Monday, July 25, 2011

Investors Guru Small Cap Stock Observer

(TSXV: PCT) Prima Colombia Hardwood - Company CEO Interview

We recently got a chance to sit down with Donald Hayes, President and CEO of Prima Colombia Hardwood (TSXV: PCT). Mr. Hayes is also Chairman of the board of directors of British Columbia Ferry Services and President and CEO of the Hayes Group, which has provided forest management services in British Columbia for over 50 years.

Q: Mr. Hayes, thank you for joining us. Please tell us about your forestry background - and how you became President and CEO of a tropical hardwood company in Colombia?

Hayes: The Hayes family entered the forestry business in 1922 when my grandfather, Douglas Hayes built some of the first logging trucks. In 1989 my brother Harold and I bought out the Family contracting business and grew it into the largest private forest service provider in British Colombia.

Q: What attracted PCT to doing business in Colombia?

Hayes: We were approached by a group from Nova Scotia who had invested in a Colombian company, REM International C.I.S.A., which had a forest license on the west coast of Colombia. They needed expertise in forest management and in particular in selective helicopter logging. We took a trip to Colombia, reviewed the opportunity, made an investment in the company and took over the management. This led to the RTO last September whereby Prima Colombia Hardwood Inc. (formerly Flagship Industries) acquired REM International C.I.S.A..

Q: Your corporate presentation summarises PCT as having "First Mover advantage, using Canadian forestry technology employing low impact, sustainable logging methods". Can you elaborate on the PCTs harvesting methods?

Hayes: PCT uses helicopters to selectively log creating minimal environmental impact. We do this in a systematic way. We start by creating a forest cover or inventory map using personnel on the ground and specialized hand held, GPS and bar code enabled computers. Based on this data, we submit cutting permit applications, select the trees for production and dispatch the helicopter to harvest those trees. This allows for the retention of trees in each species to keep the forest naturally bio diverse and sustainable.

Q: How many trees do you take per hectare?

Hayes: The density is extremely low from about 6 to 12 trees depending on size. In fact, because the density is so low, one of our challenges is that once we cut a tree, we can lose it under the forest canopy. So we have to keep track of each tree cut with GPS. The end result is a commercial forest in which there is very little visual impact or ground disturbance.

Q: What is meant by "chain of custody"?

Hayes: The first time we encounter the tree, it is given a waterproof barcode tag. The tree is entered into a computer system including its geo reference. After that, we follow that tree all the way through the production system until it is delivered to customers worldwide. It's like UPS. At every stage of harvesting and production we can tell you exactly where the tree is, where it came from, and what permit it was harvested under.

Q: What benefit does that give you as a seller?

Hayes: It allows us to control the inventory and to track costs. Chain of custody is also critical in getting third party certification like the FSC (Forest Stewardship Council). Many buyers have FSC certification and they require chain of custody. A big part of the objective of the FSC is to combat illegal logging which is done in an unsustainable way.

Q: A number of financial commentators have predicted that PCT will attract the interest of the $3 trillion ethical fund industry. Why is this so?

Hayes: Forestry is an important sustainable regional economic opportunity. Prima Colombia employs high standards of forest management over the land base which displaces the opportunity for others to harvest either illegally. My conjecture is that ethical funds will be attracted to a company managing a base of forest lands on a sustainable basis which displaces illegal harvesting.

Q: In PCT's July 14th press release, the company announced a change in jurisdiction from the Choco regional government to the Colombian Ministry of the Environment. What does this change in jurisdiction mean to PCT?

Hayes: The system in Colombia is that you have a forest licence which gives you the broad right to manage a forest base in a specific area. Each time you want to cut a smaller area within that licence you apply for cutting permits. In this instance, the Ministry of Environment has taken over the jurisdiction from the local government of Choco regarding issuance of cutting permits. In the long run we see this as a positive development. The ministry of Environment is tremendously professional, they have the resources and they've already established a 4 person technical team to work with us. We are looking forward to establishing a new relationship with them.

Q: PCT's share price has fallen since the July 14th announcement, what is the process on getting the permits re-instated?

Hayes: The MOE is in the process of doing a review of documents. Our applications have been prepared in accordance with the requirements of Choco and MOE will let us know, if they have any different or additional requirements for the applications. While this is primarily a paper exercise, we are being very proactive to ensure that the MOE gets everything that they require. The MOE is also scheduling technical visits to the site, which we look forward to.

Q: How drastically has the risk reward profile of PCT changed in lieu of this announcement?

Hayes: The trees are still there, the opportunity is still there. We're dealing with a delay in production as a result of a government jurisdiction change. The timing is unfortunate but the forestry opportunity in Colombia remains unchanged and we remain very confident.

Q: Did the Ministry of Environment provide any reasoning behind the permit revocation?

Hayes: They have given us no specific reason, we feel that it is mainly a jurisdiction issue between two branches of government

Q: PCT has reduced their burn rate to $600,000 per month - what is this money being used for?

Hayes: The money is being used to ensure that we maintain the opportunity. Half a dozen forestry engineers continue to work to support the permit process. We have camp and security personnel at our camp ensuring the assets are secure. We have a reduced business office in Colombia. Our office here in Vancouver continues to operate on a reduced scale.

Q: How long will your current cash position last and how do you look to finance the company?

Hayes: Key stakeholders of the company have given strong indication that they will support the company through this period.

Q: Do you anticipate further stock dilution?

Hayes: We had announced a private placement at the time when this arose which would have resulted in dilution. This financing has been delayed but will eventually be required. We expect that the support will have some aspect of convertibility or some equity benefits.

Q: Where do you see PCT 6 to 12 months from now?

Hayes: It is my expectation that we will be fully operational on our existing license and will be aggressively pursuing additional timber lands to add to our sustainable timber reserves.

Q: Thank you for your time.

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