Gunns felled by the inevitable

Gunns has been stranded in the wilderness for some time, an unfinished pulp mill dragging it down. When Richard Chandler lost interest, it was an almost inevitable slide into administration.

Finally, it would appear, 137-year-old Tasmanian timber group has succumbed to the years of attrition as it has sought, unsuccessfully, to get its controversial $2.3 billion Bell Bay pulp mill off the ground.

For much of this year Gunns has been trying desperately to sell whatever it could and attract an investor for the pulp mill project while relying on the support of its 10 senior lenders, owed more than $500 million to stay afloat. Trading in its shares has been suspended for more than six months.

The patience and nerve of those lenders, however, has finally broken and Gunns announced today that its lender group had advised it that they won’t allow it to retain any further funds to meet its operational and working capital requirements.

Gunns’ directors, presiding over a company with a working capital deficiency of more than $500 million (most of its borrowings are classified as current liabilities) and with equity of only $24.25 million in a $903 million balance sheet after more than $900 million of write-downs last financial year, realistically had no option but to call in the administrators.

The problem for Gunns, as it has been for some years, is that its past was dragging it down but it was unable to capitalise its future.

The massive writedowns in recent years have been against its forestry assets – it made $749.2 million of write-downs against them in the year to June – as export woodchip prices and demand tumbled. It hasn’t helped that woodchip prices are expressed in US dollars while the Australian dollar has been stuck at historically high levels.

The devaluation of its core assets, where the funding costs are greater than Gunns’ interest in the estimated net proceeds from harvesting the plantations, made it even more critical that the controversy-ridden Bell Bay project, in which Gunns has invested (and written off) about $250 million, proceeded.

Gunns has, despite the ferocity of the environmental campaigns against it, all the necessary federal and state government approvals for the project, which would have created far more value for the woodchips than the company can realise in export markets. Gunns has been trying to get the pulp mill off the ground for the better part of a decade.

Its best chance of salvaging both the project and its own finances came earlier this year when New Zealand-born and Singapore-based billionaire Richard Chandler agreed to inject $150 million of equity into the company in return for a 40 per cent shareholding.

Unhappily for Gunns, confronted by an intense campaign from an unlikely combination of environmental groups and institutional shareholders opposed to the severe dilution of their interests, he subsequently withdrew the proposal.

Since then Gunns has focused on asset sales, which have proven difficult within the current environment, and a more conventional capital raising.

It has also attracted the attention of distressed debt funds considering buying its debt at a discount as an indirect route to a recapitalisation, but nothing has eventuated. Perhaps the appointment of a voluntary administrator may enable a restructuring of Gunns’ debt or flush out a buyer for a pulp mill project in which, over the years, there has been significant international interest.

The appointment of administrators will be a blow to the Tasmanian government and the island’s economy (although the environmental groups will see it as their ultimate victory) as Gunns is one of the largest employers in an industry-light state.

There was, however, an increasing sense of inevitability about the fate of the company as this year progressed and the floods of red ink continued even as the likelihood of the company being able to raise new capital appeared to be diminishing.

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