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

[lessthaniv]

Fortress can also better weather price volatility because – unlike other producers – it has a reliable supply of low-cost hardwood chips and a less-expensive chemical process than those used by many rivals, he adds.

 

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/for-fortress-paper-pulp-for-rayon-plan-still-unfolding/article5276285/

 

Put the last 3 posts together.

 

 

[Edward]

Isn't there is a floor to the amount Thurso might lose due to simply halting any production as long as DP prices are below net variable cost?

 

[lessthaniv]

Here is what I see, for what it’s worth;

 

Note: I'm using a chart provided by Fortress Paper in a past presentation. The information provided in this chart has changed somewhat and I believe Fortress has removed it from their website. Having said that, I believe the information contained within is still very relevant although overall cash costs will likely be higher than what’s presented here.

 

In my mind this is all about oil, cotton and maintaining status as a low cost producer of dissolving pulp.

Currently Viscose Fibers represent about 4% of the world’s annual fibre consumption in the textile industry. A pittance.

 

According to the Poyry report I’ve cited, 59% of current fibre consumption in the textile industry comes from synthetic fibres which are based on oil. Not only is this an unfriendly environmental process, it’s also negatively affected by the rising price of oil and I don’t expect that to change any time soon.

 

For every 1% market share that Viscose steals from Synthetics, dissolving pulp demand rises 11%.

 

According to the Poyry report I’ve cited, 35% of the current fibre consumption in the textile industry comes from cotton fibres. Currently, cotton is oversupplied to the market causing the spot price to be low. Longer term, there are many reasons to believe that cotton supply is under pressure which we’ve all discussed many times over in this chain.  (Environment issues, water usage, farmers replanting food crops, inconsistent supply to end users)

 

For every 1% market share that Viscose steals from Cotton, dissolving pulp demand rises 6%.

 

Together, synthetics and cotton represent 94% of the fibers used in today’s textile markets. Substitution of viscose fibers for synthetic fibers and cotton fibers will be the driver for dissolving pulp prices long term.

 

The market place has seemingly grasped this. On the short term many new entrants have tried to enter the market for dissolving pulp and existing producers have reacted by increasing production to protect their market share. In 2011 world dissolving pulp capacity increased 20% in one year just as cotton supplies were peaking forcing cotton and hence dissolving pulp prices down - a perfect storm. Post Q1 2012, capacity increases have finally slowed down.

 

It’s important to understand the cost structure of these capacity increases and I’ll attempt to provide some clarity by utilizing a past chart from Fortress. (Please see my note above)

 

Fortress’s estimate of 2013 capacity was approximately 7million tonnes/year.  Notice that with dissolving pulp prices currently hovering around $950/MT, approximately 1/3rd of the world’s producers would be under water. Profitable supply is more likely hovering around 4-4.5 million tonnes.

 

There are 3 possibilities I’m considering moving forward.

 

Dissolving pulp prices could continue to fall. Post cogen, Fortress should come in with cash costs around $750. Based on the chart provided, only 2.75 million tonnes of dissolving pulp can be produced profitably at this level should dissolving pulp prices fall to Fortress’s cash cost This removes way to much supply for a commodity whose long term demand side outlook remains very positive. I view this as a low probability event.

 

Dissolving pulp prices could remain flat. As suggested above, a prolong price level of $950 would put many players out of business. It’s possible that over time any new low cost capacity increases could simply supplant the high cost producer’s contributions keeping overall supply levels neutral as the shift takes place.  In such a scenario, the low cost producers should remain profitable but with lower margins.

 

Dissolving pulp prices could raise back up to the marginal producers cash costs should demand increase enough based the substitution for synthetic fibers and cotton fiber.

 

It’s with this perspective that I understand Chad’s apparent desire to continue down the road with LSQ. He expects LSQ to be a low cost producer. Lower than Thurso as I recall and if memory serves I believe it was represents in the chart below by the gray bar to the left of Thurso (please correct me if I’m wrong). If they can bring in their cost on schedule it should keep them in a safe position regardless of the ebbs and flows of dissolving pulp prices over the short term.

 

Fortress itself is highly leveraged to dissolving pulp prices. It they can weather the perfect storm that’s occurred it’s got the potential for significant upside.

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/Fortress-1_zps839b7a13.jpg

[shoeless]

lessthaniv, the long term DP thesis sounds good but its quite wide-ranging and forming a solid opinion on it is not easy. There is also a timing aspect which is hard to get right, and the clock is ticking.

Even if true, in the long term it seems mills in South America/Africa are better positioned to capitalize on these trends than Canadian ones.

