FFHWatcher
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Posts posted by FFHWatcher
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Pulp & Paper News
Mercer International to increase Feb. 1 NBSK pulp prices $20/tonne in Asia
SAN FRANCISCO , Jan. 20,2011 (RISI) - Mercer International informed customers across Asia thatit will increase northern bleached softwood kraft (NBSK) pulp prices by$20/tonne, effective February 1 until further notice, industry contactstold RISI.
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In total, doesn't it show FFH owning about 17M shares or 17.5% of the company worth about $450M at $25/share? Was the 5.3M shares you were referring to only represent the additional shares they picked up?
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Interesting. http://www.newswire.ca/en/releases/archive/January2011/13/c2417.html
236,226 x $25 = $5.9M or 4.5 cents per Fibrek share. Distribute to shareholders or sell and use proceeds for convertible repayment or perhaps this is the start of the story of how a child comes home to live with their parents after leaving home in 2002 (ie. SFK spin off in 2002 only to come back to Abitibi in 2011?).
TSX : FBK
www.fibrek.com
LONGUEUIL, QC, Jan. 13 /CNW Telbec/ - Fibrek Inc. (TSX: FBK), a leading producer and marketer of high-quality virgin and recycled kraft pulp, today announced that Fibrek General Partnership ("Fibrek GP"), its wholly-owned subsidiary, will receive 236,226 common shares (the "ABH Shares") of AbitibiBowater Inc. ("Abitibi") in connection with the initial distribution of ABH Shares pursuant to the procedures undertaken by Abitibi under the Companies' Creditors Arrangement Act.
As an unsecured creditor of Abitibi-Consolidated Company of Canada ("ACCC"), a subsidiary of Abitibi, Fibrek GP filed a claim in the amount of $45 million (the "Claim") as compensation for the repudiation by ACCC, on May 21, 2009, of the woodchip supply contract then in effect between ACCC and Fibrek GP. Pursuant to the plan of reorganization and compromise of Abitibi, a total of 20,498,391 ABH Shares will be issued to ACCC's unsecured creditors, of which 18,165,317 have been issued in connection with the initial distribution and 2,333,074 have been reserved for the benefit of holders of disputed claims and could be distributed subsequently to unsecured creditors in accordance with the terms of the plan of reorganization.
The distribution of ABH Shares to Fibrek GP will be treated as a non-recurring item in the consolidated statements of earnings of Fibrek Inc.
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He can just move to Canada. He would be safe here as we do not have any securities enforcement agency. None that I am aware of anyway. ???
Maybe there aren't any stock market cheats or inside traders here in Canada. We are just all good people.
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paying off credit card debt is THE fattest pitch ever
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I wonder if those buyers like the decision they made? Bought for $7.35 and just hit $9. on keeps moving up. Glad to see FFH realize a profit but also good to see that they held on to half their position. FFH's decision to double down about 2 years ago paid for entire FFH Head Office salaries for years, perhaps a decade?
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The basic premise is that where multiple outcomes are possible you draw out a probability tree of events over a given time horizon, determine the value of the stock under each outcome and assign a probability to each outcome. Multiply the value x the P(x) to arrive at the probability weighted Expected Value for that branch. Sum the Expected Values of each branch to get to the Expected Market Value (EMV) of the share overall. Bayes ? Theorem. WEBs bridge example.
Some of the values will be based on liquidation, others on P/E multiple, & still more on BV multiple. Multiple valuation approaches are part of the framework. Efficient Markets
To hold a security I expect to get paid, & the more risky it is the more I get paid. Therefore I need to PV the EMV back to today to determine what price ‘X’ I should be willing to pay to buy the stock – inclusive of all my expectations. For a 1 yr horizon, & 20% discount rate, multiply the EMV by 1/(1+.2)^1. Risk/Return theory.
If todays price P(0) is < X, I should be a buyer as I can capture an arbitrage gain of [X-P(0)] x # of shares. If P(O) > X, I should be a seller. If P(O) = X, I should be neutral & therefore 50% hedged. Algorithmic formula.
