Thursday, 5 December 2013

A new forest way?


Reconstruction of the forest plantation industry continues at a lawyerly pace largely away from media glare.

What happens in the next six months or so will determine a future framework for tree plantations.

Liquidator PPB Advisory is in the final stages of terminating all Great Southern MIS schemes with the recent signing of a contract for the sale of most of the growers’ trees.
The following table contains an indication of the likely returns per woodlot:

No. Investors(1)
Hectares(1)
Estimated return per woodlot(2)
1998
1,814
134
$6.07
1999
2,269
344
$3.09
2000
4,989
11,547
$21.58
2001
2,057
4,453
$58.17
2002
2,254
5,904
$369.57
2003
4,391
18,960
$299.67
2004
7,528
27,327
$6.29
2005
7,465
26,723
$9.92
2006
6,357
23,447
$4.95
39,124
118,839
(1) PPB Advisory  report to creditors Feb 2013
(2) PPB Advisory grower update Nov 2013

 

It must be noted that Great Southern’s woodlots were 1/3rd of a hectare in size. A $3 return for a 1999 woodlot probably planted in 2000 with an expectation of growing 83 tonnes per annum doesn’t seem much of a return for a $3,300 (including GST) investment.

That’s the good news.

The bad news is the amount is taxable, the proceeds from conducting a business.

The purchaser is, as expected, New Forests, the landowner who acquired most of Great Southern’s land (not the trees) when Great Southern was liquidated. The Great Southern MIS schemes (the trees) were kept alive when Gunns Plantations assumed the role as Responsible Entity in January 2009.

Apart from an upfront fee of almost $10,000 per hectare of which about $2,000 was needed to fund tree planting, Great Southern schemes were conducted on a deferred fee basis, whereby the Responsible Entity agreed to maintain the crops and pay all outgoings in return for 5.5% of harvest proceeds.

When Gunns Plantation took over, scheme constitutions were altered entitling the Responsible Entity to  roughly 5% of harvest proceeds for each year until harvest. Growers despite having already paid an exorbitant upfront fee had no option but to agree to the additional fee.

Needless to say when the Gunns Group went into voluntary administration and subsequent liquidation, outgoings on behalf of growers ceased. Gunns stopped paying rent to landowners including those with land growing MIS crops.

The largest landowner by far is New Forest who has now agreed to buy the trees growing on its land. PPB Advisory acting for the MIS growers has revealed that 106,000 hectares of the total 119,000 hectares taken over by Gunns Plantations will be sold.

PPB is also negotiating to sell the remaining 13,000 odd hectares of trees on leased land to the 60 odd landowners. PPB doesn’t appear to be in much of a negotiating position as it has signalled its intention to wind up all schemes, meaning all trees will have to be sold. Rental arrears and possible replanting or restoration costs all but rules out interest from other tree buyers who would have to accept an assignment of the land lease or negotiate a new one.

It’s difficult to imagine landowners having to pay much to acquire the trees growing on their land. Since Gunns’ insolvency landowners have been coerced by PPB, acting on behalf of growers, from taking over trees growing on their land despite unpaid rent and requisite eviction notices furnished by landlords pursuant to the leases.

But that’s all about to change

It is not clear how much New Forest will pay for the trees. The practitioners involved in current MIS insolvency matters (Gunns and FEA) are all trying to sell trees and have kept mum about prices, as they have also done about tree yields, ostensibly for commercial in confidence reasons but probably to avoid giving the squadron of class action lawyers, watching intently from the sidelines, any reason to commence an ambulance chase to nail the original promoters for their ludicrous, often baseless, possibly fraudulent projections.

Any rental arrears due to New Forests were undoubtedly subtracted from the tree purchase price otherwise payable by New Forests.

