Gunns: A forlorn hope

When CEO Greg L’Estrange took the pruning shears to most of Gunns assets resulting in a $457 million loss before tax for the year ended 30th June 2011, he must have hoped that he’d cleaned the slate and there would be no further bad news.

Alas this is not the case, as trading continues to disappoint and the book values of assets needs even more downward revision.

Forestry Tasmania's future

Will there still be a place in the world for Forestry Tasmania FT as a GBE after reality bites?

FT has struggled with cash flow and profitability and now it’s selling some of its more commercial activities. All the calls for FT to be restructured may be unnecessary. The in-house Voluntary Liquidator Bob Gordon, like his counterpart at Gunns appears to be doing just that, as assets are sold in an attempt to survive.

But is FT better prepared to face the future? Given that we will become more dependent on plantations, has FT’s management deftly and skilfully positioned FT to meet the challenges?

Stealing IGA funds

 

The Right To Information department at Forestry Tasmania is usually busy responding to Kim Booth’s requests for information

But the latest response to Elise Archer, Liberal Member for Denison at http://www.forestrytas.com.au/uploads/File/pdf/rti2011/RTI11-21_elise_archer.pdf is of particular interest.

A briefing note (below) from Bob Gordon dated 29th July 2011 following an FT board meeting two days earlier claimed Gunns financial problems were overwhelming and likely to result in the appointment of a Receiver by the banks being the secured creditors.

 

Talk about the kettle being called black by a particularly sooty pot. FT at this stage had just experienced another year of negative operating cash flows. The only thing stopping it from following Gunns into Receivership was the Letter of Comfort.

Given any payment from GNS was unlikely, it was incumbent on the Government to find some money to help FT survive so they arranged to pinch $11.5 million from IGA funds.

But how do get money into FT from the IGA? Even though Gunns terminated Contracts 917 and 918 in writing on 18th April as further disclosed in the briefing note the only way was to resurrect the residual rights to provide for payment to Gunns, and divert some to FT ostensibly in settlement of receivables due. Without a transfusion FT was virtually out for the count.

What a rort.

It is likely that Gunns did not include amounts allegedly owing to FT as payables in its financials. To do so would have meant the absurdly concocted measure of underlying profit reported to the market was wrong.

Wouldn’t want ASIC knocking on the door again, would we?

 

Just a bit of an addendum to the hurried article.

It is the sequence of events that is most interesting.

When did the question of a value on the residual rights arise?

Gunns threw in the towel on native forests and abandoned contracts 917 and 918, FT then informed the Government that Gunns was insolvent and unlikely to pay the $26 m to FT which in turn would make FT insolvent? So the Government needed to find a solution for its wholly owned subsidiary?

So when did the question of residual rights surface?

After the possibility of Gunns’ insolvency?
It is clear the Government asked the Solicitor-General  (SG) to advise on the matter of residual rights. Not the value but whether it was possible they still existed.

To add a bit of gloss to proceedings the Government employed a Probity Auditor, not to vet whether rights existed or whether they had any value, but simply whether due process was followed. Which simply meant to check whether the final outcome was consistent with all the relevant documents and correspondence. And surprise surprise, it was.
Why was the particular Probity Auditor selected?

Why not our Auditor General?

Well one of Tasmania’s leading ethicists, the leader of the Government in the Leg Co explained in answer to a question recently that “the Auditor-General is authorised to act independently; he has complete discretion in the performance of his functions and is not subject to direction into whether or not a particular audit is conducted or report made”. Furthermore it “could potentially compromise his ability to perform a holistic, external and independent review of the processes relating to the Tasmanian Forests Intergovernmental Agreement in its entirety”. Better not give the job to someone with too much discretion. Much better to get someone else to do the job, like some guy who just happened to be a Government GBE appointee on the Board of MAIB. The Government’s overriding concern for independence caused it to select as Probity Auditor a person who had recently been bestowed a Government favour.

