is the gunns pulp mill dead ???

John Lawrence hits the nail on the head when he writes about Gunns,warts and all.Plus this company has in my opinion has had its day and further propping this nonsense with taxpayers money that can be should put to far better use.
But alas will it happen?, I doubt it as the Labour minority dodgey government and the Budgie oppostion need for political expediencey the poor suffering locals votes,this billion dollar white elephant will be a blight on the Tasmanian landscape

Part 1

Gunns: Is the worst over?

John Lawrence
07.10.10 5:15 am

The forest industry�s slow motion train wreck continues its inexorable journey.

There are many, on both sides of the forest debate who appear to accept the urban myth that had it not been for the actions of high profile activists, Gunns� former CEO would still be ensconced in Lindsay St Launceston.

A quick glance at the ASX announcement on 16th August 2010 outlining Gunns� achievements in the financial year 2010 reveal that Gunns� old business plan was a failure. The company�s old model was described as being �a conglomerate of long life low yielding assets�..(consisting of) many businesses�.. excessive levels of encumbered assets .....excessive debt levels to earnings,..... (where) potential investors do not understand the business.�

It took the new Board less than 3 months to clearfell the legacy of Miranda Devine�s Working Class Hero ( Devine retribution ... John Gay: working class hero and The Devine lie ).

The CEO�s demise and the uncertain state of his former bailiwick are due to its flawed business model, not the actions of one or two of its opponents.

There�s a real danger that erroneous reasons for the predicament facing the forest industry will lead to erroneous recommendations for a way forward.

Whatever the outcome of the Roundtable the next step will require heaps of money. From taxpayers probably. So an understanding of the current situation from a $ viewpoint must surely be close to the top of the list of current priorities.

Gunns� latest full financials released on 30th September attempt to gloss over the grim reality.

The headline profit after tax of $28.5 million has been presented as a vast improvement on the first half year�s result of a $400,000 profit.

While its second half year�s net profit after tax was a considerable improvement, Gunns� EBIT (earnings before tax and interest) was minus $85 million for the full year.

In these situations companies often present instead a figure of �underlying EBIT�. Gunns� underlying EBIT was calculated at plus $51 million, by excluding many of the write offs which caused the negative EBIT, even though they had been included in previous years to boost EBIT.

The new Gunns Board has undertaken to build a strong cash generating business. So perhaps it may be timely to start by taking a closer look at its cash flow, as per the 2010 financials, before examining the paper entries used to finalise the net profit figure.

Gunns� cash flow

A company�s cash flow statement splits cash in and out of a business into 3 categories - operating, investing and financing cash flows. Cash is a business� life blood, and operating cash flow forms the cornerstone of a firm�s profit.

Sometimes cash flows which have the characteristics of �financing� cash flows are instead allocated to �operating�. This has happened with Gunns and arguably gives an overstatement of its operating cash flow.

Understanding how MISs are recorded is crucial to understanding Gunns� financials.

Some MIS investors pay cash up front but most borrow, often from the MIS company. A MIS sale using a borrowing facility will give rise to a �sale� (in the P&L) and also a �loan receivable� (on the Balance Sheet).

Over time the investor gradually reduces the �loan receivable� with cash contributions. This doesn�t affect the P&L as the �sale� has already been recorded. It simply reduces the �loan receivable� and increases the �bank�.

But in the cash flow statement every loan repayment is recorded as an �operating� cash inflow.

Too many �loan receivables� may leave a MIS company without enough cash to operate.

So they are bundled up and sold to third parties, banks for instance. The sale proceeds are not recorded as a reduction in the �loan receivable� but instead as a �securitised loan� from the particular institution. The reason for this is that the �loan receivables� remain on the balance sheet as well as the corresponding �securitised loan� because, to use the accounting jargon, the risks and rewards of ownership have not been transferred.

There is still a lingering liability for the MIS company.

Accordingly when an investor with a securitised loan pays off the �loan receivable� it is immediately paid in full to the �securitised loan� lender. There is no impact on the P&L. The inflow is included as an �operating� cash inflow, yet the immediate outflow is a �financing� outflow being repayment of the securitised loan.

The loan repayment by the investor is never available to meet operating expenses because it is immediately paid to the lender in full. Yet the inflow is included as an �operating� cash inflow.

Arguably misleading. Within the rules but a little misleading. Especially if one is interested in trying to work out the sustainable cash flows of the various segments of Gunns� business.

In 2010 $44.5 million of securitised loans were repaid to Gunns by investors, then immediately paid to securitised lenders. Most analysts exclude amounts like the $44.5 million when assessing operating cash inflows of companies like Gunns. It�s not available to meet operating expenses.

Also normally excluded by analysts when trying to determine underlying operating cash flows are one off tax refunds. In 2010 a fortuitous review of the tax consolidation regime produced a tax refund of $29 million, $16.5 million in 2010 with the balance in 2011.

The stated net operating cash flow of $62 million is quickly reduced to $1 million if adjustments are made for $44.5 million of securitised loan repayments and the one off tax refund of $16.5 million.
Included in net operating cash flows was, needless to say, income from the sale of sawn timber. During the year, Gunns purchased ITC Timber for $88.5 million. The major asset was $56 million worth of inventory.

However the entire purchase price was included in the cash flow statement as an �investing� activity.

The argument for buying ITC was that synergies existed and working capital could be reduced by $30 million for the new combined sawmilling businesses thus creating a more sustainable business. Inventory reductions of $12 million were achieved during 2010.But to include the purchase of the sawn timber inventory as a �financing� cash outflow, and then to assign the sale of some of that inventory as �operating� cash flow simply overstates operating cash flow. Allowing for this anomaly means that operating cash flow for Gunns was clearly negative.

A bad sign indeed.