Fonterra posts $139 million impairment charge on San Lu stake

Fonterra is facing a $139 million writedown in the value of its San Lu investment as the fallout from the Chinese killer milk tragedy continues to spread.

New Zealand’s biggest company announced its results today: a final payout of $7.90 per kg of milksolids, of which farmers will receive $7.66.

The remaining 24c will be retained to strengthen Fonterra’s balance sheet in the light of instability in financial markets, the board said.

The $139 million impairment charge over San Lu reflects the cost of the product recall and Fonterra’s anticipated loss of San Lu brand value.

Fonterra’s estimate of the current book value of its investment in San Lu, after the impairment charge, is approximately $62 million.

Fonterra chairman Henry van der Heyden said the company had recognised this charge as it was required to by accounting standards, but it was certainly not putting the financial consequences ahead of our primary priority of consumer safety.

“We are focusing all our efforts on what Fonterra can best do to work with the Chinese authorities and help get safe dairy products to Chinese consumers,” he said.

“The latest revelations that an official Chinese government investigation has revealed San Lu management was investigating complaints of sick infants as early as eight months before the San Lu Board and Fonterra were first informed on August 2 is deeply concerning. That Fonterra was not informed earlier is frankly appalling,” Mr van der Heyden added.

In total, Fonterra will distribute $9.1 billion this season from the amount available for payout of $9.3 billion. This is a 65 per cent lift on the prior season’s distribution of $5.5 billion.

The 2008/09 forecast payout has dropped from the earlier prediction of $7.00 per kg of milk solids, to $6.60.

The $6.60 forecast includes a milk price of $6.25 and a value return component of 35 cents. The value return remains unchanged from the May forecast and will be reviewed again in December.

 

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