New FBK

[Uccmal]

Imagine if it traded up to 1.6 times book like cfx.un.  $7.00/share.  Just imagine.  I feel like Peter Lynch and Cajun cleaners.

[SharperDingaan]

 

Technically the rights proceeds are after the Jun-30 close date of these financials. Therefore dont count.

 

The reality though is that the extra $ are there as of today, so the net cash cost of a share (yesterday)is even lower. You should another $.31 to the projected minimimum values - the $1.69 becomes $2.00.

 

SD

[Guest Dazel]

 

 

conference call....

 

I want to hear the CEO say that the stock is so undervalued they are looking at ways to enhance shareholder value....now that the refi is done.

 

I have beaten to death the options they have. It is time for managemnet step and say that the market is giving away their assets for 20 cents on the dollar and they will do something about it besides cutting costs. Show us the confidence that they should have with their new balance sheet.

This is thing is trading like a bankruptcy candidate. They now have one of the best balance sheets in the industry. UNLOCK THE VALUE MANAGEMENT so you have more options....

 

Mercer international has $1.1 billion in debt and a total market capitalization of 1.33 billion!!!!

 

Dazel

[Cardboard]

You guys are wildly optimistic. Since when do you substract cash from the share price without taking into account debt on the other side?

 

These results are pretty much as expected and you could have done the same calculation that you are doing now weeks ago. The company is cheap, but when I hear people holding on for $6 a share when we just saw CFX.UN report fantastic results and see its share price come down, you have to wonder how bad is the slowdown in pulp prices that all producers have predicted.

 

There are two new pieces of information in the release which may help to understand why they issued shares for cash other than just reinforcing the balance sheet:

 

"The past few months were eventful for our organization. We completed our conversion into a corporation which allowed the successful completion of our refinancing. All this has brought financial stability and flexibility to our organization. As such, we will now be able to increase our focus on the execution of our operational and supply chain strategies aimed at improving the productivity, efficiency and competitiveness of our mills."

 

Plant managers don't focus on refinancing. So this recent activity should not have distracted them from looking and delivering continuous improvements unless the company is poorly managed. This sentence must be about looking at bigger solutions where cash, CFO and CEO are needed to improve their cost structure.

 

"The North American RBK market showed signs of improved demand during the second quarter. Some of this additional demand was brought about by the closure of a competitor's mill having filed for Chapter 11 bankruptcy protection. Customers also reported better order books for recycled paper."

 

I believe this is Mississippi River Corporation. Looks like that profits are hard to come by in this RBK market which is good for Fibrek. It could mean capacity removal and even some consolidation opportunities.

 

Cardboard

[FFHWatcher]

 

 

conference call....

 

I want to hear the CEO say that the stock is so undervalued they are looking at ways to enhance shareholder value....now that the refi is done.

 

I have beaten to death the options they have. It is time for managemnet step and say that the market is giving away their assets for 20 cents on the dollar and they will do something about it besides cutting costs. Show us the confidence that they should have with their new balance sheet.

This is thing is trading like a bankruptcy candidate. They now have one of the best balance sheets in the industry. UNLOCK THE VALUE MANAGEMENT so you have more options....

 

Mercer international has $1.1 billion in debt and a total market capitalization of 1.33 billion!!!!

 

Dazel

 

I wholeheartedly agree.  Personally, if their cash flow and projected cash flow seems very good, why not institute a dividend?  If that were to occur, shares would eventually (likely) trade off of the yield, if the market felt it was sustainable, manageable and could grow.  A strategic plan from management would be nice to see.  If you were the CEO or a board member who owned virtually no shares, what is the motivation to enhance shareholder value?  Very few people act like a shareholder or act in shareholders best interests (especially board members) when they simply are not shareholders or don't represent a major shareholder.  I would be curious to learn how CEO's of company's feel about the 'owners' when there are no controlling shareholders.  

 

In my opinion, Fairfax needs to get a board seat or two ASAP, especially given the circumstances around the rights offering.  I will do some more homework on the board members in the near future.

