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

[triedtestedand]

Here's a couple of interesting graphs cut-n-pasted recently from ccfgroup.com website:

 

a) DP vs cotton-linter prices over past 18 months

 

b) VSF price & margin over past 18 months

 

What would be as useful would be an overlay of the two, along with a graph I once saw (which can't find at the moment) which showed VSF plant operating rates over the same period.

 

Overall though, it does point out to me that industry-wide VSF margins are fairly skinny, reinforcing an observation from Sateri's H1-2012 results, which highlight that they make better margin on even commodity grade DP than on VSF. (And yet despite all that they've committed another half-a-billion dollars in a VSF plant?)  So the best sustainable spot to be in is definitely a low cost DP producer, especially when VSF prices today in China are way less than domestic cotton prices.  It does make Thurso and LSQ intrinsically of interest to a Chinese VSF producer, no?

 

That said ... we wait on Thurso continuing to make progress.. 

 

In the interim though, if I'm Chad I'd look to sell Landqart ... if even to liquidate, get breakeven, and get $40M would simplify the story, and remove risk.  And further, with QE3 money greasing wheels, maybe there is a credit market window of opportunity re-opening where he can find a private equity buyer for Dresden willing to fork out >5x EBITDA ... following latest upgrades Dresden could likely make $11.5M/qrtr, which at that multiple would translate to a $230M pricetag.  Between those two, they would be awash in liquidity and make a fortress of the balance sheet.  Heck ... it's do-able ... Carlyle group just paid >9x EBITDA for DuPont's car paint unit, and I just read about some fancy new "MLP" structures used to package up various income producing assets.

 

http://online.wsj.com/article/SB10000872396390443720204578000123518794446.html

 

 

 

[Liberty]

Thanks Triedtestedand!

 

One thing I'd like to know is how much further they think they can push Dresden. Seems like every year they are increasing capacity and utilization... Are they about to hit a hard ceiling that would require lots of capex to bust through, or are they just getting started?

 

Either way, I'll admit that a sale for 200M+ would certainly give a whole different feel to the balance sheet and help grease the way for more acquisitions, if that's still what they want to do. The whole company is selling in the secondary market for 203M right now, so it would certainly be interesting to see the market's reaction to that :) If the acquisitions they want to do can't/won't happen (they most certainly don't have tons of targets remaining by now - I'd guess at most half a dozen, with maybe half that really fitting all the criteria they want), they could easily do big buybacks with that dough.

 

About Landquart, I still have to defer to their judgement. They seem unemotional enough about assets and good enough capital allocators that if they thought the best thing to do with it right now was to close it or sell it in a fire sale, they'd do it. So I have to assume that they think they can either turn it around enough to make it pay for itself, or enough to get a better price in a sale later. I know it's not the most satisfying answer, but that's all I have right now, and if I didn't trust them that far, I wouldn't have invested in the first place. But who knows how it'll turn out...

[triedtestedand]

Liberty:

 

With August optimizations, capacity at Dresden goes to 60K tons/yr from 56K tons/yr, at a CAPEX cost of $3.7M.  I think I recall hearing that they might be able to squeeze out a similar incremental optimization next year ... enough to grow with the market and maintain >50% market share.  But after that,  they'd hit that hard ceiling and need to invest in a whole new line ... and probably then have to wait for the market to grow into the added capacity.  So selling it now would provide some incentive/buffer for a new owner to secure a bit more revenue/margin growth without much cost/risk, and treat it more as a stable income generator.  It's definitely proven itself as a cash generating machine.

 

As far as Landqart's concerned (ironically being in the business of generating cash, but actually not making any) ...  unless they get flush real soon with a huge set of orders for super-high-margin Durasafe, turning it around still isn't likely to generate the same size EBITDA #'s that they're looking for with the others, and it probably occupies a disproportionate amount of management energy/focus (especially being in high cost jurisdiction, and being a niche player), so as such I think they'd be in better hands with an actual printer who doesn't have a paper supplier (or who needs more such capacity).  They've run out the string on this one IMHO, and could use the cash elsewhere (if even in my own shareholder pocket).

[sculpin]

CIBC was out with a 100+ page report initiating coverage yesterday with a $27 target price. Tried to post but was too large of a file to download.

