Posts Tagged ‘Specialty Cellulose’

Pulp and Paper Canada: “Thurso’s Future Secure with Fortress”

Posted: Wednesday, June 2nd, 2010

There’s a new kid on the block and he’s playing by a different set of rules. Brimming with confidence, enthusiasm, and steadfast resolution to succeed, Fortress Paper offers a fresh perspective for Canada’s pulp and paper sector.

With its recent acquisition of the idled Thurso pulp mill located in the Outaouais region of western Quebec, Vancouver-based Fortress Paper plans not only to make a splash on the market, but a significant profit, too. By ditching the production of northern bleached hardwood kraft pulp in favour of manufacturing dissolving pulp, the company is confident it won’t fall prey to the relentless profit losses so many Canadian forestry companies have witnessed.

“We’re expecting to generate $60 million (EBITDA) but could potentially see profits in the order of $200 million,” says Chad Wasilenkoff, president and CEO of Fortress Paper, with a confidence not often heard in this industry.

Wasilenkoff refers to himself as a “contrarian” investor, as he keeps a punctilious eye on industries widely considered to be depressed, only to pounce on opportunities to grab world class assets at heftily discounted prices. For his $3 million* purchase price, Wasilenkoff pocketed $85 million worth of assets in buying the Thurso facility from insolvent Fraser Papers.

Fortress Paper currently owns and operates two pulp mills in Europe — in Germany and Switzerland. With an emphasis on specialty papers, the company’s product portfolio includes non-woven wallpaper base products, graphic papers, and technical papers. Fortress officially incorporated in 2006, with the intention of taking a closer look at investments in the forestry sector. The company was not specifically seeking to invest in Canada, but had been observing the dissolving pulp market for a number of years. When the Thurso pulp mill came on the market, the timing and price were compelling.

The acquisition is also welcome news to the 320 people formerly employed by the mill, who will, with only a few minor exceptions, be back on the job in June 2010.

“The Quebec government was very interested in getting people back to work,” Wasilenkoff confirmed. “We were informed that not only does the mill provide work for 320 people, but an additional 2900 indirect jobs are supported by the operation, as well.” The provincial government’s motivation to see the facility up and running translated to a cash infusion of $102 million, in the form of a 10-year loan.

It’s money that Wasilenkoff anticipates no difficultly in repaying. “We’re extremely comfortable with the underlying fundamentals,” he says, explaining the overall growth in the market his newly purposed mill will be supplying. “Asia will be our biggest market, and the textile industry there is very strong. As more and more people move into middle income brackets, research indicates consumption of clothing increases, and yet, cotton is an expensive material to produce. Rayon has very similar characteristics to cotton but is more absorbent and breathable, and is less expensive to produce. As a result, the finished product almost always trades at a premium compared to cotton. We consider this to be a very, very low-risk and high-return venture.”

Fortress has two additional multi-million dollar goodies in its bag: the company is entitled to $10 million from the federal Green Transformation Program, as well as $15 million from the Green Infrastructure Fund. Both are initiatives designed to encourage green energy generation and environmentally-friendly production upgrades. Fortress’ decision to construct a biomass-based cogeneration plant at the facility to produce green electricity positioned the company to benefit from these grants.

The mill won’t be making an immediate switch from NBHK production to dissolving pulp, however. Thurso will continue to churn out kraft pulp for another full year before producing its new product line starting in June 2011. Once the transition is over, the mill will produce 200,000 tonnes of air-dried product annually. The company plans to capitalize on bolstered demand for NBHK first. Wasilenkoff expects the restructuring to be a smooth process, however, as it requires very little in the way of retrofitting. Much of the equipment currently in the mill will be suitable for the production of dissolving pulp as it shares much in common with the process of manufacturing NBHK.

With a secure and reasonably priced fibre source (the company has a 50% Crown allocation), a ready-made labour force, and strong market fundamentals, Fortress appears poised for success. Coupled with Chad Wasilenkoff’s unstoppable “can-do” attitude, Canada’s pulp and paper sector may have a new market leader, and mentor, for the future.

