SFK pulp

[alertmeipp]

the 20% only applies to backstop shares.

the discount for right offering is not set. but whatever that discount is, will apply to all of us include FFH.

[SharperDingaan]

 

Just to tie some things together.

 

Both CFX & SFK are coming out of their trust structure. Within the trust framework CFX is fully priced, SFK is underpriced. Per SFK's management, the conversion is expected to add market demand/liquidity/depth to the float. The conversion effect should increase the share prices of both SFK & CFX. The SFK price should increase more as it's trading at more of a discount.

 

150M of conditional debt refinancing has been agreed to. A conditional 40M rights issue is planned, there is an agreement with FFH to backstop the issue, we know the broad terms. The existence of the conditional refinancing agreements & equity backstop are material facts, & have been disclosed ahead of a material vote.

 

IR replies suggest that the rights issue is a work in progress. A final prospectus is expected within a reasonably short time after shareholders agree to convert. The FFH backstop agreement suggest a timing within 2 months of conversion.

 

That's what we know, anything after that is really a speculation.

 

SD

 

 

 

   

[lessthaniv]

I just got a reply by email from Mme Ducharme at SFK and she told me that the 20% discount apply for the normal subscription as well as for the additionnal subscription(if you exercice alll your rights) and is for any shareholder.

 

finetrader

 

finetrader, thanks - this is what I expected to hear. I did discuss the situation with a Securities lawyer who suggested to me the price discount would have to be for all shareholders too.

[Myth465]

Thats definitely good news, and now its more of a non issue. Now to figure out if it applies to the pink sheet shares.

[oldye]

Vote passed as expected. 

 

Cheers!

[EdWatchesBoxing]

Really fast turnaround. The SFK web-site already has the Fibrek logo on it!

[oldye]

http://www.paperage.com/issues/jan_feb2010/01_2010of_interest_charge_paper.pdf

1 page paper on the paper battery. 

"This is potentially a very nice, low-cost, flexible electrode

for any electrical device,” Yang said.

 

 

[woodstove]

Wow - thanks for that re the paper battery/capacitor.  Sounds like a really useful capability.

 

Something that struck me is an article in March-2010 Plating and Surface Finishing magazine, about a technique for plating copper onto common plastic substrate - need a subscription so cannot reproduce here, but can perhaps find other info online by looking for author names - Y.Zhang, P.T.Tang, H.N.Hansen, J.S.Nielsen, with or assoc with Dept of Mech Eng at Technical Univ of Denmark, Lyngby, Denmark. The article in P&SF is "Electroless Plating on Plastic Induced by Selective Laser Activation". Essentially use a wobbly laser to etch surface of the plastic with lots of "defects", ie roughness, then activate with palladium chloride to cause palladium to be trapped in rough surface, then let copper plate onto the palladium and grow on itself.

 

End up being able to draw a circuit on a piece of plastic.

 

There are some really amazing technologies coming along.

[lessthaniv]

Q2 Metrics for Q2:

                                           March 31/10                          Today                             %Move

 

Ex Rate ($c/$us)            .9866                                .9387                              - 4.9%

Pix Pulp Index                902.33                               983.72                            + 9.0%

 

With all the moving parts of this beast (ie; debt restructuring, rights offering, trust conversion) its easy to lose sight of what's been happening to the fundamentals thus far in Q2. The comment below is from the AIF and on Dec 31, 2009 the exRate was about .95 $c/$us

 

Based on 2010 expected sales volumes and the US exchange rate as at December 31, 2009, a change of US$10 per tonne in NBSK pulp prices has, on an annualized basis, an impact of approximately CAN$3.8 million or $0.04 per Unit on SFK Pulp’s net (loss) earnings (based on 90,472,708 Units outstanding, and before giving effect to the conversion of the outstanding Debentures).

 

We've moved about $80/tonne on the Pix. So, (8*$3.8M)/4 ~ $4M. The exchange is slightly more favorable now. These additional earnings would be diluted somewhat by the rights offering. However, we will have some interest savings going forward on the restructured debt and perhaps we've seen the last of the write downs in Q1? As well, lumber prices remain strong and the cost of wood chips is easing.

