PHAUNOS TIMBER FUND LIMITED€¦ · Forestry Group Mixed Mature hectares plantations, eucalyptus...

INTERIM FINANCIAL REPORT For the six months ended 30 June 2011 (Unaudited)

PHAUNOS TIMBER FUND LIMITED

CONTENTS

Interim Management Report 1

Responsibility Statement 10

Interim Condensed Consolidated Statement of Comprehensive Income 12

Interim Condensed Consolidated Statement of Financial Position 13

Interim Condensed Consolidated Statement of Cash Flows 15

Interim Condensed Consolidated Statement of Changes in Equity 17

Notes to the Interim Condensed Consolidated Financial Statements 19

Schedule of Investments 32

Shareholder Information 33

Directors and Service Providers 34

Front cover: Eucalyptus canopy, Mata Mineira, Brazil.

This report is printed on paper from sustainable sources. Designed and printed by The Partnership Advertising and Marketing Agency.

Thinning of loblolly pine, Aurora Forestal, Uruguay.

01 PHAUNOS TIMBER FUND LIMITED

INTERIM MANAGEMENT REPORT

Phaunos Timber Fund Limited (“Phaunos” or the “Company”) is pleased to present its Interim Financial Report (“interim financial report”) for the six months to 30 June 2011 (the “period”). The Company is an Authorised Closed-ended, Guernsey based, investment scheme managed by FourWinds Capital Management (the “Investment Manager”) established to invest in timber and timber related assets on a global basis.

HIGHLIGHTS

30 June 2011(unaudited)

31 Dec 2010(audited)

30 June 2010(unaudited)

Net Asset Value US$621.6 million US$594.9 million US$560.5 million

Unadjusted NAV per Ordinary Share US$1.16 US$1.11 US$1.04

Profit/(Loss) for the period/year US$27.7 million US$20.7 million (US$8.2 million)

Earnings/(Loss) per Ordinary Share 5.15 cents 3.98 cents (1.64 cents)

• TheCompanypaiditsfirstdividendforthetwelvemonthsended31December2010ofUS$0.02grossperordinaryshareoftheCompany(“OrdinaryShare”)on15July2011.AccordinglyatotaldividendofUS$10.7millionhasbeenaccruedat30June2011inrespectofthatpostperiod-endpayment.

FINANCIAL RESULTS FOR THE PERIOD

ThetotalunauditedNAVoftheCompanyat30June2011wasUS$621.6million(31December2010:US$594.9million).Thisequates toaNAVofUS$1.16perOrdinaryShare (31December2010:US$1.11perOrdinaryShare).

AsummaryofthemajordriversinthemovementoftheCompany’sNAVfortheperiodisasfollows:

1. Unrealisedgainsontherevaluationoffinancialassets,excludingforeignexchange,forMatarikiForestryGroup of US$16.8million. Unrealised gains on the revaluation of land and biological assets, includingforeign exchange, forMataMineira of net US$5.7million.Other investments such as Aurora Forestal,GreenwoodTreeFarmandPraderaRojaalsohadmodestvaluationgains.

2. Totalforeignexchangegains,bothrealisedandunrealised,fortheperiodofUS$30.0millionwereattributabletothecontinuousweakeningoftheUSDollaragainsttheNewZealandDollar,theNorwegianKroneandtheBrazilianReal,whichpositively affected the valuation of investments inMatariki,GreenResources,EucatecaandMataMineira.

3. Operatingexpenses totallingUS$23.3million are in linewith expectationsgiven thedifferent stagesofthe plantations’ development and life cycle. These include an accrual ofUS$8.2million for a potentialperformancefee,ifthecurrentperiod’sresultsaremaintainedinthe2011auditedyear-endNAV,aswellasfundlevelexpensesandoperatingexpensesattributabletosomeplantationoperations.DiscussionshavebegunbetweentheBoardandtheInvestmentManagertoexplorewhetheradifferentfeebasiswouldalignbetterfortheinterestsofallstakeholders.

02PHAUNOS TIMBER FUND LIMITED

Eucalyptus, Green Resources, East Africa.


INTERIM MANAGEMENT REPORT CONTINUED

1 TheBoardhasreviewedtheloantoMasarangFoundation(“Masarang”)andconcludeditprudenttokeeptheprovisionagainstthefullvalue,giventheuncertaintysurroundingtheabilityofMasarang

torepay.Asaresult,theinvestmentinMasarangisvaluedatnilat30June2011andhasbeensince31December2009.Theloanisnotyetdueandisthereforenotyetindefault.

2 IncludesthefinancialresultsforCaldreySA,ForestEnterprisesdoo,SCRomforTimberSRL(“Romfor”)andBaltForTimberOU(“BaltFor”)fortheperiod.ThemajorityofRomfor’scapitalwasreturned

toPhaunosduringtheperiodasitisintendedtoliquidatethesubsidiaryby31December2011.TheliquidationandreturnofcapitalforBaltForwillcompleteinQ32011.

FIN

AN

CIA

L R

ES

ULT

S F

OR

TH

E P

ER

IOD

CO

NT

INU

ED

ThefollowingtablepresentsasummaryofthemovementintheunauditedNAVduringtheperiod:

Co

mp

any

NA

V O

rdin

ary

Acq

uisi

- U

nrea

lised

Gai

n/(L

oss

) Fo

reig

n

N

AV

Ord

inar

y

Sha

res

tio

ns/

Exc

hang

e R

ealis

ed

Mo

vem

ent

Sha

res

% o

f N

AV

31 D

ec 2

010

(Ret

urn

Bio

log

ical

Fo

reig

n Tr

ansl

atio

n Fo

reig

n in

ret

aine

d

30 J

un 2

011

30 J

un 2

011

(a

udit

ed)

of

fund

s)

Valu

atio

n La

nd

Ass

ets

Exc

hang

e D

iffer

ence

s E

xcha

nge

earn

ing

s (u

naud

ited

) (u

naud

ited

)

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

PhaunosTimberFund

Lim

ited

40,175

3,693

––

––

28

(10)

(23,121)

20,765

3.34

Tota

l Pha

uno

s

Tim

ber

Fun

d L

td

40,1

75

20,7

65

MatarikiForestryGroup

147,142

–16,751

––

10,300

––

–174,193

28.02

GreenResourcesAS

96,058

––

––

8,225

––

–104,283

16.78

GreenWoodTreeFarm

FundLP

35,843

818

608

––

––

––

37,269

6.00

AuroraForestalLimited

33,830

–717

––

––

––

34,547

5.56

NTPTimberPlus+

FundI,LP

10,807

–114

––

––

––

10,921

1.76

Tota

l Min

ori

ty-o

wne

d

inve

stm

ents

32

3,68

0

36

1,21

3

MasarangFoundation1

––

––

––

––

––

–

Tota

l Lo

ans

and

D

epo

sits

MataMineira

Investimentos

96,435

1,200

–(1,715)

7,435

–6,248

–(682)

108,921

17.52

FlorestaisLtda

EucatecaSA

65,526

––

–(296)

–4,093

–(1,570)

67,753

10.90

PraderaRojaSA

31,050

850

–(58)

1,078

––

12

(221)

32,711

5.26

GreenChinaForestry

CompanyLtd

19,929

––

–(189)

–(66)

89

(653)

19,110

3.07

Oth

er o

pera

ting

subsidiaries2

18,128

(6,561)

––

––

1,225

(119)

(1,555)

11,118

1.79

Tota

l Op

erat

ing

S

ubsi

dia

ries

23

1,06

8

23

9,61

3

NA

V o

f O

rdin

ary

S

hare

s 59

4,92

3 –

18,1

90

(1,7

73)

8,02

8 18

,525

11

,528

(2

8)

(27,

802)

62

1,59

1 10

0.00

Tota

l Fo

reig

n E

xcha

nge

Gai

ns

30,0

25


INTERIM MANAGEMENT REPORT CONTINUEDP

OR

TF

OL

IO S

UM

MA

RY

3 TheBoardhasreviewedtheloantoMasarangandconcludeditprudenttokeeptheprovisionagainstthefullvalue,giventheuncertaintysurroundingtheabilityofMasarangtorepay.

