New FBK

[Myth465]

I prefer debt free. It gives them maximum flexibility. I would want a sell / takeover or debt free with dividends of all cash flow over capex

[tgmk54]

 

Re IFRS, P29 of the Q4-2010 MD&A:

Assets will be written down on Jan 01/2011 by 139.7M because IFRS requires that you present value the assets future expected cash-flow to get to its recoverable value, today, & write-down to the lower of this amount, or book. It is essentially market value.

 

The right hand column of the page shows the Jan 01/2011 Balance Sheet under IFRS. Notable is that the equity is only 283.6M, or a BV of  $2.18/share. At $1.45/share FBK is trading at 66% of BV.

 

 

Just wanted to note that the above referenced right hand column of page 29 in the MD&A shows the 1/1/2010 balance sheet, not the 1/1/2011 balance sheet.

 

Since equity increased by 37.9M in 2010, it might be more appropriate to assume equity of 321.5M (283.6M + 37.9M), resulting in BV of $2.45/share and FBK currently trading at 59% of book.  Also, in the MD&A it was not clear to me whether the 1/1/2010 valuation was based on cash flows as of 12/31/09 or on the improved 2010 cash flows levels.   

 

 

[alertmeipp]

-10m for pension as well.

 

 

[Guest Dazel]

 

Alertmeipp,

 

The replacement value matters. To a businessmen they value what their company assets are worth if they know what their doing (i question management ability at FBK for this). They are worth a lot more to ABH, TEMBEC, Canfor etc...because their cashflows would be much higher than FBK's because they have low cost woodchips...and lumber price are good so they are cutting.

 

To say that a billion dollar plant with infrastructure and low cost power does not matter is ignorant. and that is the way i think about management. They did not build the plant and they do not care about selling because they are not aligned with that out come. I as a shareholder own that plant and I want that plant sold and I want my money now!!!

I will take that money now instead of waiting for the management to take 15 years to pay me out what it is worth through cashflow.

That is how businessmen think and that it how businesses should be run by owner managers. We do not have the right activists here...but by the repeated failed attempts to keep shareholders happy with their return on invested capital...has pissed us off. The businesses people will figure this out....that is why take overs happen....ABH and Tembec could care less what FBK cashflow is now...they will run their own figures...on an integrated basis. It's The assets that count here.....and what someone else can do with them.

 

Dazel.

 

 

[Uccmal]

That is what I was getting at Dazel, but better said.  ABH, Tembec, or Domtar could easily justify a Billion Dollar purchase of these mills by integrating them into their overall processes.  They could realize savings by eliminating an entire tier of management levels.  There would be no more need for contract negotiations for wood chips by either side (CFX is an example of this).  A larger company would simply pass on the pulp to a division that makes the paper, eliminating a sales force and European sales brokers.  I expect the competition is just waiting to see how the price of pulp plays out and making sure each of them has their own house fully in order first.

 

The bio-energy is a particularly interesting asset.  It effectively insulates the virgin mill from fuel price shock which may be looking pretty good in the near future to an acquirer.

[alertmeipp]

Trust me - we are on the same (or similar) page. Ultimately, ppl buy FBK's mills because of the cash flow it can generate (for the buyer). Not because how much FBK spent to buy those mills and not because how much it takes to re-produce the mills.

 

if MERC and CFX can generate 200m CF on FBK's mills, they may be willing pay 1 billions for them.

 

I am all for selling the co NOW at 4 bucks!

[SharperDingaan]

Under IFRS the only financial reason to keep an asset is because you think the future cash-flow from that asset will grow. You expect to make more widgets from it than planned, or to sell them at a higher average contribution margin than anticipated. Offsetting that windfall is how fast you can wear that asset out, & whether the future discount rate is likely to rise appreciably while you’re doing it.

 

Pre IFRS you kept the asset as long as possible because it was a sunk cost, & the annual cost of holding it was only non-cash amortization. No out-of-pocket cash expense, & the plant was always ready to go anytime it could make a positive contribution margin.