 

Found this snippet from the report interesting from a valuation standpoint in capturing the worth of the 2 cogen plants at Thurso & LSQ:

 

Green Energy Will Be A Meaningful EBITDA

Stabilizer For The Dissolving Pulp Mills

 

We expect each of the pulp mills that Fortress is converting to dissolving pulp

operations will benefit from meaningful green energy contracts with Hydro

Quebec. These revenue streams will serve to provide a stable level of cash flow

and substantially improve the competitive cost position of each of these mills.

The Thurso green energy agreement is already in place and provides for the sale

of 18.8 MW of power per hour, or approximately 152 GWh per annum at a rate

of approximately $118 per MWh, or approximately $18 million per annum. This

equates to a cost offset for Thurso dissolving pulp of approximately $90 per

tonne at full operating capacity.

The LSQ energy purchase agreement with Hydro Quebec is under negotiation

and we expect the company to finalize the agreement by the end of Q3/2012.

We expect the purchase rate of power will be in the range of $108 per MWh, and

will be for about 50% greater volume of electricity per annum than Thurso.

Based on an analysis of steam generation, Fortress believes the LSQ energy

island can be operated at a rate close to 34 MW per hour and the energy

contract will reflect a volume purchase rate of approximately 230 GWh per

annum. We expect the annual purchase of green energy by Hydro Quebec from

the LSQ mill to be in the range of $24 million per annum and the contract to be

a 25-year term compared to the 15-year term at Thurso. This equates to a cost

offset for LSQ dissolving pulp of approximately $96 per tonne at full operating

capacity.

Combined, these two green energy contracts will provide some $42 million of

stabilized cash flow per annum to Fortress’s dissolving pulp operations . If we

apply a utility type multiple of 8x EBITDA, this green energy cash flow would be

worth $336 million and represent value equivalent to approximately 75% of the

total capital that Fortress is spending on the Thurso and LSQ conversions.

[triedtestedand]

There are some good nuggets in the report.  I'm aligned with their thinking r.e. strategic options (esp wrt divesting of Landqart soonest - which they repeat multiple times during the report, putting a base value of $25M against it; and also possibly Dresden - if they can get good price, which they target at 6x EBITDA, or >~$220M) which have cut-n-pasted below:

 

Strategic Alternatives

 

Focus Is On Execution In Dissolving Pulp

Fortress’s strategic priority for the better part of the next two years is first and foremost its dissolving pulp business, and: (1) the successful ramp of the Thurso mill to meeting its production target of 200,000 tonnes per annum while also meeting the stringent product quality requirements of the viscose dissolving pulp business; and (2) the successful conversion of the LSQ mill with an on-time, on- budget conversion that sees that mill producing dissolving pulp by Q3/2014.

 

Decision On Landqart Mill

The company’s other strategic priority is to effectively deal with the Landqart security paper mill. We see little hope for a strong operational future for this mill under Fortress management and would applaud a plan that leads to a disposition of this asset within the next year.

 

Strategic Options In The Wallpaper Base Business

Fortress will also be considering the best path forward for the wallpaper base business. While a niche business, this continues to be a growing market and the market demand is expected to grow from 110,000 tonnes in 2011 to approximately 175,000 tonnes in 2015.  Thus, Fortress can either decide to remain in this niche business and look for intelligent ways to add further capacity, or it could decide to sell the business if a full value offer were presented. The capital realized on exiting this business could be applied to debt reduction and/or further growth opportunities in the dissolving pulp sector.

 

Other Growth Possibilities

Fortress continues to consider business arrangements that will augment growth and create shareholder value.

Integration In Some Form With Viscose Staple Fiber Manufacturers  One area that may be worth consideration is further integration with viscose staple fiber manufacturers (VSFM) in China. The dominant players in the global viscose staple fiber business like Aditya Birla, Lenzing and Sateri are vertically integrated to a certain degree with captive viscose dissolving pulp supply. There are many growing Chinese VSFMs that are looking at ways they can achieve vertical integration as well. Fortress may be able to play a role in assisting a VSFM in this regard. Possible transactions could range from investment by a VSFM directly in Fortress, or combining VSF manufacturing capacity with Fortress’s viscose dissolving pulp capacity, or combining a Chinese viscose dissolving pulp operation with Fortress’s operations. The point we are looking to make is that Fortress, as it successfully converts and ramps up its dissolving pulp production, will have strategic assets that will be recognized for their inherent value.

 

Expanding The Bio-refinery Concept

The other area that Fortress will be looking to derive more value from is the dissolving pulp process byproducts that today have no material value and are burned in the recovery boiler. These products are hemi-cellulose and lignin.

