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

[Liberty]

So I'm listening to the Whistler talk again to refresh my memory, and a few things stood out so far:

 

Thurso cogen should produce about 20m EBITDA/year. Nice stable source of cash, not cyclical. At the current stock price, just that cash will probably be worth a good chunk of the market cap (though of course we shouldn't double-count it if we use it on the other side on the DP production costs).

 

If I heard right, since they bought Dresden it went from 1m EBITDA/year to about 30m EBITDA/year.

 

Chad talked about DP spot prices, and how at the time there was some DP for sale at 1050 that was having a lot of trouble moving, but some other higher quality DP from another source was sold out "through march" (a few months ahead at the time) at a price of 1280. Looks like the "30 stringent criteria" for DP matter a lot to end users, and they won't just take whatever's cheapest if it's not what they need to fit their recipes or keeps their processes at optimal efficiency. So far the signs are good about Thurso producing some of the best DP in the world, and hopefully that turns out to be a nice competitive advantage (same is predicted for LSQ, but too early to tell) until they get certified for specialty pulp (which would be an even stronger moat and provide a few hundred $ more per ton).

 

He says his end customers are ready to pay up to 280 in spread between low quality DP and high quality, with the alpha being the main factor (and of course their long-term contracts take quality into account, not just the basic spot price).

 

I didn't remember that one: They've been "approached by viscose producers to set up operations in China." Seems like that's part of the reason why they are so confident about the cost structure in China; they did their homework to see if it could work for them... Says they believe cost in China for DP is probably close to 1300.

 

Something else I had apparently forgotten: The next Swiss Franc, which was delayed, will apparently use DuraSafe. Should be some pretty high-margin production for Landquart, though probably not huge tonnage. You can even see what they'll look like here (just do a search on the page for durasafe): http://www.polymernotes.org/country_pages/che.htm

 

Glad I listened again. It was good to refresh my memory, and if anything, I actually feel even more confident in the jockey than I did this morning when I increased my FTP sharecount by 80%.

[tombgrt]

Prunes: I would like to know more about that source if you can give any additional information. What level of management is he in? Quite a bold statement to make and based on the economics of DP and NBSK, prior and current conversions and underlying macro-trend (+ versus cotton), one take makes little sense. Would love to hear his reasoning. Does he expect this converging to happen or the whole company? Their contract prices seem pretty bad in any case...

 

And yes, I'm very confident Chad would pull the trigger again for Thurso today. Let's not forget that he started looking into DP before prices every reached anything near $1600/ton. The fact that he has stated that he is looking at making FTP a pure DP producer reinforces that imo.

 

@Liberty: A 80% position increase! Lucky you! Best I could do was +10%.  ;)

Btw, I think he'd now say the spread between low and high quality DP is a bit lower, more like $150-200/ton. (Just something I picked up somewhere from Chad in the last few months, can't remember where sorry.)

Correct about Dresden, quite amazing. Will we see $10m in EBITDA this Q?  :)

[shoeless]

Did you get the part where he says Landqart capacity for 2012 and into 2013 is at 1-5 contribution margin (around minute 8 )? Given revenue per ton of 13K like it was in Q1, and assuming 10K tons that is 130M in revenue. Even at 5% margin there is just not much there. I'm guessing the re-instated delayed order, if it is indeed from India, would likely be at the lower end of the banknotes rather than the Durasafe end and so doesn't much change the revenue per ton.

Labor costs at Landqart were 25% of operating costs according to the RJ report than initiated coverage (april 2008). Assuming this still holds and using it as a proxy for fixed costs (though there are ~10% fewer Landqrt employees in 2011 than 2008 this balances out with there being additional costs) - will Landqart be breaking-even at 1-5% contribution margin?

Given the current over supply in the banknote market I'm not sure we can conservatively expect higher margins at Landqart for a long time coming.

 

So prunes, I'm agreeing with you and others that have brought this up, the justification for the the investments made into Landqart isn't clear to me either.

 

Personally I'm weary of the price floor thesis for DP that Fortress would have us believe. Too much DP capacity is being added and coupled with a likely China slowdown (my opinion), I think even if Chinese suppliers were to stop producing there is a real risk of the price floor not holding.

