colinwalt Posted May 13, 2014 Share Posted May 13, 2014 triedtestedand, thank you so much for taking the time to write up the call - very much appreciated! Link to comment Share on other sites More sharing options...
alertmeipp Posted May 13, 2014 Share Posted May 13, 2014 Very interesting call.well worth the time. Link to comment Share on other sites More sharing options...
Myth465 Posted May 14, 2014 Share Posted May 14, 2014 Sold a day before the released. Have learned earlier in this year you dont have to make something work or sit around and hope. It may turn or may not, but I am sure no one originally invested for this thesis. We made a rational bet with decent odds, but it was a bet which didnt hold up. Time to move on for me at least, going to bet on other things with whatever cash is left form this. Luckily it was a relatively small bet. Link to comment Share on other sites More sharing options...
Liberty Posted May 14, 2014 Author Share Posted May 14, 2014 Sold a day before the released. Have learned earlier in this year you dont have to make something work or sit around and hope. It may turn or may not, but I am sure no one originally invested for this thesis. We made a rational bet with decent odds, but it was a bet which didnt hold up. Time to move on for me at least, going to bet on other things with whatever cash is left form this. Luckily it was a relatively small bet. I also sold a while ago, when it rallied about 40% in a couple days and ended above $4. Still a big loss. The company could yet make money for people at some point, especially those who got in very low, but I had other opportunities and I wanted to move on. I put that one into the 'I learned a lot' bucket. I wish it had turned out differently, but I'll certainly avoid businesses with lots of capex and commodity price exposure in the future... I'll leave these tough businesses turnarounds in battered industries to investors who are better than I am at sniffing deep value and I'll concentrate on high-quality at reasonable price to hold for the long-term. Now that I've said this, of course there's going to be the 'I sold' effect and it'll become a multi-bagger :-\ Link to comment Share on other sites More sharing options...
doc75 Posted May 14, 2014 Share Posted May 14, 2014 I averaged down enough under $3 that I was able to make a very nice overall profit when it quickly jumped over $4 on pure hope. So I, too, jumped ship. I'm quite happy to sit on the sidelines for now even if it means missing the first bump if/when good news starts rolling in. Link to comment Share on other sites More sharing options...
alertmeipp Posted May 14, 2014 Share Posted May 14, 2014 wow, why are u guys selling out now when they are now getting "close" to EBITDA neutral for Thurso and Landquart is finally turning the corner? No trust in this management any more? It was always a "discount to liquidation value" investment for me. I've never trusted this management. I think they are the perfect example of "big concentrated bets, but then it blew up on them"...those long Biglari take note...people are sometimes just too smart for themselves. But in this type of market, we end up buying these types of limited downside/huge upside investments...SED International is another one. Either these investments blow up...very possible...or at some point, they move up considerably. But the managers are in the position they are in because they made these all-in bets. Prem was lucky after TIG/ORH...Mohnish was lucky after 2007/2008...Sardar was lucky after SNS...Wasenlikoff may not be so lucky...Gad may not be so lucky. Cheers! Link to comment Share on other sites More sharing options...
Myth465 Posted May 14, 2014 Share Posted May 14, 2014 wow, why are u guys selling out now when they are now getting "close" to EBITDA neutral for Thurso and Landquart is finally turning the corner? No trust in this management any more? Did you invest for that thesis? I didnt, its a crappy one, and I wouldnt buy the company now and would not have back then had I known that was the goal. I think I first bought in 2011, its always been relatively small but they were getting to Thurso, then working out the kinks, then got hit with trade issues, then ....... Link to comment Share on other sites More sharing options...
