Cardboard
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Posts posted by Cardboard
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Here is the impact of being straightforward with investors:
http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C%3aTMB-1733392&symbol=TMB®ion=C
The share price is up 20% today following this disclosure. Tembec is a producer of market pulp, lumber and papers. They are highly levered to the price of pulp and a high cost producer. Their share price was down a lot in recent weeks similar to FBK likely due to concerns about the economy.
Why is it that Fibrek managers did not provide information on Q2 results along with the rights offering? Provide a decent guidance range along with assumptions used and you eliminate any chance of litigation if you miss. IMO, it would have helped garner some interest and prevent the share price to plummet. Q2 should be quite a bit better, so why not spreading the good news? There is a difference between issuing now 39.6 million shares and say 35 million for the exact same amount of proceeds.
Cardboard
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"...I assume most are simply concerned (based on previous quarters' precedent) that Q2 numbers will be an unspectacular improvement from Q1..."
Then the responsibility as a manager is to offer investors some guidance. Give them data so they can value the company better. If this does not work and the share price keeps going down leading to a bad rights offering price, as we have seen, then at least you have tried.
Also, what is the operating plan by Fibrek management to improve the business going forward other than just hoping for pulp prices to be sky high? Anyone?
I have a feeling that we lost here. I remember too well the Fedex warning in June 2008. Guess what, same thing today. We should have sold when everything looked rosy for pulp even if SFK was not selling at a fair price. Just like oil stocks back then. Then denial kicked in et voila, we are now holding on to this thing that keeps declining daily. Hard to deal with cyclicals, very hard.
Cardboard
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I don't mind Obama trying to push the clean source energy idea. What I have a real problem with is that he never personally picked up the phone and called Tony Hayward.
Many of you work or have worked for various companies. What happened when an "issue" surfaced at work? And I am talking an issue not a catastrophe.
In my case, I would have had my boss, my boss' boss and sometimes another one continually asking me question about progress and would have been told to ensure that I would keep them updated. It is not "help" that I really needed or wanted, but it sure made me keep my eye on the ball.
Obama is the President of the United States. He is the boss. Now, he may not have seen the need to call BP in the early days and have someone delegated to take care of this issue, but once it became clear it was a national issue he should have picked up the phone and called. He could have yelled at Hayward, I don't care, but at least get off the ivory tower and get personally involved.
This is not about buddying with the oil companies and I really don't think that the public would have seen it as such either. It is more about showing BP who is in charge, keep applying pressure and offering any help that may be required to speed things up.
Cardboard
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I will keep my eyes on the ECRI.
http://209.157.64.200/focus/f-news/2532706/posts
Based on the historical chart, it seems that whenever it goes between -5 and -10% that fairly nasty things occur in the economy. We are not there yet. At this point, it seems like a fairly sharp correction from a very sharp rebound. But if we do get there, it would seem hard for the stock market to go up.
I hate this macro stuff and I wish we could just get back to investing based on micro or company specific numbers. However, I am afraid that a depression is not completely off the table yet.
Cardboard
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This situation could take years to get resolved creating a huge overhang on the stock. All the bad news may be priced in already, but you will not know until the final lawsuit has settled in court. Think of something like big tobacco or asbestos.
IMO, it is worth paying a bit more for a producer not exposed to that disaster. It is also worth considering that this "risk" was not priced in properly before which should have a longer term impact on valuations. Production costs will also go up for additional safety to be built in the equipment, longer studies required before permitting. Growth and reserves could also be affected: takes more time, some areas become untouchable.
Longer term consumers will pay the bill. So oil could go up enough to offset higher costs and lost production. However, you have to be sure your producer is still alive to benefit when that happens.
By the way, Norway despite having already safer regulations is now not issuing anymore certain offshore drilling permits. The British could also follow soon.
http://af.reuters.com/article/energyOilNews/idAFLDE6571SP20100608
Cardboard
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IMO, it is very early to look there. We know that there was a huge housing bubble in Spain and it has not really popped like in the U.S. and that unemployment is running around 20%. The cycle takes a long time to unfold as we have seen in the U.S.
Actually, the housing bubble has not really popped in any country other than in the U.S.: Canada, England, China, etc. You still find that mentality that housing prices can only go up. It is kind of amazing to me that only in the U.S. has housing returned to affordable level relative to income after this huge crisis. The absence of massive securitization, LIAR loans, etc. may have retarded the pop in these countries. I suspect that it will take more unemployment, higher interest rates or a combination of both to cool housing prices. Do you imagine the impact of a global housing pop? I am afraid that this may be lurking on the horizon.
