Current Trading and Asset Sales
As a result of a significant simplification of the Gunns business model, the Company now operates in the following market sectors:
• The export of hardwood and softwood chips to Asia.
• Hardwood and softwood sawmilling and timber distribution.
• The management of softwood and hardwood plantation assets, both Company owned and those related to various MIS Schemes.
In addition, the Company is managing the exit from a number of businesses deemed non-core.
On 15 February 2011 the Company released its half-year results for the period ending 31 December 2010. In the accompanying release, full year guidance of an underlying EBIT in the range of $40-50 million was provided. We are pleased to confirm that there is no change to this guidance.
The current trading environment is affected by the following conditions:
• Hardwood chip export volumes are below expected levels due to reduced demand from Japan following the catastrophic earthquake that occurred in March this year. We do not expect Japanese demand to increase in the near to medium term.
• Hardwood and softwood chip margins continue to be adversely affected by the strength of the Australian dollar relative to other countries exporting woodchips to Asia.
• Our sales of hardwood and softwood timber products into the Australian building and construction industry are below expected levels as a result of lower than expected housing commencements.
Given the above, we are pleased that our market guidance underlying EBIT will be achieved, which reflects the hard work that has gone into reducing costs and improving efficiency across all business units. We note that reported statutory earnings for the period may vary materially from prior comparative periods, due to the effects of asset valuation adjustments arising from asset sale processes.
Clear Statement of intent
The Gunn’s Board has agreed a clear way forward as follows:
• Complete the divestment of those non-core assets previously advised to the market.
• As soon as practical, exit all operations that involve the management, harvesting or processing of native forest in Tasmania. This will be achieved via sale or closure of the relevant operations.
• Progress the following initiatives, which if successful, will provide the Company with sufficient funds to build and operate the Bell Bay pulp mill:
o The sale of the Green Triangle softwood plantation estate in SE Australia.
o The sale of all hardwood sawmilling activities or, in the absence of sale, a disciplined inventory realisation program.
o The sale as a going concern of all softwood sawmilling and timber distribution operations.
o The partial sale of all hardwood plantation assets (we are targeting to retain a 20% equity share).
• Although our preference is to build and operate the Bell Bay pulp mill with an industry joint venture partner, which is being actively pursued, we have formed the view that we need to put in place a financial strategy that will enable us to proceed alone, if that is necessary or indeed preferable. In the event that we do proceed alone, we will have in place firm pulp off-take agreements with a number of industry participants for approximately 80% of the planned annual production volume. We expect those off-take partners to participate with minority equity holdings in the project.
• Replace our current core trading finance facility (currently drawn to $360 million) with a facility that better reflects the need for a pulp mill construction finance facility. This work is well progressed. When in place, this new facility will provide the funds necessary to continue with the construction activities that have already commenced at Bell Bay. If all of these initiatives are successful, Gunns will have exited all businesses other than the processing and exporting of plantation hardwood and softwood woodchips, a situation that will continue until the Bell Bay pulp mill is operational. Gunns will also have a 20% equity stake in the hardwood plantation asset that it will maintain on behalf of the new and existing owners.
We are in compliance with all banking covenants but are required to repay a short-term advance totalling $45 million on or before 30 June 2011. In addition there is a scheduled $10 million repayment due in June under our core trading finance facility. The proceeds from near term asset sales and refinancing will be applied to these repayments.