The indicative grower return in the above table implies, at a guess, about $24 million or about $225 per hectare for 106,000 hectares. The latter figure is as disclosed by PPB. On the other hand New Forests disclosed they are only acquiring approximately 80,000 hectares of trees from PPB. The reason for the difference is not immediately apparent. Some of the ex Great Southern land with MIS crops, deemed unsuitable by New Forests, is already believed to have been on-sold. Temma Farm, for example, home of MIS plantings in 2006 is understood to be back in the hands of cattle farmers. Maybe that accounts for some of the difference? New Forests, if having already on-sold the land, has excluded those areas?

Growers will receive what’s left after PPB (the Liquidator in this instance acting for the growers) and Korda Mentha (Gunns’ Receiver looking after the banks’ interests) remove amounts to cover costs incurred during the insolvency period. There is also $5 million still owing for costs incurred during Great Southern’s first insolvency period prior to Gunns Plantations taking over as Responsible Entity.

It’s difficult to estimate the costs that will be deducted before sale proceeds are paid to growers. If it were $10 million, say, then the all up purchase price for 106,000 hectares of trees may well be about $35 million, giving a per hectare cost of only $300. This compares to planting costs of $2,000 and the initial fees paid by growers of $10,000. Sounds like a good deal for New Forests.

New Forests, in actual fact, is only an investment manager, looking after institutional funds via a series of trusts.

New Forests raised $490 million via the Australia New Zealand Forest Fund (ANZFF) in 2010 and $570 million via ANZFF2 in June2013. Both funds are managed by New Forests.

ANZFF has acquired investments separately and also participates in joint ventures.

ANZFF acquired the 45,000 hectare softwood plantation estate in Tasmania from Forestry Tasmania and its 50% partner GMO Resources in 2012 for $156 million or about $3,500 per hectare for a mixed aged estate, from new plantings to ready-to-harvest trees. The trees were purchased via a forestry right issued pursuant to the Forestry Rights Registration Act 1990 which gives a right to use land without paying any rent whatsoever to the landlord, the Crown in this case until 2069. The trees are contracted to the Bell Bay sawmill, originally built by FEA, then sold to Gunns before being acquired by Timberlink Australia P/L.

Timberlink, believed to be wholly owned by ANZFF, bought the softwood sawmilling businesses at Bell Bay, Tasmania and Tarpeena South Australia in December 2012 from Korda Mentha, Gunns’ Receiver. The price was only $40 million. Included as part of the deal was $26 million worth of inventory partially offset by assuming liabilities of $2 million in payables and $5 million worth of employees’ entitlements.

Hence the two sawmills, capable of processing 1 million tonnes per annum were purchased for a combined figure of $21 million. Looks like a good deal.

Timberlink obviously thought so as it booked a discount on acquisition of $46 million, implying the assets were worth $46 million more than it paid.  Booking the discount as revenue enabled Timberlink to post a profit of $44 million for the 5 months ending 30th June 2013. Memories of ABC Learning’s Eddy Groves and Gunns’ Greg L’estrange come flooding back.

It’s perhaps unfair to include New Forests with such exalted company. As an unlisted entity it doesn’t need to puff up its balance sheet the way listed companies do to pander to shareholders and having very few borrowings meant it wasn’t beholden to banks. The discount if anything is probably a conservative estimate of the unbelievable bargain obtained.

It cost FEA $72 million to construct the Bell Bay sawmill. Gunns acquired it for $48 million. So for Timberlink to acquire two sawmills for $21 million looks a reasonable deal. Maybe  Senator Abetz's mooted inquiry to look at Gunns selling a pile of junk at Triabunna for $10 million can also have a look at Korda Mentha selling state of the art sawmills for $21 million? 

In addition to investing on its own account, ANZFF has entered into joint ventures managed by New Forests with other institutional investors.

The Forestry Investment Trust FIT a joint venture between ANZFF (27%) and AIMCo (73%) (Alberta Investment Management Corporation, a Canadian pension fund) acquired the Great Southern land of 270,000 hectares for $415 million and is the proposed purchaser of the former Great Southern MIS trees, 106,000 hectares, located on that land.

