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

[lessthaniv]

Sculpin, the most recent NCIB terminated in August.

[alertmeipp]

Not the time to do equity buyback, get the converts on 50 cents on a dollar isn't a bad idea. Earn 40% ROI.

[sculpin]

DAILY NEWS Nov 26, 2014 6:28 AM

 

Neucel mill takes market downtime

 

TEXT SIZE  bigger text smaller textBy: Pulp & Paper Canada staff

LOS ANGELES, CALIF.2014-11-26

The Neucel Specialty Cellulose mill in Port Alice, B.C., is taking market-related downtime for almost two month, reports Industry intelligence Inc., a news service covering various industries. The mill produces dissolving pulp via a sulfite process.

 

Warren Beatty, vice-president of human resources, told Industry Intelligence the downtime began on Nov. 9 and is expected to continue until Jan. 8, 2015. Planned maintenance will be done during the downtime.

 

Beatty noted that commodity dissolving pulp prices in China are as low as US$840/tonne. The mill produces both commodity and specialty grades in varying proportions, Beatty said.

 

The Neucel mill was not affected by anti-dumping measures imposed by China last year on several Canadian producers of dissolving pulp.

[lessthaniv]

frustrating to try and reconcile MOFCOMS thought process on dumping.

It is investigated that the dumping margin of Neucel Specialty Cellulose Ltd. is 0.7%, which falls into de minimis dumping margin under Article 27 of the Anti-dumping Regulations. Therefore, the security deposit for Neucel Specialty Cellulose Ltd. is exempted.

 

I wonder what FTP's current dumping margin is with their improved cost structure as measured by MOFCOM

[lessthaniv]

Sodra adding some capacity into 2016.

 

Mörrum Mill Upgrade Reinforces Södra's Commitment To Dissolving Pulp

STOCKHOLM, Sweden — December 15, 2014 — Europe’s largest market pulp producer, Södra Cell, is currently investing in increasing capacity and improving quality at all three of its mills. Investment in Mörrum, where Södra produces dissolving pulp, will have a significant impact on the quality of the mill’s products, and it signifies that Södra is in the dissolving pulp market for the long haul.

 

Södra is investing SEK 700 million (euro 75 million) at its Mörrum mill in a project which includes a new chip plant and two separate wood room lines for softwood and hardwood. For Textile Pulp (Södra’s branded dissolving pulp), the investment represents an important step. It will remove the bottleneck of an ageing woodyard.

 

Once the new woodyard is up and running, however, the mill will be able to run the Textile Pulp line to full capacity and use more of its members’ birch wood. The result will be a faster, more efficient line based on birch pulp which will produce a premium quality pulp for the textile industry.

 

“We are among the top five producers in terms of quality today,” remarks Dag Benestad who heads up Södra’s Textile Pulp business, “but this investment will be a significant step towards our goal of being among the top three. Overcapacity is currently having a negative effect on dissolving pulp prices and some companies are exiting the market as a result. We are not one of them. With this investment we hope to show that we are committed to Textile Pulp for the long term.”

 

Work at Mörrum has already begun. The chip plant and wood room lines, supplied by Valmet, are due to go into operation in December 2015. Overall pulp capacity at Mörrum will increase from 380,000 tpy to 425,000 tpy of pulp. Of the increase, some 15,000 tpy will be textile pulp, bringing capacity to around 150,000 tpy. There will also be improvements in quality, working conditions and the local environment.

 

Posted December 16, 2014

 

Source: Södra

 

 

 

[sculpin]

Canaccord initiated on NTS Security today - remember this is the Company FTP sold Fortress Optical too for secured notes plus equity...

 

Nanotech Security Corp

NTS : SPEC BUY, $2.25

Initiated with a SPEC BUY and $2.25 target based on DCF

Counting off those dollar bills

 

• NTS creates sophisticated security features using colour shift threads and nanotechnology to fight counterfeiting of banknotes with applications in ID, pharma and consumer goods;

o the company recently acquired Fortress Optical Products

o In our view the company is poised for strong revenue growth

• Strong pipeline in banknotes.

o The acquisition of Fortress Optical Features (FOF) carries up to $4.5 million in earn outs which may point to a strong pipeline of the thin film colour shift threads for use in banknotes.