4 IncludescashreservesheldattheCompanylevelandbyRomforTimberandBaltForTimber.

Co

mp

any

Des

crip

tio

nG

eog

rap

hy%

of

Ow

ners

hip

% o

f N

AV

30

Jun

e 20

11

(una

udit

ed)

1.MatarikiForestryGroup

Mixedagepineplantations,sixestates,currentlywith

183,000hectares

NewZealand

Minorityholding

28.0

2

2.MataMineiraInvestimentos

FlorestaisLtda

MatureandmixedageeucalyptusplantationsinMinas

Gerais,Brazil,currentlywithover19,000hectares

EastCentralBrazil

100.

0017

.52

3.GreenResourcesAS

Mixedage,mixedspeciesplantations,currentlywith

21,300productivehectaresandrightstoplantmorethan

200,000hectares

Eas

t Afri

caMinorityholding

16.7

8

4.

Euc

atec

a S

AGreenfieldteakandeucalyptusplantationsinMatoGrasso,

Brazil,currentlywith17,150hectares

WestCentralBrazil

100.

0010

.90

5.GreenWoodTreeFarm

FundLP

Threemixedagehybridpoplartreefarmswith35,000

acresintegratedwithanewsawmill

NW

US

AMinorityholding

6.00

6.AuroraForestalLimited

Jointventureinasawmillandmixedagepineplantations,

currentlywith19,500hectares

Nor

ther

n U

rugu

ayMinorityholding

5.56

7.PraderaRojaSA

Greenfieldplantationprojectforfastgrowingeucalyptus,

currentlywith12,000hectares

Sou

ther

n U

rugu

ay10

0.00

5.26

8.GreenChinaForestry

CompanyLtd

Mixedagepineandfirplantations,currentlywith6,500

hect

ares

China

100.

003.

07

9.NTPTimberPlus+FundI,LP

“Higher-and-better-use”timberlandconversion

SE

US

AMinorityholding

1.76

10.ForestEnterprisesdoo

Pelletfuelplantusingwastewood

Serbia

100.

001.

29

11.CaldreySA

Timberharvestingcompany

Sou

ther

n U

rugu

ay10

0.00

0.42

12.MasarangFoundation

Loan:commercialforestryprojectwithsocialand

environmentalgoals

Indonesia

100.

00–3

13.

Oth

er4

Cashreservesheldforcommittedprojectsandworking

capi

tal

Eur

ope

100.

003.

42

Tota

l Po

rtfo

lio V

alue

100.

00%



PORTFOLIO SUMMARY CONTINUED

The InvestmentManager,FourWindsCapitalManagement, ispleased to reportonPhaunos’achievements,activitiesanddevelopmentsduringthesixmonthsended30June2011.

Matariki Forestry Group (“Matariki”):TheCompanyownsasignificantminoritypositioninMatariki.ThevalueoftheCompany’sinvestmentinMatarikiwasup18.38%at30June2011,includingtheeffectofforeigncurrencyvaluation, but excluding incomedistributions received byPhaunos fromMatariki.Harvesting operations areon-goingfortheproperties,andPhaunosreceivedtotaldistributionsofUS$1.4millionfromMatarikiduringtheperiod.MatarikiisintheprocessofcompletingitsForestStewardshipCouncil(“FSC”)certification.Itiscurrentlyat38%certificationandanticipates100%certificationbyyearend2011.Since30June2011,PhaunoshasreceivedanadditionaldistributionfromMatarikiofUS$2.5million.

Mata Mineira Investimentos Florestais Ltda (“Mata Mineira”):TheCompanyowns100%ofMataMineira.ThevalueofMataMineirawasup11.56%at30June2011,includingtheeffectofforeigncurrencyvaluation.TheBrazilianRealvalueofMataMineira’sproperty,inMinasGerais,Brazil,wasupby6.23%at30June2011.Harvestingoperationsareon-goingfortheproperties,whicharegeneratingcashflowforimplementingcapitalimprovementsontheproperty, includingimprovementoftimberland.MataMineirahasbeguntheprocessofFSCcertification.

Green Resources AS (“Green Resources”):TheCompanyownsasignificantminorityinvestmentinGreenResources,whichconsistsofmixedage,mixedspeciesplantationswithasawmillandtwopoleplantsinEastAfrica.GreenResourcesconsistsofbothcash-generatingoperationsandsignificantgreenfieldopportunities.AggressiveplantingandtighteningcapitalmarketshaveledtoashorttermcashshortfallatGreenResources.GreenResources is in theprocessofsecuring interimand longtermfinancingtominimiseanydisruption inoperations.

ThevalueoftheCompany’sinvestmentinGreenResourceswasup8.56%at30June2011,dueentirelytotheeffectofforeigncurrencyonrevaluationoftheinvestment.GreenResources’plantationsareroughlyone-thirdFSCcertified,withplansfor100%certification.

Eucateca SA (“Eucateca”): TheCompanyowns100%ofEucateca, agreenfieldproject inMatoGrosso,Brazil.Harvestingoperationsareexpectedtocommence in2015,anddiscussionshavealreadybegunwithpotentialbuyers.MatoGrosso,whereEucatecaislocated,hasexceptionalconditionsforgrowingtrees:highrainfallrates,abundantsunlight,andhighlyproductivesoil.Newgeneralmanagementonthegroundisfocusedoncostcontrolandimprovedsilviculturalpractices.Newrailroadtracksandfacilitieshavebeenbuiltadjacentto our largest property, which we anticipate will help reduce shipping costs. Eucateca plans to seek FSCcertificationbeforeharvestingbegins.

ThevalueoftheCompany’sinvestmentinEucatecawasup3.4%at30June2011,includingtheeffectofforeigncurrencyvaluation.TheBrazilianRealvalueofEucateca’spropertywasupby4.8%at30June2011.LandvaluesatEucatecaheldstableandbiologicalgrowthincreasedbyUS$4.5million.Thiswasoffsetbyincreasedsilviculturalexpenses required tocorrect theperformanceof the formermanager,APServicosAgronomicosLTDA(“APServicos”).

NetreservesagainstamountsduetotheCompanyfromAPServicoshavebeenincreasedbyUS$242,000at 30 June 2011.However, as part of the court-ordered reorganization plans, Eucateca has recoveredR$3.9millionworthofmachineryandisdiligentlyfollowingupontheequipmentwhichhasnotyetbeenreturned.

Aurora Forestal SA (“Aurora Forestal”): TheCompany owns a significantminority investment in AuroraForestal,whichconsistsofmixedagepineplantationswhichare100%FSCcertifiedandasawmillinnorthernUruguay. Harvesting operations are on-going on the properties, and generate regular distributions to the



Company,typicallyinthesecondhalfoftheyear.Aco-generationplant,fuelledbywasteproductsgeneratedbyAuroraForestal’ssawmill,isinthefinalstagesofconstructionandisscheduledtocomeonlinefirstquarter2012withalmostallofitscapacityalreadysold.AuroraForestalhasaggressivelydiversifieditsclientbasesincetheglobalfinancialcrisis,especiallyincreasingitssalesinChina.ThevalueoftheCompany’sinvestmentinAuroraForestalwasup2.12%inlocalcurrencyat30June2011.TheUSDollarvalueofAuroraForestal’spropertywasup2.20%at30June2011.

Pradera Roja SA (“Pradera Roja”): The Company owns 100% of Pradera Roja, a greenfield project inSouthernUruguay,andhascompleteditsplantingprogramofeucalyptusplantations.Theplantationscontinuetogrowwell,respondingpositivelytosilviculturalregimenslikeweedcontrolandfertilization.SinceMarch,thebeginningof the rainyseason,PraderaRojahashadgood rainandmoderate temperatures. InJune,cattlegrazingbeganontheplantations,whichreduceweedsandfirerisk.Limitedharvestingisanticipatedin2012,andthinningoperationsareexpectedtocommencein2013.Fullrotationharvestingisexpectedin2023.

The valueof theCompany’s investment inPraderaRojawasup2.54% in local currencyat30June2011. TheUSDollarvalueofPraderaRoja’spropertywasup4.67%at30June2011.

