Thursday, 9 June 2011

Why Gunns is teetering

What company has received $500 million in cash from the issue of new shares over the past three years but only has a market value of $300 million?

Why Gunns, of course.

What company, when faced with the daunting prospect of repaying or renegotiating almost all its borrowings of $600 million within 12 months, pretends that the announced sale of all assets is to finance a new pulp mill rather than to enable the solvency declaration to be signed?

What company, having announced the sale of all assets, will be forced to publicly reveal in its annual accounts the write down of the values to reflect current market offers rather than pie-in-the sky expectations?

What unprofitable company, whose operations have been sold, about to be sold or closed down, can still claim “underlying profit” of $40 to $50 million?

What company, operating in the native forest sector with decrepit assets and diminishing markets, is demanding compensation for a cessation of its loss-making activities?

What company failed to foresee the decline in global demand for native forest woodchips, yet nevertheless books income from plantations not due for six years as current year income?

What company brazenly tells the market that it is confident of gaining finance of $2.5 billion without a joint venture partner but is yet to reveal the new business case despite adverse exchange rate movements, the proposed sale of all forestry assets and the plummeting market assessment of its assets?

What company has not bothered to explain a material matter as to how second and third rotation tree crops needed as feedstock for a pulp mill, will be arranged and financed now that MIS schemes are defunct and plantation land about to be sold?

That’s right, Gunns, in every case.

This company is in its death throes yet continues to delude itself and the market and the Australian public that it has a future.

And perhaps it has, if government bails it out.

For that is the only way forward for Gunns.

Institutions are wary of bold new developments at the best of times, let alone a proposal from a teetering company with no experience in the operations of a high-tech, supposed state-of-the-art pulp mill.

Institutions once provided the stability, the authority, the credibility and most importantly most of the cash that has allowed Gunns to survive.

But Gunns has slipped out of the top 200 on the ASX charts and institutional interest is waning.

The current share register now more closely resembles a hotel register of a two-star private hotel.

Gone are the long-term boarders.

It’s the itinerants who only stay a night or two whose names continually appear on the register.

Here one day gone the next.

Similar to the politicians who have overseen this farce … Paul Lennon and David Bartlett.

With change comes hope. When Lara Giddings accepted the poisoned chalice as Premier, hopes were raised that someone would at last recognise that rebuilding a new Tasmanian economy on the foundations of an almost insolvent entity was not necessarily a prudent plan.

Alas, Giddings still sees Gunns’ pulp mill as the shining beacon, guiding the state forward.

Unfortunately most advice on forestry matters has come from the government-owned Forestry Tasmania, now hopelessly conflicted and closer to insolvency even than Gunns. The advice from that source is unlikely to be impartial.

It took the state government forever to realise that it might need to be a little more proactive, so it has recently called tenders to provide advice through a strategic review.

For years Forestry Tasmania, entrusted with the care of the state’s native forests, has conspired with Gunns to split the proceeds of woodchipping in proportions that favoured the latter.

But now both are facing a bleak insolvent future, and are accusing the other of price undercutting as they play leapfrog in the race to the bottom.

Only when that inevitable destination is reached will Tasmania be able to move forward.

(Published in Crikey)

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