BIDDING STRATEGIES FOR BC TIMBER SALES

J.W. (Bill) Markvoort R.P.F.

Forest Economics 318January 22, 2013

CREATING VALUE FROM COASTAL FORESTS

1UBC students

My topic today is Creating Value from Coastal Forests which has been very challenging over the past decade.

I am looking at value from a corporate point of view. However when corporations dont create value then the crown also suffers as stumpage paid to the Crown decreases.

Our company and I have been involved in bidding on timber sales and walking and advising on sales with clients since the conception of the SBFEP program in the early 80s.

I graduated from UBC and joined Probyn Log Ltd. in 1978 and have been with the company ever since.

Table of ContentsValue ParametersBC Timber SalesBid StrategiesKnowledgeKnow the Timber Sale and the Timber Know the MarketKnow the Rules and RegulationsKnow YourselfPreparing a Winning BidBC Timber Sale A74395, Conrad CreekInformation Bid PackageWinning BidderBid SpreadsheetFinal Economic ResultsConclusions

2First I will give a very short history of the BCTS program and a few pertinent statistics

I will review the strategies that have worked for my clients and my company.

Then we will look at some rather dubious or perhaps foolhardy ways of becoming a winning bidder although not necessarily a profitable one.

And I have chosen a timber sale that we successfully bid in December 2008 and harvested this past year. Conrad Creek, Mount Elphinstone on the Sunshine Coast.

VALUE PARAMETERSLog valuesBy speciesBy log sortsUtilization

Harvesting CostsRoadbuildingLoggingTransportationSorting

Marketing

Need to calculate Stand Value by block, drainage, CP. Property, unit.Affected by species, sorts and utilization.

Need to calculate Total Harvesting Costs by same units.

Concept of Total Costs which includes, engineering, roads, harvesting, silviculture and stumpageConcept of Fixed Cost (engineering, roads, certain harvesting costs and silviculture) and Variable Cost which is the extra cost of bringing the next m3 out ( do you take out the pulp or leave it behind).

Some costs best calculated by m3 and some by hectare.3BC TIMBER SALES

SBFEP formed in 1980

Reorganized as BCTS in April 2003

Strategy is to provideA credible point of pricing to harvest timber on public timberlandOptimize net revenues to CrownProvide opportunities for customers to purchase timber in an open and competitive market.

BCTS manages and administratesForest planning and timber cruisingEngineering and layout Access road constructionSilviculture and Free to Grow.

4First a very short history of the B.C. Timber Sale program. It was first formed in 1980 as the Small Business Forestry Enterprise Program

in response to concerns that there was no place for non-quota holder companies or individuals to acquire Crown timber. Over the years the program took root developed different categories and became an integral part of timber procurement in the province.In a major re-organization in 2003 B.C. Timber Sales was formed as separate from the Ministry of Forests and with its own mandate. The program was simplified, only bonus bids determine the bidder and the volumes are in the process of being doubled to approximately 20% of the provincial AAC. In 2008-2009 BCTS developed about 19% of the Crown Timber (approx 15 million m3) however net revenues have slipped from 123 million to around 50 million.Past few years BCTS hampered by a lot of no bid sales, particularly in the Interior. Poor markets and oversupply of bettle killed timberBCTS is now also putting up area based sales.

Strategy Second part of the mandate is to provide pricing signals for all publicly owned timber.

BID STRATEGIESKnow the Timber

Know the Market

Know the Rules and Regulations

Know Yourself

5 We will look at these headings individually but there is actually only one winning strategy and that is by incorporating all the various factors that make up a timber sale.KNOW THE TIMBER SALEBCTS WebsiteTimber CruiseTender Package SummaryInvitation for Application (Bid Sheet)Key Maps (Location, Cruise, Harvest)Road Layout, Profiles and Cross SectionsSample TSL documentAdvisories

Talk to the People who KnowContact Person at BCTSLocal Knowledge on Roads, DumpsQuotes on Towing, Barging, SortingRoad and Dump Use Fees

Paper ReccePut all information in a spreadsheetMake go/no go decision on site visitationMore important on remote sales

6BCTS websiteAll information is found through BCTS website, although it still not the easiest website to navigate. Many timber sale users subscribe to WoodX found under Woodx.com which is a private web site which lists and reports on timber sales in the province. It is well organized and easy to navigate in. and links directly to the BCTS upcoming sales.

ParticularsOnce you are at the proper location you can download al the particulars of a timber sale. This can be quite intimidating as BCTS staff is now in the habit of inundating you with 75 pages of cruise info and a mountain of road traverse data. Sifting through it all is an acquired skill. I have listed some of the documents that are quite pertinent to acquiring knowledge of a timber sale.

