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

[jeffmori7]

So let's recap a bit , after all the bad execution and some bad luck, we could say that :

 

-Dresden is highly profitable, at 5x EBIDTA, it could be valued at 200M$

-Does Lanquart worth something if they can't turn around, for now, they are burning cash, would a competitor pay a fair price for the plant and the know-how?

-Thurso cogen at 5M$/quarter could be valued at 100M$, and what about the other assets? Remember that LSQ and Thurso were bought for peanuts, so even considering all the cash invested, there is not necessarily a big liquidation value there.

-Still, everything else depends of the DP price, but there is a demand for this commodity, it's hard thinking it could really go lower. But how long can it stay at those depressed prices?

-and there is the debt, right now, I dont'have the numbers.

 

So all in all, we have a business with a very profitable plant worth two times the market value, a business burning cash so far (LQ), but with an upside if high-margin technologies are adopted by some countries, we have a hihgly leveraged DP business, without much downside if for execution problem, and a good long-term upside. Cogen are probably giving more value to those business, if the governement doesn't cut them.

 

So why are the chances it goes bankrupt? What are the odd it goes lower than 100M in market cap?

[prunes]

Does anyone else remember reading an agreement stating that either Thurso or LSQ agreed not to produce NBSK going forward? Anyone have more details about that?

[OptsyEagle]

I assume this is a dumb question since I doubt we have any experts in Chinese law on this board, but do you think they could render a tariff on Fortress Paper's product alone, and leave other Canadian producers of DP without a tariff?

 

If not, it seems quite bizarre that only Fortress Paper's stock is reacting negatively to this announcement.  Someone previously showed how many of the US producers just yawned this development off.  I know Tembec's share price didn't budge and Sateri's share price in Hong Kong, laughed at the announcement as well

[Liberty]

Does anyone else remember reading an agreement stating that either Thurso or LSQ agreed not to produce NBSK going forward? Anyone have more details about that?

 

From memory, LSQ is limited to 100k tons of NBSK prior to the transition to DP. You should be able to find the details in the LSQ sale agreement.

[Liberty]

I assume this is a dumb question since I doubt we have any experts in Chinese law on this board, but do you think they could render a tariff on Fortress Paper's product alone, and leave other Canadian producers of DP without a tariff?

 

If not, it seems quite bizarre that only Fortress Paper's stock is reacting negatively to this announcement.  Someone previously showed how many of the US producers just yawned this development off.  I know Tembec's share price didn't budge and Sateri's share price in Hong Kong, laughed at the announcement as well

 

Could it be as simple as an inefficient dispersal of the news about it? Financial Post had FTP in its headline, so it showed up on Google Finance and for anyone monitoring news about FTP. But other companies were not mentioned in the news items that I saw, so it's possible that the announcement flew under the radar for a lot of shareholders.

[prunes]

Does anyone else remember reading an agreement stating that either Thurso or LSQ agreed not to produce NBSK going forward? Anyone have more details about that?

 

From memory, LSQ is limited to 100k tons of NBSK prior to the transition to DP. You should be able to find the details in the LSQ sale agreement.

That fits with my recollection. I wonder whether Thurso is similarily encumbered.

[OptsyEagle]

I assume this is a dumb question since I doubt we have any experts in Chinese law on this board, but do you think they could render a tariff on Fortress Paper's product alone, and leave other Canadian producers of DP without a tariff?

 

If not, it seems quite bizarre that only Fortress Paper's stock is reacting negatively to this announcement.  Someone previously showed how many of the US producers just yawned this development off.  I know Tembec's share price didn't budge and Sateri's share price in Hong Kong, laughed at the announcement as well

 

 

Could it be as simple as an inefficient dispersal of the news about it? Financial Post had FTP in its headline, so it showed up on Google Finance and for anyone monitoring news about FTP. But other companies were not mentioned in the news items that I saw, so it's possible that the announcement flew under the radar for a lot of shareholders.

