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

[Liberty]

I don't think this has been posted here yet. Chad presents at an investment forum in October:

 

http://standrewsclubav.ca/login.php

 

Username and password are both "tpc". Chad speaks at around the 35 minute mark.

 

Thanks a lot for posting this.

 

I've just finished watching it, and I'm more impressed with Chad W. than ever before, and I was already a big fan.

[Liberty]

I found this posted on another board. Sorry if the formatting is all weird:

 

http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=30425693&l=0&r=0&s=FTP&t=LIST

[alertmeipp]

DP doesn't look at all short term, the cotton price is dropping ~50% since May.

I thought their full production cost is $600?

[Liberty]

I've watched the St-Andrews presentation a second time yesterday, and here's a few things that stood out for me:

 

The Bank of Canada assets they picked up for 750k include two machines with replacement costs of $15m each + all the IP and patents developed over years at the cost of millions. This division helps make Landquart more competitive.

 

Chad mentioned that he's looking at 5-6 mills that could be converted to DP, and he's including two of them in 2013 predictions of the competitive landscape (has enough confidence that he'll close those deals to put it out there).

 

These two new mills are both even lower-cost than Thurso (at least in the estimates), and one of them seems to have a little more production (the bar is wider on the graph) while the other is smaller.

 

He says that one of the mills he's confident he'll get has had 600-700m of investments in the past decade and he expects to get it for one dollar.

 

FTP is the first new entrant in DP in the past 40 years. Only a handful of conversions have ever been made, and FTP has hired most of the key players that worked on those conversions.

 

Asian mills use the more modern continuous process, which makes them lower cost for pulp, but means they can't be converted to DP (which requires the batch process). Also, one of te big China player doesn't have easy access to lots of fiber; they have to import 7 tons of fiber to make 1 ton of DP, and that makes them a high-cost producer.

 

Cotton prices can go down in the short-term, but I think there's a secular trend pressuring prices up. Even if China's economy slows down, clothes isn't the first place people will cut, and competition from food and tightening environmental regulations will mean that cotton acreage won't grow too much, or might even decline.

 

Since Rayon sells at a premium to cotton because of its better characteristics but costs less to produce, even if cotton goes down a lot, there should still be some margins for the low cost producers, allowing them to survive the down cycle without too much red ink.

 

Thurso's fiber supply includes the fiber from two other mills that have been shut down. Should be very safe.

 

I also love it every time to hear the stories of how he picked up the Mercer and Thurso mills. Great deep value investing, paying pennies on the dollar for assets making niche products with high barriers to entry and good margins, and then improving their productivity and focusing them on the highest margin products to get a double-whammy.

[alertmeipp]

don't you think the fact that he does so many "shows" these days is concerning? shouldn't be just keep quiet and buy? I assume there are not many other assets out there to at cents on a dollar. If there are, u got to wonder whether they are cigar butt.

[bathtime]

don't you think the fact that he does so many "shows" these days is concerning? shouldn't be just keep quiet and buy? I assume there are not many other assets out there to at cents on a dollar. If there are, u got to wonder whether they are cigar butt.

 

Great question, why talk about a deal if it can tip off your competitors?

 

I'm impressed by Chad, but looking back on it, he's been somewhat promotional in interviews. He's over-promised and under delivered with timelines for new acquisitions and gives a consistently optimistic view on DP pricing. In the past he has talked about 2012 EBITDA of $200 million from Thurso, more recently he has said $100-120 million, but based on the latest TD analysis it doesn't look like the latter will be achieved.

[Liberty]

I think some of it - like the St-Andrews thing - is just that with success comes more invitations to speak at conferences, and he probably expected only a few people to ever see it (we FTP stalkers aren't exactly average invetors), and some of it - newspaper interviews - is probably to pressure politicians. If he has a higher public profile, it's easier to get the kinds of deals that he got for Thurso, which require government action to get the fiber rights, advantageous loans, union deals, etc.

 

As for over-promising and under-delivering, I think it's still too early to tell. He's sometimes said "at today's prices, it would generate $X in EBIDTA", so it's normal that at lower prices - and more disadvantageous exchange rates - those numbers would be lower. But most of the problems of FTP have been from things that were out of management's control (market prices, union delays, equipment delivery delays, etc), so I'm not holding it against him.

