Bloomberg News

Fortress Paper CEO Defies Investors to Buy Into Pulp Plan

July 11, 2012

Fortress Paper Ltd. (FTP) Chief Executive Officer Chad Wasilenkoff says his strategy of buying unprofitable Canadian pulp mills will either spark a rally or push him to buy the whole company.

Wasilenkoff is betting idled paper-grade pulp mills can be transformed into some of the world’s lowest-cost makers of the pulp used in synthetic fabrics and LCD screens. Fortress bought a second Quebec mill last month and the CEO said he’s in talks to acquire another in North America and one in Europe.

The growing market for so-called dissolving pulp, combined with Fortress’s cheap acquisition costs, government financial support and wage concessions from workers, will generate “staggering” returns for investors, Wasilenkoff said. Fortress’s market value has declined 56 percent in the past year.

“We are going to see a significant upward movement in the shares in the next 12 months,” Wasilenkoff, who also is chairman, company founder and its largest shareholder, said in an interview near Fortress’s North Vancouver headquarters. “If we don’t, I’d consider taking the company private.”

Fortress is moving into an industry that has been stung by the U.S. housing slowdown, the strength of the Canadian currency and plummeting use of newsprint and magazine paper as the Internet and personal tablets gain in popularity. Direct jobs in the C$57 billion ($55.9 billion) industry declined by 35 percent to 233,880 in the last 11 years, according the Forest Products Association of Canada.

‘Good Talker’

Wasilenkoff faces a global expansion of dissolving-pulp production capacity, said Brian McClay, founder of Brian McClay & Associates Inc., a Montreal-based pulp-industry consultancy. Still, Wasilenkoff is helping to defy the perception that the Canadian forest-products industry is in irreversible decline.

“He’s a larger-than-life character, a good talker and a dealmaker,” McClay said in a telephone interview. “There are a lot of reasons why dissolving pulp should do very well.”

A fourth-generation Russian-Canadian and a former investment adviser at Canaccord Capital Inc., Wasilenkoff, 40, isn’t averse to taking a contrarian position.

Fortress acquired its first Quebec mill in 2010, a facility near the town of Thurso held by bankrupt Fraser Papers Inc. At the time, Fortress’s main assets were a wallpaper mill near Dresden, Germany, and a banknote-paper making operation in Switzerland.

‘Outside the Box’

The Quebec move was so unexpected for Daryl Swetlishoff, a Vancouver-based forest-industry analyst at Raymond James Ltd., that he described it as a “Crazy Ivan,” a term in Tom Clancy’s 1984 novel “The Hunt for Red October” that refers to a bold, yet risky submarine-warfare tactic.

Wasilenkoff took the comment as a compliment.

“It was a recognition that we really were outside the box, creating opportunity where others couldn’t see it,” Wasilenkoff said in the interview.

Fortress completed the purchase last month of its second Quebec mill near Lebel-sur-Quevillon for C$1. Domtar Corp. (UFS) permanently closed the mill, 500 kilometers (311 miles) northwest of Montreal, in 2008 citing “deteriorating conditions” for the global pulp market.

Fortress, which declined 2.7 percent to C$16.49 at the close today in Toronto, has dropped 38 percent this year. In that time, Jacksonville, Florida-based Rayonier Inc. (RYN:US), the world’s largest maker of specialty dissolving pulp, rose 2.2 percent in New York. The pulp is so named because it’s dissolved in chemicals before use to make products from rayon and cigarette filters to the nose cones of the now defunct NASA space shuttles.

Cost Overruns

The transformation of Thurso, about 100 kilometers west of Montreal, from a mill that made pulp for paper to a producer of dissolving pulp was slower and more expensive than expected.

The project was first forecast to be completed by mid-2011 and to cost C$153 million, according to a March 2010 statement. Production began in December and the project is now projected to cost C$210 million, Sean Steuart, a Toronto-based analyst at Toronto-Dominion Bank (TD), said in a June 12 note to clients.

That contributed to a “tight” cash position for Fortress, Steuart said.

The company consistently missed “ambitious” targets, said Paul Quinn, a Vancouver-based analyst at Royal Bank of Canada.

“The market will not pay up for lower costs until they begin to show up in financial performance, especially considering how Thurso’s conversion cost guidance has continued to increase over time,” Quinn said in a May 16 note to clients.

Quarterly Losses

Fortress reported net losses in five of the last six quarters and analysts project a second-quarter loss excluding one-time items of 20 Canadian cents a share, the average of four estimates compiled by Bloomberg.

The company said yesterday it sold 7 percent debentures in an offering to raise C$69 million to help complete construction of a power plant at Thurso and to fund the restart of Lebel-sur- Quevillon.

The “convertible debentures issue takes liquidity concerns off the table,” Quinn said today in a note to clients.

Fortress isn’t the only company in North America now seeking to exploit the market for dissolving pulps.

Aditya Birla Group, based in Mumbai, said last week it will buy and upgrade a mill in Terrace Bay, Ontario. Paper Excellence BV, a unit of Jakarta-based Sinar Mas Group, is investing in dissolving-pulp capacity at a mill in Prince Albert, Saskatchewan. And Johannesburg-based Sappi Ltd. (SAP) is upgrading a mill in Cloquet, Minnesota.

‘Timing Is Everything’

Global production capacity is set to rise 36 percent by 2015 to about 8.1 million metric tons, according to McClay, helping to contribute to an oversupply of viscose staple fiber, a pulp derivative used to make rayon fabric.

“Right now in China the price is probably $950 a ton, down from about $1,500 a year ago and $2,650 at its peak in April 2011,” said McClay, referring to the type of dissolving pulp made by Fortress. “Timing is everything in this business.”

A key assumption for Fortress is that increasing demand in China and India will lift cotton prices, helping to spur demand for dissolving pulp and rayon, a cotton substitute, Wasilenkoff said.

“You really need some big issue in cotton that drives prices up so high that people start to look for alternatives, which would be rayon,” Kevin Mason, managing director of Gibsons, British Columbia-based ERA Forest Products Research, an independent forest-industry research company, said in a telephone interview last week.

‘Pure Play’

Cotton futures have plunged 23 percent this year in New York amid concern global economic activity was slowing and demand from manufacturers in China was falling.

Wasilenkoff said Fortress may consider concentrating its operations on dissolving pulp within three years by spinning off its wallpaper and banknote-paper businesses.

“We are moving in the direction of a pure play,” Wasilenkoff said. “We think it would attract more investors” and help the company to escape its “holding-company discount.”

In the meantime, the plan is to begin production at Lebel- sur-Quevillon and show that the transforming company can generate consistent profits, Wasilenkoff said.

“This is the year to rebuild investor confidence,” he said.

To contact the reporter on this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net


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