Brian Gaynor: Ginseng prescription a costly tonic

If Doug Somers-Edgar is correct, then New Zealand should be turned into a huge ginseng farm.

His first attempt to raise money for the production of American ginseng was pulled this week after reaching the minimum subscription level. However, the promoters are promising a new prospectus on similar terms in the near future.

Somers-Edgar is incredibly bullish about ginseng.

The cancelled offering, which was called The Clean Green Ginseng Venture (www.cleangreenginseng.co.nz), forecast returns of 32.53 per cent per annum over the life of the project. These returns were based on a projected realisation of $350 a kilogram of ginseng.

The problem is that the $350-a- kilogram forecast is inconsistent with the prices received by two listed Canadian ginseng producers, Imperial Ginseng Products and Chai-Na-Ta Corp.

In its June 2004 year, Imperial Ginseng realised only C$47.20 ($56.60) per kilogram. It has a share price of 4.2Cc and a market capitalisation of less than C$1 million.

Last calendar year, Chai-Na-Ta realised only C$46.30 ($55.60) a kilogram. It's share price is 33Cc and its market value C$8.2 million.

Existing subscribers in Somers-Edgar's project will have their money returned. Before they subscribe under the new prospectus, they need to ask why New Zealand ginseng is expected to realise $350/kg, whereas Canadian producers obtain $56/kg.

Ginseng is a herb that is used in a number of cultures, particularly Chinese and Korean.

There are three main species, Oriental, Siberian and American. Oriental ginseng, which is the most popular form, is grown in China and Korea. Siberian ginseng is easier to grow, is more plentiful and sells for less than the Oriental product.

American ginseng, which is found in the mountainous regions of North America, is less valuable than the Oriental species, but is worth more than the Siberian.

But the most important feature determining the value of ginseng is the way it is grown. There are three growing methods; wild, wild-simulated and cultivated.

Wild, which is by far the most valuable, is becoming increasingly rare in Asia and North America. Prices can be as high as US$5000 ($7170) to US$10,000 per kg.

Wild-simulated, which is planted in natural forest areas under the shade of trees, can also be quite valuable. Ohio State University says producers can realise up to US$750 a kilogram for this species.

But cultivated ginseng, which is produced in a farm environment under artificial shade, does not realise much more than US$55 a kilogram.

The most striking feature of Somers-Edgar's proposal is its huge cost structure. Investors are being asked to pay $12.25 million up front with additional costs of $8.67 million over the six years of the project.

In return for the $20.92 million, they acquire a one-rotation eight-year crop of cultivated ginseng at Fitzgerald Glade, which is just off State Highway 5 at Tirau.

The crop, planted in October/November 2003, is on 7ha of land but the investors in the public offering are not purchasing the land. The $20.92 million will be spent as follows:

* $3.82 million to Ginseng New Zealand for the two-year-old crop.

* $6.26 million in advance to Ginseng Management to manage the crop.

* Another management fee of $0.66 million to Ginseng Management at the end of the project.

* $1.09 million in issue costs including a 4 per cent commission to financial planners and financial advisers.

* Additional annual costs of $0.52 million, mainly the cost of leasing the land from Ginseng New Zealand.

* Harvesting and selling costs of $8.57 million paid to Ginseng New Zealand. The harvesting and selling costs are estimated at 20 per cent of the gross value of the crop.

The two major shareholders of Ginseng New Zealand are Somers-Edgar and Brian Sage with 46 per cent each. Ginseng Management's shareholders are Somers-Edgar, Sage and Green Lane Securities with 33.3 per cent each.

Somers-Edgar has a 20 per cent stake in Green Lane Securities.

The crop is expected to realise $42.85 million in mid-2010 compared with the total costs of $20.92 million. The projected realisation is based on the premise that 4.08 million, or 77 per cent, of the 5.03 million seeds will survive to maturity and they will yield 122,430kg of dried American ginseng selling at $350 a kilogram.

These yield projections are extremely optimistic compared with the North American experience.

The NZ operation is expected to yield 17,500kg of ginseng per hectare whereas Imperial Ginseng Products yielded 2850kg per hectare in 2003 and 2004 and Chai-Na-Ta yielded 2400kg per hectare in its latest year.

The yield from a cultivated crop of ginseng can be low because the herb is difficult to grow and is vulnerable to a fungus that attacks the plant's high-value roots. Producers may not be aware of this fungus until the plant is harvested many years after the disease has struck.

The Canadian Government believes that under disease-free conditions cultivated ginseng can realise a farmgate value of up to C$300,000 a hectare but fungi inflicted yield losses are as high as 30 per cent to 60 per cent in American ginseng crops grown in Canada.

By comparison, Somers-Edgar is expecting his ginseng to yield $6.1 million a hectare at Fitzgerald Glade.

It is difficult to know how the New Zealand operation can achieve an average price of $350 a kilogram.

At a seminar in Browns Bay, one of the offer promoters told investors that most of the ginseng would be used as an ingredient for soft drinks such as Coca Cola.

He said the occasional root would have special characteristics and could be sold for $1000 plus (each root is expected to weigh about 30g).

It is difficult to understand how cultivated roots have an average farmgate value of C$1.40 ($1.70) each in Canada yet the New Zealand operation will sell sufficient roots at $1000 plus to raise its average realisation to $10.50 a root or $350a kilogram.

The other issue with the offering is its governance structure. The Clean Green Ginseng Venture is a special partnership under the Partnership Act 1908, which can deliver tax advantages to investors, but it is not the ideal structure from a corporate governance point of view.

The interests of investors are protected by Clean Green Ginseng, which is the General Partner. Grant Garner, who owns 50 per cent of the General Partner and is one of its two directors, is heavily involved with Orange Finance, Somers-Edgar's finance company.

Somers-Edgar's ginseng prospectus was withdrawn this week and, says the press statement, investors will get their money back plus interest.

The reason given was that Sage has been removed as managing director of Ginseng New Zealand after a breakdown in communications with his fellow directors over issues of governance and the future direction of the company.

A company spokesperson said a new prospectus would be issued under similar terms, with the non-involvement of Sage.

The Clean Green Ginseng Venture is far too good to be true as it is offering a realisation of $42.85 million from a 7ha crop of American ginseng, whereas the same area in Canada would be expected to yield just $2.5 million.

When the new prospectus is launched investors should give it a wide berth unless the cost structure has been substantially reduced and the yield and price realisation forecasts are more realistic.

PROFITABLE HERB

* Ginseng is a herb used in several cultures, particularly Chinese and Korean, as a stimulant and treatment.

* There are three main species of ginseng: Oriental, Siberian and American.

* Oriental, the most popular form, is grown in China and Korea.

* Siberian ginseng is relatively easier to grow, is more plentiful and sells for much less than the Oriental product.

* American ginseng, from the mountainous regions of North America, is worth less than the Oriental but more than the Siberian.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.