SharperDingaan

Nice to see the insider buying just after we rolled some of our debs into additional common ;D Good catch, gordoffh SD

Keep in mind that GS common is only attractive - if its future actually looks something like its past. The current financial reforms are changing the playing field, & most folks would expect multiple rounds of reform versus just one round. We know there are clear conflicts within this firm, those conflicts are representative of the street, and regulators need an example. We know that GS made a trading profit on every day of Q1, at the same time that many of the trading calls they gave their clients went south. Most would suggest the either the GS 'house' calls were better than they were giving their clients (so what were their clients paying for), or GS was betting against their clients (by breaking client confidentiality, &/or insider trading against their clients positions). We know that the extraordinary accomplishment also occurred while GS was undergoing an SEC originated criminal probe of broadly similar circumstances, & that GS has chosen a negotiated settlement with penalties alleged to be $1B+. If GS is broken up, as part of an industry restructuring, prior metrics are pretty meaningless. The good news is that it threatens the PAR repayment certainty of the prefs; driving up yield & magnifying the volatility. The offset is market rate resets that put a floor value under the pref. SD

The % is principal based vs codified. Would a prudent person deem your ownership % a material consideration (disclose) or an investment (don't disclose)? Own >5% of a Sched-A Bank, major life insurer, & you'd probably want to voluntarily disclose (or risk OSFI making the institution involuntarily disclose it). In most other cases about 10%, subject to whatever you're allready disclosing in your own literature. SD

You might want to consider that we don't measure 'opportunity cost', & we don't pay our advisor for it. We pay only for realized & unrealized (MTM) gains. Opportunity cost is nice but if you ultimately didn't invest in the opportunity - what's the point SD

We need to recognize that the RBK plants were an opportune investment, but they don't really reach their full potential within a cross-border ownership structure. They would be better off under a US buyer, & SFK wouldn't have the debt load - or ongoing quarterly FX impact. The real question is what is the highest & best use for the NBSK plant. (1) Buy up woodlots to drop the fibre costs & operate as stand-alone plant ? or (2) Vertically integrate into another Cdn producer at the top of the cycle ? Long term, vertical integration is a lot more certain & less risky. We know there are moving parts, they have master capital allocators behind them, its a small community, & mgmt is incentivized to get over $3.50-$5.00. There is growing evidence of share movement into stronger hands (todays early trading), & increasing conviction that Q2 may well be a blowout. SD

You might want to think these through.... As a NA investor we recently looked at NBG versus a dominant European property firm; an 8 yr euro holding, over different ends of a higher risk spectrum. We found that it was effectively a bet on macro events. For NBG: (1) Continuing & worsening Euro disruption, (2) Euroland restructuring & sovereign ejections (Greece), (3) Successful capital controls & loan principal redenomination, (4) Bank of Greece support, (5) Subsequent Greek high street inflation, (6) Current & future FX rate. We concluded that 8 yrs wasn’t long enough, & that even if NBG were 60% cheaper – you still couldn’t compound at enough to make it worthwhile. You were better off temporarily investing your $ in a petro currency (Canada) & buying NBG ‘X’ yrs from now; the same $ investment buying 1.5-2.5x more stock. Surprisingly, except for (4) & (5) the same things applied to the property firm; the only new factor was the current commercial debt refinancing crunch. It was also better to make the investment through someone else (ie: FFH), versus directly. The wildcard was how the domestic populations of crowded Euroland might react when unemployment rockets, social safety nets are cut back, generational aspirations are crushed, & the more radical elements manipulate social tensions for political gain. The current Greek & French riots could seem pretty tame, & Europe doesn’t have a great history (Bosnia, run up to WWII, etc). How much is the exposure worth to you – when it’s essentially all left tail risk? SD

Agreed. The good news is that the macros (euro disruption, chile pdtn, etc) are now forcing events, & all parties need a practical solution. Nobody can afford to do nothing anymore. SD

A little too raw for our tastes but if you're nimble - look at NBG (TSX) We dont think the Euro will collapse; but everytime a 'fix' goes in this thing jumps $.40-$.50, then falls back on coverage of the increasing street protests. Hard to see how it cannot trend down a lot lower over the next 6 months or so. SD

