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

[doc75]

Bondholders Announce Intention to Vote AGAINST Amendments to Debentures Issued by Fortress Global Enterprises Inc.

 

TORONTO, Sept. 21, 2018 /CNW/ - On September 21, 2018, Polar Asset Management Partners Inc., Chou Associates Management Inc., Concise Capital Management, LP and Fulcra Asset Management Inc., who in aggregate hold, or exercise control and direction over, more than 31% of the issued and outstanding 7.0% convertible unsecured subordinated debentures due December 31, 2019 (the "Debentures") (TSX: FGE.DB.A) of Fortress Global Enterprises Inc. (the "Company") (TSX: FGE) (OTCQX: FTPLF), announced their intention to vote against the Company's proposed amendments to the terms of the Debentures. The proposed amendments were announced on August 28, 2018 and a meeting at which holders of the Debentures are to vote on the amendments is scheduled for October 1, 2018

 

https://www.newswire.ca/news-releases/bondholders-announce-intention-to-vote-against-amendments-to-debentures-issued-by-fortress-global-enterprises-inc-693942711.html

 

This pretty much nukes any hope of the amendments passing, correct?  They need 66.7% of votes cast to be in favour, and here we have 31% of all possible votes being against.  So they'd need nearly 100% of the remaining votes to be cast, and to be in favour.

 

This seems very odd to me.  Surely they would've been in contact with these large holders before proposing these terms...

 

[bizaro86]

This is probably a negative development for the common, as you have to think that deal will get sweetened. FGE can always threaten the nuclear option of conversion, but that would destroy the common and Chad's stake, so I don't see that as a very legitimate threat. Good for Chou to do this, as it probably helps both his investors and the convertible debenture market overall.

 

I'd be very curious to know what he would prefer - a higher rate or a reset on the conversion  price.  I'd personally prefer to have the conversion price restruck.

 

I'm buying my stake in the debs back, I got some at $82.50 already.

[triedtestedand]

bizaro86:

 

Agree. Good on Chou et al.

Agree. Debs hold a number of cards (but not all).

Agree+DisAgree. Negative development for commons. 

  - Negative in terms of any deal with current debs with the amendment as currently proposed. 

  - Positive in terms of  (if can come to agreement with Chou et al) securing certainty and (finally) getting this in the rear view mirror.

[bizaro86]

Probably only a slight negative for the common. Previously I really thought this would go through. I still do, but just that the terms will be more favorable to the converts,  which transfers value from the common.

 

Interestingly, IB has 400 shares of FGE available to short. (I'm considering a short common to hedge against FGE going nuclear and converting). With essentially no availability and a 14% cost of borrow, there must be material short positions out there.

[MrB]

This is probably a negative development for the common, as you have to think that deal will get sweetened. FGE can always threaten the nuclear option of conversion, but that would destroy the common and Chad's stake, so I don't see that as a very legitimate threat. Good for Chou to do this, as it probably helps both his investors and the convertible debenture market overall.

 

I'd be very curious to know what he would prefer - a higher rate or a reset on the conversion  price.  I'd personally prefer to have the conversion price restruck.

 

I'm buying my stake in the debs back, I got some at $82.50 already.

 

No horse in this race, but why "be very curious"? Just ask the guy. As it says in the release, "For further information: Please contact Adam Mitchell of Polar Asset Management Partners at 416-369-8575 or amitchell@polaramp.com." You have to ask yourself why they put out the press release in the first place and why they provide contact details? Probably worth an email or call.

[Cigarbutt]

With the proposed amendments, the debenture would behave as busted for quite longer and the value given does not correspond to the value "deserved" IMO. The rational here is that there is sufficient resistance to obtain more than what is offered. The debenture has not moved much but built a position with a short term time arbitrage mindset.

[triedtestedand]

https://www.fortressge.com/wp-content/uploads/2018/10/Fortress-Global-Enterprises-Provides-Enhanced-Terms-to-Proposed-Debenture-Amendments-and-Extends-Consent-Fee-Deadline.pdf

[Cigarbutt]

The record date remains August 28, 2018.

