Rubicon 2006 Review

25 August 2006 - The 2006-year saw continued progress with our now well-established plans for each of our investments, together with some new initiatives in response to market developments in the period. Our core efforts during the year remained focused on advancing each of our investments and activities according to the strategies we have previously reported to you.

▪ With Tenon, that strategy has been to restructure the cost base of the business and advance new product initiatives in order to grow its earnings performance, to refine its activities by further re-balancing its customer base, and to grow its US presence through selective acquisitions. Meeting an aggressive second-six month earnings projection represented a top operating priority for Tenon.

▪ With ArborGen, the commercialisation focus remained unchanged – to continue the product development of its most advanced products (low-lignin eucalyptus for the Brazilian market and cold-tolerant eucalyptus for the United States (US) market), to advance regulatory and public acceptance in priority markets, to push ahead with customer acquisition (including through additional varietal customers in Brazil and from the expansion of the US consortia), and to lower the cost and improve the efficiency of the chosen method of embryo delivery to the customer.

▪ At Forestadora Tapebicuá, our stated desire has been to achieve a restructuring of the outstanding bank debt in order to place the business on a more secure footing, to stabilise and grow the earnings potential of the company, and to either move to a position of control or to exit.

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▪ At Horizon2, our plan has been to reduce both the cost and capital base of the business in order to re-calibrate it to the currently contracted NZ treestock market-size, to better position the business in those regions of NZ exhibiting growth in forestry, to aggressively expand its activities into the Australian market where the trading environment is more favourable, and to “lobby” the Government as to the importance of reforestation in meeting the country’s Kyoto commitments and wider climate change goals.

▪ New initiatives to respond to market developments included the acquisition of further Tenon stock (under the “creep” provisions of the Takeovers’ Code) during a period of relative price weakness, focusing Tenon on producing a strong second-half earnings performance to compensate for a disappointing first-half result, and for Rubicon the introduction of a share buyback programme to give liquidity to the market in our shares together with the deployment of a small shareholder plan to enable shareholders with small shareholdings to rationalise their holdings cost effectively.

Our 2006 performance against these strategies and initiatives is discussed below.

TENON

Tenon’s financial performance for the year was a story of two halves.

In the first six months to December 2005 Tenon reported EBITDA (i.e. earnings before interest, tax, depreciation and amortisations) of US$6 million. This was well below expectations, and resulted largely from difficult trading conditions experienced by Tenon’s investment in American Wood Mouldings (“AWM”).

Rubicon 2006 Review
Tenon subsequently issued earnings guidance to the market for its end-of-year result, which effectively set full-year earnings expectations for the company in a range of US$20-21 million EBITDA. Pleasingly, Tenon completed the 2006 year with EBITDA of US$20 million – exactly in line with market expectations. The achievement of this full year earnings result represented a telling turnaround in financial performance, by growing a US$6 million first-half result into a US$14 million second-half EBITDA performance – a 133% increase. The second-half earnings uplift came about despite a stubbornly strong exchange rate for much of the period, and largely as a result of the strategic and operational initiatives that were put in place across the full 12-month period, including:

􀂃The exiting of all non-core activities, or activities inconsistent with Tenon’s North American marketplace focus. An example of this in the period was the total exit from Tenon’s European furniture development activities with Zenia House.

􀂃The re-balancing of Tenon’s customer and product portfolio, through the acquisition of the remaining 33% interest in Empire for US$29 million (Empire is now 100% owned), and the acquisition in November 2005 of 51% of Southwest Mouldings (“Southwest”) for US$17 million. Empire is a distribution-based business acting as a major mouldings vendor to Lowes, the second largest national home centre customer in the US. Southwest is a Texas-based stair-parts, mouldings and millwork manufacturer and, in contrast to Empire, a distributor to the pro-dealer market. The Southwest acquisition is important to Tenon, because in addition to extending Tenon’s national footprint in the US, it also widens its customer base beyond the large national home centre customers.

