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

[lessthaniv]

Let me preface my comment by assuring folks that this is in no way an attempt to backslap someone. I’ve simply found this thread to be a valuable lesson in investing over the past couple of months and that’s always worth sharing. Follow the progression:

 

April 24th: I shared the following excerpt that I found valuable.

 

This has been alluded to on this forum but it's worth a read. The following brief excerpt has been taken from Philip Fisher's book - Common Stocks and Uncommon Profits and other writings which was originally published in 1958. What's occurring with Fortress at the moment is by no means new. I should also note that this excerpt was taken from Part One - Chapter5 titled "When to Buy".

 

 

http://i728.photobucket.com/albums/ww289/MikeNCathy/fisher1_zpsd554df25.png

http://i728.photobucket.com/albums/ww289/MikeNCathy/fisher2_zpsc617b968.png

 

April 30th: The Company closed the sale of Dresden for approximately $213M

 

May 13th: Q1 Financials were received without celebration. Through the month of May the stock dropped from $7.50 to the low $6's and the debentures fell from $84 to close to $67. Following the financials, clearly the tone of the board changed. Calculations began trying to determined how long the new found cash supply could last. At this point, I think it's quite useful to go back an re-read Phillip Fisher's comments again.

 

May 28th: Discussion begins on the debentures as the fall in price catches the attention of investors.

 

What do you guys think about the convertible debentures?  Almost 20% yield to maturity on this one today.

 

http://web.tmxmoney.com/quote.php?qm_symbol=FTP.DB

 

I know bond buyers are conservative but WOW, ... 20% !

 

Some conclude that the situation will worsen.

 

The debs are wholly unsecured, & subordinate to all other debt & trade payable. Interest is payable in stock at the company discretion, & deb holders agree to convert at $31.00/share. It has lost 31% of its value in the 1 year since they were issued, & the only reason the deb isn't lower is because it matures in 6.5 yrs.

 

If you dumped the deb at today's $68.51, & bought in the equivalent shares at today's $6.68, you could extract $47.00 per $100 of deb, less commission. If you simply reinvested the $47.00 in a 'real' bond with a 1.5% YTM, you could gain an roughly extra 71 bp for minimal risk.

 

FTP is capitalizing start-up costs, & burning a lot of cash. It is also highly likely that the asset sale was not voluntary, & that there will be a mystery disposition loss in Q2. A BV loss that may well  put these debs further behind, & trigger a downgrade.

 

Most would think they still have quite a way to drop yet  ;)

 

May 29th: Noticing the change in tone on the board, I thought it was prudent not to lose sight of things during this time of transition, hence I made this simple two sentence post.

 

Company has cash for a tender offer, or perhaps open market stock purchases to be held in treasury to offset dilution. Cash has given them flexibility as long as the co-gen gets up and running and the DP line stabilizes.

 

June: Over the course of the next 30 days, the debentures continued to slide to the low $60's and stock slid into the $5's while investors hypothesized about the eventual demise of FTP.

 

July:  I have a pretty good slug of FTP exposure already but this opportunity seemed too good to pass up. So, on July 8th I posted the following;

 

Picked up shares.

Picked up Debentures.

 

;D

 

Current: At this point in time we've now received the Q2 numbers and we're further down the tracks with more perspective. Even though FTP has much work left to do, it appears to me that (dare I say it?) perhaps we've made it through the worst part of the ride.  The trading in the stock and debentures has been firm and both have increased significantly since bottoming out at the end of June. Impressively, the increase continued right through the recent financials release which we haven't seen in quite some time. In front of us lies: a completed cogeneration facility and the corresponding decrease in expense; a continued increase in operating efficiency; a decrease in market overcapacity (China) as we've long hypothesized could occur; and, now this potential buyback and cancellation of shares/debentures to name a few.

 

Phillip Fisher's is a smart cookie and his chapter on "When to Buy" is worth the price of admission.

[sculpin]

IV - very good analysis.

 

 

This is from CIBC...

Fortress Paper Ltd.

 

Better Operational Results To Be Expected From

Both Thurso And Landqart

 

 We are adjusting our earnings and EBITDA estimates on Fortress Paper for

2013 and 2014, reflecting Q2 results, including weaker-than-expected

results at Thurso and better-than-expected results at Landqart. The LSQ

conversion project continues to seek a JV partner.

 

 Our EPS for 2013 are revised down to -$3.99 (previously we had EPS at

-$3.67) and for 2014 our EPS are revised to $0.17 (previously we were at

-$0.46). EBITDA for 2013 is revised to -$9.1 million (previously at -$7.5

million) and 2014 to $38.4 million (previously at $28.1 million).