• Flying solo represents partnership opportunities.

o FOF was previously part of a vertically integrated player under Fortress Paper.

o As a standalone entity that does not compete in the complete banknote value chain, the thin film division may find renewed interest in its colour shift threads from paper producers which could lead to medium-term sales

• Acquisition is the foot in the door for KolourOptik.

o The company has not yet seen traction in its nanotechnology security solution as banknotes are a highly concentrated industry with high barriers to entry.

o Nanotech may see increased interest from issuing authorities in its banknote security products through the thin film division which already has relationships with central banks.

• Consumer goods and pharma are blue sky.

o It is estimated that $250 to $500 billion is lost to counterfeiting annually with holograms generating ~$2.5 billion in sales per year.

o We view anti-counterfeiting in consumer goods and pharma as attractive, large markets for Nanotech security solutions but have not included the opportunity in our estimates.

• Valuation:

o Our target of $2.25 is based on a DCF  reflecting a WACC of 9.4%, a 3-year revenue and EBITDA CAGR of +38% and +92%, respectively, (2016E-2019E) amid margin expansion and a terminal growth rate of 3.0%.

o We rate the stock a SPECULATIVE BUY, to reflect operational risk and risk of dilutive financings amid a negative free cash outlook.

 

[lessthaniv]

http://www.barchart.com/headlines/story/4442979/swiss-national-bank-now-has-negative-interest-rates

 

The Swiss National Bank imposed the country's first negative deposit rate since the 1970s, as the Russian financial crisis and the threat of further euro zone stimulus applied upward pressure on the Swiss franc.

 

The Swiss franc quickly declined after news that the Swiss National Bank, at approximately 1:00 central time, announced a negative interest rate. The timing of this move was a surprise and was done to defend the central bank's cap against the euro currency.

[lessthaniv]

Heading into 2015:

 

OIL:

 

Jul 1: $106usd/bl

Nov 15: $75usd/bl

Dec 18: $56usd/bl

 

Diff to CC: $31usd/bl

Diff to date: $50usd/bl

 

If the change in oil from summer to november represented $1M/year in savings, then the additional drop from Nov 15 to date represents overall savings of $1.6M/yr

 

EX RATE:

 

Jan 1: CAD/USD = $1.065

Dec 18: CAD/USD = $1.165

Diff: CAD/USD = $.10

 

Looks like about $15M in savings vs the outlook for 2014.

 

Aggregate => $16M-$17M in relief over conditions heading into 2014 due to currency/inputs cost reduction. I'm wondering if other chemical costs are deflating too?

 

Although ... this won't translate  exactly to the bottom line as the adjustment is occuring throughout 2014 ... the outlook heading into 2015 is starting to improve including the debt relief.

 

 

[alertmeipp]

wonder if FTP will consider doing some hedge on oil and usd?

 

they should be making 10-20 millions EBITDA at current pricing, not bad if you assume DP pricing is going to firm up.

 

 

[sculpin]

One would think that now that the IQ debt issue has been put off to far in the future, it would make sense to repurchase and cancel some of the debentures - especially the 2019 issue which has been trading under $30 for some time now. Anyone seen anything new on dissolving pulp pricing outlook?

 

Convertible debenture holders have banded together and are well set to fight off any attempt by the Company to force change to their terms.

[obtuse_investor]

The giant CHF move today is likely to weigh heavily on FTP.

 

http://mobile.bloomberg.com/news/2015-01-15/snb-unexpectedly-gives-up-cap-on-franc-lowers-deposit-rate.html

[OptsyEagle]

With respect to Landqart.  I would think after this move in the Swiss Franc, you will hear Chad say something like "where did I put that darn padlock?".

[alertmeipp]

That's about 6m hit on annual basis.

Not good at all

[alertmeipp]

Anyone still buying or holding the common here?

 

If so, why not buy covert at 30 cents on a dollar.

[OptsyEagle]

I have been investing for a very, very long time and I have seen some companies get hit with some pretty bad luck, but I have never in my life seen the kind of luck this company has had.

 

The last 3 years has been completely unfathomable.  If anyone had of tried to predict it, they would have been carried off in a straight jacket.