 

Most people would expect the discount rate to rise, at least 200-300bp over the next few years. Over & above the wear & tear - today’s plant will be worth substantially less simply because the cash-flow will discounted at a higher rate, unless production or margin increases significantly. In today’s low interest & high commodity price environment, these plants have to worth about as much as they will ever be. We should be selling. 

 

IFRS essentially makes operating assets financially behave like bonds – which is a different mindset. Expect some adjustment.

 

SD

 

[Hoodlum]

With the Canadian dollar continuing to rise, I was wondering if anyone has calculated the impact on EBIDTA with every cent increase in the Canadian to US exchange rate.

[Alekbaylee]

I prefer debt free. It gives them maximum flexibility. I would want a sell / takeover or debt free with dividends of all cash flow over capex

 

Same thing here, specially considering today's economic incertainty.

[rijk]

FX sensitivity page 31

[cwericb]

Clearly the general consensus of this board that FBK should be sold and new management should take over. However, this is a decision that presently lies in the hands of present management and it is very unlikely that they have any interest in essentially firing themselves.

 

Therefore the impetus for a sale would likely have to come from shareholders. So how does that happen? Probably Fairfax could initiate that if they wanted, but is there enough advantage to FFH for them to do this at this point? So who, other than FFH, are the major shareholders? FFH holds something like 26% so there is another 74% of the shares out there. Members of this board probably hold a a good number of shares, but likely insignificant in the overall scheme of things. However we are shareholders and there are likely other shareholders out there who also think that the status quo is not ideal. So what, if anything, can we as shareholders do to try and prcipitate a sale of FBK or parts of FBK?

 

Of course the other scenario is that another company may initiate a purchase, but the leading contender for that would be Abitibi and that brings us back to FFH again. It seems that FBK has the basis of a good operation and a lot of potential, but in this business it lacks the advantages and the economies of scale that a merger or acquisition could bring.

 

I am just thinking out loud here but timing is important. We have high expectations every quarter but there always seems that something comes out of left field to adversely effect profits. Hopefully, in the next quarter the stars will have aligned and we will see a good report with no “one time only” problems. When that occurs it would be the ideal time to put this company on the market. But if something doesn’t happen in the next few quarters an opportunity may well be lost.

 

[Uccmal]

RE: exchange rate sensitivities.  They need only raise the realized price closer to the quoted market value by 20-30/tonne to offset any exchange rate increases.  I for one figure the exchange rate is likely as high as its going to get.  Alberta and Sask alone cannot drive up our dollar in perpetuity.  

 

Alertmeipp,  We are not really in much disagreement here.  I always value your posts.

[Uccmal]

What's interesting is that volume is so low.  This implies to me that there are alot of believers in some kind of positive outcome.  Average daily volume is 35000 shares.  Yesterday was an outright anomaly with 750 k.  Taking out FFHs holding there are 100 M shares +/-.  In a year only 7 m shares are trading out of 100 M.  That's pretty low.  Whoever is holding is holding tight. 

[lessthaniv]

RE: exchange rate sensitivities.  They need only raise the realized price closer to the quoted market value by 20-30/tonne to offset any exchange rate increases.  I for one figure the exchange rate is likely as high as its going to get.  Alberta and Sask alone cannot drive up our dollar in perpetuity.  

 

Alertmeipp,  We are not really in much disagreement here.  I always value your posts.

 

Al, this is exactly what I was expecting for the next quarter. They alluded to providing extra discounts in Q4:10 which have now been taken away in Q1:11.

[lessthaniv]

 

Re IFRS, P29 of the Q4-2010 MD&A:

Assets will be written down on Jan 01/2011 by 139.7M because IFRS requires that you present value the assets future expected cash-flow to get to its recoverable value, today, & write-down to the lower of this amount, or book. It is essentially market value.

 

The right hand column of the page shows the Jan 01/2011 Balance Sheet under IFRS. Notable is that the equity is only 283.6M, or a BV of  $2.18/share. At $1.45/share FBK is trading at 66% of BV.

 

The Debt/Equity Ratio is typically calculated as [(LTD - cash & equivalents)/Equity] x 100. On January 01, 2011 this will be 35.16%  [(118.8-19.1)/283.6]x100 which is the same as Tembec (P32 of the Investor Presentation).