FIT also bought land, and subsequently 32,000 hectares of MIS trees from Elders as it, along with all MIS companies, desperately tried to sell assets to survive.

ANZFF is also the lead partner in the Green Triangle Forest Trust GTFT which acquired 46,000 hectare softwood plantation established by Auspine and subsequently sold to Gunns. GTFT supplies timber for the Tarpeena sawmill now owned by Timberlink.

Timberlink appears to be tidily run company well capitalised with little debt employing 416 (as at 30th June 2013).

So far there is no evidence New Forests has overpaid for assets. It has strategically placed itself in position to pick up assets at favourable prices. As manger of the Tasmanian softwood estate via ANZFF and the Green Triangle softwood estate via GTFT it was in the box seat to buy Gunns’ two softwood sawmills. As landowner to Great Southern MIS crops it was in an unassailable negotiating position when the liquidator was left with no option but to sell all trees and wind up the schemes after Gunns Plantations went broke and no one could be found to act as replacement Responsible Entity.

Once PPB has tidied up the Great Southern schemes it will be left with Gunns’ MIS plantations, 107.000 hectares on behalf of almost 10,000 growers with over half on land leased from parties other than the Gunns Group.

PPB has received the all clear to proceed with the sale of Gunns’MIS trees and the winding up of the schemes. There have been a few road humps on the way. Gunns’ Growers Group lobbied to get Macquarie to take over as Responsible Entity of two of Gunns’ schemes but PPB went to Court who found that Macquarie and its partner on this occasion, WA Blue Gums (WABG) had engaged in deceptive and misleading conduct. It was a damning judgement.

Paragraphs 278 to 280 of the judgement handed down in the Supreme Court of Victoria on 16th July 2013 highlight the complex issues involved in restructuring/winding up of MIS schemes on leased land.

278 The risk in relation to rent (both accrued and ongoing) went to the heart of Macquarie’s proposal. In my opinion, the omission from the explanatory memorandum of the nature and quantum of those risks and what effect the risk eventuating would have on growers and the proposal constituted (in the context of the explanatory memorandum) misleading or deceptive conduct or conduct likely to mislead or deceive growers. In each case, the risk was substantial and the failure to inform growers constituted misleading or deceptive conduct or conduct likely to mislead or deceive growers.

279 For the new responsible entity to avoid liability for the rents on leases it was assuming involved a substantial risk, as the courts had already found that the leases novated to the new responsible entity. The argument that s 601FS(2)(d) would allow the new responsible entity to avoid liability for the leases it would take over was untested and involved a significant risk. I find that the failure of the explanatory memorandum to so inform growers was misleading or deceptive or likely to mislead or deceive growers.

280 In my opinion, the proposal creates the false impression to growers that the Macquarie proposal was a viable method for the schemes to continue unburdened by the outstanding rent obligations to the third party landlords and the ongoing rental obligations to those landlords, subject to possible risks. Rather, the proposal was certain to be challenged by the land owners and its success relied on untested legal propositions that, if upheld by the courts, would have led to the odd result that WABG would be entitled to the rights under the leases but not the obligation to pay rents, and that it could abandon these leases at its will and without any cost to it.

Finally there’s the plantations owned by Gunns, some on its land with the remainder on leased land. Most of Gunns’ managed plantations, 98% of which are hardwoods, are in Tasmania as distinct from the Great Southern schemes, most of which are in WA and the Green Triangle, with only about 8,000 hectares in Tasmania.

Also on the market are FEA’s MIS schemes about 35,000 hectares of which are in Tasmania. Liquidator BRI Ferrier has recently gained approval from scheme members to proceed with winding up the schemes in a similar manner to Gunns’ MIS schemes.

New Forests’ ANZFF2 still appears to be cashed up. Its express aim is to target hardwood and softwood timber plantations in Australia and New Zealand. It would be surprising if it wasn’t interested in other assets now on the market.

There are occasional sightings of the pulp mill ghost. Korda Mentha says there is considerable interest in the pulp mill. They said that about Gunns’ sawmills which we now discover was sold to New Forests for $21 million plus stock?