 

This company is certainly the poster child for the benefits of being diversified.  The strategy of putting all your eggs in one basket and then watching that basket, would have been nothing short of a horrifying experience if that basket was Fortress Paper.

[triedtestedand]

Agree, the padlock would definitely have gone on a few years ago.  Need to sell a lot (more) Durasafe to the Swiss National Bank (in Swiss francs).

 

The flip side is, the CDN$ has depreciated 12% in the past 6 months, and along with multiple operational improvements, Thurso looks able to turn into neutral/positive EBITDA territory for Chinese customers despite the MOFCOM duties because of it (and much better for non-Chinese customers they start to pick up).

 

But definitely ... How many lightning strikes can one take?

[alertmeipp]

Too much riding on weakening loonies now.

 

They had to get non Chinese customers soon.

 

Lanquart valuation took big hit. 

[triedtestedand]

Alertmeipp:

 

Not discounting the hit on Landqart at all ... it stings ... however $6M/yr ($1.5M/qtr) with 15% appreciation in CHF vs EUR is 1/3 the hole of the $20M/yr MOFCOM duties (which presume 100% sales into China), and in same order of magnitude as the cogen at Thurso running at 80% ($1M/qtr).

 

I worry immediately about whether it impacts ability for them to get an LOC on Landqart, and leverage such for liquidity.  Otherwise operationally they just have to keep grinding costs, and improve margin mix by moving towards higher value product (with Durasafe being the flagship). 

 

Given circumstances, they should also use occasion to charge SNB an extra 15% on their Durasafe contract ... you figure the SNB could afford it, no? ;-)

 

Thurso ... Q3 report shows they are getting non-Chinese customers, and NBHK pricing is also conducive to alternative sales ... as there's no way they could have "progressed" to -$1M EBITDA last quarter without trend toward such ... won't be able to totally "see" such effects until cogen comes back to 100%

 

[alertmeipp]

the problem I see is they have 40m convert come due end of 2016, so losing 13m is bad and losing the optionality to sell Lanquart to pay off the convert is worse.

 

The stock holds up well so I suspect ppl are betting DP price will recover soon.

 

6.5m only needs about ~40 bucks upward movement in DP price to cover.

 

[OptsyEagle]

I did verify, for anyone curious, that they only had around $5.5Million in SF denominated debt.  So this maybe adds another million, plus or minus.  A rounding error, basically.

[colinwalt]

I did verify, for anyone curious, that they only had around $5.5Million in SF denominated debt.  So this maybe adds another million, plus or minus.  A rounding error, basically.

 

Thanks!

[lessthaniv]

pretty good volume today.

[alertmeipp]

Lol.  I hope they didn't get charged for commission.

[triedtestedand]

A single trade of 187K @ $2.40 this morning on the Chi-X ...

 

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

 

 

[misterkrusty]

Hola Hombres-  I just finished a writeup on the 2016 debs.  Enjoy

 

​There is so much investor fatigue in this name that hardly anyone is paying attention now that the company’s fortunes have finally turned for the better. That’s why you can buy its debentures for a low 50’s percentage of par, despite the facts that they mature ahead of everyone else in the capital structure (12/31/16) and they’re likely to be paid on-time and in-full. Plus you get an effective >12% coupon while you wait for your 100 cents-on-the-dollar.

 

(all $ amounts in Canadian Dollars unless indicated)

 

Fortress isn’t showing up on anyone’s screens these days. The financials are a sea of red ink. But if you check the 3Q14 results you will realize that extensive cost cutting, lower oil prices, and most importantly, a much weaker Loonie (i.e. Canadian Dollar) vs the US$ allowed its biggest business to nearly breakeven in the quarter. And if you do the math on subsequent moves in oil and exchange rates, you realize that this business is probably doing something like $10M FCF per quarter right now.

 

Compare that to the $40.25M par value of these debentures and the over $50M of cash and securities. Then throw in a few other nuggets of value and you’ll see why I’m optimistic. Also, the CEO owns about 17% of the equity and has good reason to think this $5M stake could be worth far more in just a couple years, as I will explain. In other words, he’s highly incented to pay off this debt.

