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

[Liberty]

Is the original thesis (undue distressed selling a la Phil fisher) still intact given the developments?

 

I think the operational thesis, so to speak, is similar (minus LSQ, most probably), but what has changed is that there's a lot more uncertainty from external factors like tariffs, and that a lot of the targets the company set have proved to be too ambitious/optimistic (took more time to ramp up, more things went wrong than expected), so should we expect other things to go wrong or are we done with that bad streak? Did they learn from their mistakes?

 

And as always, the question is, is that priced in? Is everybody so down on the business that any good news would take everybody by surprise?

 

They do have lots of cash on the balance sheet, Lanquart seems like it's going in the black and could eventually be sold, and Thurso has the potential to be very profitable if a few things go right. But what will happen? Who knows...

[lessthaniv]

two cross trades through canaccord:

 

Time ET Ex Price Change Volume Buyer Seller Markers

12:05:55 T 57.99 0.74 1,000 1 Anonymous 9 BMO Nesbitt 

12:04:05 T 57.99 0.74 9,000 7 TD Sec 9 BMO Nesbitt 

11:37:09 T 57.00 -0.25 5,000 7 TD Sec 79 CIBC 

11:26:02 T 57.01 -0.24 1,939,000 33 Canaccord 33 Canaccord 

09:45:07 T 57.00 -0.25 1,939,000 33 Canaccord 33 Canaccord

 

hard to say if it's buyback related. while the A's are cheaper they have a nearer term maturity in the other series. could just be a portfolio manager shifting their holdings around to start the new year.

[alertmeipp]

unless the volume up more and spread into the common and the other convert, i wouldn't read too much into it.

 

these cant be buyback. i expected they would tackle the nearterm one if so.

 

 

[Liberty]

two cross trades through canaccord:

 

Time ET Ex Price Change Volume Buyer Seller Markers

12:05:55 T 57.99 0.74 1,000 1 Anonymous 9 BMO Nesbitt 

12:04:05 T 57.99 0.74 9,000 7 TD Sec 9 BMO Nesbitt 

11:37:09 T 57.00 -0.25 5,000 7 TD Sec 79 CIBC 

11:26:02 T 57.01 -0.24 1,939,000 33 Canaccord 33 Canaccord 

09:45:07 T 57.00 -0.25 1,939,000 33 Canaccord 33 Canaccord

 

Unless they changed brokers, it's not buybacks. I was told that Raymond James is their broker for the debs and Blackmont for the common.

[alertmeipp]

Loonie down almost another 1% today. DP price in CDN is almost $1000. Where will this be trading at had the political Chinese crap not happened?

[triedtestedand]

Alertmeipp:

 

Frustrating indeed r.e. tariffs.

 

That said, may finally catch a break with the Loonie, which as you note dipped below $.90USD tonight.  For other tariff-affected countries ... Brazilian real has also devalued of late, but Sateri is the only producer there, and their production is slated for their own new VSF plant in China.  So that leaves US producers (e.g. Cosmo) in the lurch, as they have both the highest interim tariffs AND relatively expensive currency to boot.

 

For Thurso ... US $890/tonne price for DP in China now equates, as you point out, to ~$1000/tonne CDN.  Take 13% of that for interim tariff, and you're at $870 CDN as effective price.  With working cogen, and with quasi reliability (the biggest issue, which hopefully Yvon and team will finally make tangible progress against), target costs (including transport to china) should be low $800's CDN ... so should be modelled as EBITDA positive despite current pricing, and despite the tariff.

 

Now, if there's any justice, and tariff gets reduced, it's all upside.  Without any tariff, and with current CDN exchange rate and quasi-reliable operations, despite current trough DP pricing they could be getting $150 to $200 per tonne ... or $35M+/- EBITDA. 

 

But not counting any chickens now ... have been burned enough.

 

Need:

 

a) to see what final tariffs are (any week now?)

THEN

b) to see if Yvon et al can get Thurso to produce for 3-6 months steadily

[alertmeipp]

yes, any day now.

I am hoping their cost will be lower than 800.

[alertmeipp]

Heads up, Chad just done presenting at BMO, nothing really new but  some interesting tidbit. Should booast hope for some here.

 

 

[Liberty]

Heads up, Chad just done presenting at BMO, nothing really new but  some interesting tidbit. Should booast hope for some here.

 

Is the presentation available (slides & recording)?

[alertmeipp]

yes, away from desktop so cant post direct link, but if you go to pennwest website, click on BMO presentation, you will see Chad is presenting in the pulp panel

[Myth465]

https://webcasts.welcome2theshow.com/whistler2014/pulp-panel

[triedtestedand]

Alertmeipp:

 

Thx for link  (it was CIBC vs BMO, but hey ... the pennwest site sent me on the way):

 

https://webcasts.welcome2theshow.com/whistler2014/pulp-panel

 

Fair bit of info actually from that.