 

I really appreciate the more negative view on FTP, and I'm always afraid of becoming biased about any of the companies that I follow, but I also don't want to take the opposite view just for the sake of it.. It's a delicate balance.

 

In any case, I think there are some interesting insights here about the TD report and DP prices/inventories:

 

http://www.stockhouse.com/Bullboards/MessageDetail.aspx?p=0&m=30426827&l=0&r=0&s=ftp&t=LIST

[bathtime]

Thank you for your thoughtful and balanced response, Liberty. I do believe Chad is taking a long term view on these projects and patience will likely be rewarded.

[Liberty]

Via SH, from a Canacord report:

 

 

Tour guide…On Thursday, Fortress management presented analysts with an update on its operating segments followed by a tour of its optical thread facility and its newly constructed dissolving pulp mill that was in its final testing phases, with production to start imminently. Following the tour, Canaccord Genuity Forest Products Analyst Neal Gilmer reiterated that he continues to believe investors should overweight the shares of Fortress Paper on the expectation of share price appreciation following the conversion to dissolving pulp. While the company has announced that it has begun start-up phase that included the final phases of water testing, he expects a certain overhang once the company has announced that pulp production has commenced with some consistent production results thereafter. The shares have declined recently following a slight delay to the production start up and slightly lower commodity dissolving pulp prices. However, after completing the tour, Gilmer said he is confident that production is within a matter of hours/days from beginning and that we will hear more in the coming weeks on the status of production. He also acknowledged that lower dissolving pulp prices have lowered potential near-term but maintains that margins remain at attractive levels. Further, he has recently seen announcements that a few of the high cost mills in China have stopped producing dissolving pulp, that should help stabilize the current supply/demand situation. Gilmer does not anticipate substantially lower prices, but near-term risk remains. The stock is now trading at 3.1x EV/2012E EBITDA, below what we believe a typical multiple of 5.5-6.0x should be. Gilmer believes that even with materially lower dissolving pulp prices in 2012, the shares remain attractive and below a typical multiple for the markets it operates in.

[Liberty]

Looks like production at Thurso has started:

 

http://www.marketwatch.com/story/fortress-paper-commences-dissolving-pulp-production-and-provides-corporate-update-2011-12-05-1631130

 

VANCOUVER, BRITISH COLUMBIA, Dec 05, 2011 (MARKETWIRE via COMTEX) -- Fortress Paper Ltd. ("Fortress Paper" or the "Company") announced today that it has commenced dissolving pulp production at its Fortress Specialty Cellulose Mill in Thurso, Quebec. The centerpiece of the project, a new state of the art pre-hydrolized kraft cooking plant, came on line successfully on Sunday. The commencement of dissolving pulp production signifies the successful completion of the conversion of the Fortress Specialty Cellulose Mill into a dissolving pulp operation.

 

Chad Wasilenkoff, Chairman and Chief Executive Officer of Fortress Paper, commented: "This is a momentous day in the history of Fortress Paper and a culmination of our work at the Fortress Specialty Cellulose Mill since acquiring the mill in April 2010. We are very proud to join the limited group of dissolving pulp producers in the world and look forward to completing our first shipments. We would like to thank all those involved in helping bring this project on line."

 

Dresden Mill

 

The Dresden Mill continues to lead the non-woven wallpaper base market globally. The order book remains strong and its recent upgrades to improve speed and capacity have been successfully implemented. During the past few months, Fortress Paper in its normal course has been reviewing each of its business divisions and assessing all options as part of its strategy to enhance shareholder value. As part of this ongoing evaluation, management identified a potential divestiture opportunity relating to its non-woven wallpaper base division. Given the financial uncertainties and lack of financial confidence in the Euro zone, Fortress Paper management decided not to pursue any divestiture option for the Dresden Mill. With the support of its management team in Germany, Fortress Paper intends to continue to grow this business division organically and potentially through strategic acquisitions.