 

Brief history:

 

CEO Chad Wasilenkoff is an entrepreneur who basically created Fortress in 2006 when he bought a couple mills from Mercer International for $15M. The mill at Landqart in Switzerland makes banknote paper on which the Swiss Franc, the Euro, and various other currencies are printed, while the mill at Dresden in Germany makes nonwoven wallpaper. While a strengthening Swiss Franc would keep Landqart from reaching its potential, the Dresden mill turned out to be a huge money maker and would later be sold to Glatfelter in 2013 for EUR 160M (CAD 212M).

 

Emboldened by this early success, Chad bought an idle NBHK (i.e. paper) mill in the town of Thurso in Quebec from Frasier Paper in 2010 for $3M, and a similar idle mill (LSQ, also in Quebec) from Domtar in early 2012 for $7.5M. The intention was to upgrade these mills to produce dissolving pulp (DP), which is usually made from wood and is used to make rayon.

 

There were three main attractions to this plan. First, the long-run outlook for DP seemed really good. Rayon is steadily taking share in the textile market from cotton, as cotton is more expensive and there is little room for cotton supply to grow as it takes large amounts of fresh water and arable land that could instead be used to grow food. Both of these inputs are increasingly scarce and valuable. As a result, the price of DP had been steadily rising and subsequently went ballistic around 2011 due to a weak cotton crop that year.

 

Second, the Thurso mill has certain advantages (access to cheap wood, etc.) that should allow it to produce DP at a lower cost than all but a few other mills in the world.

 

Lastly, Chad was able to obtain debt financing to fund the conversions on extremely favorable terms (low interest rates, non-recourse) from the Quebec government, which sees these projects as a way to create jobs.

 

Unfortunately, there were plenty of other idle paper mills suitable for conversion, and by the time Thurso finally started DP production in December of 2011 the price had come crashing down. Meanwhile, the conversion had not gone smoothly. Thurso was struggling to reach design capacity and a cogeneration project (which makes electricity from byproducts of the mill) got severely delayed.

 

Adding insult to injury, China imposed tariffs on imported pulp in November of last year in an effort to protect its domestic DP mills, which are all high-cost. As the world’s largest rayon producer, China is the world’s largest DP consumer – most of which it must import. The effect of the tariff was to push DP prices further down across the industry.

 

Finally, on the week before last the Swiss National Bank scrapped its 1.20 EUR/CHF peg and thereby wiped out profits at Landqart, which gets paid largely in Euros while its costs are largely in CHF. At the current 1.01 rate, the mill will likely just breakeven this year.

 

The good news:

 

Fortunately, Thurso is turning around nicely. Thanks to oil, forex, and a relentless battle to optimize the mill, Thurso produced DP for $757 per metric tonne (mt) in 3Q14, allowing it to almost breakeven despite weak prices. (Note: $757 is total costs to produce and ship to China, less revenue from the cogeneration plant. Management talks about costs in CAD while the industry talks about prices in USD. Ccfgroup.com publishes an industry benchmark price, which you can usually also get from management.)

 

That was with oil at US$80-100/bbl and CAD/USD averaging 1.09. Oil’s slide from over US$100/bbl to US$45/bbl today will save Thurso a few million $ per year. But the Loonie’s slide is much bigger deal. For example, had the CAD/USD rate in 3Q14 averaged 1.25 (today’s rate), Thurso would have done well over $7M in EBITDA. And it could get better from there, as the cogeneration plant is scheduled to increase output to 24MW in 2Q15, adding roughly $0.7M EBITDA per quarter. Also, the mill just went from a mix of DP and NBHK to 100% DP, which has a higher price. Finally, management plans to bring production up to 87% of capacity (vs 84.4% in 3Q14) by 4Q15, which should bring costs down to $725/mt. If they get there, then even with a lousy US$810/mt price (as low as it’s been in a long time), Thurso EBITDA will exceed $12M in 4Q15 and total around $40M for the year. After $6.6M in capex, the mill would generate over $33M in FCF, all of which can be used to repurchase and/or repay debt. And that’s just for one year - they have two years prior to maturity.