If P(O) hits X & subsequently falls, you can repurchase the hedge at a permanent cash saving. If P(0) goes through X & keeps rising, you need to sell more. The decision becomes how much of the overall portfolio should be in this stock
Move forward 1 quarter. Discount multiple is now 1/(1+.2)^.75, & EMV has changed as the P(x) of each branch has changed. The value of each outcome may have changed as well. There is a new X, & a new decision to be made.
We deliberately speak cryptically in order to make you develop your application skills, which maybe 1 in 4 will do. You can teach a monkey theory, but it becomes a gorilla when it learns how to apply.
Here endeth the lesson!
SD
Ok, Now I think understanding up to 50% S.D.'s math was too optimistic. <50% but greater than 25%. Underpromise, overdeliver.
Re: Mercer - I do own a position in Mercer and Fibrek. 1:3 ratio, respectively.
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lessthaniv, good find.
In my opinion, the best hour or so you can invest in pulp research is found here,
http://www.mercerint.com/s/Investors.asp
If anybody does the work or has already done the work, what do you think of Mercer. As far as Mercer is concerned, they are even more leveraged than Fibrek to NBSK. Pros and cons to either investment. Mercer is approx. double the market cap as Fibrek but more than double FBK's production capacity and it is all NBSK. Personally, I have taken a real liking to Mercer's financials (there is a lot more to their debt than what you see at first glance) which I stumbled upon in digging up NBSK stuff.
My 2011 Goal - try to decipher >50% of SD's posts. Apparently I should have payed more attention in school.
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Come to the FFH annual meeting this year, especially the one that Sanjeev organizes. Meet him, talk to him, ask him questions or just phone him up. He takes calls, as far as I know. From what I have seen, he has more integrity and character than any other investment manager I have met (I used to be a financial advisor in another life). I have used him personally for at least 5 years. Met him several times. My largest and pretty much only fund I hold (Chou Associates).
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Would you be satisfied if they simply called you back and said, "We appreciate your question but our policy is to report our investment results annually in our Annual Report with as much disclosure as we are comfortable with. Anything beyond that will not be disclosed publicly as we feel it has the possibility to affect our investment performance which may negatively affect all shareholders. Please see our Annual Report for a full description of the disclosure that pertains to our investments."
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They acquired RBK business by using debt
http://findarticles.com/p/articles/mi_qa3636/is_200612/ai_n17193385/
I think that explain why 80% of financial charges were allocated to the RBK mills.
They paid 160M USD for it in 2006, not sure they would receive as much would they sell the mills today.
So the company allocates based on the purchase vs. based on what is held as collateral? I am sure all assets are held as collateral but it makes sense that they allocate to debt based on the purchase. An accounting nuance that I was not familiar with. Thanx.
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Question.
Page 18 of Fibrek's most recent quarterly report.
http://fibrek.com/static/en/pdf/etats_financiers/2010_3Q_FS.pdf
Segmented Information.
3 months ended September 30, 2010, showing NBSK and RBK Mills. 80% if the financial charges were allocated to the RBK Mills. Why is that? It is a Quebec organization that is the lender and it is their NBSK Mill that is in Quebec, yet the financial charges are somehow associated with the RBK Mills.
I am hoping that they are trying to pkg the two together (US Mills and LT Debt...maybe Convert. debt too?) and want to give them away to an unsuspecting buyer :-) Of course, I just woke up so I am probably dreaming.
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In general, is the feeling with the Royalty Trusts the same as high paying dividend entities? 15% yields plus 50% capital losses still equals as shitty investment? That is my concern. Chasing yield is generally idiotic and ends in major losses. Is it the same here or is it a free ride and undervalued?
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You can add Imvescor Restaurant Group Inc on your list. It's a crappy business in my opinion but trades at a very low valuation.