tombgrt Posted May 14, 2014 Share Posted May 14, 2014 Sold a day before the released. Have learned earlier in this year you dont have to make something work or sit around and hope. It may turn or may not, but I am sure no one originally invested for this thesis. We made a rational bet with decent odds, but it was a bet which didnt hold up. Time to move on for me at least, going to bet on other things with whatever cash is left form this. Luckily it was a relatively small bet. I also sold a while ago, when it rallied about 40% in a couple days and ended above $4. Still a big loss. Did the same, even for the stake I bought at $4.20-something. Think my average selling price was $7.5-9, awch! wow, why are u guys selling out now when they are now getting "close" to EBITDA neutral for Thurso and Landquart is finally turning the corner? No trust in this management any more? Did you invest for that thesis? I didnt, its a crappy one, and I wouldnt buy the company now and would not have back then had I known that was the goal. I think I first bought in 2011, its always been relatively small but they were getting to Thurso, then working out the kinks, then got hit with trade issues, then ....... +1. For me personally a big part of the margin with safety was Dresden and they sold it rather cheap. Lessons learned indeed. One of the biggest was learning not to buy into companies with high levels of debt without very reliable levels of cash flows. Another was trusting too much on people and too little on the numbers. Also, losers are more likely to remain losers. Could probably go on and on about it. Made a temporary dent in my small net worth but the eventual future value is probably much higher because I learned it so early. Might be naïve! Link to comment Share on other sites More sharing options...
lessthaniv Posted May 14, 2014 Share Posted May 14, 2014 I think the lesson in investing is roughly 50% complete. Link to comment Share on other sites More sharing options...
alertmeipp Posted May 14, 2014 Share Posted May 14, 2014 I think the lesson in investing is roughly 50% complete. Very well said if you meant what I think you mean! ;) Link to comment Share on other sites More sharing options...
doc75 Posted May 14, 2014 Share Posted May 14, 2014 I think the lesson in investing is roughly 50% complete. Very well said if you meant what I think you mean! ;) Management has repeatedly under-delivered and I can't see how anyone would trust their forward guidance at this point. If they do get things working in their favour, it won't happen overnight. I think there will be plenty of time to get back in at very good prices if/when some better numbers start rolling in. Maybe not $3, but certainly at prices most would have salivated over in the past. I have kept a small position in the debentures. Link to comment Share on other sites More sharing options...
alertmeipp Posted May 14, 2014 Share Posted May 14, 2014 I think the lesson in investing is roughly 50% complete. Very well said if you meant what I think you mean! ;) Management has repeatedly under-delivered and I can't see how anyone would trust their forward guidance at this point. If they do get things working in their favour, it won't happen overnight. I think there will be plenty of time to get back in at very good prices if/when some better numbers start rolling in. Maybe not $3, but certainly at prices most would have salivated over in the past. I have kept a small position in the debentures. My read is Thurso's new management is delivering on both top and bottom line. The new president knows his stuff IMO. We will see in few more months. Link to comment Share on other sites More sharing options...
BargainValueHunter Posted May 14, 2014 Share Posted May 14, 2014 My question is: If the company liquidated today, paid off its debts and distributed what was left to shareholders would the amount of money each shareholder receives be more or less than the current price per share? Link to comment Share on other sites More sharing options...
triedtestedand Posted May 14, 2014 Share Posted May 14, 2014 BVH: I'll play that game ... although with everyone jumping ship ... https://www.youtube.com/watch?v=o8E7aFdsSIY&feature=kp OPTION #1 Phase 1: 1. Liquidate all inventory from both Thurso and LQT 2. Pay off all AP/AR 3. Move remaining cash proceeds quickly to parent company (presume restricted cash becomes unrestricted when you do this) Net result = ~$112M in cash at parent ... which is current working capital IF you factor out the ~$14M owing to IQ at the sub level in the next 12 months AND take out the ~$8M in prepaid expenses. Phase 2: 4. Sell LQT as a going concern ... presume 6.5x(?) current run rate biz of $11M EBITDA per year ... then pay down their $6M in debt ... gives you $66M 5. Sell LSQ to scrap vendor ... presume you get $5M for it (wild-ass guess) 6. Sell Optical Threads biz assets ... presume $4M Net result = $187M in cash ... less Thurso biz + Thurso debt + parent debt Phase 3: 5. Give the keys to Thurso to IQ ... and walk away from business, as well as the debt owing there and any other commitments Net result = $187M in cash ... less parent debt Phase 4 6a. Pay back debenture holders ($40.25M + $25M + $69M) at face value ... of $134.25M 6b. Distribute remaining $52.75M to 14.5M shareholders ... gives you $3.64/share ... OR ... OPTION #2 A better way for shareholders (ie it depends on who's doing the liquidating) would be to simply switch the order -> Phase 1 first ... gives you $112M in cash at parent PLUS Landqart/LSQ/Optical threads businesses PLUS Thurso biz PLUS Thurso debt PLUS parent debt -> Phase 3 second ... gives you $112M in cash PLUS Landqart/LSQ/Optical threads business PLUS parent debt of $134.25M -> Phase 4 third ... flesh out deb holders ... say you get $.80 on the dollar ... so you pay $107M ... leaves you with $5M left over, and saves you an extra $26.85M (or an extra $1.85 a share) -> Keep LQT/LSQ/Optical-threads businesses, along with the $5M at the parent company ... or sell it all and have $5.50/share OR ... Just stop at end of second step ... and let the market decide what the shares are worth then ... as there would be no liquidity crunch in above scenario That fleshes out several very valid questions ... which include: -> What is current $11M/yr EBITDA LQT/Optical-threads business really worth (now, or in future w Durasafe/etc)? -> What is the option on LSQ worth? -> What would Thurso be worth to IQ (or someone else) if they ended up owning it? i.e. > or < $106M -> If Thurso is actually running efficiently, could it be sold to an Aditya Birla/Lenzing/Sappi/other (no doubt IMHO) to supply non-Chinese viscose producers? As if not selling to Chinese, and take away MOFCOM duty, then at current low prices/currency exchange it's today actually a +$24M/yr EBITDA entity ... and note that as comparison, Aditya Birla is about to spend $200M to upgrade Terrace Bay These last two points bring up another liquidation option OPTION #3 -> Phase 1 first -> Then ... auction Thurso ... Then the question becomes ... Can Thurso be sold for MORE than $106M? Hmmm ... if so, then shareholders benefit on the upside there as well. Thought question ... Would one of those entities above pony up say (wild ass guess) $30M in cash to the parent company ... and take on the IQ debt at the sub level (so it would similarly NOT have recourse to said entities own parent co) ... if so, that would make for not a bad pre-financed (and debt contained) leveraged buyout, no? If such was a non-Chinese viscose producer ... they'd be ponying up 1.25x cash EBITDA (i.e. $30M cash / $24M EBITDA) ... but would add another ~$2/share to the shareholders kitty There is of course a certain amount of game of chicken/mexican standoff to all of above ... and highlights key for Thurso to actually run reliably long-term at current (or better yet - reduced) cost levels as prerequisite to play the game with any authority -> or avoid it altogether. Link to comment Share on other sites More sharing options...
Guest Quebec Posted May 14, 2014 Share Posted May 14, 2014 My question is: If the company liquidated today, paid off its debts and distributed what was left to shareholders would the amount of money each shareholder receives be more or less than the current price per share? I see another answer but here is my simplistic view. + Current assets : 166,179 (excluding plant,property,equip) - Total liabilities : 293,602 = Net liabilities : 127,423 + Market cap : 45,071 = Plant,prop,equ: 172,494 (what the market is valuing all assets) If we estimate value of LanqQart at 100m and Thurso at 200m, we come to a $12 share. If we estimate value of LanqQart at 58m and Thurso at 116m, we come to a $3 share. What we have going for us is swiss durasafe, cogen expansion, low cad$. What we need is better dissolving pulp price. Link to comment Share on other sites More sharing options...
SharperDingaan Posted May 14, 2014 Share Posted May 14, 2014 You might want to forget the angst & just buy the Debs; get paid to wait & get taken out at 100 on maturity. We own a few ;) SD Link to comment Share on other sites More sharing options...
OptsyEagle Posted May 15, 2014 Share Posted May 15, 2014 None of those scenerios is going to happen. They are either going to make Thurso work and the shareholders will be rewarded or they are not and the shareholders will give everything they own to the debenture holders, upon maturity. This last scenerio will maybe give about $0.25 to $0.40 on the dollar for each debenture and the long shaft up the wazzoo for common shareholders. That is how this story is going to end. Most of those numbers above are not realistic and since it will not happen today, this company will blow through more cash as it waits and prays for some ray of sunshine. It is that ray of sunshine that will determine the outcome for shareholders. I somehow doubt Chad is going to shaft the employees at Thurso on all their severance and then shaft the Quebec government as well, unless he absolutely intends to retire a complete and disgraced failure. Maybe, but I doubt it. Link to comment Share on other sites More sharing options...
obtuse_investor Posted May 15, 2014 Share Posted May 15, 2014 Optsy: Are you saying that "Hope is the only strategy remaining"? I hope Chad reads this forum. I hope he is offended and sprints into action. :-) Link to comment Share on other sites More sharing options...
