In the great sweep of things, those opposed to the pulp mill have been called ‘terrorists’, ‘misinformed’ and ‘anti development’. A recent paper (1) by Dr Ian Woodward of Pitt & Sherry, part of the mill consortium, represents the public as hysterical and ignorant in the details of the Tamar mill.
Time after time the public has been derided by mill apologists for both failing to understand the proposal and for being opposed to it, perhaps on the basis that any opposition to such a fabulous idea must be mistaken.
I suggest that one of the critical problems for the mill consortium was their inexhaustable ability to damage their own credibility in the eyes of the public.
From the initial promises for a rigorous and independent assessment, through to the false claims that the social and economic impacts had been studied, mill apologists repeatedly damaged their own case until they had turned just about everyone off - except the forestry industry and those who would benefit directly from the proposal.
This was all brought back the other day when I read in the Examiner 21 Aug ...“Gunns resource and sustainability manager Calton Frame was the first speaker for the evening and claimed that the pulp mill will reduce greenhouse gas emissions by 1.1 million tonnes a year.”
Are we really supposed to believe that if we did nothing and just let all the trees grow, and left our forests to sequester carbon on their own, that we’d emit 1.1 million tonnes of CO2 more than by cutting down 300 sq kms of trees a year and converting them to pulp and wood smoke in furnaces?
The public is left to wonder what kind of daffy smoke and mirrors accounting could possibly lead Gunns to that conclusion? Presumably it’s the same kind of benefits only tosh that they tried to pass off as an economic analysis in their IIS.
Can anyone believe these kinds of claims?
Logging native forests has long been understood to release massive amounts of CO2 and prevent the uptake of the CO2 that the forests would have used had they not been clearfelled. Now Gunns expects us to believe that clearfelling, chipping, pulping and burning 300 sq km of trees each year will reduce greenhouse emissions.
No wonder the stockmarket is suffering a crisis of confidence!
Gunns shares have dropped nearly 25% of their value in a few days, in part due to their profit forecasts but I’d guess that quite a bit of that was their growing lack of credibility.
What is a plantation worth?
Stockmarket pundits ascribe much of the Gunns action to a disappointing $67 million profit for the year coupled with concerns over their levels of debt. Their shares went down to $1.61 during the last day of trading.
Gunns has been reported to have debts of around $1 billion, while their worth (share issue times share value) has dropped markedly to something close to $750 million.
Just prior to the big drop, Gunns had announced that it intended to retire $170 million of debt by selling off some of its plantations. Some have suggested that Gunns debt levels were becoming uncomfortable to ANZ (their banker) as Gunns worth was falling below sensible levels of collateral for a $1 billion loan.
Unfortunately selling the plantations may be a problem, at least in Tasmania.
Gunns declared about 280,000 hectares of plantations in their IIS. It needs these for its pulp mill if it is to get out of native forests, as it probably must even if only because we’re running out of forests and the price of removing the timber is going up with distance from the proposed mill, and with fuel prices - still pretty high and forecast to increase again soon.
There are several serious problems apparent with a Tasmanian plantation sale:
• the value of the timber could be very low
• the land will cost a lot to reinstate to other uses
• buyers will want the best plantations
• a low plantation value could jeopardise their remaining collateral.
Low value of timber on plantation
The sweetheart deal that Gunns signed with Forestry Tasmania (FT) sets a hardwood floor price from public forests of around $15 per tonne. That left plantation ‘investors’ at Gunns mercy when they were offered a price for their trees. Why would Gunns voluntarily pay more than the $15 they could get from FT? If Tasmania gets around 150 tonnes per hectare over 15 years (approx) then the trees are only worth around $2,250 per hectare … hardly an attractive investment proposition for a buyer unless they pay somewhat less. Taking an average age of plantation at 7 years, that means that the investment won’t pay out for 7 more years, so a buyer isn’t likely to want to pay more than $1,000 to $1,500 per hectare. That would mean that Gunns would need to sell around 120,000 hectares of its best plantations to raise the $170 million!
It could cost a lot to reinstate the land
150 tonnes of trees on a hectare are going to need around 30 – 50 tonnes of replacement nutrients from Tasmania’s old and depleted soils. When those trees are ‘harvested’ there’ll be stumps everywhere on depleted land. It’s going to cost a lot of money to reinstate that land – fertiliser costs at least $500 tonne (2) so notionally up to $15,000 just to replenish the nutrients for more trees … plus removing those stumps using diesel at future prices.
Buyers are likely to want the best plantations
Due to poor soils and lack of water, many of Tasmania’s plantations are very poor, little more than tall, nearly dead fence posts. An astute buyer isn’t going to want those plantations, they’ll want the most productive areas – exactly the ones that Gunns won’t want to sell. This is particularly true because the productivity of any given plantation cannot really be known until it is harvested, and that date could be years away. That fact alone is likely to exercise a cautious buyer considerably.
Low value for plantations could lead to a low valuation for Gunns
If Gunns cannot achieve a price close to their own valuation for plantations, then both their credibility and the value of their company come under serious question. How they could finance a mill with so many question marks around their valuation of their plantations coupled with their existing high levels of debt is a complete mystery.
If the points above are even close to accurate, then the future of plantation forestry could be very bleak indeed. The state could be left with thousands of hectares of stumps on unrecoverable land all owned by one corporation.
So is Gunns idea of a partial sale to an overseas (?) partner an option?
But why would an overseas buyer want to build a $2 billion plus pulp mill in a country where there is no-one skilled enough to operate it? Why not just ship the trees directly to Asia and pulp them there? OK, the pulp is a higher value shipping proposition but Asians can work well with whole timbers so the trees could be worth more as … well … timber.
Gunns has landed themselves in this mess by becoming a one trick pony that relies excessively on public largesse for its ability to post profits.
As the credit crisis unfolds, more US banks fold and the globe sinks into recession, the demand for paper will decrease along with any enthusiasm for borrowing billions to process wood from a slew of one rotation plantations plus native forests with expensive access (remember diesel costs).
Gunns best hope might be to shift gears into the kind of multiple high value business described by others like Dave Groves on this site (3).
That’s unlikely to happen with the current directors and, in any case, would require significant new investments that Gunns can ill afford right now.
With its almost total reliance on subsidies and its narrowing focus on chips and pulp as commodities, Gunns has painted itself into a corner and appears to have left itself little room to manoeuvre. Get ready for the sob stories to government.
Their stock exchange announcement on 28 August of their plans to raise capital should be most illuminating. Will they act to build their credibility or will they lapse into past practice?
Watch this space.
Mike is a complex systems consultant, change facilitator and executive and management coach.
N. B. This article is intended to demonstrate the use of logic and should not be relied upon for investment purposes.
This was all brought back the other day when I read in the Examiner 21 Aug ...“Gunns resource and sustainability manager Calton Frame was the first speaker for the evening and claimed that the pulp mill will reduce greenhouse gas emissions by 1.1 million tonnes a year.” Huh? Are we really supposed to believe that if we did nothing and just let all the trees grow, and left our forests to sequester carbon on their own, that we’d emit 1.1 million tonnes of CO2 more than by cutting down 300 sq kms of trees a year and converting them to pulp and wood smoke in furnaces? The public is left to wonder what kind of daffy smoke and mirrors accounting could possibly lead Gunns to that conclusion? Presumably it’s the same kind of benefits only tosh that they tried to pass off as an economic analysis in their IIS. Can anyone believe these kinds of claims?