Gunns and Elites

An intriguing discussion was had on the Radio National breakfast program this week about the conclusions to be drawn from the demise of Gunns, Tasmania’s biggest paper and pulp mill. It is, sadly, the kind of debate that only occurs in Australia after the fact. People fear creating ripples in a small pond. Plus Australia’s horrifically suppressive libel laws means that strenuous and legitimate criticism of corporate behaviour is rarely attempted, let alone aired. Pick up an American newspaper or magazine, where there is constitutional protection of free speech and easy libel laws and you will immediately see the difference. The kind of negative commentary that occurs in the United States would simply not be allowed here. Instead, we are served up with a perpetual diet of anodyne dissimulation from corporates. The only question is whether the dishonesty is an outright lie, distortion of the truth, a partial truth or spin and exaggeration.

Thus we have to wait until companies die before people dare to be honest. Alec Marr, general manager of Triabunna Investments, which owns Tasmania’s largest pulp mill was not missing the opportunity. He exposed several issues about Australia’s corporate and financial elites which deserve far greater scrutiny, scrutiny they will almost certainly not get. Marr (former executive director of the Wilderness Society) said:

“It’s a sad day that could easily have been avoided by more sensible leadership earlier … It doesn’t matter how big you are, if you are really determined to go off an offend people all over the world, which was what (chairman) John Gay did — he offended the Japanese customers in the woodchip market, he offended the banking industry, he offended the investment community, he sued the community — I mean, those guys just didn’t think gravity applied to them. As a result they have turned a large company into a very small company and that should be a lesson to everybody who gets carried away with spending other people’s money. You have to remember that the vast bulk of this money came from people’s superannuation funds handed over by imbeciles in the investment community — I say that very calculatedly because I and others sat down in front of the CEOs and argued with their fund managers that they should not pour hundreds of millions of dollars of other people’s money into this company — and they did it anyway. And despite repeated massive losses hey just kept pouring money in. It was just crazy.”

Apart from saying the kind of thing that he could never have said when the company was still operating and able to sue him, Marr is highlighting some really important issues about the principal-agent problem — how agents of enterprises act on behalf of the owners. In this case there are two agents: the Gunns board, and specifically its chairman, and the fund managers who invest on behalf of superannuants. The latter especially gets insufficient attention, and you may notice that while Marr feels safe to name John Gay, he does not name the CEOs and fund managers in the investment institutions, because they might sue him. As usual, the fund managers get off scott free.

Read the rest here … and TT gets a mention in one of the comments …

• David Obendorf: Picking over a woodchipper’s carcass

When Gunns Ltd lender syndicate of ten banks informed the company that it would not allow Gunns to retain the proceeds from recent assets sales to cover operating costs (including staff salaries and payments to leases for plantations); the much heralded $250 million recapitalisation announcement was binned.

According to business sources Gunns was ‘on the verge of selling its two softwood sawmills – at Bell Bay and near Mt Gambier to Kingsland Timber (Australia) for $ 90 million’.

At least one of its lesser lender – Bank of Scotland International – wants out. It has sold its debt of about $100m to a hedge fund Anchorage Capital. Some see this move as a good omen to revitalise the fortunes of the remaining assets as the Anchorage Group has been involved in other debt-for-equity swap deals that have been partly successful including the Alinta Energy restructure.

Who knows.

Some analysts are suggesting the lenders will be lucky to get half their original capital back. Elizabeth Knight, writing for the SMH Business pages, reckons ‘the root cause of Gunns downfall was its inability to understand that corporate social responsibility extended beyond making a profit’. Gunns’ decision in 2003 to build a pulp mill put environmental interests on high alert and it brought the community out.

Many correspondents will chew over the bones and entrails of this fallen behemoth; others will be more clinical and look for tell-tale signs of disease or internal malady that led to its demise.

