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

[lessthaniv]

I noticed that BAL jumped 4.8% today. Here is why;

 

http://www.reuters.com/article/2012/10/17/markets-cotton-idUSL1E8LHGXJ20121017

 

Wed Oct 17, 2012 2:38pm EDT

 

 

* Price rises 4 pct to 77.86 cents, hits daily high limit

    * Cotton above 80 cents could scare away millers -traders

 

    By Barani Krishnan

    NEW YORK, Oct 17 (Reuters) - U.S. cotton futures jumped

about 4 percent for a second straight session on Wednesday,

hitting a five-month high, on worries of a near-term supply

squeeze from delivery of poor quality fiber to the market.

    Concerns that cotton from the early harvest of fields in the

southeastern United States had high levels of "micronaire", or

coarse fibers that could break during the spinning process at

textile mills, has sparked a rally since the week began.

    The most-actively traded cotton contract on ICE Futures

U.S., December, rose the daily limit high of 3 cents a

pound to 77.86 cents. It was the highest level for a front-month

contract in U.S. cotton since May 15.

    Traders said December cotton had potential to move up to

May's highs of above 80 cents a pound if the rally persisted,

cautioning that such high prices could scare away millers.

    "This is the absolutely worst thing that can happen to

demand as mills will not chase price but use more synthetics in

their fiber mix," said Sharon Johnson, cotton specialist at

Knight Futures in Atlanta, Georgia.    Cumulatively, December cotton has gained 5.52 cents, or 7.6

percent, over the last two sessions. Cotton has outperformed

other commodities in U.S. trading, topping for a second day

winners on the Thomson Reuters-Jefferies CRB index

which tracks 19 raw materials markets.

 

[jjsto]

At this point, it seems like just publishing numbers in line with expectations combined with a lack of bad news could be a catalyst.  By the end of the year (possibly quarter?) they could be over $1/share of EBITDA with all 3 segments potentially trending upwards.  How long would the stock continue to trade at less than 4xEBITDA?

[Liberty]

I noticed that BAL jumped 4.8% today. Here is why;

 

http://www.reuters.com/article/2012/10/17/markets-cotton-idUSL1E8LHGXJ20121017

 

Wed Oct 17, 2012 2:38pm EDT

 

 

* Price rises 4 pct to 77.86 cents, hits daily high limit

    * Cotton above 80 cents could scare away millers -traders

 

    By Barani Krishnan

    NEW YORK, Oct 17 (Reuters) - U.S. cotton futures jumped

about 4 percent for a second straight session on Wednesday,

hitting a five-month high, on worries of a near-term supply

squeeze from delivery of poor quality fiber to the market.

    Concerns that cotton from the early harvest of fields in the

southeastern United States had high levels of "micronaire", or

coarse fibers that could break during the spinning process at

textile mills, has sparked a rally since the week began.

    The most-actively traded cotton contract on ICE Futures

U.S., December, rose the daily limit high of 3 cents a

pound to 77.86 cents. It was the highest level for a front-month

contract in U.S. cotton since May 15.

    Traders said December cotton had potential to move up to

May's highs of above 80 cents a pound if the rally persisted,

cautioning that such high prices could scare away millers.

    "This is the absolutely worst thing that can happen to

demand as mills will not chase price but use more synthetics in

their fiber mix," said Sharon Johnson, cotton specialist at

Knight Futures in Atlanta, Georgia.    Cumulatively, December cotton has gained 5.52 cents, or 7.6

percent, over the last two sessions. Cotton has outperformed

other commodities in U.S. trading, topping for a second day

winners on the Thomson Reuters-Jefferies CRB index

which tracks 19 raw materials markets.

 

That's very interesting.

 

I wonder if the US drought caused these bad quality problems if it's unrelated.

[Liberty]

http://www.bloomberg.com/news/2012-10-17/africa-asia-may-face-food-shortages-by-2050-group-says-1-.html

 

I don't believe in the specifics of these forecasts (nobody can be very specific about the future), but I do believe we're seeing important long-term trends: that as world population keeps growing and as more people get out of poverty and eat higher on the food chain (if you eat meat instead of grain, that requires orders of magnitude more grain to be grown to feed the animals that produce the meat), that there will be huge competition for arable land (even if we can keep increasing yields).