 

Do recent acquisitions in the space reflect per-ton EBITDA like Fortress is projecting?

 

One other comment, depicting input costs as something out of Chad's control is not accurate. Signing long term contracts with customers but not with suppliers is a choice isn't it?

 

Overall I've learned a ton from the discussion in the thread but I have the feeling people who looked at the situation and have negative opinions just ignore the thread so the discussion is tilted to the positive which is not in anybody's best interest. So I welcome prunes questions and tone.

 

[premfan]

+1

[tombgrt]

A notion that can be entirely false if you can buy underused assets for $1 a piece, thus avoiding the big(gest) capital outlay that Buffett and Munger fear. Even better if you can actually move from a commodity product with that mill you bought for almost nothing to something that has characteristics of product with some competitive advantages, for example the non-waven wallpaper at Dresden.

 

I'm a big fan of Buffett and Munger but this is something entirely different. Obviously FTP isn't a great business at a good price. It's a fair business at best with a great operator, priced at a bargain price and an incredibly nice kicker if the DP thesis turns out to be correct.

[Liberty]

A notion that can be entirely false if you can buy underused assets for $1 a piece, thus avoiding the big(gest) capital outlay that Buffett and Munger fear. Even better if you can actually move from a commodity product with that mill you bought for almost nothing to something that has characteristics of product with some competitive advantages, for example the non-waven wallpaper at Dresden.

 

I'm a big fan of Buffett and Munger but this is something entirely different. Obviously FTP isn't a great business at a good price. It's a fair business at best with a great operator, priced at a bargain price and an incredibly nice kicker if the DP thesis turns out to be correct.

 

You beat me to it. I wouldn't invest in "the forestry sector", but FTP isn't the forestry sector anymore than FairFax is "the insurance sector".

[Liberty]

Did you get the part where he says Landqart capacity for 2012 and into 2013 is at 1-5 contribution margin (around minute 8 )? Given revenue per ton of 13K like it was in Q1, and assuming 10K tons that is 130M in revenue. Even at 5% margin there is just not much there. I'm guessing the re-instated delayed order, if it is indeed from India, would likely be at the lower end of the banknotes rather than the Durasafe end and so doesn't much change the revenue per ton.

Labor costs at Landqart were 25% of operating costs according to the RJ report than initiated coverage (april 2008). Assuming this still holds and using it as a proxy for fixed costs (though there are ~10% fewer Landqrt employees in 2011 than 2008 this balances out with there being additional costs) - will Landqart be breaking-even at 1-5% contribution margin?

Given the current over supply in the banknote market I'm not sure we can conservatively expect higher margins at Landqart for a long time coming.

 

As long as Landquart breaks even, I'll be relatively happy. I've given up trying to model it because who knows if the 13k/t revenue assumption is anywhere close to realistic since we don't know the mix that they had and how much the reinstated big order will provide (or the DuraSafe Swiss Franc order after that, or other things they have in the pipeline). On this one I'll just wait and see. It's not like I'm paying for it at current prices, and I think that if it had little chances of contributing it would have been shut down or sold by now.

 

So prunes, I'm agreeing with you and others that have brought this up, the justification for the the investments made into Landqart isn't clear to me either.

 

It is definitely the worst performing asset that they have so far. But I'm not convinced it can't be turned around.

 

Personally I'm weary of the price floor thesis for DP that Fortress would have us believe. Too much DP capacity is being added and coupled with a likely China slowdown (my opinion), I think even if Chinese suppliers were to stop producing there is a real risk of the price floor not holding.

 

That's definitely an important point in the investment thesis and each investor will have to decide what their confidence level is with regards to this.

 

One other comment, depicting input costs as something out of Chad's control is not accurate. Signing long term contracts with customers but not with suppliers is a choice isn't it?

 

Depends what the costs of hedging were. If they were very high, it might not have been worth it.

 

Overall I've learned a ton from the discussion in the thread but I have the feeling people who looked at the situation and have negative opinions just ignore the thread so the discussion is tilted to the positive which is not in anybody's best interest. So I welcome prunes questions and tone.

