In chess, the endgame takes place when only a handful of pieces are left on the board. In close games, the players must select the best move available to avoid being checkmated.
Gunns – Tasmania’s “forest products” giant – looks headed for checkmate. Its only remaining option seems to be paying down debt and building its pulp mill.
Every move it is making appears designed to achieve these linked objectives.
Genuine sale - everything must go!
To pay down debt, Gunns has taken dramatic action in the past couple of years, selling off just about every asset it owns.
Gone under the hammer are its wineries and hardware stores. Sold, for well below the listed value, are its Green Triangle softwood plantations and the Triabunna woodchip mill. Gunns has even recently sold the building that houses its Launceston headquarters.
Despite the fire sale, the company remains highly geared with debts of $628 million, the vast majority of which are current.
Second-quarter 2011 woodchips sales sank to an all-time low of about 0.6 green metric tonnes. This was no doubt a consequence of the general global economic malaise and the specific impact of the Japanese earthquake, tsunami and nuclear crisis.
There just aren’t many buyers around for woodchips at the moment.
And the future is not looking auspicious. The US faces a double-dip recession, Europe is mired in a sovereign debt crisis, and the Aussie dollar appears permanently stuck above US$1.05.
Getting the government to pay out
To avoid being checkmated, Gunns needs to do more than sell off assets.
To raise additional revenue, the company is demanding serious compensation from the recently signed Tasmanian Forests Intergovernmental Agreement for a 20-year Long Term Pulpwood Supply Agreement (LTPSA).
Negotiated in 2007, the LTPSA entitles Gunns to 1.5 million tonnes of softwood pulp per annum.
The contract, valued by the State of Tasmania at $200 million per annum when it was signed, stipulates Gunns can reassign the benefits. It needs the consent of the state forestry agency Forestry Tasmania, which “shall not unreasonably be withheld”.
Gunns has some leverage here. Clause 22 of the Intergovernmental Agreement specifies that the State Government will “enter into a process” to retire enough native sawlog supply to ensure the conservation of up to 572,000 hectares of identified high conservation value forests.
In other words, the two parties have to reach a substantive agreement on how much compensation Gunns should receive.
The Premier reportedly offered Gunns $23 million last week for its “residual rights” following a probity audit. But since Forestry Tasmania claims Gunns owes it over $25 million under the contract’s “take or pay” provisions, it’s possible the Government issued Gunns an invoice for the balance owed.
Regardless, the company rejected the offer and the parties are back at the negotiating table. But with the State Government broke, the Intergovernmental Agreement placing a cap on available Commonwealth funds, the Greens and Coalition opposing compensation, and the people outraged, the chance of Gunns being offered anything close to $200 million appears remote.
Rumours are swirling that the Government might up its offer if Gunns were to also retire the residual rights it holds under another supply agreement for softwood and other products. One way or another, an agreement is expected later this week.
Proving the pulp mill is on the way up
Even with compensation, Gunns could be checkmated if it fails to convince those who matter that its controversial Bell Bay Pulp Mill is a going concern. This is easier said than done.
The mill proposal has never been publicly, independently and comprehensively assessed since it was pulled from the official environmental assessment process on 14 March 2007. At best, most view it as the right mill in the wrong place.
While it has the backing of the ALP and Coalition at State and Commonwealth levels, it is opposed by the Greens and a good number of Australians. It is also unclear whether the permit that allows Gunns to build and operate the mill is still valid.
The permit required Gunns to “substantially commence” the project by the end of August. Just last week, Gunns submitted a detailed report to the Tasmania’s Environment Protection Authority (EPA) making the case it has complied. A decision from the EPA is expected later this week.
Regardless, the matter will end up in court — indeed it is already there thanks to Pulp the Mill, an anti-pulp mill campaign group.
They claim the current construction at the Long Reach site breaches the Land Use, Planning and Approvals Act because Gunns’ permit has lapsed. A preliminary hearing is scheduled in the Hobart Magistrates Court on 14 October.
Gunns’ objective in selling off assets and seeking compensation for its wood supply contracts is to make itself attractive to a joint venture partner with pulp production experience. Having committed over $200 million to progress the project to the construction phase, it is essential for Gunns that it proceed.
A number of European and Asian companies have reportedly kicked the project’s tires, but no joint venture has been announced despite being endlessly promised. The project’s controversial history, Gunns’ current financials and the future economic outlook are likely explanations for partners’ reluctance.
Indeed, the project may no longer make economic sense. When Gunns investigated the feasibility of pulp production in Tasmania in 2004, the Aussie dollar was worth fewer than US80¢ and global markets were booming. Fast-forward to today and Gunns confronts a high Aussie dollar and a risk-averse post-GFC world.
Is it time for Gunns to tip over its king?
Will Gunns survive? It depends on the moves it and other players make in the coming weeks.
If it succeeds in getting real compensation for its wood supply contracts, if the EPA deems its pulp mill project has substantially commenced, if shareholders back its transition strategy when it recommences trading, and if the court doesn’t rule against the validity of its pulp mill permit then it will have certainly improved its board position.
The announcement of a joint venture could position it for a win.
Otherwise, it could be checkmate.