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

[gokou3]

I think there's a TSX rule that limits yearly buybacks to 10% of outstanding shares.

[17thstcapital]

I haven't read the convertible bond indenture but I would presume that stock buybacks are prohibited......

[triedtestedand]

I haven't read the fineprint recently, but don't think that the debs preclude a buyback. I asked IR about renewing last year's NCIB using nominal excess funds from the oversibscription of the deb issue, and while they indicated other priorities for the cash (no specifics), they did not indicate that such was impossible.  Besides, I do know that the debs (both issues)  allow for both interest and principal to be repaid via a share issuance, so theoretically FTP could buy back shares now, and then reissue with (hopefully higher priced) shares in future if such was needed.

[triedtestedand]

FWIW ... FTP closed today below book value.

 

Also ... Does anyone recall what FTP carried Landqart's hydro assets at before they sold them?  I think I remember hearing it stated, but forget where (maybe Q1 earning call?).  The assets were sold for 18M swiss franc (about $19.2M CDN), so trying to anticipate how that might show up numerically as an extraordinary item in FTP's Q2 financials.  With analyst mean estimates of ($.20)/share from operations translating into a forecasted net loss of ~$3M for Q2/2012, offsetting gains from the sale of these assets could materially push them into a net positive for the quarter.

 

Finally ... Has anyone been mulling FTP's stated use of the $66M in proceeds from the deb ... or rather the other potential cash sources listed in the Raymond James analysis of May 16th, some/much of which can now be possibly redirected.  The RJ analysis indicated that FTP could have potentially squeezed by without the financing, so now that they have it, I'm wondering what they do with the likes of:

          $7M    Q1 cash

          $4M    IQ loan drawdown from Thurso

          $19M  Landqart hydro sale proceeds

          $31M  tax credits/other receivables over next 12 months

          $27M  Q2 to Q4 Dresden FCF

          X        Q2 to Q4 Thurso FCF

 

Am just speculating, but for the most part I'd guess they'd want to avoid using holdco cash to pay down any subsidiary debt that wasn't due, especially (as in Thurso case) if it is non-recourse.  For Dresden the, what if they now redirected it's significant FCF to pay down the >$30M LOC they have?  Doing so would use devalued Euros to pay down devalued Euro demoninated debt, but as they got the subsidiary debt down to zero, wouldn't it also make Dresden more easily marketable as an LBO candidate, especially if they had a pre-negotiated, but untapped LOC available for use by a potential buyer?  I'm not a finance guy, but the shell games that go on with cash are always fun to watch.

[Liberty]

All right. There's some stuff I just can't resist. I kept hearing Munger's voice in my head, talking about seizing opportunities when they come and betting big when you have high conviction.

 

I almost doubled my FTP share count today (not quite doubled... more like up by 80%).. Had to sell something else, but I think the risk/reward profile is much better here now.

 

My average cost is now below 23. With my luck it'll now tank below $10/share, but oh well.. I think there's a very good chance that in a couple years I'll be very happy about this move. We'll see...

[lessthaniv]

Found an interesting tid-bit on Neucel. This Port Alice mill was bought by Fulida early in 2011. I found an article from China Economic Net suggesting they paid $250M US. According to the Neucel website the capacity is 195,000 MT.

 

http://en.ce.cn/Business/Macro-economic/201202/18/t20120218_23083629.shtml

 

http://www.neucel.com/about/about-the-company.aspx

 

Fulida was already a minority shareholder prior to this transaction hence $250M would represent the value of the portion they acquired.

 

http://www.neucel.com/news/documents/NeucelPressRelease.pdf

 

 

 

 

[prunes]

Really need more info to use that as a comp but good to know. Likely they would have paid less if they bought it today. It was easier to underwrite higher prices in 2011. What does this imply about the value of FTP's assets to EV? I calculated EV at around $470 MM the other day (it's less now).

 

That sale all else equal would imply $563 MM for Thurso/LSQ, and then there is Dresden and Landqart. Call Dresden's value $180 MM (6x 2011 EBITDA), LQ is anyone's guess but call it $50 MM for the sake of round numbers. You'd need to capitalize corporate expenses but the total before that is nearly $800 MM. Given the risk and the drop in DP prices is this a large enough MOS? Is there anything I'm ignoring?

 

Apologies if I flubbed any numbers, I'm writing from memory off my iPhone.

[prunes]

I was emailing with an employee of a large DP producer that shall remain unnamed. He speculated that DP prices would bottom at low to mid $800s. He also noted that current spot prices were higher (!!) than his company's contract prices. He also noted that they are currently signing new long term contracts at current NBSK prices, and that he expects DP spot prices to converge to NBSK prices.

