Paper manufacturer PaperlinX Ltd says a review of its Tasmanian operations has found the business is facing "unacceptable" financial losses and could be closed, a move that would cause a great deal of controversy in the state.
PaperlinX chief executive Tom Park said in a statement yesterday that the group will now work with Tas Paper employees, customers, government and its lenders to "produce more positive future outcomes" for the business.
Mr Park did not rule out the sale or closure of Tas Paper, but a significant revamp and job losses seems certain.
The company revealed the review on June 1 when it completed the sale of much of its Australian paper business to Nippon Paper.
"As previously reported the sale excludes the two Tasmanian mills at Burnie and Wesley Vale.
"A detailed review of these operations is expected to complete by the end of June 2009. Potential outcomes of the review include retention of the existing business, partial closure, closure or sale," PPX said in the June 1 statement.
"The initial review has given us a better understanding of the base case scenario for the business," Mr Park said in yesterday’s statement.
"This gives us the ability now to better calibrate alternative options to seek to meet the needs of all stakeholders.
"While this is underway we will continue to run Tas Paper as we have in the past and our customers will not see any change in service or product quality."
The review of Tas Paper considered four main options including retention of the existing business model, partial closure, closure or sale.
"We are continuing discussions with both the Tasmanian and Federal governments and will also look for any guidance to come from the Federal Government’s review of the Australian Pulp and Paper Industry due to complete late in the calendar year," Mr Park said.
"We have seen good progress made by Tas Paper in its customer value propositions, and the development of innovative brands, such as ENVI, Australia’s first carbon neutral paper, and the recent winner of three awards in the Australian Business Awards, for Best Eco-friendly Product, Product Innovation and Marketing Excellence in its industry classification," Mr Park said yesterday.
There was no update on trading conditions from that given in the June 1 statement.
"Current business conditions remain difficult, with weak economic conditions impacting sales volumes in all markets," Mr Park said on June 1.
"This has been exacerbated over recent months by significant inventory reductions throughout the supply chain.
"The 20-25% approximate reduction in sales volumes versus the prior year being experienced in the second half from the above factors has impacted operating earnings, with full year divisional EBIT (reported EBIT before Corporate and significant items) expected to be 30-35% lower than in the prior year, while reported EBIT before significant items will be further reduced by around $95 million in costs relating to ongoing corporate overheads, previously announced FX losses and bank/note holder charges, consultants costs for lenders and related waiver fees.
Demand is expected to increase as economic activity improves; however the inventory replenishment cycle is expected to begin earlier.
"Mill capacity reductions, both temporary and permanent, have helped reduce the impact of demand weakness on market pricing, while cost reductions and mix improvements within PaperlinX have partially mitigated margin impacts."
"PaperlinX said it had recorded an impairment in the carrying value of the fixed assets of Australian Paper of $(567.5) million in its interim results released in February.
"A loss on sale adjustment of approximately $(150) million will be reported in the 2009 accounts.
"In agreement with PaperlinX’s key lenders, a $500 million immediate pay down in debt owing to those lenders will be made.
"A further $70 million (representing approximate net asset adjustments) is expected to be received in 90 – 120 days and will also be used to further pay down debt owing to those lenders," the company said on June.
PPX shares fell 1.5 cents to 42 cents.