􀂃The success of an earnings improvement plan at Taupo, which saw several important initiatives put in place during the period. These included the commissioning of the Taupo geothermal conversion project, which will deliver US$1 million per annum of cost savings at the site through the substitution of more expensive natural gas with geothermal energy; the renegotiation of freight rates ex-New Zealand; and the commercialisation of Tenon’s new primed and treated outdoor finishing product for the US housing market. This product is branded as Lifespan to the independent lumberyards, and ArmourwoodTM to the national home centre customers.

These initiatives, combined with an easing in the NZ exchange rate in the 4th quarter, saw Taupo return to profitability in the second half of the year.

􀂃The introduction of a US$2.5 million cost-out programme at AWM to address the difficult trading conditions that it began to experience mid-way through the first half of the financial year.

It was important to Tenon’s equity-market credibility that it met the market’s second half earnings expectations. With that successfully achieved the focus is now on the next stage of Tenon’s development. We see the imperatives being:

􀂃To address the earnings shortfall at AWM. Whilst the US$2.5 million of cost savings which were progressively put in place over 2006 will help to close some of the earnings gap, this level of savings is insufficient to return AWM’s profitability to an acceptable level - further changes will be required.

􀂃To advance the introduction of ArmourwoodTM and Lifespan. The level of working capital required to prepare Tenon for the ArmourwoodTM / Lifespan programme has been large, which has contributed to the higher than desired Tenon debt levels outstanding at balance date. While the required working capital level will decline over the next year, we anticipate that it will not be until the second six months of the 2007 financial year that we will see the earnings uplift that should accrue to Tenon from a successful ArmourwoodTM / Lifespan roll-out.

􀂃To extract full value from its recent acquisitions, in particular the synergy benefits to the wider Tenon group that flow from having taken 100% control of Empire, combined with the full integration of the Kok’s Woodgoods and Southwest acquisitions.

􀂃In order to fully rebalance its customer base, Tenon will need to make further acquisitions of the Southwest type. This will require Tenon to take more debt onto its balance sheet than is currently the case. While Rubicon, as the major shareholder, has a strong preference for Tenon to operate within conservative debt ratios, like all shareholders we will be judging opportunities Tenon brings on a case-by-case basis – and to this point, we do understand the value-uplift that will accrue to Tenon should it achieve the balanced customer portfolio that it is targeting.

At the same time that it is advancing on these fronts, Tenon needs to ensure that it continues building its earnings momentum. To this point, Tenon has already announced its intentions: “Although we were pleased with the much stronger second half performance we achieved in 2006, overall we would still only characterise the second half result as ‘solid.’ We believe there are a number of further opportunities for improvement both within our New Zealand manufacturing operations and US specialty distribution activities, which will provide future earnings performance much closer to our targeted level. Assuming stable market conditions, we see the positive earnings performance we achieved in the second half of the 2006 year carrying forward into our 2007 financial year, with our earnings being seasonally weighted to the second half of the year.”

In terms of capital base, during the period Tenon announced an on-market share buyback of up to 5% of its outstanding share capital. As at the date of this Report, Tenon had bought back 4.1% of its shares, at an average share price of $3.71. While this average buyback price exceeds the current Tenon share price, we believe that time will show it to be the right thing to have done for remaining Tenon shareholders. The same comment is also true of the additional 5% of Tenon that Rubicon acquired in the period under the “creep” provisions of the New Zealand Takeovers Code. The provisions of the Code now constrain us from acquiring any further Tenon shares until later this year (late-October / early-November). We will review our intention to continue our incremental Tenon share acquisition programme closer to that time.

ARBORGEN

ArborGen’s commercialisation focus intensified during the past year. Excellent progress was made in the period. Key highlights included:

􀂃ArborGen expanding its business model to encompass the production and sale of varietal (i.e. non bio-engineered) planting stock in the US and Brazil. These markets represent a significant opportunity with over 1.2 billion Loblolly pine seedlings sold annually. This expansion will provide earlier revenue from varietal sales in addition to developing a channel for the future sale of ArborGen’s bio-engineered pine products.

􀂃The completion of an internal reorganisation, which, while maintaining the existing size of the organisation, reduced the science team by 25% and increased the size and capability of the commercialisation team by adding new roles in marketing, manufacturing, business development, and regulatory and public affairs, in order to take ArborGen into its next phase.

