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

[Liberty]

I was surprised to hear Chad say that in the 3-5 years they would like to have 50% of capacity (including LSQ) be speciality cellulose. Was that really the number he said (my line was bad)?

I was expecting something more inline with Sappi and Sateri where around 20% of capacity is SC

 

That's what he said. About 25% of which would come from Thurso and 75% from LSQ, where softwood helps for specialty DP.

[shoeless]

Thanks Liberty

added: Sappi/Sateri I think are all hardwood. Perhaps speciality cellulose is more attractive for softwood?

Sounds like the SC market can help provide some financial stability (though demand is projected to grow slower than DP) compared to the volatile prices and fragmented and possibly financialy less secure DP customer base.

 

[tombgrt]

To bad the SP division has some problems and the extra costs for cogen (yikes...) but DP does what it has to do. Outlook for the next few years still the same. Would still be happy to buy more under $400m market cap.  :)

[Liberty]

Mr. Market didn't like Q4 apparently  :o

 

These bumps in the road suck, but they are to be expected. What matters most is that the big value creators are still on track, and I'm pretty sure that in 5 years I won't even remember that cogen hiccup...

[OptsyEagle]

The TD analyst came out and downgraded his target price from $36 to $32.  No surprise there.

 

From the conference call it would appear that we can expect another small loss for Q1.  We have Landqart still bleeding cash and Thurso at a little over break even.  I doubt Dresden can cover the shortfall but if it does, it will be by very little, in my opinion.  I hope I am wrong, but I doubt it.

 

The TD analyst also cited a capital shortfall for 2012 build out.  It will be interesting to see how FTP deals with it.  An asset sale would certainly perk things up a little, especially if it was Landqart.

 

In any event by July, after we get past Q2, I think the analyst will start counting the money and Fortress stock will start to get the recognition a cash producing machine should get.  Right now the machine is eating oil but in about 4 months it will should be pumping money horse power.

[colinwalt]

Here are some rough notes from the CC – I only listened to it once, so there are probably a number of errors in what follows.  One thing I liked was that they seemed to be pretty open about issues and challenges – and also were fine saying “we don’t know yet.”

 

Many investors may not like this - they seem to expect management to have the ability to predict the future with 100% accuracy and if management doesn’t give this impression, then they are considered incompetent.

 

Personally I tend to be wary of management that seem to have slick, perfectly confident answers, about what is an inherently unpredictable world – so I found this willingness to say “we don’t know” refreshing.

 

Call notes follow – Prepared statements (I don’t have much here as most of it matched the Press Release, which I’m not bothering to repeat):

 

Thurso: 415 tons per day now – 72%

• Daily peaks over 500

• By end of Q2 should be at full capacity.

• All customers have approved quality.

• Co-gen on time – but remaining spend is 64 Million – about 20 Million more than planned.

• DP production costs still above plan due to ramp-up costs and higher energy costs.

• Longer term, moving to more specialty dissolving products (more on this below)

• Will add more capacity if right deals come along.

• Chad will not get any annual bonus due to results.

 

Q&A Session:

 

Q: Total CapEx requirement has gone from 180 to 200M?

A: Correct – management now focusing on Co-gen now that the DP conversion is in place.

• Believe it will be OK now that they are able to focus on it.

 

Q: Maint CapEX?

A: Dresden – 2-3M Euro (Plus 2.5 for expansion)

• Landqart 2-3M Swiss

• Thurso: Don’t now yet – guess about 5-10M

 

Q: Deadline on Co-gen + penalties

A: Dec 1 2012 start date, so penalties start after this date.

• Penalties: 75,000 per day – Capped at about 1.8 Million

• But currently don’t plan on missing the target date.

 

Q: DP Production costs per ton?

A: Not stable yet, energy costs and start-up chemical costs still high – better than break-even already, but still don’t want to give a number until all is stable.

 

Q: Cost overrun due to Co-gen – what liquidity is available to meet this?

A: Landquart – order on hold – still consuming cash.

• Co-gen extra costs due to inaccurate estimation by contractor – 18M increase in costs:

• Funding:

o 15M from tax credits – should get this year.

o Once at stable full production of DP, obviously will be cash flow positive.

o 10 million Euro debt + 10 Million Swiss Francs debt capacity (CW: using already?) – looking to increase.

o Switzerland – have a hydro asset worth 20M (CW: Swiss francs? Not sure I got this right)

o Farmland – another 10M dollars.

o Once Thurso fully running by June, if needed, could take on another 100M in debt at least.

o Will avoid diluting shareholders at all costs if possible.

