New FBK

[Myth465]

 

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"

 

 

Leave me alone.

 

 

JK  :D

[doc75]

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

 

I only know that they were cut from "market perform" to "underperform".  I got the Sept 23 $0.90 price target from the basic research on my brokerage account.  No further details.

 

I'd also be very curious to see an analyst report on Fibrek -- even an outdated one. 

[Uccmal]

Not much volume.  Smaller holders panicking out of the stock trying to catch what little gain they have?

 

Management is sort of sloppy.  I agree that I would like them to tell me how they are going to improve shareholder value not just giving me a BS line about it.  

 

I am still not happy with the answer as to why they sold 20000 tonnes less pulp in a high priced market.  So what if they ran out of inventory.  I think they lost a major client and dont want to say so, which is not very forthright.  

 

I am all for a takeover if it cleans out this group.

 

I am not figuring out why it is so difficult to run this business.  Buy wood chips, sell pulp to a few long term clients at prevailing market prices.  Renegotiate labour and supply deals every 3 years.  This is not a complex affair by any means. 

 

My big worry is that pulp prices will collapse and this gang will never figure out how to "add shareholder value".

[alertmeipp]

It's cheap but holding it has been a bad move.

 

[Guest Bronco]

I know zero about FBK but is this a good business?  It seem to have a big following on the board.

 

It seems over the past year there have been many companies trading at 10x FCF.  Does this follow suit? 

 

 

 

Shouldn't we be focused on good businesses at good prices?  Again, I am not criticizing FBK b/c I know nothing about it, but the couple posts I have read seem like there is a lot of disappointment.

[alertmeipp]

It's NOT good business as it's a cyclical one. Plus, they don't have a vertical model so they have weak control on costs.

 

CFX.UN is the best in the sector, they are doing the right things, low cost - manage to be profitable even at down-turn.

 

However, it's just cheap even when one factor in the above. It's a sucker play I admit.

 

 

 

[doc75]

Not much volume.  Smaller holders panicking out of the stock trying to catch what little gain they have?

 

Management is sort of sloppy.  I agree that I would like them to tell me how they are going to improve shareholder value not just giving me a BS line about it.  

 

I am still not happy with the answer as to why they sold 20000 tonnes less pulp in a high priced market.  So what if they ran out of inventory.  I think they lost a major client and dont want to say so, which is not very forthright.  

 

I am all for a takeover if it cleans out this group.

 

I am not figuring out why it is so difficult to run this business.  Buy wood chips, sell pulp to a few long term clients at prevailing market prices.  Renegotiate labour and supply deals every 3 years.  This is not a complex affair by any means. 

 

My big worry is that pulp prices will collapse and this gang will never figure out how to "add shareholder value".

 

Yes... building up inventory while pulp prices are sky high and expected to fall is just plain fishy.  And if  the drop was mostly because of inventory build up, then why doesn't it say so in the MD&A?  Please tell me if this is what one would expect from good & honest management:

 

The MD&A says the drop is "mainly due to a strong recovery in 2009 and increase in world supply in 2010".  But according to the CC, it was "mainly inventory build-up".   This discrepancy isn't due to bad French-English translation. They just don't have their story straight on this very important issue.

 

I don't mean to beat a dead horse here, but this is exactly the type of thing that will keep value suppressed.  The drop in sales might as well have been highlighted in fluorescent paint --- it sticks out like a sore thumb.  Volumes down 20K from 2009 and 16K from last quarter while prices are the highest in years?  And yet the issue was officially addressed only by a terse & misleading sentence.  This just opens the door to speculations like Al's (ie. they dropped a big customer), because frankly their explanation doesn't make sense.

 

I was going to press them on it during the CC but didn't want to lie about being an analyst.  (I also wanted to ask about the union contract.  No mention of it from what I can tell.)

 

The fact that FBK is undervalued on an asset basis is pretty clear.   But management is far from impressive IMHO and Fibrek's valuation on an operational basis is more questionable than it should/could be.  I wish Fairfax would emphasize more "fair" and less "friendly" in this case.

 

 

 

 

[FFHWatcher]

Did you read the 29 page quarterly report?  Full report is here. http://www.fibrek.com/static/en/pdf/rapports_de_gestion/2010_3Q_MDA.pdf

 

The first report I read was shorter and less detailed. 