 

End of day, the Balance Sheet is conservatively valued, & any offer for plant at replacement value will generate a material gain.

 

SD

 

 

SD, you're comparing a company that just adjusted their accounting system to IFRS (Fibrek) to one that is still using Canadian GAAP (Tembec). The comparison of book values is meaningless without adjustments. Over time we can expect to see our comps migrate to IFRS too and then we'll have meaningful direct comparisons.

 

<IV

[Cardboard]

I recall someone on this board working for Cascades. Who is it?

 

I still cannot believe the comments made by Cote to Le Journal les Affaires. Making toilet paper and facials with recycled pulp? Our job is to make pulp, not to find an end market for it. Cascades has spent 100's of millions to do that. Then you have Kimberly Clark and P&G competing there. It is a very competitive market with low margins. I have seen what these plants look like, they are high capital items and ultra modern.

 

We cannot afford to invest a dime in that venture. Having them as a client... fantastic. I have no problem at all selling recycled pulp to P&G or another. Owning these plants, marketing, sales team, etc. no way!

 

Cardboard

[finetrader]

My view on this:

-The new book value is probably closer to real value. I really don't see FBK at 3-4 dollar, not until RBK side of business is 'fixed'. But 2.00$-2.25$/share possible in this environment.

 

-Too bad they had to took impairment on their hard asset, it was providing a tax shield in big amortization cost. FCF was way higher than earnings, and I estimate that there will be about 10M$ less per year of amortization expense, resulting in higher earnings everything else being equal going forward . I, as an owner preferred having the tax shield, but maybe one of the reasons why stock is so low is because analysts and investors focus on earnings. So this could help share price in the future..who knows...

(I have a question concerning this change from GAAP to IFRS: will this change results in impairment and big losses on 2011 Q1?)

 

- The argument that Abitibi controls chip cost and they could profit in acquiring FBK is weak, I mean you have to take into account that Abitibi is already making a profit from selling wood chip to FBK.

1+1=2 and (1+1)=2... there could be some synergies but not that much in my opinion.

 

-What is probable is that if so many people think that the stock is cheap, that Abitibi used to own it, so they must know the real value, and if a competitor (an expert in the business) think that FBK is cheap and have the financial ressource to make an offer(ex: Domtar), than FBK being a target is possible.

 

-I suspect that FFH( friendly acquisition and passive investor mentality), combine by the fact that FBK is a small % of FFH, that they will let FBK's management run the business freely.

 

as being acquired.. if Abitibi or anyone else is interesting in FBK and if management don't want to sell, they could just send an unsollicited offer.  

[alertmeipp]

3-4 dollar is what...5x-6x cash flow?

 

i sure can see it if the market sees eye-to-eye with the management. Obviously, the next catalyst is better number from RBK.

 

re: exchange rate - most of the other pulps are US-based which makes their numbers look better than FBK. USD at 0.98 vs CDN now...

 

But if we can get $50 raise on pulp price on average through the year - it can do wonder.

[SharperDingaan]

 

IV: The comparisom is that FBK's 36% IFRS based D/E ratio is higher than the 22% it was, but still a reasonable number, re Tembec's 36% GAAP based D/E. As Tembec also has plant that may incur similiar write-downs, it is highly likely that their IFRS D/E ratio is higher than their GAAP based D/E ratio as well.

 

FBK's IFRS D/E Ratio may still be one of the lowest in the industry, but its still at a higher absolute level than most folks were expecting. Can't buy as much when you're allready loaded down - so you either have to sell something, or issue more equity. Our bias, & expectation, is that St Feliceon is going.

 

SD 

[lessthaniv]

 

IV: The comparisom is that FBK's 36% IFRS based D/E ratio is higher than the 22% it was, but still a reasonable number, re Tembec's 36% GAAP based D/E. As Tembec also has plant that may incur similiar write-downs, it is highly likely that their IFRS D/E ratio is higher than their GAAP based D/E ratio as well.

