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 1/3^rd 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 30^th 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 30^th 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 16^th 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.