Recently Leg Co member Ivanasaurus Dean urged fellow members to vote for a motion affirming support for the pulp mill and State Opposition leader Will Hodgman reportedly met the Prime Minister and senior government ministers in Canberra this week and says they are prepared to consider assistance to develop the mill. That sounds like an expression of disinterest, implicitly confirmed by Mr Hodgman when he refused to speculate about what kind of help the Government might offer.

The pulp mill at one stage touted as a $2.3 billion project ended up being described as a project with an enterprise value of $3 billion after it finally dawned on Gunns that a replacement for the MIS model as a way of outsourcing wood supply was yet to be discovered and that plantations would probably need to be internalised as part of the project.

But with no fresh plantings of trees for five years giving a skewed age distribution for current crops and seeing what’s available being snapped up by cashed up investors like New Forests, has Messrs Dean and Hodgman bothered to sound out New Forests and their institutional investors about their long term plans for recently acquired plantations? Spruiking a project designed when the $AUD was 74 cents, when benefits were counted but not costs, when MIS investors were falling over themselves to buy tax deductions and fund plantations at the rate of 20,000 hectares per annum is a world away from the reality we face today.

New Forests give the impression of being patient long term investors, a distant cry from past excesses in the forestry industry dominated by short term shysters, woodchippers, paper shufflers and tax accountants, where any long term vision was replaced with myopic stupidity.

Where there’s life there’s hope.

12 comments:

  1. Great article John.
    Some questions:

    Do you know if ANZFF are obliged to pay Council rates on their 45,000 ha of Tasmanian softwood? If not then they have a very definite commercial advantage over other private Tasmanian tree growers, a significant disincentive to further private investment in the forest industry, and a major financial burden to local Councils and ratepayers. Is anyone squealing?

    And finally, I hope you are going to write a review of FTs commercial and accounting performance based on the recent annual report. I'd love to read it.

    "Where there's life there's hope." Ever the optimist John:)

    Cheers!

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  2. Gordon, the land will be subject to rates and almost certainly ANZFF will pay.

    It must be remembered however that plantations aren’t included in the value of land used for rating purposes.

    The Valuation of Land Act 2001 defines land in Section 3 to include plantations and all trees and timber on land.

    However Section 11 which outlines the approach to valuations by the Valuer General specifically excludes tree plantations from both land value and capital value (capital value is the sum of land value plus the value of improvements such as buildings, structures and virtually everything attached to the land except items of plant).

    Section 11(7) reads as follows.

    For the purposes of this Act, in the assessment of the land value, the capital value and the assessed annual value of land used primarily and effectively for growing trees to be cut for commercial or industrial uses, use as firewood excepted, and of an area –

    (a) in the case of indigenous trees not in an artificially established plantation, of not less than 10 hectares; and

    (b) in the case of an artificially established plantation, whether indigenous or foreign trees (including a plantation artificially established and naturally regenerated), of not less than one hectare –

    the value of the trees growing on the land is not to be included.

    This gives plantation owners an advantage over other farmers where water improvements, dams etc will be included in the value of land and thus subject to rates.

    FT’s financials and the virtual complete lack of interest in achieving a sustainable and profitable FT shown at this week’s GBE hearing when members devoted most of their time to special timbers that contribute only 2.5% of FT’s revenue, has left me temporarily speechless.

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  3. John,

    Thanks for that background on valuation. Wow! I didn't know that. As long as all commercial tree growers are on the same playing field then that's one good thing.

    I guess one day they will sort out the taxation disparity between growing plantations, apples, cows and onions.

    The GBE hearing sounds very typical and one of the main reasons why FT and the forest industry are in such a terrible state, AND will continue that way for many years to come.

    Politicians trying to run a business??? Mission Impossible I call it.

    So when you get your voice back, will you give us an update on FT finances and governance standards? Please!! Someone needs to keep the pressure on and expose these bozzos for their incompetence.

