Monday, 1 December 2008

Race to the bottom

The MIS companies are continuing their inexorable journeys towards a catastrophe. Not all will survive intact.

Great Southern Plantations (GSL) seems to be at the head of the peloton at this stage.

Desperately trying to find some cash to pay the bills over the next few years GSL has been trying to persuade Woodlot investors to swap their trees for GSL shares so that when the trees are harvested GSL will get to keep 100% of the net harvest proceeds instead of giving 94.5% back to the Woodlot owners.

So far the reception from Woodlot owners hasn’t been encouraging, partly because the GSL share price has been dropping like a stone and partly because it was the clearest public indication to date that the crop yields have been atrocious. This latter revelation has caused Woodlot owners to look at all their other avenues for redress.

GSL has estimated the net harvest value of a 1998 crop, for instance, at $2,300 per Woodlot. It cost the owner $3,300 10 years ago. The crop is partly harvested, and some cash already held in trust for the owners. Instead of waiting for the cash amount, the Woodlot owners can accept 4,600 GSL shares in lieu.

But at the current share price of 19c the offer is worth only $874 (before tax).It is unlikely that GSL’s offer will gain widespread acceptance from 1998 investors. And if 1998 investors don’t accept then other Project investors will become nervous about GSL’s ability to survive and tend to their crops, so they are less likely to accept possibly valueless shares as well.

GSL have been trying to hide the fact, but the continuing bad yields has always meant the GSL MIS model wouldn’t last forever. It won’t.

Plantation managers like GSL shouldn’t need reminding but the verse from Galatians Chapter 6 is indeed apt—“Whatsoever a man soweth, that shall he also reap.”

GSL late last week decided to postpone the proposed meetings of Woodlot owners and shareholders (separate meetings) and were last seen heading off to seek divine intervention.

The last few months have brought nothing but bad news for GSL. Last month, born again environmentalist Peter Garrett ordered GSL to carry out $2 million in damage repairs after the company breached crucial buffer zones that are supposed to protect the rainforests and wetlands on the Tiwi Islands from the areas bulldozed for plantations. GSL’s Independent Forester had already reported termite infestation in these very plantations. A story on GSL and Tiwi Islands can be accessed at

Joining GSL in the race to the bottom has been Timbercorp. Timbercorp manages about 96,000 ha of eucalypt plantations (GSL has 179,000 ha of which about 10% is in Tasmania).Timbercorp also has extensive non forestry (horticultural) MIS schemes such as olives, almonds and grapes, which have caused havoc in farming districts on the mainland, with their ability in the past to raise large slabs of money from investors and compete on a less than level playing field with neighbouring farmers.

Timbercorp have just released its latest Annual financial statements .The pattern revealed by the figures is unerringly similar to other MIS companies—reduced profits, a rise in bad debts on loans to investors, reduced MIS sales, but more seriously, impending cash flow problems. Banks aren’t going to lend more money if the land is leased to Woodlot owners who because of disappointing yields will pay a disappointing rent, and then only at harvest time.

Timbercorp in its wisdom has decided to try to sell some MIS land for $280m to reduce debt and will also withdraw from MIS for 2009.It expects to return to MIS in 2010 but if the land has been sold, this may be difficult. A quick report can be found at but the full Annual Report can be accessed at

Both GSL and Timbercorp have suffered 90% share price falls over the last 12 months and both are currently capitalised at only about $60m each and so are vulnerable minnows in the current environment.

Another prominent MIS activist has been Gunns. It is yet to harvest any MIS crops.

Gunns is also involved in non forestry MIS schemes such as walnuts and grapes which are now closed to any further investors. Forestry MIS schemes are still on the table. In fact the proposed pulp mill depends in part on MIS investors being persuaded to continue to buy seedlings at an inflated price for tax reasons. This now seems unlikely.

Gunns may have to internally finance its own replantings in much the same way as Auspine used to do. If it does, the budgets for the mill will look completely different .

Gunns’ current market capitalisation , given last Friday’s closing price of 96.5c was $615m. When the share price dipped to 65c the market cap was only $414m.

And this is after the institutional shareholders put in $330m a month ago. If that hadn’t occurred the market cap would have fallen below $100m. The Gunns’ directors showed some foresight in raising the additional equity when they did. It would be much harder now.

Gunns has also sold 33,000 ha of pine plantations (trees only) for $175m with a view to repurchasing them when required for processing. These plantations represent 75% of the pine plantations bought as part of the Auspine takeover. Gunns didn’t buy the trees per se, they bought the company Auspine. When the trees are sold it’s the same company Auspine (now a subsidiary of Gunns) that will sell the trees, and it is highly likely that tax will be payable on the proceeds.

Gunns released a statement to ASX ( that the sale price reflected the book value of the trees. Most people reading that statement will conclude that if its sold at book value then there’s no tax consequences.

This is probably incorrect. If the trees were planted by Auspine it is most likely a tax deduction was claimed for the establishment costs.

Nevertheless accounting conventions require a revaluation of trees each year, and hence the value on the balance sheet at the time of sale was roughly equivalent to the price eventually obtained. But tax at 30c on $175m which equals $52m is still likely. So Gunns has really only raised a further $133m not $175m.

Included in Gunns’ equity is $120m worth of hybrid securities which were due to be repaid in October 2008 but instead were rolled over but at a 2.5% higher rate of interest.

It is not clear when Gunns intends to repay these securities. Probably not while the market cap in still looking sick. Raising equity has been Gunns’ salvation, so repaying the $120m will be deferred for a while , I suspect, especially after the retail investors only contributed $1.3m to the rights issue when $90m was initially the targeted amount.

What Gunns has done is to pawn trees it owned. Raising bank loans must have been too hard so it had to pawn some trees. To pawn assets is not a sign of obvious financial health. The pawnbroker will expect a rate of return higher than bank interest (possibly 15% ).

How Gunns expects to raise funds to build a pulp mill is beyond the minds of many.

Gunns may still make money when it repurchases the trees for processing, but the opportunities for windfall gains will be much reduced. Gunns are being forced to surrender some of its monopoly power.

Gunns may still be open to new forestry MIS investors but it’s unlikely it’ll be swamped with offers. GSL and Timbercorp manage almost 300,000 ha of eucalypt plantations so their woes will not be good for the industry.

If one were to strip away the subsidies ‘paid’ to Gunns via wood supply arrangements with Forestry Tas , Gunns could well challenge both GSL and Timbercorp in the race to the bottom.

The private forestry industry in Tasmania is now at the crossroads with all the current MIS upheaval.

So far the policy response from the State Government is to consult with Evan Rolley.All part of the push towards a clever, kind and connected Tasmania, I suppose.

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