Knowledgeable peopleYour own staff, Ministry staff, cruisers and layout people, adjacent Licensees, previous licensees, there is usually a history to the sale and to the area which is crucial to be aware of. Talking to people with local knowledge (if they will share it) also gives you a first indications of the complexities, and costs involved..

Paper RecceWrite it down in your computer or on paper and do a paper recce of the sale. Sometimes it is so negative that this is far as you go on this sale. At this point very little money other than some time has been spent on the sale. Particularly important on remote sales where it might cost several thousands of dollars to go in by helicopter.

KNOW THE TIMBERWalk the Sale

Walk the road locationsReactivationNew Roads and bridgesEndhaul Requirements and pitsDeactivation requirements

Walk the the blocks thoroughly (especially near boundaries)Identify harvesting systemsIdentify reservesIdentify creeks and riparian areas.Be aware of biodiversity and wildlife requirements

Assess the timberWith knowledgeable peopleCompare visual estimates with cruiseLocal defects (white speck, powderworm, kasuri)

Other FactorsLog Dump ReactivationForeshore TenuresWindfirming

7Walk the saleOn the assumption that the sale looks OK from a paper viewpoint it is now critical to give it a thorough walk through. Most of this is self explanatory. Dont trust the cruise implicitly. Remember it is tendered under a lowest cost bid and a rookie forester just out of university may have cruised this sale.

A lot of loggers walk the sale with a broker in tow, and if a broker is bidding the sale he often has a logger/roadbuilder accompanying him. Make notes in the field.

Other factorsRead critical factors from the timber sale documents and assess how it will impact in the field and the extra costs involved. Timing windows,EBM issues, shared infrastructure.permits, FN issues. etc.

Lois Lake area, Powell River, good quality oversize Merch.8

Some very valuable Yellow Cedar from Nimpkish area $500/m3.9

KNOW THE MARKETDomesticAccurate Prices based on Industrial SortsSpecialty SortsTrends in PricingPre-Selling

ExportSurplus TestedLonger TimelineExtra CostsFee-in-LieuRequires greater Quality Control

11Again, most loggers involve a broker/ mill buyer in this critical phase of preparing a timber sale bid.

Timber cruises are set out in letter grades (Forest Service grades) and these must be transferred into industrial sorts,, ie Fir J can be in a peeler sort, pole/piling, a 12+ Export standard sort, a gang sort, etc..

Pre selling certain sorts can help reduce risk

ExportDoesnt solve all problems and must be approached with extra care. Surplus testing is required, bucking and proper log lengths is critical , there is a longer time line with extra costs and a higher degree of quality control both in the bush and on the DLS. You also have to pay a fee in lieu and be aware of the dollar exchange rates.KNOW THE RULES AND REGULATIONS

Registration and Eligibility

Outstanding Stumpage Accounts

Deposits (Bid versus Total Security Deposit)

Term Extensions and Costs

Withdrawals and Failures to Enter Into the Licence

Pre Work Meeting

Forest Act and Regulations and Other Legislation

12Be sure your registration is current. A few people have lost sales due to lapsed registration, unpaid stumpage, or maximum number.

Your stumpage from previous sales must be up to date.Be aware that the bid deposit is only 2% while the total deposit is 10% on the first $100,000 of stumpage and 5% thereafter.Term extensions come at a cost of 5% of the stumpage based on the original cruise volume, not on what is left over.failure to enter into a sale means forfeiture of the bid depositA recent development is that any timber left behind is charged out at full stumpage.

The Ministry will walk over the pertinent details of the sale at a prework meeting but the Licensee and no-one else is held responsible by the BCTS and must do their due diligence at all phases of the sale.

This includes knowing the pertinent legislation and regulations. For instance the Wildfire Act has recently changed and License holders must be current with the new regs.

Critical block in Salmon Inlet. Hydro lines below and a run of the river power project at the upper part of the photo with a penstock buried just below the road.13KNOW YOURSELF

Risk/Reward

Capital Requirements

Work in Process

Financing

Equipment

Experience

Location

14Know your self

Assess the amount of risk you are prepared to take. If you are new, start with a small sale.

Do a cash flow budget and see if you have the finances required

On the Coast it can take several months from road building to harvesting, transporting , sorting and selling the logs.