 

About the cost curve slide, anyone know how much of the Chinese cotton-linter capacity is actually Rayon grade?

 

[OptsyEagle]

If I recall, LSQ has a lumber mill that use to work alongside their pulp production.  I haven't been following the situation but it seems like lumber prices are strengthening and I was wondering if anyone has any thoughts on Fortress Paper reviving the lumber mill.

[Liberty]

There's an interview with Chad here:

 

http://www.institutionalinvestor.com/Article/3133440/Fortress-Paper-CEO-Chad-Wasilenkoffs-Contrarian-Bet.html

 

Looks like the end of tax loss selling is helping relieve some downward pressure. Stock was up 10% last I checked.

[roundball100]

There's an interview with Chad here:

 

http://www.institutionalinvestor.com/Article/3133440/Fortress-Paper-CEO-Chad-Wasilenkoffs-Contrarian-Bet.html

 

Looks like the end of tax loss selling is helping relieve some downward pressure. Stock was up 10% last I checked.

The interview with Chad does sound promising but, at some point we do need to seem some relief from all the bad luck: high Swiss currency driving up costs at that factory, lightning strike at Quebec plant, low DP prices, ...  Not sure whether it's better to send the guy a sympathy card, or to double down.

[jose]

Where is the long term competitive advantage for FTP?

 

I know Chad sees FTP as a low cost producer presumably due to local tree supply, co-gen, and the sweet gov deals to convert the mills. But these all seem reproducible by competitors in the near future, if not already.

 

Once we get past this trough in the commodity cycle and the current high cost producers (ie China) are gone, whats going to keep FTP from becoming just an average cost producer in the long term.  I haven't heard of anything special, like a proprietary DP technology, that really differentiates them.

 

I guess the best to hope for is that in the next year or two they quickly build the operational excellence and customer relationships needed to thrive long term.

 

Disclosure: I am already long FTP a good bit; might buy more.

[Liberty]

A move into specialty DP and biorefining can provide higher barriers to entry over time, though nothing like an un-breachable moat. FTP's two mills and wood supply seem well suited to produce very high alpha-DP, which helps.

 

FTP's model probably isn't that easy to reproduce, though. Chad mentioned that they looking basically at all potential mills that could be converted, and ended up with only about 6 that might be suitable at that time. They've got 2, and chances are that some of the other might have turned out to have other fatal flaws or that deals couldn't be made for whatever reason. So other DP capacity can be built or converted, but probably not with the kind of conditions that FTP got for Thurso and LSQ.

 

IMO, FTP's story is more about paying less than what assets are worth once operating, riding a secular wave for DP/cotton, and then trusting that capital will be well allocated into other undervalued assets in the future, or that existing assets will be sold when overvalued.  More a jockey stock.

 

As I said multiple times, so far things certainly haven't been going as well as was hoped, but I still believe there's a lot more value in the company than what the market currently sees.

[OptsyEagle]

The other competitive advantage with Fortress Paper is having a CEO who owns 15% of the stock, where that stock make up the lion's share of his personal current and future wealth.  Now while that in itself, doesn't ensure a profit, it certainly put's this company miles ahead of the other commodity companies where their management has very small stakes in them, most of which are options. 

 

Management tend to make more shareholder friendly decisions when they participate in both the upside and the downside, as opposed to options holders who only have upside potential, given to them for free.

[rogermunibond]

Why aren't people talking about Grasim?  I think they are a bigger market share owner and have lower cost production than Fortress. They own the AV Group plants in Canada.

[Guest Quebec]

It seems that polymer bank notes are becoming a must to control counterfeiting. Here is an old but interesting article on the matter.

 

http://www.theglobeandmail.com/report-on-business/economy/currencies/funny-money-how-counterfeiting-led-to-a-major-overhaul-of-canadas-money/article554632/?page=all

 

With Durasafe and the recent expansion, our Fortress Landqart facility is ready for this opportunity.

[Liberty]

Up to 9.25 on no news that I can find. Seems like tax loss selling was indeed a big factor last year.

 

Those who bought at 7 are already up over 30%. Wish that was the case for me...  :-[

[triedtestedand]

Could well be ebb of tax loss selling.

 

Could also a bit of short covering (Anyone know the latest #?  I think it went from 500K to 800K after the Q3 results.), especially given relatively low volumes since mid-November onwards to cover against, and that Invesco has soaked up an additional (at least) 200K shares since then.  {As of Nov30, they've raised their total to >2.6M ... they are again the largest shareholder (more than Chad).}

 

Could also be that VSF prices have bounced off the bottom ... they were as low as ~13500yuan/ton, but that has bounced back to over 14K yuan/ton since New Year's, on strong volume (info courtesy of www.ccfei.net) ... and DP prices may have similarly started to bounce off the bottom (which I think was around $850/ton).