 

Cotton acreage will be pressured, and substitutes that come from non-food sources (ie. cellulose from trees) should increase their market share because they don't have to compete with other crops in the way that cotton does.

 

So FTP is not only betting on billions of people being able to afford more clothes, but also on demand for food-producing arable land increasing, leading to higher food prices and thus more competition for cotton, making it even harder for it to keep up with growing demand.

 

It's part of my thesis, anyway... We'll see how it plays out  :)

[FrankArabia]

this stock was once a "value" stock, now its become a growth stock with people forecasting growth in its key areas rather than having a margin of safety on what is supposedly hidden assets. 

[lessthaniv]

this stock was once a "value" stock, now its become a growth stock with people forecasting growth in its key areas rather than having a margin of safety on what is supposedly hidden assets.

 

That's a silly comment.  :(

[Liberty]

this stock was once a "value" stock, now its become a growth stock with people forecasting growth in its key areas rather than having a margin of safety on what is supposedly hidden assets.

 

That's a silly comment.  :(

 

+1

[FFHWatcher]

http://www.bloomberg.com/news/2012-10-17/africa-asia-may-face-food-shortages-by-2050-group-says-1-.html

 

I don't believe in the specifics of these forecasts (nobody can be very specific about the future), but I do believe we're seeing important long-term trends: that as world population keeps growing and as more people get out of poverty and eat higher on the food chain (if you eat meat instead of grain, that requires orders of magnitude more grain to be grown to feed the animals that produce the meat), that there will be huge competition for arable land (even if we can keep increasing yields).

 

Cotton acreage will be pressured, and substitutes that come from non-food sources (ie. cellulose from trees) should increase their market share because they don't have to compete with other crops in the way that cotton does.

 

So FTP is not only betting on billions of people being able to afford more clothes, but also on demand for food-producing arable land increasing, leading to higher food prices and thus more competition for cotton, making it even harder for it to keep up with growing demand.

 

It's part of my thesis, anyway... We'll see how it plays out  :)

 

Is it your thesis or do you buy into Chad's thesis?

[Liberty]

Is it your thesis or do you buy into Chad's thesis?

 

As far as I know Chad has never mentioned the food aspect explicitly.

[Liberty]

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Oct. 18, 2012) - Fortress Paper Ltd. (TSX:FTP) ("Fortress Paper" or the "Company") is pleased to announce today the appointment of Joe Nemeth to the Board of Directors of the Company.

 

Mr. Nemeth has over 25 years of experience in the pulp and paper industry. Most recently, Mr. Nemeth held the position of President and Chief Executive Officer of Canfor Pulp Holding Inc., the general partner of Canfor Pulp Limited Partnership, having previously served as Vice-President, Sales and Marketing. Prior to joining Canfor, Mr. Nemeth worked in the Green Power Business as President and Chief Executive Officer of Greenbelt Renewable Energy. Prior to working at Greenbelt, Mr. Nemeth spent 14 years working in various positions at Fletcher Challenge Canada (now Catalyst Paper Corporation), with the two most recent positions being Vice-President, Sales and Marketing and Production Director of the Elk Falls Paper Division.

 

Mr. Nemeth holds a Master of Business Administration degree from the University of Western Ontario and a Bachelor of Forestry degree from the University of British Columbia.

 

The Company also announces that Pierre Monahan will retire from the Board of Directors of the Company effective December 31, 2012. In the interim, Mr. Monahan will continue to serve as a member of the Compensation, Governance and Capital Projects Steering Committees. Mr. Nemeth has also been appointed to such Committees in order to facilitate the transition following Mr. Monahan's departure. Mr. Nemeth will act as Chair of the Capital Projects Steering Committee.

 

Chad Wasilenkoff, Chief Executive Officer of Fortress Paper commented: "We are very pleased to have someone of Joe Nemeth's caliber and extensive experience joining our Board. I am confident his expertise will provide valuable guidance as we advance our business plans. On behalf of the Board, I would also like to acknowledge the significant contribution that Mr. Monahan has made to Fortress Paper over the past two years, and thank him for his leadership as we entered into the specialty cellulose sector."