Greenwood Tree Farm Fund LP (“GTFF”):TheCompanyownsasignificantminoritypositioninGTFF,whichconsistsofmixedagepoplarplantationsintheNorthwesternUS.Harvestingoperationsareon-going,andtheproject includesastateoftheartsawmill.Marketconditionsare improvingandthesawmill isoperatingonefullshift.InJune2011,lumberpricesforproductsoldfromthemillreachedarecordhigh,6%higherthantheprevious record set in July 2010. Additionally, recentwetweather conditions significantly reduced irrigationcosts.ThevalueoftheCompany’sinvestmentinGTFFwasup1.66%at30June2011.

Green China Forestry Company Limited (“Green China”): TheCompany owns 100%ofGreenChina,whichconsistsofmixedagepineand firplantations.Harvestingand resin-tappingoperationsareon-goingon the properties. This is Phaunos’ first year of full operation (including timber and resin selling) in Jiangxi.TheCompanyhasadoptedacautiousapproachwithlessthan5%ofPhaunosinvestedinthehighestqualityassetsavailableinChineseforestry.Timberandresinpricesarebetterthananticipatedwithvolumeslowerthanforecast.ThevalueoftheCompany’sinvestmentinGreenChinawasdown4.11%at30June2011,includingtheeffectofforeigncurrencyvaluation.TheUSDollarvalueofGreenChina’spropertyinsouthernJiangxiwasdown1.93%at30June2011.Thelossismainlyattributabletocostlevelsrelativetothescaleoftheoperations.TheInvestmentManagerisworkingwithin-countryserviceproviderstorestructureandreducecosts.

UnlikeoneofitsmainforestrycompetitorsinChina,GreenChinadoesnotuseanythirdpartyentitiesoutsideofthecontrolofthePhaunosgrouptosellitsproducts.AsaresultallrevenuecontractsheldbytheGreenChinaoperatingsubsidiaryaretransparenttotheparentcompany,Phaunos,whichallowsacompleteaudittrailforalltransactions.AllForestryResourceCertificates(forestryownershipdocuments)arecentrally locatedintheBeijingofficewithelectroniccopiesinBoston.

FULL INVESTMENT

TheCompanyisfullyinvested,andhastransitionedtoitsoperationalphase.Phaunosowns100%ofalmost55,000hectares,andownsapartialinterestinoverhalfamillionadditionalhectaresviaitsminorityholdings.Worldwide,portfoliocompaniesemployalmost6,000people,mostlyonapart-timeorconsultingbasis.Manymore people are employed as contractors to the portfolio companies.

TheCompanyisnowfocusedongeneratingcashflow,cuttingcosts,andmaximisingefficiency.Tothisend,itisimplementingaForestryInformationManagementSystem(“FIMS”)acrosstheportfolioinordertostandardisereportingandbettermanagetheportfolio.TheInvestmentManagerexpectsimplementationofthesysteminfirstquarter2012.



FUTURE OUTLOOK

TheCompanyisinvestedinproductive,tangibleforestassets;ithasnoborrowingsattheholdingCompanylevelanditsforestsarelongterminvestments.Astheworldeconomiesworkunevenlytowardrecovery,theInvestmentManagerbelievestheCompany’sportfoliowillcontinuetobenefitfromitsbroaddiversificationanditsexposuretofastergrowingeconomies.Forinstance,somegradesofNewZealandradiatapinelogsareathigherpricesthanbeforethefinancialcrisis(source:NewZealandMinistryofAgricultureandForestry).ChipsandpulpwoodpricesareupinthemarketsthataffectourSouthAmericancompanies(sources:WoodResourcesQuarterly,InternationalTropicalTimberOrganization).Pricingforresin,eucalyptus,andChinesefirsawtimbercontinuetotrendupandinsomecasesreachrecordhighpricing(source:WoodResourcesInternational).TheUShousingmarketremainsdepressed,thoughsomewoodpricesarerising.Thevalueofholdingassetsacrossbroadlydiversemarketsshouldsustaintheportfolio’scashflowandNAVovertimeanddespiteturbulentmarkets.

Additionally,theCompanyhasbeenabletorealisesomeofthecarbonvaluewhichtreesnaturallystoreastheygrow.GreenResources,whichholdsourassetsinAfrica,continuestobreakgroundinthecarbonmarketplace.InJune,itsKachungForestProjectinUgandabecameGreenResources’firstCleanDevelopmentMechanism(“CDM”)projecttoberegisteredbytheUnitedNationsFrameworkConventiononClimateChange(“UNFCCC”),a rigorousandexactingvolume-drivenprocesswhich takesyears to fulfil. Itwasonly thefifthAfforestation/Reforestation CDM project to be registered in Africa and is the first registered large-scale CDM project inUganda.InJuly2011,GreenResourcessignedanewsalesagreementwiththeCarbonNeutralCompanyforthesaleofcarboncreditsfromitsTanzanianUchindileandMapandaplantations.InNewZealand,theMatarikiForestryGrouphassuccessfullysoldover285,000NewZealandUnits(eachunitisametrictonofcarbon)undertheNewZealandEmissionsTradingSchemesincetheendofDecember2010,forapproximatelyNZ$5.7million.

TheCompany’ssharescontinuetotradeatadiscounttothenetassetvalueperOrdinaryShare.TheBoardofDirectorshasbeenengagedforsometimeinexploringhowthediscountmightbereducedandhasdiscussedpossibleactionswiththeCompany’sbrokersandshareholders.Amajorityofshareholdershaveindicatedtheywouldprefer theCompany to remain listed.Sharebuybackshavebeen triedandhadno impact.Now theCompany is fully invested, there is no spare cash to fund buybacks and borrowing for this purpose is noteconomicallyviable.DailydealingsintheCompany’ssharesremainlow.

Whenthecurrenteconomicsituationstabilises,theDirectorsbelievecontinuingtheCompany’sgoodperformancewithNAVgrowth,togetherwithcashinflowfromharvestingwillsupportthepaymentofsustainabledividends.This,combinedwithacontinuedpublicrelationsprogrammetoemphasisethevalueintheCompany’sassetsshouldlogicallyattractnewinvestorsandleadtoareductioninthediscountovertime.

FOREIGN EXCHANGE

TheCompany isUSdollar-denominated.Thecurrencies inwhichour largest investmentsareheld (theNewZealandDollar, theBrazilianReal,andtheNorwegianKrone)allstrengthenedagainst theUSDollarovertheperiod.ForeignexchangemovementcontributedUS$30.0milliontotheCompany’sNAVat30June2011.TheInvestmentManagerbelievesthataportfoliobroadlydiversifiedinarangeofcurrencieswillbeself-hedgingoverthelongrun.Timberlandinvestingisalong-terminvestment.UnderthesecircumstancestheDirectorsbelievethatanybenefitsofhedgingtheportfolioareoutweighedbythecostsandconsequentlytheCompanydoesnothedge.Theresultsat30June2011reflectthebenefitofthispolicy.However,investorsneedtobeawarethatwhiletheCompanyhasbenefitedfromaweakeningUSDollar,astrengtheningoftheUSDollarwouldseethesegainsreversed.



CASH FLOW

Thecashheldat30June2011wasUS$46.7million.ThetotaldividendofUS$10.7millionwaspaid inJuly2011.OfthebalanceUS$9.7millionisheldwithinoperatingsubsidiaries.WhiletheCompanyisatfullinvestmentit is not forecast that thegreen fieldplantationsof theportfoliowill be cashgenerativewithin the next twoyears.TheDirectorsaremindfuloftheneedtominimisecashreserveswhileatthesametimeensuringthattheCompanymaintainssufficientliquiditytomeetitsliabilitiesinordertobringtheportfoliotomaturity.

ENVIRONMENTAL STEWARDSHIP

TheCompanyiscommittedtothehighestenvironmentalstandards.WearesystematicallypursuingcertificationunderFSCguidelines.Twopropertiesare100%certified,andathirdisexpectedtobebyyearend.Afourthisscheduledtobecertifiedin2011-2012.Wehavefocusedoncertifyingplantationswithstandingtimberandarerollingoutaprogramwiththeyoungerplantationsthatwill,weplan,achievecertificationwellbeforeprojectedharvesting.

