Just what is happening with Gunns?
On 15th May 2012 it requested ASX extend
its listing suspension pending recapitalisation which it anticipated might take
an indefinite period.
Gunns advised that
·
The Victorian Heyfield timber mill sale agreement
was finally executed. The enterprise value was reported at $28 million.
·
The sale will end native forest operations for Gunns
in Victoria following similar moves in WA and announced intentions in Tasmania.
·
The
sale of Green Triangle assets was proceeding (as it has for the last 12 months)
·
Indicative
offers had been received for the mainland plantation assets (in other words the
Great Southern MIS management rights) and the Portland woodchip facility and a
structured sale process had commenced.
·
Mr L’Estrange
had his term extended until 31st December 2012.
The sale
of the company’s last hardwood sawmill at Heyfield in Victoria has been close
to completion for a long time. The enterprise finally achieved a sale value of
$28 million. At 31st December the enterprise was valued in Gunns’ books at $44
million according to the February 2012 Analysts’ Presentation.
When the
term ‘enterprise value’ is used it usually means that liabilities such as
accrued employee benefits as well as assets such as receivables and inventory
are taken on by the purchaser. It is not known whether the monies reportedly
owing by Gunns to the Victorian Government have been paid or will be assumed by
the purchaser. The Age reported on Feb 4th 2012:
“Last
financial year Gunns owed Victorian taxpayers $7.2 million for sawlogs from
state forests. The company says it has started to pay back this debt.”
The sale
of the remaining Green Triangle assets comprising 33,000 hectares of plantation
land and 12,000 hectares of land and softwood plantations has been a tortuous
process.
Together
with the 33,000 hectares of softwoods sold by Gunns 2 years ago to GMO
Resources, these assets are being rebundled into a new entity to be managed by
New Forests.
“Funds
managed by New Forests have taken a controlling interest in the 46,000 hectare
Auspine estate. New Forests’ Australia New Zealand Forest Fund is the lead
investor in the transaction, which includes the land and trees of the
64-property estate, formerly owned and managed by Gunns Limited. The plantation
estate will be managed by Sydney-based New Forests, an investment manager
specializing in sustainable forestry and associated environmental markets.”
Gunns
has an interest in this new entity which it says is worth $120 million. It is
trying to sell this interest as part of its debt reduction strategy.
The way
this deal has been structured emphasises the ownership structures that are
largely replacing the ridiculously inefficient MIS structures and moribund
State owned plantation businesses.
Timbercorp
was the first major MIS Company to venture into Voluntary Administration and
then Receivership. Some of the MIS schemes were on externally leased land, some
on Timbercorp’s land, a total of 95,000 hectares of trees of which 39,000
hectares was on Timbercorp’s land.
The
Receivers acting for the banks controlled the whole deal. Leases weren’t being
paid, the banks wanted their money so the Receivers wound up all the MIS
schemes and sold the land and trees collectively for $345 million. Growers,
many of whom felt they were being shafted by the sale process, ended up with
$198 million, just over $2,000 per hectare, much less than their initial
investment. The 39,000 hectares of land was therefore worth $147 million.
The
Great Southern wind up took a different course. The early schemes were
continued until harvest, Gunns took over 9 schemes and the 2 newest were wound
up.
The
Australian reported on 13th January 2010:
“THE
Perth office of receiver McGrath Nicol has begun a formal legal application to
wind up two orphan elements of defunct rural operator Great Southern Group, its
2007 timberlot plantations and its 2008 renewable fibre project.
The
two elements of the group’s managed investment schemes attracted no interest
from potential replacements as Responsible Entity, unlike the nine schemes
planted between 1998 and 2006 whose management was taken on just before
Christmas by Tasmanian timber group Gunns.
Without
an RE, the two most recent Managed Investment Schemes appear to be doomed as
they are a long way from harvest, and insolvent.”
Great
Southern had earlier tried to buy back all woodlots as part of Project
Transform announced in September 2008. One quarter of owners agreed and swapped
their woodlots with soon to be worthless Great Southern shares, but Great
Southern continued its inexorable journey into Administration and Receivership.
