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 is 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.
This project will cost up at least $1.5 billion, probably a lot more - 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 reduced profit of $101.3m on sales of $701m in 2004/2005 of which 43% is paid to shareholders as dividends. The share price has nearly halved since the project was announced. This has partially been caused by lower profits due to a higher Australian dollar but also by investors getting spooked by the long time before any profits are made by the mill.
Gunns Ltd latest full year results 2005/2006 show profits down to $87.1m mainly due to a downturn in woodchip sales in Asia. However, Gunns have increased their dividends substantially and the share price has since risen a bit as a result.
THE RISKS
In 2005 there were rumours that an interstate company is preparing a bid for Gunns Ltd perhaps attracted by the low share price. The lower the share price, the more tempting it will be. If Gunns Ltd cannot afford to pay dividends during the construction phase, the share price may decline more. This would mean that ultimate control of much of Tasmania's forest assets would pass interstate. 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 (probably round about the next Federal election) 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 2900 workers needed to build the mill and the 292 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. 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.
A recent report by CommSec, the Commonwealth Bank online stockbroker, advises investors to avoid Gunns shares if the mill goes ahead:
Mercury report on investor recomendation
In the Australian Wealth supplement on 23/8/06, there is a sell recommendation on Gunns Ltd shares at $2.56. They say that the reasons they give are beyond Gunns control - rising oil prices, lower margins due to strong Aussie dollar and opposition to the proposed pulp mill. The article says that the turnaround could be many years away. The Gunns Ltd 2006 AGM was held on 9/11/2006. There was a protest outside the building involving about 50 people. Net profit was down to $87.2m., earnings per share was 24.7cents and the dividend 16cents. Most of the questions at the AGM related to the proposed mill and were mainly critical. Opponents of the mill that attended the meeting said that Mr.Gay was certainly not as upbeat about the mill as last year and at a press conference afterwards Mr.Gay said that he was certain that Tasmania would get a pulp mill eventually. A change in position? We shall see. 28/2/07: GUNNS LTD HALF-YEARLY PROFITS FALLFor 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.
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:
In the Mercury on 15/4/2007 it is reported that Machteld Spek has warned Tasmanians that to go ahead with the mill without a proper assessment would be foolish.
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
Actuary Naomi Edwards has said in her submission to the RPDC that the economic benefits to Tasmania are doubtful:
Naomi Edwards submission
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:
If it succeeds then CEO John Gay will have virtually doubled the value of his company. But will it be at the expense of other businesses and the lifestyle of residents in the Tamar Valley?
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'.
