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

[Liberty]

Thanks LessthanIV. Your findings are compatible with mine, which I take to be a good sign ;)

[tombgrt]

Thank you lessthaniv, great analysis. I like your reasoning.

 

This economic moat where it is unprofitable for competition to enter reminds me of companies like WD-40. Very intriguing.

 

I've seen Chad mentioning 15%-20% growth for the non-woven wallpaper as it is replacing the old stuff. This is unlikely to slow down as market share increases because it will only get more known and demand will rise. I for one had never heard of such wallpaper but find it very interesting. Why would any customer want to bother with all the trouble of the older technology? At that growth rate the market could be almost 100% converted to non-woven by 2020. Impressive.

 

Let's hope the economic barriers to entry and technology lead on competition remain as production explodes and as long as Chad doesn't sell the mill. Anyway,  I'm far more comfortable with this part of the business than I was before. Thanks again Liberty and lessthanIV for the great insight. ;)

 

 

[Liberty]

http://watch.bnn.ca/the-close/december-2011/the-close-december-13-2011/#clip585199

 

Chad speaking about currency in EU.

[lessthaniv]

Current Sales Structure;

1) Capacity sold under 5 yr contracts @ floor of $1200 MT = 84,000MT

2) Capacity sold under 10 yr contracts @ (Rayon - $1000US) = 72,000MT

3) Capacity currently open for additional sales = 44,000MT

4) Current total production capacity = 200,000MT

 

Now let’s make some assumptions based on company presented data and other info;

1) Dissolving Pulp prices drop to $950/MT

2) Current Excess capacity is sold at spot rates

3) Rayon contract gives us a $200/MT premium to spot

4) Pre-Cogen cash cost delivered to Shanghai = $720/MT

5) Post-Cogen cash cost delivered to Shanghai = $632/MT

6) Commission = 2% list price

 

Weighted Sales/MT

42% @  $1200 =                 $504

36% @ $1150 = $414

22% @ $950 = $209

Weighted Average Sales Price/MT =                 $1127/MT

 

Pre-Cogen Cost :

 

Volume (MT) = 200,000MT

Average Weighted Price ($) $1,127/MT

Commission (2%) ($22.54)/MT

Sales Price net of commission $1,104.46/MT

Pre-Cogen EBITDA Contribution  $81,400,000.00

Post-Cogen EBITDA Contribution $94,500,000.00

 

 

A simple question to ask ; Can dissolving pulp prices last at this level for long?  To answer this question we need to understand the cost structure of the overall dissolving pulp market. Fortunately, this information was provided in the recent corporate presentation.  Chad gave us a snapshot into the 2013 marketplace including known expansion projects, anticipated expansions and greenfield projects.  It’s important to note Fortress’s placement on this chart as a low cost producer. The chart shows us that market is anticipated to produce north of 6.7M MT/yr. However, of that total, 2.4M MT/yr has a cost structure that would exceed the spot price of $950. In other words, 38% of the entire global supply chain would be losing money. The market participants with the highest cost structure are: Cotton linters (1.4M MT/yr with a cost structure above $1200MT); Older Chinese mills and Chinese greenfield projects (1.0M MT/yr with a cost structure ranging from around $990/MT to $1150/MT.

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/Fortress.jpg

 

Theoretically, if the dissolving pulp prices stayed low for a long time it would force the high cost producers to shut their doors. The supply of dissolving pulp would be curtailed and dissolving pulp prices should move higher on the lost supply. As  prices rose back up new supply will come on stream to allow the market to move towards equilibrium. But that new supply will likely come from the newer low costs mills forcing these high cost producers out of the market for good. The long term demand forecasts that I’ve read seems to suggest that demand will outpace supply. If that’s the case then the market could not afford the loss of that much supply. Prices would adjust upward but they must be in excess of these higher cost producers to keep them operational.

 

This gives me piece of mind for two reasons:

 

1) Obviously, the higher the price of dissolving pulp  the better we do.

2) Makes me understand better where the $1200/MT floor price likely came from.