If you are looking for a cheap bank, I would recommend Citigroup. At least, it has been recapitalized, massive loan loss reserves have been built-in and its main market has seen its housing adjustment. You could also argue that the U.S. is growing while Europe is entering a slowdown.
It is actually amazing to look at the transformation at C. Among the large U.S. banks (JPM,BAC,WFC) and even add USB to compare with a higher quality player, you will now find top Tier 1 ratios, the best tangible equity/asset ratio and highest pre-tax Q1 margin. Only USB can compete with them on Q1 ROE and Q1 ROA. I should also mention that both capital and return ratios are after absorbing massive loan loss reserves. Of course, this improvement came with massive share dilution since 07, but the current P/E at 6-7 times and relative discount with the other players is simply too much.
Cardboard
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"it is anticipated that the reorganized structure of the Fund as a corporation will attract new investors, including non-resident investors, and provide in the aggregate, a more active, attractive and liquid market for the Common Shares than currently exists for the Units;"
So far, it is not working too well and I have yet to see these foreign investors.
Regarding insiders trading, you may want to watch the CFO or Patsie Ducharme's next move following a sale of 7,000 convertible debentures at $95. That is $665,000 and a big chunk of change for someone who earns $190,000 a year and previously $140,000.
Unless she needs the money for personal reasons or to buy the stock (would be a big vote of confidence), it would seem bizarre to sell now considering the possibility of redemption in just 7 months that we have discussed.
Cardboard
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One thing that starts to worry me is the stabilization around the $980 U.S./ton for NBSK over the past 3 weeks and more importantly the small decline in Chinese prices for BHK for the week of June 1. It will be important to see if the latest price increase will stick.
These are still excellent prices and Fibrek should make a lot of money in Q2. I am just nervous that we may have seen the peak and that we may now move somewhat lower in pricing. What will it be going forward in Q3, Q4 and beyond?
http://www.paperage.com/foex/pulp_china.html
http://www.paperage.com/2010news/06_02_2010market_pulp_db.html
Cardboard
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Thanks for the clip Longinvestor.
FYI, Cisco just came out with their bandwitdh usage prediction up to 2014 this morning.
http://finance.yahoo.com/news/Annual-Cisco-Visual-iw-2003617535.html?x=0&.v=1
For the U.S., it should grow from 4.6 exabytes/month in 2009 to 17.1 exabytes/month in 2014. It is true that Cisco has a massive interest in the continued growth of IP, but I still think that this is data we can trust considering their size, reputation and previous forecasts accuracy.
IMO, Level 3 should get a piece of this action. If their revenues were to double over that period, which seems quite conservative based on the data above and the fact that pricing is stable, free cash flow and earnings will simply explode considering a net EBITDA-CAPEX margin of 50% on new revenues. I get an easy $7 share price target under this assumption.
Q1 was disappointing, however I still believe that we are very close to an inflection point on profitability or sometime in the next 12 months, so I agree with Southeastern on the 2010-2011 time frame.
Cardboard
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Alertmeipp,
Here is what they are waiting for to file the Final Prospectus:
"2.3 Timing of Rights Offering.
Subject to and in accordance with the terms hereof, the Corporation agrees that it will file with the Canadian Securities Commissions: (i) the Preliminary Prospectus, together with the other requisite filings and documentation, no later than 2 Business Days following closing of the Conversion, which date shall not be later than June 30, 2010 (the "Outside Filing Date"); and (ii) the Final Prospectus, together with the other requisite filings and documentation, on or before the day which is two Business Days following the date on which all necessary approvals and consents are received from the Canadian Securities Commissions and the TSX that are necessary or advisable, in the Corporation's opinion, acting reasonably, to proceed with the filing of the Final Prospectus and completion of the Rights Offering. The Corporation will use commercially reasonable efforts to obtain a receipt (or analogous decision document) as soon as possible following the filing of each of the Preliminary Prospectus and Final Prospectus with the Canadian Securities Commissions."
Based on previous cases of rights offerings in Canada, it takes roughly 10 calendar days to obtain these approvals and consents. So my best guess is that the final prospectus will be filed on June 8 or next week. This means that the subscription price should be roughly 80% of the average trading price this week.
Cardboard
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FYI, there are large forest fires raging in Quebec right now or north of Trois-Rivieres due to lack of rain recently. Smoke has been travelling to Ottawa, Montreal and Quebec City over the week-end. The last time this was seen was in 2002.