EFFECT OF IFRS ON REPORTED RESULTS

Itisimportanttonotethat,consistentwithIFRSguidelines,wholly-ownedoperatingcompanyexpenses(thatis,costsassociatedwithworkontheplantations)areincludedintheInterimCondensedConsolidatedStatementofComprehensiveIncome,inadditiontotheCompanylevelexpenses.Thiscanbemisleadingwhenonetriesto compute the total expense ratio of theCompany, since those expenses are, in fact, notCompany levelexpensesandshouldnotbeincludedinananalysisofCompanylevelexpenses.Theaccountshavebeensplitintotwosections inNote3of the InterimCondensedConsolidatedFinancialStatements inordertoprovideinvestorswith amore transparent viewof actual costs associatedwithmanaging theCompany, aswell ascostsassociatedwithoperatingthewholly-ownedinvestmentprojects.TheCompanylevelexpenses,includinganaccrualforapotentialperformancefeeaftertheyearendauditatDecember2011,areUS$14.0million,or2.25%ofassetsundermanagement.

SHARE CAPITAL

At30June2011,theCompanyhad537,149,832issuedOrdinarySharesand4,065,045OrdinaryShareswereheld in treasury.

PRINCIPAL RISKS AND UNCERTAINTIES

TheprincipalrisksfacingtheCompanyrelatetotheCompany’sinvestmentactivities.Theserisksaremarketrisk(comprisingcurrencyrisk,interestrateriskandotherpricerisk),liquidityriskandcapitalmanagementrisk.

Anexplanationof theserisksandhowtheyaremanaged iscontained inNote30of theCompany’sAnnualReportandConsolidatedFinancialStatementsfortheyearended31December2010(“2010AnnualReport”).

TheprincipalrisksanduncertaintiestowhichtheCompanyisexposedto,havenotsignificantlychangedsincethepublicationofthe2010AnnualReport.However,thefullimplicationsoftheeconomicuncertaintiesexposedin the summer of 2011 are yet to unfold.

The2010AnnualReportisavailableontheCompany’swebsiteatthefollowinglink:http://www.phaunostimber.com/documents/2010_Annual_Report_and_Financial_Statements_with_Notice_of_AGM.pdf

GOING CONCERN

TheDirectorsconfirmtheuseofthegoingconcernbasisinthepreparationoftheinterimfinancialreport.Inthisregardtherearenoneweventsorcircumstancessincethe2010AnnualReport.



DIVIDENDS

TheBoardofPhaunosispleasedtoreportthaton15July2011,theCompanypaiditsfirstdividendofUS$0.02grossperOrdinaryShareinrespectofthetwelvemonthsended31December2010.ThisdividendpaymentwaspursuanttotheresolutionapprovedbytheshareholdersattheannualgeneralmeetingoftheCompanyon9June2011.Theex-dividenddateforthedividendwas15June2011andtherecorddatewas17June2011.Giventhedividendwasdeclaredpriorto30June2011,theCompanyhasaccrueddividendsofUS$10.7millionat that date.

PERFORMANCE FEES

TheCompanyhasaccruedat30June2011itsfirstpotentialperformancefeeofUS$8.2millionorUS$0.0152perOrdinaryShare(basedonthetime-weightedaveragenumberofOrdinarySharesinissuesincetheinitialadmissionoftheCompany’ssharestotheAlternativeInvestmentMarket),astheunauditedNAVperOrdinaryShareatthatdate,asadjustedforthefollowingitems,exceededthehurdlerateofUS$1.08:

(i) anyincreaseinNAVarisingfromtheissueofOrdinarySharesasapremiumorbuybackofOrdinarySharesatadiscounttoNAV;

(ii) dividendsdeclared,announcedoranyundistributednetrevenuenototherwiseincludedintheNAVcalculation;

(iii) alreadyaccruedperformancefees;and

(iv) otheradjustmentstheAuditCommitteeandManagementCommitteeoftheBoardandtheInvestmentManageragreeareappropriate.

TheadjustedNAVperOrdinaryShareforthepurposeofcalculatingtheperformancefeeaccrualat30June2011wasUS$1.1619.

Pursuanttotheinvestmentmanagementagreement,aperformancefeewillonlybecomedueandpayabletotheInvestmentManagerasat31December2011andonlyiftheauditedNAVperOrdinaryShare(adjustedasdescribedabove)asat31December2011exceedsUS$1.08.

Whilstaperformancefeeaccrualhasbeenmadeintheinterimconsolidatedfinancialstatements,discussionshavebegunbetweentheBoardandthe InvestmentManager toexplorewhetheradifferent feebasiswouldalignbetter for the interestsofallstakeholders.Thepresentbasiswasdetermined in2006wheneconomicconditionsweremoreoptimisticandsuchstructuresmorecommon.Shareholderswillrealisethesediscussionsarecomplicatedandhavefarreachingconsequences.Theyareatanearlystage.Theoutcomeofdiscussionswillbereportedassoonastheyhavebeenconcludedanditisunlikelytobebeforetheendoftheyear.

RELATED PARTIES

Therewerenosignificantrelatedpartytransactionsduringtheperiodnoranymaterialchangetorelatedpartytransactionsdescribedinthe2010AnnualReport.PleaserefertoNote16fordetails.

VOTING RIGHTS FOR PORTFOLIO INVESTMENTS

TheInvestmentManagercarefullyconsiderstheexerciseofvotingrightsinrelationtotheCompany’sportfolioandvotes,orrefrainsfromvoting,basedonacasebycaseexamination,usingitsbestcommercialandfinancialjudgment,ofthebestlong-terminterestsoftheCompanyanditsshareholders.

TypicallytheInvestmentManagerwill,whenmakingvotingdecisions,examinethestrategicfocusandoperatingperformanceoftherelevantportfoliocompany,itscorporategovernanceandremunerationframeworkanditscommunicationsandreportingstructures.PleasenotethatPhaunosdoesnotholdanyinvestmentsinpubliclytraded companies.


RESPONSIBILITY STATEMENT

TothebestoftheknowledgeoftheDirectors:

TheInterimFinancialReportforthesixmonthsended30June2011givesatrueandfairviewoftheassets,liabilities, financial position and profit or loss of the Company and has been prepared in accordance withInternationalAccountingStandards(IAS)34InterimFinancialReporting.

TheInterimManagementReportincludesafairreviewoftheinformationrequiredby:

(a) DTR4.2.7of theDisclosureandTransparencyRules,beingan indicationof importanteventsthathaveoccurredduringthefirstsixmonthsofthefinancialyearandtheirimpactonthecondensedsetoffinancialstatements;andadescriptionoftheprincipalrisksanduncertaintiesfortheremainingsixmonthsoftheyear;and

(b) DTR4.2.8oftheDisclosureandTransparencyRules,beingrelatedpartytransactionsthathavetakenplaceinthefirstsixmonthsofthecurrentfinancialyearandthathavemateriallyaffectedthefinancialpositionorperformanceof theenterpriseduring thatperiod;andanychanges in the relatedparty transactionsdescribedinthelastannualreportthatcoulddoso.

SignedonbehalfoftheBoardby:

SirHenryStudholme IanBurns Director Director

30 August 2011


Mature eucalyptus, Mata Mineira, Brazil.


Note 30 June 2011 30 June 2010 Unaudited Unaudited US$’000 US$’000IncomeNet gain on financial assets designated fair atfairvaluethroughprofitorloss 8 36,715 4,002Revaluationofbiologicalassets 5 8,028 904Operatingincome 2 6,292 5,379

51,035 10,285ExpensesOperatingexpenses 3 (23,305) (18,470)

Operating profit/(loss) before taxation 27,730 (8,185)

Taxchargeonordinaryactivities (74) (2)

Profit/(loss) for the period 27,656 (8,187)

Other comprehensive income/(loss)Revaluationofland 4 (1,773) 1,356Exchangedifferencesontranslationofsubsidiaries’netassets 11,528 (7,735)

9,755 (6,379)

Total comprehensive profit/(loss) for the period 37,411 (14,566)

Profit/(loss) for the period attributable to:Equityholdersoftheparent 27,656 (8,187)

Net profit/(loss) for the period attributable to Ordinary Shareholders 27,656 (8,187)

Other comprehensive income/(loss) attributable to:Equityholdersoftheparent 9,755 (6,379)

Net profit/(loss) for the period attributable to Ordinary Shareholders 9,755 (6,379)

Earnings/(loss)perOrdinarySharefortheperiod– BasicandDiluted(inUScentspershare) 5.15 (1.64)

(BasedonweightedaveragenumberofOrdinaryShares537,149,832(2010:503,078,650))

Inarrivingattheoperatingresultsfortheperiod,allamountsaboverelatetocontinuingoperations.

