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John, I agree with your view on risks, but see one more from...

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Roy2U

1,073 Posts.

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08/12/16

09:10

Post #: 21187082
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Originally posted by JID ↑

Fair enough Showmethe$$$,

I would view it oppositely.

The share price is resilient DESPITE the massive increase in short positions since c. March this year where the short positions have doubled. This, IMO is a positive sign.

Unless there is a fatal flaw in the business model that we have yet to uncover then the SP has been very resilient in the face of this disequilibrium.

There are three main risks that I can see for TFC that remain:

(1) Until harvests ramp up materially in c. 5 years they are still reliant on institutional and MIS growers investing in new plantations to fund their annual plantings (which I assume will be c. 1,50o ha pa). This risk is lessening somewhat from this year onwards as harvests have jumped 10x from the previous year (and plateau now for c. 5 years) and these harvest are forward sold.

Now that products are being sold from previous harvests and supply deals achieved, you would think that this would lower this risk as institutional investors (e.g. pension funds) can see the IRR's achieved vs. their current portfolios and that there is an end market for the Sandalwood products. This should, in theory create more demand. This is likely further enhanced for US investors vs. a couple of years ago when the AUD was so much higher (USD investments go a lot further now).

(2) The second risk is that, over the longer term as harvests increase materially, can the market absorb the additional supply without major falls in the prices achieved. Whilst this will remain an issue until proven otherwise, the move by TFC up the supply chain to pharma development is a good initiative.

(3) The third risk is whether the trees will yield the amount of heartwood assumed by TFC. I note that in the latest AR this assumption has reduced from 20.8kg per tree to 19.6kg per tree. I would think that TFC are far enough along on their development pathway that there shouldn't be material falls in this assumption from here on in.

I can't see any of these risks justifying an outside party(ies) shorting TFC to the extent that it is. I am open to other suggested 'fatal flaws' that I may be missing.

The shorting may well be for the reason we have speculated previously in that holders of 54m $1.28 warrants are locking in profit now and utilising resultant funds elsewhere until they need to exercise their warrants in 2018.

If that is the case then this presents a great opportunity to secure TFC shares at a possibly discounted price whilst shares are being supplied to the market.

Ultimately these shorted shares will need to be bought back which will either:

(a) Exacerbate a surge in share price if TFC kick all their stated goals
(b) Reduce the downside if a flaw does emerge as these shares will be bought back reducing the magnitude of downside falls.

All just my opinion of course.

Cheers
John

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John, I agree with your view on risks, but see one more from left field. It is the issue of water rights in the NT. I remember this was a big political issue there before the Labor Party won government. They claimed that a National Party member benefited financially from the grant of water rights to a property which was subsequently sold to TFS with the water rights. Although this was bought in good faith by TFS, and they have a legal right to the water, you can never be sure what politicians will do to get even. It reminds me of what happened in NSW over the grant of coal mining licenses to some properties owned by some prominent figures well connected to the NSW Labor Party. I remain invested in TFS because I do not consider the NT Government would shoot themselves in the foot by destroying the business case for one of the largest businesses in that State. Still it is a potential risk.

TFC Price at posting: $1.66 Sentiment: Buy Disclosure: Held
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