FT closer to closure

The ministerial statement on the future of Forestry Tasmania today was an announcement of the appointment of a de facto Administrator.

Expressions of interest are to be invited for some of FT’s assets, mainly the hardwood plantations, which hopefully will be enough to cover the costs of Administration.

FT will then almost certainly be wound up.

It was always going to be this way. The talk about transitioning to other, in this case, private operators, is simply a restatement of what happens when companies are wound up.

Minister Harriss is pretending that selling assets in Administration will save FT from Liquidation.

How often do Administrators forestall liquidation and manage to return a company to normal trading without equity injection or a significant compromise with its creditors?

None spring to mind.

The disastrous 2014 financials as fully covered HERE particularly the appalling cash deficits before government handouts, meant selling assets was the only option given that more handouts were ruled out and loans imprudent because they couldn’t be serviced.

The only significant assets are hardwood plantations. Selling native forests is not a goer.

At this stage it is highly likely that FT is negotiating with Gunns Liquidator and Receivers about taking ownership of 14,000 hectares of Gunns’ MIS scheme trees and 7,000 ha of Gunns’ Joint Venture trees growing on Crown land. The consideration for the purchase is likely to be negligible given rental arrears. That is what is happening in other instances of Gunns’ MIS trees growing on land belonging to third parties. The latter as landlords are acquiring full title to trees for as little as a $1.

There are about 58,000 hectares of plantations on crown land and it is likely FT will soon own most of the trees.

At this stage only about 40,000 hectares of trees belong to FT. They don’t own the land only the trees.

Back in 2012 FT solved its cash flow woes by selling its 50% stake in the State’s 46,000 hectare softwood plantation estate for $78 million.

The proceeds were used to pay loans owing to Tascorp and the rest to prop up FT and replenish the TCFA grants tin that had been prematurely raided to spend on opex rather than the intended purpose of completing the establishment of 16,000 hectares of hardwood plantations @ $6,000 per hectare, the most expensive plantations in the world as Greg L’Estrange once described them.

The same will happen again when the hardwood plantations are sold. When that occurs the Tascorp loan will have grown as working capital will be needed to pay FT staff, overheads and pensions to retired foresters. Most of the sale proceeds will go to offset the Tascorp loan.

As at 30th June 2014 there was still $27 million of TCFA grants listed on the balance sheet as ‘revenue in advance’, mainly for plantation establishment costs yet to be spent, pruning and thinning for instance. What will happen to these amounts is not obvious., least of all to Minister Harriss.FT has an obligation no doubt to spend the amounts as intended by the agreement with the Feds. Whether the obligation is transferred to the purchasers of the plantations is not clear. If it does it will no doubt reduce the purchase price. Or whether the Feds just writes it off as just another dud deal with the Tassie forestry industry?

What’s likely to happen, seeing as FT doesn’t own the land is that the trees will be sold in the same way as the softwood estate?

At the time I wrote:

Actually what was sold was a forestry right issued pursuant to the Forestry Rights Registration Act 1990 .The purchase price included a right to use the land. The new owners have effectively purchased, inter alia, the right to use the land previously held by Taswood Growers.

The new owners of the trees have a right to use the land until 2069 without paying any rent whatsoever to the landlord. That’s the way forestry rights work. They’ll pay rates but no doubt if the land is worthless they’ll be arguing for a rates reduction.

So from June 2008 until now the value of the land and trees comprising the 46,000 hectare estate has fallen from $410 million to $156 million. FT will end up with 50% or $78 million, $40 million of which goes to Tascorp for loan extinguishment whilst the balance is needed to refill the TCFA cash tin prematurely raided by FT to fund ordinary operations.

We still own the land but it is virtually worthless for the next 57 years because it produces a nil return. The rent forgone is a subsidy to the new owners of the softwood plantation. They only paid a little over $3,000 per hectare for the trees of varying ages from newly established to harvestable when establishment costs, and I stand to be corrected, are about $2,000 per hectare.

It is difficult to envisage a farmer selling his standing crops or livestock then granting the Purchaser rent free use of his land for 57 years.

That’s what will probably happen with whatever hardwood plantations are sold.

Of all the direct cash handouts (HERE) to the Tasmanian Forest industry since the Helsham days in the late 1990s, of over $1 billion, over $400 million has gone to FT, about $245 million of which has been used for plantation establishment and maintenance.

When the cost of establishing the Gunns’ MIS schemes and Gunns’ Joint Venture crops growing on crown land are added to FT’s costs of establishing its own hardwood plantations, the cost of the 58,000 hectare hardwood plantations on crown land is in the vicinity of $350 million.

The current value of those trees is unlikely to be more than $50 million. A buyer will pay more for a forestry right, getting the use of the land for free for 75 years, with a sort of prepaid rent component.

One price indicator is the recent $125 million paid for 98,000 hectares of land containing 46,000 hectares of plantations previously owned by FEA. Maybe $1500 per hectare for the land with plantations and $1000 per hectare for the rest of the land?

At this stage FT control only about 40,000 hectares of trees and are expecting maybe $40 million which is feasible.

Just to be clear on this point. FT may receive $40 million for an asset that has cost it $250 million.

The massive failure of FT’s plantation strategy is of similar magnitude to the massive failure of its native forest strategy in past years, to play second fiddle to Gunns’ money making machine despite being in a monopoly supplier position of strength.

The failure of the plantation strategy is not one that can be readily blamed on the Greens or the Labor-Green accord if one is influenced by evidence based logic.

Most of the $40 million will be needed in the next two years to cash flow FT. Chairman Annells noted a best case scenario was reducing FT’s cash loss to $20 million per year.

Minister Harriss confirmation that FT’s activities in future will be focused on growing trees, managing land and selling wood to domestic customers and that responsibility for export sales and value added products will transition to the private sector, is acknowledgment that FT’s recent foray into export woodchipping, whilst offering the only chance of making a quick buck in the short term a la Gunns, was a fraught policy not least because national competition guidelines prevent government dependent businesses from competing with privateers ( as discussed HERE and HERE)

Minister Harriss has appointed a Treasury rep to assist the Board with the transition. A big vote of confidence in the Board or just a reflection of the reality the de facto Administrator needs a say on the Board? Normally during Administration the Board is sidelined and the Administrator takes control.

Let’s take a glance at what FT may look like after the sale of the hardwood plantations.

First it will have a skinnier balance sheet.

Second the stumpage value of  native forests harvested each year will only be about $20 million, maybe $25 million with a fair breeze. Even if half FT’s staff are downsized employee costs are still $13 million, overheads $10 million, capex for roads and replanting $8 million and super for retired employees $8 million, so how will FT survive? What about fire fighting and other community service obligations? Minister Harriss has vowed that not one red cent will leave the Consolidated Fund heading in FT’s direction.

That’s just the cash situation.

FT’s balance sheet will take a hit every time a coupe is logged because the pre harvest value of the coupe will need to be written off.

The balance sheet will soon become anorexic.

It will be difficult to increase prices for logs unless FSC is quickly obtained. The balance sheets of the rest of the industry aren’t in good shape either. FT has been helping them limp along with 100 day+ debtors at high levels in % terms.

Minister Harriss hasn’t produced a plan. Rather a plea. Help me. After all the talk about growing the industry when the figures suggested growing the industry will grow the losses has left him with the credibility of miracle cancer survivor Belle Gibson and the strategic smarts of Colonel Custer.

One good reason for maintaining FT for a while longer is that sale of assets will be more easily effected by a GBE.

When Minister Harriss talks about finding a way to fund a transition, he is referring to the transition from Administration to Liquidation.

Nothing else is likely at this stage.