Mondi: who are they really? Bold, smart and well-funded, Mondi is the one to watch.

Anglo Forest Products company Mondi International has had a interesting life. A combination of economic and political factors in South Africa have helped the company grow quietly, stealthily slipping onto the world pulp and paper stage where suddenly the role they have been playing is attracting attention. The billing sheet does not flash their name in lights, nor do analysts whisper in the wings, "this is the new star on the block watch them!" But remember the name, because Mondi is looking to consolidate its position in Europe and is owned by company with deep pockets.

Recent forays in the buying and selling of pulp and paper interests have seen Mondi selling its 12.3% interest in Brazil's Aracruz Celulose for US$ 370 million; acquiring an additional 68.5% of the voting stock in the Russian Syktyvkar Forest Enterprise business (it already has 19.4% interest in Syktyvkar; which was acquired in 1997) and buying French packaging company La Rochette.

The Syktyvkar deal has been cleared by the Russian anti-monopoly authorities and counter offers in the La Rochette deal closed on May 21, 2002, making it a done deal. The rival bid from Spain's SAICA was handled with a typical mixture of tenacity and diplomacy and in mid March 2002, Mondi and rival SAICA agreed to launch a joint cash offer. The offer was 317 million euros (US$ 292.6 million), or 12.24 euros a share, an improvement on both SAICA's previous offer of 12 euros per share and Anglo American's 11.6 euros per share. The deal means Mondi Europe gets assets worth 117 million euros (US$1013 million) from La Rochette and the rest will be merged with SAICA's French corrugated packaging assets. Specifically, Mondi now owns La Rochette's UK Hypac businesses, the Durtal and La Rochette (Savoy) box plants and all of its sheet plants in France and Belgium. The deal is "classic Mondi"--the company has had success in the past with joint acquisitions and eventual buyouts of minority shareholders as and when it suited both parties.

A CORE BUSINESS

Being owned by a company that has gained US$ 3.5 billion through disposal of non core assets and has spent more than US$ 6 billion on new core acquisitions must give one a warm feeling--provided that your company forms part of the core business. To some, being wholly-owned by Anglo American plc, the world's second largest mining company, may seem an anomaly; but Tony Trahar, Anglo American's CEO, said that the board regards Mondi as part of its core business. As Mondi's former CEO, Trahar may have a soft spot for the pulp and paper industry; still, you cannot argue with results. As the second largest contributor to Anglo's headline profit in 2001's interim results, there are few sentimental reasons for Anglo to regard its subsidiary with respect. In final 2001 results released in mid March 2002, operating profit increased to a record US$ 522 million, although increased debt levels affected headline earnings * (see Table 1).

Andrew Thompson, Mondi South Africa's CEO, pointed out that with mining being a non renewable resource, having a company with a renewable resource like forests complements Anglo American's holdings. As a result, Anglo describes its core business as "mining and natural resources." Anglo started out as a South African company in 1917, and listed on the London Stock exchange in May 1999 as Anglo American plc with a market capitalization of around 13 billion [pounds sterling] (US$ 18.9 billion). After restructuring, which saved the firm US$ 120 million through staff cuts, Anglo got rid of the cross holding with diamond company De Beers. Virtually all non-core operations have been sold and a re-rating of the share has some resulted in a market capitalization of some 17 billion [pounds sterling] (US$ 24.7 billion.) Company structure is shown in Table 2.

SIZE COUNTS

To put the forest products division in context, its turnover (sales) to the fiscal year ending June 2001 was US$4.1 billion, which makes it about the same size as Mead Corp. prior to its merger with Westvaco or Sappi Ltd., both of which bad turnovers of US$ 4.2 billion in the fiscal year ending September 2001. A comparison between Mondi and Sappi, the two largest players in the South African market, reveals the following:

* In the 12 months ending June 2001, Mondi's European operations added 76% to group turnover and 58% to group operating profit of US$ 558 million.

* Sappi's North American and European operations added 77% to group sales but only added 49% to operating profit of US$ 446 million.