 

Landqart Mill

 

The Landqart Mill has continued to experience challenges throughout the fourth quarter as a result of a strong Swiss franc, high raw material costs, and less than optimal production efficiency on its paper machines. The company expects that these issues will continue to materially impact results of operations in the fourth quarter. The Company anticipates that it will overcome many of these challenges with the new banknote paper orders that have recently been placed at the mill and which represent a significant portion of the mill's 2012 banknote capacity.

[AZ_Value]

Looks like production at Thurso has started:

 

http://www.marketwatch.com/story/fortress-paper-commences-dissolving-pulp-production-and-provides-corporate-update-2011-12-05-1631130

 

VANCOUVER, BRITISH COLUMBIA, Dec 05, 2011 (MARKETWIRE via COMTEX) -- Fortress Paper Ltd. ("Fortress Paper" or the "Company") announced today that it has commenced dissolving pulp production at its Fortress Specialty Cellulose Mill in Thurso, Quebec. The centerpiece of the project, a new state of the art pre-hydrolized kraft cooking plant, came on line successfully on Sunday. The commencement of dissolving pulp production signifies the successful completion of the conversion of the Fortress Specialty Cellulose Mill into a dissolving pulp operation.

 

Chad Wasilenkoff, Chairman and Chief Executive Officer of Fortress Paper, commented: "This is a momentous day in the history of Fortress Paper and a culmination of our work at the Fortress Specialty Cellulose Mill since acquiring the mill in April 2010. We are very proud to join the limited group of dissolving pulp producers in the world and look forward to completing our first shipments. We would like to thank all those involved in helping bring this project on line."

 

This is very good news. Let's see if operations going forward go as planned and Thurso doesn't encounter any more hiccups.

 

Liberty, you seem to be the resident expert on FTP so I'll address my question to you:

I heard Chad mention in one of the videos, maybe it was the investor presentation, that he had flown to China and secured contracts that set the price for some 70%+ of their expected production in the near future. I think he talked about a collar between 1,200 and 1,500 (I'm probably off on the numbers as I don't remember them exactly)

Do you know if there's any public record out there that would allow us to get more info on this? Other than Chad saying it? Info like who are the Chinese companies the contracts are with for instance. I'm just trying to look into who exactly will be the major customers the moment the dissolving pulp mill gets going.

 

[Liberty]

Hi AZ,

 

The collar for the biggest chunk of production is set between 1200 and 1600, and there's also a smaller fraction of the production that has been sold at viscose spot prices less 1000, which usually ends up being about 200 more than the DP spot price (this is from memory, so double-check anything I say).

 

I'm not aware of any public record other than what has been disclosed by the company. If they exist, they are probably somewhere in China...

 

On a conference call, someone asked Chad about these contracts and wondered how confident he was that they would be honored. Chad said that when looking for partners, it was a priority for him to make sure that whoever he made a deal with was a solid and trustworthy player. This is all from memory, but I remember getting the impression that he was very aware of that danger and that he might have left some money on the table just to make sure his deals with Chinese parties would be as dependable as possible. It does fit with his pattern of covering the downside before looking at the upside.

 

Let me know if any of this isn't clear. As I said, it's from memory, but with more time I could dig up the exact details in my notes.

[AZ_Value]

 

On a conference call, someone asked Chad about these contracts and wondered how confident he was that they would be honored. Chad said that when looking for partners, it was a priority for him to make sure that whoever he made a deal with was a solid and trustworthy player. This is all from memory, but I remember getting the impression that he was very aware of that danger and that he might have left some money on the table just to make sure his deals with Chinese parties would be as dependable as possible. It does fit with his pattern of covering the downside before looking at the upside.

 

 

Yeah... This is what I was kind of wondering if I could get a peak into who he's been signing contracts with.

Thanks for the answer.

 

[Liberty]

Mr Market sure is acting strange today. The company announces that they're done with the conversion of a plant that's worth more than the market cap of the whole company, and the stock's down 10%. Oh well, I bought more.. We'll see where it is in a few years.

 

I was expecting some people to sell for tax loss reasons (I bet a bunch bought it when it was 50-60), but this whole company having a market cap of 360m makes no sense.

[T-bone1]

Fortress was cut to "sector perform" at RBC Capital this morning, I don't have the report or know why though . . .