 

You are probably right.  I am sure that if a biased group (the Chinese) wanted to find subsidies with Chinese competitors, it would be easy to do so.  Now, if the decided that the Canadians, Americans and the Brazilians were all subisdized and rendered a tariff on all of them, then the price of DP would simply rise to account for the tariff, since this group in aggregate, pretty much control the DP market.  Only if a specific company or country is singled out does a tariff have negative effects.

 

As well, a tariff on all of these producers would hurt their own textile business, much more then it would help their small cellulose pulp business, that employs very few people comparitively.  It seems to me that this has to be more political then useful to the Chinese.  Kind of a, "you approve our acquisitions of the Nexens of the world and we won't mess with your pulp business".  Kind of like having a threat, held in the bank for future use.

 

[Liberty]

You are probably right.  I am sure that if a biased group (the Chinese) wanted to find subsidies with Chinese competitors, it would be easy to do so.  Now, if the decided that the Canadians, Americans and the Brazilians were all subisdized and rendered a tariff on all of them, then the price of DP would simply rise to account for the tariff, since this group in aggregate, pretty much control the DP market.  Only if a specific company or country is singled out does a tariff have negative effects.

 

As well, a tariff on all of these producers would hurt their own textile business, much more then it would help their small cellulose pulp business, that employs very few people comparitively.  It seems to me that this has to be more political then useful to the Chinese.  Kind of a, "you approve our acquisitions of the Nexens of the world and we won't mess with your pulp business".  Kind of like having a threat, held in the bank for future use.

 

It's just guesswork at this point, but from what I know, China's definitely not a very good place to make DP because they just don't have access to enough woodchips (both in quantity and quality). They'll never compete with Canada and Brazil on that front. But they do have a huge textile industry, which substitutes more viscose when cotton gets pricier. So your reasoning that they wouldn't want to hurt their big competitive industry to protect their smaller uncompetitive industry seems to make sense, but who knows.

[Liberty]

 

-Does Lanquart worth something if they can't turn around, for now, they are burning cash, would a competitor pay a fair price for the plant and the know-how?

 

One line of thought for Landquart is, would it be worth more to someone else? Would some big player in the industry find it cheaper to get some of its paper supplies from there rather than build a new plant somewhere or expand an existing one? Would a competitor get value from buying it to reduce competition, enabling it to increase its prices overall?

 

Not sure what the answer is to these questions, but it's possible that Landquart is worth more to someone else who could integrate it into a larger operation and/or benefit from the reduced competition.

 

Not sure, but wanted to put the idea out there.

[triedtestedand]

http://www.thompsonhine.com/publications/publication2640.html

 

 

Looks like scope includes all DP players in each country ... Including those owned by chinese companies (eg neucel).  Leads me to think it may be hard to tariff a single company, no?

[OptsyEagle]

Still, the entire industry sees this as a non-event ... and then we have Fortress Paper's reaction.

 

Here is FTP compared to Tembec and Rayonier over the last 5 days.

 

http://ca.finance.yahoo.com/q/bc?t=5d&s=TMB.TO&l=on&z=l&q=l&c=FTP.TO+ryn&ql=1

[Liberty]

I looked at that too. At first I thought maybe it was partly the illiquidity of the stock, but while Rayonnier seems to trade with more volume, Tembec isn't that different... So I'm still guessing that the Financial Post article singling out FTP (a higher-profile company because of all the media coverage in the past 2-3 years) probably explains some of that difference better.

[shoeless]

I think Rayonier is mainly into specialty cellulose which is a different market and I'm not sure they have significant Chinese exposure. Tembec is mostly specialty grade too.

I think Sappi is a slightly better comparison, although their DP products are not as  exposed to China as Fortress (e.g. they have long term contracts with Lenzing):

http://ca.finance.yahoo.com/q/bc?t=5d&s=SPP&l=on&z=l&q=l&c=FTP.TO&ql=1

 

Update: i see Sappi (or South Africa) isn't mentioned in the list of companies investigated

 

[triedtestedand]

RISI - RISI VIEWPOINT: China launches anti-dumping investigation for dissolving pulp

 

BEDFORD, MA, Feb. 13, 2013 (Viewpoint) - By Rod Young, Chief Economic Advisor, RISI

 

The Chinese government announced that an anti-dumping investigation was begun on February 6, 2013, against imports of dissolving pulp from Brazil, Canada and the USA. The investigation will extend for one year and could be further extended to August 2014, depending on the initial findings. The period to be investigated is from January 1, 2012, to December 31, 2012, for anti-dumping and January 1, 2010, to December 31, 2012, for injury to the domestic industry. Seven domestic producers of dissolving pulp are the applicants and another eight producers are supporting the petition. Together, these companies accounted for nearly 80% of total Chinese production of dissolving pulp in 2012.