BeerBaron
I did look at Imvescor, formerly called PDM Royalties Income Fund. Crappy business is an understatement. I noticed that PDM did a lot more than just collect Royalties from Pizza Delight, Scores, Mikes, Baton Rouge, etc. They also sold advertising to the franchisees and owned corporate stores. They broke the basic rules by having operations and overhead. This is not an investment that I would want to be in as the risk profile is much greater than a plain vanilla entity that receives a percentage of revenue and turns around the pays it all out to shareholders. There were quarters for Imvescor/PDM that they generated $11M in gross profit but had $8M in expenses. In this thread, I am trying to keep the discussion around companies that collect $11.2M in Royalties, have $0.2 in admin. costs and pay out $11M in distributions. In the future, I expect $11.2 in revenue, $0.3M in admin. $3.5M in taxes and a $7.4M dividend.
I am trying to determine if these Royalty Trusts that have 12% yields are going to survive or perhaps thrive as corporations. Going fwd., many will convert to corporations, pay approx. 31.5% in tax and reduce their yields (dividends for 2011 and in the future) to about 8%. If sustainable over the longer term, and perhaps even with a tiny bit of growth, these entities may represent good value. Very few corporations generate 8% or more cash returns to investors without eventually squandering that excess cash on overpriced acquisitions and inflated executive compensation. These corps generally do not really allocate capital other than pay it all out to shareholders and have no executive compensation issues as they are paid mainly by the operating company.
I am particularly interested in getting a better understanding of the trusts that carry debt, especially if it is related to the operating company. In particular, SIR Royalty and, to a lesser extent Pizza Pizza Royalty. What is the likely scenario if the wheels fall off the top line growth for an extended period of time? It has to turn out better than PDM Royalty/Imvescor because they had true operating expenses, overhead, etc, while SIR and Pizza Pizza do not.
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My goal in this thread is to learn more about Canadian (Non-Energy) Royalty earning entities and to openly discuss the investment pros and cons of such an entity that earns income from an operating business.
Here is a quick history, as I presently understand it.
In Canada we have royalty earning entities that get paid a percentage of top line sales of a group of operating companies. In most cases, these royalty earning entities are in the restaurant industry. The royalties collected are in the range of 4-9% of Revenue of the restaurants that are in the 'Royalty Pool'. Most royalty earning entities are currently structured as Income Trusts that are required to pay out all or almost all of their income to unitholders. No tax is paid by the entity and it is taxed personally to the unitholders. Yields are anywhere from 5-15% from these Royalty Trusts. These Income Trust structures will be changing in the very near future, and most will be converted to corporations as of January 2011. More on that later.
In the early part of the decade, income trusts were very popular in Canada and many larger restaurant chains took advantage of this non-corporate, non tax paying entities. If I understand this correctly, many restaurants separated their trade name, brand, Intellectual Property rights and trademarks, from the primary corporation and monetized that asset through an IPO of an Income Trust. In most cases, the original corporation maintained a significant ownership in the new high yielding income producing trust. The restaurant owner would lease an asset, which was the rights associated with the trademarks, brands, etc., into the royalty pool for a period of 99 years, in exchange for cash, while maintaining significant ownership in the Royalty Trust. Most of the ownership of the Royalty Trust by the original restaurant is approx. 10-30%. The restaurant receives their share of royalties based on their ownership percentage. For example, if the restaurants pay 6% of revenue as royalties to the Royalty trust and the restaurants generate $100M of revenue, than the trust would receive $6M. If the restaurant owns 20% of the trust, they would receive 20% of the $6M in royalties. The public shareholders would receive the other 80%. If the Royalty Trust is plain vanilla, than it has virtually no significant costs as they have no operations, just some minor administrative expenses.
When new restaurants are developed, they are generally added to the Royalty Pool after a period of time, usually 1 year. In return for adding the restaurant to the royalty pool, the operating company/restaurant would receive an allocation of Trust Units based on a formula that ensures the transaction is accretive to public unitholders. The structure is pretty straightforward except a few of the restaurants have used debt which makes it a little more risky and complex to understand.
