Araguaia

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	26835
Company name	Cia. do Vale do Araguaia
Country	Brazil
Sector	Agriculture and Forestry
Environmental category	B
Department	Global Manufacturing & Services
Status	Pend PDS-IR

Date SPI disclosed	April 16, 2008
Projected board date	May 23, 2008

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Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

Companhia do Vale do Araguaia (Araguaia or the company) is a three-year old company that owns and operates a pilot project with approximately 11,400 hectares (ha) of land in midwestern Brazil, of which about 2,100 ha are planted with young teak trees (Tectona grandis). The midwestern Brazilian states are a region with favorable soils and climate for teak cultivation and there is about a 40-year history of cultivating teak, but to date there are few large-scale teak plantations operating in Brazil. The project is the expansion of the company’s operations to roughly 50,000 ha of planted teak, which may be complemented around the year 2011 with a saw mill. Approximately $180 million is being raised to fund the project with the bulk of this sum to be invested in land, planting and land development, working capital and initial operating expenses. The company is dedicated to acquiring and managing its plantations in a socially and environmentally sustainable manner and will seek certification of the operations accordingly.

Teak is one of the most valuable of tropical hardwoods, with roadside log prices in Burma in the $600/m3-range. As is the case with other precious woods, teak only matures into commercially-suitable sizes over 20 to 50 years or more, depending upon soils, rainfall, and climate more generally. The unsustainable harvest of teak from natural forests, in particular in Mynamar and neighboring southeast Asian countries, is causing depletion of teak from natural forests. Demand for teak is anchored by the Indian subcontinent and China (areas where teak has historical and cultural significance). In addition, teak is increasingly popular in European and North American markets. As teak is naturally weather resistant, processing teak lumber into durable, outdoor furniture also requires fewer chemicals than most other woods and the species which also makes it more environmentally friendly. Unfortunately, teak from natural forests in Southeast Asia has been harvested in an unsustainable fashion and the project aims to address what is expected to be a significant gap in the future between supply and demand with teak from natural forests dwindling and insufficient re-planting occurring.

The company anticipates seeking certification of its forest management practices according to one of the widely recognized forest management standards, such as that of the Forest Stewardship Council (FSC). Such certification standards were developed with input from stakeholders, ensuring that social, economic and environmental interests are represented in standard setting.

Anticipated development impact of the project

The areas within Mato Grosso and Goias where the company will be operating are relatively dependent on a few agricultural commodities, in particular soybeans and cattle. Therefore, a development objective for the region is to achieve a more balanced economy. While the municipalities in which Araguaia will operate have good fundamentals for the cultivation of teak, to date there has not been to teak cultivation on a commercial scale and so the project will bring a welcome diversification to the local economy. Moreover, plantation forestry is relatively more labor intensive than cattle ranching or soybean cultivation, generating comparatively significant employment in the region. At full-scale, the project will contribute significantly to the local tax base as well as generate an estimated 778 jobs on the plantations and nearly another 100, higher value-added technical, supervisory and administrative jobs. Operation of the envisioned saw mill would probably generate approximately another 425 jobs.

IFC's expected development contribution

Araguaia endeavors to maintain strong relations in the communities where it is investing and to meet world-class standards with respect to operational management, environmental stewardship and corporate governance. Validation of these attributes is important to the customers the company targets and, as Araguaia grows, will be important to prospective investors in a possible initial public offering of shares (IPO) over the medium-term future. In addition to financial criteria, IFC is screening a potential investment in Araguaia on these attributes and a possible IFC shareholding serves as a validation of whether the company and management are meeting high standards. For example with respect to corporate governance, IFC is well recognized in the Brazilian market for the contribution it has made to developing the code applicable to the Novo Mercado, the tier of the Sao Paulo exchange reserved for companies meeting the most rigorous standards.

Environmental and social issues - Category B

This is a Category B project under IFC’s Policy on Social and Environmental Sustainability because a limited number of specific environmental and social impacts may result which can be avoided or mitigated by adhering to generally recognized performance standards, guidelines, design criteria, local regulations and industry certification schemes. Land acquisition, biodiversity protection and encroachment on indigenous lands have been known to be significant issues on projects in this region, but the IFC review indicated that these issues either do not exist for this project or are being properly managed. The company’s intention to obtain globally-recognized, independent certification for sustainable forest management on their farms will result in its meeting international standards for environmental and social management. As a result, the Category B designation is appropriate.

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