12 months from now, page-4

So from 12 months ago to now,some-not many voted for Gunns and some did not vote at all,you don't need a crystal ball,the comments at the senate inquiry,in particular Dr.Ajani and the rorts in the Tiwi and old liberal hacks with their social calling,and there is the matter of going off track in the clear felling or was it case an opportunity for Stirling resources,to find rutile concentrations and other mineral sands?.The point is it has shown that this was never a viable deal in the Melville Islands,just as the share raising by Gunns from investors will be another boner for small investors,if Gunns balance sheet is so good,gives us forecast end of 2011,not 2012, I Mayan not be around.




Gunns' big gamblePHILIP HOPKINS AND TOM ARUP
January 10, 2009
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Gunns is now free to build its Bell Bay pulp mill but potential lenders will wonder how prudent it is to proceed.

"SHOW me the money." The line from the film Jerry Maguire is now the name of the game for Gunns.

The timber giant has entered the back straight in its four-year quest to build a $2.2 billion pulp mill at Bell Bay in northern Tasmania. After a prolonged and eventful process marked by community divisions, environmental protests and accusations of political cronyism, this week Federal Environment Minister Peter Garrett effectively approved the controversial project.

Final federal approvals, two years away, relate only to Gunns' waste-water management plan: how it would respond to any breach of environmental guidelines. Gunns can begin to build as soon as it gets the money.

And therein lies the rub. As everyone knows, raising finance for anything is difficult right now.

"It's all about timing," says one analyst. "The pulp industry is very volatile and cyclical. If the mill had been built when originally planned, it would have had 12 months of windfall profits in the past year.

"Now, it would be the opposite. Companies in any industry are loathe to invest when the market is in retreat, like pulp and commodity markets are. It won't be built for two years, (and) the market will have changed in that time."

And it's clear that Gunns is juggling a variety of issues. As it walks the financial tightrope amid market uncertainty, it's also fighting a war for moral legitimacy on the home front. Perception is everything in politics, and Gunns is still battling the reputational fallout from its decision to walk away from the state's planning process in 2007, and the subsequent intervention, in Gunns' favour, of former Tasmanian Premier Paul Lennon.

Now, there are reports of rumblings among board members and major shareholders; and the company's chairman and chief executive, John Gay, is under pressure.

Getting to this point has been a costly and difficult process. But the potential rewards for Gunns if it gets the project up are tantalising. Credit Suisse estimates that the pulp mill would triple Gunns' earnings. Earnings before interest, tax, depreciation and amortisation from the mill would be $430 million, dwarfing current earnings of $170 million.

The mill would give Gunns the chance to add substantial value to its own products - the woodchips that it now exports. Pulp prices have come off a high of $US840 a tonne last June to $US576 now, but in $A terms, that's still more than $820 a tonne. Woodchip prices, in comparison, are now at a high of $187 a tonne, and are likely to go lower due to the global downturn. The higher export earnings Gunns could garner through the mill would knock a big hole in Australia's annual $2 billion trade deficit in wood products.

"It's going to be profitable, that's not in doubt," says a Gunns spokesman. He says the mill's advantages include its greater proximity to the growth markets of north Asia compared with big South American pulp competitors.

And cost savings would flow from Gunns needing to hire only a quarter of the ships it now needs to send the material overseas.

According to projections from Gunns, the Bell Bay mill, which is located in Tasmania's biggest industrial zone and will be fed by plantation timber within five years, will create 3400 jobs in construction and more than 1600 direct and indirect jobs once finished.

And Gunns has been keen to stress the potential benefits for Tasmania. An Allen Consulting study commissioned by Gunns estimates the mill would add $6.7 billion, or 2.5 per cent growth, to Tasmania's economy, and generate extra tax of almost $894 million.

"It's an absolute no-brainer," says a source close to Gunns who has seen the company's books. "It will value-add. Not only will it add a couple of bucks to the company share price, but it will take the company to the next level and protect it from a takeover.

"There is no problem getting the finance for this deal because the balance sheet of the company is healthy. Without this deal, they are still a good company, but a takeover target. With the mill, they go from being a good big Australian company to a global company."

But lofty aims are one thing; establishing a new major manufacturing plant is another. Richard Stanton, chief executive of the Australian Plantation Products and Paper Industry Council (A3P) - Gunns is not a member - says establishing new investment in manufacturing in Australia is a real challenge, even without the global financial crisis.

"How many manufacturing industries are we looking at where you see expansion? We have a whole range of industries where we are struggling to keep existing ones going, let alone establishing new ones," he says.

The brutal fact is a company with a market capitalisation of $730 million needs to raise money for a $2.2 billion project.