 

Ditto. As in the EBIX thread a while back with Hester, I welcome contrary opinion and appreciate the discussion.

[shoeless]

Labor costs at Landqart were 25% of operating costs according to the RJ report than initiated coverage (april 2008). Assuming this still holds and using it as a proxy for fixed costs (though there are ~10% fewer Landqrt employees in 2011 than 2008 this balances out with there being additional costs) - will Landqart be breaking-even at 1-5% contribution margin?

 

I forgot to say, 25% of operating costs came to 14-20 million in 2006-2009

So if they make 5% on 130M before fixed costs of 14-20 (not even counting depreciation) they're not breaking even.

 

I'm new to this type of stuff and I'm hoping somebody can point out my mistake...

 

I've given up trying to model it because who knows if the 13k/t revenue assumption is anywhere close to realistic since we don't know the mix that they had and how much the reinstated big order will provide (or the DuraSafe Swiss Franc order after that, or other things they have in the pipeline).

IMO the 1-5% includes the delayed order because I think he said these are the margins for the entire 2012 capacity.

[prunes]

Would love to see how you guys are calculating IV these days. What are you using as normalized DP & cost amounts?

[triedtestedand]

Interesting backstory article today on the Terrace Bay pulp mill purchase:

 

http://www.chroniclejournal.com/content/news/local/2012/07/16/chinese-firm-fought-hard-pulp-mill

[triedtestedand]

Oh, and here's the link to the E&Y document centre that has all the info on Terrace Bay:

 

http://documentcentre.eycan.com/Pages/Main.aspx?SID=102

 

I haven't checked thru it at all, but there may be some interesting tidbits.

[triedtestedand]

Terrace Bay document review ... some tidbits:

 

- 8 bids received by due date ... 6 for liquidation, 2 for ongoing operations (including Aditya Burla)

- 4 other LOI's received after due date ... including chinese bid (subject of the article) ... none pursued

- Terrace Bay does not have it's own power

- details of the non-winning bids being presented (in confidence) at court today (wonder if FTP was one of them??)

 

Aditya Burla's bid:

    - $2M cash consideration

    - forgiveness of Ontario gov't loan (~$24.5M)

    - assumption of some liabilities (mostly employee pensions, etc.)

    - exclusion of some non-core assets (mostly land)

    - exclusion of cash, AR, etc.

    - promise to invest $220M for conversion by 2016

    - no government financing

 

Am guessing then that the $110M denoted in the article represents equity injection for ongoing operations?

 

Chinese firm came in after the fact (i.e. after sale agreement signed) w/ a $35M cash offer (and subsequent request to have an open auction).  As article notes, they promised an immediate conversion, and also did not request any government financing.  They also mentioned immediately using the plant for semi dissolving pulp (which I haven't heard of).  A google search on that yielded:

 

http://umu.diva-portal.org/smash/get/diva2:514909/ATTACHMENT01

 

 

[tombgrt]

Thank you triedtestedand.

 

 

I've been looking at some press releases and documents from ICAC.

 

This is one of the last:

 

http://icac.org/wp-content/uploads/2012/07/PR-JULY-2012-World-Cotton-Trade-to-Decline-Significantly.pdf

 

Global 2012/13 cotton production is forecast at 24.9 million tons, down by 8% from this season: the decline in

prices during 2011/12 has driven cotton plantings down this year in many countries. Global stocks are expected

to expand by 10% in 2012/13 to 15.1 million tons. By the end of July 2013, global cotton stocks could represent

64% of global consumption, the highest stocks-to-use ratio since the mid-1980s. The projected accumulation of

cotton stocks will weigh on international cotton prices in 2012/13.

 

Interesting website: http://icac.org/

[jeffmori7]

Thanks for all the info guys, once again!

 

Added to my position today, average cost now under 22$.

[lookingstill]

Does anybody know when FTP is to release their second quarter results? Last year they released June 30, this year, it is July 17 and they still don't even have a news release as to when they are going to announce. Why would that be? It bothers me a bit.

