R.E.A. Holdings plc: Trading update

R.E.A. Holdings plc (RE.) R.E.A. Holdings plc: Trading update 01-Feb-2023 / 07:00 GMT/BST Dissemination of a Regulatory Announcement that contains inside information in accordance with the Market Abuse Regulation (MAR), transmitted by EQS Group. The issuer is solely responsible for the content of this announcement.

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R.E.A. Holdings plc ("REA" or the "company") - Trading update

REA, whose principal business is the cultivation of oil palms in the province of East Kalimantan in Indonesia and the production and sale of crude palm oil ("CPO") and crude palm kernel oil ("CPKO"), is pleased to announce a trading update for the year ended 31 December 2022.

David Blackett, chairman of REA, commented:

The group's improving operational and financial performance is encouraging. Generally, firm CPO prices have largely offset inflationary pressures on costs albeit that prices have been restricted by the Indonesian government's efforts to constrain the local price of cooking oil from rising above an affordable level. With extension planting now re-started, the commencement of replanting of the oldest mature areas and cash flowing from further repayments of loans made to the Indonesian stone and coal concession companies, REA expects that the group's fortunes will continue to improve.

Agricultural operations

Key agricultural statistics for the year to 31 December 2022 (with comparative figures for 2021) were as follows:

                                           2022      2021 
Fresh Fruit Bunch ("FFB") crops (tonnes): 
Group harvested                            765,682   738,024 
Third party harvested                      248,969   210,978 
Total                                      1,014,651 949,002 
 
Production (tonnes): 
Total FFB processed                        981,010   933,120 
FFB sold                                   33,169    18,369 
CPO                                        218,275   209,006 
Palm kernels                               46,799    44,735 
CPKO                                       18,206    17,361 
 
Extraction rates (percentage): 
CPO                                        22.3      22.4 
Palm kernel                                4.8       4.8 
CPKO*                                      39.8      39.5 
 
Rainfall (mm): 
Average across the estates                 3,837     3,650 

*Based on kernels processed

Group FFB increased by some 3.7 per cent in 2022 despite periods of high and prolonged rainfall and the loss of crop from the oldest areas where replanting commenced during the second half. Overall, rainfall for the year was 23 per cent higher than the historic average for the last ten years. Compounding this, the number of rain days, when harvesting had to be cancelled and evacuation was interrupted, was significantly higher than historic averages.

Although excessive rainfall and periodic flooding presented logistical challenges for crop evacuation throughout the year, continuing investment in expanding the group's transport fleet and improving group infrastructure had a positive impact on logistical efficiencies as the year progressed. 2023 should see further benefit from this investment and, with a consequential improvement in the speed of FFB evacuation, some enhancement of extraction rates.

Expansion of the group's third oil mill at Satria ("SOM"), doubling its capacity, was successfully completed in the first half of 2022. Together with the approaching completion of the repairs to the boiler at Perdana oil mill ("POM") that was damaged in 2021, this not only ensures ample processing capacity for the group's own FFB production and that of third party suppliers but also provides additional resilience in the event of temporary shutdowns for essential maintenance and repairs. It should also give the group sufficient processing capacity to allow it to separate the processing of fully certified sustainable FFB from other FFB. This should permit the sale of the CPO produced from the sustainable FFB as segregated sustainable CPO which normally commands a price premium.

As planned, in the final quarter of 2022, the group commenced land preparation at the group's newest estate at PT Prasetia Utama ("PU") It is expected that an initial oil palm extension area of 2,000 hectares can be planted by the end of 2023.

Each year the group participates in the Sustainable Palm Oil Transparency Toolkit ("SPOTT") assessment by the Zoological Society of London ("ZSL") which assesses palm oil producers, processors and traders on their disclosures regarding their organisation, policies and practices with respect to environmental, social and governance ("ESG") matters. In the 2022 assessment, published in November, the company's score increased from 84.4 per cent to 87.0 per cent, compared with an average score of 45.4 per cent, ranking the group tenth out of 100 palm oil companies assessed.