 

Look to page 22 as copied below....

 

Fibrek’s quarterly results (including sales volumes) also vary from quarter to quarter as a result of the scheduled

outages for major maintenance performed at the Mills. Scheduled outages at the Saint-Félicien Mill are

performed semi-annually, usually during the second and fourth quarters of each year. As for the Fairmont and

Menominee Mills, each mill conducts three scheduled outages during the course of the year. Each year, Fibrek

normally spends approximately $6.0 million in major maintenance work at the Saint-Félicien Mill, including

approximately $2.5 million which is allocated equally between each semi-annual outage, and a total of

approximately $4.0 million at the Fairmont and Menominee Mills on a combined basis (see “Liquidity and

Capital Resources – Capital Expenditures”).

The sales reduction from the second quarter of 2010 to the third quarter of 2010 is mainly due to lower pulp

inventories available for sales. The Company’s RBK pulp inventory was approximately 14,000 tonnes lower

when entering the third quarter of 2010 compared to inventory at the beginning of the second quarter of 2010.

As well, Fibrek’s NBSK pulp inventory was approximately 4,000 tonnes less when entering the third quarter of

2010 compared to inventory at the beginning of the second quarter of 2010. In addition, the Company’s NBSK

pulp inventory increased at the end of the third quarter of 2010 to prepare for the regular major maintenance

shutdown in November 2010.

 

Labour relations is also detailed in the long report.

 

 

 

 

[doc75]

Did you read the 29 page quarterly report?  Full report is here. http://www.fibrek.com/static/en/pdf/rapports_de_gestion/2010_3Q_MDA.pdf

 

The first report I read was shorter and less detailed. 

 

Look to page 22 as copied below....

 

Fibrek’s quarterly results (including sales volumes) also vary from quarter to quarter as a result of the scheduled

outages for major maintenance performed at the Mills. Scheduled outages at the Saint-Félicien Mill are

performed semi-annually, usually during the second and fourth quarters of each year. As for the Fairmont and

Menominee Mills, each mill conducts three scheduled outages during the course of the year. Each year, Fibrek

normally spends approximately $6.0 million in major maintenance work at the Saint-Félicien Mill, including

approximately $2.5 million which is allocated equally between each semi-annual outage, and a total of

approximately $4.0 million at the Fairmont and Menominee Mills on a combined basis (see “Liquidity and

Capital Resources – Capital Expenditures”).

The sales reduction from the second quarter of 2010 to the third quarter of 2010 is mainly due to lower pulp

inventories available for sales. The Company’s RBK pulp inventory was approximately 14,000 tonnes lower

when entering the third quarter of 2010 compared to inventory at the beginning of the second quarter of 2010.

As well, Fibrek’s NBSK pulp inventory was approximately 4,000 tonnes less when entering the third quarter of

2010 compared to inventory at the beginning of the second quarter of 2010. In addition, the Company’s NBSK

pulp inventory increased at the end of the third quarter of 2010 to prepare for the regular major maintenance

shutdown in November 2010.

 

Labour relations is also detailed in the long report.

 

 

Thanks!  You're right - I didn't see that.

 

I'm still baffled by the size of the sales drops.  It would appear that they need to keep a lot more inventory on hand than I would imagine.  Does anyone have a feel for these numbers?

 

I was starting to wonder whether the decision to keep more inventory had anything to do with the fact that the credit line is linked to inventory levels and receivables.  But the numbers make that seem very unlikely.

 

It looks likes their average realized selling price was around C$880/tonne for NBSK in Q3, as compared to the average price they quote of C$1040.  I haven't checked how this discount compares to their peers'.

[FFHWatcher]

Possible Convert Option

 

- $25M current cash balance

- $10-15M cash generation per quarter, all factors remaining constant (which I can guarantee you they won't)

- some cost savings via lower financing charges ($1M+/q) and lower wood chip cost ($2.5M/q) and higher production (if they can sell it) at NBSK

- offset by weak US $, softening but not collapsing NBSK pricing, Nov. NBSK shutdown, etc.