[shoeless]

Found an interesting tid-bit on Neucel. This Port Alice mill was bought by Fulida early in 2011. I found an article from China Economic Net suggesting they paid $250M US. According to the Neucel website the capacity is 195,000 MT.

 

http://en.ce.cn/Business/Macro-economic/201202/18/t20120218_23083629.shtml

 

http://www.neucel.com/about/about-the-company.aspx

 

Fulida was already a minority shareholder prior to this transaction hence $250M would represent the value of the portion they acquired.

 

http://www.neucel.com/news/documents/NeucelPressRelease.pdf

 

Thanks for posting lessthaniv.

Attached is some interesting information from the Sateri prospectus about a few of the mills we've mentioned lately: AV Cell Group, Domsjo and Neucel.

 

Seems Neucel capacity at the time was 140.

There's also capacity and cost information for the Domsjo mill acquired last year.

 

In the Whistler conference Chad mentioned two Canadian mills in passing. The one was close to Thurso and apparently had a low alpha of 91 and another one was of better quality.  Anybody know which is the one close to Thurso (yeah I guess I'm being lazy).

 

btw, the prospectus referenced some information sourced from the UN which led me to the following site. http://comtrade.un.org/db/mr/rfCommoditiesList.aspx?px=H2&cc=47

[shoeless]

I was emailing with an employee of a large DP producer that shall remain unnamed. He speculated that DP prices would bottom at low to mid $800s. He also noted that current spot prices were higher (!!) than his company's contract prices. He also noted that they are currently signing new long term contracts at current NBSK prices, and that he expects DP spot prices to converge to NBSK prices.

 

Interesting.

FWIW, Chad has mentioned they see 96-97% correlation between DP prices and a model made of 40% NBSK and 60% cotton.

 

btw, anyone remember the original Thurso presentation? There was a Thurso Proforma model with the low end being based on a DP price of $900

 

[BRK7]

I was emailing with an employee of a large DP producer that shall remain unnamed. He speculated that DP prices would bottom at low to mid $800s. He also noted that current spot prices were higher (!!) than his company's contract prices. He also noted that they are currently signing new long term contracts at current NBSK prices, and that he expects DP spot prices to converge to NBSK prices.

 

 

Maybe I am misunderstanding, but I don’t see how DP spot prices could converge to NBSK. 

 

Why would a pulp mill go through the extra expense and lower yield associated with producing DP, if they can get the same price/ton by producing NBSK?  In other words, wouldn’t capable DP producers simply would switch over to NBSK and earn a better profit?  If so, supply of DP would drop, driving the price of DP higher.

 

[gokou3]

Attached is some interesting information from the Sateri prospectus about a few of the mills we've mentioned lately: AV Cell Group, Domsjo and Neucel.

 

I suppose these are FOB prices, whereas FTP presentations showed shanghai-delivered prices?

[shoeless]

Attached is some interesting information from the Sateri prospectus about a few of the mills we've mentioned lately: AV Cell Group, Domsjo and Neucel.

 

I suppose these are FOB prices, whereas FTP presentations showed shanghai-delivered prices?

I think you're right about the numbers from Sateri but am not positive

 

 

[prunes]

I think a good question to ask is, would FTP have bought Thurso today? Think about where prices were then and what costs were expected to be, and where prices and costs are now. How much of what FTP is doing now is simply path dependence?

[triedtestedand]

Prunes:

 

Good point.  That said, would FTP have proceeded w LSQ in that case?  In any event, their risk is mitigated via significant portions of project financing for both Thurso and LSQ being contained at the sub level.  The other reassuring point is seeing likes of recent purchase of Terrace Bay w similarly planned conversion expense (unless both are wrong)

[prunes]

Here's an interesting question for the group. If DP prices remain depressed, how feasible would it be to convert to 100% specialty production? How would one calculate the cost/benefit?

[shoeless]

Given the risk and the drop in DP prices is this a large enough MOS? Is there anything I'm ignoring?

 

Well one thing you didn't mention is Chad. Some would say his committed attention to creating value for at least the next 5 years may be worth significantly more than his compensation.

 

 

[prunes]

As long as the compensation committee can rein him in.

 

I don't want to be too dour but let's look at things objectively.

 

Chad's 2010 comp was egregious. Yes, 2010 was a heady time for the DP industry, so buying Thurso for the price FTP paid looked like a coup. But arguably we also top ticked the DP market. DP prices have been plummeting since 2010.