[tombgrt]

http://www.bloomberg.com/news/2012-10-17/africa-asia-may-face-food-shortages-by-2050-group-says-1-.html

 

I don't believe in the specifics of these forecasts (nobody can be very specific about the future), but I do believe we're seeing important long-term trends: that as world population keeps growing and as more people get out of poverty and eat higher on the food chain (if you eat meat instead of grain, that requires orders of magnitude more grain to be grown to feed the animals that produce the meat), that there will be huge competition for arable land (even if we can keep increasing yields).

 

Cotton acreage will be pressured, and substitutes that come from non-food sources (ie. cellulose from trees) should increase their market share because they don't have to compete with other crops in the way that cotton does.

 

So FTP is not only betting on billions of people being able to afford more clothes, but also on demand for food-producing arable land increasing, leading to higher food prices and thus more competition for cotton, making it even harder for it to keep up with growing demand.

 

It's part of my thesis, anyway... We'll see how it plays out  :)

 

Jup. We should see increased demand for cotton (or alternatives) AND less supply (solely of cotton I mean) because demand for grains will rise (in general and because of increased meat consumption), shrinking arable land, water scarcities, possible change in attitude toward pesticides etc (making alternatives for cotton more likeable), ...

Some of these things actually have a huge possible impact. For ex: One third of the world's arable land is already used to grow crops to feed animals. If the rest of the world adopts our Western eating habits (China is well on it's way of course), ...

 

That is not taking into account the possible damage the climate change could cause (Grantham suggests that it is very unlikely that the droughts of the last few years are a historical coincidence). Also, taking into account human nature, it is not unlikely that farmers actually increase aggressive non-organic/chemical fertilizer use in response to higher prices, even when this causes an even higher loss of arable land.

 

We are, luckily, also seeing some good develops like perennial wheat and no-till farming. However, even when these things really take off, it is unlikely that they will prevent future disasters and general shortages.

 

This is part of my personal thesis but in no way has to play out for me to win imo, just a big bonus in case I still hold some shares in 2020 and beyond.

 

 

FrankArabia, this has always been a growth story, read the topic! One doesn't exclude the other. What 'hidden assets' are you talking about? Nevermind, no need to reply.  ;)

[jjsto]

not pretty

 

http://www.fortresspaper.com/images/pdfs/Q3%20MDA%20and%20Financial%20Statements.pdf

 

[jose]

"Given existing market conditions and in order to maintain good  customer relations, a significant portion of our sales orders for the fourth quarter is expected to be below the floor prices set forth in our supply agreements with our three major Chinese purchasers."

[triedtestedand]

Ugly indeed.  Hard to decipher what are one-time/timing issues.  Only silver linings I see are:

 

a) DP production ramp up

 

30.5K tons of DP were sold, but 4.5K tons kept in inventory, and 5.0K tons (p7 of financial statements) lost to September boiler outage (4 days) combined with extended planned maintenance (7 days) ... so if factored those back in, that would mean ~40K tons, or 80% utilization this quarter (vs 70% last quarter).

 

b) DP revenue

 

If the 4.5K tons had been sold (say at $900 net of transport) ... that would have added $4M to EBITDA

If the maintenance of $3.5M had not been in the quarter ... that would have added $3.5M to EBITDA

 

If those assumptions are correct ... EBITDA would have gone from -$5.6 to +$1.9M (vs -$700K last quarter)

 

 

c) Dresden

 

Q3 impacted by 10 day shutdown ... but business remains strong, and with greater capacity (60K vs 56K) should provide even better contributions going forward.

 

d) Co-Gen

 

On track for January startup ... will contribute $5M/quarter

 

 

 

But I digress ...

 

The star remains Dresden.

The dog remains Landqart (burdened further by $1.3M this quarter w dispute resolution accrual).  It is an albatross.

Near-term w Thurso suspect (No October utilization #'s given, so need visibility on both utilization and price, especially with contract floors being breached, to understand what their true cost-of-production is).

