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Gunns Pulp Mill Set to Roll ...or Not!

On March 10 of this year the Australian federal government signed off on the final legal environmental approval for construction of Gunns Limited’s proposed bleached hardwood kraft market pulp mill. Approval followed extended model testing and a last minute voluntary undertaking by Gunns to accept much tougher environmental limits, particularly for AOX and COD, which have been almost halved from the previous proposed limits. The company also accepted a condition to pulp only plantation wood in the mill. Almost unnoticed as part of the variation agreement, Gunns lodged a request for approval to increase capacity of the mill from 1.1 million metric tons/year to 1.3 million metric tons/year on the basis that the plantation resource will yield greater output from the unchanged fiber input limit of 4.5 million metric tons/year of Tasmanian chipped wood.

For some time it had seemed that the Gunns mill proposal would be “déjà vu all over again,” as mill opponents (and there are many) were confident that they could bring pressure to bear on the federal government to make the same decision it reached more than 20 years ago. In 1989, a proposal by Associated Pulp and Paper Mills (APPM) and Noranda of Canada to build a 440,000 metric tons/year kraft mill at Wesley Vale in Northern Tasmania was effectively terminated by the then federal government because of environmental concerns.

Opponents of that mill took advantage of the prevailing political climate and the fervor of Greenpeace activities to whip up public concern. Technically, approval of the mill was deferred and CSIRO was tasked to research and establish suitable guidelines against which such mills would be approved.

Construction of the mill was underway when Noranda pulled the plug, having seen the writing on the wall, although APPM did not formally withdraw its proposal for a pulp mill for another two years. Regulatory guidelines had been clarified by then through the promulgation of the National Bleached Kraft Mill Guidelines, which the planned mill would have achieved! Although the Tasmanian and Commonwealth governments proclaimed support for the project, pulp prices had tanked and APPM was unable to find a new partner.

Of course, not only did the mill not proceed, but inevitably the paper mill at Wesley Vale declined in viability and manufacturing ended there last year.

Ironically perhaps, for those citing environmental concerns as a basis for blocking a new pulp mill, the scientific research work done after the APPM fiasco did at least provide an excellent platform against which to evaluate the proposed new Gunns mill.

A commonly held view is that the opposition to Wesley Vale Mill, and now the Gunns mill at Bell Bay (about 25 miles from Wesley Vale as the crow flies), has really been about defending the native forests in Tasmania. However, the victory would be seen as more compelling if environmental reasons were the basis of this outcome. Certainly environmental fears widen the number and diversity of those opposing the mill. The decision to use only plantation wood should be the end of the story, if this indeed were the case. But the opposition continues, partly because those caught up in the fear campaign that cites choking toxic vapors from the mill making life unbearable and the probability of mutant fish evolving from the effects of the effluent stream are unable to concede otherwise. Others fear the impact on their lifestyle of a large industrial enterprise (on a site that was zoned for an aluminum smelter). Through the ongoing campaigns, certain core groups devoted to opposing pulp mills will not accept any concession to use trees for any purpose other than encouraging biological diversity and providing lungs for the planet.

A common perception with Gunns (and APPM before it) is that it bypassed community consultation and instead opted for direct negotiation with the state government. Recently, the company conceded it still had more work to do to achieve what is being termed a "social licence" for the mill.

In commenting on a recent consultant’s report on attitudes to Gunns and the mill, Greg L'Estrange, the new CEO of the company, acknowledged findings that "Gunns needs to change the way it interacts with the community" and “rebuild trust with the community.” L’Estrange said Gunns would accept the report's recommendation to conduct a new local consultation process and “to communicate openly and transparently.” The change to an exclusive plantation wood resource and adoption of an elemental chlorine free “light bleaching technology” reflects this new reality.

In conjunction with environmental approval, Gunns released an economic impact report to support the case for building the mill, which would be operated through a new company (Southern Star Corporation), of which Gunns would be a 51% stakeholder. Unsurprisingly, this commissioned study provides a rosy outlook predicting very substantial economic impacts on the state and national economy.  Over the years there have been other studies of the viability of the proposed mill and not all have been positive.

Wood is the largest cost component of pulp and the yardstick is clearly the very low cost hardwood resource in Brazil and other areas of South America. The Tasmanian plantation resource is not as low cost as Brazilian wood, but the proximity of the Bell Bay mill to the intended market in Asia, mainly China, relative to Brazil provides a significant offset.

The projected supply and demand scenario for market pulp indicates that the capacity of the mill (whatever is finally approved) can be accommodated, but there are other significant issues apart from overt opposition that may work against the mill being built. The project economics will have declined significantly in recent months as the Australian dollar has continued its relentless appreciation against the U.S. dollar, the international currency for market pulp sales. Most profitability determinations seem to have been made on the basis of a 0.75 AUD/USD exchange rate, whereas the current exchange rate is approaching 1.10! This effectively reduces by almost one third the pulp price received in Australian dollars. Most economic forecasters do not expect the high exchange rate to persist, but neither do they anticipate an early retreat from this situation.

Another significant issue is the overheated demand for labor and resources for infrastructure development in Australia. Many huge infrastructure projects are planned and in execution in Australia, all of which are adding to cost, and indeed the capacity to undertake projects of this size and complexity. These range from mining developments, water desalination plants, and huge liquid natural gas processing plants (for example, the Gorgon project at AUD 50 billion), to coal seam gas projects and a national optic broadband cable project costing AUD 43 billion.

Gunns now appears to be in a less stable financial position. Cash flow has been significantly impacted by suspended wood chip sales to Japan because of the recent earthquake and tsunami, which flowed through as a 98.7% profit drop for the 6 months to December 31, precipitating a dramatic fall in stock price. Now a class action has been lodged against the company on behalf of investors who bought equity in the six-month period before the profit announcement for failure to properly disclose its underlying financial situation. To address its financial position, Gunns has announced the sale of a number of its forest assets, particularly on the mainland, to meet refinancing requirements.

In the meantime, the list of potential joint venture international partners for the mill continues to be subject to rumor and speculation. Södra has formally declared an interest in the mill, Metsä-Botnia has formally denied any participation, and UPM has yet to confirm or deny!

The question is now whether there is time left for Gunns to recover the situation. L'Estrange has conceded the company could be a foreign takeover target. The seven-fold fall in Gunns’ stock price since 2007 would suggest that investors are running out of patience or fortitude and unless there is a significant turnaround, L’Estrange’s comments may well prove prophetic.

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