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

[prunes]

Is there any way to gain additional comfort beyond just trusting management that Thurso and LSQ will hit the cost estimates that management has provided? Is there any way to gain additional comfort that Thurso and LSQ will retain their relative positions in the cost curve?

 

I've seen people comment that we should expect management's DP to sell at a premium to spot because it is of relatively high quality. But in the RJ research note, it was observed that it is of quality comparable to Chinese producers. What am I missing?

 

 

[tombgrt]

By my understanding they are first ramping up to full production and then they will finetune the process to get best cash cost versus quality.  :) I'm not trying to focus too much on receiving a premium, conversion to speciality cellulose, etc. First things first and then upside should take care of itself.

 

I rely on analyst reports a bit for cash cost estimates.  Things like RJ research. It's not quite exact but it gives some reassurance that cash cost won't be $1000 or anything in that order. The analysis recently posted here was helpful as well imo.

 

Referring to our pm's about new capacity I also found this back in my folders:

http://www.tappi.org/content/events/11diss/fortin.pdf

 

It might make you more or less comfortable about the added capacity, take it for what it's worth. Maybe you've read it already.. I think it is reassuring to see that over 55% of that announced capacity is located in China. As you know the average cash cost for Chinese producers is $1150-1250. Even if it is $1000 for this new capacity (which I doubt considering it was announced when prices where much much higher), we have little to worry about. Only +- 10% is from Brazil and South-Africa, which are basically the best places to be a low cost producer.

 

I don't think the DP price will become very attractive again in the near term. This will take some time to settle. Luckily we have a long way to go anyway before LSQ is properly functioning.

 

Hope it helps!

 

 

Tom

[shoeless]

Spent some time looking into Landqart and thought I'd share some stuff I found interesting and hasn't been mentioned on the thread (or I missed it)

 

If the rumors that India is now a Lanqart customer are true, this may be short-lived as apparently India is committed to being self-sustaining wrt banknote production.

http://www.currency-news.com/articles/2012-the-winds-of-change-january-2012

 

I also found this article about the industry interesting

http://www.currency-news.com/articles/banknote-production-the-perfect-storm-may-2011

 

FWIW, I also had a look at De La Rue's currency segment numbers: in FY 2011 they produced 9900 tons of banknotes (Landqart capacity is 10K) which sold for 450mill USD and an operating profit "before exceptional items" of 44.69mill USD (9.88% margin). In FY 2012 they reported currency revenue of 520mill USD and operating profit of 71.04mill USD (13.64% margin). (DLR reports in GBP, I converted to USD at todays rate)

 

[shoeless]

Is there any way to gain additional comfort beyond just trusting management that Thurso and LSQ will hit the cost estimates that management has provided? Is there any way to gain additional comfort that Thurso and LSQ will retain their relative positions in the cost curve?

 

I've been trying to find some reassurance as well.

It seems there are (at least) three other DP mills in Canada: AV Group's (A.Birla owned), Atholville and Nackwick mills and Neucell's (Fulida owned as of 2011) Port Alice Mill.

 

Why would Fulida and A.Birla invest in mills that are structurally expensive? In particular Fulida's investment was quite recent.

To me an investment indicates a bit more conviction compared to a long-term contract.

 

Is there any reason to think FTP's costs will be significantly different from these mills?

Reminder: Peter Vinall, now at Fortress, was CEO of AV Group and oversaw some of the conversion to DP.

 

Would be nice to get more direct evidence of the cost structure at those mills though. Or the price Fulida paid for Neucell.

 

btw, another acquisition last year was A.Birla's purchase of Domsjo in Sweden. They paid $340M for a mill with 210K tons/year capacity (though I think part of it is specialty grade). But I haven't been able to find information about the costs at that mill. I did see reference to Sweden importing some wood from Canada but have no idea how relevant that is to this particular mill.

 

Thanks triedtestedand, very interesting, articles such as the one linked below have me worrying about the impact on DP consumption due to the general slowdown in China... these DP figures provide some re-assurance that the growth in the DP market is currently sustainable...

What would be the likely effect of a China real-estate slowdown on Fortress input costs? Could it open up opportunities for good long-term wood supply contracts?

 

[prunes]

Some crude calculations for Port Alice...

 

According to the CEO of Neucel, he estimates the business will spend over $200 M in 2010, and that 75% has a "direct or indirect impact" in the local area of Port Alice.

