MercoPress. South Atlantic News Agency

Doubts about Uruguay's second pulp mill project

Spanish pulp maker Ence has narrowed a search for a partner in its 1.6 billion US dollars paper mill in Uruguay to four foreign players as it struggles with huge debt, tight credit and an ailing European paper industry, reports Reuter's office in Madrid.

Ence hopes a partner will pay it around 125 million euros for a stake of just under 50% in the Punta Pereira mill and also contribute to the remaining 1 billion euros needed to put it into operation. Ence has already spent 250 million euros on the mill, which would produce 1 million tons of pulp a year. Ence's most ambitious project has suffered repeated setbacks due to environmental protests. "There are negotiations with four international companies from Europe and the Americas," a source close to the deal said. Punta Pereira, which will also have 140 megawatts of renewable energy capacity, provides an opportunity to jump into a pulp mill project that already has environmental approval and 170,000 hectares of wood supply. However, saddled with some 1 billion euros in loans, Ence could still have to sell the whole plant or postpone the project as potential buyers struggle with their own debts in a cyclical trough in the paper market seen lasting throughout 2009 Portugal's Portucel last year announced plans to pursue pulp and paper projects in Uruguay and is seen as one of Ence's most likely partners. "Right now (Portucel) is only in Europe and getting a foothold in Latin America would clearly be interesting for them" Espirito Santo Research analyst Luis Navia said. Other European candidates are Finland's Stora Enso or UPM, which have long looked to emerging markets to cut costs and offset wood supply constraints at home. Fast-growing eucalyptus trees are harvested at 9 years in Uruguay compared with 40 years in Scandinavia. However, both companies already have some presence in Uruguay and are cutting production and scaling back investments as they grapple with collapsing pulp prices and softening demand. On the other side of the Atlantic, analysts said potential partners were more likely to come from Uruguay's neighbours such as Brazil rather than North America, where leading paper companies are already highly leveraged. Brazil's Suzano, which in July said it was open to acquisitions and unveiled a 4.8 billion investment plan to double production capacity-- and Votorantim Celulose e Papel have been tipped as possible candidates. However, both Suzano and VCP told Reuters they are not interested in the project Suzano could be turned off by the lower returns Uruguay offers versus Brazil, a source said, and added that VCP is too busy integrating its recent acquisition of rival Aracruz to be looking at further expansion. Portucel, Stora Enso and UPM all declined to comment. Ence, which has not revealed the name of its adviser for Punta Pereira, is working on the premise that it will find a partner and retain control of the plant, a company spokeswoman told Reuters. If a partner is not found or fails to get financing in today's tight credit markets, Ence is most likely to postpone the project rather than push ahead with the 1 billion euro investment on its own, analysts said. Although an indefinite delay could prevent the mill from coming on stream in time for a cyclical upturn, analysts said this would still be preferable to a solo investment, which would put the company at risk of a capital increase. Ence, with a market capitalization of 390 million euros, has told analysts it is not considering a capital increase.