3) Makes me understand better why the Chinese rayon producers want to lock in dissolving pulp supply from the low cost producers with long term contracts. In this light,  I believe Fortress Paper retains the bargaining power and consequently I’m less worried about counterparties reneging on these contracts. In fact, I believe this actually bodes well for Fortress moving forward. I would think Chinese Rayon producers would naturally want to lock up supply with the most cost efficient producers to ensure they don’t loose their supply down the road.

 

As long as Fortress and ensure that whatever deals the make reside in the bottom quartile of the cost curve, they are in great shape!

 

[Liberty]

Great analysis. The margin of safety indeed comes from being a low-cost producer and from working hard at keeping that advantage (co-gen is a step to further reduce costs, the way the plant was built to allow more of the huge stainless-steel tanks to be installed for de-bottlenecking will also help down the road, and the fact that the other plants they are looking at seem to be even lower on the cost curve is very promising).

 

As long as DP/Rayon is considered to be superior to cotton yet it costs less than cotton to produce it, there will be some margin to be had somewhere. If FTP stays a low-cost producer, it should do just fine at capturing some of that margin.

 

Another thing in favor of FTP: They have a long time horizon. They aren't just looking at the next quarter. Some other companies will cancel DP plans just because of a few quarters of low spot prices and bad economic conditions (less competition will be good for FTP, obviously), but FTP will just take advantage of that to try to pick up assets even more cheaply because they understand the dynamic of the DP price that you've outlined and they're deep value contrarian investors.

[lessthaniv]

Liberty,

 

You might like to read through this paper I found from asiapapermarkets.com

 

The article is about a year old but the core message remains in tact.

 

https://doc-0s-94-docsviewer.googleusercontent.com/viewer/securedownload/dsn1aovipa7l846lsfcf94nedj8q2p4u/m8pnhvg66pvbu6it3m32u0aschvqud0r/1324483200000/Ymw=/AGZ5hq8BgbJY1gwaOYx83cPOdNw6/QURHRUVTakwzWFB6MW9RUGVmMzh2U0lXNUhvbkt4Ylk3RFNONUx2TE9TdVppa04xWFdtNUY1SDdRYlpmMFF4WUYzamZVTi1zQjF6MjlDT2VOZFpRbjhYaS1vTG1CZ21YWmo5dWZVMVdoYUlqZ0lQMWttbWFpeU9abHdiUGJLOGJfQWM0eHhPa3RkSWk=?docid=11713431b0625f0d4be439c390691ef9&chan=EQAAAE0fuz0QJDwx/G9cdersNNPSwmkYEVNd9SrNBPnFb8lA&sec=AHSqidaptaZaymzAMNHCkGF4CxYKdFa7BYBSX0sYJVM2OUeh9GkgBTzmOLTeoEISC5qcuWUuFgeb&a=gp&filename=Dissolving_Pulp.pdf&nonce=p1p2a4vonun06&user=AGZ5hq8BgbJY1gwaOYx83cPOdNw6&hash=r8nek699rc85548p5289id3759e56me4

 

 

[Liberty]

I'm afraid that the link doesn't work for me. Can you repost, or attach a file? Thanks.

[lessthaniv]

Try this:

 

https://docs.google.com/viewer?a=v&q=cache:_f-jVP-LJ_EJ:www.asiapapermarkets.com:8080/apm/apm/common/Dissolving_Pulp.pdf+cotton+linter+dissolving+pulp&hl=en&pid=bl&srcid=ADGEESjL3XPz1oQPef38vSIW5HonKxbY7DSN5LvLOSuZikN1XWm5F5H7QbZf0QxYF3jfUN-sB1z29COeNdZQn8Xi-oLmBgmXZj9ufU1WhaIjgIP1kmmaiyOZlwbPbK8b_Ac4xxOktdIi&sig=AHIEtbQYQvfcx1OXfeWBI9j07SoUap_rmQ

 

Also Credit Suisse on Sateri:

Some good info on Chinese demand ...

