2007 Annual Report - Sappi

into account, unadjusted current market prices, estimated
projected growth over the rotation period for the existing
immature timber volumes in metric ton, cost of delivery and
estimated maintenance costs up to the timber becoming
usable. The discount rate used is the applicable pre-tax
weighted average cost of capital of the business unit.
Determining the appropriate discount rate requires significant
assumption and judgement and changes in these assumptions
could change the outcomes of the plantation valuations. The
standing value of mature timber is based on unadjusted current
market prices and estimated timber volumes in metric ton less
cost of delivery.
The age threshold used for quantifying immature timber is
dependent on the rotation period of the specific timber genus.
In the Southern African region, softwood less than eight years
and hardwood less than five years is classified as immature
timber. Management focuses their attention to good husbandry
techniques, which include ensuring that the rotation of
plantations is met with adequate planting activities for future
harvesting. The rotation periods vary from eight to eighteen
years in Southern Africa.
Assumptions and estimates are used in the recording of
plantation volumes, maintenance cost per metric tonne, and
depletion. Changes in the assumptions or estimates used in
these calculations may affect the group’s results, in particular,
our plantation valuation and depletion costs.
A key assumption and estimation is the projected growth
estimation over a period of eight to eighteen years per rotation.
The inputs to our immature timber growth model are complex
and involve estimations and judgements, all of which are
regularly updated. Sappi established a long term sample plot
network which is representative of the species and sites on
which we grow trees and the measured data from these
permanent sample plots are used as input into our growth
estimation. Periodic adjustments are made to existing models
for new genetic material.
Sappi manages the establishment, maintenance and harvesting
of its plantations on a compartmentalised basis. These comprise
pulpwood and saw logs and are managed in such a way so as
to ensure that the optimum fibre balance is supplied to its paper
and pulping operations in Southern Africa. Sappi owns
approximately 369,000 (2006: 372,000) hectares of plantation
and directly and indirectly manages a further 184,000 (2006:
173,000) hectares established on land held by independent
commercial farmers. Sappi provides technical advice on the
growing and tendering of trees which are recognised as
silviculture costs in cost of sales. 409,000 (2006: 398,000)
hectares of this land is forested with approximately 37,3 million
(2006: 38,2 million) standing tons of timber. Given the extent of
our plantations between 30% and 40% of these areas are
measured in a three year cycle in order to confirm the accuracy
of the recorded volume changes.
As Sappi manages its plantations on a rotational basis and by
implication, the respective increases by means of growth are, over
the rotation period, negated by depletions for the group’s own
production or sales. Estimated volume changes, on a rotational
basis, amount to approximately six million tons per annum.
Depletions include the fair value of timber felled, which is
determined on the average method, plus amounts written off
against standing timber to cover loss or damage caused by fire,
disease and stunted growth. Depletions are accounted for on
a cost per metric ton allocation method. Tons are calculated
using the projected growth to rotation age and are extrapolated
to current age on a straight line basis.
Ruling unadjusted current market prices applied at the reporting
date, as well as the assumptions that are used in determining
the extent of biological transformation (“growth”) can have a
significant effect on the valuation of the plantations, and as a
result, the amount recorded in the income statement arising
from fair value changes and growth. In addition, the discount
rate applied in the valuation of immature timber has an impact
as tabled below.
US$ million 2007 2006
Fair value changes
1% increase in market prices 17 14
1% decrease in market prices (17) (14)
Discount rate (for immature timber)
1% increase in rate (4) (3)
1% decrease in rate 4 4
Volume assumption
1% increase in estimate of volume 6 5
1% decrease in estimate of volume (6) (5)
Growth assumptions
1% increase in rate of growth 2 1
1% decrease in rate of growth (2) (1)
The group is exposed to financial risks arising from climatic
changes, disease and other natural risks such as fire, flooding
and storms and human-induced losses arising from strikes, civil
commotion and malicious damage. These risks are covered
by an appropriate level of insurance as determined by
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