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

[A Dhandho Investor]

Slide 18:

 

confirms my last post. even though supply is increasing, utilization ex-high cost mills is north of 100%.

 

:)

 

Guess I'm missing something, how can utilization be > 100%?

 

I don't think it can, as the real utilization rate (the blue line) has never been above 100%.

 

Just guessing here, maybe they want to show that without the high cost Chinese mills, the utilization rate of the low cost producers' mills should be above 100% to address current DP demand? This would mean that, at current DP prices, at which the Chinese mills are not profitable, there is still room for additional (low cost) supply.

 

[Liberty]

I'm not sure I understand slide 18 either. Do they mean that if China's high cost mills shut down there will be a supply gap? Meaning there's a floor a that price level? Am I missing something?

[roundball100]

I'm not sure I understand slide 18 either. Do they mean that if China's high cost mills shut down there will be a supply gap? Meaning there's a floor a that price level? Am I missing something?

The message I got was: if certain producers start losing money below $1200, then they shut production when the price falls below that - and those who can produce profitably at less than this point get the business (i.e., competition falls away).  Is that it?

[lessthaniv]

First look at the blue line - Utilization:

 

You'll note in 2010; demand = supply and so utilization is at 100%. As we move forward into 2012,2013 & 2014 supply will exceed demand due to the new start ups and therefore utilization falls to a range of (85% -100%).

 

Now look at the red dashed line - Utilization excluding high cost Chinese mills:

 

At the current DP price many of the high cost Chinese mills are not profitable. They are unsustainable and will close their doors if prices remain below $1200/mt for too long. If you assume that DP prices remain at $1100/mt and hence unprofitable mills in China end up closing (safe assumption) - the remaining supply in 2012 won't be enough to offset demand. Hence utilization "ex high cost China mills" is greater that 100%.

 

This is what I was saying in my last post. Those high cost producers represent about 1/3rd of the world supply. At these levels they are unprofitable, hence unsustainable. If prices were to stay here we'd lose more supply than the world can handle.

 

That's why Chad keeps saying there is floor around $1200/mt and why the floor price of their contracts is at $1200/mt. Everyone knows a fall in price below these levels for too long is unrealistic.

 

The market can absord a 1/3rd increase in supply from new low cost operations. That will only knock off the high cost producers over time leaving the total supply to the market stable.

 

<IV

 

 

[triedtestedand]

Going back to the Terrace Bay announcement ... Am glad FTP did not attempt to match AV Group's bid to the bankruptcy court.  Consider:

 

- possible upfront cash purchase of upwards of $110M (or more?) ... vs FTP's $1/nominal amount for each of LSQ and Thurso

- no contractual commitment to convert (i.e. intend to run as NBSK for awhile, then convert for 2016 timeframe, which sounds like an option to me)

- self-financing of $250M ... vs FTP's provincial gov't supported AND project specific (i.e. non-recourse) financing for each of LSQ and Thurso

 

Proposing similar to AV Group for Terrace Bay would have required some serious up-front cash, with only marginal returns for a few years.  AV Group, being the much bigger player, no doubt has a longer-term view to secure options and lock up potential in-house low-cost supply as forecasted demand grows.  That said, this does provide a possible valuation benchmark however, which is good.  Note the following:

 

                                                      Terrace Bay                      Thurso+LSQ                  Ratio

 

Dissolving Pulp Capacity                      280K*                              458K                          1.6357

Conversion Capex                              ~$250M                          ~$430M                      1.72

Purchase Price                                    ~$110M                              $1

 

 

If we used same ratio of ~1.65, then a valuation (ex conversion CAPEX) for Thurso&LSQ would be ~$180M.  Not a bad margin of safety for FTP purchase for $1 ... especially with the added benefit of the conversion project financing for each being held at the subsidiary level.

 

* I'm not sure about the capacity # for Terrace Bay ... the 280K number is from the recent press releases, but if you look at older info, it notes that Terrace Bay had two pulp lines ... a main one producing 350K of NBSK a year (which is the one that has been started/stopped multiple times in the past few years), and a secondary one capable of producing 125K of NBSK/NBHK a year.

 

 

[triedtestedand]

As relates the new presentation ... One thing I would have liked to have seen more detail about is the demand side for dissolving pulp.  I'm comfortable with arguments about the macro trend, and with the low-vs-high cost supplier mix, but how much do short term swings if VSF customer utilization factor in to FTP's own utilization, sales, and pricing power. 

 

For example, if Fulida experiences a slowdown, I might expect them to curtail purchases from 3rd parties such as FTP before curtailing production at a company owned dissolving plant, no?  Or maybe they would only do so in event of a protracted slowdown?