As I understand it and as the Royalty Funds present it, the success of these entities are almost entirely based on Same Stores Sales Growth (SSSG). If you want your distributions to grow than you must have SSSG. If SSSG falls by 5%, it is possible that your distribution will be cut by a similar amount. In my analysis, that isn't a huge risk if you are invested for income. Currently, the yields are say, 10% and if they reduce the payout due to a 10% decline in SSSG, than the new payout may be as much as 9% (ie. 10% of a 10% yield = 1%). Share price would certainly fall 10%, likely more. I feel the real risk is if the restaurant has steady, long term negative SSSG to the point where they eventually shut down operations as they are no longer profitable. Therefore, one of the key risk factors is the restaurant's ability to maintain their sales and profitability for restaurant owners (restaurant owners could be corporate owned or franchisees). If the restaurants are not profitable for them, they will close up shop. If the restaurants close up shop, 6% of $0 is $0.
On Oct 31, 2006 the Canadian Financial Minister Jim Flaherty decided Canada was missing out on revenue due to the Income Trust structure. He brought in new rules that basically said that all income trusts would have to convert to corporations and start paying tax, or stay in their current structure and pay tax as if they were a corporation. Corporate tax rate is in the low 30% range (31.5% or so). January 1, 2011 is the date that trusts need to be converted to corporations and most Royalty Trusts have announced plans to convert to corporations at year end.
Investment Thesis - more and more investors are starved for yield with record low interest rates and the baby boomers aging and retiring. Next month a glut of high income yielding corporations will hit the market. Many of these former Royalty trusts will cut their distributions by 30-35% to account for the tax they will have to pay as corporations. Their share prices may or may not be hit when they cut their distributions. For the most part, these trusts have made their intentions very public. While some of the income trusts that have operations (ie. business and energy trusts) are changing their strategies to being growth and income oriented while Royalty Income trusts that have no operations only have one purpose, which is to pay out all royalties/cash flow to shareholders. With minimal overhead/administration expenses and their health based mostly on SSSG, I only see moderate risks ahead to their entities maintaining their dividends while the possibility of share price increases due to increased demand for demand producing investments.
Any input on this subject would be much appreciated. Additional risk factors that I am not fully comprehending would be great.
Here is a list of a few of the trusts.
Boston Pizza Income Fund
Keg Royalties Income Fund
Pizza Pizza Royalties Income Fund*
SIR Royalties Income Fund*
Second Cup Royalties I.F.
A&W Royalties I.F.
Second Cup Royalties I.F.
** I have not researched all of these companies so they may not all follow the above structure that I discussed.
* I have ownership in these.
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My only question is, will the market eventually let FFH get to a p/e of <1 ? kidding.
If the trend continues...significant share buybacks have to become more and more likely. I think raising the dividend and moving to quarterly will increase the number of potential shareholders. Purists will keep the money within FFH, which obviously hasn't hurt them in the past. Really, are you going to invest the cash better than Prem and the FFH team? Maybe, but the odds are against you.
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The 30% or so who voted for >$5M to retire, assuming that will happen within the next 10 years (yes, a 25 year old will likely need millions and millions to retire on), will make all your kids really, really happy one day.
Stop throwing out the numbers, the 2% on treasury bills needs $4.5M, etc., and get out there and talk to people who retired with $1-2M in the last 10-15 years. Stop basing your financial future on some financial calculator and go find some real life examples. I do appreciate and know of a few retires that now have less than when they started out. None of them share any characteristics with anyone on this board, IMO.
What do you guys need hundreds of thousands of dollars of year of personal income to live on for? and who has 100% of their retirement income in treasuries, aside from Greenspan?
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FFHWatcher - Do you hold FI to generate your annual requirements. I figure I can earn 8% - 10% in FI so I would want about $1 million to think about quitting my job.
Hmmm? FI? Fixed Income? Fixed Income in portfolio = 0%
Dividend generating investments, perhaps 40-50% and increasing.