 

All of the major producers of dissolving pulp in Brazil, Canada and the USA have been named in the anti-dumping application, along with two US companies that are relatively minor producers of grades that are near substitutes for dissolving pulp. In addition, five big importers of dissolving pulp into China have been named in the application, all of whom are producers of viscose staple fiber.

 

The applicants allege that companies in the named countries priced their products in 2012 well under "constructed" prices that represent what could be termed "fair" pricing. These constructed prices were built up from estimated production costs plus reasonable expenses plus a profit margin. The constructed prices were then compared to CIF prices less adjustments for freight, insurance and sales expenses. Dumping margins were then calculated by taking the difference between the constructed price and the adjusted CIF price and dividing it by the CIF price. The dumping margins calculated through this approach are 49.45% for Brazil, 50.94% for Canada, and 29.86% for the USA.

 

 

Examining the data supplied by the applicants, it would appear that there are a number of concerns that could be raised by the alleged dumping companies. The first concern would be that the petitioners are using total dissolving pulp import data, which is an amalgamation of viscose and hi-alpha pulps. Pricing of viscose and hi-alpha pulps were radically different in 2012, with our data showing a differential of somewhere around $800/tonne developing by the end of the year. Each of the three countries named in the suit exported viscose and hi-alpha pulps to China in 2012, with the shares virtually impossible to ascertain, so the unit import prices are some weighted average of the prices of these two distinct grades. The higher average price from the USA was undoubtedly due to a higher share of hi-alpha pulps in the mix, which then reduced the calculated dumping margin.

 

An even bigger concern is the origin of the cost figures used by the petitioners in their calculations of constructed prices. The production costs plus reasonable expenses for all three countries are well above our estimates of delivered costs. This is especially true when looking at just variable costs, which are appropriate level of costs to be using as an indicator of pricing in such a vastly oversupplied market as viscose pulp in 2012. Adding a 17-19% margin to the cost estimates used by the petitioners inflates the constructed prices even more, particularly in the face of such an oversupplied market.

 

The three countries cited for dumping were picked because they were the largest exporters to China in 2012, accounting for just under 60% of total imports into the country. Looking at the unit import price data, it is obvious they weren't picked because their prices were lower than other exporters to China. In fact, four of the next five largest exporting countries to China had average prices that were lower than those for Brazil and Canada. The only country in the top 10 exporters that had a significantly higher price was Norway because all of the production coming from the one dissolving pulp mill in the country is hi-alpha pulp.

 

 

Finally, a quick and dirty analysis of the potential impact that the imposition of anti-dumping duties, such as those proposed by the petitioners, would have on the world dissolving pulp market. Viscose pulp prices would likely rise in the Chinese market, but probably not by anywhere near the amount that the petitioners would like to see. There is so much overcapacity in the world market that producers outside of the three named countries, including domestic suppliers, would divert output to offset much of the tonnage loss from Brazil, Canada and the USA. These producers would be higher cost than the ones in the named countries so prices would ride up the cost curve, but not by the 30-50% associated with the proposed dumping margins.

 

 

Producers from the named countries would shift their exports to other countries requiring imports of dissolving pulp. Viscose pulp prices would likely shift downward in these countries because the companies in the named countries would have to buy market share from existing suppliers. The lower prices would encourage producers outside of the named countries to accelerate their shift toward supplying China, further inhibiting the anticipated increase in Chinese viscose pulp prices.

