Wednesday, 28 March 2012

Dream on...

Just when you thought the croupier had gone home, Morningstar analyst Peter Warnes was reported in yesterday’s press as saying ... “This is the last throw of the dice.”

He was referring to Gunns’ plan to raise another $400 million from shareholders. Business Spectator said “the funds would be used to help the company cope with the planned sale of non-core assets”. What does that mean? Are the non-core assets being sold? Or will Gunns be required to pay ‘purchasers’ to take the assets off its hands?

The sale of assets has proved to be tortuously difficult for Gunns.

The sale of Green Triangle land has been awaiting settlement for ages. The latest announcement re the Green Triangle land was only about shuffling the asset into another entity, not reaping any cash from a third party.

All the Green Triangle assets including the 33,000 hectares of trees previously sold to GMO for $173 million have been shifted to a new trust. New Forests NF is the manager. It looks after various forest interests owned by institutions including the recently acquired pine plantations that were partly owned by FT. One of the investors in the new trust is the Australia New Zealand Forest Fund, managed by NF, which also owns part of the Great Southern land along with Canadians. At this stage Gunns is also an investor in the new trust having swapped its 46,000 hectares of land for a share of the trust worth reputedly $120 m.

The ASX announcements made no reference to the 12,000 hectares of Green Triangle trees still owned by Gunns, instead referring to Gunns’ interest in the new trust of $120 million as representing the value of the transferred land.

Gunns will now try to sell its interest in the trust. Buyers can’t be queuing otherwise the increased capital raising would not be required.

The above shows how hard it’s been for Gunns to try to sell assets.

If it takes that long to organise an entity into which to shift a relatively simple asset, basically freehold land, let alone dispose of that interest for desperately needed cash, then what chance any investor(s) is going to be seriously interested in Gunns’ other land with hardwood plantations where there’s thousands of lessees many with a few slow growing trees of diminishing value resulting in an increasingly level of disgruntlement, with growing numbers walking away, refusing to pay their investor loans leaving Gunns with woodlots all over the countryside.

The Richard Chandler Corporation foray was a dream. It was never going to work. Will Hodgman was correct when he refused to forgo a day at the punt for a fruitless chat with RCC.

Even if RCC gave Gunns a tick of approval, existing shareholders would not have been keen to hand over so much value to a new shareholder for a paltry $150 million.

Existing shareholders will have to dig deep themselves. The end of the year will be upon us faster than we think and that’s when the banks will be calling the undertakers.

Gunns’ Board has so mismanaged the sale of assets that there are no other alternatives.

Existing shareholders who don’t contribute will suffer massive dilution in their holdings with estimates of a further 3.3 billion shares required to raise $400 million swamping the existing number of issued shares of only 848 million.

So they won’t be happy.

Those that do contribute will risk throwing good money after bad.

It’s a delicate balance between raising enough to survive, and not diluting existing shareholders by ‘handing over’ too much value to newcomers, then expecting a benevolent JV partner to appear with lots of money who wasn’t going to insist on further dilution, someone like Mother Teresa’s Sisters of Charity Hedge Fund.

The point was made by one observer that the size of the capital raising relative to the current market capitalisation of Gunns puts it amongst the category of ‘penny dreadful’ mining companies.

These companies have few assets except a couple a pegs in the ground, who need cash to continue the search for El Dorado, can’t borrow anymore and therefore rely on punters with deep pockets to fund the last roll of the dice before the croupier goes home.

Mere mention of small hopeful mining companies always reminds me of Mark Twain’s prescient observation…. “a mine is a hole in the ground with a liar at the top.”

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