[bathtime]

Here's the number:

 

• Fortress Paper Ltd (FTP) price target cut to C$33 from C$43 at RBC

 

[Liberty]

Here's the number:

 

• Fortress Paper Ltd (FTP) price target cut to C$33 from C$43 at RBC

 

I'd be really curious to know how they get that number.

[lessthaniv]

Its got me stumped this morning. I expected to see a positive reaction to yesterday's confirmation. The delay and ramp up phase will lower the EBITDA production in 2012 and therefore I think its expected we'll see some downward revisions to targets but any way I slice it  my valuation comes in much higher than $25/share. I originally did my valuation work and came to around $63. I would suggest a lower target now due to lower Q4 EBITDA production and extending the ramp up further into 2012 on weakening prices.

 

I poured the numbers into my model last night and came up $58/share.  Significantly different than the market!

 

 

[Liberty]

I also have trouble coming with a valuation of less than 60 with just the current divisions, unless there's a huge fire-sale at the worst possible time, but I doubt that would happen as their balance sheet is solid.

 

But I also have a fairly high degree of confidence that they can pull off 1, maybe 2, other highly accretive DP acquisitions in the next year. That could bring things to the next level and we're definitely not paying for it at these prices.

 

Based on comments by the Mayor of LSQ, we might have some news about an acquisition there this month. But then again, we were supposed to have news last summer, so who knows... Even if it doesn't pan out, I expect the 4 divisions to be profitable and Chad's capital allocations skills to stay intact; once cashflow from Thurso comes, if he can't make acquisitions and the stock price remains depressed, I would expect significant buybacks. There are many levers that can be pulled.

[bathtime]

The VIC writeup on FTP in August mentioned regarding Dresden, "There are no public comps, but the company has reportedly received overtures at 7.0x EBITDA for this asset." Anyone have any thoughts on what would be considered a normalized EBITDA for Dresden in a sale?

 

The VIC writeup comes up with midpoint EBITDA of $30m at a discounted 5x EBITDA equaling $9.98/share.

 

 

[lessthaniv]

Looks like production at Thurso has started:

 

http://www.marketwatch.com/story/fortress-paper-commences-dissolving-pulp-production-and-provides-corporate-update-2011-12-05-1631130

 

VANCOUVER, BRITISH COLUMBIA, Dec 05, 2011 (MARKETWIRE via COMTEX) -- Fortress Paper Ltd. ("Fortress Paper" or the "Company") announced today that it has commenced dissolving pulp production at its Fortress Specialty Cellulose Mill in Thurso, Quebec. The centerpiece of the project, a new state of the art pre-hydrolized kraft cooking plant, came on line successfully on Sunday. The commencement of dissolving pulp production signifies the successful completion of the conversion of the Fortress Specialty Cellulose Mill into a dissolving pulp operation.

 

Chad Wasilenkoff, Chairman and Chief Executive Officer of Fortress Paper, commented: "This is a momentous day in the history of Fortress Paper and a culmination of our work at the Fortress Specialty Cellulose Mill since acquiring the mill in April 2010. We are very proud to join the limited group of dissolving pulp producers in the world and look forward to completing our first shipments. We would like to thank all those involved in helping bring this project on line."

 

This is very good news. Let's see if operations going forward go as planned and Thurso doesn't encounter any more hiccups.

 

Liberty, you seem to be the resident expert on FTP so I'll address my question to you:

I heard Chad mention in one of the videos, maybe it was the investor presentation, that he had flown to China and secured contracts that set the price for some 70%+ of their expected production in the near future. I think he talked about a collar between 1,200 and 1,500 (I'm probably off on the numbers as I don't remember them exactly)

Do you know if there's any public record out there that would allow us to get more info on this? Other than Chad saying it? Info like who are the Chinese companies the contracts are with for instance. I'm just trying to look into who exactly will be the major customers the moment the dissolving pulp mill gets going.

