SFK pulp

[OracleofCarolina]

My pink sheet shares were replaced with FBKZF (Fibrek) yesterday and I use Bank of America.

[Myth465]

My pink sheet shares were replaced with FBKZF (Fibrek) yesterday and I use Bank of America.

 

Good to hear, hopefully mines move over at some point this week.

[tgmk54]

Yes, good news. Expect that Scottrade will also convert in due course.  Interesting that the process took two weeks to occur. 

[lessthaniv]

Final Prospectus has been posted:

 

Pricing is $1.01 reflecting the 20% discount as I suggested earlier.

 

SUMMARY OF THE OFFERING

The following is a summary of the principal features of the Offering and should be read together

with, and is qualified in its entirety by, the more detailed information and financial data and statements

contained elsewhere or incorporated by reference in this Prospectus. Certain terms used in this summary

and in the Prospectus are defined elsewhere herein.

Issuer: Fibrek Inc.

The Offering: 90,472,708 Rights to subscribe for up to 39,602,848 Common Shares. Each

holder on the Record Date will receive one Right for each Common Share held.

Every 2.2845 Rights entitle the holder thereof to subscribe for one (1) Common

Share.

Record Date: June 18, 2010

Commencement Date: June 21, 2010

Expiration Date: July 15, 2010

Expiration Time: 4:00 p.m. (Montreal time) on the Expiration Date. Rights not exercised at or

before the Expiration Time on the Expiration Date will be void and have no

value.

Subscription Price: The Subscription Price per Common Share will be equal to $1.01.

Net Proceeds: Approximately $37,827,848, after deduction of the Subscription Fee of

$396,028, the Dealer Manager Fee of $100,000 and the Standby Fee of $400,000

and estimated expenses of approximately $1,275,000, and assuming exercise in

full of the Rights or purchase of Standby Shares to the extent that Rights are

unexercised.

Basic Subscription

Privilege:

Every 2.2845 Rights entitle the holder thereof to subscribe for one (1) Common

Share upon payment of the Subscription Price. No fractional Common Shares

will be issued. See "Details of the Offering - Basic Subscription Privilege".

Additional

Subscription Privilege:

Holders of Rights who exercise in full the Basic Subscription Privilege for their

Rights are also entitled to subscribe pro rata for Additional Common Shares, if

any, not otherwise purchased pursuant to the Basic Subscription Privilege. The

Standby Purchaser has agreed not to exercise its Additional Subscription

Privilege. See "Details of the Offering- Additional Subscription Privilege".

Exercise of Rights: A subscriber may subscribe for Common Shares by instructing the CDS

Participant holding the subscriber's Rights to exercise all or a specified number

of such Rights and forwarding the Subscription Price for each Common Share

subscribed for in accordance with the terms of this Offering to such CDS

Participant.

[UhuruPeak]

Yes, good news. Expect that Scottrade will also convert in due course.  Interesting that the process took two weeks to occur. 

 

I spoke w/ a broker at Scottrade yesterday, and was told it would convert sometime between today and Thursday.

[oldye]

If for whatever reason (1000$ pulp and .95cent cad)...they trade higher between now and option expiry the rights can effectively be a fat dividend especially for those that bought their shares below 40 cents.  With aprox 134m diluted shares outstanding by end of Q2 there will be less than 1$/share in net debt and 3.5-4$/share in equity value assuming 800-1000$/ton.  Hopefully they use the proceeds to buy back the debs below par to make up for the fees!

 

 

[Myth465]

Good call lessthan. Glad to see you were right.

 

I think this will end up like FUR. It will trade down over the rights and then should begin moving up once the shares are bought. I would actually like to subscribe. Not sure how that will work with the pink sheet shares and being based in the US. The rights offering is priced at just slightly below my basis. If I cant subscribe then I hope the shares trade down  ;D so I can buy some on the open market.

[oldye]

Good call lessthan. Glad to see you were right.

 

I think this will end up like FUR. It will trade down over the rights and then should begin moving up once the shares are bought. I would actually like to subscribe. Not sure how that will work with the pink sheet shares and being based in the US. The rights offering is priced at just slightly below my basis. If I cant subscribe then I hope the shares trade down  ;D so I can buy some on the open market.

 

Why?  I mean it could happen that way or it could be the exact opposite since theres a ton of value people are giving up by selling at these prices. 

[Myth465]

It could trade up but I kind of hope it doesn't mainly because I dont think I will be able to subscribe due to holding pink sheet shares, and being based in the US. I will put in a call after my shares convert to see what the process looks like. Im just hoping out loud, also typically a rights offering kills the stock price for a bit.