Thenotesonpages19to31formanintegralpartoftheseinterimconsolidatedfinancialstatements.

INTERIM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the six months ended 30 June 2011


Note 30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000Non-Current AssetsFinancialassetsdesignatedatfairvaluethroughprofitorloss 8 361,213 323,680Land 4 93,013 90,486Biologicalassets 5 126,868 108,774Plantandequipment 6 4,262 3,043Prepaidlandlease 7 1,620 1,617Loansreceivable 9 363 528Intangibleassets 1 1

587,340 528,129

Current AssetsCashandcashequivalents 46,657 68,486Receivables 8,334 2,742Inventoriesandworkinprogress 244 210

55,235 71,438

Assetsclassifiedasheldforsale 10 8,224 9,547

TOTAL ASSETS 650,799 609,114

Current LiabilitiesDividendspayable 14 10,743 –Accrualforpotentialperformancefee 16 8,189 –Payables–duewithinoneyear 9,820 13,446

28,752 13,446

Liabilitiesclassifiedasheldforsale 10 456 745

TOTAL LIABILITIES 29,208 14,191

INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION at 30 June 2011


INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION at 30 June 2011

EquitySharecapital 11,13 432,101 –Sharepremium 13 – 432,101Retainedearnings 47,763 30,850Foreigncurrencytranslationreserve 33,133 21,605Landrevaluationreserve 1,201 2,974Distributablereserves 13 110,418 110,418Purchaseofownshares(TreasuryShares) 12 (3,025) (3,025)

TOTAL EQUITY 621,591 594,923

TOTAL EQUITY AND LIABILITIES 650,799 609,114

OrdinarySharesinIssue 13 537,149,832 537,149,832

US$ US$Net Asset Value per Ordinary Share 1.16 1.11



Note 30 June 2011 30 June 2010 Unaudited Unaudited US$’000 US$’000Operating activitiesNetprofit/(loss)fortheperiodattributableto OrdinaryShareholders 27,656 (8,187)Add: Depreciationandamortisation 2,208 340 Movementinaccrualforpotentialperformancefee 16 8,189 – Impairmentofinventory 3 – 464 Impairmentofloansreceivable 3 442 – Taxation 74 2Less: Netlossonfinancialassetsdesignatedat fairvaluethroughprofitorloss 8 (36,715) (4,002) Revaluationofbiologicalassets 5 (8,028) (904) Movementininventories (234) (784) Movementinreceivablesexcludingaccruedincome (5,592) (694) Movementinpayables (3,576) (1,171) Investmentincome 2 (2,151) (4,756) Prepaidlandlease(noncurrent) 7 (3) –

Net cash outflow from operating activities before income (17,730) (19,692)

Investmentincomereceived 2 2,151 4,673Taxationpaid (50) (484)

Net cash outflow from operating activities (15,629) (15,503)

Investing activitiesPurchaseoffinancialassets 8 (818) (118,208)Disposalsofplantandequipment 6 174 12Purchaseofbiologicalassets 5 (6,007) (61,010)Purchaseofland 4 (60) (32,222)Purchaseofplantandequipment 6 (503) (129)Repaymentofloans 403 251

Net cash outflow from investing activities (6,811) (211,306)

Cash and cash equivalents at beginning of period 68,486 331,032

Decreaseincashandcashequivalents (22,440) (226,809)Effectofforeignexchangeratechanges 611 (1,380)

Cash and cash equivalents at end of period 46,657 102,843

INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS for the six months ended 30 June 2011



Eucateca Forest, Brazil.


INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 30 June 2011

A

ttri

but

ed t

o e

qui

ty h

old

ers

of

the

par

ent

P

urch

ase

Fore

ign

of

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cu

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Land

D

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i-

shar

es

Sha

re

Sha

re

Ret

aine

d t

rans

lati

on

reva

luat

ion

but

able

(T

reas

ury

Tota

l

cap

ital

p

rem

ium

ea

rnin

gs

rese

rve

rese

rve

rese

rves

S

hare

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Eq

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(N

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11,

13)

(N

ote

13)

(No

te 1

3)

U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0

As

at 1

Jan

uary

201

1–

432,101

30,850

21,605

2,974

110,418

(3,025)

594,923

Profitfortheperiod

––

27,656

––

––

27,656

Othercomprehensiveincome

––

–11,528

(1,773)

––

9,755

Tota

l co

mp

rehe

nsiv

e in

com

e

for

the

per

iod

–

– 27

,656

11

,528

(1

,773

) –

– 37

,411

Dividends(Note14)

––

(10,743)

––

––

(10,743)

Transferofsharepremiumto

sharecapital(Note13)

432,101

(432,101)

––

––

––

At

30 J

une

2011

(una

udit

ed)

432,

101

– 47

,763

33

,133

1,

201

110,

418

(3,0

25)

621,

591



A

ttri

but

ed t

o e

qui

ty h

old

ers

of

the

par

ent

Pur

chas

e

Fore

ign

of

ow

n

curr

ency

La

nd

Dis

tri-

sh

ares

S

hare

S

hare

C

Sha

re

Ret

aine

d t

rans

lati

on

reva

luat

ion

but

able

(T

reas

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Tota

l

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p

rem

ium

cl

ass

earn

ing

s re

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es

Sha

res)

E

qui

ty

(No

te 1

3)

U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

US

$’00

0 U

S$’

000

As

at 1

Jan

uary

201

0–

390,547

41,554

10,136

14,749

10,659

110,418

(3,025)

575,038

Lossfortheperiod

––

–(8,187)

––

––

(8,187)

Othercomprehensiveloss

––

––

(7,735)

1,356

––

(6,379)

Tota

l co

mp

rehe

nsiv

e lo

ss

for

the

per

iod

–

– –

(8,1

87)

(7,7

35)

1,35

6 –

– (1

4,56

6)

Adj

ustm

ent t

o pr

ior

perio

d

treasurysharevalue

––

–(216)

––

–216

–Csharesconvertedto

OrdinaryShares

–41,554

(41,554)

––

––

––

At

30 J

une

2010

(una

udit

ed)

– 43

2,10

1 –

1,73

3 7,

014

12,0

15

110,

418

(2,8

09)

560,

472


INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the six months ended 30 June 2010


1. ACCOUNTING POLICIES

(a) Basis of Preparation

The unaudited interim condensed consolidated financial statements (“interim consolidated financialstatements”) of Phaunos Timber Fund Limited (the “Company” or “Phaunos”) have been prepared inaccordancewith International Accounting Standard (“IAS”) 34: Interim Financial Reporting. The interimconsolidated financial statements do not include all the information and disclosures required in annualfinancialstatements,andshouldbereadinconjunctionwiththeCompany’sAnnualReportandConsolidatedFinancialStatementsfortheyearended31December2010(“2010AnnualReport”),whichwerepreparedinaccordancewithInternationalFinancialReportingStandards(“IFRS”)asadoptedbytheEuropeanUnionandapplicableGuernseylaw.

TheinterimconsolidatedfinancialstatementsarepresentedinUSDollars,beingthecurrencyoftheprimaryeconomicenvironmentinwhichtheCompanyandentitiescontrolledbytheCompany(itssubsidiariesaslistedinNote13ofthe2010AnnualReport(“subsidiaries”))(the“Group”)operate.

TheinterimconsolidatedfinancialstatementsareroundedtothenearestthousandUSDollars(US$’000)exceptwhereotherwiseindicated.

The interim consolidated financial statements have not been audited or reviewed by the auditors inaccordance with the Auditing Practices Board guidance on Review of Interim Financial InformationPerformedbytheIndependentAuditoroftheEntity.

(b) Significant Accounting Policies

The same accounting policies, presentation and methods of computation are followed in the interimconsolidatedfinancialstatementsaswerefollowedinthepreparationofthe2010AnnualReport.