 

Q: Landquart – what capacity has been filled for 2012

A: Big order (new customer) delayed – 50 to 55% of capacity.

• Quality OK’d by customer, but still waiting for final OK – very bureaucratic approval process with a new customer.

• Don’t now if will be EBITDA positive in 2012 – depends on when this order is approved.

 

Q: Cotton prices in China appear to be high, but DP pricing doesn’t seem to reflect this.

• Significant new DP supply in 2011, think that will be absorbed in 2012 as economies recover (CW: not sure I got this right).

 

Q: (CW: Again on liquidity) 64M still to spend at Thurso?  But 23M cash and 23 undrawn + 8M ARs.  So have about 54M cash, but possible shortfall depending on cash generation / cash needs over the next few months?

A: Tax credit of 16M expected in 2012 + Dresden is cash-flow positive + Thurso will begin to generate cash. Also, non-core sales discussed earlier (Mar / April hope for an asset sale)

Will spend 1/3rd of the cap-ex between now and Jun (+/- 20M) and 2/3rds from then to Dec 1.

 

Q: Specialty DP market – capacity + costs for upgrading.

A: Right now, focus is on getting standard DP to full capacity by June (570 tons a day) and then 2 months on quality tweaks. 

• Will then begin working on specialty recipes – takes about 6 months for easier ones to get approval, more complex can take 18 months. 

• Longer term (3-5 years) would like to have 50% in specialty.  25% from Thurso (due to viscose contracts need the remaining capacity for regular DP + hardwood supply is less amenable for specialty)

• Plan is for LSQ to be at about 75% specialty - softwoods better for that. 

• Not sure yet how much Cap Ex will be required to get to this level of specialty capacity (CW: Based on the next comment, I got the feeling they don’t expect it to be significant).

• Will not be able to produce more complex specialty products (e.g. acetate) w/o quite a bit more Cap-Ex (not planned for now). 

 

Q: Issues with securing fiber supply as part of closing LSQ?

A: Making good progress on contracts (have about 40% secured (CW: I think))

• Need to get idled saw-mills started up for this.

• Would also consider purchasing their own mill to secure supply given the current depressed prices for shuttered mills.

[Liberty]

Mr. Market's reaction to Q4 results is quite interesting. If I didn't own so much already, I'd take this as a nice buying opportunity. Cost overruns and possible delays with the cogen are bad, and Landquart's performance is still disappointing, but for an investor planning to hold for years, that's just small bumps in the road. The earning power is still there, and with India now banning the export of cotton, things could get interesting on the DP market (especially since management seems to have a pretty aggressive timetable to get 50% of Thurso and LSQ's production certified on the specialty cellulose market, bringing higher margins).

 

I'm also intrigued by the sawmill(s) idea. I've never studied the economics of these, so I don't know how profitable they can be when the US housing market is going well. I guess it depends how cheaply you can get your hands on them...And we know Chad would only operate a sawmill if it was a high quality low-cost operator.

[Liberty]

Chad on BNN:

 

http://watch.bnn.ca/#clip634083

 

Nothing groundbreaking, but he restates his intention to acquire 1-2 other DP mills. Maybe it's just me, but in other recent interviews he mentioned just 1 other mill. I wonder if this means that there's now a second deal that is making some progress...

[tombgrt]

Mr Market is in a bad mood, I like it. Added to position today (increased position by +- 15% in size). Rest of portfolio doing very well so I felt that I could go ahead. This will either turn out to be a major hit or a big disappointment, but my estimated expected value for FTP is so high that I have to go for it. We'll see how it turns out!

 

Only buying more under $25 now.

[Liberty]

Mr Market is in a bad mood, I like it. Added to position today (increased position by +- 15% in size). Rest of portfolio doing very well so I felt that I could go ahead. This will either turn out to be a major hit or a big disappointment, but my estimated expected value for FTP is so high that I have to go for it. We'll see how it turns out!

 

Only buying more under $25 now.

 

I would like to buy more too, but I probably won't be able to because I'm currently looking at allocating capital to something else.. Wish I could add a bunch, though!

