Kiland's two-pronged pivot after 2020 bushfire loss

Australia’s 2020 bushfires burned over 17 million hectares of land destroying ecosystems, families and businesses alike. One of the affected businesses was Kiland, which is converting its burnt timberland into agricultural land for sheep farming and possibly the world’s biggest biochar projects.

Speaking on Reach Markets’ The Insider: Meet the Fund Manager in September 2022, Hancock & Gore’s Portfolio Manager Joseph Constable highlighted Kiland (ASX: KIL) as one of his three favourite stocks. Watch the full The Insider: Meet the Fund Manager session.

“Over the last decade, Kiland acquired the majority of Kangaroo Island’s timberland and this is timberland that had been planted in the decade or so before that,” Mr Constable said.

“The company was awaiting approval from the government to build a wharf to be able to export all this timber…And then the 2019-20 bushfires happened and damaged most of the company’s standing crop.”

Mr Constable outlined how Kiland went into damage-control mode, using some of its ~$70 million in insurance proceeds to buy back stock and redevelop its timberland into sheep farms.

“Obviously there’s been a strong push in agriculture recently and a lot of demand in such land,” he said. “And this will be a significant parcel and potentially sought after by big institutions around the world.”

However, what contributed to Mr Constable’s ‘asymmetric upside’ assessment of Kiland was the company’s strategy to convert the fire affected timber into biochar – a charcoal-like substance with a number of applications in agriculture, reducing carbon dioxide in the atmosphere and mitigating climate change.

“Asymmetric upside in the carbon removal works but you also have a very high margin of safety at the current valuation because the company is underpinned by all this cash and agricultural land” he said.

“This will actually be one of the largest biochar projects in the world and should, inferring what carbon credits have been going for recently, generate nearly $84 million after a funding cost of $15 million.”

James Davies, Executive Chairman of Kiland, joined Reach Markets’ The Insider: Meet the CEOs session in February 2023 where he talked through how Kiland pivoted to its new strategy as well as the opportunities that lay ahead for the company in sheep farming and biochar. Watch the full The Insider: Meet the CEO session.

“At that point, there was a reset on the business which included a refresh of the board and a change of strategy,” Mr Davies said, referring to the aftermath of the bushfires and the South Australia Government denying Kiland the approval to build a port that would help the company export its timber.

“It was a fairly straightforward decision to obviously revert to agriculture. The western end of the island has very high rainfall which is obviously a good thing but it does mean that cropping would be difficult,” he said. “We made the decision to focus on high intensity meat production, sheep meat in particular.”

Mr Davies provided an overview of the activities required to move from plantation crop through to a farm, touching on development costs before talking about Kiland’s biochar project.

“There’s about 4.5 million tonnes of standing timber on the estate. We launched a subsidiary business called Nobrac Limited,” he said. “Nobrac will undertake what will be the world’s largest biochar carbon removal project. The carbon removal that we will undertake is the equivalent of about 390,000 cars.”

Kiland had capitalised the initially 100% owned Nobrac with $2 million cash and a shareholder loan facility of up to $10 million to Nobrac. After externally raising $7.1 million in December 2022, Nobrac’s post-money equity valuation was $57.1 million (as at 31 December 2022) and Kiland’s equity ownership reduced from 100% to 87.6%.

The company estimates that processing 1,000 tonnes of biomass per day will keep the process going for 8-10 years, equating to ~950,000 tonnes of biochar and 2 million carbon removal credits.

“Carbon Removal Credits are actually quite hard to generate and biochar is really the only commercial option available now,” Mr Davies said, also highlighting companies like Microsoft as the ones looking to lead the market in buying the credits.

“We think we can produce biochar at about $32 per credit. If you compare that to the US$100 sale price, there’s a good margin in it and the biochar will be on top of that,” he added.

Joseph Constable who joined Mr Davies on February’s The Insider: Meet the CEO event said, “What we really love about it is that it’s debt-free, it’s asset rich, holds a lot of cash and land, it’s trading at a discount to its tangible book value which really is just cash and land…We’re very very happy holders, it’s 11% of our fund.”

Click here to view more videos from Joseph Constable’s The Insider: Meet the Fund Manager session, or click here to view the full The Insider: Meet the CEOs session with Kiland Executive Chairman James Davies.

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