Forest Valuation

One of the topics of greatest interest in forest economy relates to the forest value. Valuation is the first step to make a smart investment or for the identification of measures that can be taken to increase the market value of a Real Estate Asset. The Forest Valuation enables the project administration to be conducted within efficiency in the resources use allowing the manager to have in mind the economic implications of his decisions.

There are countless cases in which we should know with reasonable accuracy and acceptance the value of a Forestry Asset. It is vital that the assessment processes of forests be preceded by thorough analysis to obtain fair and adequate values, and that meet the interests of investors. The decisions making with little deep understanding of the forests value are mere guesses. Both for acquisitions and for realizations, or only for administration of forest resources, the Forest Valuation is the essential tool for optimizing the performance of any commercial forest enterprise, it is simply essential in the search for the optimal solution.

In general, the processes of analysis began by the evaluation object identification and the purposes, yet the Forest Assets can be initial, juvenile or mature. In relation to the majority of annual crops, Forest Asset administrators have interesting comparative advantage, due to the fact that the ideal time for harvesting the forest can be subtly altered without great economic loss of the project, there is not a window of time for performing the harvest if any unforeseen event occurs.

Whenever a forest business plan identifies an optimal time for harvest, this timing is defined by biometrics and economic criteria among others. The optimal solutions initially established at the moment of preparation of these plans should be reviewed constantly upon the assessment of the forest vegetative growth and the findings of the market changes in wood and its derivatives. The need for monitoring of Forest Valuation is explained precisely by these changes, the constant use of this tool allows reassessment of the forests finance maturity.

Usually the items that comprise the Forest Valuation studies relate to the standing trees values calculation, the price of land and forest attractiveness when it involves Real Estate Asset, the finance maturity of the forests and the problems of forest products transport. Based on the current situation of goods and services of a Forestry Asset we can assess a forest property, which reports the present moment of the forest, and this assessment consists of the forest monetary estimate according to the products and services available by the same in a given period of time. A forest assessment can also be studied using the concept of replacement value of the investment where the values are determined by the sum of all the costs incurred until the year of assessment disregarding the economic returns that may have happened.

Among the methods worked, the method based on future income that is founded in the expectation of the return to be obtained from the future productions and costs of the forest production, called Discounted Cash Flow Method, is the model with the operational validity more evidenced. In this main method of Forest Valuation the free cash flows of the project are discounted at a rate that takes into account the market risk of the same. This rate is the capital cost of company if the risk of the project reflects the company's risk, or otherwise a specific charge of the project.

The decision criteria for Forest Valuation of this methodology, Net Present Value (VPL), Internal Rate of Return (TIR) and Payback, are the same criteria known and applied for negotiation purpose in several objectives such as valuation of shares in the capital market and valuation of companies for merger and acquisition processes. The TIR is the rate which reflects the returns offered by investment, represents the annual or monthly gain average that the enterprise will get in its project. The VPL is probably the most widely used criterion to measure the economic efficiency of investments being obtained through the cash flow discount for the beginning of the investment period, the revenue and costs flows are discounted at a specified interest rate for the beginning of the project analysis period. The Payback is the time to recovery the investment. Other factors that this methodology takes into account for Forestry Asset Valuation and for the evaluation of the projects profitability are: Relevant Cash Flow, increasing flows; lifetime defined; opportunity costs; treatment of interests, inflation effects and the capital cost being this cost from third parties capital, proper capital cost or weighted average cost of capital.

The Fenix Consulting & Research, through economic-financial methodologies and the Verifier VFT (Value of Forests in Time) using the expertise of its professionals and staff, has specialized in this issue of Forest Valuation and offers services with competence directed towards prices evaluation of Forestry Assets or the profitability of specific projects. Our purpose is the improvement of the investor’s results through the application of economic criteria in the productive engineering that enable analysis of the financial maturity of forests. We consider the trees financially mature when its rate of annual increase in value is equal to the money interest rates, if a tree is not cut and its rate of growth in value is lower than the market interest rate, there is a loss, better if it had been sold and the result invested in the market rate.

Given the many possibilities of destination for the assortments of logs produced and the industrial world, studies of this issue are fundamental for a constant determination of the optimal solution for the enterprise. A business plan that can offer a better result today can change tomorrow and be supplanted, the markets are very dynamic and the opportunities appear. The best is to always compare the chances with precision otherwise appreciable amounts go down the drain, that is a certainty.

Our commitment and of all professionals involved in any task of Forest Valuation is to prevent that the lack of knowledge of the issues involving the complexity of the wood production and the buyer market consumes a considerable part of the investor’s possible outcomes.