 

Banknote (Landqart)

- Durasafe ... confirmed 2nd customer is Eastern European, and work has completed (presumably Kazakhstan, and awaiting politics)

                ... indicated Swiss are progressing (some caveats noted), with "zero series" of 50,000 notes produced (presumably trial run?), and still targeted 2015 for launch, so if so will need to start producing in 2014 (Q2? which would mean 2014 revenue for Fortress)

                ... indicated 2-3 other national banks are in the pipeline waiting likely to see what Swiss do

- interesting ... they now supply all of Chinese diplomatic passport paper, and other stuff as well ... and these relationships may help with anti-dumping

- Did I hear him right when he said up to $80K/tonne for Durasafe ($10K/tonne for basic banknotes; $20K/tonne for Euros)

- With changing product mix (i.e. more Durasafe), have potential for 30% margins (despite Swiss currency strength), with $140M to $160M topline (current is about $120M I believe), and $30M EBITDA

 

Bankthread(Thurso)

- EBITDA neutral now, despite operating at 16% capacity, and with 5x8 workforce

- 2 big RFP's in play ... if even get one, will fill orderbook for year ... could triple staff, run 7x24

- $10M/yr EBITDA potential in such event

 

-> Bottom line ... heard nothing but positives for Banknote/Bankthread biz ... could be the next Dresden?

 

LSQ

- if dumping stays in place, then will have to mothball or dismantle, as previous owner (Domtar) enforcing 10yr non-compete on NBSK production

- (That said, no one asked about Paper Excellence looking to transform Prince Albert pulp mill to fluff pulp instead of DP, where they have similar non-compete w Domtar)

- Quebec government ponying up half of the current $200K/mo keeping the lights on there

- Quebec government indicating that they would support financial req'ts to get things going if tariffs come off

- mentioned $30M in tax credits available

- reiterated that it would be low quartile producer if able to proceed

 

-> Bottom line ... heard "wait & see" on tariff decision before making any calls (may also see what Paper Excellence is able/not able to do)

 

 

Thurso

- Chinese gov't may extend "investigation" an extra 6mo, until Aug 6

  - Fortress seeking to leverage  relationships with Chinese Nat'l Bank (and their relationship w MOFCOM) to get similar "friends of China" treatment as Sateri and Fulida have

  - Various and sundry items relating to political nature

  - Indicated they looked at doing something with Fulida/Neucell (e.g. share swap, roll production under them, etc.), but MOFCOM was targeting original production location

- Despite all, confirmed market is there, growth in VSF continues at >10%/yr

  - indicated VSF priced at 1000yuan discount to cotton domestically in China, despite being better product

  - indicated VSF has 4% of textile share (cotton having 40%), so still doesn't take much substitution to drive growth

- seeking to reduce cost structure and be consistent (key decision behind 10wk shutdown)

  - want to make sure they are lower cost to comply w WTO (think they are now, but China may interpret differently)

  - have applied to Hydro Quebec to raise cogen contract by 5.2MW, to 24MW ... should know in a month or two

  - have asked utility regulator to extend gas pipeline to Thurso ... for them and for town ... it would cost utility $6M, but would help save $4M to $5M per year

- as relates 10wk shut, indicated Yvon and team working on more proactive processes to increase reliability (identified a half-dozen process type issues)

  - mentioned that lot of dumb mistakes have taken ramp-up from months to years

  - noted cost overruns/water pump issues

  - indicated the two lowest cost mills in the world have 29% of total capacity

  - indicating targeting still for low $600's (without transport ... add $100 for that) cost structure

 

-> Bottom line (for me) ...

a) need to "show me" better reliability once done the shutdown

b) worried of another 6mo delay in decision (unless that is needed to sway to reduce/eliminate tariff) ...

c) indicated proactive support of Quebec government agencies (although no one asked about current loan payback schedule)

 

What did I miss? (I only listened to Chad's portion of preso, not the Mercer portion)

[alertmeipp]

Thanks for the summary,

 

80k is what I heard as well.

 

Couple minor points:

- the Chinese customers want Fortress to pay all the duties charge.

- solid local NBHK market but definitely not a long term solution.

 

The pipeline and co-gen increase potentially can add close to 10 millions to the bottom line.

 

First time I hear he mentions their leverage in China, interesting. Hope the Chinese be nice to their friends. I suspect that is why they get 13%, one of the lower one.

[Liberty]

Thanks for the link and the notes.

 

I listened to it, and there's a lot of interesting stuff in there, especially about Landquart. I hadn't realized before this that the Swiss Durasafe order was this far along and more or less just a question of time now.

[alertmeipp]

Yes, Landquart should provide some margin of safety at current price.