A good example of this change was the appointment of a Director of Operations to oversee the development of the production processes needed for the large-scale production of varietal planting stock. His background in biological engineering has allowed ArborGen to improve efficiencies at the high-cost stages of the production process.

􀂃The establishment of regulatory trials in Brazil for ArborGen’s Improved Pulping Eucalyptus product (“IPE”).

􀂃Entering into cost-sharing agreements with Brazilian eucalyptus customers to prepare IPE products customised for their specific forest estates. Importantly, this includes the customers agreeing to the use of their own elite eucalyptus clones in ArborGen’s trials.

􀂃Expanding the Loblolly pine varietal testing under the ArborGen Testing Service (“ATS”) (which was established the previous year with International Paper and MeadWestvaco) to include Weyerhaeuser and a number of other companies. The objective of the ATS is to test each member’s Loblolly pine varietal clones across a wide variety of sites that will ensure members will be able to get access to the best possible varieties for their own particular sites. For ArborGen, the importance of the ATS is that ArborGen will have access to the best customer clones for use in its advanced genetics programmes. 􀂃Establishing varietal Loblolly pine trials in South America with a number of the leading forestry companies there. As in the US, this will help ensure that ArborGen and its customers are at the forefront of the best Loblolly pine varietal development in South America.

􀂃The very satisfactory resolution of the outstanding Genesis issue, which has seen all litigation between the parties dropped, Genesis giving up all rights to its previously held 5% ownership (and 5% option) position in ArborGen, agreeing not to operate in the forestry field again, and agreeing to transfer its forestry technology and patents to ArborGen in return for a payment of US$5.5 million (which was made during the period).

One of the critical factors for the successful commercialisation of a tree-biotechnology business is the development of a “pipeline of products” for commercial delivery into the market over time – and, importantly, products that will deliver a step-change in value for the industry that is either unlikely or unable to be achieved through traditional tree breeding technology. Each of the products in ArborGen’s pipeline meets this test. Over the past 12 months these products have all advanced and met their milestones, while at the same time some of the next generation products have been added into the pipeline to begin their testing process.

Plantation Hardwood for the US. The US pulp and paper industry is looking for new sources of hardwood to replace the country’s depleting natural resource. Hardwood pulp is essential for manufacturing a range of high-quality papers, where the short fibres that are inherent in the composition of hardwood trees are required for paper smoothness. A complete review of alternative options was undertaken this year and as a result of this review the decision was made to include Faster Rotation Hardwoods (FRH) along with Cold Tolerant Eucalypt (CTE) in ArborGen’s portfolio – each targeted for suitability to different site and climatic conditions, as well as to end use.

Hardwoods to be included in the FRH project include Poplar hybrids (Aspen) and Sweet Gum. A number of years ago several hardwood species were planted in ArborGen’s trials to test different growth genes. The results of these initial screening trials have been impressive. The best observed growth rates, even if only sustained at half the current observed rates through to harvest, would result in very significant yield increases. ArborGen will now establish pre-commercial trials across a wider range of sites.

In terms of the CTE project, freezing tolerance has been demonstrated in Eucalyptus trees in field trials in the US South. Based on these results, there is enough evidence to now move to large-scale tests, with trials being planted further north in numerous locations across a wide range of geographies to test the extent of tolerance to cold.

Improved Pulping Eucalypt in Brazil. Product development has progressed very well for this project. Field-grown Eucalyptus trials show that ArborGen is able to reduce lignin content. Data from the trials has confirmed the commercial target of a 20% reduction in lignin, with some lines achieving well in excess of 30%. There was also a positive trend of increased pulp yield at the lower lignin level. In addition, wood density seems to be unaffected by the lignin reduction. Trials have now been established on customers’ land, and the regulatory path largely established.

Work has also advanced on the second-generation product, which will see a growth gene “stacked” on top of the current low lignin product, to bring the added benefit of increased yield or alternatively the option of shorter rotation. Pre-selection trials are in place to demonstrate the potential for reducing rotation time in Eucalyptus.
Short Rotation Improved Pine. The large US Loblolly pine market is highly attractive for ArborGen, with annual plantings of in excess of 900 million treestocks. With the current and emerging release of varietals in the US, the industry is becoming increasingly aware of the benefits that advanced genetics can bring. ArborGen believes the opportunity exists for it to bring a step-change in value for the industry by applying its advanced tree-biotechnology techniques to significantly increase Loblolly pine growth rate which will allow the industry to reduce rotation length and hence also reduce its greatest cost – time.