 

I raise question mostly because have seen some headlines of late on ccfgroup.com denote VSF plants planning on taking downtime for maintenance, etc. in near-term as business has been slow/prices have been low.

[triedtestedand]

One more thing ... a number of the presentation visuals are sourced from, and reference, the following website:

 

http://www.fmhaemmerle.com/downloads.html

 

It appears likely that this consultant's study was commissioned by the Lenzing Group.

 

http://www.lenzing.com/fileadmin/template/pdf/konzern/investor_center/factsheet_E_Q1_SCREEN.pdf

 

[shoeless]

This is what I was saying in my last post. Those high cost producers represent about 1/3rd of the world supply. At these levels they are unprofitable, hence unsustainable. If prices were to stay here we'd lose more supply than the world can handle.

<IV

 

Did you include specialty cellulose and cotton linter capacity when estimating the amount of high cost capacity? Am I wrong in thinking the impact of low VSF demand on a SC/cotton linter producer would be minimal since they're targeted at other uses?

 

[A Dhandho Investor]

Hey guys,

 

I just noticed the 2011 annual report and management discussion have been filed on Bloomberg last week.

 

Currently, they have only been filed in French. I will also post the English versions as soon as they are filed.

 

SE000000002053839767.pdf

SE000000002053839768.pdf

SE000000002053839769.pdf

[Liberty]

http://www.marketwire.com/press-release/fortress-paper-announces-closing-of-69-million-bought-deal-offering-tsx-ftp-1678248.htm

 

VANCOUVER, BRITISH COLUMBIA--(Marketwire - July 10, 2012) - 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 7.0% convertible unsecured subordinated debentures (the "Debentures"), including the exercise in full of the underwriters' over-allotment option, resulting in aggregate gross proceeds of $69,000,000. The Offering was conducted by way of a short form prospectus dated July 3, 2012 through a syndicate of underwriters co-led by Raymond James Ltd. and Scotiabank, and included Canaccord Genuity Corp., Dundee Securities Ltd., RBC Dominion Securities Inc., TD Securities Inc., CIBC World Markets Inc., Cormark Securities Inc. and Acumen Capital Finance Partners Limited, who purchased a total of 69,000 Debentures at a price of $1,000 per Debenture.

 

Fortress Paper intends to use the net proceeds of the Offering to fund capital expenditures relating to the cogeneration project at its Fortress Specialty Cellulose Mill, to fund capital expenditures relating to its recently acquired Fortress Global Cellulose Mill in Lebel-sur-Quévillon, Québec, to reduce outstanding indebtedness and for working capital and general corporate purposes.

[sculpin]

Fortress CEO Sees Pulp Rally or Going Private: Corporate Canada

2012-07-11 04:01:00.4 GMT

 

By Christopher Donville

    July 11 (Bloomberg) -- Fortress Paper Ltd. Chief Executive Officer Chad Wasilenkoff says his strategy of buying unprofitable Canadian pulp mills will either spark a rally or push him to buy the whole company.

    Wasilenkoff is betting idled paper-grade pulp mills can be transformed into some of the world’s lowest-cost makers of the pulp used in synthetic fabrics and LCD screens. Fortress bought a second Quebec mill last month and the CEO said he’s in talks to acquire another in North America and one in Europe.

    The growing market for so-called dissolving pulp, combined with Fortress’s cheap acquisition costs, government financial support and wage concessions from workers will generate “staggering” returns for investors, Wasilenkoff said.

Fortress’s market value declined 56 percent in the past year.

    “We are going to see a significant upward movement in the shares in the next 12 months,” Wasilenkoff, who also is chairman, company founder and its largest shareholder, said in an interview near his company’s North Vancouver headquarters.

“If we don’t, I’d consider taking the company private.”

    Fortress is moving into an industry that has been stung by the U.S. housing slowdown, the strength of the Canadian currency and plummeting use of newsprint and magazine paper as the Internet and personal tablets gain in popularity. Direct jobs in the C$57 billion ($55.7 billion) industry declined by 35 percent to 233,880 in the last 11 years, according the Forest Products Association of Canada.

 

                          ‘Good Talker’

 

    Wasilenkoff faces a global expansion of dissolving-pulp production capacity, said Brian McClay, founder of Brian McClay & Associates Inc., a Montreal-based pulp-industry consultancy.

Still, Wasilenkoff is helping to defy the perception that the Canadian forest-products industry is in irreversible decline.

    “He’s a larger-than-life character, a good talker and a dealmaker,” McClay said in a telephone interview. “There are a lot of reasons why dissolving pulp should do very well.”