 

 

On cash side, they do have $84M in cash, with following detail:

      a) will spend ~$35M to complete Thurso

      b) will get $4M to tap out their $102M govt Thurso loan

      c) have not tapped any of the $132M govt loan for LSQ (which is slated to cost $220M)

 

 

[alertmeipp]

this reminds me of FBK...hopefully, this turnaround faster than FBK.

 

Chad got some serious explanation to do Monday.

 

No wonder the share price has been so depressing.

 

His thesis on DP isn't working so far and he loads up on debt to do another one.

[triedtestedand]

I hear you Alertmeipp.

 

This could turn into being worth more dead-than-alive ... $98M of the net $173M debt is non-recourse, so only $75M net is liable at the holdco level, and it represents portion of the convertible debs,  earliest of which is due is Dec/2016.   

 

Sell Dresden for 4.5x anticipated 2013 EBITDA (say $45M/yr) yields ~$200M ... and you're left with $125M (or $8/share in cash) along with Thurso (which you start to try and milk ... target $30M EBITDA in 2013?), Landqart (which you turn around quickly, liquidate, or firesale), and LSQ (which you look to push out?).  Or if feds give greenlight to CNOOC to buy Nexen, turnaround and offer Thurso and LSQ to Chinese mills for vertical integration.

 

Chad certainly knows how to buy things cheap, but have yet to see him sell high (excepting Landqart's hydro assets), and the words operational excellence (excepting Dresden) have obviously not been ringing across the co.

 

[OptsyEagle]

Wow.  Just a little worse then expected.  The main negative takeaways from this were the reduced prices they will receive from suppliers, although we do not know how much that will actually be.  I suppose one needs to forget about contracts and just use the spot price, since the contract floors do not seem worth the paper they are printed on.  My estimate for current DP prices is about $900 per tonne, as we speak.

 

The next negative is the 80% of capacity production currently at Thurso.  One needs to have some wishful thinking here to say it was 80%.  It was more then 70% so I would say they are producing at 75% to end the argument.  I am sure they will improve on this but will they get to 100%.  I am starting to feel they won't and at say 180,000 tonnes and $900 DP prices, how much money will they make on it, and will the $900 price hold?  The margins could be quite slim in this reality.

 

The last negative is Landqart.  Although we were led to believe some positive progress was being made, the quarter ended up worse.  Would like to hear the story here, but I will admit that I am getting a little tired of it.  I sure wish an employee would carelessly drop a cigarette butt into a nice big batch of loose paper and then everyone take an extended lunch break.

 

Anyway, Monday the stock market will probably make the accounting adjustment for these developments pretty quickly.  This is not a liquid stock so anyone trying to get out will have to be very motivated, in my opinion.

 

On a last note.  Why does FTP always report fully diluted share count either the same or close to the outstanding share count.  Do they not know they have CV debentures up the wasso and that their fully diluted share count is actually around 19.7 million shares.  Since they do this every quarter, including their presentations, I have to assume they do not understand "fully diluted shares", or I don't.  What am I missing here?

 

One last thing.  Peter Vinall should be charged with insider trading.  You cannot tell me that on September 28 he didn't know about this material information when he sold 10,000 shares.  I hope, at least, Chad stops giving him more shares.  He doesn't deserve any.

[alertmeipp]

Stock-based compensation expense was $2.0 million during the period compared to $0.5 million in the second quarter of

2012. The prior year comparative period stock-based compensation was $0.5 million. The increase in stock-based

compensation is a result of executive and management awards made under the Company's long term incentive plan and

awarded primarily in connection with the successful completion of the purchase of the Fortress Global Cellulose mill.

[alertmeipp]

Not expert on this, but here my take is:

 

EV = 375millions (173M net deb + 200M market cap)

 

Say it takes them 2 more Qs to reach full capacity

 

@ 1Q 2013, EBITDA

 

 

-The Specialty Papers Segment = 9m

-Dissolving Pulp Segment = -5.6million + 3.5M (maintenance cost) + 4M ( tonne@inventory) + 4M (tonne not produced due to maintenance work)  + 9M (10k tonnes @ full capacity, assume linear no efficient gain) = 14.9m (also assuming average sell price will be similar to this Q)

-Security Paper Products Segment =  -5m

-Power gen = 5 millions

 

 

23.9 millions x 4 x 75% Chad over-promise discount = 71m EBITDA (i.e. 5x EV)

 

For 13 bucks, it's not cheap but definitely not expensive neither if we assume DP pricing is in bottom of the cycle and the potential the new DP mill has.