* After price adjustments, Wasilenkoff notes, the final price paid for the Thurso facility may be in the order of $900,000.

By Heather Lynch for Pulp and Paper Canada. June 2, 2010.

SOURCE:
Pulp and Paper Canada: “Thurso’s Future Secure with Fortress”

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Financial Post: “Canadian forestry sector reseeds

Posted: Thursday, May 27th, 2010

Once-moribund industry sprouts new demand and higher share prices.

A the adage goes, the best time to plant a tree is 20 years ago; the second best time is now.

Ideally, investors planted their money into forestry early enough to see their money grow along with the recent surge in commodity and equity prices.

But the second best time to invest money smartly in the sector is now.

Over the past three years, Canadian forestry has suffered through one of the worst periods in its history. And for an industry already facing seasonal decline, there were several possible factors that could have aggravated the problem. Most of them came true.

In late 2006, the U.S. housing bubble popped, sparking what analysts have come to lament as the “lumber depression.”

In 2008, Canada’s forest, paper and packaging sector was the global industry’s worst performer, with the biggest companies accounting for half of the sector’s losses of US$8-billion. That year, Canada was the only country in the world to post a negative return on employed capital.

For companies focusing on building products, 2009 was no better. Severely curtailed demand drove about one-third of building material suppliers out of business, estimates Paul Quinn, a RBC Capital Markets analyst.

The supply chain is empty.

Extremely low inventory levels, when combined with even the modest uptick in demand in recent months, have sent market prices through the roof and the equities of Canadian forestry companies skyward.

The swift and stunning turnaround is evident in the share-price gains of industry leaders over the past year: Canfor Corp. and West Fraser Timber Co.’s have more than doubled to about $10 and $40, respectively. Shares of Fortress Paper Ltd. are up almost 400% to about $22. Now at about the $70-mark, Domtar Corp.’s shares have risen more than 650%. And Canfor Pulp Income Fund is trading at about $15, more than 11 times higher than in May 2009.

With much uncertainty in demand and prices, the challenge for investors is predicting which forestry stocks are poised to be cut down, having risen too far, too fast, and which still have room to grow.

The answer probably depends on investing style. Put money into lumber for long-term gains, says Daryl Swetlishoff, an analyst at Raymond James. For momentum traders looking to capitalize on inflated prices, pulp and paper are probably the best bet.

The fortunes of a Canadian lumber outfit are, of course, intimately tied to the fluctuations of the U.S. housing market. And in 2009, housing starts in the United States totalled 553,000, down almost 75% from the 2005 peak.

“In housing materials, it was really a depression,” Mr. Quinn says. Companies closed sawmills and curtailed production.

This year, a marginal increase in housing starts has combined with emerging demand in China to put some upward pressure on lumber prices.

But depleted inventories have been the true driving force, Mr. Swetlishoff says. “It’s more of a supply-side event.”

According to price tracker Random Lengths, the composite price for western spruce/pine/fir stands at about US$320 per thousand board feet, up more than 50% since the end of 2009.

“The big question in the building material space is: Are today’s high prices sustainable? And have the stocks gotten ahead of themselves?” Mr. Swetlishoff says.

With much variation in recommendations, most analysts monitoring lumber stocks have “hold” or “sector perform” recommendations on large solid-wood companies.

However, Mr. Swetlishoff says he believes those equities are currently trading at mid-cycle valuations and still have room to run. He has “outperform” recommendations on Canfor, West Fraser and International Forest Products Ltd.

“Our take is that if you’re looking at these stocks, it’s not for a six-month trade, because we see an emerging cycle in lumber products.”

Those less optimistic about the sector believe prices are due to fall and compress valuations.

“To the extent that forest-product stocks need ongoing lumber-price gains to outperform, we are doubtful that the recent spurt of share-price strength will persist,” said a report by Montreal-based think-tank BCA Research Inc.

The lack of consensus reflects a great deal uncertainty around market forces. The timing of the U.S. housing recovery is far from a sure bet, with some predicting a surge of shadow inventory from foreclosures and a double dip in prices.

