New FBK

[doc75]

 

On a somewhat related note:

 

Catalyst Paper just released Q3 numbers.. their best quarter in quite a while.  The stock was down to 0.09 earlier in the year (39M market cap!) and recently had a lightning quick run up to over .20.  Gobs of debt, but it's still dirt cheap if they manage to stabilize for a few quarters. 

 

I'm kicking myself.  I've been holding shares bought at an average of .20.  While it was really in the dumper, I worked some numbers and every calculation suggested that they'd be well into positive EBITDA territory for Q3 & Q4, provided the world didn't suddenly fall apart. Yet I still only took a tiny nibble when it was less than 10 cents.  I really need to learn to trust myself more when I actually take the time to do some thorough work.  In this case, there was lots of conflicting noise:  Ongoing labour disputes and a high debt load lent credence to rumors that they may file for creditor protection to tear up their union contracts.  I was scared of throwing good money after bad.

 

I mention the above only as a public admission of a lesson learned:  ignore the noise. 

 

It will be interesting to see market reaction to the Q3 numbers tomorrow.  For what it's worth, Catalyst foresees weakening pulp prices going forward but feels some of their paper markets have stabilized. The CEO has been talking about the need for merger/partnership. 

 

 

 

[triedtestedand]

Hey Dazel:

 

Remember FBK just refinanced in July ... This is the time for mgmt to buttress the balance sheet, and they are now incentivized via long-term stock grants to do it, so aligned with long-term shareholder interests (although I would have hoped they'd write their own cheques).  That said, presuming a carbon copy set of results Q3 vs Q2 (easy to say, basing on similar results at Mercer and Canfor), balance sheet for Sep30/10 could include:

 

  -$78M Quebec loan (less first principal payment)

  -$0 drawn on their credit line

  -$50M for their debenture

  +~$10M in cash/equivalents

 

Then, presuming another carbon copy of Q4 vs Q3, cash/equivalents will grow another +~$20M to +~$30 ...  so that if Q1/11 is anything similar, then >Jan1/11 they can announce redemption of $50M debenture, pay it all off and still end out the quarter with no other major liabilities except the Quebec loan.

 

I'd say that's quite a turnaround, as it means that in less than 5months from now, they could: have a full year of restored profitability, debt/equity of <20%, remaining debt due 4+ years out, and potential $80M FCF.

 

The kicker is this last item ... I don't think the market really appreciates the balance sheet transfer of PPE into cash ... which is being masked by the $10M/quarter in depreciation ... it is not alchemy.

 

Lots of flexibility then to institute dividend, buy back shares, etc.

 

Anyway ... that a long's view of things

[Guest Dazel]

 

Aside from all kinds of other options they have...talked about here including a sale...

 

Their partner (Fairfax) has $3 billion in cash equivalents making well after tax basically 0. why would managemnet not

go to Prem...can you backstop an issue for $50 million long term at 7%...this money will be used for the converts and not

acquisitions...it will give us more flexability and certainly send a message to the market that we are not bankrupt, we have your trust,

and it will give us more access to capital and allow us to pay a dividend sooner.

Prem: that is good idea because we will make the $50 million in market cap appreciation the second the loan is done...makes sense..

we will take $20 million of the loan float the $30 million...

 

or something like that..in a market where everyone is reaching for yield it would be

over subscribed etc....the summer financing was likely forced...a line of credit and long term debt are completely different animals...if fibrek

is not trying to refinace at all times as Fairfax has done at lower risk profiles.(long term debt) they should be fired... they are in a cyclical business.

 

 

They could borrow money from Fairfax directly with the hydro contract (put a value on it!) as collateral... many options...use your brain guys (management)!

 

Dazel.

[Vanshon]

Results out -

 

http://fibrek.ca/static/en/pdf/communiques_trimestriels/2010_3Q_PR.pdf

 

 

[triedtestedand]

Pluses:

 

- strong (and strengthening) balance sheet

      - book value of $3.70

      - long-term debt of $85M  (reduced further $3M after Oct1)

      - total debt/capitalization ratio of 22.1%

      - cash and equivalents of $25M

      - consolidated quarterly EBITDA of $18M

      - accumulated deficit of $213M (i.e. long runway to paying taxes)

- appeared to be disciplined with inventory/pricing (produced ~92K tonnes of NBSK, only sold ~74K tonnes) heading into Q4 downtime

- go forward cost savings on wood chips ($10M/year)

- higher efficiencies once new equipment deployed in Q4 (13K tonnes/year ... translates to $12M at current prices)

 

Concerns:

 

a) CDN $ vs USD $ ... reduced $2.5M against Q3 earnings

b) RBK is essentially breakeven (high cost of wastepaper)

c) potential pulp price softening ... although Chinese sales show increase in past # of weeks?