[OptsyEagle]

No matter how pessimistic I try to make a scenerio, I can't get my valuation down to $28 a share.  I mean Dresden would be worth over $10.  Even DP dropping to $800 puts Fortress Cellulose upwards of $25 and we would see a couple million tonnes of world supply shut down at those prices.  Then we have the co-gen plants and I would assume Landqart is worth something even if it never turned around.

 

I guess today's investor just has a lack of patience ... or math skills.

[Liberty]

I guess today's investor just has a lack of patience ... or math skills.

 

Seeing how much analyst reports move the price of FTP, I'm guessing that few people actually do their homework, they just do whatever the analysts tell them to.

[bathtime]

Sappi has an analyst's day presentation from 2/9/12:

 

http://www.sappi.com/Investors/Documents/Presentation.pdf

 

(http://www.sappi.com/Investors/Pages/Presentations.aspx)

 

Page 34 shows a list of the current producer's of DP/chemical cellulose.

 

Page 35 shows an additional 3 million tons of announced capacity (not including LSQ) scheduled to come online 2012-14.

 

I've owned FTP off and on, have been buying it lately, and see it as a potentially a great value investment. Presuming company-provided estimates on profitability hold up. But I lack clarity on the supply/demand estimates on which those estimates are based. The 3 million additional tons mentioned in the Sappi presentation is a lot for an existing 5.1 million ton global market! While we know that FTP projects to land in the lower 25% quartile on cost structure based on current global producers, do we know where FTP will land if/when 3mt of supply comes on by the time LSQ reaches full production?

 

In the Tapi article from October 2011 (http://www.tappi.org/Hide/The-Dissolving-Pulp-Gold-Rush.aspx), it reports:

 

-------

On the supply side, RISI further reports that nearly 3 million metric tons of new dissolving pulp capacity has been announced for 2011-13 in a market that was just under 5 million metric tpy last year. This means that world demand would have to grow some 20% annually over the three years to soak up that much announced new capacity, says Rod Young, chief economic advisor at RISI.

 

It’s currently unclear whether capacity will outstrip demand and dampen the dissolving pulp renaissance going forward, but one factor weighing in favor of keeping the dance going is the new Chinese Five Year Plan, Young points out, which “envisions shifting 2 million metric tpy of fiber production from cotton to rayon in an effort to cut back on cotton output in the country due to environmental concerns.”....

 

However, Mouyal notes, production and technology-wise, it’s going to take a while for China and other Asian countries to catch up with the West in the dissolving pulp production race. “Although they plan to bring some significant new capacity online in the fairly near future, we believe this will likely occur further down the line. We just don’t think they will able to move as fast as currently planned, which means they probably will continue purchasing dissolving pulps made in the U.S. and Canada for at least several more years. Beginning around 2013-14, I expect that China will no longer be purchasing dissolving pulp from the West.”

 

Sandel sees the dissolving pulp gold rush continuing worldwide for at least the next five years. “I think that at some point in time, with all of this additional capacity coming online, output will exceed demand. What we are seeing now—announced and rumored expansion plans—is probably about it for new capac- ity going forward. There might be a few other announcements, but I believe that what’s happening now and what’s on the books is basically all we will see.”

------

 

This commentary from Dave Hillman (https://www.gplus.com/timber-and-forest-products/insight/is-the-party-over-for-dissolving-pulp-producers-54909) mentions, "DP was selling for as low as $650/admt c.i.f. South China ports in 2005/06 and one wonders if these levels will ever be seen again."

 

I'm impressed by Chad's story and accomplishments, but he also sells a great story, and I'm getting stuck on these unknowns around the future pricing dynamics of the DP/chemical cellulose market. Do I have to rely on Chad's projections over industry analysts? Since the end market is somewhat opaque to me, it's difficult to feel like I have a margin of safety.

 

Thanks for any comments!

 

 

 

[keerthiprasad]

Bought a bunch more of this today!

[tombgrt]

 

I'm impressed by Chad's story and accomplishments, but he also sells a great story, and I'm getting stuck on these unknowns around the future pricing dynamics of the DP/chemical cellulose market. Do I have to rely on Chad's projections over industry analysts? Since the end market is somewhat opaque to me, it's difficult to feel like I have a margin of safety.

