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Woodchipper investors caught at crossroads

  • by:John Beveridge 
  • From:Herald Sun 
  • February 09, 2012 12:00am

A pile of woodchips at a Gunns timber mill in Tarpeena, South Australia.

TALK about being stuck between a rock and a hard place. Shareholders in Tasmanian woodchipper Gunns have a really nasty choice to make.

They can either be “rescued” by New Zealand multi-billionaire Richard Chandler and have their stake in the company massively diluted, or vote the proposal down and face a debt-ridden, uncertain future with no chance of the controversial Bell Bay pulp mill being built.

By the look of yesterday’s positive share market action, they will grab the lifeline, although billionaires rarely get that way from handing out cash at street corners.

Indeed, Chandler is getting one of those dream turnaround deals that should see him multiply his initial investment several times over.

Existing shareholders who have watched Gunns shares wither from $3.50 to just a handful of cents in five years would have been slightly less excited by yesterday’s 36 per cent spurt to 17c, particularly now they are on the hook for the rights issue and the number of shares on issue is set to more than triple.

From Gunns’ point of view, the company emerges with its debts paid off, its huge forest plantations intact, a fighting chance of the pulp mill being built and a meaningful future that didn’t exist before this deal.

But it is Singapore-based Chandler who gets the golden ticket, gaining 40 per cent and effective control of Gunns for a tiny $150 million – half in the form of a bond in case anything untoward happens – while the other shareholders stump up $130 million to own less of Gunns than they did before!

If woodchip exports to China take off in a few years as expected and the mill is built to add value to plantation timbers, expect to see Chandler exit the scene with his pockets stuffed with cash and another four- or five-bagger to add to his international list of distressed asset turnarounds.

There are the usual list of hurdles – Foreign Investment Review Board approval, an independent expert’s report and shareholder approval – but given the alternative, this deal will probably go through like a dose of Epsom salts.

In which case you should stand clear and avoid Gunns shares until the sawdust settles.

Instead, admire the skill of angel investors who flutter in with a rescue package and impeccable timing.

THEY are breaking their own records at Australian Bauxite Limited’s Taralga deposit near Goulburn.

Today, the company will announce a drilling intersection of an amazing 33m of continuous bauxite, smashing its previous record of 28m.

That compares to the more normal intersection of 2-4m for most bauxite deposits.

The exciting thing about this deposit is not just its impressive thickness, but the fact that it is a direct shipping trihydrate – a form of bauxite that has a much lower boiling point and is highly sought after by alumina smelters.

Chief executive Ian Levy said he had already had approaches from India and China to get hold of the ore, which is used as a sweetener and reduces energy requirements in smelting.

The main competition to supply trihydrate ore to China’s shiny new refineries comes from Indonesia, but mines there have been battling impurities and falling grades plus demands to keep ore in the country for local processing.

India used to export bauxite but is now struggling to find sweetener for its own processing needs.

Together with Japanese partner Marubeni, Australian Bauxite is conducting a $1.5 million pre-feasability study at Goulburn.

With rail links to Port Kembla, a simple quarry style of mining and minimal dry screening before direct shipping, this is a speculative buy for those investors with a bit of patience who realise that not all bauxites are born equal.

The Herald Sun accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser.

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