase price by TFS to arm’s length transactions between non-TFS related parties or by TFS to arm’s length purchasers. We believe that this would be possible as TFS may either be purchasing wood from non-TFS plantations (such as ITC and other small growers) or alternatively TFS would be selling a component of the wood on behalf of growers direct to users in India. In the absence of that there are other methods whereby we can pay an estimate of the market value at the time of the transaction and make provision for adjustment based on a formula that is linked to the ultimate return from the wood after processing and sale of all of the by-products on the open market.
Q	What is the relationship between the price of wood and the price of oil – how can growers be assured that the price they get at the farm gate is reflective of the price of oil or put another way, what transparency can we offer the grower that they will not be subsidising the returns which go to shareholders?
A	Typically the value of the wood will be reflective of the value of the products that can be extracted from the wood. In saying that however there are likely to be many and varied uses for the sandalwood and its by-products (including oil) which have varying price points. For example, it is likely that the highest value end market would be for a component of the actual wood itself (such as carving) although this would be a relatively small volume. Even in the oil market we should be able to achieve a premium price in the pharmaceutical / medical market but again it would just be a share of the market. We are working on all of the possible markets and ensuring that we are in a position to take advantage of the best price. As detailed in the question above we will be transparent in how the wood value is determined. There is no doubt however that the greater value we can extract from the various markets for the value of the wood will ensure that the growers will also benefit.
Q	What percentage of the land used for growing trees is owned by TFS compared to leased land and what happens to the leased land if TFS falls over?
A	The rough percentage is 60% owned land and 40% leased. Regardless as to whether the land is owned or leased we register the growers’ interest over the use of the land in order to protect their interests. Ultimately as detailed in point 1 above in a worst case scenario the power remains with the investors to ensure that any annual commitments can be met.
Q	A common problem with deferred payment of lease and management fees which are recouped from harvest proceeds as seen with Timbercorp, Great Southern, FEA and now Rewards highlights that the project manager must get these payments to survivor for the long – term. What percentage of lease and management fees are now being paid by TFS growers and is this enough to pay for operational costs?
A	Currently about 30% of our investors pay their annual fees which based on our cost estimates essentially gives us sufficient cash flow to maintain and support the whole plantation. Together with support from our other non-MIS revenues this could drop to about 20% and would be able to suffice. It is important to note that the 30% is currently achieved in spite of some of our larger investors choosing not to pay. In most cases these investors would have the capacity to pay and would no doubt contribute if it meant that it enabled their investment to mature to harvest. Making the annual fees compulsory is typically unattractive to most investors as they typically do not want to be locked into a commitment over a 12-13 year time frame, even in the situation where they have every intention of paying. As such we believe our structure provides the investors with the best of both worlds in that it doesn’t lock them in but also empowers them to have some control their investment if necessary.