The obnoxious smell (usually at pulp mills, which are a little different from paper mills) is caused principally by process by-products, specifically the reduced sulfur gases resulting from the cooking process. Thankfully, these airborne particles are not harmful to the health of the community, but they are considered a nuisance. The Kraft process (as opposed to the Sulfite process) of reducing wood logs to their fibre constituent is primarily responsible for the odor.
Paper mills can be integrated mills or processing mills. A fully integrated mill, will recieve the whole forest log (or wood chips), process it down to the individual fiber level and into a 4% (approximately) pulp slurry, then process that pulp slurry into a sheet of paper. Non-integrated mills cannot process the log (or wood chips) but instead, buy pre-processed pulp slurry in a dried and baled form, known as market pulp, from pulp mills, then re-wet the pulp bales into a 4% solution, to be processed into a sheet of paper.
The modern paper mill uses large amounts of energy, water, and wood in a highly efficient and extremely complex series of processes, using modern and sophisticated controls technology to produce a sheet of paper that can be used in incredibly diverse ways. Modern paper machines can be 500 feet in length, produce a sheet 400 inches wide, and operate at over 100 mph - what a paper cut that would make.