Guest 50centdollars Posted May 15, 2014 Share Posted May 15, 2014 You might want to forget the angst & just buy the Debs; get paid to wait & get taken out at 100 on maturity. We own a few ;) SD I think CHOU bought the Debs Link to comment Share on other sites More sharing options...
alertmeipp Posted May 15, 2014 Share Posted May 15, 2014 Chad has been transparent. He is trying his best to prolong the company for the eventual normalization of dp price. If not the Chinese tax....thurso will be making money now. IQ loan is the key. Delaying payment or increase of the size of it will be very significant. Re thurso evaluation. If we use normalized Dp price of 1050 and 7x. It is 300m. Debt is nice way to play as well as they may lower the conversation rate to extend them. I own some but I like common better at current price. Link to comment Share on other sites More sharing options...
OptsyEagle Posted May 15, 2014 Share Posted May 15, 2014 Optsy: Are you saying that "Hope is the only strategy remaining"? That's the only one I can see. Hope that DP prices rise above $1200 per tonne before the end of this year. Hope that someone actually buys Landqart. Hope that someone would actually pay 6.5x the best EBITDA they have had in a couple of years. Hope that someone would find some use for LSQ, other then scrap metal and my very best hope of all. The one that I fall down on my knees, each night, and look to the giver of all hope above ... that the biggest fire, ever seen in human history, ravages through the Thurso plant, converting all of its atomic matter to toxic gas and ash...and then I hope that we did indeed pay the last premium on that $850 million insurance policy. So there is hope. Link to comment Share on other sites More sharing options...
SharperDingaan Posted May 15, 2014 Share Posted May 15, 2014 Keep in mind that debs can be rolled (for a price); they do not have to be actually paid off. The reality is that FTP needs to extend the terms on all their debt, & no deb holder wants to force a liquidation. So to avoid liquidation, most would expect that refinancing to include some significant sweeteners (warrants) & a higher rate of interest. Buy & sell the debs, keep the sweetener, take a trading gain; & the worse it gets for FTP - the better your odds of success. Get the sweetener for essentially a zero net cost. If FTP subsequently recovers, great; if it fails - that is no big deal either. Obviously, one would prefer that they succeed. SD Link to comment Share on other sites More sharing options...
BargainValueHunter Posted May 15, 2014 Share Posted May 15, 2014 BVH: I'll play that game ... although with everyone jumping ship ... https://www.youtube.com/watch?v=o8E7aFdsSIY&feature=kp OPTION #1 Phase 1: 1. Liquidate all inventory from both Thurso and LQT 2. Pay off all AP/AR 3. Move remaining cash proceeds quickly to parent company (presume restricted cash becomes unrestricted when you do this) Net result = ~$112M in cash at parent ... which is current working capital IF you factor out the ~$14M owing to IQ at the sub level in the next 12 months AND take out the ~$8M in prepaid expenses. Phase 2: 4. Sell LQT as a going concern ... presume 6.5x(?) current run rate biz of $11M EBITDA per year ... then pay down their $6M in debt ... gives you $66M 5. Sell LSQ to scrap vendor ... presume you get $5M for it (wild-ass guess) 6. Sell Optical Threads biz assets ... presume $4M Net result = $187M in cash ... less Thurso biz + Thurso debt + parent debt Phase 3: 5. Give the keys to Thurso to IQ ... and walk away from business, as well as the debt owing there and any other commitments Net result = $187M in cash ... less parent debt Phase 4 6a. Pay back debenture holders ($40.25M + $25M + $69M) at face value ... of $134.25M 6b. Distribute remaining $52.75M to 14.5M shareholders ... gives you $3.64/share ... OR ... OPTION #2 A better way for shareholders (ie it depends on who's doing the liquidating) would be to simply switch the order -> Phase 1 first ... gives you $112M in cash at parent PLUS Landqart/LSQ/Optical threads businesses PLUS Thurso biz PLUS Thurso debt PLUS parent debt -> Phase 3 second ... gives you $112M in cash PLUS Landqart/LSQ/Optical threads business PLUS parent debt of $134.25M -> Phase 4 third ... flesh out deb holders ... say you get $.80 on the dollar ... so you pay $107M ... leaves you with $5M left over, and saves you an extra $26.85M (or an extra $1.85 a share) -> Keep LQT/LSQ/Optical-threads businesses, along with the $5M at the parent company ... or sell it all and have $5.50/share OR ... Just stop at end of second step ... and let the