 

As Sharper pointed out we dont have much volume, so I dont know what would push the price down, but I hope it will go down or that I will be able to subscribe. If I can subscribe then I naturally want it to trade up from today.

[oldye]

Pinksheet shares are the same exact shares as the Canadian shares... they're entitled to vote just like the Toronto exchanged shares so I'm pretty sure we'll receive our rights. 

[alertmeipp]

the record date is June 18. Later than I expect.

[Guest Dazel]

 

SFK has really been hit by a market storm at the wrong time for pricing of this deal. Canfor and Mercer have held during this market collapse and SFK has been killed. As we have seen the price of pulp has continued to rise while costs have remained the same or fell.

If anyone was considering taking out SFK this would be the perfect opportunity. My question... is Fairfax locked into this deal exclusively or could they sell their entire postion to a bidder who might come in to negotiate with them and the other financial backers? This compnay could be stolen in this environment if a decent price was offered to very scared shareholders.

 

Dazel.

[lessthaniv]

Well, here is what I believe transpired over the last month;

 

On May 12th the announcement regarding refinancing the corporation was made. On that day, the stock closed at about $1.60/share. As we have read the debt refinancing and rights offering are contingent on each other. Alas, when the announcement was made regarding the debt refinancing the rights offering that would eventually come under the Fibrek banner had to be disclosed. The problem of course, the pricing of the rights offering had not been set. It is very unusual that a rights announcement would be made without providing the pricing information. It leaves the company open to price manipulation. But, because of SFK’s unique circumstances they were forced to announce it without the pricing. All we were given was the formula (lower of 40d or 5d average -20%). Therein lays the problem. Existing shareholders who were fully invested in SFK and could not pony up more funds (or were not willing to pony up more funds) under the rights offering were presented with a choice.

 

a) Those shareholders could take a chance that a secondary market would develop for the rights themselves and they could try to sell their rights to someone else. Let’s look at this option a little closer with the perspective of an investor on May 12:

 

At that time the conversion ratio was not known, but if an investor assumed it would be priced when the stock was at $1.60/share (price at the time) the conversion price would have been $1.28/share. ($1.60 - 20%). To raise $40M FBK would have to issue about 31M shares under these conditions and therefore the conversion ratio would have been 2.94. The theoretical price of the rights would be ($1.28/2.94) $.43/right.

 

If the investor was able to sell his rights in the secondary market at the theoretical price (not likely) and then use the cash proceeds to buy FBK back at market ($1.60) they would be successful in at least offsetting some of the dilution. I think what’s more likely is the rights would trade at a steeper discount to the theoretical price as investors are competing to sell their rights within a very short window of opportunity. Therefore, the dilution would likely be more significant although they would be successful in offsetting some of the negative effects.

 

b) The second choice an investor could have made would be to sell out a portion of their shares at $1.60 with the hopes of repurchasing shares at a 20% discount under the rights offering. This scenario is not without its risks. As you sell shares, you are reducing the # of rights you will receive. If the stock rose back up on rising pulp prices and falling currency exchanges you’d lose out on the gains, receive less rights and have a higher than expected conversion price. However, if the stock price fell from $1.60 you could win significantly. You would lock in your sell price at $1.60 and be able to buy back at a significant discount later under the rights offering. Consider if you had 100,000 shares of SFK on May 12. You sell 25,000 at $1.60/share and keep 75,000. You get gross proceeds of $40,000 in your pocket. If the stock price didn’t change from $1.60/share then this investor would receive 75,000 rights which allow him to buy 25,510 new shares under the rights offering at a 20% discount ($1.28). The investor makes profits of $8163 and is successful at offsetting dilution on his 75,000 shares. If however, the stock price drops after selling out at $1.60/share this investor has won huge. Consider the same investor but now let’s assume the stock price drops to $1.25/share so the conversion price becomes $1.01. SFK now has to offer 38M shares changing the conversion ratio to 2.28. So, this same investor who has received 75,000 rights can now buy back 32,900 shares at $1.01. This investor has made profits north of $19K and is successful at offsetting dilution.

 

In other words, because the pricing formula was announced without the actual price a large incentive existed to drive the price of SFK down.

 

That’s why I believe the stock dropped and it’s very unfortunate because it’s caused much more dilution (roughly 8% more) to the long term shareholder (who can't fully subscribe) than what would have happened if the price was set upon announcing the rights issue on May 12.

 

<IV

 

[ERICOPOLY]

I’m surprised FFH who negotiated the pricing formula didn’t foreshadow this outcome as they are the largest shareholder and thus most heavily affected by the additional dilution.

 

Despite more shares being issued due to the lower price, they can also buy more new shares for their money.  For the same amount of new money invested, they should get roughly the same earnings.  I don't see where the additional dilution is coming from.