[Guest Dazel]

 

FFH WATCHER-I belive that Fairfax has a board seat...time to get another one

 

Cardboard- With regards to Canfor pulp...they were trading at 1.5 times book..likely overvalued...which is likley why you had sellers after their results...FBK at 22 percent of book is a diiferent ball game as you know. $6 is a pipe dream...I agree...but close to 1 times book is a real possibility since the refi is done. The market has not heard of Fibrek or Fairfax being involved....it is unloved...and was left for dead...sentiment will have to change but as we know that can happen very very quickly.

 

dazel.

 

 

[gordoffh]

These results are pretty much as expected and you could have done the same calculation that you are doing now weeks ago

 

I can't say that these results were expected - the last 2 quarters had the same expectations but failed - this is finally a result that might unveil the promise we have hoped for - ok maybe expected but never materialized

[OracleofCarolina]

Any thoughts on the conference call today?

[Cardboard]

The call was pretty short, but a few good pieces of information:

 

1- Mentioned that the conversion to a corporation structure was essential to do the refinancing. I still don't understand why, but I guess they know better than me.

2- Annual interest savings for new debt structure are $4 million.

3- Annual minimum drop in wood chip cost in 2011 if conditions remain as is: $7 million. This is due to many newsprint mills shutting down for good in Quebec.

4- Believe that planned shutdowns in the industry in Q3 and Q4 will be sufficient to keep NBSK market balanced. Then I ask, what happens in a quarter when shutdowns are low?

5- Exported some RBK to Europe for tissue market which requires some recycled based material. That I like, it is creative. Not just running plants flat out and hoping for high prices.

6- Looking to grow in RBK. They mentioned many times the importance of being "green" and that this market will grow. My read based on what was said is that a tuck-in acquisition is likely.

 

On #6, it is hard for me to accept. Sorted office paper has been the killer and RBK is always priced based on BHK. Really hard to make any margin in this business. Then they are the only RBK producer in NA with air dried pulp mills, modern/low cost and already hold a 48% market share of RBK. Other mills are all wet pulp which means higher transportation costs. How do you make any money then?

 

Looks like that they are on the right track especially when you add the savings and the Hydro Quebec power contract down the road. However, Fairfax better keep an eye on these guys before they go after some so called really attractive acquisition and blow a bunch of this very hard earned capital that they just raised.

 

Cardboard

[Uccmal]

However, Fairfax better keep an eye on these guys before they go after some so called really attractive acquisition and blow a bunch of this very hard earned capital that they just raised.

 

My sentiments exactly.  Companies with dubious acqusition records should be deprived of excess cash ASAP - to the shareholders. 

[oldye]

When you own 34% of the company you get some input as to what acquisitions are made. 

At the AGM dinner they said they didn't buy more when the stock was lower because there is a poison pill in place.  At this ownership level they'll have to consolidate their financials going forward. 

[alertmeipp]

I doubt they will do anything silly.

The impression I got from the call (I missed the first part) is they raise the money to assure that they can stand another downturn if it comes.

They seems pretty happy about the rating agencies' upgrade (the market doesn't care!)

 

If they were to issue bond to pay off the existing one, they should be able to get better rate with the current rating. (hopefully not convert!)

[Viking]

It is the US operations that I have never been able to get comfortable with. SOP pricing keeps killing them and they appear to NOT be able to get a premium price (vs hardwood) for the finished product... Tough to build a long term winner.

[FFHWatcher]

I thought the volume, or lack of volume yesterday was somewhat interesting. 

228k shares

35k shares in the first few minutes (maybe consolidated orders) at $1.09 and then for the remainder of the day a bunch of 1000 shares and 5000 shares orders that quickly trended down to $1.01/1.02 before noon.  It looks like only one order over 10,000 shares was placed after 10:30am.  So my thought is two fold; 1/ the sellers are very small, probably short term holders, that may have bought before the quarterly report hoping for more, and 2/ even with the low volume small orders selling, there still weren't enough buyers (big or small) to support the falling price. 

It seems most shareholders or potential shareholders are sitting on their hands and waiting for this to play out.  If a potential investor does come along that wants a decent chunk of shares, they may have to be very patient or move the price significantly.  Likewise going the other way, if a larger investor of > a few hundred thousand shares wants out, a lot of pressure would occur to the downside.

[cwericb]

Back in mid-July, on another board, there was mention of possible labour problems at the Saint-Félicien Mill. However, no one here seemed to think that this information was material. However, in the quarterly report they note ...

