1 2 3 -pa*Crpated - Arnold Bloch Leibler

IN THE SUPREME COURT OF VICTORIA AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
s ct 2013
2095
tN THE MATTER OF GUNNS PLANTATTONS L|M|TED (lN LIQUIDATIONXRECEIVERS &
MANAGERS APPOINTEDXACN 091 232 209) in its capacity as the responsible entity of the
managed investment schemes listed in Schedule 1
DANIEL MATHEW BRYANT, IAN MENZIES CARSON and CRAIG DAVID CROSBIE (iN
their capacities as joint and several Liquidators of GUNNS PLANTATIONS LIMITED (lN
L|QUTDATIONXRECEIVERS & MANAGERS APPOINTEDXACN 091 232 2091
First Plaintiffs
and
PLANTATTONS LtM|TED (rN LTQUTDATTONXRECEIVERS & MANAGERS
APPOINTEDXACN 091 232 209) in its capacity as the responsible entity of the managed
investment schemes listed in schedule 1
cuNNs
second praintiff
AFFIDAVIT OF DAVID JOHN PAUL
24 July 2015
the Plaintiffs
Date of document:
Filed on behalf of:
Prepared by:
ARNOLD BLOCH LEIBLER
Lawyers and Advisers
Level 21
333 Collins Street
MELBOURNE 3OOO
Solicitor's Code: 54
DX 38455 Melbourne
Tel: 9229 9999
Fax: 9229 9900
Ref: 01-1782215
(Kimberley MacKay - kmackay@abl.com.au)
l, DAVID JOHN PAUL of Level 8, 276 Flinders Street,
Melbourne, in the State of Victoria,
Consultant, MAKE OATH AND SAY that:
1
I am the Head of Forest Resources Consulting for lndufor Asia Pacific (Australia) Pty Ltd
(lndufor). I have been employed at lndufor since 22 September 2014. Prior to joining
lndufor, I was employed by URS Australia Pty Ltd (URS) as a Principal Consultant.
2
Except where I othenruise indicate, I make this affidavit from my own knowledge. Where
I
depose to matters from information and belief, I believe those matters to be true.
Experience
3
I commenced employment with URS in June 2004. Two of my key areas of responsibility
were to lead forestry valuation projects and assist as a specialist forestry advisor during
vendor due diligence on large industrial plantation acquisitions. Since 2004 I have
in major plantation asset sales (of greater than '100,000 hectares) including:
-pa*Crpated
(tç
2
(a)
(b)
Carter Holt Harvey forest divestment;
Queensland Government sale of plantations managed by Forestry Plantations
Queensland; and
(c)
4
South Australian Government sale of plantations managed by ForestrySA.
Since 20OB I have been heavily involved with the rationalisation of plantation ownership
following the collapse of the Managed lnvestment scheme sector.
5
Asset sale projects
I have been involved with
either as Project Manager or Project
Director include:
(a)
(b)
(c)
(d)
(e)
(Ð
(g)
6
Great Southern Plantations;
Willmott Forests;
Elders Forestry;
Rewards GrouP;
Environinvest; and
Gunns.
These projects all involved varying levels of due diligence, but most involved:
(a)
(b)
(c)
(d)
(e)
7
TimbercorP;
the collection of new inventory data;
a review of Plantation Yield;
auditing of the plantation area statement using satellite imagery;
a review of markets for end products; and
the development of valuation cash flow models.
I have also undertaken valuations of large privately owned plantation estates in New
Zealand (Taumata Plantations Limited) and Australia (Australian Bluegum Plantations,
Forest lnvestment Trust) as well as multiple valuation assignments over the past 11
years for global Timber lnvestment Management Organisations such as Hancock Natural
Resources Group, Global Forest Paftners, New Forests Asset Management and GMO
Renewable Resources.
B
The methodology used for the Gunns value allocation process was consistent with the
principles used for these valuation assignments.
Purpose of affidavit
g
I refer to the affidavit of Daniel Mathew Bryant sworn on 24 April 2015 in this proceeding
which exhibited at "Confidential DMB-8" a copy of a URS Report entitled 'Allocation of
Document Number: 4207 044
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3
Sale Proceeds for Plantations Managed by Gunns Plantations Limited'dated 9 April 2015
(URS Allocation Report). I prepared the URS Allocation Report on behalf of URS. I refer
to certain defined terms in the URS Allocation Report in this affidavit.
1O
I further refer to the affidavit of Adam Musgrave affirmed on 15 July 2015 (Musgrave
Affidavit). I also refer to the submissions filed in the proceeding by Mr Musgrave on 15
July 2015 (Musgrave Submissions).
