Tamar Devil
When are some Tasmanians going to face up to the hard reality that a world-scale pulp mill is not good business and never likely to be our economic saviour? We need to move on from the pulp mill and work together for more sustainable wealth creation options for our beautiful island.
This week’s announcement by Gunns Ltd that it’s “not probable” that its pulp mill will get finance and the “company has decreased confidence in its ability to influence the mill proceeding” is a significant statement. In fact, it’s the single most important statement made by Gunns in the past 8 years because it means it has failed in all its efforts to bring its pulp mill dream to reality.
This also needs to be put in a broader context. It’s not only Gunns that has failed but also its unofficial joint venture partners – the Labor and Liberal parties, federal and state governments, and other powerful vested interests in this state.
No one would deny this project has had special treatment from day one, not least a highly controversial and divisive fast-tracked assessment process and tens of millions of dollars in tax-payer subsidies to help grease the wheels. But this still hasn’t helped the project get of the ground.
What is most significant is the deafening silence from the project’s proponents this week on why Gunns has admitted it can’t value-add and commercialise its vast plantation estate, and the implications this has for those holding out hopes to do the same with Tasmania’s native forests.
It’s also interesting that no credible commentators have publicly blamed the “greenies” or anti pulp mill campaigners for this state of affairs; rather a few media commentators have pointed to “external factors” such as the high Australian dollar and weakening global pulp and woodchip markets. Others have fingered the Global Financial Crisis and credit crunch as the culprits.
While all have been contributing factors, they are not the underlying reason for Gunns’ announcement this week. Any $2 billion project being built for 30-plus years would have its profitability modelled on long-term, average prices for such factors as exchange rates.
All projections for profitability are tested for the good and bad times, so experienced investors will finance assets such as a pulp mill if the project is deemed to be profitable over the longer term.
Many big projects around the world have received finance since the GFC, so this is no excuse.
Clearly this proposal isn’t profitable enough.The pulp mill project has failed because it simply isn’t commercially viable . Add to this the fact thatGunn’s will never receive any form ofgenuine social licence for this pulp mill proposal and it’s easy to see why it can never proceed. The potential returns to financiers are just too low compared to the social, environmental and financial risks.
A commercial world-scale pulp mill in Tasmania has now been exposed as a mirage. It’s time to admit we need to put this divisive project behind us and have a frank and honest discussion on new economic directions.
The Greens have been talking to businesses and investors and are now putting together strategic ideas for how Tasmania can leverage the economic transition currently underway, and create new jobs and foster new industries. Watch this space.
This opinion piece first published in Soapbox, in The Examiner today.
• Meanwhile, Alison Andrews, The Examiner: What killed Gunns
• John Lawrence in Crikey:
Trouble at mill … is Gunns’ pulp plan dead?
Gunns recently announced it no longer believed its plan for a new Tasmanian pulp mill was “probable to proceed”. After seven long years, the controversial mill now needs an Act of God to go ahead. So where did Gunns go wrong? How did the once-mighty forestry company end up in such dire straits?
No longer are there unencumbered assets of sufficient value to allow a joint venture with an enterprise value including plantations of $3 billion, to proceed with Gunns as a JV partner. Gunns’ measure of net tangible assets (NTA) is now negative.
In January this year, Gunns was granted an 11-month reprieve by bankers and has been trying to recapitalise at the same time as search for a JV partner and a financier for the project. The half-yearly report released in February suggested NTA of $750 million was about to be boosted by a capital raising of $282 million, including $150 million from the Richard Chandler Corporation (RCC). But RCC soon walked away after a look at Gunns’ books.
Gunns has tried raising $400 million from existing institutional shareholders, but now, being underwater, such an event is unlikely, especially as the first $120 million of any contribution by ordinary shareholders will only benefit holders of hybrid securities, which rank ahead of ordinary shares. Long-suffering ordinary shareholders have in recent years already contributed $500 million in extra equity.
