Gunns, Liquidity and that Friggen’ Pulp Mill
Gunns Ltd investment is dodgy because they face a growing risk of breaking their loan covenants and a dried up cash flow. My opinion: get out now and invest in renewable energy like Roaring 40s.
Gunns Ltd losses reported last month (22 February, 2010) in the Australian:
Net profit in the half ended December 31 plummeted to $420,000 from $33.6 million a year earlier. The result was well below analysts’ expectations, with RBS having forecast an $18.2m first-half profit… Earnings before interest and tax in the first half slumped 93 per cent to $4.8m from $69.4m.Ray Brindal
Yesterday (21 March, 2010) Nick Clark in the Saturday Mercury wrote that financial analysts have reported potential cash flow stressors at Gunns Ltd and included the following warnings. Gunns Ltd:
- Risk breaching the debt ratios in their loan covenants in 2010;
- To avoid a breach in 2010, JP Morgan advised $100 million earnings would be required
- Plan to finance the pulp mill project via sale of 60% of its $1 billion plantations;
- Leaving Gunns Ltd with only 40% of the pulp mill;
- Meanwhile, saving $5 million in costs by staff cuts in its woodfibre business;
- And, present debt is $661 million
Covenants on a debt are conditions that must be met or the lender can say all bets are off.
Yes, the company has $1 billion worth of trees in the ground – but tree’s are not cash and any business knows if they fail to meet immediate debts as they fall due the game is over.
Gunns need to find a white night to save its sorry arse in short order by purchasing those $600 million worth of tree plantations or they may very well be in trouble because they have pushed themselves so far out on the pulp mill limb that its perilously close to going SNAP. No cash = no game = no business = no pulp mill.
On the eve of the Tasmanian election it was interesting to note the Liberal leader and the Green’s Peg Putt discuss the only deal that would take Liberals into power – the Liberal-Green alliance. The Liberals want the Gunn’s Pulp Mill on the Tamar River (as did the outgoing Labor Team) – at any cost. However, the Greens got over 20% of the vote on first preferences because Tasmanian’s specifically do not agree.
Green voters will not compromise on the Pulp Mill project and a retraction of the Green’s policy on this issue would be unthinkable in a Green Coalition deal. The pulp mill is ground zero for our forestry debate… sorry Gunns Ltd but there will be no more government bailout money.
Meanwhile Gunns Ltd seem to be following a pattern that I foresaw coming more than a year ago but got scoffed at in MBA classes for suggesting – Gunns may go out of business without cash flow. Gunns are failing to respond to their external environment in a world of adapt or die – people do not like burning old growth forest.
The fact stands that a strong proportion of the Tasmanian population are opposed to this industry propped up by government after government (including the one elected last night) and there will be little sympathy on our island for the demise of Gunns Ltd.
That is why I say that if I were an investor holding Gunns Ltd shares right now I would consider the risk component significantly high for the expected returns. I would look away from an industry where world opinion is turning more hostile every year. Whales, pandas, old growth trees – there is a pattern.
The bottom line for Gunns is they fail to see that they are in the wrong business. Why? Because they picture themselves as Gunns Ltd – we cut down trees and flog them off cheaply by the shipload day after day after day. The world is changing and so are customer’s attitudes. Goodbye Mr Chips.
[Images below were taken by me at the first anti Gunns Tamar Valley pulp mill rally held in Hobart several years ago... lest we forget why we voted Labor out of office, Mr Chips].
March 21st, 2010 at 6:59 pm
Never forget, and never give in. We can’t afford to.
March 22nd, 2010 at 7:56 am
Too true Jo… the moment we take our eye off the ball the major parties will give Gunns a free lunch. That is exactly why I voted Green in this election.
And it isn’t up to the Green vote to compromise, as they tried to tell Pegg on election night. Its about the major parties recognising that 21% of the primary vote was Green and that vote represents the will of a significant portion of the population.
They have to learn to govern with the Greens around… instead of taking their bat and ball away and costing many millions of extra dollars because they can’t get their own way without the balance of power.
March 22nd, 2010 at 7:55 pm
Financial Risks of Gunns Pulp Mill is compelling reading.
I especially enjoyed these two paragraphs under who pays and who loses? To quote:
March 22nd, 2010 at 8:03 pm
Corporate Accountability: The Gunns Ltd Experience by Rhett Martin, Department of Business, Law and Taxation at Monash University.
This paper is published in the Monash Business Review Volume 4 Issue 3, November 2008.
March 26th, 2010 at 8:58 am
Steven I have read your interesting summery of Gunns Ltd and from a Timber workers point of view and I’m a 4th generation saw miller and I have always said the timber industry was build on sawlogs for high value flooring and furniture timber and low volume in the 1950s and 60s and it was sustainable and I agree that the industries has gone fare and beyond sawlogs to wood chips. And I want to stress to the public good timber comes from native forests weather in regrowth or old growth not plantation timber for flooring and furniture. they are logging contractors out there that can selectively log bushes for sawlog only and that’s what I have always said has to happen the saw millers should selectively log crown land themselves to get only the saw logs he needs.
An average family owned sawmill that value add timber from green to dry flooring ect would employ approx 10 people but would only need 6,500 m3 per year of saw logs not the millions of millions of tonnes needed for wood chip. But what scare me the most is that in this whole forestry debate we the family owned saw millers are being forgotten and we have always done the right thing by our forest!
And I agree with you I think Gunns are doomed I’ve been say that for the last 9 years and the more people realising we need a timber industry that is small volume and high value the better off our forest will be for future generations of workers and the forest re-generates better being selectively logged.
Please Save our family owned sawmills!
March 26th, 2010 at 2:16 pm
Yes totally agree, the problem with Gunns is that they are about high volume low-end product in chips… the 7.30 Report this week had an interesting story explaining that nearly our total deficit is accounted for by the fact we export chips but import all the value added wood products…
It would be nice to go back to the sustainable industry that value-adds, for sure. And I agree, this has often spilled over onto anti-sawmill sentiment rather than focusing on the actual problem. We need small sawmills and wood craftsmen in the state.
I think the scariest thing about the Gunns story is that somebody like Gay can ride the company right to the bottom and refuse to get off. And with a company so heavily subsidised by the taxpayer.
Thanks for commenting because people really do forget there is another viable wood industry existing on the fringes of this debate.
March 27th, 2010 at 8:44 pm
By the way, if you’re back on this site in the next week or two Concerned Tasmanian Sawmiller – would you mind if I interviewed you over the sustainable wood industry? I am currently doing a Master of Business Administration with a specialisation in Journalism and Media Studies at the University of Tasmania.
If you could leave your number or send it to me I’d like to do an interview based story for my journalism assessment next month. If you’d like. Because it probably is the unsung story behind the Gunns story that everyone is listening to…
Just a thought.