2. OPERATING INCOME

30 June 2011 30 June 2010 Unaudited Unaudited US$’000 US$’000Investmentincome 2,151 4,756Incomefromsalesandservices 3,570 605Reversalofimpairmentofloansreceivable(a) 442 –Sundry income 129 18

6,292 5,379

(a) PleaserefertoNote9fordetailsonthereversalofprioryearimpairmentstoloansreceivablerelatingtoEucateca.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the six months ended 30 June 2011


NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS for the six months ended 30 June 2011

3. OPERATING EXPENSES

30 June 2011 30 June 2010 Unaudited UnauditedHolding Company Expenses US$’000 US$’000Performancefees(a) 8,189 –InvestmentManager’sfees 4,759 3,932Foreignexchangeloss 28 9,134Otheroperatingexpenses 1,023 1,190

13,999 14,256

Operating Subsidiary ExpensesSettingupexpenses – 375Directoperatingcosts 3,860 855Otheroperatingexpenses(b) 5,446 2,984

9,306 4,214

23,305 18,470

(a) Performance fees for the period are accrued not paid (see Note 16).

(b) Please refer toNote9 fordetailsoncurrentperiod impairmentsandwrite-offs toplantandequipmentrelating to Eucateca.

ConsistentwithIFRS,operatingexpensesassociatedwithwholly-ownedsubsidiariesareincludedinNote3,alongwithexpensesassociatedwithholdingCompanyactivities.HoldingCompanyexpenses, including theaccrualforapotentialperformancefee,totalUS$14.0million,or2.25%ofassetsundermanagement.


4. LAND

30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000CostOpeningcost 78,845 46,238Additions 60 32,607

Closing cost 78,905 78,845

Revaluation of landOpening 2,974 10,659Revaluationfortheperiod/year (1,773) (7,685)

Closing 1,201 2,974

Depreciation on land improvementsOpeningdepreciation (20) –Chargefortheperiod/year (12) (20)

Closing depreciation (32) (20)

Reclass as Held for Sale (278) (278)

Exchange differences 13,217 8,965

Closing carrying value 93,013 90,486

Land valuation

TheInvestmentManager’svaluationsat30June2011forEucatecaandPraderaarebasedontheBrazilianRealperhectareunitvaluesandtheUSDollarperhectareunitvaluesrespectivelyfromtheexternalappraisalofthatlandat30September2010andappliedtotheupdatednumberofhectaresat30June2011.

LandpurchasedbyMataMineira isbasedonaBrazilianRealvaluedeterminedbyan independentexternalappraisaldated30June2011.

ConsistentwithIFRS,Note4includesonlytherevaluationoflandinwholly-ownedsubsidiaries.LandvaluationsinminorityholdingsareincludedintheFinancialAssetcalculationasdemonstratedinNote8.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTINUED for the six months ended 30 June 2011



5. BIOLOGICAL ASSETS

30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000Cost:Openingcost 102,691 20,755Costsincurredduringtheperiod/year:Silviculturecosts 5,543 13,105Treatmentcosts 508 2,086Plantationsacquired – 67,727Other costs (44) 54Depletionoftimber (1,511) (1,023)Resinamortisation (129) –Disposals – (13)

4,367 81,936

Closing cost 107,058 102,691

Revaluation of plantations:Openingbalance (198) (1,133)Revaluationfortheperiod/year 8,028 935

Closing balance 7,830 (198)

Exchange differences 11,980 6,281


Biological assets valuation

The InvestmentManager’svaluationsat30June2011forEucatecaandPraderaarebasedontheBrazilianReal per hectare unit values and the US Dollar per hectare unit values from the external appraisal of thebiologicalassetsat30September2010andappliedtotheupdatednumberofhectaresforeachageclassofpre-merchantabletimberinexistenceat30June2011.

BiologicalassetspurchasedbyMataMineiraarebasedonaBrazilianRealvaluedeterminedbyanindependentexternalappraisaldated30June2011.

GreenChina’s biological assets located in southern Jiangxi,China are based on the InvestmentManager’svaluationat31December2010whichisanupdateoftheacquisitionappraisalofthatpropertyacquiredduring2010.GreenChina’sbiologicalassetslocatedinnorthernJiangxi,Chinaarevaluedatcostat30June2011asitwasacquiredlessthan12monthsago.

ConsistentwithIFRS,Note5includesonlytherevaluationofbiologicalassetsonwholly-ownedsubsidiaries.BiologicalassetvaluationsinminorityholdingsareincludedintheFinancialAssetcalculationasdemonstratedin Note 8.


6. PLANT AND EQUIPMENT

30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000CostOpeningcost 13,292 10,650Additions 503 3,116Disposals (174) (24)Impairment (565) (450)


DepreciationOpeningdepreciation (1,166) (491)Chargefortheperiod/year (303) (687)Disposaladjustments 24 12

Closing depreciation (1,445) (1,166)

Reclass as Held for Sale (6,992) (7,796)

Exchange differences (357) (1,287)





7. PREPAID LAND LEASE

30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000

Openingcost 1,790 –Landleaseprepaymentsduringtheperiod/year – 1,790


Lease amortisation:Openingbalance (41) –Amortisation for the period/year (53) (41)

Closing balance (94) (41)

Exchange differences (25) 56


Summaryofprepaymentsdue:Prepaymentsduetoexpirewithinoneyear 51 188Prepaymentsduetoexpiremorethanoneyear 1,620 1,617


ThroughtheCompany’swhollyownedsubsidiary,GreenChina,prepaymentsweremadeduringtheperiodfortimberlandleasesforpropertylocatedintheJiangxiprovince,China.Allleasesaretobeamortisedoverthelifeoftheremainingleasetermswhichvariesfrom30to50years.


8. INVESTMENTS

FINANCIAL ASSETS DESIGNATED AT FAIR VALUE THROUGH PROFIT OR LOSS 30 June 2011 31 Dec 2010 Unaudited Audited US$’000 US$’000

OpeningPortfoliocost 264,253 127,959Netadditionsatcost: 818 136,294

Closing Portfolio cost 265,071 264,253

Unrealisedappreciationonvaluationbroughtforward 46,761 15,492Unrealisedappreciationonvaluationfortheperiod/year 18,190 31,269Unrealisedforeignexchangemovementbroughtforward 11,922 (486)Unrealisedforeignexchangemovementfortheperiod/year 18,525 12,408

Unrealisedappreciationandforeignexchangemovement onvaluationcarriedforward 95,398 58,683Exchangedifferencesontranslationofassets offoreignsubsidiariesbroughtforward 744 –Exchangedifferencesontranslationofassets offoreignsubsidiariesfortheperiod/year – 744

Closing valuation 361,213 323,680

Unrealisedappreciationandforeignexchangemovement onvaluationfortheperiod/year 36,715 43,677Exchangedifferencesontranslationofassetsofforeignsubsidiaries – 744

Net gain on financial assets designated at fair value through profit or loss 36,715 44,421

Thenatureoftheinvestmentsdesignatedatfairvaluethroughprofitorlossisasfollows:

GreenWoodTreeFarmFundLP TimberoperationAuroraForestalLimited JointownedtimberoperationNTPTimberPlusFundILP Higher-and-better-useconversionloansGreenResourcesAS TimberoperationMatarikiForestryGroup TimberoperationMasarangFoundationAssetLinkedEuroNote09/2012 Loan




8. INVESTMENTS CONTINUED

Fair value analysis

IntheopinionoftheDirectorsthereisnomaterialdifferencebetweenthebookvaluesandthefairvaluesofotherfinancialassetsandliabilities.

Financialassetsandfinancial liabilitiesrecordedatfairvalueareanalysedbyusingafairvaluehierarchythatreflectsthesignificanceofinputs.Thefairvaluehierarchyhasthefollowinglevels:

• Level1:Quotedprices(unadjusted)inactivemarketforidenticalassetsorliabilities.• Level2:InputsotherthanquotedpricesincludedwithinLevel1thatareobservablefortheassetorliability,

eitherdirectly(thatis,asprices)orindirectly(thatis,derivedfromprices).• Level3:Inputsforassetsorliabilitiesthatarenotbasedonobservablemarketdata(thatis,unobservable

inputs).

