Forestry Tasmania: Nothing has changed

The first thing that strikes when leafing through Forestry Tasmania’s (FT’s) Annual Report for 2013/14 is that the Directors have hardened their view that profits in the foreseeable future are unlikely.

Losses in the past few years have always been understated by an amount which reflected future tax savings if ever FT became profitable and was able to offset carry forward losses against profits.

If FT lost $10 million it would say the loss was only $7 million. The $3 million difference was considered a deferred asset which would be realised when FT made a profit.

If ever?

Despite Minister Harriss’ guidance and backing, or maybe because of, FT directors have decided that the possibility of future profits was sufficiently remote that the deferred tax asset needed to be written off.

The write-off worsened the 2014 loss by $13 million, for a total loss of $43 million.

The State government tipped in $23 million of deficit funding, and the Feds contributed $16.5 million in TFA implementation funds else the loss would have been of gargantuan proportions.

Forest sales for the year were $96 million (2013: $56 million). Over 70% came from native forests, little change from a year earlier. 

The significant revenue improvement is illusory as the contractor component was $82 million (2013: $46 million).

The sales net of contractor costs (harvest & cartage costs) was therefore $14 million (2013: $11 million).

This is the best approximate for the stumpage value of timber sold.

Only $14 million.

How is it possible that an insolvent company with net revenue from its principal activity scarcely larger than the dairy farm down the road can so dominate the economic and political landscape of an entire State that everything else takes second stage?

In aggregate FT sold more timber in 2014 than the previous year, the amount being 1,386,000 tonnes (2013: 1,060,000 tonnes).

But the average stumpage value didn’t budge from $10 per tonne.

The above reflects the simple reality that the costs of extracting timber rise much faster than CPI, possibly because the  coupes are further from markets, and that FT is failing to achieve any increased prices.

That is beyond ludicrous.

It’s unfortunate but it’s impossible to work out stumpage values for the various timber types. FT have excised that information from the Annual Report for 2014.

Freight and other cost of sales of $12 per tonne meant there was a cash deficit of $2 per tonne even before the costs of roads and replanting, wages and overheads.

Roads and replanting costs are usually regarded as capex and disregarded when calculating gross cash profit from forest sales but as the Auditor General pointed out in an April 2009 draft of a report into FT’s financial performance “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.”

If roads and planting costs are expenses then the cash deficit from forest operations before wages and overheads is about $10 per tonne.

Employee costs in 2014 totalled $28 million (2013: the same).

A large chunk of wages must be direct costs related to timber extraction. If half fall into this category then the extra direct costs are $10 per tonne.

Hence every time trees are cut down and sold the direct losses amount to $20 per tonne.

How long does the welfare dependant industry think this can continue?

Growing the industry, as Minister Harriss has promised, with current settings will simply grow the losses.

One would need a pair of Joseph Smith magic glasses to read anything else from FT’s books.

It is hard to envisage what changes will boost operating cash surpluses by $30 million, the minimum required.

This is where the public discussion verges on the surreal. The Triabunna inquiry failed completely to come to terms with the fact that whatever amounts are saved by industry if Triabunna were to reopen, pales into insignificance alongside the increased prices needed to be paid by industry in order to make FT, or whoever supplies timber, profitable.

Mr Barnett’s pathetic witch-hunt didn’t even bother to drill down to get any $ figures, content to accept the baseless assertions that we’re doomed without a nearby port facility when the real issue is that the industry is doomed unless products and margins change.

When one looks at FT’s non-financial performance targets for 2013/14, all were achieved bar the amount of high quality sawlog produced. The target was 137,000 tonnes but the actual was only 128,000 tonnes. Target rates for low quality wood (in volume terms) and wood production per employee were achieved, yet losses were much worse than expected.

Not just book losses, but actual cash losses.

In cash terms the operating cash flow was about $10 million worse than expected.

In profit terms the result was about $20 million worse, mainly due to the drop in the book value of forests.

The nonfinancial targets have been set for the coming year 2014/15, showing small increases.