- Hopefully, the above plus and minus factors offset each other

 

- Trying to be conservative and say $10M free cash from each, ... Q4, Q1 2011, Q2 2011, Q3 2011 = $10M x 4 = $40M

- Add to $25M currently sitting in cash adds up to $65M

- To be safe, start using ABL Credit Facility for receivables and inventory as permitted which should raise cash balance even further to beyond the $65M

- Estimated use of ABL Credit Facility @ $25M by Q3 2011, pushing cash balance from $65m to $85M

- Use $52M from $85M cash balance to pay off Converts, leaving $33M in cash and $25M balance owing on ABL Credit Facility

- Go back to generating $10-15M/q of free cash to pay down ABL Credit Facility

- Could also use half shares (let's not do a rights offering again, ok?) and half cash to pay off Convertible Debt of $52M, depending on current share price

 

A lot of things would have to continue to go right for FBK for something similar to the above scenario to occur.  My point is, there is a way to do it that won't further dilute the crap out of the shares outstanding and won't lock the company into another 5-10yrs of interest payments and debt covenants in a cyclical industry.

[triedtestedand]

FFHWatcher:

 

My thesis is similar ... but premised that FFH (and other existing shareholders) would not look kindly on a further dilution (all long-term shareholders having ponied up $40M to shore up balance sheet already)  so therefore would seek paying off debentures with cash only ... they're pretty close to the goal line now (both from time standpoint and cash/credit flexibility standpoint), so having a little more patience is key.

 

>500K shares traded today ... somebody's soaking up the shares

[FFHWatcher]

 

 

Chart on page 6 shows quarterly avg. price @ $1,000 ($1,020-July, $990-Aug,$990-Sept).  I think I heard the CEO mention that it was the tightest spread that they have had (FBK selling price vs. published NBSK price).

[finetrader]

no dilution needed!

pay the debenture and after if FCF is still abundant, start paying a dividend!

 

 

[doc75]

 

 

Chart on page 6 shows quarterly avg. price @ $1,000 ($1,020-July, $990-Aug,$990-Sept).  I think I heard the CEO mention that it was the tightest spread that they have had (FBK selling price vs. published NBSK price).

 

I was calculating based on $64.0M in NBSK sales divided by 73900 tonnes sold. This gives about $880/tonne.  I compared this with the quoted $1039/tonne.  (p 10/11)  Note: All in Canadian $.

 

I think the # they quote (1039/tonne) is the price before discounts.  It doesn't make sense to me that they would quote this number, but it also doesn't make sense why my calculation wouldn't give the "real" $/tonne figure? 

 

Maybe someone can help me there?

 

 

 

[Uccmal]

FFWatcher, This was in the same report you referenced:

 

The NBSK pulp sales volume totalled 73,920 tonnes in the third quarter of 2010, a decrease of 20,919 tonnes when compared with 94,839 tonnes for the corresponding period of 2009. The reduction in sales volume was mainly due to a strong recovery quarter in 2009 and an increase in world supply in 2010.  Around page 15  I think.

 

I believe I read the report hence my disbelief. 

 

I dont want to keep harping on it but 20000 at 1000/tonne is 20 M in revenues missing.  

 

My concerns remain that fbk will get a certain amount of debt paid down before the real gravy hits, and then end up running up debt again, when the world pulp prices drop.  And then the birth of a value trap.  The reduced fibre costs should help.  

 

Too bad they cant get rid of those RBK mills.  Thank their predecessors for that gift that keeps on giving.    

[alertmeipp]

the discount was actually getting better.. was like 15% before. CFX has similar discount, but less.

 

[doc75]

In Q2 the discount was 15.4%.  In Q3 it was 15.5%.

 

Looks like Canfor sold pulp in Q3 at C$842/tonne ($213M in sales, 253000 tonnes).  That's apparently about $45/tonne less than FBK, so it seems CFX has an even bigger discount to list price?  Of course, they also lost 18000 tonnes of production due to maintenance, and yet still managed to handily beat their Q2 earnings.

 

It seems like selling pulp is like selling mattresses. You list everything at an arbitrarily high number and then always sell at a discount!

 

Actually, in the pulp world I imagine that the "list price" would be used for sales that aren't on a long term contract basis.  In the mattress world, I think the list price is only used so people can practice dividing by 2.

 

 

 

 

[alertmeipp]

i haven't check this Q.

But didn't someone just post about 1k listed price and 880 selling price.. doesn't make the discount 12% for this Q?