I’m not sure I understand‘independence’ any longer. Like ‘labour values’ it is becoming meaningless.

Then there is the question as to how the value of the rights was determined. We are still in the dark.

The Government unbundled the process.

Get the SG to give an opinion on whether rights exist.

Then get another guy to pass judgment on whether due process was followed.

Get someone else to decide on what the rights are worth.

Keep everyone in the dark, at arm’s length from one another and then hey presto, abracadabra, Gunns gets $23.5 million and FT $11.5 million.

 

It will be a tough 2012

What if the Premier is correct in her repeated claims that we have no money? Given that the premier is not known for telling the whole truth, perhaps the situation is worse than she says?

Will the cuts proposed in the last Budget but only now seeing the light of day restore the Budget to a sustainable basis?

The Premier, in the past, has referred to the shock of discovering the lack of hay in the barn when she assumed the top job. Let’s call it by its real name ... cash. There is very little cash in the General Government’s coffers and something needed to be done. Will the proposed changes fix this?

Prof Stewart didn't get much right

“There is a strong push to stop all logging of native forests, but is this really justified from the point of view of conservation?” asks Professor Stewart in her recent article ‘Forestry didn’t get it all wrong’ ( HERE ).

One may ask is logging really justified from a business point of view if losses continue to accrue.

Prof Stewart’s article was a sober reminder that we are as far away as ever from agreeing on a way forward for the native forest industry.

Greg's report card

Greg L’Estrange completed another semester last Friday with the release of Gunns’ latest set of consolidated financial statements for 2010/11.

Greg may be looking for a social license, but the statements highlight Greg’s progress as he staggers towards D Day, in January 2012, a date with debt and destiny when his bankers will decide whether to roll over or refinance a large part of Gunns’ debt. The dramatic decline in asset values and tight cash flows continues the pattern of 2010, a pattern that largely came to light with the abdication Greg’s predecessor.

The road to nowhere

It didn’t take long for interstate friends to offer commiserations following Monday’s Q&A.

No wonder you guys are in a mess. Is she really the Premier?

It’s actually not as bad as it appeared, I patiently explain. It’s far worse.

The time is nigh

The public transcript of the 4th July 2011 Leg Co inquiry into FT’s financial performance has now been posted on line.

In an answer in writing to a question on notice, it was disclosed that the minimum operating cash flow surplus for FT is in the order of $20 million, needed to fund necessary capital expenditure including outstanding TCFA obligations.

In 2010 the operating cash flow was $12 million negative. Bob refused to publicly disclose the cash flow deficit for 2011. He would only do it in camera. It is likely to be of similar magnitude to 2010, a far cry from what is needed.

The impact of these revelations cannot be overstated. FT is very close to insolvency.

Worth the wait? The Auditor General's Report into Forestry Tasmania.

What on earth was Auditor General Mike Blake doing?

Three years after commencing his investigation into the Financial and Economic Performance of Forestry Tasmania in April 2008 there was still no word.

The Report now tabled in Parliament hints at the reason for the Auditor General(AG)’s tardiness.

Vale Auspine

A history of Gunns undoubtedly will contain a chapter on the Auspine debacle, now edging closer to finality.

Tuck shop accounting

The Treasurer has cobbled together a survival plan for the next few years.

Short on vision but at least an attempt to confront our problems, however ill defined.

Why Gunns is teetering

What company has received $500 million in cash from the issue of new shares over the past three years but only has a market value of $300 million?

Why Gunns, of course.

What company, when faced with the daunting prospect of repaying or renegotiating almost all its borrowings of $600 million within 12 months, pretends that the announced sale of all assets is to finance a new pulp mill rather than to enable the solvency declaration to be signed?

What company, having announced the sale of all assets, will be forced to publicly reveal in its annual accounts the write down of the values to reflect current market offers rather than pie-in-the sky expectations?

What unprofitable company, whose operations have been sold, about to be sold or closed down, can still claim “underlying profit” of $40 to $50 million?