The value of Gunns investments in its MIS plantations is now [b]negative[/b] $100 million meaning the cost to the company in leasing and management of the estates is greater than any book value upon its harvesting. Remember Gunns Ltd picked up the task of being the ‘responsible entity’ for some failed MIS companies that have gone bust since 2010. The asset write-down on these poorly-managed and poorly growing MIS plantations was a much as $800 million and contributed to Gunns record $903 million loss in 2011-2012.

Gunns calculated the reduction in value in these plantations in the past 2 years at $425 million which, some analysts suggest, means that the asset was ‘originally significantly overvalued’. The write-down is publicly blamed on low woodchip prices and the sales in US dollars, but globally there is currently an over-supply of eucalypt chips internationally which is set to continue.

And that’s where the ambulance-chasing Receiver might still want to waste his breath trying to resuscitate this bag of bones. Any resurrection of the Pulp Mill in the Tamar Valley with its integrated plantation wood supply still represents a faint hope for the money-hungry creditors.

As Ms Knight states: ‘Once the corporate undertakers have picked over the Gunns carcass and auctioned off the last pieces, there will probably be less than 50c in the dollar for secured lenders and nothing for the shareholders.’

‘Investors who believed Gunns was latent with potential have clearly underestimated the lack of corporate governance and the potential for the broader constituency and environmentalists to mess up the cosy plans of Tasmania Inc.’

Wow!

‘While the demise of Gunns is being dressed up as being the result of woodchip prices, this ascribes no weight to a series of poor management decisions made over several regimes. … It is arguable that there is no value left in Gunns’ approved pulp mill plans. It would be a brave scavenger that would attempt to build the mill now,’ Elizabeth Knight told SMH BusinessDay readers last Wednesday.

[Reference: [i]Little left to pick over on woodchipper’s carcass[/i] – Elizabeth Knight, Sydney Morning Herald BusinessDay 26 September 2012]

• Matthew Denholm, The Australian, Saturday: Gunns is dead but its spectre could haunt the Apple Isle

THE felling of Gunns this week was heralded by novelist Richard Flanagan as the final end to a “tumultuous three decades of Tasmanian history”, akin to the day the Franklin Dam was halted.

“A great darkness has lifted from Tasmania. The last remnants of the fear which so pervaded and paralysed Tasmanian life are now gone,” Flanagan wrote on the Tasmanian Times website.

…

Gunns past directors, and in particular Gay, who next week appears in court on insider trading charges, bear substantial responsibility for their failure to clinch their holy grail – the mill.

With the project 100 per cent plantation-fed, the main barriers to broad public support – that “social licence” demanded by Chandler – were its siting in the Tamar Valley and the manner of its state approval.

Both decisions – the choice of the Tamar over the less contentious Hampshire and the dubious fast-tracking of the project after it failed to clear the planning umpire – can be laid squarely at the feet of Gay and his old mate, then premier Paul Lennon.

By sidestepping the normal planning process, Gay and Lennon destroyed confidence among many Tasmanians who might otherwise have supported the project.

Nor had Tasmanians forgotten the Gunns 20 lawsuit, which the company dropped in January 2010, but only after six years of mercilessly pursuing its critics.

Public antipathy might have mattered less had the investment climate been more favourable.

Market conditions – slumping woodchip exports and prices, the high Australian dollar, the collapse of plantation managed investment schemes, the global financial crisis and related credit squeeze – all played starring roles in Gunns’ horror show.

Read the rest:
http://www.theaustralian.com.au/national-affairs/gunns-is-dead-but-its-spectre-could-haunt-the-apple-isle/story-fn59niix-1226483705133

• Inside Business:
Pulp mill licence has less baggage without Gunns: Korda

Transcript:

Pulp mill licence has less baggage without Gunns: Korda

Inside Business ABC News Broadcast: 30/09/2012

ALAN KOHLER, PRESENTER: Back in 1875, brothers John and Thomas Gunn begun started a forestry business in Tasmania that grew to become one of the world’s big export wood chip businesses. It also became a powerful and often controversial presence in corporate Australia until things started to unravel when it drew up plans for a $2.3 billion pulp mill in Tasmania’s Tamar Valley. Well after being in an ASX trading halt for six months, the directors finally lost confidence that the business could be resurrected and they called in administrators, and that was trumped quickly by the banks putting in a receiver. The receiver is Mark Korda from KordaMentha. I interviewed him on Thursday.