* Sappi must answer directly to shareholders and, because of its intermediate size, is open to possible mergers and takeover bids--witness the formation of MeadWestvaco and the eventual capitulation of Willamette to a hostile bid from Weyerhaeuser.

Mondi answers indirectly to shareholders and during the last two years have in effect doubled its European presence. As part of Anglo's core business, it has the wherewithal to grow that presence further

GROWTH IN EUROPE

Investments to date by Mondi in Europe exceed US$ 2 billion (see Table 3). During the second half of 2000, Mondi concluded a number of acquisitions, increasing its interest in Frantschach packaging to 70% and purchasing Frantschach's 51% interest in Neusiedler, resulting in 100% ownership. Consolidation in the sacks market was achieved when Frantschach purchased Assi Sacks (comprising two of its sack paper mills, all of its industrial sack converting operations and its barrier coating business). Swedish paper group AssiDoman received US$ 490 million for the assets, making Frantschach the world's largest sack producer.

Following the recent Syktyvkar acquisition, Mondi Europe is now the largest producer of uncoated woodfree paper in Europe. Initially uncoated woodfree market share was strengthened through Neusiedler's 50% purchase of Ruzomberok with management control at the end of 2000. The low cost Slovakian uncoated woodfree paper producer has an integrated pulp mill and an annual production capacity of 300,000 metric tons. Europe's operating profit for 2001 was 49% higher at US$ 330 million, partly attributable to the incorporation of the Assi Sack and SCP Ruzomberok businesses. In March 2002, the go-ahead was given for a US$ 210 million rebuild and expansion project at Ruzomberok.

So far, integration has been successful. People management in take-over situations can be a tricky business; but where wholesale retrenchments have been required, a number of entrepreneurial projects have come as a direct result of Mondi's takeover. Towards the end of 2001, the Slovakian government gave the green light to a new integrated pulp and paper mill to meet increasing domestic demand and take advantage of growing paper consumption in central and Eastern Europe. Startup is expected in three to five years and the search for potential foreign investors is on. With current large foreign investors in Slovakia including Kappa Packaging, Neusiedler, SCA, and Tetra Pak, we may see another joint venture along the lines of the SCA/Mondi joint venture at the Aylesford mill in the UK.

Mondi Packaging UK acquired the packaging and paper assets of Danisco Pack UK 64 million [pounds sterling] (US$ 93.6 million) during September 2001. The deal included two waste-based containerboard mills 11 sheet plants, a sheet feeder and four integrated plants. Mondi sold a number of the converting operations to David S Smith Packaging. The jointly controlled by Mondi and SCA performed well during the first 6 months of 2001, as newsprint prices had increased by up to 16% and recovered fiber costs had decreased.

We see the full impact of Mondi's diversity in its South African operations, which include graphic papers, cartonboard, packaging, kraft pulp and linerboard, recycling and forests. Strength in diversity is not a popular route; but Mondi considers its diversity a competitive advantage.

FORESTS--THE FIBER ADVANTAGE

Mondi's forests are based largely in South Africa, where the forestry industry has enjoyed 8% annual growth in contribution to foreign trade during the last ten years. Mondi's timberlands current total 563,000 hectares (ha), with some 200,000 ha consisting of permanently open areas actively managed as conservation area. The company conducts extensive research on maximizing fiber yield from the remaining 344,000 ha, of which 33% is planted to pine, 58% to eucalyptus and 9% to wattle.

The company recently acquired the lease of 22,000 ha that was previously part of the South African Government's Safcol holdings (the privatization of which took so long that weyerhaeuser eventually invested in Australia instead.) Mondi's patience paid off, and the land will he used for eucalyptus plantations to supply the Richards gay operations. The Richards Bay mill's pulp production is around 575,000 annual metric tons. Since the installation of an oxygen delignification plant last year, 450,000 metric tons of this is 100% elemental chlorine free (ECF) hardwood bleached pulp. Linerboard production on the mill's PM2 uses 120,000 metric tons of this, plus 125,000 metric tons of unbleached softwood. The balance (330,000 metric tons) of the ECF bleached fiber is sold locally or exported as Mondi's Baycel Pulp.