 

 We expect the Thurso mill to show meaningful operating improvement in

Q3/2013 (with one month of cogen operation), and to show another step

function improvement by Q1/2014 with delivered cash costs to China

expected to be below C$800 per tonne by Q1/2014

 

 We reiterate our Sector Outperformer rating and maintain our price target

at $17.50, representing a 24% discount to our $23 NAV. We believe

significant operational improvements will be seen at both the Thurso and

Landqart mills in the next 12 months.

[Liberty]

I thought the CIBC report was quite interesting.

 

The excess DP supply equates to about 800,000 tonnes over the course of 2013 and 2014. However, it is doubtful that two of the projects on the 2014 capacity list (the Paper Excellence mill in Prince Albert, Saskatchewan and the Jari mill in Brazil) will proceed on the timetables expected, thus removing 500,000 tonnes of capacity in 2014. This then suggests that the current 5.5 million tonne viscose dissolving pulp market needs only to see about 300,000 tonnes or 5.5% of existing capacity closed or curtailed to bring better balance to dissolving pulp markets by 2014. We estimate that at least 10%-15% of operating dissolving pulp capacity today (550,000-800,000 tonnes) is generating significant cash operating losses of more than $200 per tonne and the likelihood of seeing at least 50% of this high-cost capacity curtailed in the next two to three quarters is quite high in our view .

 

The most important takeaway for investors is that we continue to believe Thurso will prove itself to be a good operating asset, producing consistent quality viscose dissolving pulp and will be able to compete on a competitive cost basis in the dissolving pulp sector. We expect that when Fortress reports Q4/2013 and Q1/2014 results, investors will begin to gain considerable confidence in this regard. We forecast that at mid-cycle dissolving pulp prices of US$1,150 per tonne, Thurso should be able to generate over $60 million of EBITDA at full operation, representing a 25% return on invested capital.

[Steady77]

Book value (based on the current shares outstanding) is $25 per share at the end of Q2.

[moustachio]

I thought the CIBC report was quite interesting.

 

The excess DP supply equates to about 800,000 tonnes over the course of 2013 and 2014. However, it is doubtful that two of the projects on the 2014 capacity list (the Paper Excellence mill in Prince Albert, Saskatchewan and the Jari mill in Brazil) will proceed on the timetables expected, thus removing 500,000 tonnes of capacity in 2014. This then suggests that the current 5.5 million tonne viscose dissolving pulp market needs only to see about 300,000 tonnes or 5.5% of existing capacity closed or curtailed to bring better balance to dissolving pulp markets by 2014. We estimate that at least 10%-15% of operating dissolving pulp capacity today (550,000-800,000 tonnes) is generating significant cash operating losses of more than $200 per tonne and the likelihood of seeing at least 50% of this high-cost capacity curtailed in the next two to three quarters is quite high in our view .

 

The most important takeaway for investors is that we continue to believe Thurso will prove itself to be a good operating asset, producing consistent quality viscose dissolving pulp and will be able to compete on a competitive cost basis in the dissolving pulp sector. We expect that when Fortress reports Q4/2013 and Q1/2014 results, investors will begin to gain considerable confidence in this regard. We forecast that at mid-cycle dissolving pulp prices of US$1,150 per tonne, Thurso should be able to generate over $60 million of EBITDA at full operation, representing a 25% return on invested capital.

 

I haven't closely followed this thread(almost 150 pages!) or company, but have kept an eye on it to see if some of the predictions on pulp prices and excess capacity become true. So, it is probable I am missing something here or have forgotten something that I've read. With that said, how are some operators losing so much money that enough capacity will be going off line and prices will go up, but this Thurso location will theoretically be able to operate at 25% ROIC? Is there something special about this plant, or would it be better to assume that at such returns other global capacity would come back online and prices would settle back down again?

[Liberty]

how are some operators losing so much money that enough capacity will be going off line and prices will go up, but this Thurso location will theoretically be able to operate at 25% ROIC? Is there something special about this plant, or would it be better to assume that at such returns other global capacity would come back online and prices would settle back down again?

 

The short answer is fiber cost. The highest cost producers, many in China, pay a lot more for their fiber (often importing it from other countries, which can lead to quality problem because you have less control over your mix and how it 'ages').

 

Because of this, along with the fact that some types of plants are more efficient than others (cogen helps), some producers can make DP for, f.ex., $600/ton and others only manage $1200.

[moustachio]

Thank you Liberty. It still looks like a wait and see situation to me. We might be in another global recession that crushes prices by the time other plants curtail production...

[Myth465]

I am sitting on a decent unrealized loss, but its a relatively small part of my portfolio.

I predict this will work out like - Xtreme Drilling and Coil which I bought at the very end of their losses

 

Rapidly made 50%, and hoping for a bit more. Either that or it will be a zero after some bleed.

Chad will get this to break even, or profitability or I will lose a small chunk of money.

 

I will watch (not too closely) and hope to add on the quarter which has breakeven provide with the last few kinks worked out.