 

http://manufacturing-today.com/index.php/featured-content/261-neucel-specialty-cellulose-ltd Port Alice's capacity is 160,000 tons with plans to expand to 200,000 tons.

 

Assuming that annual production costs are $200 M * 75%, unit costs are anywhere from $750 - $950 by my calculations.

[BRK7]

Spent some time looking into Landqart and thought I'd share some stuff I found interesting and hasn't been mentioned on the thread (or I missed it)

 

If the rumors that India is now a Lanqart customer are true, this may be short-lived as apparently India is committed to being self-sustaining wrt banknote production.

http://www.currency-news.com/articles/2012-the-winds-of-change-january-2012

 

I also found this article about the industry interesting

http://www.currency-news.com/articles/banknote-production-the-perfect-storm-may-2011

 

FWIW, I also had a look at De La Rue's currency segment numbers: in FY 2011 they produced 9900 tons of banknotes (Landqart capacity is 10K) which sold for 450mill USD and an operating profit "before exceptional items" of 44.69mill USD (9.88% margin). In FY 2012 they reported currency revenue of 520mill USD and operating profit of 71.04mill USD (13.64% margin). (DLR reports in GBP, I converted to USD at todays rate)

 

 

Thanks for the currency-related articles, Shoeless.  The January 2012 Whistler Conference has some good color from Chad on banknotes, specifically on the use of plastic/polymers in banknotes.  No color on the market capacity situation, though.  In case you haven’t heard it:

 

http://webcasts.welcome2theshow.com/whistler2012 (originally posted to the FTP thread by Liberty in January.)  Free registration, check around the 40 min mark.

 

Essentially, Chad makes a case that polymer-based currencies indeed have better durability/longevity, but are inferior in the sense that they are easier to counterfeit.  Further, Chad claims that the current transition to polymer in Canada is “not going well”, and that polymer has been 4%-5% of the market for the past 15 years with very little growth.

 

[LongTerm]

FWIW, I also had a look at De La Rue's currency segment numbers: in FY 2011 they produced 9900 tons of banknotes (Landqart capacity is 10K) which sold for 450mill USD and an operating profit "before exceptional items" of 44.69mill USD (9.88% margin). In FY 2012 they reported currency revenue of 520mill USD and operating profit of 71.04mill USD (13.64% margin). (DLR reports in GBP, I converted to USD at todays rate)

by Shoeless

 

Thanks so much for this priceless tidbit shoeless. It both sheds some light on Landquart economics and highlights some questions that I've been grappling with for a while. Maybe someone on this board with more knowledge of Fortress Paper (i.e. just about anyone) can help me.

 

When I look at the above numbers from DLR it looks like revenue per ton in 2012 is over USD $50,000. But when I look at Landquart 1Q 2012 numbers it looks like the average revenue per ton is just over USD $13,000. I thought the security paper products would be somewhat comperable between the companies. Am I missing something here? Is it a question of product mix? (for example, more security paper and less or no banknotes at Landqart).  With the reinstatement of the 2011 banknote order will the price per ton produced by Landqart begin to approach the DLR levels? If Landqart profitability were to approach that (or even half that) achieved by DLR then this is a valuable asset. On the other hand, even if the mill were to run at 100% capacity (1Q seems to be at about 40%) at current product pricing levels it could hardly justify the cash investment made to date.

 

I don't see this discussed elsewhere on the thread but I could have missed it. Thanks in advance for any thoughts or pointing me to prior posts about this.

[Liberty]

I don't know so I'm just speculating here, but afaik De La Rue is both a security papermaker and a printer, so their prices are not directly comparable to Landquart. It's also possible that Landquart's recent production mix was lighter on banknote and heavier on other security papers (visa papers, etc)..? It's possible that the rev/ton numbers could look completely different with another mix.

 

At this point I'm waiting to see what happens with LQ. Too hard to predict. But I have confidence that management will do what's best for shareholders.

[BRK7]

I don't know so I'm just speculating here, but afaik De La Rue is both a security papermaker and a printer, so their prices are not directly comparable to Landquart.

 

Liberty, you are correct that De La Rue is both a security papermaker and a printer.  Below is a link to a recent interview with De La Rue CEO, Tim Cobbold.  The segment from 3:23 – 4:30 is worth watching, as it relates to Landqart.

