Tasmanian Times


Gunns: why things are grim

Jarvis Cocker

ANZ will force Gunns to restructure the business, and some of the company’s larger shareholders will push for a serious management shakeup. And the pulp mill? The financial community has long doubted Gunns’ ability to pursue the project without outside help. At the moment, Gunns’ credit is so stretched they couldn’t buy an iPod from Harvey Norman. Let alone borrow $2 billion plus capitalised costs. Instead, Gunns will announce a partnership with an overseas pulp and paper manufacturer, possibly from China, to build the mill. Integral to the deal will be the wood supply agreement with Forestry Tasmania, which could give an overseas company the right to strip Tasmania’s native forests, at the expense of local sawmillers, for the next 25 years.

IT’S BEEN a bleak few days for the Cocker family. Wine stocks are running low. The weather is miserable. And the share portfolio, which needs to continue some form of upwards trajectory to enable Jarvis to maintain his idle lifestyle, has plummeted.

Leading the charge towards oblivion is a holding in Gunns, which fortunately, doesn’t play a major role in any early retirement plans.

The share price touched $1.60 earlier today – a level not seen since the 2002 Commonwealth Games when Australia managed to overcome the might of Lesotho, Fiji and Cyprus to win 82 gold medals.

Some of our media outlets have had a crack at explaining the collapsing share price – with one newspaper even interviewing a financial planner who suggested short selling by hedge funds was to blame.

Hedge funds have nothing to do with retirement investments for the horticultural industry. According to their promotional blurb, they are financial managers who use alternative investment strategies to generate positive returns in both rising and falling markets.

Hedge funds have been blamed for everything from the US sub-prime mortgage crisis to the near bankruptcy of former milkman Eddy Groves’ ABC Learning Centres empire. Except Gunns’ woes have nothing to do with hedge funds.

Instead, it seems that some of Gunns’ largest backers have taken a dim view of last Friday’s statement that after-tax profit would approximate $67 million. Four years ago, the figure was above $100 million. Last year, $88 million. That’s before someone checked the figures, and suggested $74 million was closer to the mark.

In short, Gunns is on the nose in the financial community. Management credibility is shot to pieces, and questions are being asked as to why the ASX wasn’t told of the latest profit slump weeks ago.

And that’s not all. What the media hasn’t asked is why things are so grim at Lindsay Street.

As a student of history, as well as being a long-suffering Gunns shareholder, Jarvis has looked back at the company’s financial records of the last few years.

Gunns does two things very well. Make no mistake, this has been, and could be again, an enormously profitable company. Most of that success has been derived from the processing and sale of woodchips. Gunns’ primary talent has been the ability to buy cheap native forest resources from Forestry Tasmania, and flog the taxpayer-subsidised product to Asian customers at a massive gain.

Their second, and less admirable quality, is their ability to borrow funds at an alarming rate, and spend them on sub-standard assets. Auspine springs immediately to mind – Gunns hasn’t made a cent on Auspine, instead inheriting a debt-ridden, public relations nightmare.

Debt, rather than anything else, explains why Gunns is struggling. And those debt levels are scary. We’ll find out just how bad the position is next week, when Gunns release their preliminary final report.

But back to the share price. As part of its “broader review of its capital structure’’ (the first anyone has heard about it), Gunns is considering selling $170 million worth of plantation forest. Presumably that’s good news, although clearly investors focused instead on the $67 million profit figure.

Most of the analysts who cover Gunns talk about the underlying value of the company’s freehold land. Some even suggest the company is undervalued, saying if the land and plantations were sold, shareholders would be in clover.

But John Gay hasn’t sold anything in years, let alone any of his beloved plantation forests. One suspects ANZ has its fingerprints all over the transaction.

Despite shunning the pulp mill project, the fortunes of Gunns and ANZ are inexorably linked. The bank has a hold on all Gunns’ assets, which isn’t surprising given the amount of money they are owed. And with the share price going down the toilet, I suspect ANZ want their money back.

Make no mistake, Gunns is a deeply distressed company. I wouldn’t be surprised if, within days, John Gay will be forced to hand the reins over to someone new (Greg LeStrange springs to mind), ANZ will force Gunns to restructure the business, and some of the company’s larger shareholders will push for a serious management shakeup.

And the pulp mill? The financial community has long doubted Gunns’ ability to pursue the project without outside help. At the moment, Gunns’ credit is so stretched they couldn’t buy an iPod from Harvey Norman. Let alone borrow $2 billion plus capitalised costs.

Instead, Gunns will announce a partnership with an overseas pulp and paper manufacturer, possibly from China, to build the mill. Integral to the deal will be the wood supply agreement with Forestry Tasmania, which could give an overseas company the right to strip Tasmania’s native forests, at the expense of local sawmillers, for the next 25 years.

Let’s see David Bartlett explain that one.

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  1. Mark

    August 23, 2008 at 10:34 pm

    I’m sorry, Paul, but I do not share your sympathy. I’ve heard many spokespeople over many years mourn the lowly contractor.