Hemi-cellulose is composed of carbohydrates based on pentose sugars (such as xylose) and hexose sugars (such as glucose and mannose). Opportunities to use this by-product include: (1) the manufacture of furfural (can be used as a feedstock for furfuryl alcohol, which is used in the production of resins or in the production of furan, which in turn is used to manufacture pharmaceuticals, chemicals or stabilizers; (2) the manufacture of xylose or xylitol, which is used in food and confectioneries (such as mouthwash or toothpaste); or (3) the production of ethanol through fermentation.

Lignin can be used in the manufacture of both biofuels and biomaterials (possibilities include thermo-plastics, adhesives and resins, and carbon fibers). Companies such as Vancouver-based Lignol (LEC-V) are pursuing these opportunities.

While it is early days for the application of these technologies, they do represent avenues of incremental value that will most probably be realized in the next three to five years. The other benefit of finding uses for these by-products is that often dissolving pulp mill production is limited by the lignin and hemi- cellulose loadings on the recovery boiler, and if applications can be found for some of this material, it would permit a greater volume of dissolving pulp production. For example, at the Thurso mill, if Fortress had a use for the hemi- cellulose produced in the cooking plant, it could increase dissolving pulp production by approximately 125 tonnes per day or 44,000 tonnes per annum with only limited additional capital investment.

 

Moving Up The Specialty Cellulose Value Chain

The other value-enhancing initiative that Fortress may consider in the medium term is moving some production into the higher-alpha specialty dissolving pulps, which are used in the production of products such as acetate tow or cellulose ethers or microcrystalline cellulose or nitro cellulose. While this is a smaller market than viscose dissolving pulp, it is also a much less volatile market from a pricing perspective, and a higher-margin market. Specialty dissolving pulps are currently selling for between US$1,200 and US$1,800 per tonne (nitrates around US$1,200 per tonne, ethers and MCC around US$1,400 per tonne and acetates between US$1,600 and US$1,800 per tonne) while viscose dissolving pulp is selling for US$1,050 per tonne. While specialty dissolving pulps are more expensive to manufacture, the cost increment is nowhere near the up to US$750 per tonne pricing differential that exists today.  The black spruce softwood fiber that the LSQ mill will have access to would make a high-quality, high-alpha pulp, and we estimate Fortress could produce up to 150,000 tonnes of specialty dissolving pulps between the Thurso and LSQ mills. However, we also believe that the management team at Fortress fully understands that over the next two years, its job is to successfully convert and ramp up the Thurso and LSQ mills as viscose dissolving mills. Any move into specialty dissolving pulps would be in the medium-term horizon.

[Liberty]

The other benefit of finding uses for these by-products is that often dissolving pulp mill production is limited by the lignin and hemi- cellulose loadings on the recovery boiler, and if applications can be found for some of this material, it would permit a greater volume of dissolving pulp production. For example, at the Thurso mill, if Fortress had a use for the hemi- cellulose produced in the cooking plant, it could increase dissolving pulp production by approximately 125 tonnes per day or 44,000 tonnes per annum with only limited additional capital investment.

 

This just blew my mind. I had never thought of it this way, and I don't remember hearing the company ever mention it  quite like that (yes, biorefinering would get more value out of the feedstock, but I didn't know it could also increase DP production). This would improve the overall economics of the project significantly.

 

Anyone can confirm that this is actually how things would happen? I'm not sure I quite understand how lignin and hemi-cellulose could bottleneck DP production... Can anyone shed some light on how exactly this process works?

 

In any case, very interesting stuff.

 

Update: I've been in touch with FTP and they asked one of their DP experts for his views on this. Am just waiting for the email.. They seemed to be saying that we shouldn't expect something quite as dramatic as CIBC is saying, but there might be some mileage there anyway. I'll update you guys when I have the email.

[Liberty]

Here's what one of FTP's DP experts had to say (via Chris Holland, who did a great job getting this info to me in less than a day):

 

“CIBC’s analysis is correct although 44,000 mt of additional capacity is theoretically correct but in practice it would be somewhat lower.  When switching from paper pulps to dissolving pulps we have to remove the hemi-cellulose component of the wood. This hemi-cellulose is combined with the lignin component and then burned in the recovery boiler to generate steam for the process and to produce electricity.  The added hemi-cellulose overloads the recovery boiler which quickly becomes a bottleneck.  To de-bottleneck a recovery boiler is very expensive and therefore any opportunity to offload hemi or lignin can allow incremental production of dissolving pulp as typically most other process areas are not a bottleneck.”