 

In retrospect, the Thurso pro forma looks foolish both on the topline and from an expense standpoint. As I said in a previous post, it's not clear to me that FTP would have done that deal today. That's not to say there isn't necessary value here but there is much less upside to the cellulose operations than we initially projected. Viewed from this perspective, Chad swung hard and missed.

 

Landqart has basically been a failure. From 2004 - 2006, total earnings were $2.6 MM, and EBITDA was $18.5 MM. 2011's $31 MM operating loss was astoundingly large. 1Q12, Landqart had an operating loss of $7.2 MM. The magnitude at which Landqart has burned cash recently has completely dwarfed its ability to generate cash in the good years. People seem to think Chad has some sort of ace up his sleeve. We'll see. Two questions for you: what margins do you think Landqart will have once (if) it is turned around, and with those margins and your estimate of revenue, how long will it take to reverse the deficit it has generated?

 

Dresden has been the one standout performer. Hopefully it will continue to perform and not succumb to competitive pressures.

[Liberty]

In retrospect, the Thurso pro forma looks foolish both on the topline and from an expense standpoint. As I said in a previous post, it's not clear to me that FTP would have done that deal today. That's not to say there isn't necessary value here but there is much less upside to the cellulose operations than we initially projected. Viewed from this perspective, Chad swung hard and missed.

 

I'm not sure I follow you. Thurso hasn't even had a quarter of production, and the co-gen isn't done. Do you know something I don't? If this was an investment for next quarter or two maybe you'd be right, but Chad is building something for the long term (commodity DP probably isn't even the destination), and while DP prices are low right now, if you think the general thesis wrt cotton/cellulose is correct, they won't stay this low forever. We're now at a time when the whole global market is in fear mode, right after history-books-type cotton prices pushed everybody and their dog to grow more cotton, and right at the crucial inflection point in the business when they have spent the maximum amount on getting a new plant going without seeing any of the benefits yet. This is transitory. Things might not be all rainbows and puppies afterwards, but be careful about extrapolating too much from a special point in time.

 

Maybe if FTP was still selling for 50-60 things would look tighter, but at these prices, I think there's very little downside left and tons of upside if anything good happens at all (and we know that dark clouds never stick around forever).

 

In fact, I don't mind the dark clouds while they are gearing up if 1) it allows me to buy cheaper while the end result in a few years will probably look very similar anyway and 2) it reduces competition's animal spirits.

 

I could be wrong about all this, but I think it's too early to tell about a lot of things, and I'm afraid that the stock price is coloring a lot of people's perceptions; if it was still selling for 45, would we get all this hand-wringing? Yet wouldn't the situation be inherently riskier at 45?

[prunes]

http://fortresspaper.com/images/pdfs/releases/NewsReleases_2010/Fortress_Specialty_Cellulose_March_24.pdf

 

When the deal was first announced, FTP estimated total cash cost of $536 with a pulp price of $900. At the time, DP was around $1500 and management rightly based it's model assuming mean reversion.

 

Then in 2011, FTP put out a presentation (uploaded previously in the thread; not on the website anymore) showing cash cost of ~$625 and DP prices of $1200 to $1600. Not sure why mean reversion didn't apply anymore.

 

Now we're looking at $725 cash cost and DP prices are below or at the lower bound of the previous estimate.

 

This is all history and I'm not complaining. But one needs to look at the facts. Management purchased Thurso based on a set of assumptions about revenues and expenses. These assumptions turned out to be wrong. Period. Therefore it's not clear to me that Chad would have thought the deal made sense in 2010 with today's knowledge. And I think one of the things we need to do as owners is evaluate management's ability to execute on its business plan.

[Liberty]

Landqart has basically been a failure. From 2004 - 2006, total earnings were $2.6 MM, and EBITDA was $18.5 MM.

 

Not sure how useful that info is, btw. Landquart's product mix and capacity was very different at the time.

[lessthaniv]

http://fortresspaper.com/images/pdfs/releases/NewsReleases_2010/Fortress_Specialty_Cellulose_March_24.pdf

 

When the deal was first announced, FTP estimated total cash cost of $536 with a pulp price of $900. At the time, DP was around $1500 and management rightly based it's model assuming mean reversion.

 

Then in 2011, FTP put out a presentation (uploaded previously in the thread; not on the website anymore) showing cash cost of ~$625 and DP prices of $1200 to $1600. Not sure why mean reversion didn't apply anymore.

 

Now we're looking at $725 cash cost and DP prices are below or at the lower bound of the previous estimate.