2% slightly oppressive opportunity cost for the window of opportunity.

 

 

[triedtestedand]

Amend and Extend is now approved, and go into effect by end of the week:

 

https://www.newswire.ca/news-releases/fortress-global-enterprises-announces-approval-of-amendments-to-its-70-convertible-debentures-due-2019-694862901.html

 

Now:

a) need to get that fifth digester permit in advance of winter (when it truly makes a difference)

b) need to keep working on consistent (lower-cost) operations (which "a" will be most helpful for)

c) keep advancing on the xylitol project

 

Most of these are in Giovanni's purview ... so will be interested to see where Chad focuses efforts next.

 

I wonder if, once approved, they will turn around and institute a NCIB on the debs (up to 10% of the $62M outstanding/yr) and/or on the stock (up to 3.5%/yr of the ~15M shares outstanding, with the 3.5% restriction imposed within the amend and extend agreement) ... as of end of Q2 they had ~$32M (which includes $8M in restricted cash).

 

I also wonder what effect will be of change of Quebec Govt to CAQ  ... who've made lots of noises about Investissement Quebec (and it under-performing) during their campaign.

[Cigarbutt]

^The new government has strong roots in regions and will be pro-business.

Richard Campeau, a candidate who is about to win, would be a good option for a minister position, possibly economy, science and innovation (which oversees IQ) and has relevant experience (regional and international) in the pulp and paper market.

[Cigarbutt]

Finished selling debentures.

Potential upside potential for the long run but not enough conviction to hold. Good luck to the equity and convertible debt holders.

 

This was a very short ride. In the last 15 years, have done these kinds of short term time arbitrage situations on a few occasions and all turned out well with most resulting in small gains but am writing this to reinforce that I eventually will likely get burned given the skewness of results associated with these types of trades, with a single negative trade wiping out several smaller gains.

 

So, for the short FGE ride, nothing to be excited about but the gain will pay a significant part of the backyard landscape/pool project. :)

[triedtestedand]

God forbid.  Fortress exceeds expectations ...

 

https://fortressge.com/wp-content/uploads/2018/11/Q3-2018-Financials.pdf

[doc75]

God forbid.  Fortress exceeds expectations ...

 

https://fortressge.com/wp-content/uploads/2018/11/Q3-2018-Financials.pdf

 

Chad is out.  Didn't see that coming.  Was the writing on the wall?  (ie. Has he been hinting at his departure in recent quarterly calls?)

[triedtestedand]

Doc75:

 

Didn't see that either. Chad definitely had not been hiding on previous calls.

 

My take is that with operations (FINALLY) showcasing potential, with the 2019 debs refinanced, and with the Xylitol initiative underway, there was room to take a breath ... he's definitely been in the hot seat for a looong time on this.

 

I personally would have hoped for him to stick around longer for further of negotiating w IQ, Mondelez, etc. ... but I'm guessing he felt confident enough (especially given his significant shareholdings) to pass the baton to Giovanni.

 

Giovanni may not be the natural deal maker that Chad, or at least it's not something that he has focused on, and will not be a song and dance guy on an earnings conference call,  but he's definitely proving himself to be the operator.  And Chad being on the board, and with significant shareholdings, will be motivated to help complement Giovanni in whatever official or unofficial capacity is requested.

 

Back in August, I had 3 big issues which worried me, issues are now complete:

  1. refinance the debs

  2. get the digester permit

  3. prove out operational consistency/potential/cost-structure

 

Item #3 is of course the long term most strategic item ... and parsing the Q3 results, I interpret (given current market conditions) the following:

  - potential for $12M/qrtr of EBITDA with 4 digesters when no downtime incurred

        -> AND potential for even more with 5th digestor operational

        -> AND reduced seasonal variability in operating results (which we have seen in the past owing to cold weather)

  - potential for MORE than >40K ADMT in a quarter with 4 digesters in place (not even counting the further 17K ADMT targeted with the 5t digester), noting that Thurso had ~1 week shutdown in July ... inferring potentially another 4K/ADMT per quarter?

