Tasmanian Times

Environment

One man and his $2bn millstone

Typed in by … Paul de Burgh-Day

Financial Review – Weekend 23-24 August 2008

The costs have become almost unbearable for Gunns, its shareholders and the man who’s chasing his pulp mill dream, writes Ingrid Mansell …

Now the straight-talking timber tycoon is about to suffer two further blows. Next week he is expected to unveil plans to relinquish his role as chief executive of Gunns, as a peace offering to investors unhappy with his iron grip over the forestry giant. And he is also understood to be considering excising the mill project from Gunns and placing it into a separate venture, in an 11th hour bid to attract funding for the controversial project.
FIVE YEARS AGO, over dinner at a waterfront restaurant in Hobart, John Gay confided his dream of building one of the world’s biggest pulp mills to Paul Lennon, then Tasmania’s deputy premier.

The Gunns chairman and chief executive, who then could still walk the streets of Tasmania without being spat or cussed at, naively thought he might be able to begin construction within 18 months.

“The mill was initially a 12 month process through the Resource Planning and Development Commission: I remember thinking we would be able to start in 2005.”

Instead, 62 months on the proposed mill site on the banks of the Tamar River, north of Launceston, lies cleared but vacant – and Gay’s grand dream is in danger of becoming a pipedream.

It is difficult to overstate the cost of Gay’s relentless pursuit of his vision, which has split the Tasmanian community like the 1980s campaign to stop the Franklin dam did.

Not only has Gunns had to fork out an estimated $100 million on the plans and consultants for the 2 billion project, but Gay and his family have faced such harassment and intimidation by environmental activists that they have retreated from public life. “Gay is a tough nut,” a friend says. “[But] he finds it hurtful because he truly believes he is doing the right thing for Tasmania.”

His passion for the pulp mill has also driven him to the debt markets at precisely the wrong time. Gunns is already overloaded – and has been punished by the market for its gearing. Its share price in recent weeks has been pulped to six-year lows of $1.68.

Now the straight-talking timber tycoon is about to suffer two further blows. Next week he is expected to unveil plans to relinquish his role as chief executive of Gunns, as a peace offering to investors unhappy with his iron grip over the forestry giant. And he is also understood to be considering excising the mill project from Gunns and placing it into a separate venture, in an 11th hour bid to attract funding for the controversial project.

Gay has been travelling the globe in search of financial backers for the mill ever since the big Australian bank lenders – led by Australia and New Zealand Banking Group, Gunns’ bank of choice for 20-odd years – abandoned plans to fund the project in May. Although there has been chatter that several major Scandinavian forestry groups are considering a stake in the project, Gay still has nothing firm for shareholders.

And the clock is ticking. Analysts believe investors, which include leading fund managers, are growing impatient with the lack of progress.

“The market is saying get a partner (for the mill) or get back to focusing on your strong cash-flow business of exporting woodchips,” one analyst says. “People forget that Gunns is a very strong company with some very valuable assets. The assets are worth more than the share price and that’s when you get the vultures coming in. “There is a lot of value in the share price to be released.”

Gunns further upset – shocked – shareholders during the week by revealing it expected net profit for the 2008 financial year would be about $67 million, versus consensus analysts estimates of $89.4 million.

The announcement, which sent the shares down almost 9 per cent on the day, was accompanied by news Gunns would offload plantations in South Australia worth $170 million to cut debt.

In another strategy to shore up its balance sheet, the company whose shares are now in a trading halt, is expected to announce next week a capital raising of between $300 million and $400 million.

Gunns’ predicament is a far cry from the confidence Gay displayed in February when he gave a rare media interview. The mill had been approved by the Rudd government – against three national environmental guidelines, and with 48 strict conditions and extra permits attached – four months earlier, a decision Gay had lauded in light of the “misinformation, dishonesty and indeed threats from the projects opponents.”

Speaking to The Mercury, Gay clearly thought the hard work was behind him.

“I think it’s gone too far financially to stop this mill. It’s all on schedule and it will go ahead.” he said. “There is nothing holding Gunns up now, there are no problems with the finance or the permits. The mill will be built.”

But on Friday federal Environment Minister Peter Garrett added to his woes by warning the company was unlikely to meet a deadline for providing environmental information for the proposed mill.

He said the timber company had yet to seek an extension and he had approved just four of 16 modules that make up that environmental management plan for the mill that Gunns was obliged to meet to seal approval.

“So all we have at this present point in time is four of the 16 modules that make up that environmental impact management plan. The remainder haven’t reached my desk yet,” Garrett told ABC Radio,

“Given the time that these modules have taken to be delivered to the department satisfactorily, then it is unlikely that Gunns are going to meet the October 4 deadline.”

Gunns insisted Friday it had submitted the final module, but that didn’t stop the Tasmanian Greens from urging Garrett to rule out granting any extensions.

Greens leader Nick McKim says Gunns has continually failed to meet deadlines throughout various assessment processes, and that Garrett should draw a line in the sand and withdraw support for the proposal if current timelines are not met.

One analyst, when asked whether the company was likely to hit the deadline to supply the environmental information, was succinct, “I think they have bigger issues to worry about.”

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1 Comment

1 Comment

  1. Mike Bolan

    August 27, 2008 at 3:39 pm

    I suggested some months ago that Gunns should thank protesters and others for delaying/preventing the mill from going ahead, particularly given the ominous financial conditions on global markets.

    If they’d signed the papers and bought the mill they’d now be carrying $3 billion in debt instead of $1 bn. They wouldn’t earn anything from the mill for at least 2 years and it would be a major distraction for their management team. Their profits would have been even lower because they’d have to stump up $300 million a year in interest payments.

    In my view, there were huge holes in their ‘business case’ because they converted their business case into a benefits only sales document. That means they didn’t study the risks and thus exposed themselves to those risks.

    Now they are getting a glimpse of the abyss created by their own management choices.

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