No one is willing to predict what financial structure Gunns will come up with to finance the mill, but all agree it is likely to be very technical. Gunns does have one big advantage in negotiating with any potential joint-venture partners: it owns the raw material to supply the mill, which would also be built at a time when construction costs are lower.

Gunns is still negotiating with potential investors and joint-venture partners, and a European bank has been tasked with raising $1 billion-$1.2 billion. "We hope to wrap up the JV partner in two months, but it could be a bit longer than that. Everyone is optimistic," a Gunns spokesman said.

"No one doubts it's a tough environment to raise funds in. If you're going to raise money in this environment, it should be a project like this, which is going to make a lot of money."

Gunns tidied up its balance sheet late last year, raising more than $500 million - $336 million through an equity raising and $175 million from selling off pine plantations - to get its debt down.

ABN Amro analyst Richard Johnston says the balance sheet is now in better shape. Debt is about $540 million, net debt to equity is about

42 per cent and interest cover about five times, "both far more comfortable levels" than last year.

But, as Johnston points out, Gunns needs to roll over $162 million of debt in December 2009. If it can't roll this over, it will be close to drawing completely on its current debt facilities of $178 million. This does not leave much room for manoeuvre if Gunns' business takes a turn for the worse. "The relative lack of debt headroom again underlines our view that the planned pulp mill is highly unlikely to go ahead any time soon, if at all," Johnston says.

Another sceptic is Tom Ellison, a financial analyst in Launceston. "I was told personally by John Gay 2 years ago that he had got the finance for the project, but it never happened," he says.

"It is going to be very hard for them to raise capital in this market. ANZ pulled out of the project when the market conditions were more conducive to the project, so imagine how hard it is now to attract investors. The most likely place is for money to come from offshore, most likely Asia, if at all."

One source close to Gunns says Sodra, a Swedish forestry company, "had a good look" at the Bell Bay project but walked away.

Crucial to the financing process is Gay, the company's figurehead, who built Gunns from a modest sawmilling operation to its current size. He has been the driving force behind the mill; its most passionate exponent. He has taken its critics to court.

As doubts have risen about Gunns' ability to finance the project, so too have questions about Gay's dominant role in the company.

"John Gay has been very good at retaining the loyalty of his institutional shareholders in the past, and they have been very good to him," says Naomi Edwards, head of Australian Ethical Investment. Edwards, a critic of Gunns, says Gay has long commanded more investor respect and loyalty than most chief executives.

"Two years ago if you asked those investors what is the greatest worry for the Gunns corporation, they would have said, 'John Gay being hit by a bus'. But now some have told me they are actively questioning Mr Gay's business strategy and are becoming increasingly worried about the direction of the company. They are calling out for change."

The acquisition of Auspine in early 2007 brought the company's debt burden into focus for investors. Gunns warned investors that debt would exceed $1 billion. The projected interest payments for 2007 were $72 million, eclipsing the company's profit of $69.5 million.

Gunns' shares fell by about two-thirds over 2008, outpacing the fall in the battered ASX 200 Index, amid growing concerns about the viability of the pulp mill and the company's high debt.

Inevitably, investor anger turned on Gay. Sources say that major shareholders became increasingly frustrated with the chairman over the course of the year. One meeting in January last year ended with institutional shareholders walking out, furious that Gay had dismissed requests for a restructure.

These worries were not fully allayed by further meetings in July and August. There was concern about the

make-up of the board, which had been criticised for being Tasmanian-centric and allowing too much power to Gay and his closest ally and former premier, Robin Gray.

One source says Perpetual and Perennial Investment Partners were worried about the board's independence, but were taking a more "softly softly approach". Investors requested a board member with international experience, and such an appointee is expected later this year.

Gay was asked to relinquish control of one of his two positions, which he will do early this year, but he was also asked to remain a key player and head of the pulp mill project. Gay is still considered the heart and soul of the company, and investors are grateful for the transformation he has effected on the once-modest company.

And although they are increasingly worried about financing the mill, investors have not called for the project to be dumped altogether. Their biggest concern, besides the pulp mill financing, is the fact that Gunns is carrying $100 million spent on the project on its books. Gunns aims to pay off that money through profits from the mill, rather than including it in its business structure.

Tom Ellison says if those costs are written off in a financial year, it would cause a negative return for the company. "But that's all right, the market understands one-off capital write-offs, especially in this environment," he says. "What the market doesn't like is continuing high levels of debt and uncertainty in business direction."

One analyst says the pulp mill would be a company maker. "But if Gunns does not do it, it will not be a company breaker. They have a very material business," he says.

Nevertheless, failure would greatly damage the company's business reputation in the market.