Mark Korda, you’ve got three assets, the saw mill in South Australia, the forestry estate in Tassie and the pulp mill. But the key issue is that what’s the value of the pulp mill licence if it’s gonna be hard to build because of all the opposition from the Greens? I mean, Gunns couldn’t get it up.

MARK KORDA, PARTNER, KORDAMENTHA: Yeah, so what’s happened: we’ve decided we’ll do a strategic review of the pulp mill. I mean, one of the things is: if someone wants to deal with the pulp mill, you actually don’t need to deal with the baggage or should I say the dead wood of the old Gunns thing. So, it might become attractive as a free standing asset without it being confused with all the other issues that Gunns have had over the last 10 or 15 years.

ALAN KOHLER: Yeah, but the opposition has been to the pulp mill, not to Gunns. So whoever tries to build the pulp mill based on the Gunns licence is going to have the same problem, isn’t it?

MARK KORDA: Yeah, I think it is difficult, but I think the first thing to establish is that given where we are on the Tasmanian forestry estate and the supply of wood and given what’s happened on international competition for new pulp mills and where the price of woodchip is, is it economically viable first? And if it’s economically viable, then we’ll leave it to whoever wants to do it and the politicians to sort that out.

ALAN KOHLER: So do you have an initial view as to whether it’s economically viable?

MARK KORDA: I think the prognosis is very difficult at the moment. Like I said, if it was gonna be built, maybe it should have been built by now, but let’s have a look over the next month and see how we go.

ALAN KOHLER: How much is the asset in the books for, the licence?

MARK KORDA: So they’ve spent $250 million to date. That’s been written down to about $38 million, which is the underlying value of the land, etc. But the total pulp mill as spec’ed is in excess of $2 billion and creates many thousands of jobs.

ALAN KOHLER: Yes, that’s right. And, you know, it’s potentially a valuable asset obviously. But the question is: when you come to auction that licence and sell it to people, what will the reserve be? Will it be $38 million, which is what it’s in the books at or will it be $250 million, which is what they spent on it?

MARK KORDA: I think what we need to do is do a strategic review and see what the economics are and what the demand is and then it’ll be what it’ll be.

ALAN KOHLER: Yeah, so you will go to an international auction to see who wants it and how much they’ll pay?

MARK KORDA: If we can make it stack up in the first place.

ALAN KOHLER: And the forestry estate feels – seems like a big asset. It’s 300,000 hectares of trees. But isn’t it the case that with the woodchip price where it is and with the exchange rate where it is, it isn’t worth cutting them down?

MARK KORDA: Yeah, so what’s happened is the woodchip price has almost halved over the last three or four years. I mean, there is enormous numbers of trees. As you say, we have either owned or under management, at least 300,000 hectares. So, we’ll just work through that. Part of the issue we’ve got is some of the trees are owned by some MIS schemes, some are owned by other management investment schemes, some are owned by Gunns, some are owned by other trusts. So, part of what you got to do is: can you pull together all the land and all the trees to make sense rather that have it all split over different parties. So, it’s a big exercise. We’ve done it three or four times before and it takes a little time, but we can usually get there.

ALAN KOHLER: Have the investors in the MIS schemes lost their money?

MARK KORDA: They will lose a substantial amount of their money. That payments – that’s my experience. Their payments were made, you know, from 1997 onwards. If the trees are older, they’ll get a lot of their money back. If the trees are young, they’ve probably lost most of their money.

ALAN KOHLER: And what about the shareholders in Gunns; have they lost all their money?

MARK KORDA: My prognosis is yes.