Capital gain for the remainder and falling.
Future target is 60-75% are high yielding, lower growth type of investments.
Tax rate is dreadfully low if almost all of your income is from dividends in Canada.
Capital gains tax is dreadfully low too...50% the tax rate of regular earned income. (perhaps 20% instead of 40%, depending on total income).
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I love hearing those $5M and $10M numbers. lol
I was a financial advisor for almost 15 years. I never had any clients with over $2M. Over 100 were retired and managing just fine. Yes, many had other sources of income, which many of us won't have in the future but most were earning $2-5k/mo in pension/retirement income. Not a ton of money. Many of my friends have $5M-10M and they are retired. Many are older than me. Most are in their 50's and some in their 60's. Everyone that I know of who retires with $5M or so, retire and then die with $5M or more. Those with $10M and retire, die with >$10M. One friend retired with about $5M and will die with >$15M. They are all over 55.
I look back at the financial industry and they convince everyone using charts and inflation and stuff like 2-4% rates of return that everyone needs millions and millions of dollars to retire. Bull&*it!! They just want you to pour more money into your investments, which isn't a bad thing because it forces you to live on less and accumulate more. People will live on what they have.
Why doesn't anyone ask an 80 year old who has been retired for 20 years what their personal experience has been? Good luck finding one who's net worth has fallen in retirement. Nobody I know of, who was moderately well off when they retired had their net worth decline during retirement. I can not think of one, especially one that retired with more than $1M. I have had family members live on less than $1,500/mo in retirement and managed just fine and were happy. They had hundreds of thousands in investments but they didn't want to spend it. Saved for 40 years and never spent $1. of their savings in retirement. Good luck telling people over 60 to spend their savings.
Personally, at 37 years of age I retired with $1M-2M, a nice house, no debt, young kids and wife who works p/t. While she is bitter that I am retired, she slugs out her 15-20 hours/week :-) We are managing just fine. Net Worth is increasing, not decreasing. Lifestyle is maybe $100k/yr (spouse is $30k/yr, I am maybe $70k or whatever I need). Because I retired so young, there is certainly a much greater chance that if my investments turn sour than I will have to find some earned income but only as a supplement to my investment income. Even if I have to work 20 hrs/week or 4-6 months/yr, it still beats the real world. I have always said, that it is much better to retire from 40-60 and then work from 60-80. Why wreck your best years working? Dumb if you have other options.
Before people chime in with $1M, 2M, 5-10M and 2-4% hypothetical returns, 3% inflation, charts, graphs, etc. Do your homework and go out and ask some questions to the people you know who are 70-80 years old and ask them what their personal experience has been in retirement. Don't rely on the financial industry to do your work for you. Their interests aren't necessarily aligned with yours, unless you are an advisor :-)
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Somebody just blew about $7,000 in about 15 seconds buying FFH. What the heck!!!!!
Drove the price from $400 to $410 from 9:31:57 to 9:32:12 with a bunch of 100 share blocks.
Increased the price by $1. every 1-3 seconds in some cases. Dumb trading (so far). I'm not saying that I have never traded like an idiot but this time it wasn't me.
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http://www.paperage.com/foex/pulp.html
Date NBSK US$ NBSK Euro(US$) BHK US$ BHK Euro
30-Nov-10 968.16 953.29 869.99 657.84
23-Nov-10 968.00 955.13 870.00 636.24
16-Nov-10 967.91 956.29 870.00 634.53
9-Nov-10 969.64 958.37 870.00 617.72
2-Nov-10 972.33 959.31 870.00 627.84
26-Oct-10 974.78 963.01 870.00 624.37
19-Oct-10 974.78 963.81 870.00 617.50
12-Oct-10 974.78 967.70 870.00 627.07
5-Oct-10 984.78 969.83 870.00 633.83
28-Sept-10 990.00 972.91 870.00 648.67
NBSK firming up, not declining.
Cdn $ at about 98 cents (95 cents would be better but 98 is better than par!).
