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

[Liberty]

The yearly tonnage is lower than I expected, and they're still going to have to upgrade the cogen, but overall I'm very happy.

 

If during the next year they acquire the other smaller mill that they were very confident about, and they have similar terms, I'll be sending flowers to Chad.

[tombgrt]

Did you expect a higher tonnage? Chad spoke of 500.000 T for Thurso plus the two likely acquisitions. Add the small green bar from the St Andrews presentation and it's +- 500.000 T.

 

Seems like they are diluting quite a bit with those 750.000 warrants but I can live with it given the prospects.

[Liberty]

I might be misremembering, but I thought that LSQ was 350k NHSK and that this would give close to 300k for DP. But 236k is fine.

 

Hopefully once the cash starts flowing they'll consider doing opportunistic buybacks if the price drops below IV (unless they have so many new acquisitions and upgrades to do that they can actually put all that cash to good use internally with high ROI). This could take care of the dilution.

[OptsyEagle]

I think I read that LSQ had a capacity of 300,000 tonnes and when it is converted to dissolving pulp there is about a 10% loss of yield, which would put it at 270,000 tonnes.  My guess is Chad is hedging a little here.  Subtract about 10% off the real number to give himself some room to exceed expectations.

 

I am sure he is aware that with the stock so undervalued right now, the difference between 236,000 tonnes and 270,000 tonnes will make very little difference over the next few months of trading, but come production time it might be a nice boosting surprise.  Anyway, it doesn't make much difference right now.

[tombgrt]

My mistake.

 

Wise remarks OptsyEagle.  :)

 

 

This story from start to present is rather amazing. If you think about the market cap in 2007 and what it could be in 2014-2015 (unspeakable numbers!). Insane.

[Liberty]

Good theory, Optsy.

 

Seems like trading has resumed. Up 12.46% right now.

[jjsto]

Seems like they are diluting quite a bit with those 750.000 warrants but I can live with it given the prospects.

 

For me, it depends on the terms of the warrants.  According to the release, the convertible debentures have a conversion price "equal to the volume weighted average price of the common shares of the Corporation on the Toronto Stock Exchange (the "TSX") for the five trading days immediately preceding the closing of the APA plus a premium equal to 50% of such trading price."  Then, if these current prices hold up, that would be a conversion price of around $57 for the debentures.

 

So, (just eyeballing the numbers) the warrants represent around a 5% dilution for an asset that will be generating around 40%(?) of the earnings.  If the strike price is anywhere near the conversion price of the debentures that wouldnt seem too onerous at all. 

[Liberty]

New documents for the environmental permitting:

 

http://alderonironore.com/projects/environmentalassessment/

[Liberty]

I think I read that LSQ had a capacity of 300,000 tonnes and when it is converted to dissolving pulp there is about a 10% loss of yield, which would put it at 270,000 tonnes.  My guess is Chad is hedging a little here.  Subtract about 10% off the real number to give himself some room to exceed expectations.

 

I am sure he is aware that with the stock so undervalued right now, the difference between 236,000 tonnes and 270,000 tonnes will make very little difference over the next few months of trading, but come production time it might be a nice boosting surprise.  Anyway, it doesn't make much difference right now.

 

I went back to the Thurso announcement and they said 200k tonnes from the start.

 

http://www.treehugger.com/clean-water/graphene-perfect-water-filter.html

 

Doesn't mean they wouldn't underpromise now, though.

[Liberty]

Reminder: the call is starting any minute.

 

http://specialtycellulose.com/wp-content/uploads/2012/01/LSQ_Announcement_Jan_31_2012.pdf

[Liberty]

Interesting. DP made from softwood could command a premium because softwood has better characteristics than hardwood. (and LSQ has softwood supply)

[keerthiprasad]

I love this company.

 

Did anyone have any notes or other interesting facts from the call?  Unfortunately, I was unable to listen in at work.

 

thanks.

[OptsyEagle]

I love this company.

 

Did anyone have any notes or other interesting facts from the call?  Unfortunately, I was unable to listen in at work.

 

Conference Call went well.

 

1) LSQ will be in lowest quartile of costs.  Slightly less then Thurso.

 

2) Equipment in great shape.  Nitrogen lined ensuring no rust.  Many large investments have been already made by the previous owner that would cost over $500 million today to replace.

 

3) Costs will be $538 per tonne, after Co-gen expansion, about $600 per tonne before that.

 

4) Total cost for both mill and co-gen $222M.  $20 to $25 million in 2012 and the rest in 2013.

 

5) Will evaluate if they will produce NBSK before conversion.  Will know in a few months.

 

6) 236,000 tonnes production estimate before de-bottlenecking.  May improve a little once they get into it.

 

7) Mill will not suffer a loss of productivity if they want to go up on the quality scale towards specialty pulp.  Specialty pulp sells at a much higher price.

 

8) Warrants will be priced at the market when they are issued.  Should have 2 year exercise date.

 

9) Will not be utilizing the sawmill, except to store and chip wood.  Will provide a lower cost from this. Mill has an integrated chemical plant that will also lower costs.

