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Fonterra Slashes Book Value Of Gutted Chinese Venture By $139m

Contributor:
Fuseworks Media
Fuseworks Media

Wellington, Sept 24 NZPA - Fonterra Co-operative Group today slashed the book value of its investment in troubled Chinese joint venture Sanlu by $139 million to an estimated $62 million, and cut back its forecast payouts to farmers this season.

Fonterra has poured nearly $200 million into the joint venture since buying a 43 percent stake in December 2005, but the investment has been gutted by last month's announcement that Sanlu has been selling poisonous infant formula for babies.

At least four children have died from drinking poisoned milk, and up to 53,000 children have been checked at hospitals after drinking milk contaminated by the industrial chemical melamine.

Fonterra today confirmed a final payout to farmers of $7.90/kilogram of milksolids for the 2007/08 season.

The milk price was $7.59/kg and the return on added value products 31c/kg.

But the actual final cash distribution to shareholders will be $7.66/kg after directors decided to retain 24c/kg from the value return part of the payout to strengthen Fonterra's balance sheet "in the light of instability in financial markets".

In total Fonterra will distribute $9.1 billion from the amount available for payout of $9.3 billion, a 65 percent lift on the 2007 season's distribution of $5.5 billion.

Fonterra directors also today lowered the payout forecast for the current 2008-20099 season to $6.60/kg from the $7.00/kg forecast in May.

The new $6.60 forecast comprises a milk price of $6.25 and a value return component of 35 cents.

About 12,892 ill babies remain in hospital, according to Chinese health ministry officials, who said 104 babies are still in serious condition. About 1579 babies have been "cured" and discharged.

Fonterra said today these "tragic events" had hurt its financial results for 2007-08: it has recognised an impairment charge of $139 million against the book value for its investment in Sanlu, to reflect the cost of the product recalls and Fonterra's anticipated loss of brand value in Sanlu.

"Fonterra's best estimate ... of the book value of its investment in San Lu is approximately $62 million," the company said in a statement. The government has taken control of the company and closed down its operations.

But company chairman Henry van der Heyden said it was focusing all its efforts on what Fonterra could do to work with the Chinese authorities and get safe dairy products to Chinese consumers.

Fonterra's paramount concern had been for the health and safety of Chinese consumers. "The scale of this tragedy has been truly shocking and our heartfelt sympathies go out to all the affected children and their families," Mr van der Heyden said. The latest revelations that an official Chinese government investigation had revealed Sanlu management was investigating complaints of sick infants as early as eight months before the company's board and Fonterra directors were first informed on August 2 were "deeply concerning".

"That Fonterra was not informed earlier is frankly appalling," he said.

NZPA WGT kca nb

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