It also looks as though there has been good price increases in the products that (NBSK) pulp is used for.
How did I miss this headline of the Canfor $10/tonne price INCREASE?
SAN FRANCISCO , Nov. 23, 2010 (RISI) - Canfor Pulp has informed customers across Asia that its northern bleached softwood kraft (NBSK) pulp prices will rise, effective December 1 until further notice, industry contacts told RISI.
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Yep, very frustrating. Prices are steady however in NA...
9-Nov-10 969.64 958.37 870.00 617.72
2-Nov-10 972.33 959.31 870.00 627.84
http://www.paperage.com/foex/pulp.html
First positive move in NBSK pricing in quite some time. The price is certainly not collapsing and indeed did a very, very modest uptick this week. That combined with some support and firming of the US $ will certainly help this quarters numbers. FBK should be accumulating cash and adding value.
http://www.paperage.com/foex/pulp.html
NBSK in the U.S.(USD) NBSK in Europe(USD) BHK in Europe(USD) BHK in Europe(Euro)
23-Nov-10 968.00 955.13 870.00 636.24
16-Nov-10 967.91 956.29 870.00 634.53
9-Nov-10 969.64 958.37 870.00 617.72
2-Nov-10 972.33 959.31 870.00 627.84
26-Oct-10 974.78 963.01 870.00 624.37
19-Oct-10 974.78 963.81 870.00 617.50
12-Oct-10 974.78 967.70 870.00 627.07
5-Oct-10 984.78 969.83 870.00 633.83
28-Sept-10 990.00 972.91 870.00 648.67
21-Sept-10 990.00 973.12 870.00 666.16
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http://fibrek.com/static/en/pdf/nouvelles/2010_0329_PEPP.pdf
As most other Fibrek shareholders are aware, Fibrek and many other pulp companies meet most or all of their energy needs via Biomass energy production. Basically, they burn a byproduct (black liquor) in the pulp production process, that produces steam which turns a turbine producing energy that the pulp company uses to meet their energy needs. Any surplus is sold back into the grid. Pulp companies have been doing this as early as the 1930's and in recent years there has been a surge by companies and gov't who have identified this as an opportunity to produce surplus energy/electricity and they are selling it back into the grid as an additional source of energy. In Canada and in other countries, gov'ts are providing credits, grants, etc. to encourage this 'green' energy source. Here is a good excerpt from Mercer Int'l website.
Approximately 45 per cent of the wood fed into the mill becomes kraft pulp. The remaining 55 per cent of the wood is converted to a biofuel known as black liquor, and is burned in our modern high pressure recovery boiler to make power. More specifically, lignin and hemi-cellulose are extracted from wood fiber, which becomes a source of fuel in boilers to make steam which in turn makes power. As a renewable resource, wood is considered carbon neutral and energy produced from wood is therefore labeled 'green' as opposed to the 'brown' energy produced from non-renewable coal, for example.
First off, I am no expert in electricity or green energy but I am a shareholder in FBK and I want to get a better understanding of how this will affect Fibrek/pulp companies.
It seems to me that energy production is becoming a significant financial component to many pulp companies (likely because the core pulp business kinda sucks). The other pulp company that I have reviewed is Mercer Int'l. They own 3 pulp plants, 1 in B.C. and 2 in Germany. Mercer is now billing themselves as a Pulp and Renewable Energy company. In the near future, Mercer's 3 mills will be producing 260MW of energy, some used for their own operations and the remainder sold into the grid. Their Celgar plant in B.C. is expected to produce a surplus of 25-30 MW to be sold to B.C. Hydro which should add an additional $20-25M/yr of revenue to Mercer's operations starting next month. Celgar was already producing 7MW prior to the recent upgrade. Fibrek has agreed to produce 9.5 MW for Quebec Hydro. Perhaps Fibrek's production is about 1/3 of Celgars?
Here is the math that I had a friend of mine prepare.