 

 

Overall, quarterly net income was lower than I might have hoped, but offset by better cash and balance sheet mgmt than I would have hoped.  They are ahead of where I thought they might be to have cash cushion built up to retire debentures in the new year (which is less than 60 days away ... so start your Christmas shopping, and remember to stock up on toilet paper), after which they will have lot greater flexibility and options.

[Rabbitisrich]

Any thoughts on the NBSK volume drop? Almost 10,000 tons below '08 and '07 levels.

[FFHWatcher]

I would add the following;

 

1/ EBITDA margin increased to 15% (from about 13.5%) in Q2

2/ Surpassed 90k tonnes/quarter in production of NBSK and RBK.  

3/ LT debt (excluding debs) is about the same as inventory

4/ Adding >10% production capacity at St. Felicien and should be ready to roll on Dec. 1, 2010 at new production level

5/ $10M in lower wood chip cost via Abitibi works out to $27/tonne at St. Felicien (370,000 tonnes / $10,000,000). Significant.

[alertmeipp]

Their pdf looks better than previous ones.

All in all, a solid quarter.

 

Good to see them focus on turning RBK around.

[FFHWatcher]

Any thoughts on the NBSK volume drop? Almost 10,000 tons below '08 and '07 levels.

 

From what I can see, FBK produced the pulp, they just didn't sell it.  Almost $10M was added to inventory from June 30th and perhaps a lot of that is NBSK (I don't think they break down NBSK vs. RBK inventory).  They are planning some down time in Nov., so inventory will likely be reduced at that time, depending on customer demand.  They did mention that customers tend to wait/delay orders when prices are falling.  As prices aren't falling too fast or as fast as first thought, orders may pick up in Q4?  Who knows.  I guess they could have dumped it as 'market pulp' instead of selling to regular customers, but that would just help to depress prices further plus open them up to the possibility of being caught short in Q4 if demand grows during planned downtime.

[triedtestedand]

I agree w FFHWatcher.  It looks like they sold as much RBK as they produced, so change in inventory is likely all NBSK related.  Like FFHWatcher also notes, they perhaps could have dumped it, but likely held back due to planned downtime and/or better discipline.  The fact that they did this and they still come out of the quarter with almost $25M in cash was bonus in my mind.

[triedtestedand]

A question for the board:  FBK shows an accumulated deficit of 213M as of Sept30/10.  It does not appear in any form on the balance sheet as a deferred tax asset (presumably because there's still question as to it's value, if any, as consequence of tax reassessment that is discussed in the financial statements?)  If it did, what value might it have?  (i.e. What is the corporate tax rate for FBK in Quebec?)  If it was 30%, then wouldn't that potentially be a $60M hidden nugget?  Thoughts?

[lessthaniv]

A question for the board:   FBK shows an accumulated deficit of 213M as of Sept30/10.   It does not appear in any form on the balance sheet as a deferred tax asset (presumably because there's still question as to it's value, if any, as consequence of tax reassessment that is discussed in the financial statements?)   If it did, what value might it have?   (i.e. What is the corporate tax rate for FBK in Quebec?)   If it was 30%, then wouldn't that potentially be a $60M hidden nugget?  Thoughts?

 

;D

[manualofideas]

I am a bit disappointed that they did not sell more NBSK pulp at near-record prices in Q3.  What are they waiting for -- lower prices?  The explanation about plentiful world supply is lame.  Do they really think that selling an additional 10-20K tonnes would affect the world market price?  They are acting as if they are a member of a "Pulp OPEC" so they have to hold back on volume.  This is just poor execution in my humble opinion.

 

In any case, Fibrek remains deeply undervalued, and there was a lot to like in the Q3 release, especially the $10 million/year reduction in wood chip costs going forward.  Also, as the RBK segment generated a small loss in the quarter, any turnaround in that segment will be a great boost to overall profitability. 

 

I sure hope they will sell more NBSK pulp in Q4...

[Uccmal]

Manualofideas, I find that really strange as well (pulp volume).  I am wondering if a key customer delayed an order or something?  I would ask the question on the conference call but cant attend.  Hopefully someone else brings it up.

[alertmeipp]

tanking ....

[doc75]

tanking ....

 

You had to know that the share price would tank after seeing the net income down to 3M from 10M in the previous quarter.  That's all a speculator would look at before hitting the sell button.