A surge in CPO prices early in 2022, in line with generally higher commodity prices, was dampened by a range of measures introduced by the Indonesian government in June 2022, aimed at supporting the local availability of cooking oil at an affordable price. These measures, which were periodically revised through the rest of the year, included an initial short ban on exports, the introduction of domestic market obligations and changes to the export tariff structure. The initial impact of the measures was a dramatic fall in the net prices receivable by the group for its produce but the later revisions to the measures saw such net prices return to, and stabilise at, a remunerative level.

The CPO price, CIF Rotterdam, opened the year at USD1,350 per tonne, closed at USD995, after peaking at USD1,990 in early March, and currently stands at USD1,030 per tonne. Whilst CPO production is recovering from the negative impact of Covid, demand remains strong. In particular, the relaxation of Covid restrictions in China is likely to lead to increased Chinese offtake. Mandated biodiesel usage in transport fuel in Indonesia also provides a valuable support for the Indonesian CPO domestic market.

The average selling price for the group's CPO for 2022, including premia for certified oil but net of export levy and duty, adjusted to FOB Samarinda, was USD821 per tonne (2021: USD777 per tonne). The average selling price for the group's CPKO, on the same basis, was USD1,185 per tonne (2021: USD1,157 per tonne). These higher average selling prices served to offset inflationary pressure on costs.

Stone and coal interests

Following the recommencement in late 2021 of operations at the coal concession held by PT Indo Pancadasa Agrotama (" IPA"), to which the group has made loans, mining from IPA's southern pit continued throughout 2022 at the rate of approximately 30,000 tonnes per month. A total of 11 shipments were made during the year totalling some 346,000 tonnes at selling prices averaging USD258 per tonne (delivered FOB vessel). In addition, small volumes of third party coal started shipping through IPA's port during 2022.

Towards the end of 2022, IPA's mining contractor completed exploratory drilling of the northern pit (which was previously mined some years ago) and commenced dewatering and some limited mining in this section of the concession.

IPA's coal production is projected to continue during 2023 at the same average rate as that achieved in 2022. With production coming predominantly from the northern pit, where the coal is mainly high calorie thermal coal rather than the semi-soft coking coal found in the southern pit, the average price achievable will be very dependent upon thermal coal prices. These may be less supported than coking coal prices if there is any fall off in current coal demand from Europe for re-opened coal fired power stations.

Plans to commence quarrying of the andesite stone concession held by PT Aragon Tambang Pratama ("ATP"), to which the group has also made loans, continued to be progressed during 2022. After extended discussions with potential contractors, ATP concluded that it should own its own crushing equipment rather than rely on access to equipment provided by an external contractor. The group agreed to finance ATP's purchase of the required equipment at a cost of approximately USD1.5 million and the equipment is scheduled for delivery in the next few weeks, after which stone production can start. There continues to be good demand for stone from third parties in the neighbourhood of the stone concession as well as for the group's infrastructure projects.

Recently concluded investigations of the sand contained in the overburden overlaying the coal at IPA have indicated that this sand should have a commercial value. PT Millenia Coalindo Utama ("MCU"), a company owned by the group's partners in IPA, has applied for the permits required to mine this sand and the group has recently concluded agreements under which, conditional upon such permits being secured, it will acquire a 49 per cent shareholding in MCU. IPA's coal mining contractor has indicated interest in extending its existing coal mining contract with IPA to cover mining of IPA sand with a similar profit sharing arrangement to that agreed for coal and on the basis that the contractor would finance initial set up costs including the purchase of a required washing plant.

It remains the directors' intention that the group should withdraw from its coal interests as soon as practicable. The continuing extraction of coal at IPA and the imminent commencement of quarrying at ATP encourages an expectation of a full recovery of group loans in due course.

Finance

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February 01, 2023 02:00 ET (07:00 GMT)