 

If pulp prices remain strong based on the low inventories present and the world continues to buy US$ treasuries as they have been doing in reaction to  Euro zone problems, the situation could improve further.  

[Cardboard]

"If pulp prices remain strong based on the low inventories present ..."

 

I think that it is our problem right there. The market has already voted with massive declines in the share price of CFX, TMB and our dear SFK. It is the same accross the entire commodity spectrum.

 

If the economy derails due to Europe or whatever the reason, pulp will tank. SFK will see a lag in its results due to FX, their contracts (remember these discounts) and wastepaper costs, but EBITDA will decline to nothing eventually.

 

These guys need to find a way to cut cost, not just interest cost, but operating cost, or to sell very soon.

 

Cardboard

[SharperDingaan]

 

Agreed. The good news is that the macros (euro disruption, chile pdtn, etc) are now forcing events, & all parties need a practical solution. Nobody can afford to do nothing anymore.

 

SD

[lessthaniv]

These guys need to find a way to cut cost, not just interest cost, but operating cost, or to sell very soon.

 

Yes, I agree too. I was speaking more to the Q2 outlook above (short term).

 

In regards to operating costs, I'm not sure that SFK can align their input costs quick enough under the current structure? SFK entered into a fiber supply agreement with ACCC that became effective on Sept 1, 2009. The contract is a 3 year contract so that won't end until Aug 31, 2012.  The contract with ACCC supplies SFK with 2/3rds of St. Felicien's required fiber at market prices. So, 2/3rd's of their fiber costs are locked into a contract at market prices. Even with $1000/tonne pulp prices, they are barely getting into the black in Q2 with the current costs of fiber. If pulp prices begin to retreat over the coming quarters (expected) then fiber costs must decline too to hold the margins and keep the company profitable.  Annually, SFK requires 775,000 tonnes to operate to capacity. So, in terms of tonnes, SFK gets 520,000 tonnes from ACCC and the remaining 255,000 tonnes from other suppliers in the area. The AIF actually says, "The remaining required volume of wood fibre for 2010 is currently contracted with other suppliers in the region."

 

This is interesting to me on two levels:

 

1) It would appear the remaining 1/3 is under a supply agreement up to the end of 2010. This may allow SFK to take advantage of lower prices in 2011 under a new agreement. I believe management said something to this effect on the CC.

 

2) Also, the comment tells us the suppliers are "in the region". This makes perfect sense as it saves the company transportation expenses by having the suppliers close. But, that leads me back to Domtar! Domtar operates the following mills in Quebec:

 

Mill                            Chip Output

Matagami:                          93

Ste Marie:                          31

Val D'Or:                            136

Total                                          260

 

Note: the total chip output from Domtar's mills in Quebec is exactly equally to SFK's annual shortfall under their contract with ACCC.

 

I am purely speculating here but I the options that I see are as follows:

 

If Domtar is funneling their chips to SFK already they would be in an excellent position to buy St Felicien. They would have material savings on 1/3 of their chip costs which represent the largest component of COGs. Even if they aren't currently supplying SFK, but could going forward, the savings could be ascertained.

 

If no deal is in the works for St. Felicien then an alternate plan B might be to become more self sufficient? Perhaps they flog their RBK mills (takes away currency issues) and funds the purchase of a lumber mill? They would be buying a lumber mill through the trough of a housing cycle (value?) and could supply themselves the chips for the pulp plant thereby ascertaining the savings themselves?

 

 

<IV

 

 

[oldye]

Q2 Metrics for Q2:

                                           March 31/10                          Today                             %Move

 

Ex Rate ($c/$us)            .9866                                .9387                              - 4.9%

Pix Pulp Index                902.33                               983.72                            + 9.0%

 

With all the moving parts of this beast (ie; debt restructuring, rights offering, trust conversion) its easy to lose sight of what's been happening to the fundamentals thus far in Q2. The comment below is from the AIF and on Dec 31, 2009 the exRate was about .95 $c/$us

 

Based on 2010 expected sales volumes and the US exchange rate as at December 31, 2009, a change of US$10 per tonne in NBSK pulp prices has, on an annualized basis, an impact of approximately CAN$3.8 million or $0.04 per Unit on SFK Pulp’s net (loss) earnings (based on 90,472,708 Units outstanding, and before giving effect to the conversion of the outstanding Debentures).