Technically every time you switch currencies, you've sold currency X & bought currency Y. Each currency is treated as though it were a security, the FX rate forms part of the cost base & the sales proceeds when you sell your security. You pay tax on 50% of the total gain which is effectively the FX profit. The reality is that CRA effectively ignores it as it is hard to track & costs more to enforce than its worth. If the average FX difference is $0.03, you need to have shifted around 666K - & not bought anything with the funds. Most folks are not going to be doing that. SD

Keep in mind that; You need to do better than your next best benchmark. For most folks here that is probably a 100% investment in FFH; hedged (sold) down to 50% over the higher risk summer months. Add in their 15% ROE, & the typical seasonal variation in the BV multiple, & you get around 20%. Not risk free, but not especially risky either. Very few of us here are going to do 20%+ as reliably, every year, with as little volatility, in all kinds of conditions. We might do better when markets are buoyant, ... but when they aren't? At times its just better to invest with HW, rather than alongside. Before they found this board, most common sensical laypeople might have averaged maybe a 6%/yr average return when the 5 yr Canada was around 3%; or about the 5yr Canada rate + inflation + GDP growth. If FFH is your benchmark; today your spread is maybe 17% (20-3), or > 5x what it was. Do you really need the additional risk? SD

Don't fall in love, take gains off the table, limit the unrealized gain to X%, increase the position hedges to 50%+, move up the quality curve into marginable securities, increase liquidity to minimum 50%. Recognize that insurance costs; commission & opportunity costs rise, but liquidity rises & volatility declines. The more uncertain the environment, the higher the cost. Recognize that the strategy change over time; when times are hard one plays defensively with a few breakouts here & there, & reinvests in quality at cheap prices for the long term. Recognize that liquidity is cash + unused borrow capacity; cash is best, then securities that are 70-90% marginable, small caps < $3 are worst. Move up the quality curve & liquidity can improve dramatically, with no impact on cash. SD

Just to tie some things together. Both CFX & SFK are coming out of their trust structure. Within the trust framework CFX is fully priced, SFK is underpriced. Per SFK's management, the conversion is expected to add market demand/liquidity/depth to the float. The conversion effect should increase the share prices of both SFK & CFX. The SFK price should increase more as it's trading at more of a discount. 150M of conditional debt refinancing has been agreed to. A conditional 40M rights issue is planned, there is an agreement with FFH to backstop the issue, we know the broad terms. The existence of the conditional refinancing agreements & equity backstop are material facts, & have been disclosed ahead of a material vote. IR replies suggest that the rights issue is a work in progress. A final prospectus is expected within a reasonably short time after shareholders agree to convert. The FFH backstop agreement suggest a timing within 2 months of conversion. That's what we know, anything after that is really a speculation. SD

Grenville: This reference is from the standby agreement with FFH, & applies only to any shares that FFH has to buy over & above its entitlement. One of the other posters advised that they had received confirmation from SFK`s IR department to that effect on Sunday. We think the conversion is going to let some US buyers buy what they presently cannot. They will be new & marginal buyers, both CFX & SFK are very cheap (by US standards), & we think their collective impact on the limited float will be enough to move the market. It may take a little time, & our little `puddle`may be in rough equilibrium, but we think its about to get swamped by the broader ocean. - Mgmt has made repeated refs to broader liquidity, wider mkt, etc; higher demand for the same supply. - The unusual structure of the equity offering itself implies higher prices. - The smoke of the rumours hasn`t gone away & consistently pointed to higher prices. SD

Do you think the trading period will end after Q2 is announced or before? We think the trading period ends before the Q2 announcement, but the rights are 'live' over the announcement period. Doesn't mean we're right - but part of the elegance is that the deal concentrates market speculation onto the rights issue, over a strong quarter (assumed), which dramatically reduces the odds on FFH having to backstop. SD

LessthanIV: If you think the rights are going to be fairly hot items (ie: leverage); the market will take up all the rights sold, & FFH will not have to backstop anything; if its really strong FFH could even be selling its rights & diluting its position. Keep in mind that the 20% is only if FFH has to buy-in beyond its entitlement - if they dont have to buy-in; the 20% doesn't kick in. Cardboard: Agreed the dates are 'stickier' than we'd like, but we don't see this as being a whole lot different than the typical 'grace period' after failing to make an interest payment. Yes, you haven't strictly met the terms - but if you have a very valid reason for it, we'll give you an extra day or so of 'grace' to rectify. Ideally SFK/FFH will better clarify the intent over the next few days. Once we see how it trades post conversion, these issues may well become moot. If the price is materially higher (expected) the rights will have a +ve value, & much of the uncertainty will dissappear. SD