    Cheers!

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  4. John,

    Thanks for this. I read above that the RE retains that lease liability, and that it has given up 5% pa at harvest, why are those returns above so low? Is the wood worth so little that it would not cover the lease amounts owing?

    ... and then where has any other party assumed any risk for the basis of the lease arrangement? Such as landowners, Gunns Board and Gunns auditors.

    For example, if I let my investment property and the tenant stops paying rent it's not usual for the tenant to then become responsible for mortgage.

    I'm struggling with this as you can see!

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  5. Trevor, when Gunns Plantations took over as RE, growers agreed to pay a deferred fee of roughly 5% for each year until harvest, which I termed a harvest commission. From memory it meant for the most recently planted crop Gunns Plantations would be entitled to a harvest commission of over 50%. The fee was intended to cover RE expenses, rent etc paid in period before harvest.

    Gunns Plantations would have relied on the backing of its parent, Gunns. In all likelihood Gunns owed money to Gunns Plantations, hence the Directors of Gunns Plantations were able to rely on the fact that Gunns were still trading as the Directors thought it was solvent, so therefore Gunns Plantations was still solvent.

    But as soon as Gunns became insolvent then so did Gunns Plantations as it could no longer rely on getting anything from Gunns.

    Gunns Plantations was the lessor, and it will no doubt argue that it ceased trading as soon as it became insolvent, that is as soon as it learnt that Gunns was insolvent. So therefore it may be difficult to argue liability for lease default should be borne by the Directors of Gunns Plantations.

    Gunns Voluntary Administrator VA did remark in his detailed second report to creditors that Gunns may have been insolvent well before the end. The VA observed that directors were less than diligent with revaluing assets in a timely manner. The auditors may have a case to answer in this regard.

    The low return to growers is obviously a function of the yield and the price per tonne offered by New Forests. At this stage we have no information on these amounts .

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  6. Its obviously best to be the buyer at the firesale where the negotiator is most interested in their sky-high fees (PPB) and not the interests of the grower.

    In the wash up of my 2001 Willmott investment I asked whether PPB or any party would apply some test in hindsight to see if fair value was in fact returned to the growers. I got no answer.

    On road trips north, however, I have seen log trucks coming down the Murray into Albury. About the same section as my pine trees they were obviously worth more than $0 to someone!

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  7. Thanks for an excellent article John.
    I'm curious as to whether you are aware of any land holders exercising their basic rights, based on possession being 90% of the law, and have simply taken possession of the trees on their land?
    I would think that an investor owning trees on another parties land, on which rent had not been paid, would be in a very shaky position?
    Apologies for the "anon", but there are reasons!

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    Replies
    1. Anon, in cases where there are three parties involved--- growers, the RE and third party landowners, growers have entered into sub leases with the RE who in turn have leased land from third parties. Notwithstanding the RE is now in default in respect of the head leases, there is a legal argument that growers still have an interest in the trees.

      I understand in straightforward cases, with only two parties,where forest companies have leased land to grow trees for themselves, the landowners have exercised their rights to grab the trees .

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  8. Thanks for that John. I wonder how much of that legal argument is simple bluff?
    Without trying to delve into the complexities of lease agreements, I would think that it would all boil down to basic principles. A totally dissimilar, but possibly still applicable example would be that of stolen property. Doesn't matter how many hands it passes through, if the title is not good, it still belongs to the original owner.
    Equivalent logic is that if the rent's not paid the landholder has possession and the grower and RE better sort it out between themselves.
    Has it been tested in court yet?

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  9. No it hasn't been tested yet.

    The review of Tasmania's plantation estate chaired by Martin Ferguson released its report in the past few days. It canvasses some of the issues and mentions the possibility of court action.

    It can be found at http://www.dier.tas.gov.au/__data/assets/pdf_file/0003/94179/Review_of_the_Tasmanian_Private_Hardwood_Plantation_Estate_2013.pdf

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  10. Thanks John. That's an interesting link!

    ReplyDelete