New fund launched to develop NZ carbon sinks.

Media coverage:

Radio New Zealand: (from 1:32)
BusinessDesk
Farmers Weekly
NBR (subscriber only)
NZ Herald (premium)

MyFarm has launched a new fund to give wholesale investors the opportunity to take advantage of the rapidly increasing price of carbon as New Zealand puts policy in place to reduce carbon emissions.

The CQuest Forestation and Carbon Investment Fund is seeking an initial $15.2 million to buy up to 1,500 hectares of land to plant in radiata pine. It will give wholesale investors an opportunity to farm carbon credits.

It will initially invest in a 465 ha former sheep and beef property in the Tararua district and will add to the portfolio as suitable land is found.

CQuest Fund envisages sequestering around 480 tonnes of carbon per hectare through the planting of pine trees, generating carbon credits at a cost of $20-25/tonne. And, as the trees grow to maturity, it then aims to sell the credits on the secondary market where carbon credits have recently been trading as high as $60/tonne. The Fund has secured property to plant with the initial property expected to be planted in 2022 into around 356 effective hectares.[1]

These returns will be supplemented by the sale of wood once the trees reach maturity, or if sold post the carbon earning period. If held through to harvest there is an obligation to replant the forest once harvested.

CQuest Fund is to be managed by MyFarm, New Zealand’s largest rural land syndicator and Afforestation Partners Management Limited, which over the past three years has established 1,500 hectares of similar carbon related projects for private investors.

Its launch comes a little over a month after the Intergovernmental Panel on Climate Change (IPCC) warned that human induced changes to the global climate were unprecedented and that more intense rainfall, flooding, as well as more intense droughts are now expected in many regions of the globe.

It also follows a more than doubling in carbon prices over the last two years from just over $25 per tonne of CO₂ in September 2019 to more than $60 per tonne last week after the Government’s most recent auction of carbon units and announcement the price floor and ceiling are to be lifted in coming years.

MyFarm Chief Executive Andrew Watters said: “CQuest Fund is among the first specifically targeted at giving New Zealand wholesale investors the opportunity to acquire carbon credits at a discount to the price prevailing on the secondary market and benefit from the difference and any further increase in carbon prices.

“Revenue from the sale of the wood represents around a quarter of the base case projected return over the circa 25-year life of the investment and substantially less than that should carbon prices rise.

“Our base case is to sell units over the life of the investment at a price ranging between $50 to $60 a tonne. This revenue, combined with the returns from forestry, is projected to generate an internal rate of return (IRR) on the Fund of 6% to 9% per annum. However, our sensitivity analysis shows that every $10 per tonne increase in carbon above the base case will add a further 2 percentage points to IRR and much more to distributions through the carbon earning period.

“It is an exciting opportunity. Several critical policy shifts have seen the local carbon price double over the past year. It is now clear that a higher carbon price is needed if the New Zealand economy has any hope of achieving its Paris Agreement targets and delivering on the transition to a low-emissions economy.”

MyFarm GM Investments, economist Con Williams said in sharp contrast to forestry investments of the past, which typically generated little cash flow until the forest was harvested, the Cquest Fund is projected to produce positive cashflows much earlier- thanks to the carbon credit revenue.

“We project that investors will have earned their capital back potentially within 14-16 years and much faster if carbon prices increase. And at that point The CQuest Fund investors will then still own the property and benefit from any returns derived from the sale of trees.

He says the forestry sector is one of New Zealand’s largest export earners over many years and currently brings in nearly $6.8 billion worth of foreign earnings annually.

“The sector is also experiencing a period of solid returns fuelled by a combination of steady Chinese demand, further restrictions in export markets on the harvesting of native forests, a domestic building boom, and a supportive NZD/USD relative to in-market prices.

“Many of these trends are looking likely to continue. In addition, radiata pine is a very versatile raw product, there are a range of new applications emerging in the likes of housing fitouts, wood remanufacturing, furniture end-uses and cellulose fibre to replace plastics that could open new opportunities when CQuest Fund properties are logged.

“We have reached a pivotal point in the New Zealand carbon market, and we are excited to offer MyFarm investors an opportunity to add a carbon focused investment to their portfolios.”

Key terms:

The offer to wholesale investors is for 15.2 million Units in CQuest Fund at an issue price of $1/unit. The minimum investment is 50,000 Units ($50,000) and thereafter the size of an investment can be increased in multiples of $10,000. The minimum capital raise is $4.0 million Units.

Key dates:

- Offer opens Wednesday 15 September
- First Close – 8th October with 35% applied for due ($17,500 for those who apply at the minimum level).
- Other fund calls will be with 20 working days’ notice.

For more information:

[1] The homestead, support buildings and around 30 ha of flat land are to be subdivided and sold, possibly to a neighbouring farmer. The residual area is a mixture of native bush, plant setbacks and areas unsuitable for forest establishment.