Financial risks of Gunns’ pulp mill

The Tasmanian Government has not investigated the financial risks of the mill to the State and documented the subsidies. The economic viability of the pulp mill has not been tested in public.

The financial risks arising from the proposed pulp mill could have a significant impact on all players involved, foreign bankers, land owners, the public, local businesses, the government and Gunns itself. In addition, the forestry industries' economic model is undergoing a slow motion collapse.


Financial analysis of Gunns' half year report (18 February 2011) by John Lawrence

He’s done it again.

This time in broad daylight.

Under the gaze of thousands of Gunns’ watchers, CEO Greg L'Estrange has once again manufactured a few book entries to help Gunns achieve a modicum of profit and loss respectability.

That boy certainly has chutzpah.

He didn’t quite make a profit, but an EBIT of $5 million loss for the first half of the 2010/11 year took a bit of work.

With asset impairment charges, loss on asset divestment and other restructuring charges totalling $50 million Gunns were a few goals down at three quarter time with the wind against them in the last stanza.

Then Greg delivered.

Three of Greg’s book entries totalling $45 million warrant a mention.

First, Gunns’ trees, the ones still standing, were considered to be worth another $11 million. That was booked as profit.

The second book entry was all class. Gunns underpaid for FEA’s sawmill and that underpayment of $19 million was included as income. Shades of the previous year when an underpayment for ITC Timber’s assets of $4 million and a further $3 million for Great Southern’s plantation management assets were both booked as income.

Memories of Eddy Groves from ABC Learning come flooding back. Eddy has recently been charged by ASIC. Read more at Financial analysis of Gunns' half year report 18 February 2011 by John Lawrence


Gunns: The Next Chapter by John Lawrence. (25 October 2010)

First published on Tasmanian Times

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.

Go to Gunns: The Next Chapter for the full analysis.


Analysis of Gunns Ltd's financial health  by John Lawrence (6 October 2010)

(First published in Tasmanian Times)

The forest industry’s slow motion train wreck continues its inexorable journey.

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. The company’s old model was 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.”

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.


But then in a breathtaking display of bravado Gunns included as revenue, an amount of $67.7 million for the current value of future commissions to be received at harvest time from trees owned by Great Southern investors.

So for a payment of $6.1 million to Great Southern’s Liquidator, Gunns improved their reported revenue by $70.9 million, a truly awe inspiring effort. When it comes to award winning book entries, this was a peerless performance.

A UBS analyst, (UBS is one of Gunns’ major shareholders) was reported in the AFR on 16th August of this year as saying “(w)hile Gunns has given earnings guidance for 2010, the high contribution of EBIT from MISs, almost entirely non-cash, means it is of questionable quality”.

Gunns’ latest full financials released on 30th September attempt to gloss over the grim reality. Read Gunns. Is the worst over?


Summary of risks to Swedish company Sodra's bottom line from investing in Gunns’ planned pulp mill (June 2009)

A. The incomplete assessment of the pulp mill and forestry means that many subsidies are undisclosed. This is because there has been no:

  • socio-economic and environmental analysis of the pulp mill proposal;
  • analysis of the cost side of a cost-benefit study;
  • risk assessment to Australian Treasury standards of the pulp mill project;
  • assessment by Sweco Pic of noise emissions, impacts on surface or estuarine waters, effects on flora and fauna, transport implications and social and economic effects, nor construction impacts, nor impacts from off-site infrastructure development such as raw water supply pipeline, effluent pipeline or quarry.

B. The profitability of Gunns Ltd is artificially propped up with a wide range of taxpayer subsidies. These include ongoing subsidies of $360m/year and one time diversion of taxpayer dollars of $399m (so far). If the pulp mill proceeds, estimated losses to other businesses (tourism, fishing, fine foods, wineries, agriculture) and the community will be more than $3.1bn.

C. The global financial downturn will force governments to look for ways to cut back on expenditure including subsides.

D. Should Södra invest in Gunns’ planned pulp mill, their future profits are at risk from the removal of subsidies. The most responsible decision for Södra is to wait until the scale and type of subsidies is clear and the risks clarified.

