Firstly I want to notify readers that this website will soon cease to exist and I will be changing to www.daniecuyer.com, which will be in a similiar blog format, offering a commentary on Climate Change and Sustainability issues.

Funding the Gunns pulp mill, Viable or Not as Sharemarkets collapse and credit markets tighten! 

The ongoing fallout from the sub-prime debacle and the collapse in global equity markets, of which Australia has been one of the worst hit, raises many questions over the ability of Gunns to obtain the necessary finance for the pulp mill.

The Gunns shareprice has not been immune to the ASX collapse retracing 11.5% since January 14th, broadly in line with the market. However the bearish sentiment, reported losses and write-offs from major US investment banks on the sub-prime collapse has caused bank spreads to widen susbstantially back to the levels seen when the markets first got wind of the defaults on sub-prime loans.

In lay persons terms this means that the banks think in this environment it is a lot riskier to lend, so they hoard cash and not only do they lend less but they increase the interest cost on the loan to the borrower to cover the higher risks of lending (as funding for them has become more expensive).

What does this mean to Gunns? In principle it means that Gunns is going to find it a lot harder to borrow the money to get the pulp mill project off the ground. Moreover in a climate when financial institutions have become risk averse, Gunns, who have been dogged by controversy at all levels would not be the most appealing client to lend to.

Other problems when assessing whether to lend to Gunns would include the following-
1. Ongoing delays and problems caused by dissention from Tasmanian's and other anti-pulp mill lobbyists.
2. Rampant bushfires in Tasmania's north east will be raising questions over the feedstock supply for the mill. The Climate Change impacts on Tasmania can no longer be ignored. Less rain and hotter summers will impact on the viability of plantation stock and affect native forests.
3. Risk of a cost of carbon in a post 2012 Global Climate Treaty. As highlighted in Bali,the post Kyoto agreement will be seeking to arrest native deforestation to curb global emissions.
4. A high Aussie dollar and the risk of falling pulp mill prices as other major pulp mill's come on stream in two years time will be undermining the profit forecasts for the Gunns pulp mill.
5. Higher financing costs for the loans on the mill will erode future earning streams and make the project less viable.
6. Every week that passes makes the Gunns earnings streams look less appealing to investors. Construction of the mill continues to be dogged by the impacts of strong lobbying of ANZ Bank; further requests for information from ANZ and the Enviromnent Minister Peter Garrett (largely Gunns own fault as they by passed the RPDC process and rail roaded the approval through as a hot potato in an election year); and a global credit crunch raising the cost of lending to Gunns.

There is no doubt in my mind that John Gay and his board must be tearing their hair out. Each day as the global shareprices fall and the uncertainty around a looming US recession and how Australia's new government will balance the inflation tight rope and their first budget, means that economic uncertainty and fear of further fall outs from the sub-prime collapse will make the viability of borrowing the start up funds for the mill, less and less likely.

If I were a Gunns shareholder I would be ringing my fund manager or broker and really getting the lowdown on this story. In the absence of the pulp mill being constructed and the ongoing decline in demand for native woodchips, this tree lopping behemoth is looking less and less attractive. Moreover in times of uncertainty investors flock to defensive stocks and Gunns is not one of them. I wonder what Perpetual is saying now?

Since writing this post on monday 21st January, the volatility in sharemarkets has increased substantially. The 7% fall is the Aussie market yesterday saw the Gunns shareprice retrace to $3.09, 16% below recent highs, although as I write this it is up 4% on the markets bounce. However, the key point is world economic and market uncertainty, fear and risk aversion. All of these factors will continue to erode the prospects of Gunns securing finance for the pulp mill. Watch this space.

This entry was posted on Monday, January 21st, 2008 at 11:06 am and is filed under Gunns Ltd. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.