market decide what the shares are worth then ... as there would be no liquidity crunch in above scenario That fleshes out several very valid questions ... which include: -> What is current $11M/yr EBITDA LQT/Optical-threads business really worth (now, or in future w Durasafe/etc)? -> What is the option on LSQ worth? -> What would Thurso be worth to IQ (or someone else) if they ended up owning it? i.e. > or < $106M -> If Thurso is actually running efficiently, could it be sold to an Aditya Birla/Lenzing/Sappi/other (no doubt IMHO) to supply non-Chinese viscose producers? As if not selling to Chinese, and take away MOFCOM duty, then at current low prices/currency exchange it's today actually a +$24M/yr EBITDA entity ... and note that as comparison, Aditya Birla is about to spend $200M to upgrade Terrace Bay These last two points bring up another liquidation option OPTION #3 -> Phase 1 first -> Then ... auction Thurso ... Then the question becomes ... Can Thurso be sold for MORE than $106M? Hmmm ... if so, then shareholders benefit on the upside there as well. Thought question ... Would one of those entities above pony up say (wild ass guess) $30M in cash to the parent company ... and take on the IQ debt at the sub level (so it would similarly NOT have recourse to said entities own parent co) ... if so, that would make for not a bad pre-financed (and debt contained) leveraged buyout, no? If such was a non-Chinese viscose producer ... they'd be ponying up 1.25x cash EBITDA (i.e. $30M cash / $24M EBITDA) ... but would add another ~$2/share to the shareholders kitty There is of course a certain amount of game of chicken/mexican standoff to all of above ... and highlights key for Thurso to actually run reliably long-term at current (or better yet - reduced) cost levels as prerequisite to play the game with any authority -> or avoid it altogether. Thanks for that analysis. :) Link to comment Share on other sites More sharing options...
sculpin Posted May 28, 2014 Share Posted May 28, 2014 May 14, 2014 Paper & Forest Products Fortress Paper Ltd. Thurso Mill Still Struggling To Find Its Footing FTP posted a Q1/2014 EBITDA loss of $13.6 million. The Dissolving pulp segment posted an EBITDA loss of $15.2 on shipments of 8,849 tonnes of dissolving pulp and 11,410 of NBHK pulp. Sales were $15.3 million on these shipments with a realized pulp price of $754/tonne. 2014E EPS is now at -$3.66 (previously -$3.62) and for 2015 is at -$0.84 (previously -$0.96). 2014E EBITDA is revised to -$18.3 million (previously at -$14.5 million) and 2015E EBITDA is at $23.7 million (previously at $21.7 million). We are modeling the Thurso pulp mill to have an EBITDA loss in 2014 of $19.5 million. Our forecast Q2/2014 loss at Thurso is $3.5 million, with above breakeven performance modeled for balance of 2014. FTP has yet to meet operational expectations at Thurso. We maintain our Sector Underperformer rating and price target of $3.00 representing a small discount to our $3.10 revised NAV. Operational improvements at the Thurso mill, duty relief, and debt restructuring will be needed to generate any upside in FTP. Thurso Dissolving Pulp Operations The Thurso mill operated at an estimated 20% operating rate in Q1/2014, producing approximately 10,000 tonnes of dissolving and NBHK pulp. As noted, the mill had eight weeks of market related downtime in Q1/2014. As painful as the start-up curve has been for this mill over the past two years, the operating management at FTP believe they are making operational progress and that the mill should run closer to EBITDA breakeven in Q2/2014 even with current viscose dissolving pulp prices at US$855 per tonne and with a 13% Chinese duty. However at this point we need to see the results before giving credence to these estimates. We are estimating a $3.1 million EBITDA loss for Thurso in Q2/2014. Other Cash Savings/Cost Savings Items at Thurso On May 12, 2014 Fortress announced the Thurso mill had been awarded a power supply agreement by Hydro Quebec for an additional 5.2 megawatts of power to be produced at its cogeneration facility. With this announcement the amount of green power supplied by the Thurso mill’s cogeneration facility to Hydro Quebec will increase from the current 18.8MW of power to 24MW of power. Fortress is anticipating overall cost savings of approximately $2.7 million annually from this increase in power sales. Additionally, Fortress’s management is in the process of converting the lime kiln at Thurso to be fired with CNG rather than oil. This conversion is expected to be completed in Q3/2014 and should lower total mill fuel costs by