 

I like that he only thinks it would be "somewhat" lower than the 44k/mt. Even if it's just half (22k/mt), that would make a big difference in cost per ton since the higher volume would be spread over similar fixed costs. And that doesn't even include the biorefinering's added value.

 

Of course, going into biorefining probably isn't simple and must take a while, so this isn't a short-term catalyst. But it's good to know that there's this long runway ahead and that there are known ways to squeeze more cashflow out of these assets.

[FrankArabia]

this sounds like a huge cigar butt.

 

all this technical talk is only masking the real problems underneath the company.

[Liberty]

this sounds like a huge cigar butt.

 

all this technical talk is only masking the real problems underneath the company.

 

Please elaborate.

[FFHWatcher]

this sounds like a huge cigar butt.

 

all this technical talk is only masking the real problems underneath the company.

 

Cigar butt investing involves company's with "one puff of smoke left".  FTP's largest assets with the Specialty Cellulose business, in one case, haven't even started to produce anything.  The other very large asset there has just started production this year.  As for the banknote and security papers printing business, perhaps if paper currency eventually gets replaced by electronic currency, I could agree with what you are saying.  But for the most part, I have no idea what you are talking about. 

 

Perhaps you are using the 'cigar butt' term with reference to the stock price?

[FrankArabia]

I suppose this is not even a cigar butt than as their operations are barely off the ground really.

 

Just sounds like this company has "potential". Not sure why some value guys are all over this. The analyst I work work with who covers this stock don't think its worth anything more than $18.

[jeffmori7]

Just sounds like this company has "potential". Not sure why some value guys are all over this. The analyst I work work with who covers this stock don't think its worth anything more than $18.

 

The Dresden mill alone is worth more than the actua marketcap!

[Liberty]

I suppose this is not even a cigar butt than as their operations are barely off the ground really.

 

Just sounds like this company has "potential". Not sure why some value guys are all over this. The analyst I work work with who covers this stock don't think its worth anything more than $18.

 

Ok, so basically you haven't really taken an in-depth look at it and it's not your style. That's fine.

[FrankArabia]

The Dresden Mill is worth more than the market cap? how do you get to that valuation and how much cash does that mill throw off each year?

 

This is from ABC Funds:

 

"The Dresden Mill is located in the town of Heidenau, 12 kilometres south of Dresden on the Elbe River. The mill has total capacity of 36,000 tonnes and a 12,000 tonne machine costs approximately EUR 30 million. Therefore the total replacement value of three 12,000 tonne machines is EUR 90 million or CAD $125 million. Additionally, the Dresden complex includes land, a hydroelectric plant and a water treatment facility, which were appraised at CAD $50 to CAD $100 million combined."

 

 

[Liberty]

The Dresden Mill is worth more than the market cap? how do you get to that valuation and how much cash does that mill throw off each year?

 

This is from ABC Funds:

 

"The Dresden Mill is located in the town of Heidenau, 12 kilometres south of Dresden on the Elbe River. The mill has total capacity of 36,000 tonnes and a 12,000 tonne machine costs approximately EUR 30 million. Therefore the total replacement value of three 12,000 tonne machines is EUR 90 million or CAD $125 million. Additionally, the Dresden complex includes land, a hydroelectric plant and a water treatment facility, which were appraised at CAD $50 to CAD $100 million combined."

 

Your info is very old. Dresden now produces 56,000 tonnes per year, has around 50% of world production market share (and growing) in its niche, and lower costs than its competitors (they coat the paper online, which nobody else does, etc), and it throws off close to 40m EBIDTA per year, so even at a 5X price it would be around 200m.

[FrankArabia]

so why is company barely making any money? their EBITDA LTM is roughly negative 2 million?

 

i sense they got a bunch of hidden assets (both good and bad).

[jeffmori7]

FrankArabia, could you just start by looking at the financial results of the company more in depth?

 

Ah, and if you read this entire thread, you will get a lot of answer also! Then feel free to ask your questions!

[Liberty]

so why is company barely making any money? their EBITDA LTM is roughly negative 2 million?

 

i sense they got a bunch of hidden assets (both good and bad).

