$400m forests sale plan at CHH

By PAM GRAHAM

Carter Holt Harvey will keep timberland in Northland and the central North Island, while jettisoning about $400 million worth of forests throughout New Zealand.

The company will also start "serious planning" on a new sawmill, by far the largest in the country, either at Marsden Point or at its Kinleith pulp and paper mill near Tokoroa.

Analysts estimated the new mill would cost $100 million to $150 million.

The forest sale is separate to the disposal of 9500ha of land in the central North Island for conversion to dairying, reported in the Business Herald yesterday.

The forest sale and sawmill plan were the big signals from the country's biggest forest owner as it yesterday reported a $87 million loss in the three months to September, down from $70 million profit last year.

The loss included a $128 million tax charge in anticipation of the forest sale. Ignoring the tax charge, operating earnings were in line with analysts' expectations and showed the benefit of an efficiency drive and cover against the high New Zealand dollar.

The company is not signalling a return of capital from its forests sale. "Investment opportunities would be our first option," said chief executive Peter Springford.

That investment could be in China.

Springford said he had told the board the company would bed down the purchase of a wood-panel business in China this year before doing anything else. But he said yesterday: "We actually see quite a few opportunities" - without elaborating.

The company's shares fell 16c - almost 7 per cent - to close at $2.17 yesterday.

Arthur Lim, of Macquarie Equities, said the forest sale was about half as big as the market expected, and investors were disappointed.

"The market prefers cash in the hand. It now has to judge Carter Holt as a forest cycle play, rather than an asset sale play," he said.

The head of the company's forest business, Devon Mclean, said if an offer for all of the forests was received it would not be accepted.

The company is selling forests in Auckland, the Coromandel, Hawkes Bay, the Bay of Plenty and Canterbury, equal to one-third of its estate in area and a quarter by book value.

Deutsche Bank is handling the sale. An information memorandum will be released in the first quarter of next year and a sale is likely in the second quarter.

Carter Holt is keeping its Northland, Kinleith, Woodhill and Nelson forests.

Analysts said the company's forests should net between $375 million and $400 million.

This is small in the context of recent forest sales. The Fletcher Challenge forests were sold for $725 million and the Central North Island Forest Partnership forests, including Kaingaroa, were sold for close to US$650 million.

The buyers were the biggest timber funds in the world and Harvard University's endowment fund, which is now the second biggest forest owner in the country.

"The company is giving consideration to extending its wood processing operation through construction of a new world-scale sawmill," Springford said.

He said analysts' estimates that such a mill would consume 800,000 tonnes of logs a year were "pretty much what we are thinking about". The company has land at Marsden Point for a mill. It already has a laminated veneer lumber plant in the area. It also has space at Kinleith, near Tokoroa.

Springford said both sites were being considered.

He would not say whether the decision to keep forests in Northland meant Carter Holt would not be aggressively bidding for Tenon's structural sawmills and plywood business in the centre of the North Island. Bids for those assets are due today and up to seven private equity and trade buyers have had a look at an information memorandum.

The decision to keep the Northland forests is important for the industry. The forests are maturing for the first time and processing facilities need to be built for them.

Industry participants in Northland have been unhappy with Carter Holt for not declaring its intentions in the region, because it made it difficult for others to make decisions.

The region produces dense wood suitable for the structural uses which are the focus of Carter Holt's processing business. Northland also has a new deep water port at Marsden Point and is well located to serve the Auckland and Australian building markets.

Commenting on the latest quarter, Carter Holt said the domestic building market was holding up but the high dollar and high freight rates were hurting exports.

Springford confirmed that the company had put 9500ha of land in the centre of the North Island up for tender for conversion to dairying.

Carter Holt booked a $19 million gain from foreign exchange hedges in the quarter. Sales were down because the tissue business was sold in May.

The forest business is struggling against a high dollar, high freight rates and a credit crunch in China.

The average pulp price in the quarter was US$583 a tonne but prices had fallen to US$470 a tonne.

"At these prices it is going to be pretty challenging in the fourth quarter," said Springford.

McLean said the prices paid by the Forest business' foreign customers "are in the top quartile of what they have paid in recent years but by the time you translate it through the freight rates and the strong New Zealand dollar our returns are amongst the lowest we have had in recent years".

Harvest costs and distribution improved by 8 per cent.

Orders were strong for wood products.

In pulp and paper, the Whakatane mill continues to increase production, which will add to earnings. "Paper prices will be maintained and the average price of pulp for the quarter we expect to be well down on the third quarter," said Springford.

In packaging, there will be a seasonal upturn and there will be $28 million of income from foreign exchange hedges in the fourth quarter at current exchange rates.

"Taking all those things into account, we see it being a pretty challenging quarter," said Springford.

The nine-month profit of $409 million was up from $162 million and included the tissue sale.