        -> i.e. potential to exceed targeted expectations r.e. annual capacity of 167K ADMT to potentially 190K ADMT?

 

 

 

 

[doc75]

Okay now I'm truly surprised to see the shares down 16% to 1.73. 

 

Anyone have insight?  The operational results were great.  Fear of Chad bailing?  Something said on the call?

 

EDIT: Just listened to the call. Nothing of concern was said, and only one question, I believe from a private investor.  Looks like the market is completely disinterested in this company at this point.

[triedtestedand]

Doc75:

 

The market was not  completely disinterested ... almost  100k shares traded today ... so some actual liquidity for once. My question would be “Why sell now / at this price?”. 

 

Rather than continued underperformance and/or the latest external issue, this looks like value now hiding in plain sight?  Maybe issue is that it’s hard to believe given history?

 

 

[Cardboard]

Change in strategy and why Chad left?

 

Q2 MD&A:

 

"Consistent with the Company’s overall strategy, we continue to explore various shareholder enhancing opportunities,  including investments in industries external to the Company’s current business segments, as well as

joint venture, partnership and divestiture transactions. The Company’s core strengths involve identifying and capitalizing  on investment opportunities and divestitures. In relation to these core strengths, the Company may pursue opportunities outside of the Company’s existing business segments that would diversify the asset base or monetize existing assets."

 

Q3 MD&A:

 

"Consistent with the Company’s overall strategy, we continue to explore various shareholder enhancing opportunities, but the primary focus will be on operational excellence and maximizing the potential of our existing assets. The  Company has determined that corporate resources should presently be primarily focused on supporting operational efficiency and productivity improvements at the FSC mill and advancing the Bio-Products Segment."

 

So the days of managing this as some holding company, turning around businesses, then selling them is over. It has not been successful at all anyway with the security paper business being the latest example.

 

I really like the renewed focus on mill reliability, cost and throughput and believe that good numbers are ahead. Already seeing some big improvements and there is a new plan for early 2019 per presentation.

 

DP pricing has also held nicely despite noticeable weakening of cotton. Fundamentals look good and with some luck $1,000 per ton is within reach.

 

Then we are talking $60 million/year in EBITDA and maybe more. Debt gets repaid with free cash flow and then another boost comes with xylitol. Massive upside from here if we ever get into that virtuous cycle. 

 

Cardboard

[lessthaniv]

Change in strategy and why Chad left?

 

Q2 MD&A:

 

"Consistent with the Company’s overall strategy, we continue to explore various shareholder enhancing opportunities,  including investments in industries external to the Company’s current business segments, as well as

joint venture, partnership and divestiture transactions. The Company’s core strengths involve identifying and capitalizing  on investment opportunities and divestitures. In relation to these core strengths, the Company may pursue opportunities outside of the Company’s existing business segments that would diversify the asset base or monetize existing assets."

 

Q3 MD&A:

 

"Consistent with the Company’s overall strategy, we continue to explore various shareholder enhancing opportunities, but the primary focus will be on operational excellence and maximizing the potential of our existing assets. The  Company has determined that corporate resources should presently be primarily focused on supporting operational efficiency and productivity improvements at the FSC mill and advancing the Bio-Products Segment."

 

So the days of managing this as some holding company, turning around businesses, then selling them is over. It has not been successful at all anyway with the security paper business being the latest example.

 

I really like the renewed focus on mill reliability, cost and throughput and believe that good numbers are ahead. Already seeing some big improvements and there is a new plan for early 2019 per presentation.

 

DP pricing has also held nicely despite noticeable weakening of cotton. Fundamentals look good and with some luck $1,000 per ton is within reach.

