It's the bottom line $$$$$$tupid!
In all the reports people are still being told that the cost of the Pulp Mill is $2.2 billion, even though John Gay himself said a month or two ago that the mill estimate had probably risen to $2.3 Billion. That was before they started having problems with the pipeline and stock market collapsed, and there was also a withdrawal of public funds in the form of subsidies. Now the start date has been pushed out to the end of next year and finance will only 'possibly' be available by March 2009. None of these items seem to have been costed in to the guestimates.
The effects of a looming depression, to use the no-no word, is that world economies are failing, jobs are being shed, companies are collapsing and the amount of paper required is dropping by the day. The many new pulp mills that are due to come on-line worldwide will probably create a glut of pulp and the demand for new mills will drop substantially. By December next year, there may not even be a manufacture of this equipment still in business, and even if there is, they will not be manufacturing at 2007 prices. By the time the new revised construction commencement date appears, the cost will probably be nearer to $4.5 billion, and who the hell in their right mind would finance that!
To counteract depression, the answer has always been to increase the inflationary spiral somewhat, but this has not been factored into Gunns estimates, and the bigger the risk, the higher the price of capital. Again, to counteract inflation costs, wage demands will see to it that there is a higher labour cost.
Further, it is quite possible that many of the MIS companies (Including Gunns itself) will also collapse financially, thus increasing the wood supply problem. Gunns has already been forced to sell off some of its plantation timber to finance its debts and failed to raise capital from a rights issue.
When investors realise that the basis for these companies resembles the sub-prime fiasco, and the forecast profits are somewhat of a myth, and that the majority of the capital assets actually do not belong to the company but to the investors, they too could follow a path of the grave. The mill will then be dependent on keeping alive a wood supply from Forestry at even more ridiculously low (fixed) prices - something that may also be under review if lines in the sand ever become set in concrete.
Another major factor is that during recessions, when private industry contributions dry up, governments become more reliant on voters for their ability to remain in power, as instanced in America recently. The Republican party, which is traditionally funded by wealthy self-interested manufacturers, failed to raise anything like the money the Democrats managed from the plethora of small donations collected from the general public, and Obama trounced the efforts of McCain. Human beings started to feel empowered again.
This factor may have some bearing on recent events in Tasmania where we have a majority of the population expressing the opinion that they do not want a pulp mill and they want the old growth logging to stop. This is an old chestnut, but now with Gunns failing financially, the support money for the local political parties will not be available any more, and to stay in power, the incumbents may have to resort more to appeasing these public wishes.
If one looks carefully, the signs are already becoming apparent, with deadlines for Gunns now being fixed and the Sovereign Risk Agreements already being withdrawn and pressure being put on Forestry to cancel their current Wood Supply agreements. If this happens and Gunns is forced to pay a genuine commercial price for their wood supply, they are finished. The losses that the Tasmanians annually make from their forestry operation will no longer appear as a direct benefit on Gunns broadsheet, and the company will return a substantial annual loss. The Government is already making noises about no longer supporting this project, and in these financially stressed times, subsidies are being slowly put on the back burner.
A second major blow was struck by their chief advocate himself. Lennon announced a couple of weeks ago that he was looking for a job, but that 'he was not going to join the board of Gunns'. (One wonders which side this decision actually came from or maybe he has some clearer insight into where he company is heading?) Under Parliamentary privilege he attacked the DPP and also used the opportunity to inform the world that he considered the Pulp Mill project already dead. When you employ a known head-kicker, sometimes one has to watch one's own head! The result was that Gunns share price immediately dropped to well below the critical one dollar mark and any remaining stock market confidence evaporated.With share prices where they are now, Gunns is ripe for a take-over and a possible asset-stripping operation.
Alongside this, the world is becoming more environmentally conscious. Forests are taking on a new potential and 'Green' is the fashionable colour at the moment, if not as a party. Trees are already being seen as being more valuable standing than as a woodchip supply.
Having shot themselves in the foot a couple of times, Gunns is now being asked by the government to stand on its own feet. If you've got any money left to play with, I would suggest you look somewhere else for a safe hedge.The bottom line here is beginning to read $$ 'Disaster'!
Barnaby Drake
