Media reports for October 2010

25 October 2010. The Truth and Reconciliation Roadshow continued last week with a presentation by Gunns’ CEO to a conference run by investment bank UBS, coincidentally a Gunns’ shareholder. The changes from the presentation which accompanied the release of Gunns’ preliminary 2010 financials in mid August were subtle and revealing of the future chosen path. John Gay’s business model was then described as being “a conglomerate of long life low yielding assets…..(consisting of) many businesses….. excessive levels of encumbered assets .....excessive debt levels to earnings,..... (where) potential investors do not understand the business.” The latest presentation includes further criticisms of the old model. Mr L’Estrange confirmed that Gunns was “cash negative” and was bedevilled by “aging inefficient assets”. Cash negativity is a fairly serious condition. If it persists disaster usually awaits. Aging inefficient assets make the problem worse. Forget about a social license. Gunns needs cash and a more ‘efficient’ portfolio of assets. In August the new look Gunns was to comprise a division devoted to ‘hardwood and softwood’ sawmilling. This has now been revised to ‘softwood processing’ only. No mention of hardwood sawmilling. Literally, this means an exit from all hardwood sawmilling not just native forest sawmilling. Normally a CEO when spruiking his Company will attempt to explain and justify the latest P&L Statement. UBS has been critical in the past of the book entries of Dickensian proportions that have been used to prepare Gunns’ financial accounts. Hence Greg didn’t dwell on Gunns’ appalling 2010 results. He was on a hiding to nothing. He simply said “if your investment focus is purely about this year’s trading, GNS is not your stock”. Never a truer word has been uttered. See Gunns: The Next Chapter by John Lawrence or Tasmanian Times for the original article with comments.

22 October 2010 Gunns' proposed Bell Bay pulp mill will be one of the world's top five pulp facilities for environmental compliance when built, says chief executive Greg L'Estrange. Tasmanian permit conditions for the pulp mill were the most onerous for any operation globally, Mr L'Estrange said. Mr L'Estrange was addressing delegates at a national share funds conference. He said despite the difficulties, the pulp mill would remain as one of the four major planks of the revitalised company. Gunns' annual financial report, released this month, showed that the company was still negotiating with two financiers in an effort to raise the $2.3 billion needed for the proposed pulp mill. Examiner

22 October 2010 The Tasmanian Premier has rejected claims the timber company Gunns is in for a massive pay-out following the signing of the new forest agreement. He has dismissed claims by the State Opposition that Gunns could receive $200 million in compensation. The Opposition says the total cost of implementing the deal could exceed $1 billion and cost thousands of jobs. Yahoo Finance

21 October 2010 A former Greens Senate candidate says the peace deal for Tasmania's forests will not last unless Gunns moves its Tamar Valley pulp mill. The Statement of Principles signed by the forest industry and environment groups indicates Tasmania should have a pulp mill somewhere in the state. Gunns Chief Executive Greg L'Estrange says the Tamar Valley is the best site for the mill but the Wilderness Society's Paul Oosting says he does not support the mill Gunns is proposing. Peter Whish-Wilson, who runs a winery in the Tamar Valley, says residents will not have their environment sacrificed to stop logging in old growth forests. He describes the peace deal as "a train wreck waiting to happen." "I'd really like to see a resolution on forestry conflict in Tasmania but if it means that the Tamar Valley is going to be sacrificed at the altar of some high conservation coupes then I don't think it will last. "No I think it's a train wreck waiting to happen because the opposition to this pulp mill in the Tamar Valley is very strong." Yahoo Finance

21 October 2010 A bridge-builder is at the helm of the country's biggest woodchipper, writes Andrew Darby. But Gunns' redefinition has cost it an alliance with the Tasmanian forest industry and brings uncertainty to dependent small timber communities. Further, the company has yet to achieve financial backing for a pulp mill project weighing increasingly on its books. The restructure by the country's biggest wood chipper began under Gay as cash from export woodchip sales dried up. Gunns embarked on cutting debt and refocusing on the timber business. In the past 12 months it has sold hardware stores, wine assets and private native forests, and is moving to shut down sawmills in Western Australia and Tasmania. This makes the $2.2 billion pulp mill project, on which it has sunk substantial amounts of cash already, of even greater significance to the company - and the state. The Tamar Valley mill will probably proceed, based on achieving finance. If it failed to go ahead, Gunns would have to write off $205 million in capital works. Much of L'Estrange's public language is addressed at calming community fears about the mill, and building the ''social licence'' investors are likely to require. The peace pact ties green groups to supporting ''a'' pulp mill but not ''the'' mill. L'Estrange has opened the prospect of tinkering to meet community concerns such as odour but he is adamant Gunns will not be going back to the drawing board. A financial analyst at Shadforths, Matthew Torenius ... said the prospect of government compensation was likely to be behind Tuesday's share rise. Business Day

20 October 2010 Environmental groups and the timber industry have reached an historic agreement to shift to a sustainable plantation industry, ending a 30-year war over the logging of native forests in Tasmania and opening the door for Gunns to get its long-desired pulp mill project across the line. The Gunns share price closed 22 per cent higher, at 78¢, after the deal. Farm Online

