Business News

Stops construction of paper machine in Brazil

Wednesday 12. March 2008 - The board of Norske Skog has decided to stop the construction of paper machine 2 at the mill in Brazil. The net cost of stopping the project will be about NOK 450 million (USD 82 million).

“To Norske Skog, it is decisive that we improve profitability and restructure the company so that the debt is reduced. As the costs of the construction of paper machine 2 in Brazil have turned out to be so high, we were forced to stop the project for financial reasons,” says chief executive Christian Rynning-Tønnesen.
 
In 2006, Norske Skog decided to move one of the used paper machines at the discontinued mill Norske Skog Union in Skien to Norske Skog Pisa in Brazil. The project had an original cost limit of USD 210 million.
 
Following reports of possible cost overruns in the project earlier this year, a group of Norske Skog employees and external specialists were tasked with auditing the project. The group’s report was ready on Friday 29 February, and it showed that the total costs of completing the project would be significantly higher than budgeted.
 
The possible cost overruns were presented to the board on 4 March. It was then decided that he project would be temporarily halted to await the corporate management’s assessment of the costs of stopping the project versus completing it. The corporate management’s assessment was presented to the board on 10 March, and the board then decided to stop the project.
 
The accounting cost before tax will be about USD 125 million in the first quarter. Tax effects of USD 17 million and termination of currency hedging with a cash effect of USD 26 million are deducted. The net effect for the group after tax and currency hedging will therefore be about USD 82 million.
 
Parts of the project, which will benefit the remaining part of Norske Skog Pisa, will be completed. The paper machine itself will be stored at the mill. The project may therefore be restarted at a later time if it appears financially prudent.
 
The board of Norske Skog has been kept continuously informed of the project’s progress. The progress of the project and capitalised project costs adhered to the adopted project plan until January 2008. There was no reporting about the risk of significant cost overruns before the board meeting on 4 March.
 
In order to illuminate the issue properly, and to avoid similar cases in the future, the board has decided to carry out an external investigation of the project and the decision process. A mandate and a schedule for this investigation will be adopted as soon as possible.