There are 365 days/yr x 24 hours = 8760 hours per year
9.5MW x 8760 hours/yr = 83,220 MWh, or 83,220,000 kWh in a year
They produce surplus power at a rate of 9.5MW an hour.
9,500 kWh x $0.112/kWh = $1064.00 per hour
$1064.00/hr x 8760 hr/yr = $9,320,640.00 per year.
But there's losses and down time so maybe $7.5Mil to $8.0Mmil per year.
That's assuming they have enough black liquor to run close to max output.
Have others run some numbers yet?
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FFWatcher, This was in the same report you referenced:
The NBSK pulp sales volume totalled 73,920 tonnes in the third quarter of 2010, a decrease of 20,919 tonnes when compared with 94,839 tonnes for the corresponding period of 2009. The reduction in sales volume was mainly due to a strong recovery quarter in 2009 and an increase in world supply in 2010. Around page 15 I think.
I believe I read the report hence my disbelief.
I dont want to keep harping on it but 20000 at 1000/tonne is 20 M in revenues missing.
My concerns remain that fbk will get a certain amount of debt paid down before the real gravy hits, and then end up running up debt again, when the world pulp prices drop. And then the birth of a value trap. The reduced fibre costs should help.
Too bad they cant get rid of those RBK mills. Thank their predecessors for that gift that keeps on giving.
Uccmal, I agree about the US Mills. At this point, it seems like a good asset to let go...or rather, an asset that would have been nice to never have purchased in the first place? Anyways, that is history, Fibrek owns it and it seems they are trying to make the best out of a poor situation.
My main reason for replying to your post is to reflect on the lost opportunity of selling $20M extra in NBSK in Q3 that we have all addressed. Let's face it, an extra $20M would have been nice to sell and it could very well have meant the share price sitting at $1.30 right now vs. $1.03. I have been taking a closer look at their inventory and their explanation as to why they didn't sell that extra $20M of NBSK and here is what I have.
I have to make many assumptions and hopefully most of them are reasonable. My assumptions are that inventory is generally split evenly between NBSK Mill and RBK Mills given they have similar monthly production volumes. My other assumption is that Fibrek tends to trend around $80M in inventory at the end of each quarter (see below). Therefore, based on almost $80M of total inventory, NBSK Mill might have as much as $40M of NBSK inventory but of that $40M of inventory, not all of it would be finished pulp product and therefore, not all of the 'normalized' $40M of NBSK inventory is even available for sale. A portion of it must be unfinished goods such as chemicals, wood chips, etc. I don't think it is even fair to guess how much is unfinished vs. finished but what if we guess at $30M is finished and $10M is unfinished (ie. 75%/25% split). Please see the ending quarterly numbers for inventory below in dollar terms.
Inventory Level
Sep 30, 2009 - $85.2M
Dec 31, 2009 - $79.6M
Mar 31, 2010 - $78.0M
Jun 30, 2010 - $70.4M**
Sep 30, 2010 - $79.8M
Someone else did the math and estimated that FBK avg. $880/tonne for NBSK in Q3 in actual selling price. As discussed above, let's continue to assume that half of the inventory is NBSK. As shown above, on June 30, 2010 their inventory fell to $70.4M or almost $9M lower than normal. In the Q2 2010 MD&A, FBK explained the decline as follows... " Total inventories decreased by $8.6 million, mainly due to the reduction in pulp and wood fibre inventories, partly offset by an increase in wastepaper inventory." Therefore, if wastepaper increased and if wastepaper is related only to their RBK Mill, than most of the decline in inventory was from the NBSK Mill. From the FBK explanation, it is in fact possible that NBSK inventory is down $10M and that RBK Mill inventories are up $1.4M (or some combination that nets out to $8.6M decline). If my assumptions are correct or at least in the right ballpark, then it is possible that at the end of Q2 NBSK 'normalized' inventory of finished and unfinished goods were at $30M and not the regular $40M.