 

FBK's IFRS D/E Ratio may still be one of the lowest in the industry, but its still at a higher absolute level than most folks were expecting. Can't buy as much when you're allready loaded down - so you either have to sell something, or issue more equity. Our bias, & expectation, is that St Feliceon is going.

 

SD   

 

Agreed.

[FFHWatcher]

 

IV: The comparisom is that FBK's 36% IFRS based D/E ratio is higher than the 22% it was, but still a reasonable number, re Tembec's 36% GAAP based D/E. As Tembec also has plant that may incur similiar write-downs, it is highly likely that their IFRS D/E ratio is higher than their GAAP based D/E ratio as well.

 

FBK's IFRS D/E Ratio may still be one of the lowest in the industry, but its still at a higher absolute level than most folks were expecting. Can't buy as much when you're allready loaded down - so you either have to sell something, or issue more equity. Our bias, & expectation, is that St Feliceon is going.

 

SD   

 

I have thought about the option of selling Saint-Félicien (it had never crossed my mind before SD proposed that as an option) and I just can't get my head wrapped around how that would play out in reality. 

 

It may be the ideal business case but not reality, IMO.  Fibrek is predominantly a Quebec based business with Quebec based senior executive and Quebec based board of directors and their Quebec based mill is the only one that is currently producing EBITDA of any significant amount.  Knowing that, how do they sell their only Quebec based mill?

 

I think it is the one mill that buyers would be most interested in but knowing everything else about the company, I just can't see how the future would look at Fibrek without the Saint-Félicien Mill.  If Saint-Félicien were to be sold, I would conclude that Fibrek would no longer exist (in it's present form with a similar executive team and a similar BOD) and I can't see how the (Quebec based) Board and the (Quebec based) senior executive would manage 2 U.S. based mills. 

 

It is possible that FBK could fetch enough $$ from Saint-Félicien on it's own to represent all of the current market vlaue plus debt of FBK, leaving the US mills worth nothing at the current share price.  That I can see and accept as reasonable.  I just can't accept that it is likely that Fibrek will sell the only Quebec based Mill.  That just isn't how Quebecers think and every single person involved in a decision to sell Saint-Félicien Mill is a Quebecer.  My opinion obviously. 

[Uccmal]

I dont get it either.  If they sell ST. F. then I hope they get enough per share to leave $5 per share cash to distribute to everyone. 

[SharperDingaan]

 

Not to put ideas in managements head, but ….

 

- Selling St F is not the same as firing the people. It is the same plant, & the same people, they just work for somebody else. Everyone gets to stay in Quebec.

- We all get paid for the power deal, all the green projects, & the future production – today. And that future CF is discounted at the lowest possible rate (maximizing todays asset value).

- We’re left with 2 US plants, almost 50% of the RBK market, all the debt repaid (assumption), & a wad of leftover cash (assumption). We have strong incentive to change to a US coy, & elminate our Balance Sheet FX translation exposure.

- We very likely have a share consolidation, a rebranding, a graceful change in the institutional ownership, & probably a RBK related acquisition financed with LT Debt. The ‘new’ FBK becomes a utility company doing recycling, & pays dividends at a rate that one might expect of a utility.

 

Elegant, best use of capital & everyone gets what they want.

 

SD

 

[cwericb]

I don’t see why FBK management would want to sell the profitable side of an operation which has decent upside potential become more profitable through lower priced wood chips, increasing NBSK prices and power generation. Why sell that and keep the dubious business of producing RBK? Sure, I can see some potential for the US plants but why exchange a longshot for a relatively sure thing?

 

Additionally and on the subject of the staff, sure the workers would stay in Quebec but is senior management prepared to pull up stakes and move to the US to run what’s left of the company?  It just doesn’t seem to add up imho.

 

Personally, I don’t think management has any intention of selling the company. If an approach comes from outside or they receive pressure from shareholders than that is a different situation but until something like that occurs it is what it is.

[finetrader]

about wiping your ... with recycled fiber

 

http://www.theglobeandmail.com/globe-investor/cascades-aims-to-take-the-scratch-out-of-recycled-toilet-paper/article1929376/