approximately $3 million per year. We have not at this point factored in these cost reductions or cash generating options that FTP management may be able to conclude in 2014. To the extent that both are successfully completed, they should be able to increase the overall EBITDA generation at Thurso by $8 million per annum. In addition other cost reduction measures are being targeted at Thurso that could see another $4 million to $6 million of lower costs (chemicals, materials, labor etc.). Debt Restructuring At Thurso Also A Likely Event We believe that FTP management is in ongoing negotiations with Investment Quebec (IQ) with regard to the $105 million secured term loan for the Thurso mill. This loan was initially scheduled to commence principal amortization in 2014 with quarterly principal payments of $4 million. These quarterly payments have been waived for Q1/2014 and Q2/2014. We further believe that FTP is negotiating with IQ to convert either a substantial part or all of the term debt at Thurso into preferred shares or a zero coupon bond structure that would preserve cash resources over the next 4-5 years. Fortress clearly needs to defer scheduled principle and interest payments on its senior debt until higher and more sustainable levels of operating cash flow are being generated by its two main operating assets (Thurso and Landqart). While timing on these negotiations can be hard to determine, we expect to hear further on this front with the publication of Q2/2014 results in late July or early August/2014. Dissolving Pulp Markets World dissolving pulp markets remain in a state of oversupply and we estimate it will take at least until late 2014 before the outlook begins to improve. The positive news is the viscose dissolving pulp continues to see strong demand growth as viscose staple fiber gradually increases its share of the textile market. Viscose dissolving pulp demand is estimated to be growing at an annual rate between 9% and 10%. With global viscose dissolving pulp demand estimated to be 4.9 million tonnes in 2013 – demand growth is running at approximately 450,000 tonnes per annum. The problem is supply is growing even faster with an estimated 820,000 tonnes of new viscose dissolving capacity entering global markets in 2013 and a further possible 900,000 tonnes being added in 2014 which equates to 1.7 million tonnes of possible new capacity over a two year period that demand is growing by 900,000 tonnes in total. Short-term Implications and Recent Developments: The MOFCOM dumping duty has resulted in some producers moving away from viscose dissolving pulp production to produce fluff pulp; The MOFCOM duty is expected to cause delays to or abandonment of certain new dissolving pulp projects that have been announced over the past few years . Recently Aditya Birla stated they have pushed out the date for converting the 350,000 tonne Terrace Bay mill from NBSK to viscose dissolving pulp to 2017 (previously conversion was thought to occur early in 2016); Some international VSF producers in China are announcing downtime which will cause shot-term negative price pressure on dissolving pulp; This also means projects such as Prince Albert in Saskatchewan and the FTP proposed mill at LSQ will all be non-starters as viscose dissolving pulp mills. Thus dissolving pulp capacity growth in 2014 is likely to be closer to 400,000 tonnes than 900,000 tonnes. The excess supply equates to about 400,000 tonnes over the course of 2013 and 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) are generating cash operating losses and the likelihood of seeing some of this high cost capacity curtail in the next 2-3 quarters is quite high in our view. Thus between some existing planned capacity being cancelled due to duties, and some existing high cost capacity being curtailed, we expect to see a better tone coming into viscose dissolving pulp markets by late 2014. Security Papers Division The Security Paper segment reported its fifth consecutive quarter with sales, volumes and revenues significantly higher to any comparative period in 2012. Still, the segment had unfavorable conditions such as the strength of the Swiss franc against the Euro. This division posted positive EBITDA of $3.2 million in Q1/2014 vs the $1.3 million we were expecting and above the $2.7 million in Q4/2013. Since 2008 on a cumulative EBITDA basis this business has lost approximately $35.1 million. For 2014 overall we expect Landqart to have positive EBITDA of $7.6 million and this number could be easily beat if Lanqart remains on its EBITDA trajectory shown in Q1/2014. Despite the higher sales