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

[doc75]

PR should be released soon, but Q4/Annual reports are already posted on Sedar.

 

Q4 was ugly.  Operating EBITDA loss of 5.7mm for Q4, with a loss of 4.4mm from the dissolving pulp segment, *after* adjusting for 1.3mm in extra costs associated with the the aux system failure.  Production of DP at 27500 ADMT, down significantly (no surprise).

 

Unrestricted cash at 40.9mm at Dec 31 plus 7.8mm restricted cash.  The MD&A reminds us that the 2019 debentures can be redeemed with common shares, if necessary.  No mention of China duties.

 

 

[Cardboard]

Not that bad as Q4 was largely expected to be poor:

 

Current price of $930 U.S./ton for DP is pretty good for the low season, plant problems behind them, large production expansion which will increase revenue and reduce cost, WTO ruling to matter soon on pricing and a high value, low cost xylitol plant coming in 2020 with Mondelez in the picture.

 

Looks promising IMO.

 

Cardboard

[triedtestedand]

Q4/17 = kitchen sink quarter

Q1/18 = mediocre, but finishing off well

 

Tidbits from call and questions to mgmt:

 

- producing now at "high 400's per day" ... if assume 480/day then that would be >40K/ADMT in a quarter

    - if so, then costs/ADMT will go below $900CDN/ADMT

 

- MOFCOM is mostly mitigated (now <$20USD/ADMT mitigation), so almost a non-issue/dependency on Chinese/WTO elements

 

- deferral of 2018 Investissement Quebec principal and interest helps a lot w cash

 

- w CDN$ @ $.77USD and DP @ $930USD/ADMT and above and reliable ops and non-winter type impacts on costs ... dare we see two really solid quarters (Q2/18 & Q3/18) in a row ... and impact of 5th digester providing reinforcement?

[KJP]

Do you trust this crew with the xylitol plan?

[Cardboard]

"Do you trust this crew with the xylitol plan?"

 

Yes and I hope that they can accelerate.

 

Chad is a project/venture type of guy and quite capable to attract capital. Licensing the technology is also major upside as discussed on the call and having a good salesman, contract guy helps.

 

On capital, most of the funding for the demonstration plant will come from governments which is a big plus. They have had hiccups at Thurso but, I think it is now all coming together.

 

There could be delays and issues since this is development but, capital at risk is very low. Mondelez also seem to have been quite involved in this technology and use a lot of Xylitol which I really like. IMO, it is pretty much all upside since the plant will keep doing its thing and while the Xylitol productivity is yet to be seen, the fact that it is burned material today, any recovery only helps.

 

I was afraid for a while that he would venture into some risky/non-related business. However, this is very positive IMO.

 

Cardboard

[doc75]

I was afraid for a while that he would venture into some risky/non-related business. However, this is very positive IMO.

 

Agreed - I was also fearful of a far-flung venture. 

 

I don't trust management to get things done smoothly, but I really the idea and (as Cardboard says) it appears Chad has done a good job leveraging government/outside money.  The market is rightly skeptical and will remain so unless/until Thurso ops show some consistent earnings.

 

I think Q1 results will be lacklustre but fingers crossed for a Q2 without further issues.

 

 

 

 

 

 

[doc75]

Q1 numbers are out.  Minor improvement in cost, but slow progress.  DP prices are doing quite well and the DP segment managed barely positive EBITDA. 

 

I just listened to the call.  The most interesting takeaway for me was a brief comment on the Chinese anti-dumping duty.  China lost the WTO case and was supposed to remove the duties by end of April, but has since said they have no intention of doing so. 

[Cardboard]

"China lost the WTO case and was supposed to remove the duties by end of April, but has since said they have no intention of doing so."

 

Yes, but in turn, this opens the door to compensation for damage from Canada's trade department as Chad mentioned. This could really come handy to help with the debenture maturity in Dec 2019.

 

They have also cut their costs and increased capacity quite a bit in Q1 with the 5th digester. The tone was pretty upbeat for Q2 although, the CFO played it down indicating that cash flow would remain neutral for the rest of the year.

 

The elephant in the room IMO is this tightening in everything related to pulp and the oil price going up really pushing up polyester.

 

Some bull market in this is highly probable IMO and you are talking very few options for investors to go into. Just have a look at Canfor Pulp to give you a hint of what could happen:

 

https://www.stockwatch.com/Quote/Detail.aspx?symbol=CFX&region=C

 

However for FGE, the impact would be much more dramatic considering leverage operationally and its capital structure.

 

Bull markets in paper, wood, happen about once every 10 years. Some made a lot of money with lumber producers a few years ago and now it seems that it is pulp's turn.

