fin review-gns/abc

� AUSTRALIAN FINANCIL REVIEW - Wednesday 7 September 2011
By Carrie LaFerenz

Gunns� suspicion fuels supposition

The vacuum that has developed around Gunns Ltd�s future is being filled by wild speculation that swings between the timber company operating an informal administration and being on the brink of signing a partner for its long-hoped for pulp mill.

The length of Gunns� self-imposed suspension from trading has drawn unflattering comparison with childcare operator ABC Learning Centres - which was suspended in August 2008 pending the release of an announcement regarding financial results but the company never re-emerged because it was forced into the hands of corporate undertakers.

It has been 5 weeks since Gunns first sought a trading halt, ostensibly because it was negotiating a compensation package with the Tasmanian Government to exit native forest logging contracts in the State.

Expectations for the cheque it would receive have been slashed from about $200 million 12 months ago to about $35 million. Any payments will likely take into account debts of $27 million the State-owned Forest Tasmania claims it is owed by Gunns, but which are being contested.

Gunns formally rejected an initial offer on Monday night but is back with the Government trying to hammer out a key part of the forestry agreement .Gunns must exit native forest logging and Forestry Tasmania must extinguish those contracts; so they can�t be re-issued to anyone else. Otherwise, all bets are off.

Apparently, the parties aren�t too far apart, but the gap was enough to make Gunns think it not worth holding out.

Conspiracy theorists are seeing the hands of Gunns� banker, ANZ Banking Group in everything the company does at the moment, particularly as it approaches a January 2012 deadline to re-finance its $350 million core lending facility.

Gunns� boss, Greg L�Estrange has been furiously selling down assets, and in the case of the Triabunna woodchip mill and port that is central to the native forest industry in Tasmania; Gunns accepted a price that was half of what he originally wanted and $6 million lower than another offer that had seemed a �done deal� until payment delayed provided an opening for environmentalists Jan Cameron and Graeme Wood to trump the offer with less, but certain cash.

The more excitable corners of the market see a managed wind-down of the company ahead of formal administration, although sources close to the company say that is not the case.

However, one could be forgiven for wondering what is going on when Gunns has sold so many of its core assets on a big bet that it can get the pulp mill funded and built. Gone are Gunns� Launceston headquarters and plantations in the Green Triangle region of South Australia. The company also wrote down the remaining assets in the annual financial results last month [25 August 2011].

The more positive view is that Gunns is cashing up and clearing up its balance sheet in readiness to land a partner for the Bell Bay pulp mill that it has been attempting to build for the better part of a decade.

While squeezing more money from the government can be seen as a win, Gunns is still on thin ice.

Its net debt fell from $629 million in the fiscal 20011 from $659 million the year before, but 95%, or $593 million of the debt is current.

Gearing is very high compared to its operating cash flow and assets sales are therefore needed. It�s a tricky process since the saleable assets usually generate cash flow that is needed to pay off the debts.

Gunns� MIS loan book is on the market, but its sale would deny the management fees and interest income on its loan book. The interest rate on the loan book is higher than the interest rate on the main facility to ANZ. Which means Gunns� net interest expense goes up if the loan book is sold.

Operating cash flow fell from $62 million to $37 million in 2011, painting a dire picture for the key operating woodchip business. Woodchip volumes fell sharply in the second half of 2011 and the revenue was down 25 % year on year.

Gunns will have some explaining to do when it comes out of suspension.