The
announcement gives a little more context to the going concern deliberations
currently occupying the minds of both Gunns’ and FT’s Directors.
This
time last year Gunns was contemplating the year ahead:
“The Company has completed a number of
transactions to focus its operations. There are a number of significant
transactions remaining to be closed in the course of the current year. These
include teh the sale of our MIS loan book, completion of the Green Triangle
forest estate sale and the financial closure of the Bell Bay pulp mill equity
investment”.
None of
the significant transactions referred to above were completed during the year.
The
Board contemplated life without the possible completion of the transactions and
concluded it was still reasonable to continue to adopt the going concern basis
when preparing the financial statements. This was best described in a Note
contained in last year’s financial statements.
“Should the ability of the consolidated entity
to realise sufficient cash flows from trading operations, secure additional
lines of finance or the sale of assets be restricted, the consolidated entity
will actively pursue alternative funding arrangements and institute additional
measures to preserve cash. These may include (but are not limited to) further sales
of assets (refer Note40 – Events subsequent to balance date), working capital reductions,
accessing capital markets and further restrictions of operating and
non-essential capital expenditures.
The Directors have also considered the
ability of the consolidated entity to obtain alternative sources of debt
finance or refinance senior debt at or before its maturity date of January
2012. The ability and timing of the consolidated entity to secure long term
debt financing beyond that date cannot presently be determined with certainty;
however management and Directors are confident that new banking arrangements on
mutually agreeable terms and conditions will be established prior to the
maturity date of the existing facilities.
After making enquiries and considering
uncertainties described above, the Directors have a reasonable expectation that
the consolidated entity will have adequate resources to continue to operate and
meet its obligations as they fall due for the foreseeable future. For these
reasons the Directors continue to adopt the going concern basis in preparing
the Consolidated Financial Report.”
The
Directors dodged a bullet in January 2012 when banks agreed to extend loans
until December 2012. It wasn’t a completely charitable gesture by the banks as
Gunns had to agree to pay a further bank fee of $30 million.
It is
always a little difficult to ascertain the size of Gunns forest estate here in
Tasmania partly because of the different measures bandied about eg area under
management vs area owned freehold vs area with plantations owned by Gunns vs
net plantable areas.
Overall
Gunns manages plantations of 341,000 hectares. Of these 53,000 hectares are
softwoods, almost all in the Green Triangle (ex Auspine). Most of the Green
Triangle softwood trees have been sold and Gunns have been trying to sell the
land for ages (see above).
That
leaves 288,000 hectares of hardwood plantations under management.
Approximately
130,000 hectares of MIS plantations were taken over by Gunns from Great
Southern. All are owned by MIS growers on leased land and all except about
9,000 hectares are located on the mainland, mainly in the Green Triangle and in
the South West of WA.
That
leaves approximately 167,000 hectares of managed hardwood plantations in
Tasmania. Two thirds are managed on behalf of MIS growers with the remaining
one third growing trees owned by Gunns, some in a joint venture arrangement
with third parties.
Hence
only about 100,000 hectares of hardwood plantations in Tasmania are growing on
Gunns’ land, with about half belonging to MIS growers. The balance of Gunns’
managed plantations almost all belonging to MIS growers is on land leased from
third parties.
This
means only about 50,000 hectares are Gunns’ trees on Gunns’ land.
Gunns
only owns a total of about 200,000 hectares of freehold land in Tasmania, but
92,000 hectares is classed as non-wood production areas mainly native forests
withdrawn from production or areas unsuitable.
There
have been few plantations established in the last 5 years. With the youngest
plantation being 4 to 5 years old it is possible to assess eventual yields to
within 10% for the short rotation crops. The value of these trees is currently
affected by depressed pulpwood prices which in turn reflects the value of the
underlying land.
The
biggest current uncertainty when trying to assess the value of plantation land
is what will happen once the crop is harvested. There was a time when it was
blandly assumed that more MIS investors would easily be found to finance second
rotations. But no longer.
It’s got
to the stage where if a landlord may become responsible for post harvest
replanting and/or cleanup the huge depressive effect on plantation land values
may well mean the land has close to a nil value from an investment viewpoint.
What
will be weighing on the minds of shareholders being asked to contribute another
$400 million on top of the $500 million contributed in the last 4 years, almost
all of which has vanished, is what is the value of the freehold land owned by
Gunns or more specifically, who will pay the replanting/cleanup costs—- Gunns
or the existing growers.
If it’s
the former then the land with third party crops has probably a nil value, the
land with Gunns’ own crops may have some value (much is the stunted plantations
at Surrey Hills behind Burnie), and the native forest plantations are worth
maybe $1,000 per hectare on a good day with a fair breeze.
