SharperDingaan

http://www.theglobeandmail.com/globe-investor/new-abitibi-head-aims-to-control-costs/article1833059/ "Mr. Garneau will also lead a management team – including Mr. Paterson in an advisory role until next summer – that will be on the lookout for acquisition opportunities, Mr. Evans added." FBKs plants use chemicals that could be obtained cheaper if bought in bulk (in combination with all other ABH pulp plants). FBK wood chips are also likely progressively cheaper the more volume taken (not a problem if you're also buying to fullfill a ABH order). Synergistic cost savings, & friendly shareholders, has to be putting FBK high on the list. SD

Keep in mind that with FFH, you should add the FBK exposure to ABH. ABH still holds the portion of FBK's St Felicion mill that wasn't sold (SFK IPO Prospectus), & FFH is a dominant shareholder in both FBK & ABH. The elegant operational solution is to merge the two entities (via an mixed equity/cash offer for FBK). With most shareholders electing to take tax-free rollovers (ie: institutions taking ABH equity); ABH could afford to pay full value, lower their Debt/Equity ratio, & simultaneously increase their very small 100M share float. How long can it really be before exactly that happens. May we all see a interesting 2011! SD

Preferably SAC gets bled white first ! SD

You're welcome. Your guiding principle should be that it is not too bright to concentrate both your wealth (investment) and your livelihood (salary) in the same basket (industry); unless you can fully hedge at least one of the eggs (ie: investment) - ALL of the time. When the environment slumps, I-Banks will fire their analysts; who are effectively unemployable untill the next I-Bank up cycle - as there is no recent main-street experience in environmental science. If the slump is severe enough, engineering firms will also fire their MSc's; but the CFA/MSc walks away with a gain as their employee share options were hedged, & has stronger job prospects as there is current main street experience, & many more engineering firms than there are I-Banks. The main street CFA/MSc has diversified the total return (investment + salary) & improved the return/unit risk (Sharpe ratio). Hedging the employee stock option simply multiplys the ratio. The smartest guy in the room is usually not the glamorous one with the flashy suit & doting media. Look for the quiet Brooks Brother's somewhere in the backround. SD

Very elegant, & very nice to see! SD

Its actually very bullish. All the returning production (primarily) from Chile (8% of global supply) is being absorbed without lowering the price. IE: There must ALSO has been an 6-8% increase in global demand, net of USD devaluation. When there is no more production, we can expect another run up. SD

Investment analysts are a dime a dozen, & it is generally better if they come with significant Indian or Far Eastern background (lived/born there, culture, language, business ethics, etc.). That is where the business is, it is where analysis is outsourced to (same intermediate level CFA costs less there than in the US), & it is often where there is greater committment (CFA's write at 1AM, to comply with EST). It is highly likely that the long term growth of Environmental Science will greatly exceed that of the investment industry (lower starting base). It is also likely that as resource substitution occurrs (gas to electric/nuclear) & pollution levels rise, earning power will increase. ie: Environment Science is the faster growing, & stronger, business. An Investment Analyst can only do investment analysis. A MSc can generally do more things & in more industries (ie: job security). A MSc can also be trained in Investment Analysis a lot quicker than a CFA can be trained in Environmental Science (ie: there will be opportunities). Ignore the glamour, look under the hood, & look up the Sharpe ratio. We would suggest that the return/unit of risk is materially better for the MSc. SD

PAD rigs have an advantage in shallow shale fields where the formation is tight & you want a lot of holes drilled cheap, in fairly close proximity, & where they can be easily fract. Alternative directional drilling is more costly & really more cost effective at the medium & deeper depths. The good news is that shale fields deplete quickly, & the more holes the higher the depletion rate; to keep up production you have to keep drilling. Low gas prices may highlight their competitive advantage, but they also reduce the size of the industry drilling budget & increase competition. At some point they will entertain a take-out bid. That said, they like what they do, they do it well, & there is no compelling rush. SD