Do you have the right equipment and is it available

Do you have the experience for the type of logging show involved

Remote locations require a huge amount of transportation logistics

PREPARING A WINNING BIDPrepare Spreadsheet Model

Lock in Log Values

Lock in Harvesting Costs

Stumpage is Locked In

Calculate Available Bid

Calculate Profit and Risk Margin

Bonus Bid

15Prepare a spreadsheet model ( I will show one in a few slides that I have developed which models the costs of bidding on a timber sale

Try to lock in some costs and values. Can sometimes presell some log sorts (although this can cause a drop in pricing if not careful and this requires a level of trust between buyer and seller that may take time to develop.

The stumpage is locked in for the duration of the sale and all extensions which can come back to bite you.

Once you have a stand value and have factored in all costs including upset stumpage you will have a margin available for bidding and P&R

Calculate what percentage of this you are willing to bid away.

Put in a bid and go for it.

Take notice that, pursuant to Section 20 of the Forest Act, Timber Sale Licence A89069 is being offered for sale by the BC Timber Sales Strait of Georgia Business Area. Tenders will only be accepted from individuals or corporations registered as a BC Timber Sales enterprise in Category 1, 2 and 3 under the BC Timber Sales Regulation.

Closing Date: FEBRUARY 7, 2013 at 11:00 a.m.Closing Location: Applications will be accepted by the Timber Sales Manager, Campbell River Timber Sales Office, at: 370 South Dogwood Street, Campbell River, BC V9W 6Y7.

Geographic Location: McNeil Lake

Estimated Volume: 23,676 - cubic meters, more or lessEstimated Area: 32.8 ha.

Estimated Species: Hemlock 10,236 m (43%), Douglas-fir 7990 m (35%), Cedar 4,374 m (18%), Alder 1,076 m (4%), more or less.The preceding volume and species estimates are based on samples from a Full Cruise. Please see tender package for additional detail. Bidders are strongly advised to conduct a thorough field review of the licence area to verify timber volume and grade estimates.

Licence Term: 12 months

Upset Stumpage Rate: $20.39/m. The upset stumpage rate was determined in accordance with the Coast Appraisal Manual and applicable to coniferous sawlog grades.

Notice ID: 7618 Posted: 2013-01-09 Notice Type: BC Timber Sales Expires: 2013-02-07 Issuing Office: Strait of Georgia Timber Sales Office Title: A89069 McNeil Lake Open to Tender (18 days left)Licence Number:A 89069 * February 07, 2013Closing Time:*11:00 am Opening Time:11:00 amGeographic Area:McNeil LakeBCTS Area:Strait of Georgia (Campbell River)District Area:Sunshine CoastVolume:23,676 m3 Term: 12 monthsSpecies:Hem 43%, D-Fir 35%, Ced 18%, Ald 4%Upset Stumpage:$20.39 Tender Type:Bid Tender (sec 20) Category: Cat 1,2 or 3Stand Type:78% 2nd GrowthLogging System:Hoe Forwardingsilviculture:CCWR, Windfirm treatmentSeason:Dry SeasonRoad Building:New rd. construction 1.8 kmAccess:Sechelt/ Hwy 101/ Menacher Rd./McNeill Lake FSR/ MNL034Comments:Contact:Mike Romalis(604)485-0717Avg Piece Size: .94 m3/treeNet merch 721 m3/ha. 32.8 ha area.4,187 m3 non-competitive($.25)(no bonus)4 Blocks

CONCLUSIONS

Knowledge is Key (no surprises)

Work within your level of expertise

Leave margins for both risk and reward

Bid within your limits

Keep re-evaluating your budgets

18Thats it

There is no magic really

Once you have all the numbers and estimates a bid will present itself.

So let me repeat

Know the SaleWork within your level of expertiseLeave a margin for risk and reward

Get lucky.who knows the market might go up but most of the luck goes to people who are well prepared.CONCLUSIONS

If you get it all right and with a bit of luck you end up with:19A Happy Forester

20HOWEVERIf Lady Luck works against you

This is what could happen

Timber Sale A80080 Jennis Bay

Over $150,000 of roads already built plus deposits

Then on April 21, 2011

21

On april 24 2011 the road gave way with the excavator

22

This is where he ended up. Luckily no one was hurt. With Ministry approval we brought a P Eng Geotech in. Reported no fault to builder. Then in summer restarted roadbuilding.

23

On July 7 slide # 2 occurred. 24

No one hurt.

Now working with Ministry to heli log a small portion to try and recover costs. No more roadbuilding. Ministry and logger co-operating to clean this up

A bit of a nightmare and very expensive

So make sure to leave some room for Mr X25

Thank You

26Thank you

Any questions.