After that it should be smooth sailing. If we bleed to death, then this will just get less and less looks, and be a smaller and smaller piece of the pie which will be sold when I have upside I need to minimize from a tax perspective.

 

What do you guys think.

[alertmeipp]

I am sitting on a decent unrealized loss, but its a relatively small part of my portfolio.

I predict this will work out like - Xtreme Drilling and Coil which I bought at the very end of their losses

 

Rapidly made 50%, and hoping for a bit more. Either that or it will be a zero after some bleed.

Chad will get this to break even, or profitability or I will lose a small chunk of money.

 

I will watch (not too closely) and hope to add on the quarter which has breakeven provide with the last few kinks worked out.

After that it should be smooth sailing. If we bleed to death, then this will just get less and less looks, and be a smaller and smaller piece of the pie which will be sold when I have upside I need to minimize from a tax perspective.

 

What do you guys think.

 

I think if the China tax issue is resolved in favour, this will fly. It should have +cash flow when the cogen is on, nice cash cushion, hopefully a equity partner on LSQ.

[Liberty]

Question for those more familiar with the TSX buyback rules than I am;

 

Is it standard that companies have the right to buy a big block of stock once a week above what they are permitted daily?

 

ie. you can buy X shares per day, which represents Y% of average volume, but once a week you can buy a big block.

 

I ask because there's another Canadian company that I own, and the CFO told me that it was their only way to buy back as much stock as they wanted. Daily volume are too low, so they could never reach the full amount they were approved for from just those, but once a week they could do a big block (hundreds of thousands of shares at once) and that's how they got most of it.

 

If that's the case, I think FTP just bought back 163k shares :)

[triedtestedand]

a) Yes ... see item #7 below.

 

  http://tmx.complinet.com/en/display/display.html?rbid=2072&element_id=566&print=1

 

b) Maybe someone else bought?  Or someone is covering a short? A Dhandho indicated to me recently that short interest was around 885K shares.  The float getting smaller doesn't help that constituency.

 

[Liberty]

a) Yes ... see item #7 below.

 

  http://tmx.complinet.com/en/display/display.html?rbid=2072&element_id=566&print=1

 

b) Maybe someone else bought?  Or someone is covering a short? A Dhandho indicated to me recently that short interest was around 885K shares.  The float getting smaller doesn't help that constituency.

 

Thanks.

 

It's certainly possible that someone else bought. We'll see on CanadianInsider.com when they report buybacks, I suppose.. But to see such a large block traded 2 days after buybacks begin does make it fairly likely that this is the company IMO.

 

Knowing this right now rather than later when they report doesn't really change anything, though, so this is just idle speculation. But I just would like to see them buy as much stock and debentures as possible before the cogen is operational and thurso finishes ramping up, so the sooner the better.

 

 

[triedtestedand]

If FTP did buy back the 163K, and if they did buy max in previous 4 days as well (11K/day), then weekly total would be 207K, or ~ 1/6 of the authorized limit of 10% of outstanding float ... i.e. at that rate (and price), they could tap out the 10%/$15M max by the end of the quarter.  Oh what you can do with a linear extrapolation ... ;-)

[lessthaniv]

If FTP did buy back the 163K, and if they did buy max in previous 4 days as well (11K/day), then weekly total would be 207K, or ~ 1/6 of the authorized limit of 10% of outstanding float ... i.e. at that rate (and price), they could tap out the 10%/$15M max by the end of the quarter.  Oh what you can do with a linear extrapolation ... ;-)

 

When I was a kid, my Dad used to say to me; "If my Aunt had balls, then she'd be my Uncle".

;D

[Liberty]

If FTP did buy back the 163K, and if they did buy max in previous 4 days as well (11K/day), then weekly total would be 207K, or ~ 1/6 of the authorized limit of 10% of outstanding float ... i.e. at that rate (and price), they could tap out the 10%/$15M max by the end of the quarter.  Oh what you can do with a linear extrapolation ... ;-)

 

That's just the common, though.

 

They could probably burn through the 15m pretty quickly if they split it between the common and the two debentures and are lucky finding big blocks. We'll see.

[lessthaniv]

1) Dec 31/2019:  7%          $69M, Conv @ $31            (2,225,806 shares - 15.29% dilution)

2) Dec 31/2016: 6.5%        $40M, Conv @ $37.5          (1,066,667 shares - 7.33% dilution)

 

Total potential dilution : 3,292,473 - 22.6%

 

3) Current Shares Outstanding: 14,561,417

4) Public Float: 12,028,600

_____________________________

 

Under the buyback:

 

They can buy  a maximum of $4M of 6.5%'s

They can buy a maximum of $6.9M of 7%'s

They can buy a maximum of 1,202,860 common shares

 

Such that the combined total doesn't exceed $15M

 

______________________________

 

So, looking at the shares first;

 

They have an undiluted book value of $25/share. Currently trades at $7.80.  If they execute all the shares only they can pay up to an average cost $12.47/share and stay under the bid parameters of $15M. If they could successfully buy 1,202,860 for an average of say $9/share, they are cancelling shares at 36% of stated book value and will only use up $10.8M of the bid - which means they could then move onto the converts with the remaining $4.2M. The 1,202,860 shares being acquired and cancelled would effectively reduce the future dilution related to these converts to around 2,089,613 or 14.4% from 22.6%.