Couple of tidbits we've learned over the last few years. Like the duck on the pond though ... you're not good at hedging, you just have the sense to recognize when the water is running out ;D Set a modest maximum loss per position & hedge as soon as you cross it. Worst case is that you get whipsawed, give up some unrealized gain, & pay more commission/tax than you’d like. But you will not lose more than X, & you will have no downside volatility. Look 2 Quarters out; do a probability tree & determine expected future value. If the return is not adequate, hedge the position against a better prospect. SD

If one simply bought quality, & bought well, why would one not expect at least a double within 3 yrs (26% compound ROI)? Even if one were over optimistic, & it actually took 4 years – it is still a 19% compound ROI. The main risk is that what one bought goes insolvent, but if one bought quality & bought cheap – how big can the expected loss really be? & would one really do nothing while it was falling? When money is cheap, & bankers are desperate to push markets, why would one not use modest leverage? (assume 30%) To buy well, one had to have monitored Mr Market and made the right decision at the right time; therefore one can also tell if Mr Market is frothing or not. If one can recognize this, the shares have a cash yield, & the financing is depression era cheap - why would one assume that one could not maintain a positive (or at least neutral) carry over the holding period? 27-37% compound return over 3-4 years [19*1/(1-.3)=27%] SD

A global reserve currency [uSD] cannot hyper-inflate. The currency just loses its reserve status, & ends up devaluing as nations swap their reserves out of the old reserve currency. Sterling is the example. The UK eventually started printing money to repay/service its obligations & began to inflate [at a time when the consequences of inflation was seen in Weimar republic terms] . Creditors started taking their money out via gold purchases [was a bank reserve then], and asset sales [of UK real-estate, & corporate holdings] to American companies. Illegal holdings of sterling [dictators, etc] sold & bought US dollars, & all of them at a accelerating pace. There was effectively a run on sterling that the BOE could not contain, & the value of sterling collapsed. The devaluation was roughly 35%. SD

Keep in mind that inflation is just total supply of money available/total supply of goods available. Globally print enough extra money to offset the global reduction in the demand for goods - & every country can keep its factories open (jobs), with no global inflation [G-20 Nirvana]. Print too much money, or the global velocity of money accelerates, & we get an inflation spike [Gold investment]. But ... only if countries have free exchange rates, & they trust each other: When the US devalues, all currencies pegged to the USD get cheaper as well, & their domestic economies [China] inflate. The higher domestic sales price, & the lower USD, prices the exporter out of the US Market & generates job loss [imports US unemployment]. De-peg the currency & you still import US unemployment - you just dont get inflation as well. Do the G-20 global inflation thing, & there is no impact. To do this you have to look past the denial - & trust the gringo to not screw up again, with stakes that could not be any higher, & when the global economy is lurching from crises to crises. There is not a lot of confidence. SD

The incremental cost is depreciation on the new equipment, & maybe a few extra people directly associated with the additional generation. Assume a 22M/cost over a 10yr amortization - somewhere around 2.5M/yr +/-. Net contribution to EBITA will be roughly 5M/yr. SD

The sell rating and concurrent insider buying is probably not wholly accidental. SD

HTM are bonds valued at cost + any ongoing amortization if you're holding zeros (or coupon bonds no longer paying interest). There is only a gain/loss when the bond matures at 100, or the bond is sold/transferred to HFS (deemed sale). The HTM portfolio probably exchanged the better quality bonds for whatever the HFS couldn't dump, & restructured whatever was about to default bonds into long term zeros. The HTM number is probably high relative to what it iniatially was. The HFS is high because it has the best of both portfolios in it. Were there a 10% drop in the HFS portfolio, the whole delta would hit their P&L immediately. A hit big enough to really screw up their day? SD