 

Cardboard

[triedtestedand]

Very simply:

 

a) Prove to market they can keep costs below $900/ADMT for two quarters in a row (Q2 and Q3) to prove they can achieve reliable operations, while also combining favourable summer seasonal conditions AND no planned shutdown.  Midway thru Q2, they are 1/4 of the way through (although impacted by ice storm in Ottawa in mid-April).

 

b) Figure out the 2019 debs ... which they have 19mo to achieve.  The comment that cash balances would be neutral thru end of 2018 was a bit worrying, but I wonder if the ($5M of) cash/working capital commitments for S2G will offset cash creation thru the rest of this year, and what else there is.  Further, their accounts payables are coming off of highs (from $50M to $46M quarter over quarter), so it may be better to look at working capital vs strictly cash+restricted cash for visibility into progress.

 

c) Avoid any other new curses.

 

 

[Cardboard]

My view is that issues are behind them and the call confirmed that relative to operations: capacity will keep moving up and costs down. 5th digester was implemented on time and on budget and no mention of any hiccups afterwards. Capex forward needs are also minimal with only $3-5 million for regular October maintenance shutdown.

 

Yes I agree that demonstrating stable, lower cost, higher capacity operation is needed. However, no one gets rich in a commodity business via cost savings. That is why pricing of DP is now the key factor and pretty much everything is now going up with Kraft pulp and oil being the largest drivers IMO: reduces DP production and increases prices of polyester respectively.

 

Moreover, unlike oil, gold, copper iron ore and other commodity producers, they do not have hedges nor have entered into long term sales contracts. So any improvement in pricing will flow immediately to the bottom line.

 

The market cap is essentially nothing or $46 million. There is no value for improved operations nor for their end market which has and is improving. A 5 bagger in this from today's price is not crazy at all.

 

Cardboard

[lessthaniv]

With Rayon being a substitute for Cotton a key driver is the price of cotton. High cotton prices drive substitution and blending and low cotton prices the opposite. The Chinese state inventories are still an overhang on world markets.

 

http://www.blackseagrain.net/novosti/cotton-prices-to-tumble-in-2018-19-despite-surge-in-chinese-imports

 

 

[Cardboard]

Have you read your article?

 

Less inventory, less production, drought... This is all bullish and the price of cotton is going up:

 

http://markets.businessinsider.com/commodities/cotton-price

 

Cardboard

[lessthaniv]

The U.S. Department of Agriculture’s (USDA’s) first 2018/19 world cotton projections anticipate that consumption will exceed production, bringing world stocks down by 6 million bales, more than offsetting 2017/18’s 900,000-bale increase. World cotton production is expected to fall 3.6 percent with yields declining in some countries and area falling in a number of producing countries. Global consumption is expected to continue growing, but at a more moderate pace. It is expected that China will continue to pursue policies limiting imports in order to dispose of surplus government-held stocks. The A Index is forecast to decline about 10 cents to 73 cents per pound due to projected higher stocks outside of China.

 

https://www.usda.gov/oce/forum/2018/commodities/Cotton.pdf

 

 

Less inventory, less production, drought ... but Chinese stockpile overhang.  This is what I was looking at.

 

 

[Cardboard]

Cotton price going straight up hitting $95 last night and still above $92 this morning. The one year chart looks like a parabolic ascent is forming.

 

Oil remains strong especially Brent at over $76 U.S./barrel. This has a direct impact on polyester pricing.

 

Then you have Kraft pulp still well above $1,200 U.S. per ton in the U.S. and close to $1,200 in Europe. No one under this pricing environment is considering converting a Kraft pulp mill to a dissolving pulp mill and it becomes interesting to actually switch back.

 

I am telling you. Most if not all the signs point to a much stronger dissolving pulp price. Sensitivity to a higher price is extreme at Fortress especially considering the market cap of $40 some million.

 

Cardboard

[doc75]

Amazingly low volume in this name.  I imagine management's tendency to overpromise and the 2019 debenture question mark have kept a lot of people in a wait-and-see mode, despite the solid fundamentals.

[Liberty]

Amazingly low volume in this name.  I imagine management's tendency to overpromise and the 2019 debenture question mark have kept a lot of people in a wait-and-see mode, despite the solid fundamentals.

 

Stocks with market caps under $50m CAD with a history of losing 95% of their value in 7 years tend to have low daily trading volume, in my experience.

[doc75]

Amazingly low volume in this name.  I imagine management's tendency to overpromise and the 2019 debenture question mark have kept a lot of people in a wait-and-see mode, despite the solid fundamentals.

 

Stocks with market caps under $50m CAD with a history of losing 95% of their value in 7 years tend to have low daily trading volume, in my experience.