 

With any remaining funds the company can move onto the converts. Each series offer pros/cons: The 6.5%'s mature at the end of 2016, however they carry lower interest payments and a higher conversion price. The 7%'s mature at the end of 2019, but have a  higher interest cost and lower conversion price making them riskier from a dilution perspective.

 

Unlike others have expressed, I'm less worried about total debt in the company. Their Net Deb/D+E ratios are in line or better than both Sateri and Lenzig. The problem has been the assets have been bleeding money which makes carrying any debt, more difficult. I suspect some positive EBITDA production on the way from both assets and with that hopefully things settle out.  Now, therefore, is the time for a conservative buyback as I've hoped for some time.

 

 

 

 

[Steady77]

The 159,500 block trade today is showing Canaccord as the buyer and seller.  Who is FTP using as their brokerage firm?  Chad worked with Canaccord from 1997 to 2002.  Coincidence?  Maybe.  We'll see from the insider reports.

[alertmeipp]

The 159,500 block trade today is showing Canaccord as the buyer and seller.  Who is FTP using as their brokerage firm?  Chad worked with Canaccord from 1997 to 2002.  Coincidence?  Maybe.  We'll see from the insider reports.

 

Don't think it's insider. Probably just a pre-arranged transaction.

[triedtestedand]

Leaderboard has changed a bit:

 

http://investors.morningstar.com/ownership/shareholders-major.html?region=CAN&t=FTP

 

Ramius LLC is new, w 410K shares position as of June 30th ... will see how opportunistic they are.  They appear to be activist shareholders.

[Liberty]

The 159,500 block trade today is showing Canaccord as the buyer and seller.  Who is FTP using as their brokerage firm?  Chad worked with Canaccord from 1997 to 2002.  Coincidence?  Maybe.  We'll see from the insider reports.

 

Don't think it's insider. Probably just a pre-arranged transaction.

 

Appears you were right, the company confirmed to me that Raymond James is their broker for the debs and Blackmont for the common.

[alertmeipp]

i don't see any transaction yet. The volume is pathetic anyways.

[alertmeipp]

based on previous communication, we should hear the water pump and lsq update soon, interesting time. making the dp division profitable will be huge

[OptsyEagle]

Hard to imagine that it has almost been a full year since the original scheduled completion date for that cogen plant.  This delay has almost made it a non-event, but the money from it should spruce things up a fair bit. 

 

I caution, however, that being EBITDA positive does not make the plant profitable nor the company.  I think I calculated another $150 per tonne of DP prices, above their cost estimates, to do that, however, if Landqart can maintain its current performance numbers, that number can be reduced by $50 or so.  Remember, there is still a lot of interest on debt to pay, maintenance capital to spend and of course, corporate expenses.

[alertmeipp]

Hard to imagine that it has almost been a full year since the original scheduled completion date for that cogen plant.  This delay has almost made it a non-event, but the money from it should spruce things up a fair bit. 

 

I caution, however, that being EBITDA positive does not make the plant profitable nor the company.  I think I calculated another $150 per tonne of DP prices, above their cost estimates, to do that, however, if Landqart can maintain its current performance numbers, that number can be reduced by $50 or so.  Remember, there is still a lot of interest on debt to pay, maintenance capital to spend and of course, corporate expenses.

 

I agree on this one, ultimately, they need the DP price to be above 1k to see nice profit.

 

Nonetheless, I think we will get a nice pop when the cogen is finally on-line simply because it will reduce the cash burn.

[tombgrt]

Little relevant article today in 'Metro', a Belgian newspaper.

 

 

http://img854.imageshack.us/img854/6793/ygcg.jpg

 

Uploaded with ImageShack.us

 

 

I'll translate it later today. It mentions the transparant window that Durasafe also offers. It's unclear to me whether BoE would ever use Landqart as it's supplier or if they would produce it themselves or go to DLR.

 

 

There is still potential to make Landqart into a nice profitable niche company. Always said Dresden and Landqart had a possible moat where their DP business will need to be a low cost producer to get profitable. Too bad this last part has been failing horribly so far. We'll see how it all turns out.

 

Edit: Had to edit it. Print screen at work and my second computer screen was on it as well. It contained a client's contract! Glad I saw it. :x