[Liberty]

Does anybody know when FTP is to release their second quarter results? Last year they released June 30, this year, it is July 17 and they still don't even have a news release as to when they are going to announce. Why would that be? It bothers me a bit.

 

I don't think they released it June 30 last year, as that's the exact day when the quarter ends (afaik) and they aren't quite that fast :) 

 

From memory, I'd expect it in late July/early-August.

[lookingstill]

Does anybody know when FTP is to release their second quarter results? Last year they released June 30, this year, it is July 17 and they still don't even have a news release as to when they are going to announce. Why would that be? It bothers me a bit.

 

I don't think they released it June 30 last year, as that's the exact day when the quarter ends (afaik) and they aren't quite that fast :) 

 

From memory, I'd expect it in late July/early-August.

 

You are correct. Sorry, the brain didn't quite wake up yet. Just looked at the front page of last year's release without thinking that the date will just be the last day of the quarter. But anyway, they could've at least announced the release date by now. While adding at these levels, just itching to find out what their second quarter looks like.

[jose]

According to the TD report, Fortress is scheduled to report Q2 after market close on August 13.

[lessthaniv]

getting excited about q2 results is perhaps setting yourself up for a bit of a letdown. while i expect improvement, the real meat and potatoes will be in managements comments about Q3.

 

[Liberty]

getting excited about q2 results is perhaps setting yourself up for a bit of a letdown. while i expect improvement, the real meat and potatoes will be in managements comments about Q3.

 

Indeed, I wouldn't expect too much for Q2. It's really H2 2012 that will become interesting, and early 2013 after the cogen is done that I'm truly waiting for. Patience is required.

[lookingstill]

According to the TD report, Fortress is scheduled to report Q2 after market close on August 13.

 

Thank you.

 

I don't expect much from the Q2 results, just hope there are no significant unpleasant surprises.

[prunes]

Some questions:

 

In an interview linked off FTP's website, it was observed that Thurso's insurable value was greater than $800 MM and that scrap value was even more. Why then do the financials show an original cost closer to $80 MM? Im guessing this is probably 1950s untrended original cost and that depreciation was estimated. Is this right? Or was the equivalent of GAAP purchase accounting applied in which fair value was estimated?

 

Also, on a Sappi call they mention the 1 - 2 year vetting period for new DP suppliers. How did FTP manage to execute contracts in 2010 without a track record producing DP (management aside) and without Thurso operational.

[motownsf]

PULP Highlights from 01-15, Jul 2012

 

Prices for linter were stable at the beginning of the first half of this last fortnight in the Chinese domestic market. Cotton linter pulp industry meeting was held and pulp producers were advised to cut operating rate to control prices. Cotton linter market remained in stagnation during the second half of this last fortnight. In cotton linter market, both inquiries and sales have been improved, but prices still lagged behind as buyers cut offers and reduced purchasing volumes. In cotton pulp market, prices were largely stable.

Jul 2012    

[shoeless]

Also, on a Sappi call they mention the 1 - 2 year vetting period for new DP suppliers. How did FTP manage to execute contracts in 2010 without a track record producing DP (management aside) and without Thurso operational.

 

Are you sure the remark wasn't about specialty grade cellulose (Sappi makes that too)?

 

[tombgrt]

Fair questions Prunes, like your input. Hope someone can answer them as well. ;)

 

Not that I like how much attention this topic gets but it is interesting to see how people are becoming more nervous. Take the question about earnings release and the fear that something could be wrong.

 

I'm wondering what is preventing management to do a MBO at this point? I have knowledge or experience in this field so maybe someone could explain what possible problems could be. They could sell off Dresden and Landqart and probably pay back the debt of the MBO in one move? Would banks fear that there is too much leverage even if there is a very good chance that the other units will be sold? Would it leave FTP to leveraged compared to its two main assets, of which one would still be in process of transforming into a DP-producer? Or is Chad really hoping to use the money of any sale of non-core assets (Dresden, Landqart incl.) for a new acquisition, which would not be possible in an MBO unless it was financed with private equity from someone else?