 

https://doc.research-and-analytics.csfb.com/docView?language=ENG&source=ulg&format=PDF&document_id=868415111&serialid=RlW61pjP9ociuBYHuruLbq1cyvloQeGJbyddNySNO4U%3D

 

 

[Liberty]

Thanks! I already had the first one, but not the CS report.

[tombgrt]

Great analysis lessthaniv, especially on the reliability of the contracts. I did the same calculation but really basic, just with an average guessed selling price of $1100 and average 2012 cash cost of $680. Seems like I wasn't that far off.

 

It's good to see Chad is focusing on acquiring the 'green' and 'grey' DP producers from the chart but he seems a bit to optimistic in his EBITDA projections (also in general?) for 2013 with an ebitda estimate of $500m. I would be véry happy with half that.

 

 

Also thanks for the link from asianpapermarkets, added to my bookmarks to read it later.

[Liberty]

http://www.marketwire.com/press-release/fortress-paper-announces-4025-million-closing-of-bought-deal-offering-tsx-ftp-1601428.htm

 

Fortress Paper Ltd. ("Fortress Paper" or the "Company") (TSX:FTP) is pleased to announce that it has completed its previously announced bought deal offering (the "Offering") of 6.50% convertible unsecured subordinated debentures (the "Debentures"), including the exercise in full of the underwriters' over-allotment option, resulting in aggregate gross proceeds of $40,250,000. The Offering was conducted by way of a short form prospectus dated December 19, 2011 through a syndicate of underwriters led by Raymond James Ltd. and included Canaccord Genuity Corp., Dundee Securities Ltd., RBC Dominion Securities Inc., Scotia Capital Inc., TD Securities Inc., Cormark Securities Inc. and Acumen Capital Finance Partners Limited, who purchased a total of 40,250 Debentures at a price of $1,000 per Debenture.

 

Fortress Paper intends to use the net proceeds of the Offering to reduce outstanding indebtedness, to fund costs arising from its Fortress Specialty Cellulose project and for working capital and general corporate purposes.

[tombgrt]

:) I'm expecting a neat acquistion somewhere in the next few months.

 

I love how the stock is staying down. Hope to increase my holding if it drops further or if I can sell other holdings with a decent profit but that is really just wishful thinking.

[Liberty]

At these levels I'm kind of wishing they would use their 10m authorization for buybacks. But I don't know if they've set things up so they have an extra 10m for that or if they'd rather hold on to all their cash for future acquisitions and capex.

[tombgrt]

Yes, that would be great. We'll see what happens.

 

I just bought more after checking the numbers again. It's a sizeable position now. I couldn't resist, and figured that if it dropped substantially that I would find money from another stock anyway. I would be sorry if it rose to $30+ again without buying more, but would be happy when the stock tanked even after buying now, so it was an easy decision.

[Liberty]

TDW apparently lowering target. Found this on some other message board:

 

Fortress Paper Ltd.

(FTP-T) C$26.46

Resuming Coverage Following Convert Offering

Event

We are resuming coverage of Fortress Paper following the completion of

a $40.25 million convertible debenture offering (December 31, 2016

maturity with a 6.5% coupon and conversion price of $37.50 per share).

Net proceeds of $38.6 million will be used to 1) repay short-term debt, 2)

fund remaining capex at the Thurso pulp mill (mostly for the cogeneration

facility) and 3) for general corporate purposes. Recent discussions with

management indicate that the Thurso dissolving pulp (DP) ramp-up is

progressing well, but we are lowering our earnings estimates to reflect lower

DP price realizations through 2013 (given ongoing pressure in spot markets),

a slower earnings recovery at the Landqart security paper mill, and slight

earnings dilution related to this financing.