    A fourth-generation Russian-Canadian and a former investment adviser at Canaccord Capital Inc., Wasilenkoff, 40, isn’t averse to taking a contrarian position.

    Fortress acquired its first Quebec mill in 2010, a facility near the town of Thurso held by bankrupt Fraser Papers Inc. At the time, Fortress’s main assets were a wallpaper mill near Dresden, Germany, and a banknote-paper making operation in Switzerland.

 

                        ‘Outside the Box’

 

    The Quebec move was so unexpected for Daryl Swetlishoff, a Vancouver-based forest-industry analyst at Raymond James Ltd., that he described it as a “Crazy Ivan,” a term in Tom Clancy’s

1984 novel “The Hunt for Red October” that refers to a bold, yet risky submarine-warfare tactic.

    Wasilenkoff took the comment as a compliment.

    “It was a recognition that we really were outside the box, creating opportunity where others couldn’t see it,” Wasilenkoff said in the interview.

    Fortress completed the purchase last month of its second Quebec mill near Lebel-sur-Quevillon for C$1. Domtar Corp.

permanently closed the mill, 500 kilometers (311 miles) northwest of Montreal, in 2008 citing “deteriorating conditions” for the global pulp market.

    Fortress, which declined 1.1 percent to C$16.94 yesterday in Toronto, has dropped 36 percent this year. In that time, Jacksonville, Florida-based Rayonier Inc., the world’s largest maker of specialty dissolving pulp, rose 1.9 percent in New York. The pulp is so named because it’s dissolved in chemicals before use to make products from rayon and cigarette filters to the nose cones of the now defunct NASA space shuttles.

 

                          Cost Overruns

 

    The transformation of Thurso, about 100 kilometers west of Montreal, from a mill that made pulp for paper to a producer of dissolving pulp was slower and more expensive than expected.

    The project was first forecast to be completed by mid-2011 and to cost C$153 million, according to a March 2010 statement.

Production began in December and the project is now projected to cost C$210 million, Sean Steuart, a Toronto-based analyst at Toronto-Dominion Bank, said in a June 12 note to clients.

    That contributed to a “tight” cash position for Fortress, Steuart said.

    The company consistently missed “ambitious” targets, said Paul Quinn, a Vancouver-based analyst at Royal Bank of Canada.

    “The market will not pay up for lower costs until they begin to show up in financial performance, especially considering how Thurso’s conversion cost guidance has continued to increase over time,” Quinn said in a May 16 note to clients.

 

                        Quarterly Losses

 

    Fortress reported net losses in five of the last six quarters and analysts project a second-quarter loss excluding one-time items of 20 Canadian cents a share, the average of four estimates compiled by Bloomberg.

    The company said yesterday it sold 7 percent debentures in an offering to raise C$69 million to help complete construction of a power plant at Thurso and to fund the restart of Lebel-sur- Quevillon.

    Fortress isn’t the only company in North America now seeking to exploit the market for dissolving pulps.

    Aditya Birla Group, based in Mumbai, said last week it will buy and upgrade a mill in Terrace Bay, Ontario. Paper Excellence BV, a unit of Jakarta-based Sinar Mas Group, is investing in dissolving-pulp capacity at a mill in Prince Albert, Saskatchewan. And Johannesburg-based Sappi Ltd. is upgrading a mill in Cloquet, Minnesota.

    Global production capacity is set to rise 36 percent by

2015 to about 8.1 million metric tons, according to McClay, helping to contribute to an oversupply of viscose staple fiber, a pulp derivative used to make rayon fabric.

 

                    ‘Timing is Everything’

 

    “Right now in China the price is probably $950 a ton, down from about $1,500 a year ago and $2,650 at its peak in April 2011,” said McClay, referring to the type of dissolving pulp made by Fortress. “Timing is everything in this business.”

    A key assumption for Fortress is that increasing demand in China and India will lift cotton prices, helping to spur demand for dissolving pulp and rayon, a cotton substitute, Wasilenkoff said.

    “You really need some big issue in cotton that drives prices up so high that people start to look for alternatives, which would be rayon,” Kevin Mason, managing director of Gibsons, British Columbia-based ERA Forest Products Research, an independent forest-industry research company, said in a telephone interview last week.

    Cotton futures have plunged 23 percent this year in New York amid concern global economic activity was slowing and demand from manufacturers in China was falling.

 

                          ‘Pure Play’

 

    Wasilenkoff said Fortress may consider concentrating its operations on dissolving pulp within three years by spinning off its wallpaper and banknote-paper businesses.

    “We are moving in the direction of a pure play,”

Wasilenkoff said. “We think it would attract more investors”

and help the company to escape its “holding-company discount.”