Great
Southern owned about 270,000 hectares of land of which 167,500 was considered
productive. In January 2011, a syndicate managed by New Forests comprising
Alberta Investment Management Corporation, a Canadian pension fund (73%) and
Australia New Zealand Forest Fund (27%), the same entity involved in the
purchase of Green Triangle and Forestry Tasmania’s JV assets, acquired the land
from the Receiver, McGrath Nicol for $415 million, reportedly at a 40% discount
to the original cost price.
At the
time the possibility of buying the MIS woodlots was floated as a possible
future course for the New Forests managed syndicate.
This is
now increasingly looking like a distinct possibility.
When
Gunns took over as Responsible Entity of the nine Great Southern Projects, the
rules were changed. Originally Great Southern contracted with grower/investors
to manage the Projects on a deferred fees basis in consideration for the high
entry fee paid, all of which was spent. A new Responsible Entity would incur
huge losses if it were to proceed on this basis.
Accordingly
the investors agreed to reimburse Gunns at harvest time for costs incurred by
Gunns during its management period. Growers are now awakening to the reality
that the meagre future harvest proceeds will be further hammered by the
reimbursement required to the Responsible Entity. Future expected yields of
about 160 tonnes per hectare revealed in September 2008 as part of Project
Transform haven’t shown much improvement and now Growers will lose even more of
their harvest proceeds.
The
Growers have been softened up enough for a possible low ball takeover by New
Forests. To combine the ownership of both land and trees makes economic sense
for New Forests.
Gunns
purchased the management rights to nine Great Southern projects, which was
widely interpreted as part of Gunns’ plan to ensure they had sufficient
plantation feedstock for the pulp mill.
The
February Analyst’s Presentation listed the Great Southern MIS business as an
operation ‘to be discontinued’ not as ‘an asset for resale’ but a business to
be discontinued. This appears a little strange because Gunns has been bringing
to account as future income its share of future harvest commissions so it
appeared to believe it was worth a lot more than the purchase price. But now
the business will be discontinued.
There
doesn’t appear to be a categorical statement from Gunns confirming what is
proposed and there has been no talk of a replacement Responsible Entity which
is mandatory if the MISs are to continue.
Which
suggest the purchase of trees from the Growers is a distinct possibility.
New
Forests would almost certainly be the likely purchaser.
If Gunns
resigns as Responsible Entity and New Forest gets control over the trees at a
bargain price, New Forests may be more favourably disposed to acquiring from
Gunns its interest in the new Green Triangle entity.
The
possible downside for Gunns is if it needs feedstock for the pulp mill it will
have to pay more. Naomi Edwards in her January 2011 pulp mill analysis update
included the stumpage price for Great Southern plantation timber at $20 per
tonne. An investor like New Forests would require a higher figure, possibly
somewhere between $35 and $40 to give it an acceptable rate of return.
The
third example of a MIS company wind up is FEA. The Voluntary Administrator is
running the company for the benefit of the shareholders, creditors and
grower/investors subject to the right of the secured creditors, the banks, who
have appointed Deloittes to look after their interests as Receivers and
Managers.
The Administrator
no doubt has learnt from the experiences of Timbercorp and Great Southern
although factual situations always differ in some way.
The
Administrator found “the group’s affairs were restructured over time in ways
that have tended to enhance the interests of its secured creditors at the
expense of unsecured creditors, shareholders, and investors in the Managed
Investment Schemes.”
Furthermore
he wryly observed that ”the secured creditors have indicated that they regard
themselves as uniquely entitled to market the land and trees for sale; to do so
without reference to other creditors, and subject only to limited duties owed
under the Corporations Act. They also contend that all of their debt, inclusive
of penalty interest, and the costs of the Receivers and Managers, ought to be
paid in priority to the claims of both Growers and unsecured creditors of the
companies. All these issues remain to be resolved…”
There is
“a need to preserve Growers interests ......within the context of steps taken
by the Receivers to terminate internal leases.”
FEA
growers have been more fortunate than their Timbercorp counterparts as the
Administrators have battled with the Receivers acting for the banks who would
have preferred a Timbercorp style solution.
