Gunns bottom line and strategy (1)

Henry Melville

According to the Criterion column in Business section of The Australian, the Tasmanian treelopper – Gunns Ltd shares are to be avoided. This is despite the company posting a 1% increase in after tax profit of $88 million for the 2006-07 financial year. Criterion calls the profit increase – ‘puny’ and had already rated Gunns Ltd stock a ‘sell’ in mid-May and was still recommending that it be lopped from anyone’s share portfolio. AVOID is the final by-line.
The breakdown of Gunns report to shareholders may be of interest to Tasmanian Times readers.

The Company states its capital costs – to date – for prosecuting its $1.7 billion Bell Bay pulp mill project is $51.5 million.

On Thursday last week Gunns Ltd told the ASX it was sticking to its Gunns and “maintains its full commitment to pursue the project.”

Gunns Ltd total revenue for the 06-07 financial year is posted at $689.9 million.

Revenue from its forest products rose by 4% to $431 million.

Woodchip sales – by volume for the 2006-07 year – were 3,400,000 green metric tonnes, down from 3,500,000 gmt the previous year.

This is derived from lopping and chopping across 200,000ha of freehold land and 38,000 ha of native forests.

Revenue from its lucrative Managed Investment Schemes (MIS) has sky-rocketed again this financial year rising by 23% to $152.5 million.

Gunns has expanded MIS opportunities in viticulture, walnut plantations and ‘woodlots’ – Gunns euphemism for tree plantations. It ‘manages’ $315 million in MIS investor funds in various tree plantation, grape and walnut schemes.

In the last financial year alone the company states it has developed more than 21,000ha of plantation woodlots.

BACKGROUND BRIEFING:

The federal Government has deferred its decision on the 100% tax write-off provisions for investors in MIS involving agricultural plantations. The review follows significant concerns over the equity regarding the application of MIS tax concessions to food-based agricultural plantings and non-food based forestry plantations.

CommSec no longer covers the stock, but previously has argued that pulp will be no more valuable as an export commodity than woodchips, with massive and cheaper capacity being developed in Brazil, Chile and South Africa.

On the Auspine takeover move: This financial year, Gunns Ltd also launched another expansionary move at its arch domestic wood products rival Auspine. It lobbed a $320 million cash/scrip offer for the South Australian-based company with sawmills and plantations in NE Tasmania. Auspine has 40,000 ha of softwood plantations in South Australia and Victoria. Gunns now has a majority ownership in the Auspine after their share purchases rose to 52%.

The international market for woodchips and pulp is tight due to many factors including increasing supply and competition. Gunns Ltd is a price taker hostage to the supply & demand vagaries of an abundant and globally traded commodity (woodchips). The same will be true if Gunns Ltd becomes a pulp manufacturer.

The international hardwood pulp market is a dumping ground. Cheap-pulp producers like Indonesia, Brazil and Chile are expanding their production capability massively. Supplying hardwood pulp into Australia’s domestic market will be difficult. Currently PaperlinX has that market effectively sewn up … unless of course Gunns and its backers are thinking of further expansion bids!

Since 1980, Judith Ajani tells us in her book The Forest Wars, three pulp mills have been built in Australia – all plantation-based: at Albury [NSW in 1981], Maryvale [Victoria in 1984] and Tumut [NSW in 2001]. The position of mills near softwood and hardwood plantation resource is a ‘no-brainer’, however, their value-added product is paper. Australia’s established paper producers correctly predicted our increasing demand for packaging papers, newsprint and tissues: all made primarily from recycled paper combined with long-fibred softwood. There is no pulp mill in Australia currently using hardwood pulp from native forests.

Meanwhile Gunns Ltd is pushing ahead with its hardwood pulp mill proposal in Tasmania with its 80% reliance on native forest feedstock (at least in its first 5 years of operations) with plantations supposedly becoming more important in the future.

As Judith Ajani writes, genuine promoters of a new hardwood pulp mill might like to rise above the false portrayal of the environment movement’s opposition to a pulp mill and ask themselves what is really frustrating investment in a hardwood pulp mill in Australia. She says the answer lies in the combination of PaperlinX’s (formerly APM and AMCOR) power & control in the Australian printing and writing paper market AND the nature of the global pulp and paper industry.

PaperlinX has the Australian printing and writing paper market stitched up. PaperlinX is not only Australia’s monopoly producer of printing and writing paper but is also a major importer of these papers through its paper distribution subsidiaries. So therefore any new hardwood pulp mill is effectively forced to export most of its product … that means Gunns pulp.

And a more gruesome market for a raw manufactured product is hard to find! The real (inflation-adjusted) price of globally traded kraft-treated hardwood pulp has declined by an average of 2.1% per annum since 1970 (over 60% over the period). Although the spot-price for hardwood pulp is volatile – like other commodities – companies that have no ability to sell into the domestic paper manufacturing market will be at a distinct disadvantage. Globally, most pulp is produced by companies that also produce paper in the one location as an integrated pulp & paper operation. That’s the way Australia’s current pulp & paper industry is structured.

PaperlinX stands in Gunns Ltd’s way into the domestic market, effectively forcing each and every hardwood pulp mill onto the export market with all its rollercoaster volatility in pulp prices.