11
On 16 July 2015, I received an email from Kimberley MacKay, a solicitor for Arnold Bloch
Leibler, solicitors for the Plaintiffs, in relation to the Musgrave Affidavit and Musgrave
Submissions that were filed in relation to the Allocation and Distribution Application. Ms
MacKay requested that I respond to the Musgrave Affidavit and Musgrave Submissions.
Now produced and shown to me marked "DJP-f is a copy of the email from Ms MacKay
to me dated 16 July 2015 (excluding attachments)'
12
I make this affidavit in response to certain of the matters in the Musgrave Affidavit
and
Musgrave Submissions.
Response to Musgrave Submissions
Response to paragraph 28 of the Musgrave Submlssions
13
I refer to paragraph 28 of the Musgrave Submissions in which Mr Musgrave states that
the URS inventory programme was completed in a total of six days compared to 15 days
proposed in the Valuation Terms of Reference.
14
The six days noted in page 14 of the URS Allocation Reporl refers to site inspections as
distinct to plantation inventory. The six days for the site inspection were completed by
URS staff and included a review of plantation health by air and ground survey, an audit of
plantation records and an assessment of plantation access'
1b
The 1b days proposed in the Valuation Terms of References relates to the estimated
time to complete the plantation inventory programme. The actual time to complete the
plantation inventory was 21 days, with each professional inventory crew consisting of two
people.
Response to paragraphs 29 to 31 of the Musgrave Submrssions
.16
referto paragraphs 29 to 31 of the Musgrave Submissions in which Mr Musgrave refers
to the number of inventory plots relating to the 2002 Proiect. Mr Musgrave notes that
URS indicated the minimum number of plots for the 2002 Project to be 40. He also notes
I
the actual plots completed by URS in the 2002 Project was 29. On this basis Mr
Musgrave states the URS yield estimate for the 2002 Project to be flawed'
17
The process of estimating a sampling intensity requires assumptions regarding the
diversity of the population being assessed, and then having sufficient sample points to
Document Number: 4207044
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provide a meaningful estimate of that population. The initial estimate of a minimum of 40
inventory plots for the 2002 Project made assumptions about the diversity of the
plantations within this Project.
18
The objective of an inventory programme is to have a result which is a reasonable
measure of the precision of the estimate, which in plantation terms is commonly
assessed through a probable limit of error (PLE) around a parlicular estimate. PLE
represents the confidence interval of the sample and is calculated as a percentage of the
sample mean.
1g
Table 5-3 of the URS Allocation Report presents the resultant PLE for the URS inventory
process by Project. The PLE for the URS inventory programme for the 2002 Project is +/17%, which approximates an industry accepted variability in estimates for this type of
inventory, and is lower (i.e. is more precise) than the PLE attained for the majority of the
other Projects.
20
On that basis, the actual number of plots sampled for the 2002 Project provides
a
reasonable estimate of the actual yield at the time of the inventory.
21
As described in paragraphs 14 and 15 above, discussion relating to a'truncated
inspection' programme is not relevant to the inventory sampling intensity and the related
estimates by Project.
Response to paragraphs 32 to 35 of the Musgrave Submlssions
22
I refer to paragraphs 32 to 35 of the Musgrave Submissions in which Mr Musgrave states
the plantation damage noted by URS at the plantation SQ139 Armistead was not
factored into the 2OO2 Project value allocation. Mr Musgrave references URS
correspondence regarding the damage to plantations noted by fungal and insect
pathogens, and the related potential impact on plantation value'
23
Severe plantation damage can impact on plantation value. Where severe plantation
damage was reported or observed during the plantation inspection, URS excluded these
areas from the allocation process and assigned a zero value to that plantation area' This
approach to adjusting plantation area was applied across all Projects, including both the
2002 and 2005 Projects.
24
On this basis, the plantation damage noted by URS was taken into account in the 2002
Project value allocation.
25
At paragraph 35, Mr Musgrave also states that the total area loss in the 2005 Project was
less than the total area loss for the 2002 Project.
26
ln terms of value allocation, the percentage of area loss as part of a total Project area is a
more relevant indicator than the absolute area loss noted at a property level. Furthermore
several of the properties identified in Table 4-2, including SQ139 Armistead, contain
Document Number: 4207044
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plantations assigned across multiple Projects. As noted above the severely damaged
plantation areas were removed from the value allocation process'
Response to paragraphs 36 to 42 of the Musgrave Submrsslons
27
I refer to paragraphs 36 to 42 of the Musgrave Submissions in relation to the adjustment
made by URS to the 2005 Project. Mr Musgrave observes the scaling of 69% applied by
URS to the 2005 Project, and he refers to inventory data for the 2002 and 2005 Projects,
and particularly tree height, tree count and basal area. Mr Musgrave also refers to the
management of the plantations under GPL and states new owners of the GPL plantation
would clearly more actively manage the 2005 Project than GPL did, and that the
plantation performance will improve as a result of more active management.