Candidate gene tests established in 2004 with Loblolly pine are serving as the basis for the decisions for the first two rounds of selection tests. The best trial growth improvements in Loblolly pine have ranged from 100-140%. Growth modelling techniques allow ArborGen to extrapolate these trial growth rates into predicted yield over the life of a tree, and therefore into optimal rotation time. The net effect would be the equivalent of an increase in yield of approximately 45-70%.

Biofuels. Over the past two years high oil prices have increased the desire to develop biofuels from domestic sources. The interest in biofuels (mainly ethanol but also biodiesel) is further strengthened by concerns about the security of oil supply in an uncertain world and the contribution that biofuels can make to the achievement of environmental objectives. Currently the main commercial ethanol programmes are from sugarcane in Brazil and from corn grain in the US. However, a substantial step-up in biofuel production, sufficient to have an impact on the global oil market, will require the production of ethanol from ligno-cellulosic feedstocks such as crop residues, grasses and trees.

The increased attention being given to biofuels is of great interest to ArborGen, as the same traits that ArborGen is pursuing in its FRH, CTE and IPE products are also very desirable traits in tree feedstocks for ethanol.

A variety of process routes for making ethanol from ligno-cellulose are under development internationally by various consortia, and some are already at the pilot or demonstration stages. Commercialisation of several cellulosic processing routes is expected in the next three to four years. The US Energy Policy Act of 2005 includes a range of measures designed to accelerate the development and commercialisation of ethanol from ligno-cellulose - for example, there are now large financial incentives for the production of the first billion gallons of annual biofuel output from ligno-cellulosic feedstocks. As a result, US government funding of research has also been stepped up sharply.

The US Department of Energy recently released a report detailing a roadmap for accelerating cellulosic ethanol research, with a goal of making biofuels practical and cost-competitive by 2012, and with the potential to displace up to 30% of current US gasoline use by 2030. The roadmap identifies the research required in order to overcome challenges in meeting the large-scale production of cellulosic ethanol. A specific target to enhance wood traits for energy applications has been set, focusing on three traits:

i. Faster tree growth;

ii. A lower proportion of lignin and extractives and increased cellulose; and

iii. Modified tree architecture i.e. where in the tree biomass is allocated

Why the increased interest in trees for use in biofuels? Because trees are non-food crops that offer enormous economies of scale over food crops and even grasses. A hurdle for the use of US hardwoods is the current absence of a profitable technology for their intensive (plantation) management: in the US – i.e. in the US there are just not the large hardwood plantations that can be found in Brazil and other countries. In this regard, tree biotechnology has the potential to transform the economics of hardwood plantations in the US such that their large-scale establishment becomes an attractive investment.

ArborGen is well positioned to be a leader in this area through its ability to manipulate lignin levels, its research into cellulose, and its increased yield and stress tolerance technologies. There is also the potential for growing hardwoods suited to combustion for electricity generation (where high lignin content is desirable), which is already occurring through the co-firing of wood with coal in existing power stations. Many US states are setting ambitious targets for the proportion of electricity that must be generated from renewable sources in the future.
The ultimate goal of biomass processing is the creation of bio-refineries, akin to petroleum refineries, that produce a slate of products, utilising almost all the feedstock input and achieving high-conversion efficiencies. Pulp and paper mills are prototype bio-refineries and may well prove to be the shortest route to large-scale commercial production of ethanol, other liquid fuels and bio-chemicals, by converting currently under-utilised hemicellulose and black liquor waste streams, which is another attraction for the focus on fuel from trees. The American Forest and Paper Association and the US Department of Energy are working on projects to achieve this.

Whilst biofuels was clearly not a target market envisaged at the time of the formation of ArborGen, it is an excellent example of the incremental value that may potentially accrue from “step-out” technology projects that leverage off ArborGen’s core tree-biotechnology platform and capabilities.