What company, operating in the native forest sector with decrepit assets and diminishing markets, is demanding compensation for a cessation of its loss-making activities?

What company failed to foresee the decline in global demand for native forest woodchips, yet nevertheless books income from plantations not due for six years as current year income?

What company brazenly tells the market that it is confident of gaining finance of $2.5 billion without a joint venture partner —  but is yet to reveal the new business case despite adverse exchange rate movements, the proposed sale of all forestry assets and the plummeting market assessment of its assets?

What company has not bothered to explain a material matter as to how second and third rotation tree crops needed as feedstock for a pulp mill, will be arranged and financed now that MIS schemes are defunct and plantation land about to be sold?

That’s right, Gunns, in every case.

Death throes?

There is nothing particularly new in the latest statement by Gunns to the ASX.

Except maybe that “that reported statutory earnings for the period may vary materially from prior comparative periods, due to the effects of asset valuation adjustments arising from asset sale processes”.

This means that the bottom line will cop an absolute shellacking from all the asset write downs. It is likely to be a large red number. Gunns are forewarning the market.

Forestry Tasmania's secret

Last week both the Mercury and the Examiner reported Forestry Tasmania’s refusal to supply cash flow information to the Leg Co Committee looking at FT’s financial performance. (ABC report on TT HERE)

Winners and losers

 

Finance & Economic Aspects of Gambling in Tasmania

There’s no denying that the election of Andrew Wilkie to a position on the cross benches in a Parliament with a minority Government has propelled the issue of gambling into the public policy spotlight.

And rightly so.

It is a many faceted issue.

The obvious social implications of gambling are foremost in most discussions.

But there is also a fiscal aspect to gambling as it raises about 11% of total State taxes, about $100 million out of total State taxes of $880 million for 2010.

Lotteries, wagering and Betfair produced $40 million of State revenue, leaving $60 million raised by table gaming, keno and electronic gaming machines (EGMs).

Gunns, FT and cash flow problems

Questions about Gunns'  and Forestry Tasmania's cash flow problems abound Charles(#9)asks

1. Forestry Tasmania FT has an increasing overdue credit portfolio, which has risen steadily over the years to $40 million?

Comment: This is essentially correct. FT’s trade receivables at 30th June 2010 were $38.5 million, after writing off $1.2 million worth of bad debts for the year. $6 million were GMO JV receivables, the balance related to its own receivables.

Flanagan L'Estrange exchange

It was pleasing to see Greg L’Estrange put pen to paper by replying (HERE) to Richard Flanagan (HERE) rather than rely on the bland response of his media department. It does enable a reader to pick up nuances that are otherwise lost.

It was a tad arrogant however to suggest as Greg did that Richard has a simple view of the world. A different view perhaps?

Greg's Chutzpah

He’s done it again.

This time in broad daylight.

Under the gaze of thousands of Gunns’ watchers, CEO Greg L’Estrange has once again manufactured a few book entries to help Gunns achieve a modicum of P&L respectability.

That boy certainly has chutzpah.

Bartlett's mess

It’s not uncommon for people from all walks of life to take credit for the favourable decisions and blame the rest on circumstances beyond their control.

Politicians are probably keener than most to take credit for the good stuff.

Forestry tasmania's cover up

Sue Neales was on the right track with her story titled $22m in forest funds sit idle (HERE)

The story regarding unspent funds received by Forestry Tasmania as part of the Tasmanian Community Forest Agreement TCFA was immediately rebutted by FT’s Hans Drielsma (HERE) who denied any hoarding of funds saying a prudent plan was in place to spend the remaining $22 million, a figure from internal FT spreadsheets obtained under RTI and referred to by Sue Neales.

But the truth is much worse, if one chooses to believe Mike Blake, the Auditor General. The TCFA future commitments far exceed the available cash on hand. There is an eerie resemblance between FT’s use of TCFA funds to operate and Mr Aird’s use of the SPA account to fund current Government programs.

Let’s start at the beginning.