typing is not activism….

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Commonwealth Bank takes 5% stake in Gunns

with 4 comments

ABC reports that the Commonwealth Bank through its investment arm Colonial First State has just become a major shareholder in Gunns. With twenty million shares – or 5% of the company – their investment must be in excess of $50 million.

This means that Commonwealth Bank and Colonial First State will now be on the “fair target” list of investment houses – alongside ANZ and Perpetual Investment – for those wishing to oppose the pulp mill. It is likely that pressure through logic and economic rationale shall be the m.o. rather than straight boycotts.

An interesting example of protesters getting it wrong on economics and big evil companies getting it right is the Barrick open cut cyanide leech gold mining operation at Lake Cowal in the south-west of New South Wales. Although protesters are right about the New South Wales government selling out public interest, water supplies, farmers, and the environment for a handful of dollars they were wrong about the value of the project to the Canadian miner.

At the peak of the protest, gold was valued at around $US380 an ounce. It is of course heading toward $900 an ounce, which adds about 150% to the potential value of the project.

Of course, this doesn’t change anything. Barrick are still super-evil money-grabbing motherf@#%er$. The point is that protesters attacking Gunns on an economic tangent better use the kind of foresight that they are demanding from Gunns and the federal and state governments or they will actually weaken their own case – not just the economic argument, but the mill opposition in its entirety.

Chris Lang has detailed the global outlook for the expansion of pulp production over the next 5 – 10 years. Obviously, the fact that a lot of this is taking place in developing countries will put downward pressure on the price companies in developed countries – with environmental laws, however inadequate – can put on their ‘product’.

It has also been speculated that a glut of supply shall also push prices down, and that the volatility in the global pulp market makes it more a venue for buyers than sellers.

And of course there’s the impending cost of carbon which should bugger everyone who cuts down trees for a living.

So with all of these “downward pressures” anticipated by anti-mill activists, why are big investment houses and banks now flocking to Gunns like flies to a turd? Anybody?

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Written by typingisnotactivism

November 14, 2007 at 2:57 pm

4 Responses

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  1. One reason for the rush to get into Gunns mode, could be the sheer scale of the subsidies being pumped into the Tasmanian logging industry.

    Currently it looks like this..

    Some indicative costs of subsidies to the logging industry

    Creation/upkeep of roads & bridges about $20 million/year
    Work done by FT for Gunns benefit about $50 million/yr
    Cash payments over last 10 years average of $50 million/year
    MIS worth about $3,200 /ha average $60 million/yr
    Non payment for water used by tree plantations @ $100/Ml = $40 million/yr
    New infrastructures for mill over $100 million
    Future – deliver timber to pulp mill (fuel risk) $10 – 50 million per year

    TOTAL SUBSIDIES per YEAR $220 million plus infrastructure

    Basically the timber industry is a machine to transfer money from the public purse to the private sector. The worse off the timber industry is, the more subsidies flow to protect the major parties from embarrassment. As you can imagine, quite a bit of the money finds its way into the pockets of the major political parties in the way of donations.

    That kind of quality of relationship between one corporation and all levels of government is something quite a few banks etc would like to be a part of.

    So the more ‘downward pressure’ on pulp prices, the larger the subsidies will become hence…

    Mike Bolan

    November 15, 2007 at 9:10 am

  2. “”why are big investment houses and banks now flocking to Gunns like flies to a turd? Anybody?””

    1) Bankers don’t always make the right investment decisions – that is why they sometimes loose money. They only have to get it right ‘on average’. I can give you half a dozen examples where they made the wrong call by saying yes, and half a dozen where they made the right one by not saying yes.

    2) There is a significant difference between the arranging bankers and the credit approval bankers. The arrangers (those that troop out and negotiate deals) have to look busy, or they loose their jobs. Once Gunns has its joint lead arrangers organised (I’m expecting 5-6 banks if they want to get it done, less implies greater risk) they will be mandated in an agreement which includes retaining fees if the deal isn’t closed within 3-6 months. Often around $25,000 a month per bank, these fees mean the banks keep working even if the chance of success is slim. Gunns has the cash to pay the fees and keep the show rolling for years. If the market turns south, being at the arranging table, and the fees that entails, will keep a Director employed by the bank when he otherwise might be ‘let go’. From that perspective a deal like this is uncovered meat for bankers, to follow the flies analogy.

    3) Bankers never (or rarely) say no. If you are a banker, and getting fees, if something doesn’t work, do you walk, or do you say “Do you think you can fix this?”. Usually you’ll say the latter.

    If you’re a potential borrower who has spent $20 to $50 million on a project already do you say, “I quit” or do you say “yeah I think I can fix it, just give me another month to write the report that will get you comfortable”.

    So the reports, emails, meetings go round and round, with consultants getting paid, lawyers getting rich and bankers and corporate managers keeping their jobs, the company spins progress to the markets, and shareholders pay the bill. This keeps going for 6 to 24 months or until the company finds something better to do. If a deal is fundamentally sound and counterparties are flexible, the deal eventually crosses the line, if not the game goes on until the company stops paying the bills, sometimes because it’s found a better project and sometimes because it’s run out of money.

    This deal will bring the banks $25 mill in fees (assumign 2% at $1.25 billion) so it is a good excuse to look busy.

    Alex Wadsley

    November 15, 2007 at 1:18 pm

  3. hmmm… and ouch. Good answers making sense of the obscene – thanks Mike & Alex. Any other Tasmanistanians with ideas of their own or a need to vent, please do!


    November 15, 2007 at 2:50 pm

  4. I agree with Alex’s and Mike’s explanations of how the dodgiest pulp mill in the world looks like a good investment prospect if you’re a banker.

    Last year CIFOR produced a study on financing of pulp mills. They found that banks rarely carry out proper due diligence before financing pulp mills. Instead they look to minimise their risk by distributing their loans geographically and across different sectors. CIFOR’s Chris Barr describes the funding of pulp mills as “low fact financing”. CIFOR’s report was based on eight years of research, looking at the financing of 67 pulp mills and it was carried out by a financial analyst with more than 20 years experience. CIFOR’s report is available here.

    What the banks tend to do is wait for the World Bank or an Export Credit Agency to agree finance the project before they get on board. Which, for anyone who has ever looked at how the World Bank decides whether or not to support a project, is deeply worrying. In the case of Gunns they don’t need the World Bank when the government is so heavily behind the project.

    Earlier this year I took part in a meeting with European Banks to talk about pulp mill financing. Rather than investigating seriously the impacts and risks involved with financing the pulp sector, the banks were looking to the NGOs to work out some sort of policy on financing forestry projects (including pulp mills). My take on the meeting is here.

    And a few months ago I had a look at the subsidies which poured into the Botnia pulp mill in Uruguay. Bad news, I’m afraid – millions of dollars subsidies and support from the World Bank, export credit agencies and banks using public money:

    Sorry about all the links!

    t.i.n.a.: Sorry? that’s silly! I’ll repost this as an article in it’s own right shortly. Thanks heaps Chris – great to hear from you 🙂

    Chris Lang

    November 24, 2007 at 5:40 am

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