FORESTADORA TAPEBICUÁ (“FTSA”)

Argentina enjoyed strong economic activity during the 12 months to June 2006, and FTSA was able to grow average monthly sales to 4.4 million (previous year 3.5 million) pesos. This was driven by a continued swing back to domestic-focused business with more than 90% of revenue in the period being derived from domestic sales.

Revenue growth was achieved through both volume growth and improvement in the grade mix of products. Plywood continued to lead the growth comprising some 70% of sales, and lumber and remanufacturing operations also offer further potential with appropriate management and capital input over time. To this end, 4.4 million pesos were reinvested into the business during the twelve months, with upgrades being made to boiler capacity (1.0 million pesos), to the plywood veneer surfacer (0.4 million pesos), and to the company’s remanufacturing facilities (1.4 million pesos). These upgrades, the last of which was commissioned in June this year, will allow the operation to achieve improvements in quality–grade–output mix, and better match production capabilities to the available log supply.

Pleasingly, the company improved earnings and maintained positive operating cashflows, in the face of a shift away from reliance on its own mature forest and inflationary pressures on operational costs. However the reality remains that the business continues to be affected by partner issues and the unresolved status of its bank debt.

As already noted in this Report, our goals for this investment have been to stabilise and grow FTSA’s cash-earnings potential, to effect a debt-restructuring agreement, and then to either move to a position of control or to exit totally. While we believe we have advanced considerably the first of these objectives, the latter two are still work-in-progress as at Report date. Having said that, we have now achieved a very positive dialogue with the new owners of FTSA’s bank debt towards the achievement of a debt discount arrangement, and we are also actively discussing with both FTSA’s partner and the new debt owner alternatives for ownership restructuring. While these discussions are underway we have decided to put on hold the arbitration proceedings that we had previously initiated to address the disputes we have with FTSA’s Argentine shareholder. As we progress to a conclusion it is necessary that we continue to incur some legal and arbitration costs to protect our position – unfortunately, these cannot be avoided if we are to extract value from this investment.

HORIZON2

Horizon2 reported EBITDA (100%) of US$1 million for the 12 months to June 2006 (in line with the previous 15-month period), all of which was recorded in the second six months of the year. The result would have been higher but for the impact of a freak hailstorm that hit Horizon2’s Australian operations in November, negatively affecting first-half earnings. As we reported in our interim result, the storm was of such intensity that it destroyed the protective cladding of the container facility, causing the complete loss of the container seedling crop. The facility was repaired and the crop was immediately replanted in time to meet the 2006 lifting requirements, however all the related costs incurred were expensed in the period.
As discussed in our interim report, New Zealand market conditions have not been favourable to Horizon2. New Zealand Radiata treestock plantings figures released by the Ministry of Agriculture and Fisheries show that only 33 million Radiata treestocks were planted in 2005, down dramatically (25%) on the 44 million planted in the previous year, on the 56 million of five years ago, and on the 100 million recorded in the mid-1990s.

This extremely low current level of replanting provides a unique opportunity for the Government to “promote” reforestation in order to meet the country’s Kyoto commitments and wider climate change goals - particularly given the size of the projected carbon deficit the country will be facing in future periods. We had previously made submissions to the Government on this matter, and in this respect it was particularly pleasing to see that in the May Budget, $100 million was set aside for 2006 / 7 climate change related initiatives. Whilst this is a positive development, we are still not aware of any precise initiatives for the use of this money – something that urgently needs addressing by the Government. Our belief is that any incentivisation of forestry replanting should have a focus on the industry value that can be generated from the use of treestocks with higher genetic specifications.

The acquisition of the Puha nursery last year moved Horizon2 into one of New Zealand’s forestry regions that is growing in activity. In 2006 Puha produced almost a quarter of Horizon2’s New Zealand volume. The rebalancing of Horizon2’s production portfolio continued this year with the acquisition of the Treecorp nursery business in Victoria, Australia. Treecorp is a state-of-the-art operation, with combined container and field-grown capacity of approximately 10 million treestocks per annum (but with sales volumes of only half that level upon our acquisition). Since the acquisition Horizon2 has aggressively grown its Australian sales, to the extent that in 2006 more than 8 million treestocks were produced and sold in Australia – up dramatically on the 700,000 treestocks (or 5% of the total) that Horizon2 sold in Australia in 2003.

