SHARES in the tree lopper have fallen as swiftly as a chainsawed Tasmanian bluegum, with investors assuming its $2 billion pulp mill won't go ahead.
Gunns' shares now appear to be priced on a worst-case scenario, which ignores the improvement in global woodchip and pulp prices. Gunns this year is receiving $18 per bone-dry metric tonne for its hardwood chips - 12 per cent higher - with the prospect of more increases to come.
Investor fears have been sparked by two events: strong reports that ANZ Bank has decided not to help fund the mill; and this week's resignation of Tassie premier Paul Lennon.
Lennon's (political) assassination means the Government is not likely to be quite so Gunns-friendly. Indeed, new man David Bartlett has ruled out tipping in public money, including for a proposed $65 million water pipeline.
ANZ is keeping mum, but we wouldn't be surprised if it pulped Gunns' credit application. Brownie points from the greenies go some way to repairing its Opes-Primed reputation.
If ANZ does withdraw as lead financier, the thinking is that other banks will fill the void. "Timing-wise, we expect a reasonable time frame is at the end of Gunns' June 30 year-end," say Credit Suisse's tree-watchers. "The only outstanding finance issue for us is whether a seemingly inevitable equity raising takes place in conjunction with the debt package (ie, next quarter) or construction finalisation (two years' time)."
The firm adds that the political risks are an "unnecessary concern". Federal Environment Minister Peter Garrett has swapped passion for power and approved the mill, while local agreements (notably the supply agreement with Forestry Tasmania) is set in, er, wood.
Not everyone is convinced the mill stacks up economically, with fears that costs will blow out and that the project will compete with lower-cost Chinese and Brazilian producers. But the consensus view is that if it goes ahead, Gunns will discover that money really does grow on trees.
On JP Morgan's numbers, at prevailing pulp prices the mill would generate annual EBIT of $435 million, on output of 1million dry tonnes. This figure is highly sensitive to $A levels and pulp values. Credit Suisse plugs in a $430 million number and both firms concur the project would add $2 to Gunns' shares.
Gunns' downside is that it's already carrying debt of $1.1 billion, the result of last year's $350 million cash purchase of mainland plantation operator Auspine. However, interest cover will improve as it tapers back on its managed investment scheme activity, which requires the up-front purchase of large tracts of land for the plantations.
The mill is not due for completion until late 2010 and Murphy's Law suggests cost and timetable blowouts. In the meantime, Gunns is reaping better returns from flogging woodchips to the Japanese.
Criterion last rated Gunns an avoid at $3.50 on October 9 last year. It now looks a speculative buy on the mill going ahead, with the comfort that the stock is reasonably valued on a steady-as-she-goes basis.
While we don't expect the Wilderness Society's superannuation scheme to pile in to the stock, Auspine steers Gunns away from forests.
GNS Price at posting:
0.0¢ Sentiment: LT Buy Disclosure: Held