But the price of lumber may be somewhat insulated from demand fluctuations by other supply constraints, including the destruction wrought by the mountain pine beetle, Mr. Swetlishoff argues.

“Until flying over the B.C. central interior and seeing nothing but red (dead) trees for hours, it is difficult to grasp the scale of the disaster that is the … beetle,” Mr. Swetlishoff said in a note.

Also, the reduction in capacity over the past three years is not immediately reversible, even though demand has picked up. And a strong loonie offsets some of the incentive to crank up production, despite the allure of high prices.

“While restarting mills is relatively easy, a strong Canadian dollar would prolong the lean supply backdrop. The latter raises the break-even cost of restarting Canadian mills and/or adding capacity, given that lumber is priced in U.S. dollars,” the BCA report said.

In fact, Mr. Swetlishoff goes so far as to apply the theory of peak oil to timber, predicting that a number of demand and supply factors will combine to produce a lumber “super cycle.”

That will lead to “sustained elevated pricing associated with structural supply deficits,” he wrote. On that front, he recommends International Forest as a small-cap pick, as well as West Fraser and Canfor.

While the peak lumber theory applies to the long term, Mr. Swetlishoff also predicts that the seasonal industry decline expected in the second half of 2010 will not push prices below break-even levels, and thus will not strip his stock picks as recommendations for deep-value investments.

Without the reliance on U.S. housing, pulp and paper companies were better able to weather the recession, but are still enjoying a recent run in prices due to supply constraints.

After a number of pulp mills closed last year, the earthquake in Chile wiped out about 7% to 8% of global capacity. Pulp is expected to hit US$1,000 per tonne soon, an increase of almost 60% since last May.

In that sector, Domtar has consistently beat earnings expectations, attacked its debt levels and recently announced the reinstatement of its dividend.

And even with big gains already realized, Domtar’s equity is considerably undervalued, Mr. Quinn says.

“Domtar’s our favourite story,” he says. “We love it.”

His share-price target is $100, well above Domtar’s current price of about $70.

“It’s balance sheet is underleveraged, it’s going to generate some significant free cash, almost $10 a share in our estimate in 2010,” Mr. Quinn says.

As a unique pulp and paper investment opportunity, Mr. Swetlishoff has a strong “buy” recommendation on Fortress Paper.

The B.C.-based producer of security and specialty papers recently acquired a hardwood pulp mill and converted it to a facility producing dissolving pulp, which is used in the production of rayon, a substitute for cotton with a large market.

“That is one I do not have to stress my model at all, and I get a lot of upside,” he said. “A lot of the other stocks I cover, I run pretty hard.”

In the wood-panel market, Norbord Inc. continues to garner “buy” recommendations on the strength of an extraordinary price environment for oriented strand board, whose price has soared to the highest levels in five years.

“At this price, they’re making lots of money,” Mr. Quinn says.

By: Tim Shufelt, Financial Post
Source: National Post

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Fortress Paper Announces an Acquisition to Enter the Specialty Cellulose and Bio-Energy Sectors

Posted: Thursday, March 18th, 2010

Fortress Paper Ltd. (“Fortress Paper” or the “Corporation”) (TSX:FTP), a leading producer of security and specialty papers, in a major strategic move today announces the signing of an asset purchase agreement (“APA”) to acquire the assets of a northern bleached hardwood kraft (“NBHK”) manufacturing facility located in Thurso, Quebec (the “Thurso Mill”) from Fraser Papers Inc. (“Fraser”) with the intention to convert this operation into a world class, low cost, specialty cellulose (dissolving pulp) operation. Concurrently, Fortress Paper intends to build a biomass-based cogeneration plant at the Thurso Mill which will produce green electricity resulting in material net energy savings (income).
Upon closing of the acquisition of the Thurso Mill, which will be completed through its wholly-owned subsidiary Fortress Specialty Cellulose Inc. (“Fortress Specialty”), the Corporation intends to incur capital expenditures of approximately $153 million to convert the non-operating NBHK mill into a high quality specialty cellulose mill and to construct a new cogeneration facility. In connection with the proposed capital expenditures, Fortress Paper is pleased to announce that it has pre-arranged specific financing initiatives to fund the conversion and cogeneration projects.