The Treecorp acquisition represents a major step to reduce reliance on an otherwise currently depressed New Zealand market – and almost overnight achieves the goal of re-weighting the relative importance of these markets. Horizon2’s production in Australia next year will represent some 20% of the total Australian softwood treestock market, making it a significant player there. In New Zealand, Horizon2 remains the largest nursery and tree improvement business, supplying close to half the country’s total treestock requirements.

With that positioning in place the priority is to further expand both markets for Horizon2’s products. Australian conditions (in terms of customer support, industry economics and governmental backing) are very favourable to achieving this, and we would hope to see Horizon2’s 2007 sales in that geography increase more than 30% on that achieved in 2006. However, the New Zealand situation has been constrained for some years now, with poor industry returns driven by a high NZ dollar exchange rate, decisions of forest owners to increase forest rotation age, and an increase in land-conversion to non-forestry uses, all contributing to an unsustainably low replanting rate. This low-harvest / low-replant situation is not expected to continue, and the Government’s announced commitment to the introduction of land-based policies that will acknowledge (and hence incentivise) the positive impact that forestry can produce in terms of climate change metrics should lift the domestic market for Horizon2. We await with interest the finalisation of Government policies in this regard.

2007 will be a year of further change for Horizon2.

As noted, it will see growth in Horizon2’s sales in the Australian marketplace. It will see Horizon2 continue to lower its cost base – the emphasis being on production asset rationalisation in New Zealand to release surplus capital, and on further cost reduction in its research and development activities including in its core somatic embryogenesis production programme. 2007 will also see resolution to the ownership of the CHH forest estate. Of course, Horizon2’s strategic relationship agreement with CHH does protect Horizon2 to a large degree from any significant CHH forest downsizing, as at the time of the formation of the partnership CHH agreed to compensate Horizon2 should certain CHH restructuring events occur in the future. However, regardless of that fact, bringing certainty to the future ownership of this important forest estate will be welcomed (as at the time of writing, the CHH forest sales process had not been concluded). Finally, and as already discussed, 2007 should see the introduction of the Government’s much-awaited land-based policies that will address climate change initiatives – something of critical importance to the New Zealand forestry industry.
GOVERNANCE

From 1 July 2005 we moved to the US dollar as our functional currency, reflecting the economic reality that the underlying driver currency of almost all of our operations and investments is the US dollar. By way of example, this now means that all Rubicon’s cash is now held in US dollars, as is the underlying cost base of our major investments – including our ownership interest in Tenon (which has also changed to a US dollar functional currency). One result of the change in functional currency that will be immediately noticeable to the reader of this Report, is that our financial statements are now shown in US dollars (with an accompanying conversion to NZ dollars for convenience purposes only).

We have also become an early adopter of IFRS (International Financial Reporting Standards). While the impact of this change on our financial statements is not great, we are required to give our shareholders a large amount of information on the change. As a consequence, our financial statements in our Annual Report will be more voluminous than they may otherwise have needed to be.

We saw major changes in both our share register and our capital base during the period, with our 20% shareholder, GPG, exiting its Rubicon investment in a placement of its shares primarily to existing and new US-based investors. Whilst it was extremely pleasing to see the extent of interest in Rubicon, in that the entire GPG block was sold in an over-night placement, the placement did have the effect of exhausting the on-market buying that those investors had previously been undertaking. This, combined with the first half earnings downgrade that Tenon announced soon after, saw Rubicon shares come under both price and liquidity pressure. Given this, and our belief that Rubicon’s shares were (and still are) significantly undervalued, we informed the market (in successive announcements) that we would be undertaking an on-market buyback of up to 15% of our issued shares. Since those announcements, we have acquired just over 11% of our outstanding issued capital, acquiring 32 million shares at an average price of under 90 cents per share. Today’s share price of 95 cents per share compares favourably with the 85 cents per share recorded in the week immediately prior to the buyback announcement, and represents a good outcome for Rubicon shareholders who have chosen not to sell their shares during this period.

