The black hole

Those at risk could include their mill contractors, landowners whose land was used to hold the pipeline and others - basically no one knows because the legal situation is unclear. The uncertainty has been amplified by the State Government’s refusal to give reasons in court for Sec 11, instead threatening to strike out the case.

Brokers

Brokers rely on reputation in order to be able to persuade their clients to acquire any given portfolio.

Just a few weeks ago, brokers at Macquarie, JP Morgan and Credit Suisse, persuaded investors to part with $1.50 per share in Gunns to help their capital raising. This was after Gunns shares had plunged to $1.67 from $2.30 in a few days and Gunns suspended trading.

At the time of writing (September 22, 2008), Gunns shares stand at $1.17 - a loss of 50c per share for those investors. Since the amount raised was $336 million or so, that means those “investors” lost 30 per cent - $100 million which Gunns probably used to pay off some of the debts that they’d incurred.

The reputations of the brokers who convinced investors to buy those shares may need considerable rehabilitation.

Financiers

Gunns worth is influenced by the value of their plantations, which can be understood in at least two ways:

• what the plantations and timber might be worth to Gunns; and
• what the plantations and timber might be worth to any financiers and others.

Determining either of these requires a reasonable understanding of how much timber might be produced from the plantation estate, when it will be available commercially and what its commercial value might be.

Clearly the commercial value of pulpwood to Gunns will be related to whether they have a pulp mill or whether they have to sell the timber as wood chips or other feedstock (for example, biofuels) because each delivers different profit lines.

Many would argue that wood is worth considerably more as timber, but that doesn’t match Gunns concept.

It is very much in Gunns’ interests to claim the highest value possible because it leads to a higher perceived value for their company, paints a rosy profit picture for plantation “investors”, and provides collateral for big loans.

On going harvests

There are sufficient failed or feeble plantations dotted around Tasmania to raise the question of the value of the land for regrowth of timber. Food growers understand the importance of crop rotation to replenish depleted soils, but tree plantations are in perpetuity so - no rotations - no replenishment.