However
Growers have been required to dip into their pockets to provide funds to the
Administrator to keep their Projects alive.
The
banks have further distinguished themselves by refusing to make contributions
in respect of the Woodlots which they now own as a consequence of default,
usually loan default, by Growers. Needless to say, this has jeopardised the
future of the Projects, which is precisely what the banks have been trying to
achieve.
The
Administrator accepted a detailed plan, which eventually failed, whereby Rural
Funds Management RFM planned to restructure FEA by introducing institutional
funds of $85 million for a 50% interest, with growers having a 48% interest and
FEA creditors being granted a 2% interest, plus an extra $100 million to be
advanced by a NAB. The gross assets therefore had a market value of $270
million after restructure costs. With $34 million of cash working capital and
the 67,000 hectares of plantation belonging to the Growers valued at $113
million, this left only $123 million as the implied value of the productive
land being the FEA land growing investors’ crops of 44,000 hectares (the
balance of Growers crops are on leased land).
That
implies less than $2,000 per hectare for the trees (equal to the costs of
establishment), and about $3,000 per hectare for the land.
The
trend towards aggregating land and trees into one entity is sure to continue
and is almost certainly occupying the mind of Gunns’ de facto Voluntary
Administrator as plans for a $400 million capital raising continue.
The multitude
of leases to MIS growers severely inhibits any dealings with the land even more
so than the mortgages and it’s finally dawned on Gunns that it needs to tidy up
the ownership of the land and trees.
Even if
a pulp mill does not proceed it is clearly in everyone’s interest to tidy
things up lest a repeat of FEA’s mess ensues.
Gunns
has chopped and changed plans for its hardwood plantations and trees over the
years, whether to retain them within Gunns? to sell to a third party? (who
would buy with all the MIS leases in place?) and now it would appear, whether
to purchase the Woodlots from Gunns’ MIS growers?
What are
the woodlots worth? With 106,000 hectares of Gunns’ MISs at about $2,000 per
hectare makes $200 million. Less say $100 million if New Forests buys Gunns’
interest in the new Green Triangle assets.
There’s
about 58,000 hectares of Gunns’ own plantations including those in JV
arrangements, Tamar Tree Farms etc. These are listed in the books at $3,000 per
hectare, or $187 million in total, which seems to be a little higher than
recent market sales. Plantations vary a lot, Gunns has some good ones but also
some pretty crappy paddocks. The Surrey Hills plantations aren’t known for
rapid growth.
It will
be interesting if Gunns makes an offer to its MIS growers and what that offer
will be.
Gunns’
plantation land of about 150,000 hectares is listed in the books at about
$3,000 per hectare or $418 million in total. Again it’s difficult to compare
with recent market sales, some land may be better, some worse, with the Surrey
Hills spread struggling to register a value, if James W Sewall Company, FT’s
valuer, applied their methods. See
Hence if
Gunns does consolidate the hardwood plantation trees and land, say 150,000
hectares, they would have to be worth at least $600 million, which together
with what been spent to date at Longreach may be enough to stay in the poker
game. Even so this doesn’t guarantee a JV partner fronting with a matching
stake.
As a
fallback position, at least Gunns will have some freehold plantations worth
something, albeit well underwater when compared to the amounts contributed by
shareholders.
Gunns’
February Analysts’ presentation detailed the cost of pulp landed in Shanghai at
US$355 with the exchange rate at $1.05 and after netting off the revenue from
selling surplus electricity into the Tasmanian grid. The gross manufacturing
costs for one tonne of pulp were US$ 387, with a wood fibre content of US$245.
In AU$
terms the implied figure was $233 for the costs of the wood fibre, or $58 per
tonne of green chips. This is a mill door price which suggests that some of the
wood must be from internal sources which seems to further suggest that a
buyback of MIS woodlots is on the cards.
Naomi
Edwards estimated in January 2011 that the average stumpage for Gunns’
woodchips was $28 per tonne green, but this was weighted down with the cheaper
chips from Great Southern plantation. If Gunns loses control of the latter then
the price will rise.
