FGE.to - Fortress Paper (formerly FTP.to)

[Steady77]

After setting aside cash for LSQ, rainy day fund and future growth opportunities that Chad is looking at I would agree with a buyback sooner rather than later.  Once thurso including the co-gen is running smoothly the stock price is very likely to be much higher at that time.

[lessthaniv]

My preference:

 

Excluding the privately placed convertibles;

 

1) $69M 2019's with $31 CP --------------->(This implies potential dilution of 2,225,806 shares)

2) $40M 2016's with $37.50 CP ----------->(This implies potential dilution of 1,066,667 shares)

 

Total potential dilution for these two issues is 3,292,473 shares or roughly 23%.

 

At today's closing price of $8/share the company could use $27M of its new found cash hoard to buy in stock and hold it in treasury. Assuming the net $140M this would leave $113M for short term needs and funding LSQ. Treasury stock can always be resold back into the market and if the company does that after the stock recovers it makes money.

 

A transaction like this would offset the dilution risk created by the converts. If the stock price doesn't get back to the CP's prior to redemption dates, the company could redeem the converts and eliminate the debt and dilution risk with its excess cash. Should the stock price rise past the CP's and shares get issued, the company could simply cancel their treasury stock and offset that dilution.

 

When you look at the leverage we have to dissolving pulp prices, I don't want to give up 23%. Surely that's worth a heck of a lot more than $27M long term. I can make a case for the company being worth $1B in a few years. The dilution created by the converts under such a scenario would be huge relative to cost of  the buyback.

[Steady77]

Since Chad currently owns around 17% of the company you can bet he will be looking for the best option(s) to increase shareholder value with the excess cash from the Dresden sale.  Of course, these options include, but are not limited to, the buyback of common shares (an opportunity to increase his %) and/or the convertible debentures (he doesn't want his interest diluted either).  I like that he has this much skin in the game.  It ensures his interest is in line with the other shareholders.

[OptsyEagle]

The problem is that the leverage you talk about goes both ways.  If DP prices continue to decline then we can expect the quarterly losses at Thurso to lever up, as well.  I would hope that if there were lower prices, then what we have today, that they wouldn't last until the maturity of those convertible bonds, but if they did, Fortress would have a much bigger need for cash to pay back those loans and certainly will not have any concern or worries about dilutive conversions.

 

If you do some profiling of earnings I think you will see that with DP prices where they are today, in the $900 to $950 range, even with Co-gen operational and above 95% production rates, Fortress still loses money. 

 

You see, we talk about costs, post-Co-gen, but those are just operational costs.  They don't include depreciation or should I say, on going maintenance capital and they don't include interest on the debt that they needed to take on to get this thing going.  We also have Corporate costs to deal with and perhaps even some losses at Landqart.  In my estimates, even with 97% production rates and an operational Co-generation plant, Thurso needs about $1,050 per tonne of dissolving pulp produced, just so that Fortress can break even on an EPS basis.

 

With that in mind, knowing where DP prices are now and the fact that Chad has already indicated his concern for their direction in the 1st half of this year, it is my opinion, that a share buyback and even any debt payback is pretty much off the table, until you see DP prices above $1,100 a tonne.

[sculpin]

LessthanInv - I agree that a substantial issuer bid in a range of $7.50 to maybe $9 to buyback the potential dilution from the convertibles would be a smart use of cash.

[triedtestedand]

Looks like cogen may be finally be ready to go ...

 

http://translate.google.ca/translate?hl=en&sl=fr&u=http://www.lapresse.ca/le-droit/economie/gatineau-outaouais/201304/13/01-4640681-de-lelectricite-bientot-produite-a-thurso.php&prev=/search%3Fq%3D%2522Fortress%2BCellulose%2BSp%25C3%25A9cialis%25C3%25A9e%2522%26sa%3DX%26hl%3Den%26biw%3D1011%26bih%3D588%26tbs%3Dqdr:w&sa=X&ei=I4ZqUbOYEozIrQfc3YCYCg&ved=0CDYQ7gEwAA

 

 

 

Fortress Specialty Cellulose began the first phase of cogeneration, last week at the Thurso mill.

 

 

At the end of the month, the company should be able to generate electricity by burning natural resources usually wasted. The sludge produced by the plant, and its wood residues and those of neighboring plants will turn into fuel, as building materials used.