Impact

NEGATIVE – Management has been transparent that this financing was put

in place to bridge lower-than-expected short-term cash flows from Thurso

(lower DP price realizations/start-up delays) and Landqart (slow progress

towards filling out the banknote order book). Given the use of proceeds, we

are surprised that there has not been more share price pressure since the

financing was announced. We have lowered our estimates to reflect

several assumption changes (noted above) and are also trimming our 12-

month target price to $30.00 from $37.00. Our HOLD recommendation

is unchanged. We suggest that investors wait for downward revisions to

consensus 2012 and 2013 earnings estimates and evidence that Thurso is

ramping up on schedule, with the targeted cost structure, before buying

shares.

Details

DP production at Thurso has been underway since December 5.

Conversations with management indicate that the startup has proceeded

according to plan after a three-month delay in completing the conversion to

DP from commodity paper grade hardwood pulp. There have been typical

bottlenecks associated with a project of this scale, but pulp quality has been

good. Management has targeted DP production of 700 tonnes per day by

December end, which would imply a 70% operating rate. This ramp-up

would be ahead of initial guidance of a 50% operating rate by the end of the first month; we are inclined to

wait for evidence that this objective has been met before giving management the benefit of the doubt. The

company is sticking with guidance that the pulp mill will effectively be close to full capacity three months

after startup and that the 25-MW cogen plant is on schedule for a Q3/12 startup. Management suggested that

the entire Thurso project will come in “substantially” on target, which it suggests could be +/- 10% around the

$178 million budget ($101 million spent through early November).

Fortress management has a delivered cash cost objective of $660 per tonne (including $100 per tonne in cogen

cost savings starting mid-2012), which would place the mill at the low end of the global cost curve.

Approximately one-third of cash costs are fixed (i.e., this portion is subject to higher per-unit figures at lower

operating rates). With a steep startup curve planned and more conservative cost estimates than management’s

guidance, we expect Thurso’s DP-delivered cash costs to start at ~$975 per tonne by the end of the first month,

dropping gradually to $800 per tonne as the mill approaches full capacity.

Spot DP prices have crashed and are below the floor price for some of Fortress’s contracts. DP prices to

viscose staple manufacturers are under pressure as a result of significant capacity growth, slowing demand

from China, and lower costs for cotton (the other side of the textile market). Current DP spot prices in China

are reportedly around US$1,000 per tonne – down 60%+ from the all-time peak price in March. Prices

are approaching the long-term average of $900 per tonne and momentum remains negative for the time being.

As a reminder, 42% of Fortress Paper’s pro forma DP capacity is contracted with a cap-and-collar structure

ranging between US$1,600 and US$1,200 per tonne. With spot prices now below the low end of this range, it

is fair to question the security of these contracts, all of which are with buyers in China. Management has

suggested that recent discussions with contracted buyers indicate that they are prepared to honour the floor

price terms.

Exhibit 1. Dissolving Pulp Price Trends

$200

From Q4/11 through the end of 2012, aggregate DP capacity additions (only projects selling into the

viscose rayon market) are 1.4 million tonnes – representing growth of >40% from capacity at the end of

2010. Many producers announced conversion projects when prices were at the Q1/11 peak and some have

since been abandoned (more project cancellations are expected in the coming months). Even with a less

daunting list of projects, we expect the market to struggle to absorb this much supply so quickly.

Management’s internal forecast calls for industry operating rates to fall to 95% in 2013 from 97% in 2011. We

have lowered our 2012 average DP price expectation (Fortress Paper’s weighted average price

forecast falls more modestly to US$1,150 per tonne from US$1,200 per tonne.

Outlook

Thurso is Fortress’s main earnings driver, but it is worth noting that turning around margins at Landqart

(EBITDA-negative for four consecutive quarters) is also an important objective. In early December,

management noted that high input costs and poor productivity are expected to weigh on this mill’s Q4/11

margins. Our earnings estimates through 2013 are well below consensus forecasts, but we still expect strong

earnings growth over our forecast horizon given compelling economics at Thurso, much improved margins at

Landqart as that mill’s order backlog is filled, and steady results at Dresden. While management has further

growth aspirations, with Dresden no longer for sale and the shares well below peaks, we suspect that

management will keep its powder dry for the time being.