 

Cant wait to see the DP price turns,  cotton price rebounds nicely and hold firm. Viscose still trending lower, strange market.

 

For Thurso, all I want is break even. for now

[OptsyEagle]

What is everyone's thoughts on what Fortress Paper will do if the MOFCOM ruling is extended to August of 2014?  Extend the shut down till then or fire the plant back up in February.

 

The next speculation we need to address is what will Fortress Paper do, longer term, if the MOFCOM rulings of 13% duty becomes permanent?

[finetrader]

what will Fortress Paper do, longer term, if the MOFCOM rulings of 13% duty becomes permanent?

 

Trying to find new customers in other countries seems like a no brainer

[alertmeipp]

what will Fortress Paper do, longer term, if the MOFCOM rulings of 13% duty becomes permanent?

 

Trying to find new customers in other countries seems like a no brainer

 

They've tried already.

 

They will just probably continue to lower their cost by getting more co-gen and pipeline etc... and hope that their forecast about DP price start trending up later half of this year will prove to be accurate.

[alertmeipp]

What is everyone's thoughts on what Fortress Paper will do if the MOFCOM ruling is extended to August of 2014?  Extend the shut down till then or fire the plant back up in February.

 

The next speculation we need to address is what will Fortress Paper do, longer term, if the MOFCOM rulings of 13% duty becomes permanent?

 

 

They will resume production Feb if they can achieve their desired cost structure.

[OptsyEagle]

I suppose there really isn't a clear option if the Chinese duties are maintained. 

 

The problem with using non-Chinese customers is that all the other companies, where duties were imposed, will be searching them out as well.  Since those customers are well aware of this situation, I am sure they are going to want a price reduction to take DP from these suppliers.  Since many of those other companies had duties higher then 13% imposed, I would imagine the price reduction these non-Chinese companies would demand would be even higher then 13%.

 

I am just concerned about the viability of this company if those duties are maintained.  Chad talks about being or close to being EBITDA neutral, but we certainly have not seen anything close to that, and that was before these duties were imposed.

 

I would love to pick up some shares here at this price, since it is a screaming bargain if DP price rises above $1,200 per tonne or the Chinese duties are removed, but if it doesn't or it takes a year or two to happen, things could get pretty ugly.  I suppose this is why the stock trades where it does.

 

 

[alertmeipp]

break even later half with duties is what i heard

[triedtestedand]

Optsy:

 

In terms of companies (and tonnage) that are affected, I think in the long term it's more the future tonnage than existing tonnage that's an issue.

 

For affected Canadian companies other than FTP with existing production, Neucell got a free pass, Tembec has 40K tonnes affected (which isn't material), and the other two are owned by Birla, so most (all?) of their production goes to them anyway.

 

For Brazilian companies ... there's only one with existing production (Sateri), and all of their production is still going to china (albeit w 6%+ duty), but being directed to their new VSF plant, which just started operations.

 

That leaves the US located plants.  Rayonier just converted from fluff to DP, targeting high end DP over time, but with (previous) ambition to sell commodity DP in the interim.  I think they are now reverting to fluff for time being.  Sappi has converted NBHK plant in Minnesota, but they have options as well, as can either revert back to NBHK ... or leverage fact they are part of Sappi (largest DP producer), and target DP production for non-Chinese customers, and redirect DP production in S. Africa from non-Chinese customers (e.g. Lenzing) to Chinese ones (i.e. shell game).  I'm not sure about others, but Cosmo is probably most affected, as think most of their production was targeted to China.

 

For all these, US are most affected, as they both have highest duties AND their currency is strongest (Brazil, S. Africa, and Canada have all seen currencies devalue in past year ... while Chinese, Euro, and USD have all strengthened comparatively), so may be uneconomic to redirect to other customers if try to reduce prices anyway.

 

Who knows though ...

 

[alertmeipp]

another implication is who the hell would want to invest in dp when the biggest customer can do such an harm without any justification.

 

even those that are not impact FOR NOW

[alertmeipp]

if Landquart can do 30m ebitda in coupon yrs, it wont be too ugly even if dp stays here. But if it drops further then they will probably turn the key in

[obtuse_investor]

if Landquart can do 30m ebitda in coupon yrs, it wont be too ugly even if dp stays here. But if it drops further then they will probably turn the key in

 

That is exactly how I see it. I believe FTP is a textbook case of market ignoring the healthy part of the business because of one not-so-healthy part. A simple sum of the parts analysis shows that there is significant value in the security paper business, which in itself is higher than the EV (at high $3s/shr) of the entire business.

 

I picked up some more shares on Friday. There is very little liquidity out there and order book is very shallow. I am small fish and I couldn't help but move the price by a few hundred basis points. In other words, there was a definite shortage of sellers on Friday.