 

Fuel oil is currently burned to clean the pipes. Over the next few days, sludge and residue will end up in the burner to prepare the plant test 100 hours of Hydro-Québec. The corporation must analyze the stability of energy production by the company to buy electricity from Fortress.

 

These new processes, which required an investment of $ 115 million, will allow the plant to inflate its revenues by approximately $ 18 million per year. This will require ten years before profitable cogeneration.

 

 

"When I started at the plant in 1981, we did not go ahead with a project if it does not reach profitability after six months," recalls the director of the factory, André Boucher . "Now there is no question of passing a value, even if it is small."

 

"I even think it will become a standard in the factories that maximize the use of waste, he says. In addition to generating revenue, it stops the waste. "

 

CHP should also significantly reduce the foul odor in Thurso, since the sludge will be burned instead of being buried. Only ashes will be in the ground. "We can not guarantee that the smell will disappear completely, because you never know what can happen, says Boucher. If we have a mechanical problem, it is likely that we should bury our sludge again temporarily. "

 

A difficult market

 

In recent months, production of viscose (rayon) does not generate the expected income. The company posted losses in early. It has to recover in the coming months. "The market price is low, says Boyer. China is currently experiencing an economic downturn, as it is our largest customer, we suffer the impacts. "

 

For now, the plant sells its production cost. However, she found a recipe for increasing the quality of the dough. "The goal is to have the best product on the market. So, buyers are willing to pay a little more, "says Boucher.

 

The plant manager would allow residents to Thurso to visit the factory this summer. "The population has endured the noise and odors, and traffic and dust engendered by the construction of the cogeneration plant. This will be a way for us to thank them for their patience, "he says.

 

[colinwalt]

OptsyEagle,

 

I'm trying to reconcile your comment that at 97% capacity and 1,050 p/ton things are only at break-even - here are my calculations:

 

Assume delivered cost is $750 p/ton (this cost includes cogen up + running I believe, even better if I've gotten that wrong)

 

Output (97% of 200,000): 194,000

Production Costs:  145,500 (194,000 * 750)

Revenue: 203,700 (194,000 * 1,050)

Op Income: 58,200 (203,700 - 145,500)

 

Overhead (from the YE financials):

 

Amortization: 15,669 (Excludes Dresden)

Corporate: 9,739

Interest Expense: 14,959

 

Total Overhead: 40,367

 

So that results in (admittedly, pretty rough) Net Income before Taxes of: 17,833

(58,200 - 40,367)

 

Of course Landqart could easily wipe that out, but eventually (sooner rather than later I would guess) they'll stop the bleeding even if that means shutting it down and selling the machinery for scrap - so I'm not sure it's completely valid to include that in break-even estimates - but I'm open to counter arguments...

 

Or have I missed something else?

 

Regards Colin.

[sculpin]

So Chad & his buddies on the Board of Directors decided that Chad should get $500K & 200K more options as the share price tanked from $26 to $8 in 2012. This is in addition to his $1million annual salary & the $16 million he was awarded in 2010. I will be voting against the shareholder's rights plan & maybe withhold on the Board nominations as a token show of disapproval. See excerpt from mgmt circ. below:

 

The Compensation Committee recommended, and the Board approved, a discretionary bonus pursuant to the Chairman, CEO and President’s employment agreement, comprised of a cash payment of $500,000 and 200,000 Options. This bonus was awarded in the context of the Chairman, CEO and President’s achievements in 2012,

which included the successful acquisition of the Fortress Global Cellulose Mill for a nominal cash purchase price, the completion of related project financing arrangements, the successful completion of the 2012 Debenture Financing, collectively totaling financing of over $200 million, and the sale of the hydropower assets and associated real estate at the Landqart Mill.

[tombgrt]

Nice robbery.

[biaggio]

Have been following FTP thread.

 

I very much was hoping to find another jockey/capital allocator to invest in

-was hoping that Chad was it - so this recent pay package very disappointing.

 

Actions speak louder than words. What else is going on behind the scene- then again I just read Sculpin's post so I could be off base.

 

I never bought in as I was scared away by the nature of the business, and up to recently the amount of debt they were carrying. Now add in question re your jockey.