levels in the segment, unfavorable conditions over the prior year such as the strength of the Swiss franc against the Euro impacted results. The key for Landqart going forward is to be able to build up a reasonable level of orders for its new Durasafe banknote paper which has the combined benefits of a polymer core along with optical thread enhancements. Recently Landqart’s Durasafe was selected as the bank note substrate for the new Swiss banknote. Initial shipments under this order are expected in H2/2014 and should carry into 2015 and 2016. While tonnage numbers for this order were not released by the company, we estimate that the shipment tonnage should range between 200 and 300 tonnes per annum of Durasafe notes per annum once this contract is underway. Importantly, this validation by the Swiss National Bank, will pave the way for other countries to look at the benefits and features of the Durasafe substrate. The company continues to market the strong durability and security features of their Durasafe notes, which include their optical thread technology, and we believe more significant orders for Durasafe are in Landqart’s future. If Landqart could build 15%-20% of its overall orderbook on Durasafe orders (1,500 to 2,000 tonnes per annum), we believe the mill would have a substantial swing in profitability to the range of $15MM to $20MM of EBITDA per annum. Ultimately we expect that FTP is still a seller of Landqart, but would rather do so from a position of greater strength in two to three years time, where sale proceeds of $70 to $90 million might be obtained. Balance Sheet And Liquidity Becoming A Risk Fortress ended Q1/2014 with net debt of approximately $187.6 million (up from $166.2 million net debt in Q4/2013), and a net debt to cap ratio of 40%. Our modeling suggests that, given present amortization arrangements on its debt, Fortress will continue to eat away its cash reserve in the next two years. We forecast the debt to cap ratio for Fortress which was 35.5% at the end of 2013, to be 44.6% at the end of 2014 and 45.9% by the end of 2015. Rating As a result of the Chinese anti-dumping duty being assessed, we maintain our rating on Fortress as Sector Underperformer. The risk on this name has risen appreciably as the company strives to cope with a significant anti-dumping duty, while continuing to ramp up the recently converted Thurso dissolving pulp mill. There are many uncertainties, both with Thurso operations as well as viscose dissolving pulp markets in general, that will need to play out over the next several months making FTP a much higher risk investment. Summary At the current share price of $3.09, we still see downside risk in this name unless the company is able to negotiate a debt restructuring with Investment Quebec that conserves cash for Fortress over the next 2-3 years, while it builds a sustainable and positive cashflow from its operating assets. We do note that Fortress is working on meaningfully lowering operating costs at Thurso and were successful in securing an increased power off-take contract from Hydro Quebec and are now working on lowering energy costs via converting their lime kiln to CNG. The company is also working to lower chemical and other operating costs at the mill. The combined impact of these initiatives could be to lower overall operating costs by $10 million to $12 million per annum. In our view, the Thurso mill is not yet de-risked from an operational standpoint. We expect this will eventually occur but not before late 2014. Price Target Calculation Our price target calculation is based on a valuation methodology that uses a weighted average 6.1x EBITDA multiple on mid-cycle earnings potential and then discounts this value based on time factors and risk factors to mid-cycle earnings being achieved. We have utilized a 7x EBITDA multiple on the renewable power EBITDA and a 5.5x EBITDA multiple on the dissolving pulp and security paper EBITDA. In the case of Fortress, we do not anticipate mid-cycle earnings to occur before 2015, and suggest a valuation of $3.10 per share would be appropriate at that time provided dissolving pulp pricing has returned to $1,150 per tonne. We have then applied a minimal discount in setting our revised $3.00 price target. Link to comment Share on other sites More sharing options...
alertmeipp Posted May 29, 2014 Share Posted May 29, 2014 Thanks. But really, it's just another analyst report that "adjusts" target price based on current trading price. Not forecast. Link to comment Share on other sites More sharing options...
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