 

 

He definitely sells a great story, that was one of my main concerns as well.  :D

 

You are correct to worry about the impact of new supply but I think it will be fine after everything I have read about it. You should also not forget:

 

- Chad has price contracts (min. $1200/ton) for 78% of Thurso's capacity;

- Thurso's DP is of better quality than average and LSQ's will probably be in the same league. This means they will get a better price and/or they can convert to speciality cellulose;

- N-America and S-Africa are the best places for DP. In effect, China has a much higher cost/ton which makes them less competitive. I don't see how they won't be buying from the West anymore anytime soon;

 

The uncertainty is, as always, the driver of the current low price. Most people can't deal with the fact that profits for FTP could be anywhere from $3 to $15 in 2015. Dresden and Landqart are possibly worth the current market cap, especially when looking out a few years. In a way we are getting the DP division for free.

[OptsyEagle]

I'm impressed by Chad's story and accomplishments, but he also sells a great story, and I'm getting stuck on these unknowns around the future pricing dynamics of the DP/chemical cellulose market. Do I have to rely on Chad's projections over industry analysts? Since the end market is somewhat opaque to me, it's difficult to feel like I have a margin of safety.

 

Thanks for any comments!

 

You seem to have a good handle on the situation and the story.  Since most of the story is about the future, one cannot put aside the issues you stated with any concrete information.  All will be subjective to a degree.

 

I own the stock and like you, ponder and sometimes worry about the issues going forward.  3 million tonnes is a lot of new capacity, although most of it is scheduled for 2013 and beyond.

 

The points that keep me invested are really as follows and probably in this order:

 

1) I do believe the "cellulose gap" part of the story.  It makes sense that the demand for cotton will outstrip its supply abilities and I believe, in turn, the world will turn to dissolving pulp, as it has already started to.

 

Recently, I found it interesting reading about India.  They put a ban on their cotton exports and then due to world outcry, agreed to lift it.  The question I ask is "why would India do this ?".  The only answer I can come up with is that they see a severe shortage of cotton supply going forward and want to maintain their competitive textiles industry with a lower cost cotton, then the rest of the world would need to use (certainly doesn't help their cotton farmers, but would propell their cotton textiles).  This certainly bodes very well for DP demand going forward and helps reaffirm the cellulose gap story.

 

There are other such indicators of this lessening of cotton supply, going forword, that keeps the story of a longer term increasing demand picture for dissolving pulp, strong in my mind.

 

2) Fortress Cellulose cost structure.  All of this, I take from the presentations given to the public by FTP and I can only hope they are correct.  From other presentations of competitors I have noticed that they are very close if not completely accurate.

 

In any event, if they are in 1st quartile of industry costs to produce DP, that would leave 75% of supply at a higher cost.  Since most of the costs of producing DP are variable (wood fibre, energy, chemicals) it would make little sense for a company to produce any DP at all, if the price was below their costs.  So in a 5 million ton market, 3.75 million tons would shut down before the price of DP started to produce losses at Fortress Paper.  This should stabilize the price, somewhat. If FTP can switch over some production to specialty pulp, which it looks like they can, then this gives them another avenue to ensure profitability, going forward.

 

 

3)  Fortress Paper's long term contracts.  These put a nice, profitable floor in the price that FTP receives for their pulp.  I am hoping, that since a lot of the capacity you mentioned is not coming on until 2013 and 2014, that Fortress Paper can, again, lock in long term contracts of their future LSQ production by using Thurso's extra production, that is online now, as a sweetener.  A contract there would go a long way in reassuring investors.

 

4) Chad.  I like the guy.  He owns way more stock then I do, has way more at risk, and seems to know what he wants, and for the most part, how to go about getting it.  He understands business, labour, government, enviro regulations and most importantly, investors.  He is not my number 1 reason for holding this stock, but in the back of my mind, something keeps telling me that he is going to succeed.  He seems to want to do it with Fortress Paper and anyone can decide to join him, any day of the work week between the hours of 9:30 and 4:00pm (stock market trading hours).

 

5) FTP share price.  If this stock was trading for $60 or higher, most of the concerns you mentioned would start keeping me a lot more awake at night, then it does.  With the price at $28, it is not difficult to see that the margin of safety in this company, is quite high.  You can run your numbers on worst case DP prices, various earning scenerios, or even liquidation value and it's very difficult to come up with a price for this company, below $28.

 

 

That's about how I see the story.

[bathtime]

tombgrt and OptsyEagle, thank you very much for your thoughtful replies.

[tombgrt]

Call me crazy but I collected some 85%+ gain from $BAC (1/5th of position) yesterday and bought some more $FTP with it at $27.4. I'm in for a huge chunck percentage wise. Operational risks are still there but are diminishing quickly. Q2 results will be exiting, hopefully in a good way.

