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Extract:

Submission: Public Hearing to the Inquiry into the Triabunna Woodchip Mill and Future Development Opportunities for the Triabunna Region

Submitted By: Gregory L’Estrange

Triabunna Woodchip facility had one major contract customer since the 1970s, being Nippon Paper. This supply arrangement was supported by a contract that was due to expire in December 2010.

During 2010 the Gunns sales team worked with Nippon seeking to achieve a change in position. Unfortunately this was not achieved, as Nippon’s preference for supply to its Japanese facilities was for FSC certified plantation fibre at more competitive prices than had been historically achieved.

In the first quarter of 2011, the Triabunna woodchip facility was closed and all the employees were given their notice of redundancy.

Gunns embarked on a sale process for the facility and invited industry participants to review an information pack on the facility and make a commercial offer. From this process three offers were received:

1. An industry group whose offer was highly conditional and incomplete, with a value range between $0m and $5m.

2. The Triabunna Investments offer of $10m, without conditions.

3. Fibre Plus (Tas) Pty Ltd and RD O’Connor and B O’Connor (Aprin Pty Ltd) with an offer of $16m. This group will be the O’Connor transaction for this report.

During the month of May Gunns negotiated with O’Connor to conclude an agreement. During these negotiations Gunns made it clear that such a transaction was to be concluded by 30 June 2011. In early June 2011, O’Connor and Gunns entered into an agreement for the sale of the Triabunna facility, with the date for settlement being 29 June 2011.

The contract for sale was not subject to any finance provisions, but did include specific details around transitional arrangement and the need for Gunns to undertake maintenance works prior to the sale.

O’Connor represented in this agreement to Gunns that funding was not an impediment to settlement by the 29 June 2011. Only when O’Connor failed to settle the transaction on the agreed settlement date, did it become apparent that the equity component of the investment was not significant and that the debt funding had not been committed.

Gunns completed its required maintenance works, at significant financial cost, and was in a position to settle this transaction on the agreed settlement date.

On the 29 June 2011, O’Connor advised Gunns that they were not in a position to settle the transaction. Indeed, no money was deposited in Gunns’ bank accounts to settle the agreement.

On further inquiry it was learnt that O’Connor was seeking to fund the transaction by way of a loan of $10m and a funding arrangement of $6m from the Tasmanian State Regional Development Authority. Such arrangements were preliminary and incomplete.

It is beyond doubt, that had O’Connor on the 29 June 2011 complied with the Agreement of Sale, as they had contracted, Gunns would have settled.

But this failure left Gunns to review what options it had. It was communicated to O’Connor that Gunns was still keen to complete the transaction, but O’Connor needed to supply proof that they had the ability to do this. During this period Gunns continued to seek to understand O’Connor’s ability to raise the finance and complete the transaction.  Early in July 2011 O’Connor’s solicitor advised Gunns that the contract was “at an end”.

Once O’Connor’s position became clear, Gunns commenced negotiation with Triabunna Investments, that had the next highest bid and with the least number of conditions. This was and would be considered normal commercial process in the conduct of any sale.

Not to complete this transaction, as outlined, would have been a breach of the fiduciary duty. By law officers of a company must act in the best interest of the owners of the business.

In the discussions with Triabunna Investments, it was Gunns that insisted that should Triabunna Investments be successful in the purchase that they make the facility available to the industry as a woodchip export facility. Triabunna Investments agreed with this, on the condition that it would only be made available for wood that was procured from areas covered in the Tasmanian Forest Agreement.

On the conclusion of the negotiations with Triabunna Investments, Gunns was at a decision point. Accept the negotiated contract that was on offer from Triabunna Investments, which was now unconditional and with known counter parties, with the capacity to complete, or hold out for O’Connor to achieve funding.

We knew that Triabunna Investments would not accept delaying tactics and would most likely remove the offer if this were the case.

The judgment had to be made on O’Connor’s ability to arrange the necessary finance to complete a contract, noting that O’Connor’s solicitor had informed Gunns in July 2011, that the contract is “at an end”. These considerations included:

1. The commitment status of the loan funding being sought. There was uncertainty as to due diligence and completion requirements.

2. The approval requirements for the TDA loan were unknown. This process could also have been potentially subject to political risk.

3. What would the continual delay in this process mean to our stated exit from the native forest sector and our ability to gain financial partner support for the Bell Bay Pulp Mill?

The Gunns decision was to conclude the agreement with Triabunna Investments, given that the industry had many months to purchase the facility and had either chosen not to or had not been able to financially conclude a transaction. Gunns had however provided for them the opportunity to maintain the facility.

Gunns actively and publicly provided the industry and Government the trends that were affecting the traditional markets for woodchips and for sawn timber, contributing to the economic challenges that faced the industry. Those parties’ inability to act or recognize these issues should be the focus of any review, not a private legal commercial transaction between entities.

• All submissions - including that of Graeme Wood (Triabunna Investments) - can be accessed via:

http://www.parliament.tas.gov.au/ctee/House/HAComDev.htm

• John Hawkins, in Comments: Barnett, The submissions now available on your enquiry website from L’Strange, Lawrence and Wood provide enough evidence in the public arena to demand a Royal Commission into the distribution of public money in a criminal fashion to a bankrupt industry. Be brave, do it.