 

I am ready for corrections and feedback.

[triedtestedand]

Alertmeipp:

 

 

a) Thurso ... NB: extra DP production revenue does not go straight to EBITDA (targeted cost w shipping is ~$725/ton) ... Modelling earlier in the year, I estimated they would get $80M/yr EBITDA at Thurso with an average $1125/ton sell price (including shipping ... $1025 without) and at full production, and including $20M/yr COGEN. 

 

So for every $100/ton less, take out $20M/yr EBITDA.    If they can actually ramp to 100%, then at ~$900/ton I would estimate $30M/yr next year if prices stay low, and $50M/yr or more if they bounce back over $1000/ton

 

b) Dresden ... Q3 is always their low quarter, owing to maintenance downtime.  Q2 is probably more representative ... EBITDA there was $11.5M, so unless EURO/CDN ratio works against them further, I might use that (and leave some upside) ... so $46M/yr

 

c) Landqart ... just get rid of it ... otherwise -$24M/yr

 

d) corporate ... -$6M/yr

 

e) LSQ ... presume anything there is capitalized?

 

That gives them $50M to $70M ... but I'll be pressing for a catalyst ... they need to focus on fewer moving parts.

 

[17thstcapital]

Too many if's and excuses quarter after quarter with this company.  This management team has been awful at executing on the assets they currently own and yet they continue to have a growth mentality.

 

Given big cash burn here (looks like they burned through $17mm this Q) and the already high leverage, I think investors should start looking at restructuring scenarios.  Are there bank covenants here that forces them into bankruptcy? Companies with negative EBITDA usually trip covenants. How much of the subsidiary level debt is guaranteed by the parent? In other words, can you walk away from unprofitable plants without the parent going down with them? My sense is that it won't be easy or else they would already be walking from Landqart.

 

I cringe when I hear talk about selling Dresden - why would anyone do this when what's left is bleeding a fortune? Only a gambling fool would sell the only asset with any value today and bet the proceeds to invest in assets that they've struggled to turn around. It may very well be that in order to maximize the equity value is for the company to restructure around Dresden and let the other assets go. But that also won't be easy now given that any potential buyers likely will go for blood. 

 

Monday trading may not be fun.....

[enoch01]

 

I cringe when I hear talk about selling Dresden - why would anyone do this when what's left is bleeding a fortune? Only a gambling fool would sell the only asset with any value today and bet the proceeds to invest in assets that they've struggled to turn around. It may very well be that in order to maximize the equity value is for the company to restructure around Dresden and let the other assets go. But that also won't be easy now given that any potential buyers likely will go for blood. 

 

Monday trading may not be fun.....

 

Might they go for an equity raise to give themselves breathing room, instead of allowing for a restructuring?  That may be the time to start looking at this.

[17thstcapital]

 

I cringe when I hear talk about selling Dresden - why would anyone do this when what's left is bleeding a fortune? Only a gambling fool would sell the only asset with any value today and bet the proceeds to invest in assets that they've struggled to turn around. It may very well be that in order to maximize the equity value is for the company to restructure around Dresden and let the other assets go. But that also won't be easy now given that any potential buyers likely will go for blood. 

 

Monday trading may not be fun.....

 

Might they go for an equity raise to give themselves breathing room, instead of allowing for a restructuring?  That may be the time to start looking at this.

 

I wouldn't be surprised if they raised more equity. But it might be very expensive unfortunately.

[shoeless]

Since the DP contract low prices aren't holding, next year could be ugly wrt DP prices given the large amount of DP capacity coming online and the chance that "China slowdown" gets worse.

Just thought I'd throw this out there, things have been too upbeat in the thread lately.

Does anyone have any idea how much DP capacity actually ends up being used domestically in China vs. used by Chinese textile manufacturers who then export?

 

[alertmeipp]

I think it's too early to discuss equity raise. I think this maybe a kitchen sink quarter.