Market Pushes Gunns Shares Up 27%

Tasmanian timber group Forester Gunns Ltd was a market star yesterday with a surprisingly strong surge in its share price after it issued a short statement that on repeated reading was actually a statement of the group's corporate strategy.

Even though much of the strategy has been talked about in the past by the company, senior executives and analysts, it was probably the best summation of where this controversial company sees itself heading in future years.

Basically, the direction is away from cutting down forests, but still in pulp and timber, with a few bells and whistles, including one major point of difference.

The company realises the pulp mill project is very tough, it still can't find helpers among customers and others who are willing to share ownership and the financial load, so it will do the project itself.

In the statement to the ASX yesterday, the company said it now accepts that it may have to build its proposed Bell Bay pulp mill in northern Tasmania alone, although it expects buyers of offtake from the mill to take minority holdings.

The market looked at the statement and liked the news and the approach.

Investors also liked the reaffirmation of previous earnings guidance, despite the company being hurt in Japan by the damage to its customers from the March 11 quake and tsunami.

So the shares were chased and jumped by a quarter, or 27.3% (9c), to 425c at the close.

The rebound only took the shares back where they were just over three weeks ago. Since then they hit a 52 week low of 30c.

So the market reaction was the first real sign of confidence in the company for the best part of a year.

Gunns said it still was looking for a joint venture partner for the mill in northern Tasmania, but it was putting in place a financial strategy in case it failed to find one.

Gunns said it was restructuring its main trading bank finance facility, drawn now to $360 million, to reflect the need for a pulp mill construction facility.

The company said it was in compliance with all banking covenants; although it was due to repay $55 million by June 30.

Gunns also confirmed on Wednesday its annual earnings guidance, saying it expects earnings before interest and tax (EBIT) in 2010-11 of $40-50 million.

This was despite hardwood chip exports below expectations, chip margins held back by the strong Australian dollar, and sales of timber products into the local building industry also below forecast.

The company said in the statement:

"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," the company cautioned.

Looking to the future, the company issued what it called a "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:
The sale of the Green Triangle softwood plantation estate in SE Australia.
The sale of all hardwood sawmilling activities or, in the absence of sale, a disciplined inventory realisation program.
The sale as a going concern of all softwood sawmilling and timber distribution operations.
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."

The company said these changes would see the current core trading finance facility (currently drawn to $360 million) replaced 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 said it will also have a 20% equity stake in the hardwood plantation asset that it will maintain on behalf of the new and existing owners.