The specialty cellulose mill is planned to have an annual production capacity of more than 200,000 air dried metric tonnes and is expected to be completed in mid-2011. In entering into the specialty cellulose sector, Fortress Specialty will focus on producing dissolving grade cellulose for the textile industry, primarily targeting viscose fibre (rayon) products which have shown strong growth of approximately 10% in China and 7% worldwide over the past five years. Rayon is a technically evolved and versatile fibre with many advantages, particularly in the warmer and higher growth regions of the world.

Fortress Paper also plans to construct a 25 megawatt cogeneration facility to service a net 18.8 megawatt power supply agreement over a 15 year term. The location of the cogeneration facility provides it with access to on-site generation of biomass and an extensive local network of chip and other biomass suppliers. The cogeneration facility is expected to be supplying electricity in the fourth quarter of 2012.

Chad Wasilenkoff, CEO of Fortress Paper, states, “We are very pleased to announce this new acquisition which we believe will add significant shareholder value in the years to come. Both the Board of Directors and management of Fortress Paper feel that this new opportunity warrants the diversification of the Corporation into other specialty sectors as it has the potential to materially enhance shareholder value. Once the conversion and cogeneration projects are complete, we will be entering a new product segment which offers long-term growth prospects and attractive margins. During the interim period, we will capitalize on the current strength of the NBHK pulp market. We feel it is important to emphasize that this is not an acquisition to enter into the pulp industry, but rather the opportunity to acquire assets that are ideally suited to be converted into a bio-refinery and produce high value-added products. We intend to strategically enter this sector at a time when demand exceeds current capacity. We believe this trend will continue over the next several years given the limited announced new capacity.”

Pursuant to the terms of the APA, Fortress Paper will pay Fraser $3 million in cash at closing, subject to certain adjustments. The closing of the APA is subject to various conditions, including (i) as a result of Fraser and its subsidiaries having filed for creditor protection under theCompanies’ Creditors Arrangement Act (the “CCAA”) in Canada, the approval of the transaction by the Ontario Superior Court of Justice (Commercial List) in connection therewith, (ii) Fortress Specialty entering into renewed collective agreements with all unionized employees of the Thurso Mill, and (iii) the Corporation and Fortress Specialty securing financing as necessary to implement their proposed business plan at the Thurso Mill. Fortress is optimistic that it will be able to finalize mutually satisfactory renewed collective agreements with the three unions imminently and looks forward to building a mutually beneficial relationship with the community of Thurso. The closing of the acquisition is anticipated to occur on or about April 30, 2010.

Investissement Quebec (“IQ”) has committed, by way of an agreement in principle, to grant Fortress Specialty a loan in the amount of up to $102.4 million to support Fortress Paper’s proposed business plan in respect of the Thurso Mill. The loan will be secured by the capital assets of Fortress Specialty and will have a term of 10 years. Interest will be calculated at a fixed rate of 5.0% per annum for the first five years, followed by a rate based on the cost of IQ’s funds plus 2.0% for the remaining five years, up to a maximum of 5.5% per annum. The loan is subject to receiving the requisite approval of the Government of Quebec and is subject to completion of definitive documentation.

Fortress Paper has also signed a conditional commitment letter with a Quebec financial institution providing for the subscription of an unsecured convertible debenture of Fortress Paper (the “Debenture”) in the principal amount of $15 million maturing in five years with an interest rate of 7% per annum. The Debenture will be convertible, in whole or in part, at the option of the Quebec financial institution into common shares of Fortress Paper at any time after closing of the debenture at a conversion price equal to the lesser of 145% of the trading price of the common shares on the Toronto Stock Exchange (the “TSX”) and $20.00.