E. Södra’s has specified three key conditions regarding investing in a pulp mill - Forest Stewardship Council certification, environmentally friendly bleaching technology (totally chlorine free preferred), and 100 per cent plantation forest to be used. However, Gunns’ planned pulp mill does not have FSC certification, will use chlorine dioxide and partly consume wood from native forests. Gunns has chosen to site the mill away from its major plantations in the North-West and near North-East native forests. It has also secured a 20-year agreement with Forestry Tasmania to be supplied with wood from native forests.
See undisclosed risks to Sodra


Landowners to carry risks of Gunns' pipeline (September 2008)

A plain English guide to Gunns' contract offer was prepared by a Melbourne lawyer for landowners who have been approached by Gunns' negotiators to purchase rights to install a pipeline across their land. The purpose of the 1m diameter pipeline is for transferring water from Lake Trevallyn to the planned pulp mill across private land.

The question of who bears the risk from a pipeline rupture is clouded by Section 11 of the Pulp Mill Assessment Act which prima facie blocks any capacity for landowners to seek compensation from Gunns.

The bottom line is that it seems the landowner is being offered a short term, once off financial benefit, for long term financial detriment and long term inconvenience and risk. See pipeline risks - legal advice.


  Risk assessment of Gunns’ pulpmill, pipelines and transport of chemicals (June 2008)

Gunns have not provided a risk assessment in their Integrated Impact Assessment of hazardous chemical transport, of the pulp mill generally or of pipelines carrying water and waste. UK regulations now requires a risk assessment for the transport of all hazardous chemicals. The cost of doing a risk assessment is not onerous but the cost of not doing so could be very significant. A range of risks must be considered in building and operating pipelines such as those listed in risk assessment.


5. Gunns' pulp mill sums - who pays? who loses? (April 2008)

This paper is an attempt to identify and quantify the subsidies paid to Gunns and the logging industry in Tasmania. It was compiled by Andrew Bent drawing upon broad community input via the online newspaper and was edited by TAP.

In summary, taxpayer funding diverted to support pulp mill and logging amounts to a one time capital cost of $399m (so far) and ongoing costs of $360m/yr. If the mill operates for 30 years, the total is $11.2bn. It is pretty clear that the level of subsidies is very high, particularly for an activity that generates so few jobs per $million invested, and that produces such small returns from valuable resources.

Overall, the forestry industry appears to remove resources worth about 10 units and return about 1 unit in exchange, such a poor return that they need major subsidies to keep going. This is played out each time they chip a celery top/myrtle/blackwood tree worth $1,000 and produce about $100 worth of woodchips from it.

Read more at Gunns' pulp mill sums - who pays? who loses?


Competitiveness of Gunns Ltd's mill continues to fall while government subsidies rise (April 2008)

Naomi Edwards FIA FIAA FNZSA, prepared this personal research paper. She concludes that:
•The cost of building the Bell Bay pulp mill is too high
•Bell Bay fibre costs will be US$227/t compared to US$103/t in Brazil
•Input cost forecasts from Gunns are not credible
•Government continues to subsidise mill but for how long?
•Comparisons with the Aracruz pulp mill are flawed

Read more at Competitiveness falls while subsidies rise


Summary of financial risks (2007)

Report prepared by TAP.

Gunns Ltd and the Tasmanian Government both trumpet the economic benefits of an anticipated $6.7 billion boost to the state economy with 1617 new jobs from construction and 292 jobs long term. However, by counting only benefits and ignoring costs, the economic studies of the proposed pulp mill by Gunns and the Tasmanian Government fail basic due diligence tests. The economic report prepared for Gunns by Allens Consulting Group failed to meet Australian Treasury guidelines for economic appraisal. In addition, the Tasmanian Treasury Department has not investigated the risks of the mill to the State and the economic viability of the pulp mill has not been tested in public.

This analysis draws together the more significant financial risks arising from Gunns' proposed pulp mill.

Read more at Summary of financial risks