 

http://www.cantos.com/company/De%20La%20Rue

 

[shoeless]

Thanks BRK7, lots of interesting information in the Whistler presentation.

LongTerm, great point. I didn't  know the answer but it looks like we may have part of it now. Thanks guys.

 

update: some numbers Chad gave in the Whistler presentation

commodity paper: $600-$900 a ton

Lowest quality passport paper: $6-7K/ton

Low grade banknote with few security features: $12-12K/ton

Euro 25-28K/ton

Swiss franc: just over $30K/ton

Durasafe: 45K/ton

 

So the potential for higher revenue/ton is there if they can get the right orders.

 

[gokou3]

Terrace Bay paper mill to convert to rayon fibre

http://www.saultstar.com/ArticleDisplay.aspx?e=3592166

 

AV Group to purchase Terrace Bay Pulp for dissolving pulp

http://www.pulpandpapercanada.com/news/av-group-to-purchase-terrace-bay-pulp-for-dissolving-pulp/1001520194/

 

Aditya Birla Group, through its Canadian subsidiary AV Group, has agreed to purchase the assets of the idled mill for a reported price of $300 million. The Indian company, which already owns two dissolving pulp mills in Canada, plans to invest more than $250 million to convert the Terrace Bay site to dissolving pulp for use in rayon

 

So, a total consideration of $550M for a DP mill.  Per the below article, the converted capacity by 2016 will be 280kT/yr:

http://m.indianexpress.com/news/aditya-birla-to-buy-terrace-bay-pulp-mill/970830/

 

[motownsf]

Terrace Bay paper mill to convert to rayon fibre

http://www.saultstar.com/ArticleDisplay.aspx?e=3592166

 

AV Group to purchase Terrace Bay Pulp for dissolving pulp

http://www.pulpandpapercanada.com/news/av-group-to-purchase-terrace-bay-pulp-for-dissolving-pulp/1001520194/

 

Aditya Birla Group, through its Canadian subsidiary AV Group, has agreed to purchase the assets of the idled mill for a reported price of $300 million. The Indian company, which already owns two dissolving pulp mills in Canada, plans to invest more than $250 million to convert the Terrace Bay site to dissolving pulp for use in rayon

 

So, a total consideration of $550M for a DP mill.  Per the below article, the converted capacity by 2016 will be 280kT/yr:

http://m.indianexpress.com/news/aditya-birla-to-buy-terrace-bay-pulp-mill/970830/

 

 

You can look at this two ways. First, it's bad because it adds additional capacity.

 

Secondly, it's positive because 1) Another group views the economics of producing DP at these price levels as being so attractive that they are willing to commit over half a billion to a new project, 2) It assigns value to Thurso and LSQ in the event Chad wanted to sell either project at some point down the line.  If someone is willing to commit $550m for 280k ton/yr of capacity, what will FTP's 437k of capacity be worth at LSQ and Thurso? If we use this project as a proxy, FTP's two projects could be worth somewhere between $800m and $900m to an outside buyer if the economics of the projects are similar to this one.  Add in Dresden (which is on a run-rate of $37.5m in EBITDA) and assign an LBO multiple of somewhere between 6 and 8x and you have breakup value well in excess of today's EV. In addition, Landqart (with its new large order) presumably will become an economically viable operation at some point.

 

 

 

 

 

 

[Liberty]

I think it also highlights that, despite the cost overruns on the cogen, FTP is getting these assets very cheaply. Chad's not paying 300 million for LSQ, yet it's a very modern mill that is about as good as any in the world as far as I can tell...

 

It also makes me wonder whether Chad had a look at that Ontario mill and passed because the price was too high, or maybe some other reason (wood supply not as good as LSQ and Thurso? do they have a cogen? is the Ontario government giving worse terms than the Quebec government? how about labour contracts? is the mill less adapted to very high alpha specialty DP?). There are lots of moving pieces that need to come together to make a good deal, the physical mill is just one of them.

 

Hopefully by 2016 the market will have grown enough to easily absorb new capacity. I can't predict macro, but I think the thesis that billions around the world will be able to afford more clothes in the coming years and cotton will have trouble keeping up makes a lot of sense.

[lessthaniv]

I'm not so sure its proper to automatically assume that world DP production rises with every new mill. There exists a wide gap between the cost structures of domestic Asian producers and domestic North American producers. As we've already discussed and witnessed; DP prices are decoupling from Cotton; Chinese DP producers are shutting the doors at $1150/mt.