 

10) Current DP prices around $1160 per tonne.  What they see is when prices get below $1,200 per tonne, capicity just shuts down.  Chinese capacity is all over $1,100 per tonne in cost and not a concern.

 

11) All environment risk is obsorbed by the Quebec government except for a requirement to invest $7.5 Million over 5 years into a remediation fund, by FTP.

 

12) Should be eligible for other Federal grants.

 

13) $222 million investment = $40 million for Co-gen and $182 Million for mill.

 

14) Preliminary discussions with their existing customers has shown a very high interest in the production from the LSQ mill.  Management felt confident that they would make this acquisition so they kept the other 22% of Thurso's production which is not covered by contracts available for negotiation.  Basically, if their customers want the remaining production at Thurso then management would like them to put contracts in place for the LSQ production capacity.

 

That's about it.  About a 100% return on investment, annually.  WOW.

 

 

 

[keerthiprasad]

Wow.  Sounds awesome...can't say im surprised at all though lol.

 

Thanks for the info, I really appreciate it.

[Myth465]

Looks like my buys around $35 are proving worth while. I wish I had bought more below $30. This and LRE are shaping up to be my most head ache free investments, just need 7-10 more companies like this....

[Liberty]

just need 7-10 more companies like this....

 

Let me know if you find them :)

[Myth465]

Whats your portfolio Liberty you seem to be better at finding these gems than I am lol.

 

Relooking at my portfolio I would say the ones below are pretty headache free. They feature cheap companies (some assets most FCF) which dont have too much debt, and are growing earnings each quarter or are fairly consistent.

 

ATSG - Aircraft Leasing

LRE - Insurance

Fortress Paper

ALS - Resources, and Assets based, under water but it should work out fine.

[jjsto]

I too am interested in the portfolio of others who are invested in FTP.  Not that anyone cares, but my portfolio looks something like this:

 

ALS 24% basis 12

Cash 20%

CRESY 14% basis 8 (potential value trap)

WFC 14% basis 21

FTP 12% basis 27

FFH 6% basis 325

Others 10%

 

I would love to find more companies like ALS and FTP to diversify a little and deploy some cash.  Unfortunately, I cant seem to find anything that has similar risk/reward and margin of safety.

[tombgrt]

Because you're interested:

 

FTP 31,5% (average 27.9)

C 24,3% (average 26.9)

BAC 21,1% (average 5.95)

LUK 16,5% (average 21.85)

FFH 6,1% (average 385)

 

I'm kinda a believer in betting big, adjusted kelly formula and all that. Must say I have at least 5 stocks (LRE is one. WFC I sold for a 30% to buy more C after last earnings) that would qualify if I wanted to diversify more. I will but not at current prices. I'll also diversify more as my portfolio grows, no need for that now.

[tombgrt]

Oh and I have like 0.1% cash.

 

I don't have an account on stockbroker so let me reply here:

 

I can't seem to cut and paste the report but suffice to say, he increased his price target from $30 to $36 and since the stock has already blown past that, he downgraded the stock to reduce.

Let's see.  The company gets $500Million of prestine equipment for $1, makes an investment financed with cheap money from the Quebec government, that will provide close to a 100% return on investment, annually and he increases his target by $6 ... or $96 million (when multiplied by 16 million shares).

Is he nuts.  Even with his low target for DP prices the company will earn over $12 per share, starting next year and he thinks the stock should trade for $36.  And they pay him for that.  Anyway, I disagree.

 

Obviously we all disagree with such targets. But I think it's a good thing they write such silly reports. FTP down 4% today on a green day, probably partly because of the report. For all I care we go to $20 because of those wackjobs, more to grab for us!

[OptsyEagle]

I think the TD analyst and quite a few others are perhaps misguided about the opportunity we are seeing here.  I think the investment community is looking at Fortress Paper as just another company working in a historically bad industry that will be subjected to the boom and bust cycle, like most other commodity producing companies.  Hence, they want to assign a much lower multiple of the earnings to that business.

 

 

The basic opportunity here can all be found on pages 7 and 8 of this presentation:

 

http://specialtycellulose.com/wp-content/uploads/2012/01/LSQ_Announcement_Jan_31_2012.pdf

 

Many companies in the forestry sector have found that it was very difficult to complete globally, from Canada.  Because of this, they ended up in the top quartile of costs and since commodity pricing will usually gravitate to a price equal to the higher cost producers, they struggled.  This price gravitates to this level, because when higher, new capacity usually comes along, itseverely hurts the higher cost producers.  Now this is key.

 

In slide 7, we can see that this is not the case in this particular instance.  Fortress Paper has ensured their cost structure is in the lowest quartile of costs.  This is because, for dissolving pulp, Canada has a distinct advantage.  Large supply of good fibre (trees), excellent transportation systems, and plentiful, educated labour.  Since labour is one of the lowest costs in the production of dissolving pulp (FTP will generate about $1,000,000 of revenue per employee making wage differences immaterial).