 

[lessthaniv]

yes you're right. i misstated that, as FFH is expected to fully subscribe. it would affect the guy who can't subscribe. point taken on FFH. i'll modify that post as its wrong.

[Uccmal]

There is no dilution unless you dont exercise your rights.  

 

If you exercise your rights you own the exact same thing you did before - transactional fees at the FBK level : on a book value basis.  

 

The only inconvenience is having to pony up more money without knowing whether or not management is taking advantage of the good pulp market and increasing book value.  In the meantime this transaction has caused the stock to tank.  The worry among board members seems to be that the stock will never recover prior to pulp prices moderating.  I share that worry.  

[Uccmal]

I am interested to see if we get some upward price action once the rights are put into our accounts. 

 

Then all the unknowns are known...  :P

[tyska]

The volume is up quite a bit today over what it has been lately and the price is holding up. So hopefully we are at a turning point.

[SharperDingaan]

 

Just some rough numbers:

 

Apr-26 (pre Q1-2010 earnings announcement) we had 90.473M shares trading @1.85 for 167.37M of MV. We're now issuing another 39.6M shares to total 130.077M. 167.37MV/130.077 shares = $1.28/fully diluted share = effectively todays closing price of 1.26. As each right is worth 10.9c (1.28-1.01)/2.2845, the current MV of our holding is $1.37/share.

 

The rights convert on July-15. Q2 results are typically released late July/early August; so conversion will be without seeing the benefit of Q2 results. The rights have a 3 week life, so they'll list on the TSX sometime during the week ended Jun-25.

 

Q2 has 3 weeks to go. Assuming no major changes Q2 should be materially better than Q1 (pricing, FX, etc.). Given that we have substantial improvements (refinancing, int cost, conversion, etc), most would expect the shares to go well above the 1.85 they were at pre-dilution; which is where we're trading at today.

 

SD

 

[value-is-what-you-get]

From March's MD&A . . .

 

"SFK Pulp’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."

 

Looks like some maintenance outage will need to be factored in to the estimates for this quarter.

 

Does anyone know how these outages generally affect production on a percentage of output and or tonnage basis? 

[doc75]

 

Just some rough numbers:

 

Apr-26 (pre Q1-2010 earnings announcement) we had 90.473M shares trading @1.85 for 167.37M of MV. We're now issuing another 39.6M shares to total 130.077M. 167.37MV/130.077 shares = $1.28/fully diluted share = effectively todays closing price of 1.26. As each right is worth 10.9c (1.28-1.01)/2.2845, the current MV of our holding is $1.37/share.

 

The rights convert on July-15. Q2 results are typically released late July/early August; so conversion will be without seeing the benefit of Q2 results. The rights have a 3 week life, so they'll list on the TSX sometime during the week ended Jun-25.

 

Q2 has 3 weeks to go. Assuming no major changes Q2 should be materially better than Q1 (pricing, FX, etc.). Given that we have substantial improvements (refinancing, int cost, conversion, etc), most would expect the shares to go well above the 1.85 they were at pre-dilution; which is where we're trading at today.

 

SD

   

 

I am ever-more-nervously hoping for good/smart things from Fibrek.  But to be the devil's advocate here:

 

The average exchange rate thus far in Q2 is 0.975 US = 1 CAN, marginally higher than the 0.96:1 ratio for Q1.  So, unless markets and the CAD$ continue to slide through the rest of June (they've been trading in lock-step), I think we're looking at a Q2 average FX rate roughly equal to that of Q1.

 

That said, in Q1 the CAD$ was going up in value as the price of pulp increased, whereas since late April CAD$ has moved down from April highs as pulp has increased.  So even if the CAD$ stabilizes at current levels there should be a positive impact, but I can't see an FX windfall in Q2. 

 

I wish the folks at Fibrek would provide more guidance on things such as their discount rates (seemingly very high), input costs (wastepaper and fiber), and expected down time.  Where they see them heading and how they plan to deal with these. 

 

On that point, I've found it difficult to get an accurate picture of wastepaper and fiber prices just from noodling around on the web. I found a few links to rather pricey pay services, but that's about it.  I believe the RBK mills depend on sorted office paper.  From all I can gather, prices are high and have continued to rise into Q2, and are expected to fluctuate between high and very-high for the foreseeable future, provided the economy doesn't go to hell.  Does anybody have any real insight here? 

 

I found very little info on fiber costs, aside from the general feeling that they are elevated and also expected to remain so.

 

It will be interesting to see if market optimism for Fibrek begins to build near the release of the Q2 numbers.  Given the results from Q1, I suspect enthusiasm will be somewhat muted this time around, and of course very dependent on where pulp prices go in June/July.  We can talk about net asset value all we like, but if they can't knock it out of the park at these pulp prices and a Canadian dollar near par (where many expect it to be for a while), then it's hard to imagine what conditions would be needed to see the value realized.