ALAN KOHLER: So, what you have is a class action by them, or a group of them. Is there any insurance that might get them something?

MARK KORDA: I’m not familiar with that at the moment, but it’s usual there are directors and officers insurance, but it’s very early days at the moment, Alan, and there might be some other claims on that policy as well.

ALAN KOHLER: And if they actually won the class action, would that get them to higher in the queue than they are now?

MARK KORDA: No, they would be an unsecured creditor.

ALAN KOHLER: So why do you think Gunns went broke? I mean, obviously they ran out of money, but what fundamentally was the cause, as you come in and look at it?

MARK KORDA: So it’s sort of early days to have a look at it, but a couple of things. Clearly the woodchip price has collapsed. Let’s blame the GCF as usual. The woodchip price has collapsed – and I’m talking about halved, alright? You’ve actually got now a huge supply of woodchips because of the managed investment schemes were planted. Ostensibly you had a view of woodchips, but you also got a tax deduction, so you’ve got an oversupply. They’ve spent enormous amounts of money on research and development on the pulp mill and the Australian dollar has made life very difficult. And then you got all the issues about have they managed it properly?

ALAN KOHLER: Thanks for talking to us, Mark Korda.

MARK KORDA: Thank you, Alan.

• What Examiner Editor Martin Gilmour reckons …:

IT will be fascinating to see the impact of Gunns’ demise and the loss of hundreds of jobs when Tasmanians head to state and federal elections within 18 months.
See your ad here

By any definition that fails the most basic leadership test.

• 730 Tasmania: An uncertain future for Gunns owned plantations

Friday 28 Sept 2012 – 730 Tasmania

Reporter: Airlie Ward

http://www.abc.net.au/news/2012-09-30/an-uncertain-future-for-gunns-owned-plantations/4288170?section=tas

Airlie Ward: Despite getting out of native forest logging, Gunns foot print in Tasmania is still massive over 300,000 ha of plantation across the island. The majority of the plantations are entwined in complex lease arrangement incorporating Managed Investments Schemes. 125.000 ha is plantations Gunns took over from Great Southern; another failed MIS scheme. Some are freehold, some are joint ventures; some on State forest. But a lot is on land leased from private owners.

It seemed like a good idea at the time.

David Gatenby: We thought we were on to something….on to a good commercial proposition. But at this stage, it’s rather very doubtful whether we are or not. We might of made the wrong…the wrong decision.

Airlie Ward: David Gatenby’s 2000 ha property is in the foothills of the Great Western Tiers in Tasmania’s northern midlands. Around 6 years ago after battling years of drought, a decision was made to lease 300 ha of the property to Gunns.

David Gatenby: In our case it was a good move to… to… it enabled us to do other things on the farm that we wouldn’t have been able to do.

Airlie Ward: Gunns leased the land to establish a soft wood plantation. Annual lease payments enabled the Gatenbys to put in a 1000 megaLitre dam to drought-proof the property. Gunns got land for trees the Gatenbys got improved infrastructure; it looked like a win-win.

David Gatenby: We signed a 25-yearcontract so basically we’ve got 17 or 18 years to run with them. So the uncertainty surrounding all this at the moment is a real worry to us.

Airlie Ward: With Gunns going into administration this week, the future of any lease payments is uncertain.

Mark Korda: So we’re reviewing all the lease payments at the moment. But clearly Gunns have run out of money and the extent that it’s not economic to make those lease payments, they won’t be made.

Airlie Ward: The Gatenbys rely on those lease payments worth around $70,000 a year. They are not the only ones in this predicament; there are approximately 200 landowners in the state who have lease land to Gunns.

David Gatenby: It’s a huge amount of money for outlay which if we don’t get paid – something like $12 million a year out of the farmer pockets. So it’s a huge amount of money.

Airlie Ward: Losing those payments would be another blow to those rural communities already struggling with the forestry downturn.

David Gatenby: A farmer, I mean, he makes a dollar; it’s got a multiplier effect of 4 or 5 times.