    I remember meetings in Franklin between Paul Lennon and contractors guaranteeing their futures.

    I remember confrontations in Lucaston. I know of bashings throughout the valley.

    I remember burn-offs in the Huon as log trucks hauled their loads. Were they pleading some type of Nuremberg defence? Everyone has a choice in life.

    They are the same as any new business. Do a business plan, do your research, have financial capital and estimate your net profit. One would expect a truck driver to look at the clause concerning the price of diesel.

  2. Paul de Burgh-Day

    August 23, 2008 at 5:12 pm

    While many of us will not shed any tears if (or when) Gunns goes belly up, we must be on the alert for what follows.
    A new set of unfortunate consequences are inevitable.
    The last thing I would want to see is for some other entity to pick up the Gunns wreckage for a song, then go on doing the same.
    Somehow we must set out to change direction. No more of the monolithic industrial scale rape, pillage and plunder!
    We must strive to bring back a sustainable community based forest industry with numerous players in the field.
    If they go down, it will not just be the Gunns Ltd board who will lose. Shareholders too, and bankers.
    Are those tears of joy or anguish I see?
    But the people I think we should spare a thought for are the contractors. The small business people who have been utterly dependent on Gunns for their living – who have been trampled over by Gunns, who have had little choice but swallow the Gunns line, who have been treated like dirt.
    They and their employees will suffer big time. Many more will follow those who have already been spat out by Gunns and sent to the wall.
    There must be a lot of very worried timber industry people out there right now. Mostly silent – they are forbidden by their contracts to say anything.
    Many of them may well rue the day they cheered John Howard. They were gulled by Gunns and their government lackeys. They were gulled by their union.
    Now they will be the ones likely to suffer the most.
    The Gunns board may take a bath – but you can bet they will not feel too much pain.

  3. Mike Adams

    August 23, 2008 at 12:59 am

    While the legislation remains on the books, the opportunity for any company inheriting Gunns’ mill to avail themselves of its benefits stays with us.
    The chance of current MPs of Lib/Lab and several independent Legislative Councillors to publicly admit they got it wrong are at present zero. Kim Booth’s Bill to annul this law will be vigorously opposed with stern action taken against members who are thinking of changing their minds.
    However, how many of them will be privately wondering about their parliamentary futures after March 2010?

  4. Chas/Rosevears

    August 22, 2008 at 1:11 pm

    Its not over yet, keep the pressure on, be at todays rally. Chas

  5. kay

    August 22, 2008 at 12:05 am

    Hey Crud, Bartlett couldn’t even pull a 50 million dollar pipeline out of his arse.

  6. anne

    August 21, 2008 at 9:50 pm

    Why any financial institution, be it in Australia or overseas, would be mad enough to consider investing in a company whose shares have been in consistent freefall since its ill-conceived idea for building a pulp mill was born, is beyond me.

    And while I make no claim to being a financial expert, or fully understand how the sharemarket works, I do wonder about the efficiency of a Board that apparently supports somebody who’s managed to achieve such a consistently negative result. Any other company CEO or Chairman would have been deservedly dismissed months ago surely.

    Talk about being architects of their own demise.

  7. Paul de Burgh-Day

    August 21, 2008 at 8:18 pm

    Way back – well over a year ago – I predicted that Gunns would be brought undone by a global banking and finance collapse. That there was no way they would get finance for their stinking rotten pulp mill.
    I have no doubt that when something as abominable as the Gunns pulp mill is the focus of so much concentrated apathy, it will not happen. There will of course never be a visible connection between thousands of minds willing that it will not happen, and the events that are bringing it undone. I am however quite clear that we have contributed to it not being built.
    Yes, I can see that there could still be more twists and turns that will worry us – until a stake is driven through the heart of this awful spectre.
    Even if, as seems more than likely, that Gunns will get broken up, some other entity will pick up the assets. For a song in the current circumstances.
    Central to the future will be whether any current or future Tasmanian government sees itself locked into some of the slimy deals that were done in the Bacon/Lennon years.
    If anyone could make up a list of these scams? No doubt the present Gunns lot would reckon they have value – to be sold on to whoever.
    I would like to see a campaign mounted to see that the people of Tasmania are not sold down the river to anyone, least of all to Japan, or China, or any other country!
    Who wants to see China becoming the biggest landowner in our state?
    It is clear that the ANZ will play a key role in what happens now. Of course they will want to maximise what they can recover from the wreckage. We the people must keep reminding Mike Smith and his board that any moves that fly in the face of the decisions they have already made (not to fund the mill) will have serious consequences for the bank. ANZ has big enough problems as it is with the Opes Prime debacle and big hits they have taken from the US sub-prime mortgage CDO scam. There are even more massive hedge fund/derivative disasters to come.
    Ironically, grim times – which will impact on us all, will likely be what dooms the mill, and Gunns, and woodchip exports etc etc. Every cloud has a silver lining eh?

  8. crud

    August 21, 2008 at 6:18 pm

    KAY,you wont be dancing after the bartlett labor govt.buys the 170 million timber reserve from gay with taxpayers money to help bale him out.