 

At $8 seems cheap though---nevertheless can t see it as a long term hold due to the above. i.e. if I was a holder would look to sell on a rally and buy into something else like ALS if you want a commodity play

[ECCO]

Nice robbery.

 

It is a robbery. The next Buffett is so hard to find. Better to invest in the real Buffett instead of trying to find the next one. 2-3 years ago I was thinking that guy was the next Buffett... lets talk about being stupid...stupid me. But you should see the house he have in West Vancouver...beautifull. At least he know what to do with that money.  :-\

[OptsyEagle]

OptsyEagle,

 

I'm trying to reconcile your comment that at 97% capacity and 1,050 p/ton things are only at break-even - here are my calculations:

 

Assume delivered cost is $750 p/ton (this cost includes cogen up + running I believe, even better if I've gotten that wrong)

 

Output (97% of 200,000): 194,000

Production Costs:  145,500 (194,000 * 750)

Revenue: 203,700 (194,000 * 1,050)

Op Income: 58,200 (203,700 - 145,500)

 

Overhead (from the YE financials):

 

Amortization: 15,669 (Excludes Dresden)

Corporate: 9,739

Interest Expense: 14,959

 

Total Overhead: 40,367

 

So that results in (admittedly, pretty rough) Net Income before Taxes of: 17,833

(58,200 - 40,367)

 

Of course Landqart could easily wipe that out, but eventually (sooner rather than later I would guess) they'll stop the bleeding even if that means shutting it down and selling the machinery for scrap - so I'm not sure it's completely valid to include that in break-even estimates - but I'm open to counter arguments...

 

Or have I missed something else?

 

Regards Colin.

 

Colin.  Your numbers are almost exactly like mine.  So thanks for the confirmation.  The only difference is the cost of production.  You used $750 per tonne and I believe you got that from Fortress management's disclosures.  I delved into it a little deeper.  I took the revenue in Q4 ($35.7M) and added the EBITDA loss ($$3.5M) and divided that by the number of tonnes produced (43,800) and obtained a cost of production in Q4 of $896 per tonne, PLUS $120 shipping and commissions.

 

I then took Fortress Paper's Nov.2010 presentation where Fortress actually presented the breakdown of their cost estimate for wood, variable costs, daily costs, fixed and Thurso corporate.  At that time their estimate was for $536 per tonne, before shipping and commissions.  I took the percentage of each category and put them into the $896 above.  I then started tweaking.  Increasing some fixed costs with the rest going to variable categories until the 5 categories equalled $896.  Lastly, I took those numbers for Q4 and did my best to adjust some for an extra 6,200 tonnes of pulp they say they will produce, when at full capacity.

 

Now here comes the sad part.  I tried and tried and tried and I cannot get their operational costs below $825 per tonne (including shipping and comm.) with the co-gen operational and reducing costs by $100 per tonne.  Maybe I am missing something and I am certainly not a DP production expert but that is probably where our differences lie.  At the end of the day, it is only $75 per tonne anyways.

 

Even if I am wrong and Thurso gets their costs down to your $750 per tonne, we still have losses at Landqart to deal with and everything above assumes 100% of their production meets specification.  Last quarter 10% to 20% was below spec. pulp and from my analysis Thurso takes a considerable haircut on selling that stuff.  They don't even get back the cost of their wood ($330 per tonne in my analysis) for below spec. DP. 

 

Also, I am not completely convinced that they will get $100 per tonne of net revenue from the Co-gen operation.  Not only does my very back of the envelope numbers only get around $80 per tonne, but what is up with Triedtested's post above where Andre Boucher talks about a $115M co-gen investment taking 10 years to payback.  He talks about $18 million in revenue but perhaps there are some ongoing operational or capital costs associated with that part of the operation.  In any event, I am using $100 per tonne in my numbers but will be keeping a close eye on this.

 

So anyways, that being said, I believe we need $1,050 DP prices or higher, to break even.  All this is my opinion.

[tengen]

Now here comes the sad part.  I tried and tried and tried and I cannot get their operational costs below $825 per tonne (including shipping and comm.) with the co-gen operational and reducing costs by $100 per tonne.  Maybe I am missing something and I am certainly not a DP production expert but that is probably where our differences lie.  At the end of the day, it is only $75 per tonne anyways.