 

Great post btw OptsyEagle.

[biaggio]

Call me crazy but I collected some 85%+ gain from $BAC (1/5th of position) yesterday and bought some more $FTP with it at $37.4. I'm in for a huge chuck percentage wise. Operational risks are still there but are diminishing quickly. Q2 results will be exiting, hopefully in a good way.

 

Great post btw OptsyEagle.

 

did you mean $27.40

[tombgrt]

Woeps. Of course!  :D

[Liberty]

Call me crazy but I collected some 85%+ gain from $BAC (1/5th of position) yesterday and bought some more $FTP with it at $37.4. I'm in for a huge chuck percentage wise. Operational risks are still there but are diminishing quickly. Q2 results will be exiting, hopefully in a good way.

 

Great post btw OptsyEagle.

 

Sounds like a good move. I wish I could do the same  right now :)

[tombgrt]

Call me crazy but I collected some 85%+ gain from $BAC (1/5th of position) yesterday and bought some more $FTP with it at $37.4. I'm in for a huge chuck percentage wise. Operational risks are still there but are diminishing quickly. Q2 results will be exiting, hopefully in a good way.

 

Great post btw OptsyEagle.

 

Sounds like a good move. I wish I could do the same  right now :)

 

Having a small circle of competence, small asset base (and concentrated portfolio) has its advantages.  :-X

 

We'll see how it turns out. I love how this stock is bouncing around regardless of intrinsic value or any news. I guess uncertainty is a patient investor's friend;

[lessthaniv]

March 30, 2012

Fortress Paper Announces New EUR25 Million Credit Facility and Executive Management Changes

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 30, 2012) - Fortress Paper Ltd. ("Fortress Paper" or the "Company") (TSX:FTP) announced that its wholly owned subsidiary, Dresden Papier GmbH ("Dresden"), has entered into a new EUR25 million credit facility with Commerzbank. The new facility expires on June 30, 2017 and will be primarily used to repay the balance of an existing loan agreement between Dresden and GE Capital Bank AG of EUR22.15 million that was used to finance the rebuild of papermachine no.1 at the Landqart Mill.

 

Chadwick Wasilenkoff, Chief Executive Officer of Fortress Paper, commented: "The terms of the new facility are more competitive than our prior loan agreement, and provides enhanced financial flexibility at a lower overall cost to our business."

 

The Company also announces that Alfonso Ciotola has resigned as President of the Company and Mr. Wasilenkoff has consolidated such position with his role as Chief Executive Officer. Mr. Ciotola will remain with the Company as Chief Executive Officer of Landqart AG and Managing Director of Dresden. In addition, Erich Sulser, Chief Operating Officer of the Company and Chief Financial Officer of Landqart AG, is no longer with the Company. His duties will be assumed by other officers at this time.

 

About Fortress Paper

 

Fortress Paper operates internationally in three distinct business segments: dissolving pulp, specialty papers and security paper products. The Company operates its dissolving pulp business at the Fortress Specialty Cellulose Mill located in Canada which is also in the process of expanding into the renewable energy generation sector with the construction of a cogeneration facility. The Company operates its specialty papers business at the Dresden Mill located in Germany, where it is a leading international producer of specialty non-woven wallpaper base products. The Company operates its security paper products business at the Landqart Mill located in Switzerland, where it produces banknote, passport, visa and other brand protection and security papers, and at its Fortress Optical Facility located in Canada, where it manufacturers optically variable thin film material.

 

CONTACT INFORMATION:

Fortress Paper Ltd.

Chadwick Wasilenkoff

604-904-2328

info@fortresspaper.com

www.fortresspaper.com

 

INDUSTRY: Manufacturing and Production - Forest and Paper Products

 

 

[Liberty]

The Company also announces that Alfonso Ciotola has resigned as President of the Company and Mr. Wasilenkoff has consolidated such position with his role as Chief Executive Officer. Mr. Ciotola will remain with the Company as Chief Executive Officer of Landqart AG and Managing Director of Dresden.

 

Setting up for a spin-off?

[lessthaniv]

The Company also announces that Alfonso Ciotola has resigned as President of the Company and Mr. Wasilenkoff has consolidated such position with his role as Chief Executive Officer. Mr. Ciotola will remain with the Company as Chief Executive Officer of Landqart AG and Managing Director of Dresden.

 

Setting up for a spin-off?

 

Possibly?