The mill enjoys ISO 14001 environmental certification, ISO 9002 certification and FSC (Forestry Stewardship Council chain of custody) certification. It is only the second pulp and paper manufacturer worldwide that has gained all three. Other in South African interests currently being upgraded include Mondi's Durban-based Merebank mill, which houses five paper machines with output reaching over 500,000 metric tons/year. The US$ 50 million revamp includes the installation of a multi-fuel boiler and the overhaul of the mill's 80,000 metric tons/year uncoated woodfree PM 2. The company expects a capacity increase of 40,000 metric tons/year. The intent is that the increase will consolidate Mondi's local market share as well as increase its export capacity. (With the South African currency sinking, the more paper a mill can export, the better.) The project will be completed in early 2003.

Mondi plans further investment in South Africa, but it is subject to market conditions. For instance, there is room for expansion at the Richards Bay site, and word is that studies are being done to increase capacity by a further 125,000 metric tons/year bringing capacity up to 700,000 metric tons/year from 575,000 metric tons. With global pulp projects expected to bring approximately 1.5 million metric tons of new pulp capacity on line by 2003, this project will definitely hinge on Mondi's interpretation of where the world market is headed.

As world consolidation in the industry continues, the question remains, where will Mondi take its shopping basket next? David Hathorn, CEO of Mondi Europe, was recently quoted as saying, "We do not want to be half-pregnant in too many different places.

We would rather have a strong regional position in Europe than moderate global one." It seems reasonable to conclude that more will be spent in Europe--but once consolidation there is complete, with a parent like Anglo American plc, who knows what may yet take Mondi's fancy?

Table 1: Anglo Forest Products results for
2001 released on March 13, 2002.

US$ million                               2001   2000

Total operating profit                    522    458
Europe                                    330    221
South Africa                              185    202
Brazil                                    7      35
Headline earnings *                       267    308
Net operating assets                      2700   3054
Capital expenditure                       283    126
Share of headline earnings * (%)          15     15
Share of group net operating assets (%)   18     19

Table 2: Anglo American plc--Anglo forest products--Mondi
International.

Mondi South Africa         Mondi Europe

Paper                      Mondi Packaging Europe (corrugating)
Kraft                      Frantschach (sack/packaging)
Cartonboard                Swiecie(packaging papers)
Forests                    Neusiedler (cutsize papers)
Mining Timber              Aylesford (50:50) with SCA)newsprint
                           Europapier (paper merchant)
Mondi Park (corrugating)

Table 3: European Investments to date.
Tables 1, 2 and 3 include the entire output of consolidated
entities and the Group's share of joint ventures and associates
where applicable. source: Anglo American plc

1990   49% of Neusiedler (Austria)
1992   44.4% Frantschach (Austria)
1993   50% of Aylesford (UK)
1997   increased stake in Frantschach to 50%
1999   60% of Swiecie (Poland)
2000   remaining shares in Neusiedler
       additional 20% and full control of Frantschach
       100% of Assi Sacks
       50% of SCP Ruzomberok
2001   100% of Danisco UK
2002   88% of Syktyvkar
       control of La Rochelle

IN THIS ARTICLE, YOU WILL LEARN

* How Mondi has grown into important European presence.

* Why mining company Anglo American considers Mondi a "core business."

* Mondi's plans for future expansions.

ADDITIONAL RESOURCES:

* Anglo American pic's home page: www.angloamerican.co.uk

* An accounting/investment concept used in the UK and South Africa, basically defined as a company's revenue less capital items.

About the author: Jane Molony is a freelance journalist who edits the TAPPSA Journal for the Technical Association of the Pulp and Paper Industry of Southern Africa. She is based in Durban, South Africa and may be contacted by phone at [phone] or e mail at [e-mail]