 

This is all history and I'm not complaining. But one needs to look at the facts. Management purchased Thurso based on a set of assumptions about revenues and expenses. These assumptions turned out to be wrong. Period. Therefore it's not clear to me that Chad would have thought the deal made sense in 2010 with today's knowledge. And I think one of the things we need to do as owners is evaluate management's ability to execute on its business plan.

 

Facts:

 

Inflated costs of chemicals is industry wide. Not specific to Chad. Rising cost curves has been an industry fact of life.

 

The presentation you cite (original) was done in March 2010. At that time they did not have any contracts in place to sell the output. Hence, Chad presented the numbers based on long term trends and also showed proforma spot rates. In the 2011 presentation the parameters changed to $1200 - $1600 to reflect the floor/ceiling price of the contracts they signed in October of 2010. Mean reversion doesn't make sense when your holding contracts unless you beleive the contracts are bogus.

 

But if you feel the counterparty risk is high - ask yourself why Fulida;

 

1) Bought Neucel outright.

2) Signed a contract 1 1/2 years in advance of production completion.

3) Said in May 2012 that they are pleased with FTP's output and would consider taking on more.

4) has a 5 year plan to double their own production.

 

These conversations are educational, healthy and useful. But I'm getting the distinct sense that shareholder conviction is waning. Capitulation?

 

 

 

 

[Liberty]

http://fortresspaper.com/images/pdfs/releases/NewsReleases_2010/Fortress_Specialty_Cellulose_March_24.pdf

 

When the deal was first announced, FTP estimated total cash cost of $536 with a pulp price of $900. At the time, DP was around $1500 and management rightly based it's model assuming mean reversion.

 

Then in 2011, FTP put out a presentation (uploaded previously in the thread; not on the website anymore) showing cash cost of ~$625 and DP prices of $1200 to $1600. Not sure why mean reversion didn't apply anymore.

 

Now we're looking at $725 cash cost and DP prices are below or at the lower bound of the previous estimate.

 

This is all history and I'm not complaining. But one needs to look at the facts. Management purchased Thurso based on a set of assumptions about revenues and expenses. These assumptions turned out to be wrong. Period. Therefore it's not clear to me that Chad would have thought the deal made sense in 2010 with today's knowledge. And I think one of the things we need to do as owners is evaluate management's ability to execute on its business plan.

 

Those are good points. No plan survives contact with reality intact. It's weird that on p.17 of that presentation the delivered cash cost seems to be 600 while on p.19 it's 536. Not sure if it's an error or what I'm missing..

 

In any case, I feel that for what I paid for, I'm getting a lot in return and have a very good chance of doing quite well, and that for the level of complexity of what was achieved, and the terms that were had from all the stakeholders, things went pretty well despite the increased costs and delays (some of those will also fall on competitors). There are some things that I'm not happy about (many of them out of management's control), but overall, there are a lot more things to be happy about IMHO.

 

As I said elsewhere, it would have been great if there had been no delays, no cost overruns, etc. My average cost might have been in the 40s or 50s or 60s (if I had bought at all) rather than in the low 20s, though, so in the end, 2-3+ years from now, I'm not sure I would have done much better if it had all been clear sailing.

 

And I think they used 1200 and 1600 in the 2011 presentation because by then they had their long-term contracts using for most of their production using those prices, and because they seem to believe that 1200 is a mid-term floor and 1600 is probably about as high as things could get over any period of time (?).

[shoeless]

It's weird that on p.17 of that presentation the delivered cash cost seems to be 600 while on p.19 it's 536. Not sure if it's an error or what I'm missing..

 

As I read it, $536 CAD does not include shipping.

 

2010-march presentation- cash cost: 536 CAD, shipping:  90 CAD. Total 626 CAD

2012-march presentation- cash cost: 559 CAD, shipping: 100 CAD. Total 659 CAD

To the above, for modeling purposes one needs to add sales commissions

 

AGM: $725 (I assume CAD) including shipping, and since ttt's notes say this is the number Chad said to use for modeling purposes then I assume it also includes sales commissions. Thus to compare to the above numbers we must deduct $24 (assuming $1200 sale price).

 

So since 2010 we've seen an increase from 626 to 700 in delivered costs to china which is around 12%

 

update: re-reading ttt's notes I'm not sure if 725 includes sales commissions or not. If not, we've seen an increase of 100 (16%)

 

[shoeless]

prunes, I'm glad you bring up Landqart. I'm actually quite confused about it and hopefully somebody can set me straight.

 

(deleted - i see my mistake  :-[  will repost after giving it more thought)

 

I'm happy to entertain an argument for DP reaching and staying the NBSK levels - can your contact give us more to chew on here in terms of arguing for this?