 

AZ,

 

Here is some helpful info for you :

 

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

 

Notes:

 

Data: US$/MT with $1US = $.95 CAD

 

Pre Cogen Facility:

 

Cash Cost = $620

Shipping = $100

____________________________

Total Cost = $720

 

Post Cogen Facility:

 

Cash Cost = $620

Cogen Benefit = ($88)

Shipping = $100

____________________________

Total Cost = $632

 

Contracts are in place to sell 78% of Thurso’s output. Those contracts are structured as follows:

 

2 Contracts are 5yr deals at the spot price with a US$1200/mt Floor and a US$1600/mt Ceiling. These two contracts represent 42% of the output.

 

1 Contract is a 10yr contract and is based on the Rayon price. Rayon generally trades at a premium to cotton. The formula is (Rayon Price – US$1000). Historically, this formula has provided a $200/mt premium to the spot price used in the other contracts. This contract represents 36% of the output.

 

The remaining 22% would likely be sold at spot prices.

 

[Liberty]

The remaining 22% would likely be sold at spot prices.

 

Mostly likely, yes. But there's always the possibility that they'll enter another long-term contract for it the next time prices are at a level that they like. Could it be that they didn't include it in the long-term contracts because they kept a margin of safety on the mill's DP production? Once it's up and running, confirming that they have 200mt/y, maybe they'll take a second look. Just a guess, though.

[lessthaniv]

Mostly likely, yes. But there's always the possibility that they'll enter another long-term contract for it the next time prices are at a level that they like. Could it be that they didn't include it in the long-term contracts because they kept a margin of safety on the mill's DP production? Once it's up and running, confirming that they have 200mt/y, maybe they'll take a second look. Just a guess, though.

 

Yes, I would agree that its a buffer.

 

If you look at the cash cost side in comparison to their global competitor landscape, they definitely appear to be a lower cost producer. It's been a rough market over the last couple of months. The global supply has increased north of 20% causing the commodity price to fall north of 30%. A rebalancing is necessary. As the commodity price slides the higher cost producers will curtail production rebalancing the market and stabilizing prices. It remains to be seen whether Fortresses counter-parties will honour the previously established floor price contracts should the spot price remain below the floor for an extended period of time. (Porter's 5 Forces - Who has the bargaining power?).

 

What gives me some added confidence is the contracts are with Chinese Rayon producers. (I can't believe I just said that in this market). Point being ... the Chinese DP producers are among the highest cost producers. This is because they need to import huge amounts of chips as they don't have enough trees locally which impacts their cost structure.

 

The cotton production yields in China have increased quite significantly over the years. However, this is due to weak environmental rules. In other words, China is growing more cotton on the same amount of land but its causing significant environmental damage. If Chinese yields fall back in line with global yields, the cotton supply tightens.

 

So, I think there is ample motivation for the Chinese Rayon producers to secure and honour a contract with a potential long term supplier. The proof will be in the pudding. Perhaps the market will gain confidence as orders are filled at the agreed upon price.

 

 

[Liberty]

If there is actually a secular movement toward more demand for Rayon/DP and for Cotton, and if there are really pressures that keep cotton production from expanding rapidly to meet that demand in the future, I would expect Chinese rayon producers to be very aware of that and not wanting to screw a potential long-term supplier to save a few bucks in the short term when prices are depressed.

 

In other words, let's say that DP prices remain low for 6 months or a year. Will Chinese producers want to break their long-term contracts to save a few hundred $/ton for a few months and then take the risk of having to find supply for the remaining 9 years at potentially higher prices? Maybe, but it seems like quite a gamble..

 

If they were willing to sign 5-10 year contracts in the first place, it seems to be a sign that safety of supply is quite important to them.

[lessthaniv]

If there is actually a secular movement toward more demand for Rayon/DP and for Cotton, and if there are really pressures that keep cotton production from expanding rapidly to meet that demand in the future, I would expect Chinese rayon producers to be very aware of that and not wanting to screw a potential long-term supplier to save a few bucks in the short term when prices are depressed.

 

In other words, let's say that DP prices remain low for 6 months or a year. Will Chinese producers want to break their long-term contracts to save a few hundred $/ton for a few months and then take the risk of having to find supply for the remaining 9 years at potentially higher prices? Maybe, but it seems like quite a gamble..

 

If they were willing to sign 5-10 year contracts in the first place, it seems to be a sign that safety of supply is quite important to them.

 

Exactly.