 

This may be a dumb suggestion, but how about sending your analysis to FTP and asking them to explain the 75$ difference? Chad apparently never sleeps so he should have time to answer. :)

[OptsyEagle]

He already answered it in an interview video a few months back.  When asked why the stock was doing so poorly he indicated that it was because the analysts were taking current production costs and extrapolating them forward.  His point was that once Thurso moved to full production, the costs were going to drop considerably, due to the fact that on a "per tonne" basis they would even reduce some variable costs like chemicals and heat, etc.  He indicated that the analyst just didn't understand dissolving pulp production. 

 

He may be correct.  I know I don't fully understand dissolving pulp production but remember, in Q4 they achieved an 87.6% level of target capacity and their costs, all in with shipping and commissions, was $1,016 per tonne.  It was hard for me to rationalize that with another 12.4% increase to total capacity, that their costs were going to drop down to $750 per tonne.  Sure the co-gen gives us $100, but where does the rest come from?  In my analysis, I just can't see them saving that much money on chemicals and a few other things.  Even if they didn't use one more jug of chemicals from 43,800 tonnes to 50,000 tonnes, the cost per tonne doesn't drop that much.  I worked a bunch of figures and when I was done I came up with $825, all in...and I worked hard for that number.

 

Maybe Q4 was exceptional.  Maybe they used a lot of materials for tests.  Ran a lot of overtime shifts, at time and a half.  Maybe the weather was colder, requiring more heat energy?

 

We will know more after Q1.

[OptsyEagle]

Here's another way of looking at it.  Q4 saw production of 43,800 tonnes and costs were $39,200,000.  So on a per tonne basis we have $896 per tonne, plus $120 shipping and commissions.

 

Even if we assume that they can produce another 6,200 tonne for free, then their costs would be $39,200K (as in Q4) divided by 50,000 tonnes, equals $784 per tonne.  Minus $100 for co-gen savings, plus $120 shipping and commissions, we are still at $804 per tonne, all in.

 

You see what I mean.  What is wrong with my math?  They will actually have to produce 6,200 tonnes more then they did in Q4 and spend about $3 million less then they did in Q4, to meet that $750 target...and I am pretty sure there is going to be some wood costs.

 

I am not an expert in DP production, but I an still confused.

[Liberty]

Optsy, I like the way you are thinking about it, but I'm not sure it's that easy to model.

 

Operations during the ramp up phase can be significantly different from operations once everything has been tweaked and figured out. It's a bit like the difference between driving in the city and on the highway; you'll burn a lot more gas per kilometer in the city (because you are constantly accelerating and decelerating) than if you were just driving at a steady speed in top gear for long distances  on the highway. So if someone looked at fuel economy in the city and tried to model what the car can do on the highway from there, it could be tough.

 

They could be producing smaller batches to test different recipes, with varying amounts of chemicals (trying to find minimum amount that still gives good results), various mixes of wood chips from different tree species, de-bottlenecking certain processes, etc. This could mean more workers around the plant because things have to be stopped and started more often, could mean that some machinery spends less time operating at peak efficiency, etc..

 

I don't know if they'll reach their targets, but I do think that it's probably very tricky to extrapolate from the ramp up phase.

[ECCO]

You guys should relax, Chad had a bonus this year, this should mean things are going well.  :-\ :o

[Liberty]

You guys should relax, Chad had a bonus this year, this should mean things are going well.  :-\ :o

 

I dislike the high compensation as much as anyone and think pretty much everybody should do what Buffett does and just be content with owning stock, but that's rare to find unfortunately.

 

To play devil's advocate, I'd say that paying a bonus for finding and closing LSQ probably isn't that crazy if you ignore what the stock price has done (would people complain if the stock was at 45?). This deal could significantly increase the value of the company in the long-term and seems to have been done on very good terms, for what seems like a good asset, with a clever structure that gives welcome flexibility.

 

Right now, everything is going wrong and macro is bad, but if things go the other way and DP stabilizes a bit higher, it's possible LSQ could be worth hundreds of millions of dollars. That might be worth a bonus.

 

I wouldn't have paid it, at least not this much, but I also don't think it's entirely for no reason... I know, that's a small consolation...

[OptsyEagle]

Optsy, I like the way you are thinking about it, but I'm not sure it's that easy to model.