2/3 of chip supply for the St-Felicien mill comes from sawmills in a radius of 100 km from plant. Therefore, there could be some risk to availability and cost of chips if these fires spread or last much longer. However, I could not find anything in the 2003 annual report related to impact from these fires at the time. SFK became public in 2002 just after these fires. I hope that disruption to production or costs will be minimal in this period of very high prices for NBSK.
Cardboard
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IMO, some interesting points from the prospectus:
1- Foreign holders (U.S. and other) will need to follow a special procedure to exercice their rights. I know we have some on the board.
2- Directors and officers are not committing to subscribe in full to basic subscription privilege. With their ownership already low at SFK/FBK, I wish we could have seen more rallying behind this offering. The risk here IMO with low ownership, is that to them what is paramount is the well being of the corporation. Shareholders/Equity and debt is just how the corporation is funded.
3- Conversion price for the debentures will be repriced following the offering down from $4.80. Although, I tried to figure out the formula, I have a heck of a time understanding how to calculate the new price with the way it is explained.
4- The new lending agreement with SGF/GE will allow for the convertible debentures to be redeemed. So after Dec 31, 2010, they will be able to call them at par (before that date need shares to trade at 125% of conversion price).
5- Not clear to me that Fairfax is obligated to exercise its basic subscription privilege. To clear the confusion, it should be simply stated that Fairfax rights are not part of the calculation of rights available under the over-subscription privilege. Or that Fairfax will exercise in full its basic subscription privilege. I don't know why they don't write it down clearly. So easy. Only in the "Significant shareholder" paragraph is there a mention of exclusion: "Assuming none of the Rights, other than those held by Fairfax, are exercised and..."
6- The dealer or TD is existing lender to SFK/FBK. So you can see some potential conflict of interest between how they recommend to raise cash in order to repay their own debt.
Cardboard
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"Each of the components of the Refinancing Transactions is conditional upon the closing of the reorganization of SFK Pulp into a corporation, which is subject to the approval of SFK Pulp's unitholders at our annual and special meeting to be held on May 19, 2010, and upon the closing of all the other
components of the Refinancing Transactions (collectively, the "Closing").
You are right Alertmeipp. It was disclosed in that paragraph. Sorry!
Now, regarding the over-subscription privilege, it was there before as well.
Cardboard
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I am not too pleased with that:
"Each of the components of the refinancing transactions referred to above is conditional upon the closing of all other components of the refinancing transactions."
Unless I missed it in the original press release or in the agreement with Fairfax, this condition was not mentioned before. It was mentioned that all components of the refinancing transactions were conditional upon the conversion and that the rights offering was conditional upon the SGF financing and at least $55 million by way of revolving credit facility. Now everything is conditional upon one an other in full.
I suspected that it could be the case since the rights offering would make the SGF and GE more secure with their loans, but I had to guess that. It was not disclosed. Why?
Now, there is no way to back out of this unless everything is cancelled. The whole deal seems to be structured in a way to ensure the maximum issuance of shares to raise the $40 million: no fixed price, in a down market, very time consuming since conditional upon conversion process. Was there not a better way to raise $40 million?
We are at risk here of increasing the share count from 90 to 130 million or by 44%. And possibly more. I don't understand how Fairfax can be happy with that. They paid $4-5 a share for their 19% stake. How do they plan to recoup that money with such massive dilution? If they have to backstop by a lot, it will allow them to average down and increase their percentage of ownership, but the intrinsic value per share goes down. To see $5 a share again becomes near impossible.
Cardboard
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I have money into CTL. Made a little bit, but it has been a very poor use so far of my capital relative to everything else.
The stock ran up with the announcement of the 2nd pulp line restart then plunged following Q1 results. The pulp mill will bring very much needed cash, but the real turnaround never seems to come with very little improvement in paper prices. They are one of the lowest cost producers of newsprint, directory, coated/uncoated papers in North America having generated enough EBITDA throughout the crisis to pay their interest and more. Their newsprint competition can't say the same and is mostly bankrupt: AbitibiBowater, White Birch.
Unless the creditors at Abitibi start to wake-up and really force the shutdown of their more unprofitable mills, the situation won't get much better. The trend for less paper usage in NA and Europe are clear. Maybe that China will help with demand, but so far it seems muted.
The other concern that I have is that the company itself does not seem to believe in its chances: they had a rights offering in November that they then postponed. If they go ahead again with this thing, the dilution on a per share basis will be so high that the upside left in the shares won't be worth the risks. Only 3rd Avenue can help there, but these guys are incomprehensible having sold shares in the low $0.20's over time. Why buying a huge stake at $2-3 and then selling tiny pieces at a very low price?