Couple of relevant add-ons: We expect that FFH will end up with minimal, if any, backstopping on the rights issue (hence the 20% discount is effectively irrelevant). They will essentially get 400K to reduce their cost base. We think the rights are going to act as options on the Q2 results, & as every speculator will want the embeded leverage; the rights should drag the stock up. Gravy ;D Elegance. SD

Agreed they want the conversion asap, & the preliminary filing will be May-27 or abouts. But there is nothing that says you have to start on the Final Prospectus immediately thereafter; it's only the common practice because it reduces the associated uncertainty. In this case the existence of the proposed offering is a material fact, ahead of a material vote; they're pretty much required to disclose its existence. Assuming conversion is voted in tommorrow & that day 1 is May-19; 40 trading days later is around Jul-15. If you accept that the early disclosure is neccessary, but disruptive, you also accept that you need to mitigate it; a 6 week delay in filing the final prospectus to obtain a minimum trading record under the materially different structure, is not unreasonable. Everything about these transactions screams 'fairness', but it's because its 'too' clean relative to market expectations that we're having this problem. Mr Market would seem to prefer that it remained hidden, because that's the norm? SD

We went back & re-read the terms of rights offering. Nothing happens untill SFK files the final prospectus, & nothing requires them to file it by June-30 (which starts the calculation now). The market has assumed that they need the cash right now; they don't, so why would a rational management not simply delay the filing by a month so that all the calculations will be post conversion closing, & presumably a lot higher? We bought the debs < 40 & sold > 98. If you think the debs might get taken out at 101 within 3 months, the best you can do is another 5% [(102.75/98.0)-1]. If Mr Market is being manic we can very easily do 50% in the common, & don't have 10x the risk. We haven't sold all our debs (we could be wrong), just reinvested 1/2 the proceeds in the common. As the remaining proceeds are in cash, we're happy with the incremental risk. SD

Re disclosure; we've taken some $ off the table, & rebalanced between debs & common. SD

The market cannot tolerate the fact that we don’t know the price of the rights offering, & hence the dilution that it will generate. .... (1)To continuously sell is to lower the price, drive up the potential dilution, & further drive down the price; ie: self-fulfilling momentum trading. (2) Analyst cannot ‘sell’ the deal until the price starts rising & the potential dilution starts declining; eliminating price support. But ....... (1) We also know that pulp prices have been rising over Q2, & the average FX rate has fallen; most would expect Q2 EBIDTA to be at least comparable or better than Q1, & positive net earnings. (2) We have agreements to refinance & extend the debt terms at far lower rates; ie BK threat removed & material interest savings. (3) We have 40MM in additional equity, & more operating cash, that should increase the EBITDA/EV valuation (all else equal). We also have a very carefully structured deal with FFH’s hands all over it, but we think FFH has suddenly become exceptionally dense? (because we haven’t seen all the pieces yet) (4) Debs are trading like the BK threat were removed, and the Deb to common arbitrage is looking increasing promising. Given the nature and materiality of the plusses, most people would value the stock at a premium to the 1.85 it traded at prior to the Q1 earnings announcement; but because our manic Mr Market is suddenly offering it at 25% less, we’ve phased? All Mr Market has shown, is that this stock can easily move down 25-30% from pre-announcement; it can also move up 25-30%. And FFH seems to have anticipated at least a 20% reaction. Assume we’re totally wrong ..... & there is no reengineering in the background. Isn’t 25%+ off still a gift, versus what you’d rationally expect? Enjoy the opportunity; they don’t come by that often. SD