 

Insightful.  Of course I mean the recent volume is low in relation to average volume.  Only 2500 shares per day (less than $8k)  over the month of May.

 

 

 

 

 

 

[Liberty]

Amazingly low volume in this name.  I imagine management's tendency to overpromise and the 2019 debenture question mark have kept a lot of people in a wait-and-see mode, despite the solid fundamentals.

 

Stocks with market caps under $50m CAD with a history of losing 95% of their value in 7 years tend to have low daily trading volume, in my experience.

 

Insightful.  Of course I mean the recent volume is low in relation to average volume.  Only 2500 shares per day (less than $8k)  over the month of May.

 

I thought you meant volume in general, but I could have been more restrained with the snark. It's probably because I lost some money on this company a while ago (I call it tuition, that feels better) and it feels good to kick it in the ribs once in a while :P

[Cardboard]

Some weird trading today. It seems like interest is picking up.

 

Cardboard

[doc75]

Some weird trading today. It seems like interest is picking up.

 

Cardboard

 

Noticed that.  It was kind of my point about the very low volume.  The order book indicated that you'd have to move the market significantly to build even a moderate position.  (Of course, it cuts both ways!) Today we've seen 20k shares push the price up 15-20%.  Interesting to see if it's just a momentary blip.

 

I need a little sunshine, even if it only lasts a few hours.  With this and DC.A in my portfolio, things have been pretty bleak.

 

Hmm... maybe Liberty has a point about stocks that lose 95% of their value in the past few years...

 

 

 

 

 

[Cardboard]

Input cost should be falling for Fortress while pricing pressure on dissolving pulp has to be mounting with oil, cotton, Kraft pulp all going up:

 

http://www.paperage.com/2018news/06_07_2018wood_fiber_prices.html

 

"In Eastern Canada, growing lumber production has created ample supplies of residual chips while demand for wood fiber has stagnated. This imbalance, building over the past 18 months, finally resulted in significant price declines when the annual price negotiations of 2018 were concluded. Wood chip prices in the 1Q/18 were at their lowest level in over 30 years and the region's pulp mills now has the lowest softwood fiber costs in North America."

 

Cardboard

[roundball100]

I must admit confusion here.  How is it possible that trading  volume is so low, for so long? If there is such a dis-connect between current stock price and value, why would Fortress itself not buy back stock?  It strikes me as something that the CEO would not miss, it there was true value.

[doc75]

I must admit confusion here.  How is it possible that trading  volume is so low, for so long? If there is such a dis-connect between current stock price and value, why would Fortress itself not buy back stock?  It strikes me as something that the CEO would not miss, it there was true value.

 

They don't have any excess liquidity to expend on share repurchases.  In fact, liquidity concerns are almost surely keeping buyers at bay.  There's a series of convertibles coming due Dec 2019 that have to be dealt with, and they've guided for cash to remain at around the same (low) levels as today for the remainder of the year.

 

The CEO himself already owns a big chunk of the equity, though of course I'd love to see insiders buying more at these levels. (Not easy to do without moving the market.)

 

As for the disconnect in general: Chad (CEO) is a promotional guy and the company has a long history of overpromise/underdeliver with regards to Mill performance. So I think the market is right to be skeptical, just not quite this skeptical.

 

I'll be a lot happier when they deal with those debentures, which they expect to do sometime this year.  With Chad's equity stake I'm sure they'll do everything to avoid going nuclear and redeeming for shares, but even still...

[Cardboard]

"...they've guided for cash to remain at around the same (low) levels as today for the remainder of the year."

 

This was said by the CFO during the last call but, what assumptions are behind this statement?

 

If DP goes up at all from $932/ton or the level at that call and with lower costs at the mill along with more production (heard no pessimism relative to that on the call or quite the opposite), then cash flow will skyrocket.

 

It is classic cyclical/commodity at the bottom but, almost all fundamental elements around DP have already turned up. If you wait to buy once DP has moved up in price and with it cash flow, this thing will have doubled and maybe more.

 

The various hiccups at the mill are also behind them IMO with the various learnings all put in place with the completion of this 5th digester. There is also no further capex required this year until the regular fall maintenance for $3-5 million.

 

Regarding the debentures, there was also discussion on the call that the government will help producers if China continues not to abide by the WTO ruling. Chad mentioned that this could be used to refinance the debs.

 

Considering how much help these guys have received over the years from the government to support this mill, I think it is fair to assume that it will continue.

 

There is no guarantee in life but, the odds look pretty darn good.

 

Cardboard

[doc75]

Cardboard: Thanks for your thoughts on this one... and optimism.

 

My recollection from the call was the potential government help (re: China) was a possibility but by no means guaranteed.  I'll have to listen again.  One thing that can be said for Chad is that he must excel at working the government angle.