28
Mr Musgrave also states that the 2002 Project suffered a greater absolute area loss than
the 2005 Project. On the basis of Mr Musgrave's view on particular inventory specifics,
his observations about management and the area loss by Project, he submits URS
should not have scaled back the 2005 Project.
29
At paragraph 42 of the Musgrave Submissions, Mr Musgrave submits that "URS should
not have scaled the 2005 Project yield back by 69%...". This statement is inaccurate.
The 2005 Project was not scaled back by 69%, it was scaled back to 69% of the GPL
forecast to align with the URS inventory results.
30
The inventory data includes the estimated recoverable volume by Project, as estimated
by the URS inventory and according to GPL forecasts. The URS volume estimates are
based on the measurements referred to by Mr Musgrave, being tree height, tree count
which estimates the numbers of trees stocked per hectare, and basal area (stem girth).
31
Mr Musgrave notes the 2005 Project tree height is 75% of the 2002 Project, and that the
tree count for the 2005 Project compares favourably to the 2002 Project.
32
Mr Musgrave also notes the basal area for the 2002 Project is approximately double the
2005 Project.
33
Assessors of forest inventory understand the combination of these three metrics provide
the estimate for the volume per hectare, and where basal area is double from one
population
to
another and tree height
is
greater, the estimated volume will
be
substantially higher (i.e. the volume of the 2002 Proiect will be substantially higher than
the 2005 Project).
34
As noted in Table 5-3 of the URS Allocation Report, the URS inventory estimate for the
2OO2 Project standing volume was 285 mt/ha compared to the GPL forecast of
247 m3lha, with low and high PLE estimates of 236 m3/ha and 335 m'/ha respectively.
The GPL forecast falls within the low and high PLE estimates of the URS inventory.
Document
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umber: 4207 044
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35
ln contrast the URS inventory estimate for the 2005 Project was a current standing
volume of 87 ms/ha, compared to the GPL forecast of 126 ms/ha. Furthermore the PLE
low and high estimates for the 2005 Project were 62 mt/ha and I 13 m3iha respectively.
36
Given the GPL forecast for the 2005 Project was outside the PLE estimates of the URS
inventory, and therefore outside plausible confidence limits, the yield was adjusted back
to 69% of the GPL forecast to align with the URS inventory results.
37
tt is noted that the 2006 Project was also scaled back to 53% of the GPL forecast, using
the same approach as the 2005 Project because the GPL forecast was also beyond the
plausible limits of the URS inventory.
38
URS were requested to provide a valuation for the tree crop that existed at the time the
GPL liquidation process received a bid, being 24 April2014, As part of that assessment,
URS took into account the condition of the plantation, and estimated growth rates.
39
Part of the valuation process requires assumptions regarding future costs including future
plantation management inputs and costs. URS has assumed future plantation
management costs would reflect a typical plantation management regime.
40
The new management options of severely damaged plantations would
involve
considering a wide range of decisions by the tree crop owner and potentially the land
owner (where they are independent of each other).
41
URS would not concur that
a new plantation owner would
automatically result in an
improved performance from the 2005 Project. A new owner would need to balance any
additional cost of extraordinary plantation management actions, with the potential for
expected improvements in the plantation performance and the time involved in gaining
that expected improvement. ln some circumstances a new owner may judge the most
effective course of action would be the removal of a damaged plantation and then start
with a new plantation crop, or, may accept a lower growth rate of the damaged plantation
with no additional cost, or seek to intervene and improve the performance recognising
that an improvement in the plantation may or may not eventuate.
42
More broadly, a new plantation owner would consider where else it may invest within its
plantation estate, and what might provide the best return to the investors. As an example
of how a new plantation owner might consider investment
alternatives, the URS
Allocation Report notes the announcement by Forico, as the new owner, regarding
upgrading of the Hampshire mill, an investment which has the potential to improve
returns for a wide range of plantations and across a range of Projects.
43
The valuation is assessing the plantations at the relevant date, and takes into account
the markets, yields and reasonable costs of management given the condition of the tree
crop at that time.
Document Number: 42O7O44
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7
Response to paragraphs 47 to 50 of the Musgrave Suþmrsslons
44
I refer to paragraphs 47 to 50 of the Musgrave Suþmissions in which Mr Musgrave refers
to an alternative allocation and distribution proposal. Mr Musgrave proposes an allocation
based on the plantation area of each Project, with Projects with greater plantation area
receiving a greater allocation of the sale proceeds.
45
The approach of Mr Musgrave to value allocation ignores accepted valuation practices,
both within and outside the forestry sector.
46
A key underpinning of an asset's value is the cash flow it can reasonably be expected to
generate, This approach is a requirement of the lnternational Financial Reporting
Standards, and reflected in the Australian Accounting Standards Board (AASB) 141
-
Agriculture standard, which is the approach adopted by URS in this valuation.