 

 

 

[SharperDingaan]

 

Keep in mind that many folks were expecting around $2.20/share ($1.84 in todays structure) just after Q1-2010 results were released. As we're quite a bit better this time around, a simple sanity check would suggest that we'll probably see it again.

 

If it does go to $1.84, the common increases by 46% (((1.84-1.26)/1.26-1)*100); but the warrant increases by 227% (((.36-11)/.11-1)*100). And everytime the warrant goes up 1c, the common goes up 2.28c

 

Pretty sure there's going to be market optimism ;)

 

SD

[oldye]

 

 

Does anyone know how these outages generally affect production on a percentage of output and or tonnage basis?   

The sfk plant makes roughly 1000 tons of pulp per day as do the rbk mills so if the nbsk mill is shut down for 6 days you have roughly 6000 tons less production at say 200$ ebitda ton (guessing it could be as high as 300 but with all the different discount/input costs its difficult to know for sure) you lose about 1.2 million ebitda for the quarter.  Q2 will also be hurt by the refinancing, rights offering fees so its probably safe to say that if you expected 30 million ebitda it'll probably be closer to 26. 

[alertmeipp]

1.25 - it was hoping we would up big today.

seems like we will stuck around here until the right offering is done.

[triedtestedand]

Cardboard, Sharper, etc:

 

With the final prospectus now out, can you clarify your understanding of some details of the rights offering.  I get the main points ... if I was beneficial owner of 100,000 shares on June 18th, then I would have right to purchase another 43773 shares (=100000/2.2845) at $1.01 ... and these rights will trade (somewhat more easily for Canadians?) until July 15th.  That said ... What if I want to buy more?  There is an "Additional Subscription Privilege" which is available if you subscribe in full to your "Basic Subscription Privilege", but I'm not sure how it all works.

 

Here's the language:

 

Each holder of Rights who has initially subscribed for all of the Common Shares to which he or she is entitled pursuant to the Basic Subscription Privilege may apply to purchase additional Common

Shares, if available, at the price equal to the Subscription Price for each additional Common Share (collectively, the "Additional Common Shares"). The number of Additional Common Shares available for all additional subscriptions will be the difference, if any, between the total number of Common Shares issuable upon exercise of Rights and the total number of Common Shares subscribed and paid for pursuant to the Basic Subscription Privilege at the Expiration Date (the "Additional Subscription Privilege"). Application for Additional Common Shares will be received subject to allotment only and the number of Additional Common Shares, if any, which may be allotted to each applicant will be equal to the lesser of: (a) the number of Additional Common Shares which that applicant has subscribed for under the Additional Subscription Privilege; and (b) the product (disregarding fractions) obtained by multiplying the number of Additional Common Shares by a fraction, the numerator of which is the number of Rights exercised by that applicant under the Basic Subscription Privilege and the denominator of which is the aggregate number of Rights exercised under the Basic Subscription Privilege by holders of Rights that have subscribed for Additional Common Shares pursuant to the Additional Subscription Privilege. If any holder of Rights has subscribed for fewer Additional Common Shares than such holder's pro rata allotment of Additional Common Shares, the excess Additional Common Shares will be allotted in a similar manner among the holders who were allotted fewer Additional Common Shares than they subscribed for.

 

To apply for Additional Common Shares under the Additional Subscription Privilege, holders of Rights must forward their request to a CDS Participant prior to the Expiration Time. Payment for Additional Common Shares, in the same manner as for the Basic Subscription Privilege, must accompany the request when it is delivered to the CDS Participant. Subscribers should contact their particular CDS Participant for complete details on how to exercise the Additional Subscription Privilege. Any excess funds will be returned by mail, or credited to a subscriber's account with its CDS Participant, without

interest or deduction. Payment of such price must be received by the CDS Participant prior to the Expiration Time, failing which the subscriber's entitlement to such Common Shares shall terminate.

 

So:

- What if I sell some of my rights, and subscribe in full to the rest?  Am I still eligible?  (I think the answer is NO?)

- What if I buy some rights from others?  Am I eligible to buy into the extra?  (I think the answer is NO?)

- What constitutes beneficial ownership?  If you subscribe in full to some in a registered account, but not to others that are in a cash account, and/or there are others that are in a spouse's account ... or are shares in different accounts treated wholly independently?  (I think each will be treated separately?)

- Then, if you do want to buy more ... how many more can you buy?  (I think it's the lesser of as many as you ask for, or your pro-rata amount of those available, based on your pro-rata subscription to the basic shares that were subscribed.)

 

Any thoughts?