The Debenture will be redeemable, in whole or in part, at the option of Fortress Paper, from the second anniversary date of its issuance at par plus all accrued and unpaid interest, provided that the volume weighted average trading price of the common shares of Fortress Paper on the TSX is not less than 125% of the conversion price. The Debenture financing is subject to various conditions, including approval by the decision-making authorities of the Quebec financial institution, satisfactory due diligence, the concurrent completion of the IQ financing, the closing of the APA, receipt of TSX approval for the issuance by Fortress Paper of the Debenture and the completion of definitive documentation.

Included in the assets being purchased from Fraser is approximately $9.9 million in credits (black liquor credits) granted under the Canadian government’s Pulp and Paper Green Transformation Program (the “GTP”). The GTP aims to improve the environmental performance of Canada’s pulp and paper industry by funding approved capital projects with environmental benefits. Fortress Paper also intends to apply for approximately $15.2 million in federal credits under the Green Infrastructure Fund program of the Minister of Transport, Infrastructure & Communities relating to the planned cogeneration project.

As no definitive agreements have been entered into with respect to the financing initiatives described above, there can be no assurance at this time that the financing in connection with the Thurso Mill will be completed on terms acceptable to Fortress Paper or at all.

For more information on the Fortress Specialty Cellulose project you can access the Fortress Specialty Cellulose PowerPoint Presentation by going directly to the link atwww.fortress.presenternet.com

A prerecorded voice presentation is available to accompany the PowerPoint and can be accessed at:

Prerecorded Presentation dial-in number 1-877-353-9587 or from overseas 403-699-1055 and follow the prompts. When prompted, enter the 6 digit conference reference number 274464 followed by the number sign (#). The recording will be available for 7 days.

Future replays of the PowerPoint Presentation can be accessed by a link on the front page of our website at www.fortresspaper.com and alternatively at www.fortress.presenternet.com.

About Fortress Paper

Fortress Paper is a leading international producer of security and other specialty papers. Fortress Paper operates two paper mills, the Landqart Mill located in Switzerland and the Dresden Mill located in Germany. Fortress Paper’s security papers include banknote, passport and visa papers and its specialty papers include non-woven wallpaper base products, and graphic and technical papers. As an extension of its security papers business, the Landqart Mill has been actively developing and marketing innovative paper-based security products.

This news release contains certain forward-looking statements that reflect the current views and/or expectations of Fortress Paper with respect to its performance, business and future events, including statements relating to the Corporation’s completion of the APA and the outcome of its financing initiatives; its intention to convert the Thurso Mill into a specialty cellulose (dissolving pulp) operation; its plans to build a biomass based cogeneration plant and the financial results and production capacity expected therefrom; its ability to complete the necessary financing to make planned capital expenditures; the expected effects of the acquisition of the Thurso Mill on the business of the Corporation; the state of the market in the specialty cellulose and green bio-energy sectors; and its intended application for federal tax credits. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about the business and the industry and markets in which the Corporation operates, including assumptions relating to the Corporation’s ability to complete the APA; its ability to complete the necessary financing to successfully implement its business plan in respect of the Thurso Mill; the success and profitability of the specialty cellulose operation and cogeneration plant; the expected effects of the acquisition of the Thurso Mill on the business of the Corporation; the state of the market in the specialty cellulose and green bio-energy sectors; and the Corporation’s ability to obtain certain federal tax credits. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, that the Corporation will not complete the APA; will not obtain the necessary financing to complete its business plan in respect of the Thurso Mill; will be unable to implement its business plan in respect of the Thurso Mill as planned or at all; that the specialty cellulose operation and cogeneration plant will not be successful or profitable and will not meet anticipated production capacities; that the Corporation will not obtain the federal tax credits; and those risks relating to changes in the market, potential downturns in economic conditions, fluctuations in the price and supply of raw materials, foreign exchange fluctuations, labour relations, regulatory requirements, reputation, competition, dependence on major customers, and other risk factors listed from time to time in the Corporation’s public filings. These risks, as well as others, could cause actual results and events to vary significantly. Accordingly, readers should not place undue reliance on forward-looking statements and information, which are qualified in their entirety by this cautionary statement. Fortress Paper does not undertake any obligations to release publicly any revisions for updating any voluntary forward-looking statements, except as required by applicable securities law.

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