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Quintis discounting to stave off collapse

Troubled Quintis is heavily discounting its stocks of sandalwood oil and timber as the company tries to stave off collapse. Source: Australian Financial Review

The Perth-based sandalwood grower will fail unless it can successfully negotiate a recapitalisation before it runs out of cash. Its shares have not traded since May and the company’s failure to file its March quarter accounts could tip the business into default if it cannot produce the numbers, or secure a waiver from bondholders, by July 8.

The former TFS slashed prices late last week on its inventory of Australian sandalwood oil, higher-value Indian sandalwood oil, and some logs. Quintis only grows Indian sandalwood, but it refines oil from Australian sandalwood trees acquired from the West Australian Forest Products Commission.

Quintis’ liquidity problems are mounting as its cash reserves run down, from $89.8 million at the end of December to $17 million at the end of May. It has to make an interest payment to bondholders August 1 and prepare for the possibility that one of its plantation investors exercises their right to force the company to buy back trees as part of a $33.9 million put option that can be struck in July.

The stock remains suspended and Quintis declined to provide a specific reason why it cannot file its historical financial statements.

“You don’t need to be an MBA to work out there’s something wrong with this business,” said Steve Zanin, an independent agribusiness consultant.

Quintis became a high-profile target of short-sellers when US hedge fund Glaucus Investments published an investment thesis in March that claimed the shares were worth zero. But long-time observers of the company had quietly expressed concerns long before then disputing its accounting methods and the lack of transparency around pricing.

For example, in the first half, $10 million in proceeds from the sale of a loan book was recorded through operating cashflow.

Australian sandalwood (Santalum spicatum) oil is being discounted by 25 per cent, The Australian Financial Review has learned, causing upheaval in the typically stable West Australian market. It has also become apparent that although Quintis disclosed to investors it had negotiated supply deals at up to $US4500 a kilogram for its Indian sandalwood (Santalum album) oil, that is not representative of the market price.

Of the five customers identified in March as having multi-year contracts for the purchase of wood or oil, two of those are known to have lapsed: Shanghai Richer Link (at an average of $US150,000 a tonne for timber) and Galderma (at $US4500 a kilogram).

Quintis has previously cited a range of $US1075 to $US1860 a kilogram for Australian sandalwood oil sales.

Mr Zanin said that any estimation of what the company is really worth depends on inputs around heartwood content, the amount of oil the heartwood yields, and the market value of oil. He also said it was important to consider that the surrounding sapwood needs to be removed to identify the available heartwood.

The independent consultant said the impact of significant tonnage coming on market by 2026 appeared to be negative for the commodity price. “We can expect the price of oil to fall well below current market prices of circa $US3600 [a kilogram], well below market estimates put forward by QIN,” Mr Zanin said.

Forecasts for future harvests of Australian sandalwood “will put further downward pressure on prices across both species”.

Quintis also faces class action risk after failing to disclose until May 2017 that a prestigious contract with Galderma was terminated in December last year, because the company says its current board and management were unaware of that fact. This is despite not having shipped any oil to Galderma since June 2015 and key figures within Quintis also serving on the board of Santalis – the subsidieary at the heart of the the disclosure failure which had knowledge of the termination.

When Quintis raised $US250 million in the bond market in July 2016, it told prospective investors “Galderma is expected to consume a significant proportion of our future Indian sandalwood oil production”.