    In the meantime, the plan is to begin production at Lebel- sur-Quevillon and show that the transforming company can generate consistent profits, Wasilenkoff said.

    “This is the year to rebuild investor confidence,” he said.

 

For Related News and Information:

Fortress Paper news: FTP CN <Equity> CN BN <GO> Stories about lumber: NI LUMBER <GO> News about forest products: NI PAP <GO> Top news about Vancouver: TOP VN <GO> Top Canada stories: TOPC <GO>

 

--Editors: Steven Frank, Simon Casey

 

To contact the reporter on this story:

Christopher Donville in Vancouver at +1-604-331-1310 or cjdonville@bloomberg.net

 

To contact the editor responsible for this story:

Simon Casey at +1-212-617-3143 or

scasey4@bloomberg.net

 

[motownsf]

Due to droughts (and record prices), will farmers move cotton producing land to produce grain?

http://in.reuters.com/article/2012/07/11/markets-grains-idINL3E8IB2DK20120711

 

This would seemingly boost cotton prices if supply shifts towards other commodities.

[Liberty]

Fortress bought a second Quebec mill last month and the CEO said he’s in talks to acquire another in North America and one in Europe. [...]

 

Wasilenkoff said Fortress may consider concentrating its operations on dissolving pulp within three years by spinning off its wallpaper and banknote-paper businesses.

    “We are moving in the direction of a pure play,”

 

Interesting stuff, thanks for posting.

[bathtime]

Thanks for the article. I do get uneasy when I read Wasilenkoff predicting the stock will see big gains. Considering that the last time it happened it didn't pan out.

[tombgrt]

I think Chad is uncomfortable with the low stock price because this limits the potential of acquiring more mills. No way he can issue new shares now to raise more cash. It's bad enough that he has to offer debt with a nice kicker attached.

I also believe that if we don't see a stock price that is a lot higher than it is today in 12 months, our thesis was simply wrong or at least way too bullish.

[Liberty]

I also dislike CEOs who talk too much about the stock price, and I don't want to sound like I'm defending Chad too much, but with these interviews it can be hard to know what exactly was said. What questions the interviewer asked? How many other things that we would have liked to read about were said but didn't make it to the printed page? It's not like Chad spends any time talking about stock price in conference calls..

 

His thought process is probably something like: We've been having delays and have lost money for a while, and the market didn't like that. But with how things are going now, next year we should earn multiple dollars per share and the market should hopefully notice, and if not, screw it, I'll look into taking the company private.

 

IMO there's a difference between management that speaks as if what truly matters to them is the stock price rather than generating long-term business value, and management that says that operational results should now be good enough for the market to notice. My interpretation is that what Chad said falls in the latter camp, and that he's thinking about the actual business and how to build it over many years when he's having insomnia, not about the what the stock is doing this quarter.

 

But still, it's not my favorite thing to read in an interview.

[keerthiprasad]

I too wish he didn't care much about the stock price, but I am sure he knows that a lot of investors are disappointed with how things have worked out recently.  I was recently wondering about why he hasn't taken the company private and I really hope it doesn't happen!

[lessthaniv]

Genuity Analyst is now out of the blackout period and provided an update.

 

_________

 

Paper and Forest Products -- Paper and Forest Products

CLOSES CONVERTIBLE DEBENTURE

FINANCING

Investment recommendation

 

We are no longer research restricted following the closing of Fortress

Paper’s convertible debenture financing. We remain positive on Fortress

Paper’s earnings potential as a result of its expanding dissolving pulp

production at Thurso and potential at LSQ. We believe H2/12 will

demonstrate a marked improvement in earnings with Thurso reaching

full operating capacity along with the banknote order reinstated at

Landqart announced in early June. While the soon to be released Q2/12

results will not demonstrate the true earnings potential of Fortress, we

believe they will mark the turning point. Given the longer than expected

turnaround at Landqart, and the delayed ramp-up at Thurso, we

understand some investors have grown weary. But, with the material

bank note order in place and Thurso ramping from the 84% level the

company announced in early June, we believe Q3 should demonstrate a

material improvement. Dissolving pulp prices have edged lower, but in

our view, remain at a level that will be profitable for Thurso at full

operating rates. We are slightly more cautious in our overall price

outlook, but remain positive in the cost structure of Fortress’ mills.

While we remain bullish in our longer term view on Fortress, we will

not be surprised for the shares to remain near current levels as current

investor demand may have been soaked up by the $69 million financing

and as investors await tangible evidence of Thurso’s profitability. We

reiterate our Buy recommendation but are lowering our target price to

C$38 (from C$42) to reflect the effect of the recent financing.

