The tree or the forest?

If you read this blog in the last years, you’ve probably noticed how much I like Fortress paper and it’s manager Chad. In the last year and a half, FTP share value dropped from 54$ (top) to the current 20$ price per share. You probably would stay away from such an investment wouldn’t you? Well if I knew I could buy this company for 20$ instead of 40$ (my initial purchase price) I would have saved a lot. But I could not know.

The tree that hit FTP …in its face.

Fortress Specialty Cellulose

LSQ plant was purchased from Domtar for 1$ + 7m payable in the next 3 years or so to an environment fund.

FTP started DP conversion on its functioning Thurso plant. They did that by stopping operation which costed a lot more than originally planned (50m).

New labor contracts were signed with a major salary cutback from previous plant employees for a 10years duration in LSQ and Thurso plants.

The cogeneration equipments were purchased and are under installation and they costed more than originally planned because no used equipments were available.

Dresden

This plant is producing at maximum capacity and returns 6-8m quarterly consistently.

Landquart

This plant had several strategic and functional issues in the last 2 years. A major conversion project occurred to transfer this specialty paper company to a money-paper-printing plant. The major issue being they did not get contracts to print paper-money… New, delayed contracts are always promised but never delivered. It is losing 5-7m per quarter consistently… Offsetting completely the gains from Dresden.

The general manager of that plant is now out of the picture and Chad is starting to liquidate adjacent assets (cogen plant, lands…) to pay for the losses.

Legal
There is one pursuit from a Chinese company for intellectual property.

Cash flow

This year FTP burned cash like crazy. The company debt is now thought the roof and if Thurso is not paying for itself, FTP may have to refinance by issuing shares. Chad is confident that he will not have to, but…he was confident that Thurso would pump cash already and Landquart too…

The forest behind the tree.

Thurso
Thurso is now producing. Not at full capacity, but consistently with reasonable quality as of march 18th. This should provide minimum profit to finish the year at 0 to 30m profit. I know, it is quite a wide range but I can only guess based on Chad’s numbers that are not quite verified yet so I must assume worst case. In 2013, I would assume full year production at around 7m profit per quarter based on 175k tons production and 1100 selling price for the low end and 11m per quarter on the high end at the contractual price of 1200/ton.

LSQ
LSQ does not have major expenses yet. Chad must finance first. Let’s assume 2m corporate expenses loss on LSQ in 2012 and major capital expenses in 2013-2014.

Dresden
Still the cash cow at 28-30m profit per year.

Landquart
Let’s hope they start printing in the second half of 2012. I assume they will lose more in Q2 and make a small profit in Q3-Q4 for a 15m loss in 2012 and 0 profit in 2013 (wild estimates, we could also close the plant fans sell the lands for a profit). Let’s assume 15m loss in 2013 to in the low end estimate.

Corporate expenses
Those expenses should be close to 10M yearly for Chad’s salary and financing costs.

Expected profit

2012
Low (0+28-15-10) 3m profit (p/e 100)
High (30+30+0-10) 50m profit (p/e 6)
2013
Low (30+30-15-10) 50m or (p/e 6)
High (50+30+0-10) 70m or (p/e 4)

What’s your take on FTP and Chad’s undelivered promises?

Disclosure : Author is Long FTP

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5 comments on “The tree or the forest?
  1. Brett says:

    Any updates on FTP and JCTCF? Still a fan of both? Whats the updated target prices?
    Thanks.

    • Dominic Nadeau says:

      Still waiting on Thurso profit for FTP. Still a target around 30$.

      JCTCF is close to my target (11$) but still heavily invested in.

    • Dominic Nadeau says:

      I’ve sold both. JCTCF because I reached estimated value and FTP because I think the risks are now too high.

  2. Brett says:

    What the f on FTP? Any updated thoughts? Thanks.

    • Dominic Nadeau says:

      I can’t think of a situation where it is worth less than 300m. Just need to be patient.

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