 

Are we simply witnessing a shift? As new low-cost production hits the market it may be somewhat offset by the shuttering of doors from Asian producers; hence supply may not be growing as fast as you think.

 

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

 

Remember, as per the chart above roughly 35% of the forecasted (may be slightly dated) 2013 world supply comes from Chinese suppliers or Cotton linters with cash costs north of $1000/mt.

 

There is a reason that your linked article (thanks for posting this gokou3) is describing an Asian Rayon producer buying a North American DP asset.

 

I think we are hearing more of these deals at the moment because soft DP pricing expedites the transition. In analysing a project to convert a mill, soft pricing expectations allow one to reduce world supply estimates knowing that roughly 1/3rd of the world supply is unprofitable and unsustainable.

[motownsf]

I think it also highlights that, despite the cost overruns on the cogen, FTP is getting these assets very cheaply. Chad's not paying 300 million for LSQ, yet it's a very modern mill that is about as good as any in the world as far as I can tell...

 

It also makes me wonder whether Chad had a look at that Ontario mill and passed because the price was too high, or maybe some other reason (wood supply not as good as LSQ and Thurso? do they have a cogen? is the Ontario government giving worse terms than the Quebec government? how about labour contracts? is the mill less adapted to very high alpha specialty DP?). There are lots of moving pieces that need to come together to make a good deal, the physical mill is just one of them.

 

Hopefully by 2016 the market will have grown enough to easily absorb new capacity. I can't predict macro, but I think the thesis that billions around the world will be able to afford more clothes in the coming years and cotton will have trouble keeping up makes a lot of sense.

 

 

My guess is that the group from India came in and paid a bigger number than the local players. It usually happens that way.

[tombgrt]

One of the questions that remain then is at what spot price it makes sense to built new DP mills after all economically viable conversions are completed and have replaced high cost producers.

 

Say that it costs $1b to build a 250,000 tonnes DP mill with cash costs (all inclus) at $600/ton. Would I be far off? Maybe a couple hundred millions, idk. Anyway, it's probably fair to assume that they won't build it with the prospects of selling for $1200/ton or less (giving the mill only $150m in EBITDA at best under that scenario) IF $1b is a correct raw estimate. Maybe they get 350,000 tonnes out of $1b, again, idk. The fact is that Thurso and LSQ should remain fairly profitable in the first 5-10-15 years even when this happens.

 

This gives me only more reassurance that DP prices should be reasonable in almost any case, even when others invest heavily in new mills with lower production costs. Every time you see either much higher conversions costs, much higher cash costs or a combination of both (which I believe Terrace Bay could be). When the industry runs out of possible conversions, this will become even more true.

 

Do I make any sense here or is my reasoning seriously flawed? Just thinking out loud here.

[motownsf]

 

 

One of the questions that remain then is at what spot price it makes sense to built new DP mills after all economically viable conversions are completed and have replaced high cost producers.

 

Say that it costs $1b to build a 250,000 tonnes DP mill with cash costs (all inclus) at $600/ton. Would I be far off? Maybe a couple hundred millions, idk. Anyway, it's probably fair to assume that they won't build it with the prospects of selling for $1200/ton or less (giving the mill only $150m in EBITDA at best under that scenario) IF $1b is a correct raw estimate. Maybe they get 350,000 tonnes out of $1b, again, idk. The fact is that Thurso and LSQ should remain fairly profitable in the first 5-10-15 years even when this happens.

 

This gives me only more reassurance that DP prices should be reasonable in almost any case, even when others invest heavily in new mills with lower production costs. Every time you see either much higher conversions costs, much higher cash costs or a combination of both (which I believe Terrace Bay could be). When the industry runs out of possible conversions, this will become even more true.

 

Do I make any sense here or is my reasoning seriously flawed? Just thinking out loud here.

 

 

I think it depends on what the entity doing the conversion has a their return target and what their cost of capital is.  I personally would want to generate well in excess of 30% IRR for taking on a project with this kind of risk.