Cardboard
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Forget about NBSK or St-Felicien. That is not our issue. The gap in total cash cost there in Q1 vs CFX was only $10 a ton. Then if you look at sales, the gap is $7.
The issue is the RBK mills were SOP cost or wastepaper is way up. These mills were generating an EBITDA margin of 16-17% when they were purchased by SFK in 2006. In Q1, which was arguably a very strong quarter for pulp generally, the EBITDA margin was only 5.3%. I suspect that Q2 will be a lot better for these mills, but we cannot afford to make reasonable money on them only 1 quarter out of what, 20? And, I am talking EBITDA margins. With costs in USD and sales in USD, the margin is not influenced by foreign exchange.
The fundamentals for scrap paper seem to have changed a lot, thanks to China's appetite for wood fibre of all kinds.
So this is my big concern longer term. Of course, if there is some kind of wonderful transaction in a month or two, then we don't care, but if we are stuck with this puppy for another few years... we might want to figure out how they can make these mills more profitable.
Cardboard
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Yes indeed, completed as of today.
http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C%3aSFK-1724491&symbol=SFK®ion=C
It will start trading Thursday under FBK.
Assuming that today meant closing for the conversion, then we should see the preliminary prospectus for the rights issued tomorrow or Thursday.
IMO, the final prospectus won't take long to be issued afterwards (10 days?) since all is needed is regulatory approval for listing, etc. Unless Fairfax waives the condition and decides to delay along with SFK to hopefully get better pricing. Looking ugly right now: 80% of $1.30 is $1.04 or 38.5 million new shares.
Makes me regret sometimes my decision to switch from CFX to SFK in December/January due to relative valuation. It is still blue sky for these guys and look at us.
Cardboard
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Did you guys ever looked into Total S.A.? That is the oil & gas French giant or 5th worldwide. Is there anything wrong with reserves, growth or other?
I noticed that it is trading at a P/E multiple of 6.5 times vs BP at 6.4 times which is intriguing since it is not involved in any big issue that I can find. Even Repsol or the Spanish oil company is trading at 7.5 times which is closer to the roughly 8 times of Chevron and ConocoPhillips, so it does not appear to be a discount due to the Euro situation. The dividend is also better covered by earnings than BP and is now at 7.0%.
Also, Pargesa Holdings owns 4% of Total and is an active shareholder. It is controlled by the Desmarais and the Frere Group of Belgium. So you have smart people certainly looking to maximize shareholder value.
Cardboard
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Regarding Citigroup, the stock trades now at $3.78 while book value is $5.22 and 2010 EPS are around $0.55.
In comparison, a company of similar size (book value, assets, revenues) and exposed to the same risks or JP Morgan trades at $38.62 while book value is $39.38 and 2010 EPS is $3. JP Morgan also has just over $20 billion more in goodwill than Citigroup.
The ROE and ROA at JPM is worst than C, but it trades at a higher multiple because it has not experienced the same issues and people think now that Jamie Dimon can walk on water.
So I can see why some investors like Berkowitz, Watsa and Paulson are plugging money into C. Relatively speaking it's a cheap bank and if the economy keeps on improving C should outperform JPM based on valuation.
IMO, a better trade could be a pair trade between the two. This way you avoid making a bet on the economy.
Cardboard
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IMO, even if S&P and Moody's do downgrade, these big banks will still be seen as too big to fail and the implicit guarantee will remain in investors minds. It may hurt the value of their bonds somewhat, but it won't impact them so much since they have access to cheaper funding via the Fed window. The government just can't afford to have one of them go down in flames.
Actually with derivatives, there is no size that is not too big to fail. Every player involved in this game has such massive notional positions that book value or percentage of revenues means nothing. Think about AIG. They had a massive book value, their main business was plain vanilla insurance but, they wiped out everything with the issuance of some credit default swaps. I say some since these guys are tiny in the derivatives world.
I have a really hard time understanding how, for example, this massive decline in the Euro has been absorbed with no major loss anywhere. None that we have heard anyway. How is it possible for these large banks to always be delta hedged perfectly? Euro/USD contracts are in the trillions. What about very large hedge funds, especially when there was a strong consensus not that long ago that the Euro could only keep going up?
Cardboard
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Pulp demand could get cut in no time. Just look back at the end of 2008 and early 2009. Inventories were way up.
Now regarding costs, I have done some 1st quarter comparison with CFX. Translating every item on $/ton you see fairly quickly where the gaps are. It is not a perfect comparison since CFX produces kraft paper, but it is close enough.