Possibly
only $150 million to $200 million in total for the land plus say $100 million
for its own plantations, a far cry from the $600 million book value.
That is
why Gunns admitted to the ASX on 1st July that it will have to revalue its
assets as at 30th June. It is unlikely that the book value of its softwood
sawmills will escape unscathed from any revaluation.
It is
facing serious going concern problems, investors have baulked at putting in
more funds.
It
looked for a while that shareholders might opt for one more spin of the wheel,
to consolidate the land and trees into one ownership structure, but the numbers
are so unfavourable it starting to look like a case of good money chasing bad.
Forestry
Tasmania FT will also need to write down the value of its hardwood plantations.
It too will need to assess its going concern situation. The $78 million from
the sale of its 50% share of the softwood JV suggested liquidity problems were
solved for a year or two, and a continuation of its three year prayer mat vigil
might solve longer term going concern issues.
This is
what FT’s Directors said in their Report, dated 15th August almost 12 months
ago on the matter of its going concern status when preparing the annual
financial statements.
Forestry
Tasmania’s operating result, together with the ongoing uncertainty around the
Tasmanian Forests Intergovernmental Agreement and the Statement of Principles
and their possible impact on the business, have caused the Directors to review
the appropriateness of continuing to prepare the accounts on a going concern
basis. The current trading outlook presents significant challenges in terms of
sales volume and pricing and in these circumstances there are material
uncertainties over future trading results and cash flows. In addition, the
effect on the business of the Agreement and Principles is yet to be finalised
but it is possible that they will lead to a significant reduction in the
resource available for harvest and sale.
Also
relevant is that the State Government has commenced a strategic review of
Forestry Tasmania. The outcome of this review may or may not increase the
uncertainties surrounding Forestry Tasmania’s operations.
The
Directors have concluded from this that the combination of these circumstances
represents a material uncertainty on the operations of the business.
However,
the Directors note that:
•
there are signs of improved demand for forest products, pricing is improving
and Forestry Tasmania has reduced its costs significantly;
•
measures have been instituted to preserve cash, additional sources of finance
have been secured and other initiatives are being considered including asset
sales;
• it
is likely that assistance will be received in restructuring operations and the
balance sheet;
•
appropriate enquiries of the relevant ministers have been made and, bearing in
mind the uncertainties described above, the Directors have concluded that the
Group and the Organisation will receive ongoing support and adequate resources
to continue in operational existence for the foreseeable future.
Taking
into account all the above factors the Directors have concluded that it is
appropriate to continue to adopt the going concern basis in preparing the
financial report.
FT
displayed its usual unjustified optimism with regard to improved demand and
lower costs but at least the Directors appeared to consider the possibility
that further Government assistance/compensation, in addition to the more than
$220 million granted since corporatisation 17 years ago, might be necessary to
satisfy going concern requirements.
In
December 2011 the unlikely tag team of Messrs Gutwein and Booth quizzed FT at
an Estimates hearing. Mr Gordon from FT responded at one point:
“So
we said, ‘Okay, let us model a scenario where the future looks like the volumes
in the IGA.’ We then ran a series of scenarios to sell the softwood joint
venture and we assumed that we would get our reserve price for it or keep the
softwood joint venture. We also looked at a series of other scenarios about
when we could harvest our plantation assets. Again that depends on basically
whether they end up being sliced, peeled or sawn. Under those scenarios FT has
an operating profit and retained earnings sufficient to retain cash in the
business, pay tax and a dividend for each of the next 25 years.
We
also included the very significant reductions in operating costs that we have
done in the last three years, from 540 staff to 340-something today. We have
factored in the other savings we have made in terms of roading costs and a
whole range of other things. When you take into account substantially reduced
income, as we have modelled, compared with cutting 300 000 cubic meters of
sawlog we are still in a position where we can return a profit, a dividend, pay
taxes and maintain a cash balance necessary to have some capacity for
investment in new activities and to pay our way.”
That
looks awfully like an implicit denial from Mr Gordon that he was not a modern
day Capt Edward Smith heading towards an iceberg in the North Atlantic and that
really, everything was under control. To repeat “...........we are still in
a position where we can return a profit, a dividend, pay taxes and maintain a
cash balance necessary to have some capacity for investment in new activities
and to pay our way.”
Barely
six months later following the Government belated appointment of URS as a
Strategic Reviewer it appears that FT is facing chronic cash flow difficulties
with Treasury advising Leg Co members of a cash flow shortfall of $35 million
for 2012/13. Hence the appropriation of $35 million in the Budget and a total
of $110 million over the Forward Estimates period, was needed just in case FT
was to keep trading for a further 4 years without any changes to its errant
ways.