The financial targets are not disclosed but given the modest increases in the non financial targets another cash deficit of at least $20 million can be expected.

At this stage Minister Harriss is yet to decide how the deficit will be funded.

No doubt the decision will occur sometime after the December estimates hearing to avoid public scrutiny, maybe a few days before Xmas when all through the house, not a creature will be stirring, not even a mouse, and St Paul’s letter to the Board will avoid the light of day for a few months.

Handouts, asset sales and loans are the only alternatives to closing the shop.

Hodgman has continued to rule out handouts but Harris has equivocated.

Selling assets is often floated, but what assets?

The past few years has seen the sale (and subsequent leaseback) of motor vehicles and the sale of FT’s 50% interest in the State’s 46,000 hectare softwood plantations to New Forests in 2011 for $78 million.

This latest year saw the further sale of a softwood plantation right for $6.5 million which helped reduce the loss. Further details about which plantation(s) were withheld from the annual report.

FT is yet to fully embrace transparency.

Included in FT’s annual report is an Appendix of Data Tables, usually helpful, but this year less so.

Nevertheless it appears that approximately 1,500 hectares of FT’s remaining softwood plantations on State forest and Crown land have gone.

A sale price of $6.5 million for 1,500 hectares is a bit over $4,000 per hectare, roughly the same price as the tranche sold to New Forests, which may well be the purchaser in this instance as well.

What is likely to have occurred is the sale of a right pursuant to the Forestry Rights Registration Act 1990, which gives the purchaser ownership of the trees and a right to use the land rent free for the term of the deal.

New Forests have a right to use the 46,000 hectares of land involved in the 2011 deal until 2069 without paying any rent whatsoever to the Crown.

Forest rights often run for up to 75 years.

In reality a forest right includes a component for the value of the trees and a component for prepaid rent over the term.

FT’s valuers have convinced FT that the land growing FT’s trees (ie State forest and crown land) is worthless and the value of FT’s forests and plantations are with the trees and roads.

Hence when the trees are sold and a forest right is granted to a purchaser, there is no compelling need to split the proceeds with the owner of the land because its consultants reckon the land is worthless.

How convenient for FT.

Currently there is 16,640 hectares of private hardwood plantations on what is now called Permanent Timber Production Zone (PTPZ) land, up from 14,405 hectares in the previous year. The majority is 14,000 hectares of Gunns MIS schemes in the process of being sold.

It will be recalled that when New Forests bought assets from Gunns’ Receiver KordaMentha for $330 million, included was approximately 100,000 hectares of hardwood plantations growing on Gunns’ land, half of which were MIS plantations.

This left approximately 50,000 hectares of Gunns’ MIS plantation growing on leased land which Gunns’ liquidator, PPB Advisory, charged with winding up the MISs is trying to sell. The 14,000 hectares on PTPZ land is the largest slab.

The purchase price of the trees is likely to be negligible, especially as there is likely to be considerable rent arrears owing to land lords.

There have been unconfirmed suggestions that FT, having gained title to the MIS trees will then sell the trees via the granting of a plantation right over the 14,000 hectares of hardwood plantations to New Forests.

At maybe $2,000 per hectare for a forest right, more or less depending on the age of the trees, proceeds might be as much as $28 million, enough to pay FT wages for another year.

If the land value is zero FT will feel little need to split the prepaid rent component of the forest right with the land owners, the people of Tasmania.

This in turn will allow the government to run a straight faced claim that it didn’t prop up FT.

Even if it occurs it will be a stopgap measure, and will further reduce the assets on FT’s balance sheet which just leads to inevitable questions as to what’s the point of FT if it sells the very assets which are the reason for its existence.

The valuation of FT’s forests warrants a comment.

FT values the estate as a whole, essentially based on future expected income. It then divides the value between roads and trees as the land is considered worthless.

This differs from other approaches.

