George Town - Australia's oldest town, 10kms from the proposed mill - will it provide a huge financial boost?
There is no doubt that Gunns Ltd was a brilliantly managed company. From being a small timber company and retailer it has become within a few years a major company with a market capitalisation of over a billion dollars. This has been done largely by purchasing and taking over going concerns which provide an instant income.
More recently though, the concentration on the holy grail of the pulp mill and refusal to recognise the World-wide trend towards renewable wood sources and certification has resulted in Gunns' virtual collapse with the share price retreating from well over $4 to 60c.
This project will cost up at least $2.5 billion, probably a lot more - far, far more than the entire company is worth. And what is more, no income will be produced until it is up and running. Gunns made a profit of $101.3m on sales of $701m in 2004/2005 of which 43% is paid to shareholders as dividends. The latest result shows Gunns are running at a loss and there have been no dividends for a couple of years. The stock is a speculators' delight, swinging wildly with rumours and counter-rumours.
THE RISKS
Any unexpected delays could cause huge cost blow-outs. Unexpected equipment delays, very bad weather, an outbreak of bird flu, a serious war somewhere, and the likelyhood of massive demonstrations and disruptions by protesters could all cause massive and possibly fatal delays. Another problem that Gunns Ltd will face is the lack of skilled labour available in Australia at present. Where will they find the 1250 skilled workers needed to build the mill and the 250 needed to run it? IIS: Gunns expect to find 40% of the workforce from Tasmania, 50% from the mainland and 10% from overseas. Very few will come from the immediate area. Comment: This does seem extremely unlikely given the acute shortage of available skilled labour in Australia. Opponents expect most workers to come from abroad.This project is therefore a massive gamble which, if it were to fail due to unexpected delays, cost increases or sudden increased interest rates, Gunns Ltd may be taken over or have to go into liquidation with assetts being auctioned off to the highest bidder. Opponents think that the strength of the Australian dollar has made the project unviable. It certainly will find it difficult to compete with South American mills. A new assessment of the mills' economics has been published by the Greens which indicates Gunns' pulp will be $100 tonne more expensive. Quite recently an Australian company ION failed trying to expand quickly and the Magnesium project near Rockhampton went belly-up losing investors hundreds of millions of dollars and causing a mini-slump in the area.
Gunns' own assessment says that the benefits to the Tasmanian economy run to billions but risk factors and subsidies have been ignored.
For further consideration is the fact that there have now been doubts cast on the supposed knock-on financial benefits to Northern Tasmania. The NTDG study tour found no obvious flow-on benefits at Stendal and Jose Koopmans calculated at Veracel that it was unlikely there was any net gain of jobs at all. In other words, the new pulp mill may have actually destroyed as many jobs as it has created. And MLC Ruth Forrest reported from the study tour on Aldea Nuova that locals did not get the jobs
In a paper titled 'Financing Pulp Mills - An appraisal of risk assessment and safeguard procedures' by Machteld Spek several points are emphasised including:
(1) Even the pulp producers with low cost bases have often not succeeded in delivering quality returns to their shareholders.
(2) The full impact of pulp mills on the environment is not yet fully understood.
(3) There is a history of projections of supply self-sufficiency being incorrect.
(4) Virtually every green field large scale new pulp mill is being built in developing countries. Costs in developed countries tend to be too high. The exception to this is Stendal in eastern Germany but this appears to be a political decision, not a commercial one.
(5) Company projections tend to be optimistic.
(6) If a pulp mill is found to be unsustainable, it is not closed down but kept going with subsidies, etc.
You can read the entire report on this link:
An article in 'The Age' newspaper highlights some of the problems with forestry operations including:
* Contractors on breadline rates because of Gunns Ltd virtual monopoly * There are seven times the number of jobs in agriculture as opposed to forestry for the same land * Agriculture will generate ten times the income for the same area of land * Plantations impact on agriculture as they use up huge amounts of water * The wrong type of wood is being grown for the chinese market
The new Launceston sea port - Investment in projects like this have renovated the Tamar.
Here is an analysis by TAP that indicates that the pulp mill will benefit Tasmania by about $6.7 billion, but could in fact cost $17 billion in various other ways:
It now looks more and more unlikely this project will succeed. Even if Gunns found a joint venture partner, only about 30% pf these arrangements actually come to anything. But Gunns has such huge debts, which are growing, that they cannot admit that the pulp mill is not going ahead or the $220m. they have invested in the project will move from being an assett to a liability and Gunns will be breaking banking covenants and could pass in to administration.
Finally, a Swedish report by Anderson and Bartholdsen on the Veracel mill observes: 'There also exists a clear democratic problem, since the paper and pulp companies exercise large formal and informal political influence on regional State and Federal level. The opposition to the pulp and paper corporations, which consists of a wide array of popular groups and organisations, has much weaker political representation and much less access to the media'.
Anderson and Bartholdsen on Veracel pulp mill