 

Operations during the ramp up phase can be significantly different from operations once everything has been tweaked and figured out. It's a bit like the difference between driving in the city and on the highway; you'll burn a lot more gas per kilometer in the city (because you are constantly accelerating and decelerating) than if you were just driving at a steady speed in top gear for long distances  on the highway. So if someone looked at fuel economy in the city and tried to model what the car can do on the highway from there, it could be tough.

 

They could be producing smaller batches to test different recipes, with varying amounts of chemicals (trying to find minimum amount that still gives good results), various mixes of wood chips from different tree species, de-bottlenecking certain processes, etc. This could mean more workers around the plant because things have to be stopped and started more often, could mean that some machinery spends less time operating at peak efficiency, etc..

 

I don't know if they'll reach their targets, but I do think that it's probably very tricky to extrapolate from the ramp up phase.

 

I hope you are right.  I like your mileage analogy, but on a humerous side note.  Have you ever bought a car, looked at the specified mileage ... and ever obtain it?  lol.  It's all made up, by the way. 

 

I just hope we don't have a similar experience here.  In any event the discrepancies are not huge.  The most important factors are getting the co-gen operational, reaching full capacity, and ensuring every tonne meets the minimum specification.

[Liberty]

I hope you are right.  I like your mileage analogy, but on a humerous side note.  Have you ever bought a car, looked at the specified mileage ... and ever obtain it?  lol.  It's all made up, by the way.

 

Yeah, the EPA's testing methodology doesn't follow real-world usage too closely (Japan's test cycle is even less realistic). They've revised it recently so that it's closer than it used to be (f.ex. it used to not take into account A/C), but there's still a gap (though there are also hyper-milers who get more than EPA numbers, but that's another discussion).

 

Interesting trivia: Part of the benefit of hybrids like the Prius is that there's a big LCD that shows you real-time and historical MPG. It's a feedback mechanism that teaches drivers how to drive more efficiently (almost like a game, and you learn how to get the highest score). If we had screens showing fuel economy in all cars, I bet we'd seem much better real-world results.

 

I just hope we don't have a similar experience here.  In any event the discrepancies are not huge.  The most important factors are getting the co-gen operational, reaching full capacity, and ensuring every tonne meets the minimum specification.

 

I certainly hope so too. This investment has certainly taught me all kinds of lessons, but I think the current lesson is patience.

[tengen]

This investment has certainly taught me all kinds of lessons, but I think the current lesson is patience.

 

Amen.

[colinwalt]

Colin.  Your numbers are almost exactly like mine.  So thanks for the confirmation.  The only difference is the cost of production.  You used $750 per tonne and I believe you got that from Fortress management's disclosures.  I delved into it a little deeper.  I took the revenue in Q4 ($35.7M) and added the EBITDA loss ($$3.5M) and divided that by the number of tonnes produced (43,800) and obtained a cost of production in Q4 of $896 per tonne, PLUS $120 shipping and commissions.

 

OptsyEagle, you are far too modest with "Your numbers are almost exactly like mine". You have obviously spent far more time thinking about this than I have - many thanks for sharing.

 

On the other hand (confirmation bias at play here?) I do think Liberty's city versus highway driving analogy makes a lot of sense.

 

And I also presume that Chad must have derived his end cost of production number by looking at the production costs of competitors and figuring out where he had a cost advantage - and despite the options / compensation / bonus issues, he does have a lot (most?) of his net worth in this, so  I don't think he's going to be pulling numbers out of the air without some pretty solid modeling behind them - but maybe I'm too trusting....

[triedtestedand]

Anybody got access to RBC reports, and any insightful reason why Paul Quinn is now lowering target to $8 from $10 (i think a month after raising it from $9 to $10 on sale of Dresden)?  Stock breached below $7 again today.

[alertmeipp]

Multiple lowered from 3.5 to 3x

 

1) Chinese tax

2) Channel check says some customers may switch because of quality issues.

[lessthaniv]

I think these analysts back into their valuations by adjusting the multiples to match the stock price.  Adjustments to multiples are being made after a move in the stock price. A quick check by charting the analysts changes relative to market prices confirm this.

 

I don't like the 200,000 options. I'm travelling at the moment and have limited access to the net. Anyone read the AIF to see what the options were priced at? Chad's compensation is out of whack with the rest of the executive. If you believe fair value is say $25 then those 200,000 options have much more value than what they currently look like. That's not a great way to treat shareholders.