Gunns Pulp Mill: what is credibility worth?

What is a plantation worth?

Stock market pundits ascribe much of the Gunns action to a disappointing $67 million profit for the year coupled with concerns over the company’s levels of debt. Their shares went down to $1.61 during the last day of trading.

Gunns has been reported to have debts of about $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; and
• 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 about 150 tonnes per hectare over 15 years (approx) then the trees are only worth about $2,250 per hectare: hardly an attractive investment proposition for a buyer unless they pay somewhat less.

Taking an average age of plantation at seven years, that means that the investment won’t pay out for seven 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 about 120,000 hectares of its best plantations to raise the $170 million!

It could cost a lot to reinstate the land

One hundred and fifty tonnes of trees on a hectare are going to need about 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 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.