 

If you really want to know, all the info is in this thread and the company's financials.

 

It's definitely not an investment that will fit everybody's style, but in my opinion, it's a great asymmetric opportunity.

[FrankArabia]

sorry for the questions. i did look at the financials and figured it out. easy pass for me.

[kevin4u2]

sorry for the questions. i did look at the financials and figured it out. easy pass for me.

 

Frank, I too took a look at this one and decided to pass.  I just don't see the value in the financials either.  I have followed the discussion here from the start but most of the reasoning behind this one is the "faith" in the CEO.

[FrankArabia]

Kevin...i agree.

 

i think value investors cling on to this story because it sounds smart. i like to see profitability and cash. i don't see anything here. not even a dividend. excuses about why the company is operating in the red don't pay the bills. i just want to know who was buying this at over 30.

[Liberty]

Kevin...i agree.

 

i think value investors cling on to this story because it sounds smart. i like to see profitability and cash. i don't see anything here. not even a dividend. excuses about why the company is operating in the red don't pay the bills. i just want to know who was buying this at over 30.

 

I'm buying this for the earning power of the assets, because I think liquidation value is higher than what I'm paying for, protecting the downside, because I think the billions of people in developing countries who can afford a few more clothes will put significant pressure on cotton production which won't keep up because of structural reasons, and because I trust management to add value (they've bought great assets for peanuts in very cleverly structured deals) and be shareholder-friendly (the CEO owns ±20% of the stock).

 

It's a kind of risk/time arbitrage. I think these assets are worth X when running, but right now they aren't so the market assigns them a very low value. Sure I could wait for these assets to all be cash-flowing optimally to reduce risk, but maybe by then there would be no gap between IV and market price and thus no opportunity.

 

As someone else said elsewhere:

 

To reference Phil Fisher:

When to buy a good stock?

 

The best time to buy a company’s shares is right before the improvement of its earning power and before its shares price reflects the anticipated earnings improvement.

When the company’s commercial plant for a new processes is about to begin production. Initially, growth drains profit and other resources of the business. The point in the development of a new process that worth considering as buying time is that at which the first full-scale commercial plant is about to begin production. (Extra cost will incur, benefit of the new production has not crept into EPS. But eventually profit will come.)

When the company Introduces new products

When the company faces problems of starting complex plants. Such troubles are temporary rather than permanent

 

Is it a sure thing? No. Few things are. But I like the risk/reward profile, and we'll see how things turn out in a year or two...

[keerthiprasad]

I wont get into the details of why i hold shares,  but I was buying above 30 and I tend to agree with Liberty for the most part.  I dont think this is a sure bet, but it is a very assymetric one with the downside being significantly limited at current prices.

[triedtestedand]

Looks like an updated company presentation (dated Sept 20th)  was posted yesterday:

 

http://fortresspaper.com/images/pdfs/investor_relations/Fortress%20Paper%20Powerpoint%20Sept%2020%202012%20Black.pdf

 

Key picture is on page 12 ... which shows ramp-up of Thurso production rates until end-of-August.  Compared to similar graph from the previous presentation from early July (which displayed ramp-up until Jun11th, when they first hit a 7-day moving average >90%) ... the trend is encouraging (despite downtime), as continues to generally move upward, including a week-to-two-week stretch in August where they actually got pretty close to 100% of target.  They also state on p10 that the cost structure is coming into line with projections.

 

Not much else different between the presentations from what I recall.  For Thurso, it looks like they took out a slide which showed a bunch of DP attributes (viscosity, ash, etc.) and how they were rating ... but they also added in a slide for Landqart showing how the Swiss are enforcing their exchange rate with the Euro.

 

Now they just need to sell Landqart (for whatever they canget) and Dresden too? (if they can get a good price)

 

[Liberty]

Now they just need to sell Landqart (for whatever they canget) and Dresden too? (if they can get a good price)

 

Selling Landquart would definitely be a good move. If they know it can at least break even or make a little bit of money soon, it can make sense to wait until then to shop it around, but just the freed up management time and energy from getting rid of it would probably be worth it. I used to be more on the fence about it - figuring that if they're keeping it there's a reason - but as time goes on I'm starting to lean more heavily on the "sell it soon" side.

 

For Dresden, I think it's a good deal either way (a sale for 200m+ or keeping it operating close to 40m EBIDTA/y), and it seems to take very little of management's time since it runs so trouble-free.