 

The conference call just finished.  Very few questions.  Decrease in sales was mostly due to inventory buildup, given the upcoming maintenance downtime (as conjectured on here).  They claimed they were running with low inventory and had to build it up to make sure there was enough. 

 

I don't quite follow.  The stated inventory level from end of Q2 seems like plenty to cover 10 days downtime with lots of spare, and prices were only going to go lower. 

 

 

[alertmeipp]

so the nbsk inventory build up is done on purpose for inventory control.

rbk continues to suck - at least the company admit it needs a turn around.

 

2 callers - the first one is from a investor group - u can tell they are not that shareholder friendly.

[alertmeipp]

I missed part of the CC because I was listening to another tankies (Sandridge).

 

did they comment on the power generation agreement?

 

It's coming online 11 or 12?

 

 

[FFHWatcher]

I hope that the guy who was not an investment analysis who got on the conference call and asked questions was not from this board.  Questions like, what interest rate do you pay on your debt and how many shares do you have outstanding and how much do you have in converts were a waste of time.  Who asks questions on a conference call to the CFO and CEO who hasn't event taken the time to read the quarterly and annuals reports?  No wonder companies don't let anyone other than analysts ask questions.  Vent over.  

 

Dec. 2012 for power generation.  24 months away still.

[finetrader]

talk about a lack of interest... 2 callers asking questions only..

 

I should have ask a question about their dividend policy.

 

 

[Guest Dazel]

relax....it's the assets....the management is focusing on the business. I do appreciate that...it is a tough

business to be in.

 

One thing that we see managers fail with time and again..is that they will not ask questions. They are n the pulp business and they have done a good job of cutting costs and inputs. Capital allocators they are not....and the financial structure of a company like this is most important. Managemnet...please ask Fairfax the hard questions....

should we sell? If we are going to sell how do we set it up to get the best price? Or do we sell the U.S ops...how can we use the hydro deal to help our financial structure?

Should we do a bond offering to buy out the debentures now? what terms? How do we go about it?

 

These are the types of questions that should be asked of Fairfax...or someone who knows about them.

***The line that they are doing these operational changes and this will create "long term shareholder value" is great but guess what it is not working. Time to ask the hard questions.

 

Dazel.

 

 

[Myth465]

relax....it's the assets....the management is focusing on the business. I do appreciate that...it is a tough

business to be in.

 

 

I agree, it looks like they are cutting costs and managing the business. I would like a revaluation now, but I think we are on the right track. I agree with you on asking the right questions, but I wish FFH would ask them some hard questions.

[doc75]

I hope that the guy who was not an investment analysis who got on the conference call and asked questions was not from this board.  Questions like, what interest rate do you pay on your debt and how many shares do you have outstanding and how much do you have in converts were a waste of time.  Who asks questions on a conference call to the CFO and CEO who hasn't event taken the time to read the quarterly and annuals reports?  No wonder companies don't let anyone other than analysts ask questions.  Vent over.  

 

Dec. 2012 for power generation.  24 months away still.

 

At first I thought that Fibrek was being really pissy with that guy -- asking him where he's from, and if he's an analyst etc.  But then he asked his questions and I thought "what a moron".

 

FYI:  Raymond James downgraded Fibrek today.  Their old target price (as of Sept 23) was .90 so I'm curious to know if they've gone even lower.  I suppose this may explain some of the slide as well.

 

[alertmeipp]

that guy's questions were the highlights on a otherwise boring CCs. :)

You can tell by the # of callers that the market doesn't really care much about it - kind of flying low in the radar.

 

continue to like the valuation here. less than 2x cash flow to market cap. less 4x to EV.

[lessthaniv]

I hope that the guy who was not an investment analysis who got on the conference call and asked questions was not from this board.  Questions like, what interest rate do you pay on your debt and how many shares do you have outstanding and how much do you have in converts were a waste of time.  Who asks questions on a conference call to the CFO and CEO who hasn't event taken the time to read the quarterly and annuals reports?  No wonder companies don't let anyone other than analysts ask questions.  Vent over.  

 

Dec. 2012 for power generation.  24 months away still.

 

At first I thought that Fibrek was being really pissy with that guy -- asking him where he's from, and if he's an analyst etc.  But then he asked his questions and I thought "what a moron".

 

FYI:  Raymond James downgraded Fibrek today.  Their old target price (as of Sept 23) was .90 so I'm curious to know if they've gone even lower.  I suppose this may explain some of the slide as well.

 

 

If you have the Raymond James report handy (anyone) I would love to read their comments. I can send my email by PM. Thanks