18 October 2010 An anti-pulp mill group wants the State and Federal Governments to withdraw permits for the proposed Tamar Valley mill after the Gunns Chief Executive revealed the mill could have flaws. Gunns CEO Greg L'Estrange told The Australian newspaper the company would consider changes for better effluent treatment and extra measures to reduce air pollution and odour. Friends of the Tamar Valley spokeswoman Anna Pilkington says Mr L'Estrange's comments send mixed messages. "He's basically admitted there is going to be odour and pollution from this pulp mill," she said. "Where all along we've been getting these messages that it's going to be the world's cleanest and greenest and most environmentally friendly pulp mill around, so he's just basically come out and admitted that they have been telling untruths." Ms Pilkington says Gunns is in damage control. "After six long years they're still trying to find a financial partner for this pulp mill," she said. "So we think they're just trying to sweeten things up a bit for their upcoming AGM and try and imply there's some community agreement and community acceptance of this pulp mill where there isn't and there never will be." Gunns has been contacted for comment. ABC

16 October 2010 [Opinion piece] Tasmanians are still trying to get their heads around Gunns' apparent new status as a green crusader. The company, long at the vanguard of the logging industry, has raised the white flag, vowing to lay down its native forest chainsaws forever and shift into plantations. [P]aper companies had long resisted the arguments of the Wilderness Society, but ... they shifted tactics, targeting companies further down the supply chain, notably retailers such as Ricoh. By persuading retailers that customers did not want paper made from woodchips from these forests, the Wilderness Society forced the paper-makers to re-evaluate their loyalty to Gunns. Terry Edwards [Forest Industries Association of Tasmania chief executive] believes Gunns' transformation, which he attributes "almost single-handedly" to L'Estrange, is all about gaining the FSC certification demanded by would-be pulp mill financiers. Gunns' focus is now on a plantation-fed pulp mill, but some in the industry believe this is a risky strategy. What happens if attempts to lock in mill finance and a joint-venture partner fail? Australian

16 October 2010 Gunns will consider modifying its proposed Tamar Valley pulp mill to try to win over locals opposed to the $2.3 billion project. Chief executive Greg L'Estrange said the company would consider changes sought by the community, such as better effluent treatment and extra measures to reduce air pollution and odour. "We'll sit down and talk and look at what it is (that is sought), where that leaves the overall (mill) facilities and what are the benefits for the community," he said. "We accept there has to be a range of engagements with the community and we need to work through and see if there are areas where we can even improve over where we are at the moment." Some industry figures believe Gunns, which has vowed to end native forest logging, is taking an enormous risk by focusing its future entirely on a plantation-fed pulp mill that may not eventuate. Mr L'Estrange insisted the company would survive even if the project fell through because of the value of its 200,000ha plantations in Tasmania, Victoria, South Australia and Western Australia. However, he said failure to secure the mill, which still faces considerable local opposition, might force Gunns to shift the focus of its operations from Tasmania. "If we're not into the pulp area in Tasmania, we would see other opportunities for the business -- but they may not lie in Tasmania," he said. Gunns has been negotiating with two potential equity partners in the pulp mill and had expected to finalise finance by the end of this year. However, Mr L'Estrange would no longer commit to that. "I'm not putting a time on it because there's already been more dates than Casanova," he said. The project, tainted by a controversial state approvals process that by-passed the peak planning body, needs community support if it is to obtain Forest Stewardship Council certification demanded by some potential financiers and joint venture partners. Australian

11 October 2010 Robert Eastment totally wrong, says Dr Warwick Raverty. [In The Examiner Newspaper, 9 Oct 2010] Industry analyst Robert Eastment said that it was unlikely that Gunns would go a step further with its design to build a totally chlorine-free pulp mill because of the quality of pulp produced. He said that the pulp produced from a partly chlorine-free mill was of a higher grade with much stronger fibres that could be used for higher quality goods. He said that the water from the mill would only need to be treated to make it look more presentable by removing the tannin but the quality would be acceptable for re-use.

The facts [edited for brevity] are these, says pulp mill expert, Dr Warwick Raverty:

1. TCF bleached eucalypt kraft pulp has exactly the same strength as ECF bleached pulp.

2. Strength (tensile strength or tearing strength) is not a criterion of prime consideration when buying bleached pulps to make printing and writing grades of paper (the overwhelming market for the proposed mill).

3. The only quality deficit in TCF bleached eucalypt kraft pulps compared to their ECF cousins is in brightness - TCF pulps tend to be very slightly yellower in colour (87% Brightness) to their ECF cousins (90 Brightness) WHEN PRODUCED USING THE SAME AMOUNT OF BLEACHING CHEMICAL ON AN OPERATING COST BASIS.

4. Sodra do make 90 Brightness TCF pulps at some of their Swedish mills using larger amounts of TCF chemicals at a higher operating cost.

