License article

Little left to pick over on woodchipper's carcass

IT'S Goodbye, Mr Chips, for Tasmania's biggest public company and one of its largest employers. Step back five years in time and Gunns was a stock that investors were regularly advised to buy because of its latent earnings potential, albeit one that the ethical investor fraternity wouldn't touch.

Yesterday it was placed in the hands of administrators, leaving bankers with loans of more than half a billion dollars, and large shareholders including Schroders and Perpetual spitting chips - or at least worthless pieces of scrip. (And approved plans for a multibillion-dollar pulp mill that will probably never get built.)

Since August it has been clear that the company's tangible assets are less than its liabilities and the only chance of survival was to rely on bankers to extend it further working capital.

But the ANZ-led banking syndicate - owed $560 million - decided it was no longer worth

keeping the timber company afloat. And the odds of recovering even half the funds are estimated to be slim.

Only adding to the ignominy of Gunns' fortunes has been a brewing class action over an alleged lack of disclosure and separate charges laid against former chairman John Gay for insider trading in Gunns shares.


The ambulance-chasing class-action law firms and their funders are now likely to abandon this claim given there is nothing left to recover.

While the company's history is littered with disasters, the root cause of its downfall was an inability to understand that its corporate social responsibility extended beyond just making profit.

Timber milling has long been a sensitive business, but its decision seven years ago to build a pulp mill put environmental interests on high alert, bringing on a fight. It would ultimately win that fight but the victory would come too late to save the company from extinction.

Gunns finally got the green light to build the pulp mill, but not before it had to get through federal approvals and several court challenges. By the time it had navigated these, the company was not in a financial position to fund the mill and had to find a partner with capital. Earlier this year it announced a deal to raise equity through a new investor, Hong Kong-based Kiwi billionaire Richard Chandler, but it eventually fell through with no proper explanation as to why. Subsequent attempts to raise capital were unsuccessful.

Many of the other assets once owned by the company were sold off in various restructuring attempts. What was left, including its land and plantation estate, its interests in managed investment schemes (MIS) and the investment costs associated with the pulp mill project, were written down by as much as $800 million last month.

The value of the investment in the once tax-effective MIS is now negative $100 million. This means the costs to the company in funding the leasing and management of the Tasmanian MIS estate are greater than the interest in the harvest proceeds.

The total impairment on the MIS assets over the past two years has been a huge $425 million - a figure that must bring into question whether they were originally significantly overvalued.

If woodchip prices had not fallen there is a chance the company would still have a business, but there is now a huge oversupply, which is not likely to ease in the medium term, putting pressure on prices. Woodchips are sold in US dollars and have been additionally hit by the high local currency.

But any improvement in the value of the woodchip business was reliant on getting the mill up and running.

Once the corporate undertakers have picked over the Gunns carcass and auctioned off the pieces, there will probably be less than 50ยข in the dollar left for lenders and nothing for equity holders.

ANZ (which accounted for about 50 per cent of the bank syndicate loans) said it had already made provision for its loans to Gunns. It is likely the other lenders in the syndicate and investors who believed Gunns was latent with potential clearly underestimated the lack of corporate governance and the potential for the broader constituency and environmentalists to mess up the cosy plans of Tasmania Inc.

A January 2008 report commissioned by the Wilderness Society estimated the Bell Bay pulp mill would run at a $300 million loss to Tasmania. However, the company told the stock exchange in February 2011 that the mill would generate between $475 million and $500 million in earnings before interest tax, depreciation and amortisation.

While the demise of Gunns is being dressed up as being the result of woodchip prices, this ascribes no weight to a series of poor management decisions made over several regimes.

Nor does it take into account the hazards of building a pulp mill that history makes clear.

In 1989 Wesley Vale pulp mill was proposed but did not go ahead. The Wesley Vale project was to be a craft mill and was also subject to local opposition due to its use of chlorine as the main bleaching chemical, a convention of that time.

It is arguable that there is no value left in Gunns' approved pulp mill plans. It would be a very brave scavenger that would attempt to build a mill in Tasmania now.