Think we're getting old; agreed BV only goes up 40M. Redo the calcs at todays rates & going upwards. If FFH backstopped the entire issue at 1.23 (80% of 1.53) we end up with 122.99M shares (36% dilution) & a BV of 3.84; but to get this there have to be no other buyers, & how likely is that ? given mgmts recent statements about greater liquidity, marketability, etc ? If FFH backstopped at todays price of 1.53 (80% of 1.83) we end up with 112.33M shares (24% dilution) & a BV of 4.20; but to get this we have to rise 20% & still have FFH take up the entire issue. We effectively just start from where we were pre Q1 results release; but again, how likely is it that there are no other buyers out there ? SFK has gone out of its way to structure this offering with FFH having parity with any other buyer above 1.83, & any price rise above 1.83 benefitting all shareholders through reduced dilution. Then keep in mind that this is effectively a control block, were ONE new buyer to take up the entire rights issue. One has to think that the narrowing gap between increasing market price & reducing BV/share (via dilution) isn't accidental. Now assume that the US mills were sold, but the consideration was paid in both cash & a return of newly issued SFK shares. The share price rises, the share count goes back to where it was, debt gets repaid, the buyer can afford to pay a little more as they have an offsetting gain on their share holding, & SFK could do the share repurchase as a general buy-back benefiting all. Obviously we think there are more shoes to drop. SD

Quick back of the envelope to explain the dilution. 90.473M shares x 4.78 = 432.46M of BV. Sell 10.7M shares x 3.74 for 40M & retire 52M in Debs Share count rises to 101.173M; BV rises to 524.46. BV per share becomes 5.18. Non Dilutive. But if you sell at 2.08 or less .... Share count rises to 109.72M; BV rises to 524.46. BV per share becomes 4.78 or less. Dilutive. 2.08 is 44% of BV, & 36% higher than todays 1.53 close. Do you really think that after conversion the share price is NOT going to rise by at least 40% when all these transactions, & another good quarter are going through the books ;D SD

We hear you, but it really comes down to whether you see them continuing as is. Sell the units at 3.74 to call the deb, & the 10.7M units of dilution is no more than you were allready expecting. And to get 3.74 the transactions only need reduce the BV discount to 22% from the existing 68%; even the EBITA to Enterprise `floor`value is around 55% of BV. Yes there will be net dilution, but there will also be another 92M of equity to dilute. By year end most of Chile`s production should be back on, & we will have still more supply from the restarts that are allready in progress. If they are to restructure there`s no better time than near the top of an extended cycle, but the result has to better than liquidation. Process & timing are of course no more than a rational best guess, but at this point - a liquidation vs earnings valuation does seem to make the most sense. SD

May-25. Assume conversion. Currently restricted buyers can start to accumulate on May-26. What stock they can't buy outright they can buy later via the warrants, but untill the warrants list they can only get those shares from the limited float. If there is additional demand, the share price can only rise. Jun-30. Deb holders receive a 30-day call notice along with their interest payment. Jul-20 + a few days after. Rights offering executes, debt is refinanced, Q2 results released, Debs called. August/September. US buyer does a cash bid for the US plants & the sub they're in (tax losses). Cdn buyer does a cash/share bid for Fibrek itself (St Felicien + tax losses). Shareholder approval required for the Fibrek sale, but not the US plants. Vote is sometime in mid November, delisted by Dec-31. Then keep in mind that the sale of the US plants to a US buyer will eliminate much of the FX volatility, & the proceeds will be more than enough to retire all of SFK’s debt. Receiving your proceeds as either shares/cash also allows the buyer to pay more, & you to execute a taxfree roll-over ... and when the target is debt free, it can effectively finance its own takeout. SFK paid relatively little for those US plants, & has taken a couple of years of depreciation against them; NOT getting a healthy ‘gain on sale’ is going to be almost impossible. Same thing for St Felicien except that now it also comes with a power plant, massive incremental cost savings if you have chips, 2 yrs worth of tax losses to shield the record income, & a whack of unspent ‘green’ grants. Christmas could be looking very good this year! SD

Very, very interesting Notice that all the LT debt is essentially being refinanced, including that due within 12 months. If nothing else happened we probably have a material easing in covenants, at least a 250bp reduction on the Term Loan, & a 287.5bp reduction on the Revolver (Q1-2010 financials, Note 3). A minimum saving of 742K/quarter [108,826*.025/4+34,615*.02875/4=742], but realistically something higher still. It's also now virtually certain that the debs will be called, saving another 905K/quarter, materially improving the debt/equity ratio, & eliminating 10.7M shares of potential dilution. Total interest saving of 1600-1750K/quarter. Notable is the dates, & the terms. 1) The pricing period hasn't started yet, 2) The 20% discount suggests they expect a potential price spike well beyond the intrinsic value. Most folks would infer that they are aware of a new buying interest that can only come in post conversion; material enough to overcome the rights dilution & still drive the price up. Very elegant. SD