5. Mr Eastment is totally wrong about ‘tannins’ in either ECF, or TCF effluent from a pulp mill bleach plant. Any ‘tannins’ in pulp wood are completely removed by the kraft pulping process. The brown colour that remains in the unbleached pulp is a chemically resistant form of the lignin biopolymer that nature uses to make wood waterproof. This ... has a high demand for oxygen. If this solution (effluent) is sent out of the mill without treatment, it causes anaerobic conditions to develop in the sea water into which it is discharged and fish and other marine organisms die. In addition to the oxygen deficit, their are also toxins in untreated effluent.

6. ECF effluent cannot be recycled back into the mill for re-use (closed loop technology) because the product of bleaching with chlorine dioxide is chloride ion (present as sodium chloride - table salt) which would build up in the mill’s process water circuit and cause severe corrosion of all the steel piping and tanks. This consequence was confirmed in Canada in the 1970s when a bleached kraft pulp mill tried to run in closed loop mode for 6 months. The trial had to be abandoned.

7. No one has found an economically feasible way of operating a TCF bleached kraft pulp mill in closed loop mode, because although the effluent contains no sodium chloride, wood contains many ‘non-process elements’: potassium ions, magnesium ions, iron ions and manganese ions being among the most problematic. These elements would gradually build up in the mill’s water circuit of run in closed loop mode and prevent the bleaching process from working as well as corroding the chemical recovery boiler. Tasmanian Times

10 October 2010 Former Tasmanian premier Paul Lennon has warned Tasmania it will never get a pulp mill unless Gunns' $1.5 billion project in the Tamar Valley goes ahead. Mr Lennon said yesterday he remained confident a pulp mill would be built at Long Reach, north of Launceston. His comments come despite a green light for the controversial mill in the Tamar Valley not being part of a forest peace pact now under tense negotiation between environment groups and the forestry industry. But the preliminary deal includes acknowledgement by environmentalists that a pulp mill "in principle" is a future part of a new-look forestry industry based on plantation-only timber. Environment groups including Environment Tasmania, the Australian Conservation Foundation and the Wilderness Society have agreed "a" pulp mill could be part of the state's economic future. But Mr Lennon, who is now acting as a facilitator representing forestry workers, unions, contractors and companies in the secret talks, believes Gunns' Tamar Valley mill is the only mill with any chance of success. "This agreement is not about the [Gunns] pulp mill it's not helpful at all when [involved parties] keep saying it is," Mr Lennon said. Mr Lennon's comment comes as Gunns seeks a "social licence" from the community for its long-delayed mill. Mercury

8 October 2010 Mr Lennon chaired a pivotal meeting of forest industry groups on Wednesday to try to find a compromise between the key players on the future of logging Tasmania's native forests. One industry figure said Mr Lennon, who quit politics and the top job two years ago, had respect from every quarter of the forestry industry and he is also known for his pragmatic approach to politics and negotiations. "He was brought in to bang heads together and make some people see sense," he said. Mr Lennon said his role was to keep groups representing forestry working towards a common outcome, including the CFMEU, the Forest Contractors Association, NAFI and Timber Communities Australia. Key planks of the deal Mr Lennon has been called in to broker include [among others] - agreement that the Gunns pulp mill in the Tamar valley can go ahead without protests. Mercury

7 October 2010 [Analysis of Gunns financial health by John Lawrence.] The forest industry’s slow motion train wreck continues its inexorable journey. Gunns’ latest full financials released on 30th September attempt to gloss over the grim reality. There are many, on both sides of the forest debate who appear to accept the urban myth that had it not been for the actions of high profile activists, Gunns’ former CEO would still be ensconced in Lindsay St Launceston. A quick glance at the ASX announcement on 16th August 2010 outlining Gunns’ achievements in the financial year 2010 reveal that Gunns’ old business plan was a failure. It took the new Board less than 3 months to clearfell the legacy of John Gay. The CEO’s demise and the uncertain state of his former bailiwick are due to its flawed business model, not the actions of one or two of its opponents. Tasmanian Times

5 October 2010 [Gunn's] 2010 financial statements hint that construction of the long-delayed $1.4 billion Bell Bay pulp mill could start this year. But, despite the positive headlines, it seems Gunns insiders are increasingly nervous about the company's future. When it comes to their own hard-earned, they are not keen to be unsecured creditors of the company they work for. This is showing through in dwindling balances in an unsecured note scheme that allows Gunns executives to deposit cash with the company, presumably with an interest rate a little better than a bank deposit. The unsecured notes rank behind more than $500 million of bank debt. It is Gunns's top brass that are leading the charge. By June 2010 the directors had just $135,191 on deposit, down from $1.75 million a year earlier. The company's senior executives are also fleeing the unsecured note scheme - their holdings were down about 60 per cent for the year. Notably, Gunns's chief executive, Greg L'Estrange, whose base pay is set to double to $1 million in 2011, keeps his cash somewhere other than the unsecured notes. Business Day

1 October 2010 Gunns predicts processes will be finalised soon that would allow the start of construction of its northern Tasmanian pulp mill. In financial statements released to the stock market today, Gunns says investment and construction processes would be completed in this financial year. The company says it is currently dealing with two parties interested in investing in the pulp mill and it hopes to have the finance for the project secured by the end of 2010. Gunns has also confirmed a loss before interest and tax of $86 million. Its profit after tax was $28 million, down from $56 million the previous year Yahoo Finance