Hidden mill investment exposures!
Reading this could save you a lot of money…
Make no mistake, Poyry is writing Gunns script and there has been no independent verification of their claims whatsoever.
Repaying the debt and earning profits in such an unpredictable environment could be very problematic, not least because Gunns has ignored so many obvious threats to their business.
Leaving threats to your business out of your plans is a recipe for sudden surprises and disasters.
CONCLUSION: Gunns survival depends entirely on taxpayer subsidies.
Subsidies are good news in good times, but in difficult times they expose the company to huge losses when subsidised activities suddenly become a cost.
One question for investors is whether they really believe that governments will continue to justify around $200 million per year as subsidies, when social pressures are calling for greater government investments in health, education, aged care etc.
For Gunns, the inconvenient facts are that:
- Cost and availability of water for plantation growth
- Changes in fuel costs (e.g. ships bunker fuel)
- End market changes (e.g. polymer papers from plastic waste)
- Pulp price collapses (forecast 2010 glut)
- Adverse carbon credit findings leading to new costs
- Input losses due to fires and firestorms (each 100 ha lost = $3.2 million of pulp)
- Plantation investor revolt (e.g. Class action)
- Catastrophic event at pulp mill (e.g. ClO2 explosion, black liquor boiler explosion)
- Odours from mill disrupting other Tamar businesses
- Federal MIS schemes
- Roads & bridge maintenance
- Charges for water used by plantation
With those subsidy levels, Gunns has been effectively making losses for years and has only been posting a profit thanks to taxpayer subsidies or cost relief.
Gunns should make its economic assumptions and models available to all shareholders now so that they can decide what level of protection there is from threats presented by those types of variables (e.g. fire, drought, subsidy losses).
Facts and implications for investors
- What happens if tree growth is stunted by drought? Or fire storms destroy plantations?
- If Peak Oil is real, could ships' bunker fuel prices cripple competitive exports?
- What exposures exist from further overseas market changes (e.g. polymer papers)?
- Pulp market forecasts describe a glut of pulp by 2010. What impact might this have on pulp prices and profitability?
- If Gunns is seen as an emitter of carbon, how might the extra costs affect Gunns bottom line.
- Plantation investors pay around $7,000 per ha to own the trees. Since each hectare produces between 150 – 200 tonnes then investors will expect between $35 - $46 per tonne to break even. Gunns can now buy timber from Forestry Tas for $16 per tonne, delivered to the mill, so investors are in for a very rough ride when they try to sell to the only buyer - Gunns! Expect the outcome to be strongly politicised.
- For each hectare of plantation established by Gunns, they receive over $3,000 of taxpayer money via MIS. To increase their plantation estate, Gunns needs more land. The mill seems to need a minimum of 400,000 ha of plantation, an increase of 200,000 ha from current levels. That growth would represent further federal subsidies of $640 million. If that scheme is stopped (and there are many farming and community groups fighting it), then plantation estate increases would be curtailed. That would cap inputs and lower income significantly.
- Road and bridge repairs are conducted at ratepayer expense. The weight of modern log trucks creates disproportionate damage and total cost relief for this item has been estimated at about $20 million per year across Tasmania. Councils are already crying poor, how long before this subsidy comes under serious question?
- Plantation trees consume a lot of water (reported as averaging 2 Ml/ha/yr more than grasslands for grazing) for which plantation operators do not pay. Tasmania is in drought status right now, rainfall has been diminishing for 10 years and reservoirs are at record lows. Pressure from farmers and communities down catchment could easily change government policy on water charges for trees. The 400 Gl currently calculated for Gunns plantation, at $100 Ml, represents $40 million dollars of foregone State revenue per year.
- Additional subsidies in the forms of cash payments and cost relief have also been made available to Gunns (e.g. forest agreements etc) to the value of over $300 million in the last 3 years
If you're going to be locked into something that relies on long term stability, you really need to know what could go wrong so you can assess the risk.
What is Gunns trying to hide?
If Gunns insurance is as tenuous as insiders report, then shareholders could be severely exposed in the event a major mill accident or a class action against the company.
We cannot understand how the company's management can leave the company and shareholders, so exposed by keeping us ignorant of so many critical factors that would affect our perceptions of value and risk. Drought risks alone include stunting plantation growth, firestorms and new charges being levied for tree plantation water use. Risks that surely merit discussion with shareholders before the company plunges itself into the unknown.
Frankly, after we'd reviewed everything that Gunns has hidden, we decided to EXIT.
If you convert high value, differentiated timbers into low value, commodity wood chips, you'll need subsidies so that you can pretend its a business.Our advice?....It was great while it lasted but from here on in....
...we're out of here!
This way to the EXIT everyone....asx.com.au
INSIGHT: Competent executives? Due diligence?
“The main input for the economic modelling was the financial model supplied by Gunns….on a strict commercial-in-confidence basis”
Back to Mr Stanford on public concerns about environmental costs (e.g. water, fires)
“We did not model the economic impact of any significant adverse environmental impacts because we were not advised that there would be any such impacts.”Mr Stanford on concerns about project risks
“I have never included an analysis of project risks when evaluating and reporting the economic outcomes.”
It's pretty obvious that Mr Stanford only did what he was told, only used information provided by Gunns and did no risk analysis whatsoever.
Professional? You be the judge at...Jonathan Stanford sworn witness statement
Mr Stanford is now, worryingly, a partner at Deloitte.
See also Dani Ecuyer's (investment analyst) analysis
You'll find more information about the risks in Foresty actuary's RPDC submission
Chris Lang also provides a good and detailed alternative overview of the pulp business