Shares shock for pulp mill: Report warns investors to shun Gunns
By SUE NEALES
Chief Reporter
30may06
PLANS by timber giant Gunns to build a $1.4 billion pulp mill are financially risky and dangerous, says one of Australia's largest stockbrokers.
A damning report from CommSec, the shares and stockbroking arm of the Commonwealth Bank, advises investors to steer clear of Gunns if it goes ahead with its controversial pulp mill on the Tamar River.
The investment advice predicts the pulp mill will never be cost-competitive.
"Gunns' move into pulp production is fraught with danger," the CommSec advice says.
The report also warns that as Gunns is forced to rely more on plantation woodchips for its pulp mill -- rather than woodchips from native forests -- its production cost will more than triple.
CommSec analyst Sephorah Mangin recommends investors dump their Gunns shares immediately since there is an 80 per cent likelihood the company will go ahead with the pulp mill.
"Gunns' pulp-mill project is only viable on the assumption that pulp prices remain high," the CommSec report says.
"We believe this assumption is flawed."
The report by Ms Mangin, which was published last week, may impact on Gunns' share price on the Australian Stock Exchange and its overall financial viability.
Gunns Ltd shares were yesterday trading at $3.12 each, up from their $2.65 low of October last year.
But CommSec believes a more realistic value of shares in Gunns Ltd is $2.56 today, and an even lower $2.38 a share if Gunns proceeds with its pulp-mill plans.
CommSec is regarded as a highly influential investment adviser and stockmarket analyst, with its major clients including big fund managers such as AMP, Colonial First State, Perpetual Mutual and Perennial Investment Partners.
The final go-ahead for the pulp mill depends on approval from Tasmania's independent Resource Planning and Development Commission, subject to strict environmental guidelines.
But the State Government supports the project as the answer to Tasmania's declining wood exports and as part of its policy move towards more local value-added processing.
But Ms Mangin's CommSec report is unequivocal.
She says Gunns Ltd's plans to replace declining Japanese markets for woodchips with its own mill's demand for the same woodchips are flawed.
CommSec says Gunns Ltd expects the pulp mill to consume 4.5 million tonnes of woodchips annually, the amount it currently exports to Japan.
"The pulp mill will effectively replace Gunns' woodchip export business with a pulp export business," the analysis says.
But CommSec fears that a "surging" supply of pulp from South American bluegum plantations will more than meet the increased demand for pulp by China's expanding paper mills.
"As a higher-cost producer, Gunns will be extremely vulnerable to any downturn in pulp prices," CommSec warns.
"Building a pulp mill is a highly risky project for Gunns.
"It is not the solution to Gunns' problem of declining woodchip exports."
In further detail, the CommSec report claims:
- A pulp mill would leave Gunns Ltd vulnerable to any downturn in world pulp prices.
- It would cost Gunns Ltd $US405 to produce a tonne of paper pulp compared to $US250 from a similar pulp mill in Brazil.
- This higher production cost would not be offset by lower transport costs from Tasmania to major pulp markets in China.
- With wood from native forests decreasing, Gunns would have to pay $36 a tonne compared to $12 a tonne for its pulpwood timber.
"Gunns' costs for native forest timber [that] it pays Forestry Tasmania are actually very low," the CommSec report says.
"Using plantation timber significantly increases Gunns' costs; if the proportion of plantation timber [required by the pulp mill] is higher than 30 per cent, our estimates of Gunns' wood costs would increase substantially."