  9. kay

    August 21, 2008 at 1:06 pm

    There’s something wrong with my shoes, I keep breaking out into ‘Happy Dances’

  10. Richard C Butler

    August 21, 2008 at 12:20 pm

    Beware of raids engineered to achieve low cost takeovers. Our Iron Ore is precious and the chinese want it. This could be a Trojan Horse.

  11. Dave Groves

    August 21, 2008 at 9:58 am

    Gunns has shown consistency with management, community, profits and share price.

    A once revered company now finds itself clearing native forest and native wildlife, growing exotics weeds (harvested as arm wood) across Tasmania and brokering tax minimisation schemes……

    With reported debt of a billion dollars, profits dwindling despite generous subsidies and a graph of their share values looking like the north face of Mt Everest…..my question is what if…….

    Gunns had put a stop to clearfell, 1080 and napalm burns, planted mixed forest on marginal land, selectively harvested for saw logs, promoted small local saw mills, left leatherwood alone, stopped further plantation, put an existing plantation matched closed loop TCF or better pulp mill with paper production facility in the NW and set that up with full retail/export facilities, turned Evercreech into the next “King Island Dairy”, left Tamar Ridge as a boutique winery/vineyard with B&B;’s, trout fishing, restaurants and retailers of Tassie’s finest produce…as just a start….

    My point is that there has been no evidence of lateral thinking, no thought of the future, no thought given to the lives of anyone other than the profiteers.
    Trouble is this blinkered line of thinking seems to become greed driven and that often leads to irrational paradigms and destructive behaviour.

    I was speaking to a logger yesterday, a man who hated his work, but could see no way out. It was very sad and I felt deeply for this man as I watched him sip coffee putting his truck in gear for the umpteenth time.

    I thought of Latham’s $800 million restructure retraining that went begging while orange shirts hugged JWH and thought back to this cove in his multi wheeled office. I hope he finds a way out.

    Gunns on the other hand seem hell bent on sticking to their chosen path.

    I hope they don’t take too many with them.

  12. Mark

    August 20, 2008 at 10:42 pm

    Sad but true, Jarvis.

    Perhaps Robin Gray could return to Tassie politics? His CV of financial management must be showing something of a trend by now.

  13. Tomas

    August 20, 2008 at 8:54 pm

    identity theft deleted

  14. Mike Bolan

    August 20, 2008 at 8:46 pm

    Good stuff Jarvis. It seems that Gunns hasn’t been a timber company for years – they consume over $250 million per year in various subsidies and only return a fraction of that as profit which makes them a tax subsidy processor.

    If Gunns wants to sell its plantations to pay off debt, it’s going to have to confront some serious self created problems.

    Because Gunns is getting prime timber from public forests at $15 tonne, it’s hard to see how plantation timber will be worth any more. With Tas production at about 150 tonnes/hectare over 15 – 20 years, that means a hectare will bring just over $2,000 for the trees, then the buyers will have to figure out what to do with the depleted land that’s covered in stumps.

    While Gunns probably thought they were being pretty clever in suckering investors into a situation where Gunns could offer $15 tonne for trees that cost the ‘investors’ nearly $45 tonne, that shift in the ‘floor price’ could spell the end of any plantation sales fantasies.

    The land? First you’ve got to remove the trees and stumps, then regenerate the land to grow real crops – it would cost more than the land was worth. Some might be used to locate housing but after the first few dozen hectares there might not be much demand.

    Who is going to want to buy plantations when the only buyer of the wood will be Gunns?

    No-one with any brains is going to want to pay more than $1,500 hectare if they’ll only get just over $2 k for a hectares worth of trees. To get $170 million out, Gunns would need to sell nearly 120,000 ha of plantation, that’s nearly 1/2 their holdings.

    And which plantations? Many of them are failed – Tassie’s old, depleted soils and drought conditions in many areas have doomed many to being little more than dead matchsticks.

    Any astute buyer will want to assure themselves that the plantations purchased are capable of full production with marketable timber.

    These are exactly the plantations that Gunns won’t want to sell.

    And who are the buyers? If Gunns sells its best plantations they’ll be back to relying on native forest for pulp mills and woodchips unless they buy back the wood from the buyer…and if so at what price?

    The plantation owners will then have more of a whip hand and can raise the price of the timber, since Gunns won’t have an alternate source.

    Finally, if an overseas buyer (e.g. China) appeared, why would they want to build a pulp mill?

    They could just take the whole trees which are worth more than pulp anyway, and process them at home without building a $2.5 bn mill in an area with no-one to operate it.

    Gunns actions make no sense at all except in the context of building excuses to get more subsidies from the taxpayer. That’s where their ‘skill’ lies and they’ve become lazy and allowed their business to be single point sensitive to one class of market – chips and pulp. They haven’t invested in their business recently so they’ll find it hard, and expensive, to change course. And is the management team up to it?

    This probably won’t last long either as the financial crisis and recession really start to bite and ANZ and others start to need their money.

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