Banks are required to mark the Held For Sale portfolio to market with the mark going directly to income. You hold these things for trading, so if you screw up - you take the P&L hit & reduce your equity immediately. The value of the loans is what someone else is willing to pay for them, not what you'd like it to be. I sell you my bad loans for X, & agree to buy your bad loans for X. We both have a valuation sale & no cash changed hands, but neither of us will trade as we dont believe each other. Instead we'll each sell some of our bad loans to the fed in return for cash & slightly better quality bad loans. The fed takes the bottom tranche of credit risk & pushes out cash that gets reinvested in T-Bills. Each banks average loan quality & T-Bill holding rises, which reduces their capital requirement & leverage ratio. Deleveraging. If the banks take a collective material writedown (ie: foreclosure mess) the process stalls & leverage ratios abruptly climb. To get the ratio back down, the banks need a collective equity issue equal to writedown. SD

Keep in mind that if you buy & hold, a 10% return just means a double every 8 yrs. Any interim dividend receipt or inflation experience simply drives the future value up quicker, reduces the time to double, & increases the compound return. All of which is gravy. Do nothing but buy good quality equities, cheaply, and hedge on an ongoing basis against a material downturn - & you're almost guaranteed a double within 5 yrs (14.87% ROI). Longleafs inflation + 10% is pretty conservative. Same thing with Prems 15% target. The real elegance is in what happens to these portfolios if there is an extended period of asset deflation & consumer price inflation. SD

Very noticable is the distinction in timing; < 2yrs, & > 6-10yrs with different strategies for each. Overweight cash by repaying/terming out debt (ie: FFH), buying back shares (ie: FFH buy-ins of minority positions), or returning original capital (ie: Klarman/Baupost). Get that cash by selling into the rally, & selling puts (ie: FFH CDS swaps & S&P hedges) to profit on the way down. Cash is off BS - via a stronger financial position & exchange traded derivatives (with the fed indirectly backing the exchange). Add to the minority stakes in the developing world by using the exit disruption generated from hot vs cold money arbitrage. Elegant. If you can buy cheaply & hold, renewable commodities are clearly where it is at (ie: FFH holdings of FBK & Abitibi). Explains the FFH approach over FBK & early last years decision to learn the oil/gas business. SD

You might want to consider why the fed felt that it still had to do QE2 - as it is highly likely that they would have been fully aware of the firestorm that it would set off. We woud suggest that the foreclosure moratorium & state/municipal budget setting, are going to generate ugly surprizes in Q4/Q1, big enough to force many back to the well for additional capital. When even sovereigns cannot afford to roll their debt at 5%, what do you think will happen if some of the US states cannot do it ether? QE2 or a PIIGS type crisis on US soil - just when many have to go back to market? Which is the least damaging? Import prices will go up (by FX devaluation &/or cost push inflation), import volume will fall, Americans will pay more for their goods, & their current account gap will fall. That said - less things bought, & more local buying employing more local people, is not such a bad thing. SD

Analysts are under pressure to get a flash report out, & get their name on the conference call record. AR & QR docs are scanned, numbers are cherry picked & dropped into models - if it doesn't 'fit' the model it doesn't get plugged in. (FBK 10M/yr wood-chip future woodchip saving). The result is volatile trading & shallow questions on earnings day. A more detailed report, & a clear recommendation, is expected within 2 days. Initially property of the favoured few, then spun out to broader & broader audiences. Recommendations become part of the analysts track record. The result is typically a price rise that plateaus at a level sustained by the broadening buying. Manipulation is part of the business. Bad-mouth on earnings day to drop the price, buy in inventory, & make your recommendation look better. Report distribution is essentially market skimming via premium, market, & discount pricing. Play the game or you're fired. SD

3 considerations: - You really want to be holding something stable in a petro-currency, & let Euro devaluation against that currency boost your return. A Cdn Sched-A bank, or dominant life insurer, should head your list (ie: 8 names) - If you must stay in Europe you want a beat-up government backed vehicle, where your bigger risk is dilution vs bankruptcy. The expectation is that the company will look very different < 2-4 yrs. BP makes good sense, similar thing for the major german industrials, & the spanish bank. - If you're restricted to Europe, & low risk, buying a concentration in almost any one or two european majors will do - provided you roll in your purchase over a 1-3yr period. The expectation is that at least some of your buys will be good ones, & the major will eventually either buy out somebody - or get bought out. SD

