Gunns reports net loss for half year to December 2010

Underlying earnings before interest and tax (EBIT) was $20.2 million, up $12.7 million on the previous corresponding period and in line with the company’s guidance. No interim dividend has been declared. Managing Director Greg L’Estrange said “one-off items including impairments of non-continuing assets totalling $30.8 million and business restructuring costs of $9.5 million were necessary to position the company for the changing economic conditions of the forestry sector.” “In the past six months we have made significant progress implementing the strategic review we announced last February,” he said. “This has been a critical stage for the company, which has necessitated us divesting non-core assets and operations, including the Tamar Ridge Wines business, walnut operations and arranging a progressive exit from the construction business.” “We have made appropriate impairment charges to the value of non-continuing assets, including the Scottsdale mill and our West Australian Jarrah operations.” “During the half we also increased our investment in softwood processing assets, taking over operation of the former FEA Bell Bay softwood sawmill. This mill, which is only three years’ old, provides scale and an efficient processing base for our Tasmanian softwood business and will contribute $85 million a year to revenue. The company recorded a gain on purchase of the mill of $18.8 million.
Forecasts of profitability and cash flow indicate that all debt covenants will be met during the remaining term of the existing senior debt facility; however, it must be emphasised that the timing and value of the remaining asset sales are critical to achieving this outcome. The company requested a trading halt last Friday due to an unexpected delay in finalising a financing facility. Revised cash flow modelling indicated the need to put in place temporary funding facilities as a result of the delay. These temporary facilities are now in place with re-payment to be made from the proceeds of asset sales or the completion of the planned financing. The Directors have reviewed the status of the FORESTS note issue. Whilst the note is structured as a perpetual instrument, the Directors expect to either convert the FORESTS to ordinary equity or undertake an on or off market purchase of the FORESTS at or around the then current market price following completion of restructuring and refinancing transactions. Further guidance in respect of the FORESTS note will be provided as the asset sale and restructuring transactions are progressed. BELL BAY PULP MILL PROJECT The key objective of the strategic review is to bring the pulp mill development to a financial close. In April 2010, Gunns initiated a formal investment process managed by a financial advisor to secure direct equity investment for the pulp mill project. This process is proceeding through the due diligence stage with two potential mill co-investors to finalise equity investment in the project. Stakeholder engagement in respect of the mill project, and the company’s broader business activities, has been significantly extended, with permanent processes established to maintain and develop our community engagement. “The company has submitted its final environmental modules relating to the mill’s operation to the Federal Government for approval, which is due by early March,” Mr L’Estrange said. “The project is ready to begin construction on financial close.” “As previously announced, the mill will operate on 100 per cent plantation fibre from the commencement of operations. We are continuing to progress to achieve dual certification of our wood supply through the Forest Stewardship Council. We are encouraged by the FSC’s statement this week confirming the company’s commitment to the FSC process.” “The signing of the Tasmanian Forests Statement of Principles between industry and environmental groups last year recognises that a pulp mill is critical to the forest industry.” “The company has made a clear commitment to exit from the processing of native forest resource in Tasmania, with a focus on utilising our significant plantation resource at the Bell Bay pulp mill.”
OUTLOOK Market conditions for the wood fibre business are expected to remain difficult, while the strength of the Australian dollar against the US dollar is maintained. Earnings from sawn timber operations are expected to increase in the second half of the 2011 financial year, with the integration of the Tasmanian softwood operations to one site at Bell Bay, and further rationalisation of hardwood operations. Full year underlying EBIT is expected to be consistent with the company’s previous guidance, between $40 and $50 million.