But the
most bizarre reaction was from the rusted on FT supporters who overlooked the
fact that at worst Mr Gordon had misled Parliament and at best had raised
serious doubts about his transition from driving a Pulp Mill Taskforce Bus to
driving a GBE with all the attendant fiduciary responsibilities to
shareholders, creditors and employees, and instead decided if opprobrium should
attach to anyone it should attach to Mr McKim for daring to suggest that
business as usual at FT was not an option.
Mr
McKim’s was hardly a radical view. In fact the Auditor General went further
when he was particularly scathing about FT’s inadequacies in a draft report on
FT’s performance in April 2009. He said “without stronger financial
performance, investment in roads and plantations over the past 15 years will
not yield future benefits to Forestry and arguably should be expensed rather
than capitalised. On that basis, it can be argued that ordinary operations from
1994 to 2008 have yielded little profit.”
In other
words if all the compensation money received so far, over $220 million, won’t
yield future benefits, then why entrust FT with any more?
The pro
forestry cheerleaders are almost at the stage where they’re acting as double
agents, by further undermining the industry with their consummate lack of
understanding of the loss of equity from the industry over the last few years
and the distortion of the contribution of the industry to the State economy.
We keep
hearing that forestry is an $800 million pa industry, or if a really large
number is required, the level of economic activity is $1 billion plus.
But
these are all measures of what is essentially turnover, apparently derived by
adding intermediate outputs with final outputs to get a grossly inflated figure
for the contribution of the industry, camouflaging the loss of capital
essential for any industry to thrive which in turn inevitably casts a pall over
the future industry as envisaged by the spruikers.
Four
years ago Gunns’ balance sheet revealed its net worth or equity position at
about $1 billion. Since then shareholders have contributed a further $500
million but the company has probably a zero value given the lack of enthusiasm
by instos to contribute more and given that more asset write downs are now occurring.
That’s a loss of capital of $1.5 billion.
Let’s be
quite clear about this, loss of equity doesn’t happen when assets are sold and
loans repaid, it happens when assets are worth less than book value and when
operating losses persist.
Four
years ago FT’s equity was $550 million, last year it was $146 million. Today,
with a revaluation of its remaining hardwood plantations and continuing losses,
FT could go close to registering a zero equity position———a little bit of
working capital, a few trees, a few roads on land it doesn’t own offset by an
unfunded superannuation liability which at last count was $122 million.
Between
Gunns and FT the loss of capital over the last 4 years is almost $2 billion.
That
this is not of sufficient concern to warrant a comment from the spruikers is
simply mindboggling.
A lot of
comments on FT focus on the operating profit. Sure it’s been a bit negative,
but these are tough times, but forestry is still a $800 million industry, blah,
blah, we’ve heard it lots of times. But the entire capital base has gone, at
least from major players like Gunns, FT and FEA.
I recall
FT’s current Chairman saying to an Estimates Hearing just over 3 years ago:
“Much
has been made of the …. loss recorded by Forestry Tasmania, and it is worth
explaining in layman’s terms how that figure came about when the operational
profit was $8.5 million. In any business accounting, accountants calculate the
value of the physical assets held in that business……. it is my view that this
valuation number is a somewhat theoretical number. In financial terms, a better
measure of how we are travelling is the operating profit or loss.”
I wonder
if the Chairman would make the same comment now that all FT’s equity has
disappeared.
It is
troubling that a GBE Chairman finds presenting a meaningful balance sheet a
little theoretical.
The
corollary is if valuing trees is theoretical, on what basis investors are
supposed to use if they are to consider an investment in the forest industry.
If they don’t go through a similar exercise by estimating likely future
proceeds and costs and trying to assess whether an investment is worthwhile
then what are they supposed to do, flip a coin?
Therein
lies the crux of the problem. Plantation land has lost value, expected future
returns are unattractive. Hardly any investment for the last five years and
unlikely to suddenly resume. We await the outcome of the IGA deliberations as
they concern native forests, but meanwhile the plantation industry too is as
good as dead. Capital and equity has vanished. Without it an industry will find
it difficult to grow.
It’s a
microcosm of what’s happening everywhere. If overseas Governments weren’t
already insolvent, rescuing insolvent banks which needed to be recapitalised
following plummeting asset values, soon fixed that.
The IGA
process might be flawed and unrepresentative but there won’t be anything
better.
The Libs
cling to the mistaken idea that the industry will survive and will trade out of
its problems, seemingly oblivious to the eroded balance sheets that pervade the
industry. Their potholed Road to Recovery dependent on diverting FT
appropriations will become impassable if FT needs more funds.
Threats
to tear up the agreement are lamentably short sighted, especially when no
alternative blueprint is presented except maybe a belief in the confidence
fairy.
Without
capital the task will need more than a magic wand.
It’s
time stopped we deluding ourselves and moved on.
No comments:
Post a Comment