Valuation

Based on our 2012 estimates, Fortress trades at 6.8x TEV/EBITDA versus the broader peer group average of

6.2x. In our view, Fortress shares are fairly valued at these levels.

Justification of Target Price

Our 12-month target price of $30.00 per share is based on a multiple of 4.2x applied to our mid-cycle EBITDA

estimate (EV is adjusted for free cash flow forecasts through the end of 2013, which include discretionary

capex earmarked for the Thurso projects).

Key Risks to Target Price

The primary risks to our target price include: 1) sensitivity to changing exchange rates; 2) rising input costs; 3)

dependence on major customers; 4) discretionary capital spending execution risk; 5) retention of senior

management; 6) risks associated with a three-mill operating structure; 7) competitive pressures in the

nonwoven wallpaper industry; 8) competition from non-cash payment methods; and 9) legal filings against the

company.

Investment Conclusion

Thurso is expected to be a major contributor to Fortress’s long-term earnings, but given the scale of the

project, management’s arguably ambitious cost objectives, and ongoing DP price pressure, we would wait for

evidence that the mill is ramping up on target before stepping in.

[lessthaniv]

Is it just me or does TDW adjust their forecasts to match the stock?

That's not much help when it comes to investing.

 

To me, this is all about the Cotton markets at the moment. I'll try to expand on that when a I get a few minutes to record my thoughts.

 

Thanks for sharing that though. I do appreciate the different perspective.

[Liberty]

I never pay attention to analyst forecasts and targets. The only thing that I look for in these reports are facts like "is this mill running well" "how's the quality of the product" "any new orders?" etc.

 

A lot of these reports are hedged anyway; if stock price goes down, they can say they were right because of the negative stuff in the report, and if it goes up, they can point to the positive stuff, or even say that they were conservative if their target price turns out to be low. Meh.

[alertmeipp]

probably some shorting going to hedge the coming convert.. should see some upside after

[bonechip1]

Has anyone seen the global cost curve for cotton producers?  I have not had any luck trying to find it.

 

[Liberty]

probably some shorting going to hedge the coming convert.. should see some upside after

 

Could you elaborate on this? I'm not quite sure I get what you're saying. Thanks.

[alertmeipp]

Some investors like to shorts the underlying stocks after/before they purchased the convert to hedge out the risk.

 

For example: Imagine one shorted the stocks at 40 bucks, now they bot the convert, they don't need worry about cover as they will get shares from the convert, etc...

 

As well, some may prefer to own the convert rather than stocks and sell out stocks to subscribe to the convert. Thus, caused the weakness.

[Liberty]

Makes sense. Thanks!

[tombgrt]

Lib, I just read the weird discussion on Stockhouse with that mad man "Shortdawg". What the hell is wrong with that guy?  :o It goes to show that not everyone has the stomach to handle market volatility and remain rational.

 

For those interested, it starts here and has some good posts: http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=30506028&l=0&r=0&s=FTP&t=LIST

 

(edit: Oh and it seems that I missed the colorful posts of Azorean.. )

 

 

I also think this post of onxy1 applies to FTP:

 

Resist the urge to buy in early; the market often offers attractive entry points when information is lacking between quarterly earnings releases.

[Liberty]

My best judgement told me not to reply to these people, but sometimes they write things that are so outrageous that I can't help myself. It's certainly not the most constructive use of time since these people rarely discuss fundamentals, and when they do its usually to misrepresent them.

[tombgrt]

My best judgement told me not to reply to these people, but sometimes they write things that are so outrageous that I can't help myself. It's certainly not the most constructive use of time since these people rarely discuss fundamentals, and when they do its usually to misrepresent them.

 

it's awfully quiet on that forum today. Why would that be?  ;) I would just ignore them, also literary with the forum option. Nothing but a waste of time.

 

FTP up on much higher volume. Strange how all losers of 2011 are fiercly going up lately. Maybe the 'tax selling effect' isn't really dead yet? Fingers crossed that the stock stays under $30-35 for a bit, I'd like to add even more.