 

Then we are talking $60 million/year in EBITDA and maybe more. Debt gets repaid with free cash flow and then another boost comes with xylitol. Massive upside from here if we ever get into that virtuous cycle. 

 

Cardboard

 

Wait a minute ... weakening cotton ... but

[triedtestedand]

COTTON pricing past 3 years:

 

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=COTTON&insttype=Future&freq=2&show=&time=10

 

Note that the spring time run up in cotton pricing was short term ... and didn't correlate w any bump in DP pricing ... so "weakening" is a time relevant description that I don't think is adequately relevant in this particular scenario

[sculpin]

Raymond James...

 

Fortress Global Enterprises Inc. November 6, 2018 | 10:53 am EST

FGE-TSX Company Comment

 

Daryl Swetlishoff CFA | 604.659.8246 | daryl.swetlishoff@raymondjames.ca

Bryan Fast CFA (Associate) | 604.659.8262 | bryan.fast@raymondjames.ca

 

Forest Products | Pulp & Paper

 

3Q18 Beat on Strong Ops at Thurso; Management Transition Sees

New CEO

 

Recommendation

 

Our Outperform rating for Fortress Global Enterprises is a function of strong

leverage to dissolving pulp (DP) prices with additional upside from the acquired

Xylitol venture. We view the management transition as a prudent move in order to

focus on operational performance at the company’s existing operations.

 

Analysis

 

 Fortress reported 3Q18 EBITDA of $7.5 mln (from continuing operations),

compared to RJL of $4.6 mln – Relative to 2Q18 EBITDA of $2.7 mln, results were up

185% q/q as the company saw improved operational performance and higher

production. Production costs improved relative to the prior quarter by 13% as the

company saw higher production and lower variable costs. Sales of 38.4k ADMT (airdried

metric tons) of dissolving pulp were down slightly (4%) from 2Q18.

 

 Management transition – Fortress announced that President and CEO Chadwick

Wasilenkoff will resign from the company effective Dec-5-18, and that Giovanni

Iadeluca will be promoted to President and CEO of Fortress Global. Mr. Wasilenkoff

will remain a Director of the company. Mr. Iadeluca was previously president of the

Specialty Cellulose subsidiary at Fortress and will bring operational focus of the

company’s existing asset base, with over 20 years of senior management experience

in the manufacturing industry.

 

 Strong quarter operationally; looking for consistency – Something we see as

important to the performance of the share price, is consistent operational

performance from the Thurso mill. The company had previously been plagued by a

run of bad luck, resulting in downtime. 4Q18 is off to an encouraging start as the

company saw a scheduled maintenance early in the quarter reduced to 3 days

(previously scheduled for 8 days), an encouraging feat as the company looks to

continue their operating momentum into 2019. With the operational permit

received for the fifth digester, Fortress will look to ramp up production from the fifth

digester which is expected to increase annual production capacity by 17k mt.

 

 Stable Dissolving Pulp prices – Dissolving pulp remained relatively range bound for

the quarter averaging US$935/mt (flat q/q) while the slightly lower C$ resulted in a

1% increase in dissolving pulp in C$ terms. Current DP prices have crept back above

the Q3 average, as new DP capacity has been producing paper pulp instead. VSF

pricing has improved in recent months, with inventories at low levels.

 

Valuation

 

Our $4.00 target is based on a 6.5x 2019E EV/EBITDA multiple, which is near the

midpoint of the 5-year trading range of 5.25x–7.25x

[triedtestedand]

Thx Sculpin.

 

Help me with the math, will you.

 

What does RJ infer 2019E EBITDA to be then?  If I assume:

 

Forecasted MarketCap ~ 60M (i.e. 15M shares @ $4/share)

Total Debt ~ 209M

Total Cash ~ 33M (25M + 8M restricted)

Ratio = 6.5

 

6.5 = EV/EBITDA

 

EBITDA = EV/6.5

            = (60+209-33)/6.5

            ~ 36

 

Right?