4T
This approach recognises the future cash flows that would arise from the management
and harvesting of the existing tree crop, and discounts the resulting cash flow to a
common start point (the valuation date) to determine the net present value of the tree
crop. This is termed a discounted cash flow (DCF) approach.
48
This approach is the common basis of investing, purchasing and selling plantations
across Australia.
49
The approach proposed by Mr Musgrave fails to meet a wide range of valuation
principles. These include: the time period until the tree crop matures and therefore the
time elapsed until a harvest return might be realised (which could be overa 10-15 year
period); the variation between plantations in the volume of timber forecast to arise from
the harvesting of the tree crop; the variation between plantations in the overall costs
involved in managing the tree crop through to the time of harvest and the costs involved
in harvesting a tree crop; the revenue likely to accrue as a result of harvesting the trees
given the location of particular plantations relative to the respective woodchip processing
location; the price of logs and woodchips at the time of harvest; accounting for the time
preference for money; and accounting for the differing risk profiles between plantations in
achieving these returns.
50
Each of these elements have been taken into account in the DCF approach used by
URS.
Response to Musgrave Affidavit
Response to paragraph 7 and 11 of the Musgrave Affidavit
51
I refer to paragraphs 7 and
Document
N
umber: 4207 O44
1
1 of the Musgrave Affidavit.
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I
52
the Musgrave Affidavit, it is deposed that I had a telephone
conversation with Mr Musgrave on 13 July 2015. I confirm that I spoke with Mr Musgrave
At paragraphs 7 to
1O of
by telephone on this day.
53
At paragraph 9 of the Musgrave Affidavit it is deposed that Mr Musgrave was provided a
spreadsheet of inventory records and derived outputs from the URS records. lt is
deposed that this spreadsheet was taken from a larger inventory model and contained a
number of errors.
54
The initial spreadsheet received by Mr Musgrave had been incorrectly transposed from
the master inventory model. The incorrect transposing related to the URS inventory data
and the GPL forecast data, which were reversed and placed into the incorrect columns
for both the 2002 and 2005 Projects. ln addition, the calculations shown in the GPL
Estimates columns reflected
a
methodology that was not ultimately adopted for the
analysis. This was why Mr Musgrave could not reconcile the figures in the spreadsheet
with the URS Allocation RePort.
55
I
refer
to Exhibits "Confidential AJM-4' and
"Confidential AJM-5" of the Musgrave
Affidavit.
56
Both of these exhibits contain
a
spreadsheet provided by URS. The spreadsheets
associated with these two exhibits have been incorrectly identified. The spreadsheet
annexed to "Confidential AJM-4" is dated 13 July 2015 and should be referenced as
"Confidential AJM-S". "Confidential
AJM-5'is dated 29 June 2015 and should be
referenced as "Confidential AJM-4". This can be confirmed by checking the dates on the
second line of each spreadsheet.
57
Due to the presence of these errors, "Confidential AJM-4" being the original inventory
data spreadsheet, was considered flawed and was superseded by "Confidential AJM-5"
of 13 July 2015 sent by Ms MacKay to Mr Musgrave and revised
inventory data spreadsheet. This data reflected the methodology used for the
being the email
assessment and was consistent with the data presented in the URS Allocation Repoft.
5B
At paragraph 10 of the Musgrave Affidavit it is deposed that URS had only inspected 29
plots in the 2002 Project and that I had acknowledged the comment relating to a
minimum number of plots.
59
Further, at paragraph 10 of the Musgrave Affidavit, Mr Musgrave deposes to part of our
discussion on 13 July 2015. The recollection of the discussion requires some clarifìcation.
Mr Musgrave's comment regarding access affecting the number of plots measured is
correct. Poor access to the plantations prevented a number of plots from being
measured. Mr Musgrave's statement that 40 plots was the minimum number of plots
required to assess the robustness of Gunns yield estimate for the 2002 Project is not
correct. The selection of 40 plots was considered the minimum number of plots required
Document Number: 4207 044
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during the planning of the inventory programme, The inventory planning process occurs
before any measurements are taken.
60
The PLE for the 29 inventory plots actually measured for the 2002 Project approaches
industry accepted averages and are lower (i.e. more precise) than the plot data arising
from several of the other Projects. On this basis the 29 inventory plots for the 2002
project provides an adequate sampling intensity given the observed population
variability.
SWORN at Melbourne
)
in the State of Victoria
)
by DAVID JOHN PAUL
)
this 24th day of July 2015
)
)
KATE ALEXANDRA ELLIOTT
Amdd Blocf¡ l¡þter
t0vd.21, 333 Colffns $tred, tldboums 30OO
-An Australian Lega¡ praafi¡oner
within üþ mdning of fie
{-egal Profession Un¡O¡r¡-t-rw
ú¡qorh)
.
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