In 2007-08, Gunns completed the takeover of Auspine, a listed company with softwood plantations and sawmilling interests in Tasmania and the Green Triangle. The euphoria from being the largest processor of hardwood and softwood forest products in Australia, the largest exporter of native forest woodchips and with a profitable managed investment scheme (MIS) business, was soon tempered with the reality that it was burdened with $1 billion of debt.
The sale of most of the Auspine softwood trees for $175 million and a capital raising of $334 million in the 2008-09 year occurred before the effects of the GFC compounded the decline of native forest woodchipping and the unmasking of MIS as little more than a widely orchestrated fraud, and fortunately meant debt at June 30, 2009, was reduced to $662 million.
The disastrous half yearly results in February 2010 led to long-time chairman and CEO John Gay being shown the door, and precipitated a sale of non-core assets.
Until then, Gunns’ balance sheet resembled that of an old-fashioned conglomerate that had grown like Topsy without a clear plan. As well as forest and forest-related assets, it owned a wine business, managed wine and walnut MIS’s, ran a pub, a collection of hardware shops under the Mitre 10 banner, a heritage-listed country estate, and a commercial building division that at one stage found time to renovate the residence of the then-premier for an undisclosed price.
The answer as to how the board was able to manage such a diverse business as well as plan for a large technologically advanced pulp mill soon became apparent.
It couldn’t.
A lot of Gunns’ assets are old. Debt is still $500-plus million, despite the asset sales and further equity injection of $170 million.
Coincidentally, just when Gunns needed to window dress the pulp mill project by starting site works, it received a $23.5 million government ex-gratia payment, camouflaged as compensation for surrender of native forest harvest rights.
The noble gesture of exiting native forests was spruiked as a necessary precursor to long-awaited peace in Tasmanian forests, and as a way to assist Gunns obtain a “social licence” for the mill.
In reality, Gunns couldn’t continue operating unprofitable businesses with deteriorating assets and high debt, as well as build a mill.
The final crunch preceding the recent negative NTA revelation was a fall in plantation woodchip prices, further denting the value of the MIS business, the value of Gunns’ own plantations and the value of the underlying land used to grow its own trees plus those of some MIS growers. Notwithstanding $250 million of capitalised pulp mill expenses are to be written off given the project is unlikely, the permit will remain alive if Gunns can successfully defend court action by the Tasmanian Conservation Trust that the mill was not “substantially commenced” by the requisite date of August 31, 2011, as per the permit conditions.
The key to any pulp mill is resource security but this too seems to be slipping from Gunns’ grasp.
80% of Gunns’ managed hardwood plantations are owned by MIS growers. The travails of insolvency practitioners unravelling the affairs of Timbercorp, Great Southern and FEA has served to highlight the MIS model may have cash-flow attractions when new money keeps flowing in the door, but when the flow stops, the ongoing legacy costs, the disappointing yields, the falling prices and the conflicting interests of lessees, lessors and managers have all combined to make the MIS structure a commercial nightmare.
Gunns’ MIS business now has a negative value. No future project of any scale is likely to be based on resources from such a structure, if indeed it can survive, and hence it will need to be dismantled.
New players such as New Forests, owner of the land growing Great Southern MIS’s, or Australian Bluegum Plantations, which took over Timbercorp’s land and trees and recently bought Gunns’ Portland woodchip export facility, are possible buyers. Neither has expressed any public interest in a pulp mill but they appear to have the wherewithal to own and manage plantations sufficient for such a project.
Gunns is unlikely to have much of an equity interest in any future forest industry. It ran out of management expertise a few years ago and now its luck has all but gone.
But the memory of 2007 is still vivid. Just as Gunns was about to be told by the state planning authority that its mill permit application was “critically non-compliant”, it withdrew from the planning process. The then premier immediately tabled legislation, allegedly drafted by Gunns, to enable the mill dream to survive.
Another act of God, or maybe mammon, is now needed.
A Crikey-length version of John Lawrence’s original articles published on Tasmanian Times: here