The recent joint sale of Gunns’ land and MIS trees involved extensive negotiations leading to a court approved agreement, between KordaMentha as receiver and PPB advisory as liquidator of the trees, which split the value of the estate between land (including improvements) and trees. By far the largest component was allocated to land

With FT’s land being considered worthless, roads are allocated their book value with the residual amount becoming the value of trees.

Roads consequently have a value of $85 million and trees $86 million.

It’s a very subjective split. It’s just as easy to argue, as the Auditor General has, that roads and plantations are worthless and need to be written off as they’re unlikely to yield future benefits.

If roads were to be written off, all FT’s remaining equity will disappear. All the equity created when assets were originally transferred to FT for safekeeping and income production will vanish.

In any event $171 million is the sum total of the forest assets administered by FT however it may be split into component parts.

It took $28 million in employee costs and $18 million in overheads to produce a stumpage return of $14 million.

Quite a stunning achievement.

The stumpage return is probably even lower because FT has a habit of double counting income.

When a receivable is raised it becomes revenue at that point as is customary with accrual accounting. If the amount becomes impaired it is treated as an expense. If subsequently the bad debt is collected as happened in 2014 in the case of $1.5 million, instead of being treated as a reversal of a prior year’s expense, it is once again treated as income.

Two bites of the cherry FT style.

FT used this method two years ago when significant take or pay amounts were in dispute with Gunns. Amounts were included as income, then treated as an expense as impaired. When the government arranged to pinch $11.5 million of IGA funds and pay it to FT to settle its dispute with Gunns it was once again treated as revenue from forest sales.

It’s plainly misleading.

It’s hard to believe the Board approves, let alone the Auditor General sanctions, such behaviour.

FT has managed to reduce its receivables by $9 million which helped cash flow but 40% is overdue by 90+ days with most of that considered impaired.

This confirms that an insolvent FT is still propping up an insolvent industry.

This highlights why borrowing to survive could be a treacherous path.

Current borrowings are zero because there’s not enough cash to service any debt.

But there are other liabilities.

Revenue received in advance of $27 million and spent on ordinary operations needs to be found from somewhere when the time comes to spend the grants on their intended purpose.

And of course there’s the unfunded superannuation liability of $149 million. It cost FT $6 million to service this liability in 2014. The servicing costs won’t fall for at least 10 years, not until old pensioners start dying faster than new ones appear on the payroll following retirement. It will rise if anything.

Pension and benefit payments by FT are currently equivalent to half the stumpage income earned each year.

A staggering indictment of a dysfunctional company.

But the industry is about to grow so we are told.

It would be misleading in the extreme to conclude that the positive vibes from New Forests/Forico is a vote of confidence in Minister Harriss. Forico are simply reaping the benefits from having acquired 100,000 hectares of Gunns’ timber at little more than $5 per tonne which can be harvested and carted to a port to make woodchips for $100 per BDMT when the wharf value is what?.......$160 per tonne ......and rising.

Nothing Minister Harriss has done to date will have any effect on FT’s bottom line in the short to medium term. FT is addicted to loss making native forests. Plantations, if retained, are a long way from profitability, if ever.

A slow death is still a real possibility. The chances of FT folding haven’t diminished.

If anything Minister Harriss has caused the odds to shorten. His cheer squad might proclaim him as a saviour, but from a pragmatic viewpoint he looks like a double agent. Fuelling fires and promoting Armageddon won’t help FT.

It’s been 18 months since the Liberals announced they would stop handouts to FT. It was obvious to all but the cerebrally impaired that this would make it impossible for FT to survive.

FT’s annual report contains a footnote that the government is conducting a review. Yep, another one.

How are the Libs going to arrest the 10 year spate of operating losses and negative operating cash flows despite $300 million of cash injections from governments and the sale of most of its softwood assets and the pawning of its motor vehicles?

Start selling the hardwood plantations?

How is FT going to find the money to repay the TCFA grants spent on other matters?

How will FT continue to fund pensions to retired foresters?

How long can FT continue to earn such a miserable stumpage return that is completely dwarfed by employee costs and overheads?

Nothing has changed.