By GEOFF SENESCALL
Fletcher Forests shares could fall as low as 10c if the company does not resolve a dispute with its Chinese forestry partner Citic, says a broker report.
The shares closed yesterday at 35c.
The report's author, Dennis Lee of ABN AMRO, says his prediction is worst-case.
It is based on Fletcher Forests being forced to surrender its jointly owned Central North Island forestry assets to banks and pay $85 million in costs to Citic.
But Fletcher Challenge spokeswoman Ginny Radford said this was an extreme view and was unlikely.
She said the company had been successful so far in defending Citic's legal challenge.
As far as the Central North Island forestry asset went, Ginny Radford said, there was a reasonable probability that a key bank ratio would be breached when the banks next reviewed the investment, in December.
"There are a variety of options open to the banks of which only one is to seize the assets.
"The bank would have to think very carefully as to whether that is the best way to deal with recovery of its funds should that happen."
Such an situation could be averted if Citic and Fletcher Forests put more money into the asset. Ginny Radford said that parties who did due diligence on Forests this year had indicated the forestry asset had significant value.
Mr Lee reached his 10c a share valuation by writing down the value of the subordinated debt Fletcher held within the partnership from $610 million to $159 million.
This took the asset backing of the company down from 67c a share to 40c a share.
He took off another $85 million, or 10c a share, by estimating the potential cost of Citic wining its case.
Mr Lee estimated the impact of a forced exit from the Central North Island asset on the rest of the group as being $169 million.
" [Strategy plans] include log prices improving to historical trend line levels, strengthening of the kiwi dollar, and Citic agreeing with Forests' formula in the recapitalisation of the Central North Island Forestry Partnership.
But, he said, it was 'too difficult to predict an attractive outcome at this stage."
Broker tips big drop if forest row goes on
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