Airlie Ward: part of the lease arrangement was that Gunns maintained roads, controlled pets nd reduced fire hazards. Recently that hasn’t happened.

David Gatenby: Road haven’t been graded into these areas. Fire is always a huge risk in these drier parts of Tasmania – it’s no different here. There’s often weeds and gorse coming in those plantations. So yeah, in the ideal world they [Gunns] should have done more maintenance.

Airlie Ward: They also failed to look after the main product – the trees. How long since there’s been any actual maintenance on these trees?

David Gatenby: Oh… there wouldn’t have been any maintenance for the last three years on these trees. Ideally they’d be good sawlogs, but the way they are at the moment they probably only be chippable logs.

Airlie Ward: It was well known Gunns was in financial strife. Mr Gatenby says they only made their quarterly lease payments at the 11th hour. When is your next lease payment due?

David Gatenby: It’s due in 58 days’ time so we’ve got a bit of sweating to do in that meantime.

Airlie Ward: Mr Gatenby has been examining his contract. Your understand of your contract ss that if they default that the trees revert to you.

David Gatenby: Correct, after 60 days .. yeah that’s under our contract. Ahhm… that they [the trees] revert back to us.

Airlie Ward: Have you got some concerns and got someone out to have a look at the trees, given it’s a long time since any work has been done on them?

David Gatenby: Yeah we did. We probably saw a little bit of this [collapse] coming.

Airlie Ward: Gunns’ Receiver KordaMentha admits it may happen in some cases.

Mark Korda: Prima facie, if you don’t play your lease then the trees may revert to the landowner.

Airlie Ward: But Mark Korda says Gunns plantations are many and complicated.

Mark Korda: What’s referred to as the Tasmanian forestry estate is 300,000 ha – just a little over. And that consists of trees that Gunns owns and the growers owns through the MIS schemes on both leased land and owned land.

Airlie Ward: It’s a significant chunk of Tasmania.

Mark Korda: So, Gunns has under control – in one form or another – through leased or owned land, you know, almost 7% of the land mass in Tasmania. It’s an incredible isn’t it.

Airlie Ward: Despite the current woes of the timber industry the receivers believe there will be buyers for the plantation estate.

Mark Korda: Oh… absolutely. It’s saleable or it can be restructured.

• ABC1 News Tasmanian Government among Gunns creditors

[excerpt]

http://www.abc.net.au/news/2012-09-30/tas-govt-among-gunns-creditors/4288420?section=tas

Rachel Fisher: he administrator of the collapsed Tasmanian timber company, Gunns, has confirmed the State Government is among thousands of creditors, who are likely to lose money. A significant amount of State Forest has been used to grow plantations shish are now in limbo when Gumnns went into administration last week.

Annah Yard: There are almost 50,000 investors who put their money into Gunns plantations; in fact over the years they pours about $1.6 Billion into the Manage Investment Scheme.

Mark Korda: They will lose a substantial amount of their money… that, that… that payments… that’s my experience, were made from 1997 onwards. If the trees are older they’ll get a lot of their money back; if the trees are young they’ve probably lost most of their money.

Annah Yard: Also likely to lose out are 200 landowners whose lease agreements are now in limbo. Many are farmers like David Gatenby. By Gunns administrator, Daniel Bryant has told 730 Tasmania one landowner is the Tasmanian Government.

Daniel Bryant: As a landholder yes… they have an interest in this, yes.

Annah Yard: The interest is substantial; about 22,000 ha of taxpayer owned forest is tied up in Gunns plantations. Gunns receivers have embarked on a strategic review of the company and hope that the pulp mill will be attractive as a free-standing asset, but they’re not certsain the project is economically viable.

Mark Korda: I think the prognosis is very difficult at the moment. Like I said if it was, ahhm… if it was gunna be built, maybe it should have been built by now. But let’s, let’s have look over the next month and see how we go.

Annah Yard: They’ll be plenty of people doing that.