Then
there are the costs to the mill door estimated by Naomi Edwards to be between
$29 and $37 per tonne of green chips. These costs have a habit of rising in
real terms. The $58 figure for a mill door delivered tonne of green woodchips,
derived from Gunns’ figures, seems to be at the bottom of the possible range.
Then
there’s the question of where will all the chips come from? OK so Gunns has
150,000 hectares but about 250,000 hectares will be needed to feed a mill. FT
has about 56,000 hectares but much of that is supposed to replace the native
forest resource in the future.
Private
growers will require $35 to $40 per tonne if they are to be attracted to
growing plantation trees for pulp. There haven’t been many plantings in the
past 3 years and future plantings will inevitably lag any pulp mill go ahead
decision by a few years, so it will be some time before there’s any chance of
increased private plantings.
If Gunns
has to fund all the new plantings then the cash flows will look a little
different.
The
entire unanswered questions will remain so until details of the capital raising
are announced and the trading suspension lifted.
But the
odds are firming that we will see a continued aggregation of land and trees.
Meanwhile
as the world changes and adapts to life after the GFC without MISs, the
extraordinary admission in Thursday’s State Budget that the State Government is
contemplating funding Forestry Tasmania FT is a reminder that plus ca change
plus c’est la meme chose.
The
responsible Minister, Bryan where-do-I-sign Green, continues to astonish with
the revelation that FT is being considered for a $100 million boost in addition
to a refund of the payment to the Government of $10 million in 2012/13 relating
to the sale of the softwood resource which involved the de facto lease of Crown
land to a cashed up investment fund New Forests rent free for the next 57
years.
That’s
$35 million for next year and $25 million per annum thereafter.
Apart
from native forests and a small area of softwood, FT is now only responsible
for about 56,000 hectares of hardwood plantations. Of this 23,000 hectares is
privately owned, either outright or as part of a JV with FT, about 13,000
hectares are ‘the most expensive plantations in the world’ planted with the $90
million TCFA monies which won’t produce a positive cash flow for 20 years,
leaving about 20,000 hectares, not much bigger than a large farm. And they’re
going to get another $110 million? Not to plant more trees I hope. The last of
the 3,000 TCFA hectares is still not planted according to 2011 reports
ostensibly because of lack of suitable land.
To put
this into context, if one were to exclude the 50 % of FT’s revenue that relates
to harvesting and transport to the mill door or wharf as the case may be, which
is immediately paid to contractors as reimbursements, in other words to include
as revenue only the stumpage sales, FT’s income next year will be lucky to be
$35 million.
Yet Mr
Green proposes to give the company an amount equal to its revenue, to help meet
changes in circumstances, most relating to circumstances which every other
business has had to face without Government assistance or which wilful
blindness prevented the Government and FT from seeing when it was obvious to
everyone with an enquiring mind.
The
failure to factor in a decline in native forest woodchipping was an act of
wilful blindness.
As was
overlooking the fact that MISs were a bubble waiting to explode. How could such
a sham last forever? How could a North Shore dentist leasing 1/3rd of a
hectares to grow poor yielding timber notwithstanding he might have agreed to a
Constitution, a Lease or Forest Right Agreement with a Responsible Entity, a
Compliance Plan, a Plantation Management Agreement, a Lease with a Landlord and
possibly a Loan Deed be regarded as sensible and sustainable public policy.
Yet Mr
Green as Minister continued to support MISs via submissions and approaches to
the Federal Government to the very end.
Wilful
blindness and non cooperation with the Auditor General prevented an early
release of his damning report into FT by at least 2 years.
Wilful
blindness and procrastination delayed the appointment of a Review into FT.
Wilful
blindness led to the appointment of URS to conduct a review into FT,
overlooking URS’s contribution to FFIC ‘s now lapsed New Forestry Plan which
forgot to eliminate intermediate goods and services when listing the output of
the New Forest Industry, leading to a virtual doubling of proposed turnover of
the industry.
With the
forestry peace combatants lying semi comatose on the canvas at the end of the
14th round of their scheduled 15 round contest, wilful blindness is now preventing
recognition of the fact that the old forestry industry is dead.
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