An economic and Technical analysis of potential forest industry developments in Labrador

Abstract

An analysis is performed to determine the intrinsic economic value of four potential forest industry developments for the Goose Bay area of Labrador and their relative attractiveness to investment. These are a newsprint mill, an integrated newsprint mill and sawmill, a chemithermo-mechanical pulp (CTMP) mill and an integrated CTMP mill and sawmill. -- Prior to carrying out the analysis, a review is made of past attempts to develop the forest resources of Labrador, the choice of these four particular forest industry options is explained, and key considerations to the development of these options are discussed. -- The analysis employs discounted cash flow (DCF) criteria for evaluating these investments, eg. rate of return (ROR), net present value (NPV), and others. A computer model developed by the author is used to assist in the analysis. The industry options are first evaluated under base case conditions in which it is assumed that these projects would be financed only by investor equity. The sensitivity of base case results to potential changes in components of interest is then evaluated. This allows determination of the relative importance of all factors, and consequently also determines what leverage is available to Government and prospective developers for improving the attractiveness of these investments. -- Under base case conditions, none of these investments meets the minimum criteria for investment. Moreover, the results indicate that an integrated newsprint mill and sawmill or an integrated CTMP mill and sawmill are less attractive investments than a newsprint mill or CTMP mill alone. These options are therefore, eliminated from further analysis. Penalties and benefits associated with locating in Labrador are quantified in terms of ROR and it is concluded that there is a net penalty in each case. The potential for debt financing to overcome these net penalties and to make these projects meet the minimum criteria for investment is examined along with various forms of financial incentives available to Government, eg. tax relief, subsidies, grants, loan guarantees. It is concluded that these measures have the potential available for making a newsprint mill or CTMP mill development in the Goose Bay area of Labrador an attractive investment.