 

Who knows ... maybe they've also actually managed to run Thurso at >90% for the past 3 months ... and that the cogen is actually going to come online in late January as they have indicated it will.  Or that Dresden is running well, and that Euro has bounced off it's bottom.  Or, lest we dream, Landqart is actually stemming it's cash hemorrage by stuffing it's wounds with super absorbant Durasfe banknotes.  It's not like there's been a lot of upside priced into the stock of late ...

 

 

[Liberty]

Good points. Whatever it is, it is having an effect. Up another 11.35% right now...

[rjstc]

3 X normal volume

[Liberty]

3 X normal volume

 

Based on Google Finance's recent average, we'll probably end the day at 10X normal volume.

 

This stuff always makes me wonder if some inside info has leaked. F.ex., did they just fire up the cogen to test it out and everything worked perfectly?

 

Maybe not, or maybe there's some analyst report that came out with a higher target or whatever.. Not that it matters that much in the long term, but that price action sure is intriguing.

[triedtestedand]

At ~$3.25 or so today, Tembec is up 45% from it's 6mo trading range of $2.25 in past 3 weeks ... and up >80% from lows of $1.80ish from mid-November ... on no real news themselves in the intervening timeframe ... except that they updated their own shareholder rights plan.  So I guess my point is -> who really knows why ...  ;)

 

That said, I'm still guessing it's as much shorts covering what I think may have become a fairly large short position (800K) relative to the float (14.5M - Chad's 2.5M - Investco's 2.6M), and with daily average volumes fairly low (<50K shares per day), and with realization by shorts  that it could be a challenge for the share to fall much further than it has, especially as longer-term holders who still believe the story soak up shares and double down?

 

And as relates any material events ... if there is a press release coming from FTP, my guess it would be announce go-live of Thurso co-gen, and if utilization rate over intervening 3mo has (finally) been reasonable, they would note such at that time.  If I was Chad, having been burned several times already with the line "we've been running over 90% for the past few weeks", FTP will want to get a long run rate in before doing any more cheerleading.

[lessthaniv]

I'm thinking tax loss selling and window dressing.

 

The low of the stock was $6.85 which was attained in the immediate days following the q3 numbers on big volume. All of the damage was essentially done on the 5th, 6th and 7th of November. Three tradings days whereby 1.64M shares traded hands.

 

Since then the stock has stabilized and now that we've moved into the new calendar year those window dressers can repurchase the stock artfully having harvested the tax loss and avoiding showing the holding in their annual reports.

 

 

 

[lessthaniv]

http://www.dailyfinance.com/2012/12/26/building-a-better-bill-to-curb-counterfeiting-paper-goes-high/

 

I'd love to see a comparison between the incremental costs for Durasafe vs. The cost of counterfeiting for a given country.

 

Also found this interesting.

 

http://washpost.bloomberg.com/Story?docId=1376-MEUVH26JTSF201-2VEQC9TSK1MS78S9JS7P1RR4BI

 

 

[rjstc]

Wonder if there is some link to their just doing the shareholder rights plan?

[BargainValueHunter]

3 X normal volume

 

Based on Google Finance's recent average, we'll probably end the day at 10X normal volume.

 

This stuff always makes me wonder if some inside info has leaked. F.ex., did they just fire up the cogen to test it out and everything worked perfectly?

 

Maybe not, or maybe there's some analyst report that came out with a higher target or whatever.. Not that it matters that much in the long term, but that price action sure is intriguing.

 

Average volume..1,530.00

Today's volume...161,713.00

 

Holy Mackerel!

[A Dhandho Investor]

That said, I'm still guessing it's as much shorts covering what I think may have become a fairly large short position (800K) relative to the float (14.5M - Chad's 2.5M - Investco's 2.6M), and with daily average volumes fairly low (<50K shares per day), and with realization by shorts  that it could be a challenge for the share to fall much further than it has, especially as longer-term holders who still believe the story soak up shares and double down?

 

According to Bloomberg, there are still 940K shares sold short at this moment. Seems however strange to me, as I also believe part of the recent rally is caused by covering shorts.

[Liberty]

Up almost 13% again right now. Interesting how the upward pressure is so evenly distributed each day rather than having a huge spike and then a plateau at the new equilibrium.

 

Oh well, the ways of Mr. Market are impenetrable. I'm not complaining.

 

edit: It's not even noon and we're already at 177k shares traded. Crazy volumes!

[Edward]

The price action of the stock for the last few months has been ridiculous. Ha!