TheGroup’sunlistedsecurities,classifiedasfinancialassetsdesignatedatfairvaluethroughprofitorlossandvaluedatUS$361.2millionat30June2011(31December2010:US$323.7million),werecategorisedasLevel3inputsinaccordancewiththefairvaluehierarchy.

InputsforthedeterminationofthefairvaluesoffinancialassetsdesignatedasLevel3includevaluationsprovidedbythemanagersofalltheunderlyinginvestmentsattheperiodend.TherewerenotransfersoffinancialassetsbetweenLevelsduring theperiod.The tablebelowreflects themovements inassetsdesignatedasLevel3during the course of the period.


Fairvalueatbeginningofperiod/year 323,680 142,965Acquisitionsatcost 818 136,294Unrealisedappreciation 36,715 43,677Exchangedifferencesontranslationofforeignsubsidiaries – 744

Fair value at end of period/year 361,213 323,680



9. LOANS RECEIVABLE

At30June2011thebalanceoftheloanreceivablefromAGNGestaoFlorestalLTDAisUS$493,000(R$769,000)(31December2010:US$592,000(R$983,000)).InrespectoftheloanreceivablefromAPServicosAgronomicosLTDA(“APServicos”)thebalanceat30June2011isUS$2.0million(R$3.1million)(31December2010:US$2.3million(R$3.8million)).

Duringtheperiod,EucatecaassessedtherecoverabilityofthereorganisedloantoAPServicos.ItwasdecidedbytheInvestmentManagertoreinstatetransferequipmentvaluedatR$400,000,whichwaspreviouslyreservedbyEucatecaat31December2010.AdditionallyAPServicosrepaidR$313,073againstthereorganisedloan.As a result the reorganised loan and related reservewere reducedby a total ofR$713,073 (US$442,000). ThisrepresentsareversalofprioryearimpairmentstoloansreceivablewhichisshowninNote2.

Alsoduring theperiod, the InvestmentManagerdetermined total impairments toequipment received in theloan reorganisation of R$882,498 (US$565,342) and total losses to write-off of R$193,154 (US$119,823). The impairmentstoequipmentrepresentadjustmentstofairmarketvalueforequipmentreceivedduringtheperiodandreservesforequipmentnotyetreceivedfromAPServicos.Thewritten-offlossesrelatetoadjustmentstothecorrectpurchasepriceandequipmentdeemedinoperable.TheseimpairmentsandlossesareincludedinotheroperatingexpensesforsubsidiariesinNote3.

10. ASSETS/LIABILITIES CLASSIFIED AS HELD FOR SALE

ForestEnterprisesiscurrentlyheldforsalefollowingthestrategicdecisionin2010bytheInvestmentManagertodivestofnon-coreassets.However,duringtheperiodtheInvestmentManagerdecidedtocontinueoperatingCaldreyasagoingconcern.Asaresultthefollowingbalancesreportedat30June2011relatesolelytoForestEnterprises:AssetsclassifiedasheldforsaleUS$8.2million(31December2010:US$9.5million)andLiabilitiesclassifiedasheldforsaleUS$456,000(31December2010:US$745,000).

Forest Enterprises d.o.o. (“FE doo”)

FEdoo is thewholly-ownedsubsidiaryofForestEnterpriseB.V. (“FEBV”),which in turn isawholly-ownedsubsidiaryofPhaunos.AfterFEdooissold,FEBVwillbeliquidated.InNovember2010,FEBVhiredCitadelFinancialAdvisoryd.o.o,Beograd(the“FinancialAdvisor”)totakeallnecessarystepstomanageandexecutethesaleofFEdoo.Todate,interestedpartieshaveexecutedaNon-DisclosureAgreement.TheFinancialAdvisorhasinvitedbidsfromalimitednumberofinterestedpartiesandreceivedonenon-bindingofferwhichisunderconsideration.Attheendoftheperiod,weareunabletopredictthesalepriceorfeepayabletotheFinancialAdvisorforsuccessfullycompletingtheFEdoosaletransaction.

Caldrey

As of 31December 2010 the InvestmentManager anticipated the sale ofCaldrey as a private transactionandPhaunoswasinnegotiationswithanindividualinterestedinpurchasingCaldrey.Thepotentialbuyerwasunabletoobtainfinancing;thereforetheInvestmentManagerintendstocontinueoperatingCaldreyasagoingconcern.Duringnegotiations,Caldreycontinuedoperationsatfullproduction,whichisreflectedintheperiod’sconsolidatedfinancialstatementsasoperatingactivity.


Thinning of slash pine, Green China, China.


11. SHARE CAPITAL

Authorised, issued and fully paid

Asat30June2011and31December2010: US$UnlimitedOrdinarySharesofnoparvalue –

Number Amount of shares US$’000

At30June2011:OrdinaryShares 541,214,877 559,758PurchaseofOrdinaryShares(nowheldinTreasury) (4,065,045) (2,819)

537,149,832 556,939

TheholdersoftheOrdinaryShareswill,undergenerallaw,beentitledtoparticipateinanysurplusassetsinawinding-uponlyinproportiontotheirshareholdingsintheappropriateclass.

On8June2010,43,510,000CShareswereconvertedinto38,815,271OrdinarySharesandwereadmittedtotheOfficialListoftheUKListingAuthority,totradingontheLondonStockExchangeandtolistingontheChannel IslandsStockExchange.TheCShareswereconvertedtoOrdinarySharesataconversionratioof0.8921basedontheauditedNAVoftherespectiveshareclassesat31December2009,andinaccordancewiththeArticlesofAssociationoftheCompany.

12. PURCHASE OF OWN SHARES


Treasury shares reserve at end of period/year 3,025 3,025

TheTreasuryShares reserveat theendof theperiod represents4,065,045OrdinaryShares (31December2010:4,065,045OrdinaryShares)purchasedinthemarketatvariouspricespersharerangingfromUS$0.64toUS$0.80andheldbytheCompanyinTreasury.Thesesharesmaybereissuedorcancelled.

At the Annual GeneralMeeting of the Company held on 9 June 2011, it was resolved that the Companybeauthorised tomakemarketpurchasesofOrdinaryShares,provided that thenumberofOrdinarySharespurchaseddoesnotexceed14.99%ofthenumberofOrdinarySharesinissueonthedatetheresolutionwaspassed.




12. PURCHASE OF OWN SHARES CONTINUED

ThenumberofOrdinarySharesinissueatthedatetheresolutionwaspassedwas537,149,832.ThenumberofOrdinarySharesheld in treasuryby theCompanyat thedate the resolutionwaspassedwas4,065,045representing0.75%oftheOrdinarySharesinissueatthedatetheresolutionwaspassed.

TheCompany’sauthoritytomakepurchasesofitsissuedOrdinaryShareswillexpireattheconclusionofthe2012AnnualGeneralMeeting.ArenewalofsuchauthoritytomakepurchasesofOrdinaryShareswillthereforebesoughtfromshareholdersatthe2012AnnualGeneralMeeting.Undersuchauthority,theDirectorsonlyintendtopurchaseshareswheretheybelievesuchpurchaseswillresultinanincreaseintheNAVperOrdinaryShareandwillassistinnarrowinganydiscounttotheNAVperOrdinaryShareatwhichthesharesmaybetrading.WhenOrdinarySharestradeatasubstantialdiscounttotheNAVperOrdinaryShareanddonotcoincidewithtradingvolumesinthemarket,theDirectorsmayfeelthatitisappropriatetoexercisesuchauthority.

13. DISTRIBUTABLE RESERVES

TheCompany’sArticlesofIncorporationwereamendedduringtheperiodtoreflectchangesintheCompany(Guernsey)Law,2008asamended(the“Law”)relatingtodistributablereserves.AsaresultofthechangeintheLaw,thereisnolongerarequirementtoseekcourtapprovaltomakedistributionsfromthesharepremiumaccount; therefore, the balance held to this account is now eligible for distribution together with existingdistributablereserves.

Thebalanceof thesharepremiumaccountasat1January2011ofUS$432.1millionand thedistributablereservesasat thatdateofUS$110.4millionareall available fordistributionsubject tomeeting the relevantsolvencytestsintheLaw.Theexistingbalanceonthesharepremiumaccounthasbeentransferredtosharecapitalas theLawnowrequiresproceedsofshares issuedtobecredited tosharecapital.Thisbrings totaldistributablereservesat30June2011toUS$542.5million.