In addition to the share buyback, we also put in place the Rubicon 2000 Share Plan, which allowed shareholders holding less than 2,000 shares the brokerage-free opportunity to to buy up to a 2,000 shareholding level, or if they held fewer than 500 shares to sell out entirely. The Share Plan proved very popular, with over 1,800 shareholders participating in this opportunity. 1,100 shareholders elected to buy additional Rubicon shares,90% of whom bought up to the maximum 2,000 share level – a very pleasing outcome for us.

In order to tidy up the Company’s share register, on 27 February we compulsorily sold all shareholdings smaller than the NZX minimum holding level of 500 shares. This reduced our shareholder base by 3,610 shareholders, with those shareholders holding less than 0.25% of Rubicon’s total shares outstanding. As at the writing of this Report, the Company has approximately 10,500 shareholders on its register, holding a total of 251.6 million shares. The Company still has up to 9.7 million Rubicon shares (or 3.9% of the currently outstanding share capital) that can be bought back prior to 14 March 2007 under its current share buyback programme.

Bill Hasler retires by rotation this year, and being eligible offers himself for Director re-election at the next Rubicon Annual Shareholders’ Meeting. This meeting will be held at the Christchurch Town Hall, at 10 am on Monday, 6 November 2006.

FINANCIAL

As previously noted, this is our first year of reporting under IFRS, and also in using the US dollar as our functional currency. In addition, the comparative “year” is actually a 15-months period, as last year we changed our balance date from March to June. As these many changes make it difficult for the reader to achieve a “snap-shot” view of performance, the chart below is presented for convenience.
The chart summarises our operating earnings (including interest income and before depreciation) for the 12 months. This positive result of US$18 million is after accounting for the expensing of US$3 million relating to ArborGen’s annual research-related activities. As we have previously noted however, an earnings analysis does not show the full value picture for Rubicon, as ArborGen in particular is still a developing business and its true value is not captured in its earnings contribution – in time we believe it will be.

As Rubicon now owns more than 50% of Tenon, Tenon’s balance sheet is required to be included within Rubicon’s reported consolidated balance sheet. Unfortunately this makes it difficult for the reader to separate out the funded position of Rubicon Limited. To assist in this analysis, at 30 June 2006 Rubicon Limited had no debt, and cash on its balance sheet of US$17 million. The reduction in our cash balance over the period related solely to investment in our existing activities - US$6 million invested into ArborGen (including an additional US$2 million relating to the ArborGen-Genesis settlement), US$9 million on increasing our percentage ownership in Tenon from 50% to 55%; and US$19 million on our share buyback.

The Tenon group invested US$51 million during the period – US$29 million in acquiring the remaining 33% ownership interest in Empire, US$17 million on the purchase of 51% of Southwest Mouldings, and US$5 million on various capital expenditure projects to reduce the cost-base of the business (including the commissioning of the geothermal upgrade at Taupo). Tenon ended the period with consolidated net interest bearing debt of US$52 million.

OUTLOOK

From Rubicon’s listing up until the time of writing, our annualised shareholder return has exceeded our 17% per annum target. Clearly, we did not achieve this in 2006 when we recorded a fall in our share price – largely as a result of “uncontrollable” and transitory events. While it is true that since our ASM last year Rubicon shares have actually out-performed the NZX market (as measured by the NZX50 index), we get no joy from outperforming a poor index number, as we are well aware that our shareholders invest in Rubicon for healthy positive returns and not just for our performance relative to the total NZ equity market.

So our goal remains the same – to return an absolute 17% per annum to our shareholders - and we still do believe we can in future continue to produce the sorts of annualised returns we have generated since our listing. Repeating the words we used in our interim report – “We believe we have in place the right strategies and initiatives to significantly lift value in Rubicon in the future. Nothing has occurred in the period that has changed our fundamental belief that there is considerably more value in Rubicon than is reflected in our share price today. Accordingly we will continue to pursue our existing strategies for unlocking value in each of our investments. At the same time we will push forward with our share buyback programme ... effectively increasing, at an attractive price, our continuing shareholders’ exposure to the considerable upside we see in Rubicon.”

Stephen Kasnet Chairman Chief
Luke Moriarty Executive Officer

ENDS

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