 

``The Saint-Félicien Mill’s collective agreement with production and maintenance employees expired on April 30, 2009.``    ...   ``No negotiations between Fibrek and its union have yet begun in respect of local issues. There can be no assurance that Fibrek will be able to successfully renegotiate the collective agreements or renegotiate them on terms satisfactory to Fibrek.``

 

Now the supposed word from inside the plant last month was that the workers were talking strike, and with the union contract having expired well over a year ago, does no one here see this as a serious concern?

[SharperDingaan]

 

There is a different way of seeing this.

 

The reality is that FBK is rangebound in a turning pulp cycle. It can not go up materially or change its structure unless FFH agrees to the divestment, take-out, restructuring, etc. It can not go down materially as the illiquidity discount will cripple any material seller. Therefore its stay as they are, improve the cost structure to reduce the break-even, & maybe a tuck-in acquisition here & there where there is clear & immediate benefit.

 

If there were no changes & they made a base 30M next year, EPS would be $0.23. Interest savings of 4M would add $0.03, 50% realization on the anticipated 7M of Quebec pulp savings might add another $0.025. 2011 earnings of maybe between $0.23 & $0.285. Were you to offer 5X earnings, at best - the price could only get to $1.15 to $1.43. At $1.29 average; roughly a 30% one-year return, or not that bad.

 

The reality though is that its worth far more `restructured`; so its really a 30% one-year return with a cost free call option on any gain from an intervening event.

 

It may not be the investment you thought it was, but if you have the liquidity - its certainly not the worst investment either.

 

SD

 

[Uccmal]

That is a nice summary Sharper.  The stock price is playing off the perceived future pulp prices.  The lack of trading is interesting.  240000 shares is only 3 times my total holdings. 

[alertmeipp]

Margin is starting to go to the right direction. Hopefully the cost-saving will continue to hit the bottom line (they may as well cut the website - it's still not up yet!)

 

The "listed" NBSK pulp price looks good. However, the actual sales price is still about 15% lower because of the discount (actual sales price 864$).

Had they able to actually sell at listed price, the profit will be enormous like (50m more!)

While selling at listed price is practically impossible (Catalyst's is 840, Canfor is like 900*), if they can cut discount by to 10%, it will be an additional of 20m to the bottom line.

 

As at July 16, 2010, the Company had drawn US$10 million under the ABL Credit Facility + 78M Term loan = total 88m

Vs. before

As at June 30, 2010, $114.0 million (US$107.5 million) was drawn under the Old Term Facility and $35.3 million was

drawn under the Old Revolving Facility (of which $15.0 million was denominated in US dollars). = total 130m

 

~42m less outstanding balances (probably from offering).

 

16m receivable + 30m more cash generated by year end should allow them to call the converts comfortably. However, they will potentially issues more shares for the convert if the share price recover a bit from here. They keep mentioning it as a possibility: "Fibrek may elect to satisfy its obligation to pay the principal amount of the Debentures by issuing Common Shares."

 

The right offering if nothing else put Fairfax in a very good position regarding its converts:

 

1) allow Fibrek to pay them back in cash.

2) Or to pay them back in shares at a great discount to book.

 

FFH screws us big time is my read. :)

 

 

[FFHWatcher]

The right offering if nothing else put Fairfax in a very good position regarding its converts:

 

1) allow Fibrek to pay them back in cash.

2) Or to pay them back in shares at a great discount to book.

 

FFH screws us big time is my read. :)

 

 

 

Are you suggesting FFH owns the convertibles or did I misunderstand the end of your post?

[alertmeipp]

>>Fairfax also owns convertible debentures of SFK (the "Convertible Debentures") that are convertible into 1,250,000 units of SFK

 

It's from my misread.

so, about 6 million worth.. not much..

 

[triedtestedand]

It appears that ~4M debentures traded during the middle of the day on August 4th @ 99 ... and another 1M or so traded on July 16.  On the conference call, there wasn't any mention of open-market debenture repurchases, was there? (They wouldn't need to announce intent for such as they would a share repurchase, would they?)