 

So they forecast averaging $9M/qrtr overall then? (10.5 if factor out .5M/qrtr for the xylitol group, and $1M/qrtr for corporate)

 

I guess RJ want a couple of consistent quarters (and with fifth digestor) to target a higher forecast?

 

[lessthaniv]

COTTON pricing past 3 years:

 

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=COTTON&insttype=Future&freq=2&show=&time=10

 

Note that the spring time run up in cotton pricing was short term ... and didn't correlate w any bump in DP pricing ... so "weakening" is a time relevant description that I don't think is adequately relevant in this particular scenario

 

Yes, I agree with you TT that the long term trend is improving. My comment was tongue in cheek and in reference to another comment in May where I mentioned that I believed cotton prices weren’t going to continue rising into parabolic peaks. I mentioned that I believed Chinese stockpiles were still an overhang. Here are the updated world stockpiles numbers in (million 480-lb bales).

 

2016/2017;

 

Beginning stocks World = 90

Beginning stocks China = 57

 

2017/2018 EST;

 

Beginning stocks World = 80

Beginning stocks China = 46

Ending stocks World  = 80

Ending stocks China = 38

 

Over the last two cycles the Chinese imports of cotton have hovered around 5-5.5. They haven’t increased much at all. Their domestic production has increased though and their massive stockpiles have been used to offset increased demand. And, while the massive stockpile is definitely getting reduced over time I still feel it overhangs the market as ending Chinese stocks will represent 48% of the Worlds ending stocks.

 

A few years back world stockpiles were over 100 With China owning close to 60%.

 

 

 

 

[sculpin]

Thx Sculpin.

 

Help me with the math, will you.

 

What does RJ infer 2019E EBITDA to be then?  If I assume:

 

Forecasted MarketCap ~ 60M (i.e. 15M shares @ $4/share)

Total Debt ~ 209M

Total Cash ~ 33M (25M + 8M restricted)

Ratio = 6.5

 

6.5 = EV/EBITDA

 

EBITDA = EV/6.5

            = (60+209-33)/6.5

            ~ 36

 

Right?

 

So they forecast averaging $9M/qrtr overall then? (10.5 if factor out .5M/qrtr for the xylitol group, and $1M/qrtr for corporate)

 

I guess RJ want a couple of consistent quarters (and with fifth digestor) to target a higher forecast?

 

This is their forecast for 2019. Can't fault them for being very conservative with this Company...

 

New 2019E Revenue 192mm  EBITDA 36mm

 

[bathtime]

Fortress down 20% to C$1.45. One of the prices of tuition with this one was to learn be more skeptical about promotional CEOs.

 

In its heyday, I was caught up in Chad's talk of being a deep value investor when his prior track record was essentially being a sales broker and a commodities (uranium, gold) investor.

 

From that May 2011 article in the Globe and Mail when the stock price was $50:

 

----

And a press interview is something Wasilenkoff conducts at his West Vancouver pile over a couple of beers. He's convinced the deals he has on the go could make Fortress a $300 stock and a $4-billion company-from an $8-million company in 2006. His outlook is wildly bullish but aired without the promotional fervour of Vancouver's Howe Street. "It won't be this year, but by the end of next year. It's a very clear runway."

----

 

At the end of 2012, it was $8 instead of $300.

[Cardboard]

Don't disagree about Chad but, now he is mostly gone. For disclosure, I also bought in more recent times so my average cost is below $5/share.

 

While the stock price is a mess look at the volume and dollar value being traded today: this is nothing! One small frustrated, demoralized or having received a margin call investor could have caused this to drop massively and trade at $1.41 (I bought some).

 

Last quarter was the first one starting to prove the thesis or improving operations/reliability, more production capacity and somewhat better prices.

 

Moreover, the large uncertainty regarding debs refinancing has also been put to rest for a few years.

 

So things are getting fundamentally better. And if China/U.S. get a trade deal done, pricing/demand for DP should improve further.

 

Cardboard