 

CFX discount used to be lower than SFK ... maybe they panic and often more discount in last Q?

[doc75]

i haven't check this Q.

But didn't someone just post about 1k listed price and 880 selling price.. doesn't make the discount 12% for this Q?

 

CFX discount used to be lower than SFK ... maybe they panic and often more discount in last Q?

 

Avg. list price (in C$) was 1039.  Sale price 878.  Discount (1039-878)/1039 = 15.5%

 

I suppose Fibrek could have lost sales because of deeper discounts elsewhere.  As a low cost producer, CFX would have the  margins to offer deeper discounts.

[alertmeipp]

>>Avg. list price (in C$) was 1039.  Sale price 878.  Discount (1039-878)/1039 = 15.5%

 

Thanks for showing me the math. ;)

[SharperDingaan]

 

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

 

[FFHWatcher]

>>Avg. list price (in C$) was 1039.  Sale price 878.  Discount (1039-878)/1039 = 15.5%

 

Thanks for showing me the math. ;)

 

My $1000 price reference was US$, convert to Cdn$ explains the difference ($1,000 US $ = $1,039 CAD$).

[Uccmal]

So now that management skillfully delivered all the good news, is anyone buying at our new lower prices?  I have been standing pat for now to see how pricing shakes out.  That will really be their only saviour. 

 

At this point they need enough cash on the balance sheet to cover the closure of those US plants, and see St. Felicien through the next price crash.  What a fiasco.  Remind me to let someone else do the recapitalizing in the future.  This is the second time I have been stung participating in a recap.  Actually, I am still above break even on this but nevertheless.

[triedtestedand]

UCCMAL:

 

If I was Mel Gibson, I wouldn't be hiring these guys to rehabilitate my image ...

 

That said, to your points:

 

- someone's buying a lower prices ... 500K shares traded friday, another 400K shares traded today ... with another 200K in bids around $1/share

- FFH did a fair bit of the recap (~40% of it) themselves.

- At the end of this quarter (or early next), they'll likely have enough $ to pay off the $50M debenture, at which point, from a big picture/simplistic balance sheet point of view:

                          - accounts receivables will offset accounts payables

                          - inventory will offset long term debt

 

As such, what could be left in 90 days is a stated ~$500M asset (yes, that value is arguable), depreciating at a $40M/yr clip, but currently generating $80M+/yr in FCF, and with a accumulated deficit of ~$200M (arguable) to protect against taxes ... all for the exhorbitant price of <2x FCF.  Downside remains as always (USD depreciation, pulp price deterioration), but that's the beauty of cigar butt investing.

 

 

 

[doc75]

So now that management skillfully delivered all the good news, is anyone buying at our new lower prices?  I have been standing pat for now to see how pricing shakes out.  That will really be their only saviour. 

 

At this point they need enough cash on the balance sheet to cover the closure of those US plants, and see St. Felicien through the next price crash.  What a fiasco.  Remind me to let someone else do the recapitalizing in the future.  This is the second time I have been stung participating in a recap.  Actually, I am still above break even on this but nevertheless.

 

This is not my biggest loser, but it's without doubt the most frustrating.  Quite a quick ride down from the lofty heights of $1.25...  and plenty of volume in the drop today, which is interesting/disconcerting.  I hate to say it, but Raymond James has thus far been eerily competent with their prognostications.

 

I just can't bring myself to buy more unless it gets really stupid cheap.  This feels like a value trap... at least in the sense that value has been trapped by management and they won't let it out.  

 

I'd be curious to hear others' thoughts on the future of the RBK mills.   FBK management indicates that there has been some increasing interest in recycled papers as the economy improves.  I assume this is because environmental morality is a luxury item to most.  I can buy this argument.   Management clearly views these as strong assets and expect them to drive profits in the future.

 

But it strikes me that the RBK mills are dead in the water if wastepaper doesn't come down.  And it's unclear to me why wastepaper should trend lower.   Doesn't this require either a dramatic increase in NA & EU virgin paper  usage (ie increased supply) or a reduction in fiber demand?   Nobody expects western paper use to go back to previous highs, and with China having limited fiber available won't they continue to eat up fiber supply?

 

Again, curious to hear others thoughts on this.