Ann: Response to ASX Query, page-32

Morning guys,

I think that the response was as good as could be expected from QIN and investors/ speculators must now weigh up the merits of each argument.

For me, I view QIN as a genuine business vs. a ponzi scheme, but one that is operating in a completely new sector (Sandalwood plantations) and thus with an elevated amount of risk that a well establish business in a mature sector. This, however, represents a potential increased reward too if QIN is ultimately successful.

The risk primarily surrounds two key areas, IMO:

(a) ability to continue to source funding for the next 4-6 years until plantation sizes are at maturity - i.e. 15 years x 1,500ha per annum harvest = 22,500ha, of which QIN are currently sitting on c +12,000ha.

(b) that the operational expectations are met in regards to (i) mortality rates (ii) yields per tree (iii) demand size and price inelasticity

I have read the McKinsey report and I think that, in the fullness of time, and with the possibility of a few false starts in establishing supply chains there will be significant demand for QIN's end products with various markets exhibiting different pricing dynamics (some elastic - e.g. pan masala, and some inelastic - e.g. pharma).

Again, I have no problem with QIN controlling the supply of Sandalwood products by buying raw product from its managed plantations and then undertaking the value-add component or controlling the distribution of unprocessed harvested wood.

There are, however, some aspects of the Glaucus report that show deficiencies in QIN's disclosure to stakeholders, including the lack of 2017 sales from its Chinese partner (only one of several customers but at this point, their largest).

In addition, the issue of 19.6kg of heartwood per tree comes from the latest AR (2016). It is found in Note 11 (page 86) whereby it is used as an input to valuing the TFC owned biological assets.

The concern is that the early plantation vintages are yielding a much lower weight of heartwood and QIN have not demonstrated (via harvest) that this 19.6kg yield can be achieved. In QIN's defence, however, the majority of QIN's ownership in plantations comes from later stage plantings whereby silvicultural practices are greatly improved and thus the expected yields.

I for one am happy with the end outcome here, regardless of whether QIN or Glaucus is correct - I suspect a bit of both at this stage.

I believe that disclosure, going forward, from QIN will be much better, especially surrounding the sale of end products to customers.

Perhaps QIN got lazy in selecting a single Chinese partner for its harvests out to 2021 and this has blown up in QIN's face. If anything, and assuming the McKinsey Report is valid, this could be a good thing in making QIN diversify its customer base and reduce single partner risk which is ultimately what will be required given the huge ramp up in supply coming down the pipe.

It is a good sign too for shareholders if there is now no more available shares to borrow from brokers (if an HC'er comment is true) as it will make Glaucus's job of defending their short position (by selling into this news) that much harder.

Cheers
John