 

I believe the TD analysts main concern is from the additional capacity that is currently coming on line.  Although, there is reason to believe the demand for DP will be able to absorb all this new capacity, the most important point is ... it doesn't really matter.  A question was asked on the conference call about whether the market could absorb another 236,000 tonnes of capacity.  The answer is again... it doesn't matter.  If it can, then the DP prices will be very high and profitability will far exceed even Fortress Paper's estimates.  If it cannot, some other company on the upper end of the cost curve, seen on page 7 of the presentation, will start to have some financial difficulties.

 

Since the production of dissolving pulp's costs are mostly variable, for instance, the tree fibre, I believe, makes up about 50% of the costs, with power being next in line, then chemicals and finally labour, which is a very small component.  If prices decline below a companies cost level, they will see very quickly that it makes more sense to shut down their capacity, then to keep producing.  We have already seen this in the current cycle we are in.  That being said, if you review page 7 of the presentation you will see that in order for DP prices to get down to the level of FTPs costs, it would take a reduction in about 70% of world capacity.  That is very unlikely to happen.

 

So in a nutshell, what Fortress Paper is finding, is that Canada has a considerable number of mills that cannot compete globally in the traditional pulp market, due to their higher cost structure, but converted to producing DP, they transform into a low cost producer.  With that in mind, as long as they don't bring on more then about 4.2 million tonnes more of DP (70% of world capacity), they will simply be able to displace a higher cost producer, with their new supply and the prices of DP should not fall much below the $1,200 floor we have seen.  Since the mills available are fixated on the previous business experience, they can be picked up very, very cheaply, as we have seen.

 

I hope that makes sense.  The currency issue is also in play here.  Since DP is priced in $US dollars, but most of the producers and customers are not from the US, any decline in the $US, should simply result in a higher nominal sale price of DP.  Keep in mind, the most important currency for dissolving pulp is the Chinese yuon and it has been rising lately and expected to continue to do so.

 

All that being said, I would suspect, that as the investment community starts to realize this considerable difference, a much larger PE multiple will get assigned to this company.  It may take them a while, but they will get there.

 

 

[ECCO]

About p7 and p8, I wonder where are these plan that produce at lower cost than Thurso and LSQ?  There is about 1.3M tons at a cost of 450$ or lower. How can they acheived that and can other plants being built or converted there?

 

The other question I tried to find info about but dont get the answer is: where is the other plan that Chad is talking about that they expect to close the transaction. That plan would produce 100M tons so that should be a plan that NBSK capacity is around 130M tons. 

[OptsyEagle]

I can't tell you where the next acquisition is and I kind of hope it doesn't happen for at least 6 months.  Peter Vinall and Chad have enough on their plate for at least that long with LSQ.

 

As for the low cost producers, I think the big ones are in Brazil.  There is a plant there that I think pumps out over 700,000 tonnes of DP.  They also have a good fibre supply and their plants are fairly new.  They are the ones to watch, not the Chinese.

[lessthaniv]

I believe the TD analysts main concern is from the additional capacity that is currently coming on line.  Although, there is reason to believe the demand for DP will be able to absorb all this new capacity, the most important point is ... it doesn't really matter.  A question was asked on the conference call about whether the market could absorb another 236,000 tonnes of capacity.  The answer is again... it doesn't matter.  If it can, then the DP prices will be very high and profitability will far exceed even Fortress Paper's estimates.  If it cannot, some other company on the upper end of the cost curve, seen on page 7 of the presentation, will start to have some financial difficulties.

 

OptsyEagle,

 

If 4M MT of supply came on board tomorrow with a cost structure equal to FTP's then what do you suppose would happen?

 

Sure the high cost producers would lose out. They'd shut their doors and the market loses 4M MT of supply to come back to equilibrium. But the result is not good for FTP. They no longer reside in the bottom quartile of producers. DP prices have the ability to be cannibalised and could definitely fall significantly.

 

My point being - it's to FTP's advantage to bring on supply at a measured pace. They want the high cost producers in the market. That is where their moat and competitive advantage is coming from. By doing so they get their high margins for a long period of time vs. high margins for a short time (followed by low margins for long time).

 

So, I believe that supply matters. I want to see FTP bring on supply at a rate that is perhaps slightly ahead of demand.

[OptsyEagle]

I did say that, without any change in demand, if Fortress Paper brought on 4 million tonnes of DP they would still be profitable.  I didn't say they would be very profitable.  The point I was making in my analysis is that, as this new supply comes on the market, the price of DP will decline.  As it declines, the higher cost producers would exit from the market.  With 4 million tonnes from Fortress Paper, I would expect the price of DP to floor out at their costs, since all the higher cost producers would be gone and they would then become the high cost producer.  So to answer the question, I would expect the price of DP to level off at around $650 to $700 per tonne, knocking out all the higher cost producers and meeting the current global demand for DP.

 

Obviously they are not going to do this and they have no choice but to bring on their supply at a measured pace, since it takes a couple of years to convert a mill and it can take quite a long time just to acquire one.

 

So not to worry here.  My point wasn't that anyone was going to bring on this much DP, but to point out that the only supply we need to worry about is the supply that comes on with a cost below ours and even then if it in an amount that knocks out the higher cost producers and puts us up at the top of this curve.

 

I hope that makes sense.