 

Viscose staple fiber (VSF) producers in China would see their competitive position erode relative to producers in other countries who wouldn't be burdened by higher prices associated with duties on viscose pulp imports. It appears that there isn't a huge amount of excess VSF capacity outside of China, with most of the oversupply in this sector concentrated within China, but any excess would be utilized by the suddenly lower-cost suppliers in these countries. Also, they would be encouraged to add new capacity if the Chinese duties looked to be long term in nature. The logical conclusion of this set of events could be that the Chinese government would be petitioned by local VSF producers to apply anti-dumping duties in the future.

 

[triedtestedand]

So the strategy is:

 

A) target countries that export a mix of viscose and high-alpha grade pulp, and distort the statistics to presume that they are dumping all the high-alpha stuff below cost into the viscose market, but then assume that all grades of pulp are being dumped and ask to apply tariff against such.

 

 

B) target countries w highest export volumes, even though their prices for viscose grade are HIGHER, and their costs LOWER, than the rest of the exporting countries.

 

Go figure.  Who said anything was logical?

 

Can only trust the lengthy investigation period is way to buy some time, and placate local producers that they are doing something? I'm sure the local VSF producers (who are the higher value added producers here) are not keen on this.

[OptsyEagle]

and again, very curious that almost no other DP producers, from the 3 countries sited, had a negative reaction to this announcement...except Fortress Paper.

 

I think Liberty must be right.  The only company that was ever mentioned, in any article that I have seen, was Fortress Paper.

[OptsyEagle]

What do you think about Fortress Paper making an announcement that they intend to start focusing on the Specialty DP market?  The benefits would be obvious.  The last quote I saw for specialty DP was $1,700 per tonne, back in June 2012, so they would address the current issue of profitability and they would sidestep this rediculous issue around dumping, since it pertains to commodity DP only.

 

The obvious issue is what would their production numbers be if they had to produce a more specialized version of DP.  They are not perfect now with the commodity stuff.

 

Anyway, do you think this adjustment in strategy would be too early or just in time?

[jose]

This investigation business shouldn't be a big surprise to Fortress.  This kinda stuff probably happens regularly in international commodity markets when domestic producers can compete no longer, no matter how legitimate the market pricing may be.  You could blame it on China being a centralist, protectionist, blah, blah but I'm sure the US has done similar things in the past with tariffs/subsidies/etc.

 

Hopefully Fortress has been preparing to get lean and mean (ie burn down Landquart) to survive a long war with their competitors.

 

Sort of like the princess bride guy said, never get involved in a price war with China. :)

 

 

 

 

 

[jeffmori7]

Will we get a new 52-week low soon? Anyone buying more under 7$? Or you're waiting for the quaterly results?

[shoeless]

Jose, yep, it reminds me of US cotton subsidies:

http://en.wikipedia.org/wiki/Brazil%E2%80%93United_States_cotton_dispute

I've read estimates that global cotton prices would be around 10% higher were it not for these subsidies

[alertmeipp]

Will we get a new 52-week low soon? Anyone buying more under 7$? Or you're waiting for the quaterly results?

 

How can we trust their timeline anymore.

[triedtestedand]

500K+ shares traded today ... 3rd most ever, after a) March 2013 announcement of Tembec, and b) Q3/2012 results debacle ... and unlike back in November, the stock went down a measly 25 cents ... on no news.  Largest block was over 130K shares ... traded 2 minutes before the bell.  Institutional capitulation?

[no_free_lunch]

How can we trust their timeline anymore.

 

I don't mean to defend management, as I have only a sliver of a position in this one but for sake of argument aren't delays in these type of expansions common place?  The stock certainly deserves a discount but this seems overdone.  Forget DP, their wallpaper business is worth considerably more than their market cap.  If they can just get DP to break even which should happen with cogen and shut-down the bank note division, the wallpaper business should be worth $150-$250M from what I understand.

[BargainValueHunter]

Isn't FTP trading below most estimates of break-up value now?

Is this sell off way overdone or does it make sense?

[Liberty]

IMO Mr. Market is way overreacting and the best thing to do is to wait. It really sucks that everything's turning out to be late and that macro hasn't been cooperating, but lots of progress still has been made and this won't last forever.