Bottom line: Management had a great story & screwed up. In the modern era investor relations is a functional requirement - no different to marketing, human resources, or accounting. They need to get over it. - When was the last time you saw FBK make an industry presentation? & why do I NOT see a NEW power point deck on the website every quarter? Or do we only hear from them, when they want something? - When was the last time you saw annual EBITA guidance on a quarterly basis? Yes it’s an estimate, not industry ‘practice’, & you have to explain actual vs forecast differences – but why is that so wrong? Standard practice for budgeting. - When was the last time you saw them regularly consult their fellow owners - when they weren’t in trouble? Jean Guy may be great at running the bush lots, but he doesn’t work in isolation. Actual Q3 results were quite good. - At 130.1M shares & 1.25/share; shares are pricing at 2.9x trailing 1 year EBITA (.4, 15.1, 20.8, 19.8). If 2010 results YTD are representative for the next year - base EBITA is 74M (15.1+20.8+19.8)*4/3 ... but add 10M in wood chip savings (announced Q3) & 3M in cost/financing savings (announced Q1, Q2). Forward 1 yr EBITA is approx 87M. - If Investor Relations does no worse & the EBITA multiple remains at 2.9x, the forward price is about $1.95 (2.9x87/130.1). In line with recent postings on the stockhouse board. - If Investor Relations does better (Deb retirement, EBITA guidance, road shows, etc) & the EBITA multiple goes to 3.5x, the forward price is at least $2.34 (3.5x87/130.1). 132% above the $1.01 rights issue price Earnings trading. - The rational institutional trade is buy CFX, move to UFX, Sell FBK, Sell UFX, Buy FBK. The trade should be buy CFC, move to UFX, move to FBK, sell FBK. Either way, FBK has a high volume day following the announcement – which is what we saw. - The rational retail trade is sell FBK & take the gain – also what we saw. Needless to say, we’re the irrational retail that buys when others sell. SD

I also come from an engineering backround (petroleum) & have the CFA. The CFA should be looked on the same way as engineering courses - lots of theory & mathematics, & light on application; but without the background you really can't do anything. You learn application by getting out into the field, & being forced to figure out how to do something with squat. The result is many possible solutions. Every profession has its propaganda & the CFA is no different; you just don't have to follow the herd. A securities analyst with a CFA might aspire to become a PM and/or fund partner. A PEng with a CFA might aspire to be the CFO partner within an engineering firm. Different strokes. Once you have the technical, you'll probably get the most value by looking at the styles of WEB, Soros, etc. & ensuring that you include a heavy leavening of Indian, Asian, & Middle Eastern names in the mix. It's also helpful to travel to those countries to get a sense of their conditions. Western culture is just one of the many pimples on the arse of the world! SD

The zero coupon is a lot more elegant than you think. At inception, the unearned zero interest is non-cash equity limiting risk & reducing the D/E ratio. Going forward, if nothing happens the zero's BV increases 6%, but is offset with positive earnings - increasing the D/E ratio going forward & return/$ invested. If something goes wrong both their earnings & the zero's BV decline by the same amount, decreasing the D/E ratio. Subtle, & elegant SD

Keep in mind that valuation reflects overly low revenue estimates, discounts the effect of operating & interest savings (approx 1M+/qtr), & is not recognizing co-generation expense capitalization. Most folks will have discounted the estimated NBSK market price received with a 15-20% discount off the list price, & will not recognize the operating/interest savings until they actually see them. Obviously if you think differently, there is some earning upside. To move up we really need the P/E multiple to rise. ie: 1) rising confidence in earnings predictability, 2) disclosure on the new material ownership positions (where did the new rights shares actually go?), 3) management maturity, & 4) credible guidance around 2011 business objectives (debs repaid with cash/shares?, acquisition/divestment?, etc.). When the result is material outcomes, a mature management should be disclosing the broadbrush intent & not hiding behind the corporate veil. It is because management has not spoken up - that FBK trades as a bankrupt ... as why on earth should I pony up when mgmt cannot evidence that it even has a plan ? SD