CFX:
Sales = $782/ton
Manufacturing = $516
Freight = $102
SG&A = $21
Amortization = $38
Operating income = $106
Cash costs = $638
SFK:
Sales = $738/ton
Manufacturing = $585
Freight = $55
SG&A = $17
Amortization = $51
Operating income = $29
Cash costs = $657
SFK RBK:
Sales = $703/ton
Amortization = $23
Operating income = $14
Cash costs = $666
SFK NBSK:
Sales = $775/ton
Amortization = $81
Operating income = $46
Cash costs = $648
For NBSK, it seems that we could get a little more for our sales $7/ton and we could also cut manufacturing costs a little (chips) or $10/ton, but it is not a huge gap with CFX. The higher amortization is also surprising. I am not sure why it is so different with CFX.
The real problem appears to be RBK again. It simply costs way too much to produce a pulp that will always sell at a discount to NBSK. Wastepaper appears to be the culprit and I am not sure what is the solution: its price goes up when demand for pulp/paper is up, when it goes down its because pulp prices are also coming down. It will be better in Q2 with RBK prices going up faster than SOP, but Q2 is as good as it gets in pulp.
Another big difference with CFX is freight. I am not sure why SFK has such an advantage, it could be how they categorize costs between companies. Although, I suspect that the RBK mills are advantaged with their locations.
Cardboard
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"If pulp prices remain strong based on the low inventories present ..."
I think that it is our problem right there. The market has already voted with massive declines in the share price of CFX, TMB and our dear SFK. It is the same accross the entire commodity spectrum.
If the economy derails due to Europe or whatever the reason, pulp will tank. SFK will see a lag in its results due to FX, their contracts (remember these discounts) and wastepaper costs, but EBITDA will decline to nothing eventually.
These guys need to find a way to cut cost, not just interest cost, but operating cost, or to sell very soon.
Cardboard
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Biaggio,
I didn't mean that I was specifically looking for illiquid stocks. It is just that some small companies trade very little. They are ignored by the market and it helps them be cheaper. What I also noticed is that they trade very little when you buy them, then when the good news comes out along with the price there is generally no problem selling them with volume picking up. What I am more worried about is their survival capacity under depression like conditions.
Regarding price movement, sometimes they look good in your account because they don't trade in a down market. Although, it is an illusion since if you were trying to sell them at that point, you would likely find very low bids making it worse than the market decline in %. With time, the bid/ask will generally follow the market on the downside.
Cardboard
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Thanks guys for all the replies.
Looking in detail at my portfolio yesterday, I realized that I had grown quite complacent with all the good fortune since March 9, 2009. A date that I will not forget! 100% long, some leverage via options, still invested in good opportunities, but nowhere near as good as they were: overall price to value ratio going up.
In order to rebalance my portfolio and psychology, I think that it may be time to look for short ideas again. This was suicide in the run from the lows with all boats rising, but with the market now at least more "neutral", it should react negatively to bad companies instead of having them rising with the rest. It should also force me to really think twice before buying and on what to hold since I will also be on the lookout for what is a good short.
Are you short any names right now?
One developing trend that I see sticking for quite a while is the severe weakness in the Euro vs other currencies which will lead to smaller profits for Canadian and U.S. entreprises doing business in Europe. This may be quite a nasty development for some specific cos.
Cardboard
BP (ADR)
in General Discussion
Posted
I fully agree Packer. It is hard to disconnect our minds from this story, but we have to remember that other more "quiet" investments are still competing for our capital.
So taking a step back, what is the potential upside under a good scenario? Goes back to $50 in 2 years? What is comparable?
Bill Ackman made a solid case for Kraft which has similar upside if you include the dividend. Bruce Berkowitz thinks that Citigroup has quite a bit of upside. These are two large caps where you can use LEAPS if you want or just like with BP.
I also think that Tilson made a strong case when you look at BP as a whole, its on-going profits generation and the fact that payments will be made over a period of years. Even the $20 billion trust fund is built over a period of years.
Two problems with the thesis are unremitted earnings and profits cyclicality. The cash at BP and its earnings are not all U.S. based. The majority is earned elsewhere and permanently reinvested locally to avoid taxes. If the cash pile and all earnings are now diverted to the U.S. to pay for the spill, you should expect a significant tax hit in the various countries where they are involved. I am not saying that it will make it impossible for them to pay, but it could create timing issues and will mean less cash available. If you get involved, it is something that you should carefully assess. Their profits also vary a lot. If we have a double-dip recession then what happens?
Cardboard