[FFHWatcher]

 

Agreed. The 42.94M of cash is $.33/share; at $1.06 you're getting FBK for $0.73 net - or 21% of BV. More noticeable is the Q2 vs Q1 2010 incremental change. The incremental EBITA margin was 34% - 2.5x the average Q2 EBITA margin of 13.5%. Should have paid up for that extra 200,000 shares  ;D

 

 

 

I don't follow this company closely, but it was my understanding that the $42.5m of cash is before the rights offering. The new loan and facility are for $153m which more than covers the old loan and facility (roughly $143.5m). So, wouldn't you add the $40m from the rights offering to the $42.5? That gets you to $82.5m of cash or $0.63 per share plus whatever they have earned since the end of Q2. 

 

That seems reasonable.  Probably close to 90 m cash as of today.  I expect they are not using the revolving credit lines as much as expected which of course will add more to cash flow directly.  So as of yesterday you could have bought this company at 20%.

 

I am sure of one thing.  FFH's adjusted cost base is about 3.50 per share, so dont expect them to let this go below $6.00 to someone else.  My major concern is that FFH will try to take it out but they could have done it anytime in the past year for cheaper so they wont likely now.  So that leaves a dividend.  I would guess about 0.02/quarter to start.  These guys are playing it safe so it will be awhile.

 

In the MD&A FBK said they used the proceeds from the Rights Offering to repay debt, not to augment cash (pg. 18).  ABL revolver has $10M outstanding out of a total available of $75M, as of July 16, 2010 (pg. 17).  Looks like new $78M Term Loan + $38M from Rights offering = $116M was used to repay the Old Term Facility that was due in 2012.  Used cash and $10M from New ABL Revolver to repay the old Revolver due 2010

 

Post June 30, 2010 - Debts

$78M Term Loan Due 2015 (Old Term Loan was $114M - down $36M)

$51.7M Debentures Due Dec. 31, 2011 (same)

$10M out of $75M on ABL Revolving Credit Line (Old Revolver was around $35M - down $25M)

$6M PSIF Interest Free Gov't Loan (was $4.5M - up $1.5M)

 

Debt is down significantly (approx. $60M) and I suspect that cash is also down (a lot?), to pay off Old Revolver (as new ABL Revolver only has $10M on it).

 

Did I miss anything? 

 

I also reviewed the board of directors and I can't see any Fairfax Financial representation. 

[Cardboard]

I mentioned before about this possibility and it is already in place:

 

"a) Regular grant

On May 25, 2010, the Board awarded 1,086,009 options under the regular grant to executives and key employees having an exercise price of $1.35 per common share and a term of six years from the award date.

 

On May 25, 2010, the Board awarded 1,135,269 options under the special one-time grant to executives and key employees having an exercise price of $1.35 per common share and a term of six years from the date of award."

 

We have heard about the "special one-time grant" at $3.50 and $5. They were a pretty high hurdle in terms of incentive. These above are more the regular options that we see issued by corporations. The bar is generally not set too high. I have seen corporations picking the exact bottom in their share price to issue them.

 

Anyway, the cost to us is not very high at about 1.7% of outstanding shares, but dilution is dilution. The more these get issued, the larger the cap on the share price. I hope that it will motivate management to put more attention toward their stock. I would be happy with $2 a share based on the current situation.

 

Cardboard

 

[Guest Dazel]

 

It was Mackenzie that had a board seat....my mistake....I would like to see Fairfax step up to the plate here.

 

1m  options at least gives some incentive to management for a restructure or sale...$2.70 is a million dollar bonus

for management...a special share option gift may be the stake holder's givivng a carrot for a sale...I can't see it being for any other reason

when they are trading at such a discount to asset value. It would not make sense.

 

Dazel

[triedtestedand]

Cardboard:

 

I like the options grant because it encourages ownership mentality ... without it being a crazy high amount creating significant dilution (my one big beef remains that management doesn't have enough equity skin in the game) ... the $1.35 grant price is 35% greater than current price, so it isn't at the lowest floor price ... and the special grant condition is a high (but achievable) threshold over a 3-5 year window.

 

How to get there ... keep buying back debt (ex the debentures - using cash vs shares), to make the balance sheet stronger ... they could then (or in parallel) initiate even a modest share repurchase, which would significantly enhance shareholder value given the low P/B ratio they currently have (would much prefer this at this juncture than a dividend)