Investment highlights

• Fortress raised gross proceeds of $69 million through a 7%

convertible debenture with a conversion price of $31.00.

Valuation

Our target price of $38.00 represents 7.0x EV/2013E EBITDA and is

supported by our DCF.

Daily Letter | 2

10 July 2012

 

Convertible debenture financing

 

Fortress raised gross proceeds of C$69 million through a 7%, seven-year convertible

debenture. The debentures will have a conversion price of $31.00 and will accrue interest

at 7% per annum payable on a semi-annual basis beginning December 31, 2012. Fortress

intends to use the majority of the net proceeds from the offering to finance capital

expenditures with respect to the cogeneration project at Thurso and to finance capex at

LSQ. The remaining will be used to repay outstanding indebtedness and for working

capital and general corporate purposes.

 

Dissolving pulp

 

Current prices for staple grade dissolving pulp are reported to be in the US$1,000 per

tonne range according to CCF. Prices have edged down over the past month, not

surprisingly due to the decline in cotton prices and global macro-economic uncertainty.

Given the nature of the dissolving pulp market and the higher quality product Thurso is

expected to produce, we expect Fortress is able to command a premium to quoted prices

but until we have a couple normalized quarters it is difficult to quantify the premium

realized. However, with its cost structure expected to come in below a significant portion of

the overall market capacity, we believe some high cost manufacturers have and will

continue to scale back production, limiting further material price weakness. We believe the

Q2/12 results will provide some clarity on Thurso's price realizations, but expect that Q3

should provide even better operating metrics to evaluate Thurso.

 

Outlook and recommendation

 

Overall, we believe Q2/12 will mark the bottom for Fortress, with very promising prospects

for a material ramp in earnings as we progress through H2/12 and into 2013. Dresden, the

wallpaper segment, continues to perform well with strong operating rates and we believe

continued solid margins. We believe Landqart will report a significant loss once again in

Q2/12, but moving forward it should reach the breakeven level or be slightly EBITDA

positive following the material banknote order being reinstated. Lastly, Thurso should have

close to its first full operating quarter in Q3, which should provide some insight into

normalized revenues and costs. While we remain positive in our outlook over the long

term, we highlight the possibility for the shares to be somewhat range-bound over the next

few months. A lot of investor demand was likely satisfied by the financing and we believe

many will look for evidence that Thurso continues to ramp towards 100% and have a

better grasp of its profitability before pushing the shares materially higher. That said, we

remain bullish on the long-term earnings growth potential driven by Fortress’ growing

dissolving pulp footprint.

[PLynchJr]

I've decided to start building a small position.  I got some yesterday for $16.30 and today for $15.49.

[Liberty]

TD analyst reduced target from 26 to 20, still on HOLD.

[tombgrt]

I bought some more as well today.

 

Liberty, do you have an analyst report for TD or was it not included?

[Liberty]

I bought some more as well today.

 

Liberty, do you have an analyst report for TD or was it not included?

 

Here it is.

FTP_-_TD_-_12juillet2012.pdf

[triedtestedand]

Pop quiz ... which stock has fallen further in the past 3 months ... RIMM or FTP.

 

Yes, the answer is RIMM, but only by a few % points.

[tombgrt]

Thanks for the analyst report Liberty. Let's see if our assesment of the DP market holds up now that spot prices are reported under $1000/ton. If the thesis is correct, lower prices for a prelonged period would actually be a very good thing. I'm actually more worried about Chad taking this company private in 2013 if DP pricing stays this low, which would influence the share price too much.  :-\

 

I also saw a comment you made on Bullboards:

 

Yea, crazy price. Wouldn't it be interesting if they sold Dresden for 200m+ and did 100m of buybacks and used the rest to fund a good chunk of LSQ's conversion?

 

It would, but I think it would be quite impossible to do $100m in buybacks.  ;D Even if $50m in buybacks was an option before the price shot up to the $25-30 range, I think Chad wouldn't hesitate considering how determined he is to make FTP a pure DP play. I think I'd like a spin-off more.

[Liberty]

Yea, crazy price. Wouldn't it be interesting if they sold Dresden for 200m+ and did 100m of buybacks and used the rest to fund a good chunk of LSQ's conversion?

 

It would, but I think it would be quite impossible to do $100m in buybacks.  ;D Even if $50m in buybacks was an option before the price shot up to the $25-30 range, I think Chad wouldn't hesitate considering how determined he is to make FTP a pure DP play. I think I'd like a spin-off more.

 

I don't think it's likely or even possible because of how very little volumes can move the stock price a lot. Just an interesting thought experiment to put in perspective the current market cap :)