Wednesday, 21 December 2011

Forestry Tasmania's future

Will there still be a place in the world for Forestry Tasmania FT as a GBE after reality bites?

FT has struggled with cash flow and profitability and now it’s selling some of its more commercial activities. All the calls for FT to be restructured may be unnecessary. The in-house Voluntary Liquidator Bob Gordon, like his counterpart at Gunns appears to be doing just that, as assets are sold in an attempt to survive.

But is FT better prepared to face the future? Given that we will become more dependent on plantations, has FT’s management deftly and skilfully positioned FT to meet the challenges?

It is not the easiest task in the world to try and isolate the contribution made to FT’s bottom line by its plantations versus the contribution of the native forest segment. The Auditor General worked on his report into FT’s performance for 3 years and wasn’t able to shed much light on the issue. FT’s accounts do not provide a segment breakup to enable a reader to better understand the financials.

Never have so many inquiries yielded so little information. The only $ info on a segment basis is in the Sustainability Report which lists the estimated Mill Door Landed Value for timber products from State Forests. But these only give a rough clue as they don’t reconcile with FT’s financials. The estimated mill door prices aren’t necessarily what FT received and recorded in its financials.

The 2011 financials lists FT’s revenue from forest sales at $135 million. But over half is reimbursement for the costs of harvesting and transport to the mill door (or the wharf).The stumpage value of sales was only about $55 million. And 80% of that is from native forests. The reminder is from plantations. Less than half the plantation revenue, which in this instance excludes the JV with GMO, is from hardwoods. Employee costs and overheads eat up all of the $55 million, so there’s nothing there to fund any capital outlays. FT’s woes have been so obvious for so long it’s a source of wonderment that the Government has been so slack. And now there isn’t any money its options are few so FT is selling assets to survive.

The size of the plantation estate managed by FT and its Joint Venture partners has shown little change over the past few financial years, at just over 50,000 hectares for both softwoods and hardwoods.

New plantings have declined in each of the past 4 calendar years as shown below. The 2011 plantings only reflect a 6 month period. Thus far only about 13,000 hectares pursuant to TCFA arrangements have been planted over the last 5 years. The remaining 3,000 required hectares are awaiting suitable land.

At 30th June 2011, FT owned/managed softwood (Pinus radiata) plantations, of 52,670 hectares including the 46,000 hectares Joint Venture with GMO which has just been sold to New Forests, leaving about 7,000 hectares, roughly a third of which is a JV arrangement with Norske Skog.

The current hardwood plantation estate involving FT (i.e. excluding private forests on private land) of 55,960 hectares comprises approximately 85 per cent Eucalyptus nitens and 15 per cent Eucalyptus globulus. With all those E.nitens it’s little wonder FT is such an unrepentant supporter of the pulp mill. Only 30,000 hectares of hardwood plantation trees are owned outright by FT, the rest is caught up in JV arrangements, MISs via Tassie Tree Trusts and 14,830 hectares owned privately but growing on Crown land. The latter probably includes trees owned by Gunns and Gunns’ JV tree partners, which may change hands soon as Gunns follows the same pattern as FT by selling assets in a desperate attempt to fend off the bailiff while pretending to be preparing the ground for the pulp mill.

The breakup of FT’s plantation estate at 30th June 2011 is outlined in the following table.

It’s a pretty sorry tale. The softwood estate is all but gone. The hardwood estate will undoubtedly undergo ownership changes in the near future. The 30,000 hectares of hardwood plantations owned outright by FT is a possibility, even the underlying land as well.

It isn’t clear to the writer whether the State will gain any return from its continued ownership of the 46,000 hectares of pine plantation land. Under JV arrangements which take many forms, the landowner doesn’t normally receive a rent payment but rather the crop proceeds are split in such a way to reflect the different contributions of the JV partners. But with the sale by the JV partners of their JV assets, the Crown is simply a landlord. What will its rental stream be?

Of course if one were to accept the value of land as determined by FT’s valuer, the plantation land has a zero value. Perhaps rent is zero? That would make it a bargain purchase. Whose rent is it anyway? FT’s? They don’t own the land. The Crown? They could do with a cash boost.

If the pulp mill doesn’t proceed then it’s back to the drawing board for the State’s hardwood plantation estate to try to map out a Plan B. Or maybe the recent Strategic Review has laid out a path? We’ll never know if they never release it. But given the current plantation size, age and species, there won’t be enough cash to fund replanting. So what will FT do?

If the pulp mill does proceed what happens to FT’s hardwood plantations may well depend on what happens to Gunns’ plantation land and trees? Will the latter become part of the pulp mill JV or will they be owned by a third party? The 2011 financial accounts for Gunns included $654 million of Tasmanian land and plantations as assets for resale yet the Chairman’s AGM address 3 months later referred to the company’s hardwood plantation forest and processing assets with a carrying value of over $700 million as forming part of the equity base of the pulp mill project. So who knows?