 

Fortress had $57M of cash and securities at the end of 3Q14. Between then and year-end 2016, it will have spent $13.5M on corporate overhead and $23M on interest, leaving $20.5M of cash to pay off this $40.25M of principal debentures. So the $20M difference could be satisfied by little more than two quarters of Thurso FCF at current rates. That seems like a good margin of safety to me.

 

Also, the entire issue is unlikely to still be outstanding come year-end 2016. Management has publicly said that they would much rather buy these debentures in the open markets at deep discounts than pay the full 100% of par at maturity.

 

It’s also possible that management could offer to exchange these for new debentures with a longer maturity, by offering a higher coupon and/or a lower conversion price (this is a busted convert struck at $37.50, while the shares now trade around $2). It’s not uncommon for Canadian debentures like these to get refinanced, and if more than 2/3 of the issue accepts the offer, even the holdouts will get new notes.

 

That doesn’t worry me, however, since I can’t imagine an offer getting that many votes if it would be worth less than the current price. In fact, I’m not sure there is anything that Fortress would likely offer that would get over 2/3 of the vote. A number of deep value investors now own significant stakes in this issue and I think they realize that Fortress has the means to pay them. Frankly, I would welcome an exchange offer that pushes some – but not all – of this issue past the maturity date, as that would make it even easier to pay off the holdouts.

 

Finally, there are a couple other nuggets of value that could be monetized. First, management planned to sell down some excess inventory at Thurso in 4Q14, which should have generated about $4.2M. There might also be another $4M of excess inventory remaining to be sold – we’ll see.

 

Second, there’s Landqart. Until the Swiss Franc debacle, I had estimated its value at roughly $70M based on about 8X 2015E EBITDA of $9M+). Now that EUR/CHF has gone from 1.20 to 1.01, the mill is likely back to breakeven and thus I’m hesitant to ascribe any going-concern value (though there is some hope). In any case, the mill has excess land worth $5-15M against just $5.5M of unsecured subsidiary-level debt due in 2020. And frankly, I wouldn’t be surprised if there is at least some scrap value given the $58M spent in 2010-11 to upgrade its two paper machines.

 

Third, there’s the LSQ mill. Conversion work on LSQ never went very far. China declared a 23.7% tariff on any new Canadian DP mills (vs 13% at existing mills like Thurso), which makes conversion to DP a non-starter. But there may still be ways to monetize this asset. If nothing else, management thinks the scrap value should more than cover the $7.5M mill-level environmental liabilities. That seems credible to me. Sodra sold a Norwegian mill for scrap to the Vietnamese in the middle of last year. Based on the price per unit of capacity, LSQ would fetch at least $15.6M, allowing Fortress to upstream $8.1M to the holdco after paying off all liabilities.

 

Outlook for DP:

 

Getting back to the CEO and his shareholdings, let me explain why he really, really wants to put this obligation behind him. Not only is Thurso making money today, but there’s also a good chance that DP prices will improve over the next couple years. The reason is that additions to DP supply are likely to slow while demand keeps growing steadily.

 

Year Supply growth Demand Growth (sources: CIBC, World Dissolving Pulp Monitor, own estimates)

 

2013 820,000mt 410,000mt

 

2014 545,000mt 438,000mt

 

2015 125,000mt 460,000mt

 

2016 125,000mt 493,000mt

 

Supply growth is slowing because there aren't that many idled paper-grade pulp mills left that are well suited to DP conversion … you can see evidence of this in the prices paid by Fulida, Aditya Birla, and Paper Excellence for mills that mostly have higher production costs than Thurso. Moreover, greenfield expansion is more expensive. It costs about $500/mt to convert a paper-grade pulp mill to DP production, while it costs $2,000 to build a greenfield plant in China, $3,000/mt in Brazil, and probably even more in North America or Europe. In addition, the China tariffs killed the economics on a lot of previously announced projects.

 

Given the nature of supply it’s not hard to be reasonably confident about this forecast. Building a DP mill is a big undertaking. Everyone knows what’s being built and plants don’t spring up overnight. If you haven’t started the process already, you’re probably not going to be in production by the end of 2016.

 

Remember that Fortress shares traded more than 10x the current price for almost two years when DP prices were higher.