[shoeless]

Terrace Bay paper mill to convert to rayon fibre

http://www.saultstar.com/ArticleDisplay.aspx?e=3592166

 

AV Group to purchase Terrace Bay Pulp for dissolving pulp

http://www.pulpandpapercanada.com/news/av-group-to-purchase-terrace-bay-pulp-for-dissolving-pulp/1001520194/

 

Aditya Birla Group, through its Canadian subsidiary AV Group, has agreed to purchase the assets of the idled mill for a reported price of $300 million. The Indian company, which already owns two dissolving pulp mills in Canada, plans to invest more than $250 million to convert the Terrace Bay site to dissolving pulp for use in rayon

 

So, a total consideration of $550M for a DP mill.  Per the below article, the converted capacity by 2016 will be 280kT/yr:

http://m.indianexpress.com/news/aditya-birla-to-buy-terrace-bay-pulp-mill/970830/

 

Thanks for posting gokou.

 

Seems there are conflicting reports of the price paid in the Terrace Bay deal (110M vs 300M). I also saw this "The mill has two full integrated pulp lines, and three integrated pulp machines, with a rated capacity of approximately 550,000 air-dried metric tonnes of pulp per year (hardwood and softwood combined)."

So maybe 280K DP is in addition to other production.

 

[shoeless]

One of the questions that remain then is at what spot price it makes sense to built new DP mills after all economically viable conversions are completed and have replaced high cost producers.

 

I think "all economically viable conversions" may be a moving target. One interesting point in the Whistler Conference presentation was the discussion by Mercer CFO of why they halted their plans to convert one of their mills to be a "swing" DP producer.

He said that in the past mills with continuous digesters (like the mill Mercer considered converting) have not been successfully converted to DP production but that recently Andritz sold such a solution to a Chinese customer with 'performance guarantees'. Mercer thinks that if this project is successful there is a chance that continuous digester mills in Brazil may convert to DP using this technology and bring on cheap capacity so they decided to wait and see how this plays out.

I see here http://reports.andritz.com/2012q1/andritz-report2012q1-en-pulp-and-paper.pdf that one such conversion has been completed (Sun Paper’s Yanzhou mill) and another conversion has been started in Japan

Some additional info here:

http://www.andritz.com/no-index/pp-continuous-pre-hydrolysis-cooking.htm

 

I also ran into mention of another technology that may effect Rayon production, search for "paper pulp viscose".

 

 

[Liberty]

I think "all economically viable conversions" may be a moving target. One interesting point in the Whistler Conference presentation was the discussion by Mercer CFO of why they halted their plans to convert one of their mills to be a "swing" DP producer.

He said that in the past mills with continuous digesters (like the mill Mercer considered converting) have not been successfully converted to DP production but that recently Andritz sold such a solution to a Chinese customer with 'performance guarantees'. Mercer thinks that if this project is successful there is a chance that continuous digester mills in Brazil may convert to DP using this technology and bring on cheap capacity so they decided to wait and see how this plays out.

I see here http://reports.andritz.com/2012q1/andritz-report2012q1-en-pulp-and-paper.pdf that one such conversion has been completed (Sun Paper’s Yanzhou mill) and another conversion has been started in Japan

Some additional info here:

http://www.andritz.com/no-index/pp-continuous-pre-hydrolysis-cooking.htm

 

I also ran into mention of another technology that may effect Rayon production, search for "paper pulp viscose".

 

Have you contacted FTP's IR to ask them what they think about those? I don't quite remember if Chad addressed those at the Whistler conference, might have to listen again.

[Christopher1]

Updated presentation from the website:

http://www.fortresspaper.com/images/pdfs/investor_relations/Fortress%20Paper%20Powerpoint%20July%202%202012.pdf

[shoeless]

Have you contacted FTP's IR to ask them what they think about those? I don't quite remember if Chad addressed those at the Whistler conference, might have to listen again.

 

I haven't been in touch with IR. I don't recall Chad addressing this in the conference.

 

 

[Liberty]

Updated presentation from the website:

http://www.fortresspaper.com/images/pdfs/investor_relations/Fortress%20Paper%20Powerpoint%20July%202%202012.pdf

 

Page 9 is very interesting. Very healthy-looking curve.

 

They seem confident they can reach cost targets.

 

DP was 1250 in april, now back to 1100 on recession fears.

[lessthaniv]

Slide 18:

 

confirms my last post. even though supply is increasing, utilization ex-high cost mills is north of 100%.

 

:)

[colinwalt]

Slide 18:

 

confirms my last post. even though supply is increasing, utilization ex-high cost mills is north of 100%.

 

:)

 

Guess I'm missing something, how can utilization be > 100%?