11. Biological assets

The forests of Precious Woods in Brazil are organized as one single forest management and are managed in a sustainable manner, which means that no more than the incremental growth will be harvested, and the substance of the forest will be preserved. The appraisal of the Group’s naturally grown forests was performed according to IAS 41 Agriculture and IFRS 13 Fair Value Measurement.

Accounting policies

Biological assets are measured at their fair value less costs to sell, with any resultant gain or loss recognized in the consolidated statement of profit or loss. The fair value of biological assets was estimated by applying the income approach, considering the MPEE method. The income approach reflects current market expectations in relation to future values. The costs to sell are made up of harvesting, transporting and processing costs.

Valuation process

The Group has a team within the Internal Reporting department that performs the valuation of biological assets. The valuation is updated internally at the end of each reporting period. When considering the appropriate input data, the team reviews available information such as quantity of tree harvest, expected yield, current market prices, expected harvest costs through to harvest and the expected timing of harvest.

The valuation policies and procedures, as well as changes in the fair value measurements are reviewed by the chief financial officer (CFO) annually. The CFO is responsible for the Group’s internal valuation team. The Group’s internal valuation team comprises two employees, both of whom hold relevant internationally recognized professional qualifications and are experienced in valuations in the forest industry.

Methodology and assumptions used in determining fair value

Since Group Management was able to provide reliable cash flow estimates, the income approach was utilized, specifically the MPEEM (Multi-Period Excess Earnings Method). The MPEE method is a valuation approach that considers the ability of biological assets to generate future cash flow in order to determine their fair value.

The following significant assumptions were adopted by the group to determine the fair value of the forest:

Volumes: The biological assets consist of a variety of naturally grown trees native to the region, which are cut from 50 cm in diameter and have a natural renewal cycle of 35 years. For value estimation and still considering the characteristics of the evaluated assets and the sustainable management, an annual exploration area of up to 10 600 hectares was considered. The exploration area of effective forest management area is calculated from the total area of forests owned by Precious Woods (in order to obtain the exploration approval) excluding 20% of the permanent preservation area.

For the estimation of the fair value of the forest, a certain volume of exploration area was considered, according to the evolution through years and the Group Management’s expectation of exploration for the coming years. The harvesting volume was calculated based on effective quantities. Due to the implementation of optimization measures, the following harvesting volume development was expected: 2025: 14 m³/ha/year and 125 000 m³; 2026: 15 m³/ha/year and 160 000 m³; and from 2027 onwards, 17 m³/ha/year and 180 000 m³ harvesting volume. The actual harvesting volume for 2024 was 117 000 m³ (2023: 86 500 m³).

Volume adjustment factor: The logs will be transformed into sawn timber in various dimensions. An average yield factor was applied.

Prices: The average price applied on the volume to generate revenues were derived from the segregation between export or domestic market, type of product (commercial / non-commercial) and the corresponding prices. Generally, the costs contain cutting, transportation and processing as well as the depreciation expenses of the related fixed assets. For the export market, additional costs for drying and packaging are added. The majority of timber is for the export market and related to market prices.

Operating costs: The costs include all costs related to sustainable forest management and the production cost in the industry. Production costs are being directly subtracted from the prices to determine the prices of raw wood. Meanwhile, sustainable forest management costs – such as harvesting, loading, transportation, and related activities – are being deducted from the cash flow projections.

Costs to sell: On top of operating costs there are costs for packaging, administration, sales activities and transportation respected, but no financial costs.

Level 3 fair value

The valuation model considers the present value of the net cash flows expected to be generated from the natural forest management activities in the next 4 years. The forest for the 31 years remaining part of the cycle is regarded as non-productive forest, even if harvesting will follow, as the forest is naturally re-generated during the cycle of 35 years. Therefore, the values remain stable if there are no major market price differences to the ones applied.

Key assumption used in the determination of the discount rate

In determining the after-tax weighted average cost of capital (WACC), a group rate of 14.0 % (2023: 18.0 %) has been applied considering the following inputs:

Sensitivity analysis

Assuming all other unobservable inputs are held constant, the following changes in these above assumptions will cause a change in the fair value of the forest:

The above sensitivity analysis shows how the present value of the discounted cash flows would be affected if the key valuation parameters were attributed other values than those that form the basis of the current valuation of the discounted cash flows. An increase by the same percentage would have the opposite effect on the valuation.

The Group is exposed to a number of risks relevant to its natural forest management activities, namely:

Regulatory and environmental risk: The Group has established environmental policies and procedures aimed at compliance with environmental legislation. Group Management performs regular reviews to identify environmental risks and to ensure that the management systems in place are adequate. The Group manages its natural forest in compliance with FSC and PEFC standards since 1994 and 2017 respectively.

Supply and demand risk: The Group is exposed to risks arising from fluctuations in the price and demand for log products. When possible, the Group manages these risks by aligning its harvest volumes to market demand. Group Management performs regular industry trend analyses to ensure that the Group’s pricing structure is in line with the market and to ensure that projected harvest volumes are consistent with expected demand on a sustainable basis.

Climate and other risk: The Group’s forests are exposed to the risk of damage from climatic changes, diseases and other natural forces.