It still seems to be a buyer’s market for large parcels of trees and plantation land as the prices are well below those of a few years ago.

For instance when Gunns bought Auspine three years ago, 45,000 hectares of land and pine plantations were booked at $435 million. Then Gunns offloaded 33,000 hectares of trees only for $173 million to GMO clocking a much needed profit of $23 million. That’s just over $5,000 per hectare for the trees.

Compare this to about $3,400 per hectare to be paid by New Forests for the FT JV trees.

Gunns thought they had a buyer, rumoured to be GMO, for the remaining Green Triangle trees plus all the 45,000 hectares of land ex Auspine at $107 million. The deadline for completion of the sale kept passing. The latest ASX announcement is that the deal has fallen over. The Australian Financial Review (AFR) reported a new buyer was found to take not only the remaining trees and land from Gunns for a reported $120 million, but also the 33,000 hectares of trees from GMO. AFR suggested New Forests is the buyer.

The figures seem to imply a price of about $3,400 per hectare for the trees, similar to what it will pay FT, and about $1,700 per hectare for the land, roughly the same price as New Forests paid as part of the syndicate with Alberta Investment Management Corp which bought all Great Southern’s land from the Liquidator McGrathNicol two years ago.

By way of a footnote the profit from the sale of the first tranche of pine trees was an illusion as Gunns will end up blowing about $140 million on Auspine land and trees over about a 3 year period, a 30% loss of value.

Prices for hardwood plantations however will be vastly different. Much less. The age profile of FT’s plantation is younger and dominated by the selected strains of E. Nitens var firewoodii.

The proceeds of the sale of FT’s 50% share of the softwood JV of $78 million will be used in the first instance to pay off the $40 million owing to Tascorp because FT can no longer afford to pay the interest on the loan. The remaining funds will be much needed to replenish the TCFA cash tin as over $30 million is yet to be spent on the remaining 3,000 hectares of plantation establishment mentioned above plus all the pruning and thinning as prescribed by the TCFA in order to achieve what one G L’Estrange described as “the most expensive plantations in the world.”

The cash boost from the sale of the softwood JV share will undoubtedly help FT pay the bills for the next couple of years. But is it a sustainable set up? Hardly. FT still has a $120 million liability in the form of an unfunded superannuation commitment, which it can’t service from operations.

Prompting by Ruth Forrest’s Leg Co committee investigation into FT’s performance finally persuaded FT that they needed to fall into line with other State Government entities and start reporting some of the costs of the unfunded superannuation as operating expenses. This has meant that FT has had an operating loss for the last 5 years, when prior years’ financials are correctly restated. The Auditor General restated 4 years worth of figures in his report to Parliament.

And if the Auditor General was more insistent about including some of the costs of the trees that have been sold, as operating rather than non-operating items, the situation would be far worse. Had that been done FT would clearly be seen for what it is, a basket case beyond salvation.

By incorrectly calculating operating profit Messrs Gordon and Kloeden have been allowed to pretend FT was profitable, when it clearly wasn’t. The entire FT Board with as impressive array of post nominals as one is ever likely to see, failed to bring a switched on awareness to the table. FT’s woes could have been addressed years ago with a more accurate set of accounts. Alas, it’s now too late. The Australian Institute of Company Directors to which FT Directors mostly belong should run a remedial course on understanding published financial statements.

FT is still living in a world of complete unreality if some of its publications are any guide. FT was particularly selective as to what bits of the Auditor General’s Report into FT to include in its 2011 Stewardship Report. One gets a different picture, for instance, if one carefully reads what the normally mild mannered and reticent Auditor General said in April 2009 but not reported till quite recently (and things have since worsened):

“Profits have trended downwards since 1995, mainly because of a substantial decline in softwood revenues. Other than softwood, quantities sold had shown a small increase, prices had fallen and costs had not changed substantially.

The return on assets has been consistently poor. Analysis suggested Forestry’s assets were over-valued, but at recent levels of profit, return on assets would only have been reasonable if no value was assigned to the biological assets (trees) or land improvements (roads).

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.

On that basis, it can be argued that ordinary operations from 1994 to 2008 have yielded little profit. It also follows that dividends paid had been entirely funded from abnormal receipts such as Commonwealth compensation money.”

That’s it in a nutshell. Not much profit since Methuselah was a boy, bludging off the Feds, the vehicle fleet pawned, the softwood resource sold. Hang on to your seat Grandma, you could be next. The plantation hardwood resource won’t be cash flow positive for a while, if ever, and the native forests industry will be unable to sustain the current workforce of 400+, the unfunded superannuation liabilities and the community service obligations. FT is shedding its commercial operations and the State is going to have to pick up the tab for the unfunded super and the CSOs, so do we really need to interpose a GBE? It seems a ridiculously inappropriate structure.

Maybe the best course of action is to pack up your empty lunch box, Bob, and go home. It’s almost knock off time.

And don’t bother coming back after Christmas.


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