The Company now has in place a pricing structure whereby the price charged for rice is determined by the quality of the product sold, specifically, the percentage of broken grains. The prices the Company is achieving are consistent with earlier estimates and at a significant premium to global rice prices. The Company anticipates selling to additional counterparties over the course of time.
Outlook
The Company's strategy for its oil palm plantations business continues to be to maximize returns from existing plantings while investing in new plantings and the required processing capacity. Commissioning of the new palm oil mill at Yaligimba is expected to provide the Company with immediate access to an additional 3,903 ha of mature oil palms for the production of CPO, an increase of 62.1% from the area currently accessible. Once the Yaligimba palm oil mill is completed, there are no major capital expenditures currently anticipated in the Company's oil palm plantations business, excluding costs associated with the Company's replanting program.
The Company has made progress in establishing commercially viable rice yields at its arable operation, has established a pricing formula and is making sales to high quality local counterparties. This furthers our confidence in the favorable dynamics of the local rice market. The Company is currently evaluating how to prudently expand its arable farming operation in light of these recent positive developments.
In summary, the key objectives of the Company for 2013 are as follows: (i) finish construction and commission the palm oil mill at the Yaligimba plantation, thereby enabling the Company to harvest and process fruit grown at that location; (ii) re-plant up to 5,000 ha across its oil palm plantations; and (iii) prudently advance its arable farming operation.
As previously disclosed by the Company, on December 24, 2011, the government of the DRC promulgated a new law, "Loi Portant Principes Fondamentaux Relatifs a L'Agriculture" (the "Agriculture Law"), for the stated purposes of developing and modernizing the country's agricultural sector. Feronia continues to seek clarification on the implications of this legislation from local counsel and government in the DRC. If the Agriculture Law is interpreted by the DRC government to apply to the existing concession rights held by the Company and the Agriculture Law is not amended, it could have a material and substantial adverse effect on the value of its business and its share price. In such case, Feronia may be required to sell or otherwise dispose of a sufficient interest in its operating subsidiaries so as to ensure that it meets local ownership requirements. There is no assurance that such a sale or disposition would be completed at fair market value or otherwise on acceptable terms to Feronia. Please refer to the Company's Management Discussion and Analysis for the three and 12 months ended December 31, 2012 available on www.sedar.com for a full discussion on the Agriculture Law.
Discussion of Operations - Three and 12 months ended December 31, 2012Revenue and Gross Margin ---------------------------- --------------------------- ---------------------------- ---------------------------(Expressed in thousands of US dollars) Three months ended Dec 31, Year ended Dec 31,------------------------------------------------ --------------------------- % % 2012 2011 Change 2012 2011 Change------------------------------------------------ ---------------------------Palm Oil $ 1,009 $ 2,518 (60)% $ 6,805 $ 6,631 3%Other 20 493 (96)% 325 818 (60)%------------------------------------------------ ---------------------------Revenues $ 1,029 $ 3,011 (66)% $ 7,130 $ 7,449 (4)%Cost of Sales 1,628 2,150 (24)% 6,082 4,585 33%------------------------------------------------ ---------------------------Gross Margin (Loss) PHC (1,2) $ (599) $ 861 (170)% $ 1,048 $ 2,864 (63)%Gross Margin (Loss) PHC % (1,2) (58)% 29% n/a 15% 38% n/a------------------------------------------------ ---------------------------Arable operating expense 1,557 1,620 (4)% 3,205 2,248 43%----------------------------------------------------------------------------Notes:(1) Gross margin is a non-GAAP financial measure. See "Non-GAAP Financial Measures" below.(2) Gross margin is impacted in the short term by improved harvesting practices which management believes are in the long-term interest of better profitability.