14. DIVIDENDS

ThefollowingdividendsweredeclaredbytheCompanyandapprovedbyshareholdersduringtheperiodandpaidaftertheendofthereportingperiod.Thedividendshavebeenaccruedat30June2011.


Dividend for the year ended 31 December 2010

US$0.02 per Ordinary Share (2010: US$ Nil) 10,743 –

15. CAPITAL COMMITMENTS

At the period end, the Group has outstanding non-contractual commitments of up to US$4.3 million (31December2010:US$5.0million),whicharesubjecttoduediligence.


16. RELATED PARTIES

LianeLukeisaseniorconsultantintheInvestmentManager’sgroup.KimberlyTaraisadirectorandshareholderoftheInvestmentManager.AsLianeLukeandKimberlyTaraarealsoDirectors,itistheCompany’spolicythattheyarenotmembersoftheManagementEngagementCommitteeortheAuditCommitteeoftheBoard.

US$4.8million (30June2010:US$3.9million)ofcostswere incurredby theCompanywith the InvestmentManagerintheperiod,ofwhichUS$Nil(31December2010:US$Nil)wasoutstandingtothisrelatedpartyasat30June2011.Givenmanagementfeesarepaidinadvanceonaquarterlybasisduringtheperiod,theCompanyhadpaidnetUS$2.2million(31December2010:US$Nil)totheInvestmentManagerat30June2011.TheBoardhasagreedtopaytheInvestmentManagerUS$36,400inrespectoffinancialreportingandconsolidationworkfortheCompany.

Under the terms of the investment management agreement with the Investment Manager, the InvestmentManager is entitled to receive abase fee togetherwith reimbursementof reasonable expenses incurredbyit intheperformanceof itsduties.Thebasefeeisequalto0.375%perquarteroftheNAVoftheCompany,calculatedquarterlyandpayableinadvance,usinganimpliedstraight-lineincreaseinNAVof10%perannumonabasiswhichincreasesat2.5%perquarter.

AsthequarterlycalculationisbasedonanestimatedNAV,followingthecalculationoftheauditedNAVattheendofeachfinancialperiod,thebasefeepayableoversuchfinancialperiodwillberecalculatedandanydeficiencywillbepayablebytheCompanytotheInvestmentManager.Totheextentthatsuchpost-auditrecalculationdemonstratesthatanexcessfeehasbeenpaid,anysuchamountwillbedeductedfromthepaymentduetotheInvestmentManagerinrespectofsubsequentperiods,upuntiltheamountequaltotheexcesshasbeenrepaid.

TheCompanyhasaccruedat30June2011itsfirstpotentialperformancefeeofUS$8.2millionorUS$0.0152perOrdinaryShare(basedonthetime-weightedaveragenumberofOrdinarySharesinissuesincetheinitialadmissionoftheCompany’ssharestotheAlternativeInvestmentMarket),astheunauditedNAVperOrdinaryShareatthatdate,asadjustedforthefollowingitems,exceededthehurdlerateofUS$1.08:

(i) anyincreaseinNAVarisingfromtheissueofOrdinarySharesasapremiumorbuybackofOrdinarySharesatadiscounttoNAV;

(ii) dividends declared, announced or any undistributed net revenue not otherwise included in the NAVcalculation;

(iii) alreadyaccruedperformancefees;and

(iv) otheradjustments theAuditCommitteeandManagementCommitteeof theBoardand the InvestmentManageragreeareappropriate.

TheadjustedNAVperOrdinaryShareforthepurposeofcalculatingtheperformancefeeaccrualat30June2011wasUS$1.1619.Pursuanttotheinvestmentmanagementagreement,aperformancefeewillonlybecomedueandpayabletotheInvestmentManagerasat31December2011andonlyiftheauditedNAVperOrdinaryShare(adjustedasdescribedabove)asat31December2011exceedsUS$1.08.

17. EVENTS AFTER THE BALANCE SHEET DATE

• On1August2011,PhaunosreceivedadistributionofUS$2.5millionfromMatariki.

• On15July2011,PhaunospaidatotaldividendofUS$10.7milliontotheOrdinaryShareholdersoftheCompany.



SCHEDULE OF INVESTMENTS

30 June 2011 31 Dec 2010 Unaudited Audited

Total Net Total Net Nature of Fair Value Assets AssetsName of investment investment US$’000 % %

MatarikiForestryGroup Timberoperation 174,193 28.02 24.73

GreenResourcesAS Timberoperation 104,283 16.78 16.15

GreenwoodTreeFarmFundLP Timberoperation 37,269 5.99 6.02

AuroraForestalLimited Timberoperation 34,547 5.56 5.69

NTPTimberPlus+FundI, Higher-and-better-useLP conversion 10,921 1.76 1.82

MasarangFoundationAssetLinkedEuroNote09/2012 Loan – – –

Total financial assets designated at fair value through profit or loss 361,213 58.11 54.41

Othernon-currentassets 226,127 36.38 34.36Othernetcurrentliabilities (12,406) (2.00) (0.28)Cashandcashequivalents 46,657 7.51 11.51

Total NAV 621,591 100.00 100.00


SHAREHOLDER INFORMATION

The Ordinary Shares are traded on the Main Market of the London Stock Exchange and on the Channel Islands Stock Exchange. The Ordinary Shares may be dealt in directly through a stockbroker or professional adviser acting on an investor’s behalf. The buying and selling of Ordinary Shares may be settled through CREST.

TheISIN,SEDOLandtheLSEmnemonicoftheOrdinarySharesare:

ISIN SEDOL LSE mnemonic GG00B1G3RS66 B1G3RS6 PTF

SHAREHOLDER ENQUIRIES

TheCompany’sCRESTcompliantregistraris,asatthedateofpublicationoftheseinterimconsolidatedfinancialstatements, Capita Registrars (Guernsey) Limited, whomaintains the Company’s registers of shareholders. Theymaybecontactedbytelephoneon+44(0)1534847445.

ForinformationaboutinvestingintheCompanycontactinfo@fourwindscm.com


Registered OfficeArnoldHouseStJulian’sAvenueSt Peter PortGuernsey GY13NF

DirectorsKeithOates–ChairmanIanBurns–Appointed1March2011LianeLukeMartinRicketts–Appointed5January2011SirHenryStudholme–Appointed5January2011KimberlyTaraSarahEvans–Resigned5January2011PeterNiven–Resigned5January2011

Investment ManagerFourWindsCapitalManagementScotiaCentrePOBox268GTGeorgeTownGrandCaymanCaymanIslands

Corporate Broker (to 5 January 2011)CollinsStewartEuropeLimited88 Wood StreetLondonEC2V7QREngland

Joint Corporate Broker (from 5 January 2011)VSACapitalLimited14AustinFriarsLondonEC2N2HEEngland

AuditorsErnst & Young LLPPOBox9RoyalChambersStJulian’sAvenueSt Peter PortGuernseyGY14AF

AdministratorHSBCSecuritiesServices(Guernsey)LimitedArnoldHouseSt.Julian’sAvenueSt Peter PortGuernsey GY13NF

Sponsor to CISX ListingMourantOzannesSecuritiesLimitedPOBox1861LeMarchantStreetSt Peter PortGuernseyGY14HP

RegistrarCapitaRegistrars(Guernsey)LtdLongueHougueHouseSt. SampsonGuernsey GY24JN

Joint Corporate Broker (from 5 January 2011)WinterfloodInvestmentTrustsTheAtriumBuildingCannonBridgeHouse25DowgateHillLondonEC4R2GAEngland

DIRECTORS AND SERVICE PROVIDERS


Advocates to the Company(astoGuernseyLaw)MourantOzannesPOBox1861LeMarchantStreetSt. Peter PortGuernseyGY14HP

Solicitors to the Company(astoEnglishLaw)HerbertSmithLLPExchangeHousePrimrose StreetLondonEnglandEC2A2HS

UK Transfer Agent CapitaRegistrarsLtdTheRegistry34BeckenhamRoadBeckenhamKentEnglandBR34TU

DIRECTORS AND SERVICE PROVIDERS CONTINUED

PHAUNOS TIMBER FUND LIMITED

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