If NBSK inventory was down to $30m or so, then it is possible that only $20-25M of finished NBSK pulp was available in inventory to sell going into the first day of Q3. Given that FBK is selling approx. $20-25M per month in NBSK Pulp, had they sold that extra $20M in Q3, they would have entered Q4 with an even lower inventory level than they entered Q3 with. Doing that with knowing that they are shutting down the plant for 8 days at about 1000 tonnes/day in lost output could put FBK in a precarious position. I am not sure what happens to FBK if they are late in delivering on their fixed contracts but perhaps they didn't want to find out? Either way, it seems to me that FBK sold some of their inventory that would normally carryover into Q3 in Q2 and they had to rebuild their inventory level during Q3, before entering Q4. It is also possible, that some late Q3 NBSK orders would not be delivered until (early) Q4 (and therefore FBK can not show the revenue until the product is delivered) awaiting lower potential prices in Q4. In Q4, I will be looking to see a more normalized sales pattern of around 80-90k tonnes sold, even with the 8 day shutdown (fingers crossed).
Summary : Although selling the extra 20K tonnes @ $880 = $17.6M would seem nice on the surface, I think the reality was 3 fold. 1/ they sold extra NBSK in Q2, left their inventory lower than normal and had to replace it in Q3, and 2/ I believe that customer orders in Q3 that under normal circumstances would be delivered and booked as revenue in Q3 were deferred with hopes of lowered pricing and will be delivered and booked as revenue in Q4, and lastly #3/ Q3 2009 was a tough comparable for Q3 2010 because in 2009 inventory levels at FBK/SFK were at all time highs (all time high in tonnes, not $$ value), prices were quickly recovering (up almost $100 US per tonne from the Q2) which lead to much higher than average sales (94.8M tonnes), not to mention that SFK was desperately needing CASH. When you put all the pieces together, it has lead me to conclude that FBK really didn't have the extra 20k tonnes available to freely sell in Q3 2010 and that management are operating the company responsibly. The one caveat I will mention is that I will be taking an even closer look at NBSK sales volumes in Q4.
Note: if you go back and look at inventory levels, keep in mind they are shown in Cdn dollars, not US$ and not in tonnes. You must take the current expected selling price x volume (ie. $70M of inventory in early 2009 does not equal the same volume/tonnes of inventory of $70M in mid 2010 due to the drastic price change). I am not an accountant, so please feel free to correct my numbers, assumptions, etc. With so many assumptions, it is possible that I am completely off base here but I have put a lot of effort and thought into this and I believe the overall analysis is mostly accurate.
New FBK
in Fairfax Financial
Posted
I mentioned Mercer International a little earlier in this thread. They have 3 NBSK pulp mills. 1 in British Columbia and 2 in Germany. The biggest negative against Mercer is their enormous debt. Essentially, it looks like they owned the 1 German mill and then borrowed $300M to buy their Cdn mill and then borrowed another $500M (80% is guaranteed by German Gov't and is non-recourse to the rest of Mercer) or so to build their 2nd German mill. Their operations are very large and relatively new.
What I find interesting is that even though they have an enormous debt load of about $800M (Euro) that costs approx. $65M (euro) per year, their energy revenue is approx. the same as their total annual interest costs.
Is it unreasonable to look at the energy revenue at the pulp mills as a new revenue stream with little added costs (highly profitable) and in Mercer's case, remove a lot of their debt risk due to this new source of revenue? What about Fibrek? Not nearly as much energy revenue ($0 actually as it is still almost 2 years away!!!) but their is an opportunity there.
While I agree that Fibrek seems cheaper and less risky than Mercer, I thought and continue to think that both companies are good ways to play the continued strong pricing (and strong demand) in NBSK Pulp which was widely (and so far, inaccurately) expected to decline after a large run up in late 2009 and early 2010. It seems that emerging markets may be creating pulp demand as fast or faster than developed markets are reducing their pulp usage.
Aside from debt, there are lots of things to like at Mercer. Investor relations and a website are two that quickly come to mind.