 

We've moved about $80/tonne on the Pix. So, (8*$3.8M)/4 ~ $4M. The exchange is slightly more favorable now. These additional earnings would be diluted somewhat by the rights offering. However, we will have some interest savings going forward on the restructured debt and perhaps we've seen the last of the write downs in Q1? As well, lumber prices remain strong and the cost of wood chips is easing.

 

If pulp prices remain strong based on the low inventories present and the world continues to buy US$ treasuries as they have been doing in reaction to  Euro zone problems, the situation could improve further.  

 

8*3.8/4 = 7.6  not 4

As you've said the cad will have an impact ...should be about a 20m quarter less refinancing chargesassuming break even at the rbk mills.

 

For those concerned about ongoing costs:

You also have to remember the energy generation that will start up in a little over 2 and a half years that will cut their costs by another 6m per year add another 3.5m in savings from eliminating the debs and another two or three from the refi and we're making 10m more per year.

I don't think they need to sell anything, but if they do they should not sell the nbsk mill for anything under 1,000/ton.  Oh and once the conversion takes place they'll have a hefty tax asset to add to the balance sheet.  

 

Rational investors would of expected the stock to rally once the refi and conversion were off the table but instead liquidity got tight and usually these small caps tend to get dragged under regardless of the situation.  

 

For those concerned about pulp prices...there is no way in hell you will see prices come down when inventories are at record lows...I'm not sure I understand the argument but exactly where is all this pulp going to come from?  

 

 

 

[Cardboard]

Pulp demand could get cut in no time. Just look back at the end of 2008 and early 2009. Inventories were way up.

 

Now regarding costs, I have done some 1st quarter comparison with CFX. Translating every item on $/ton you see fairly quickly where the gaps are. It is not a perfect comparison since CFX produces kraft paper, but it is close enough.

 

CFX:

 

Sales = $782/ton

Manufacturing = $516

Freight = $102

SG&A = $21

Amortization = $38

Operating income = $106

 

Cash costs = $638

 

SFK:

 

Sales = $738/ton

Manufacturing = $585

Freight = $55

SG&A = $17

Amortization = $51

Operating income = $29

 

Cash costs = $657

 

SFK RBK:

 

Sales = $703/ton

Amortization = $23

Operating income = $14

 

Cash costs = $666

 

SFK NBSK:

 

Sales = $775/ton

Amortization = $81

Operating income = $46

 

Cash costs = $648

 

For NBSK, it seems that we could get a little more for our sales $7/ton and we could also cut manufacturing costs a little (chips) or $10/ton, but it is not a huge gap with CFX. The higher amortization is also surprising. I am not sure why it is so different with CFX.

 

The real problem appears to be RBK again. It simply costs way too much to produce a pulp that will always sell at a discount to NBSK. Wastepaper appears to be the culprit and I am not sure what is the solution: its price goes up when demand for pulp/paper is up, when it goes down its because pulp prices are also coming down. It will be better in Q2 with RBK prices going up faster than SOP, but Q2 is as good as it gets in pulp.

 

Another big difference with CFX is freight. I am not sure why SFK has such an advantage, it could be how they categorize costs between companies. Although, I suspect that the RBK mills are advantaged with their locations.

 

Cardboard

[Grenville]

These guys need to find a way to cut cost, not just interest cost, but operating cost, or to sell very soon.

 

Yes, I agree too. I was speaking more to the Q2 outlook above (short term).

 

In regards to operating costs, I'm not sure that SFK can align their input costs quick enough under the current structure? SFK entered into a fiber supply agreement with ACCC that became effective on Sept 1, 2009. The contract is a 3 year contract so that won't end until Aug 31, 2012.  The contract with ACCC supplies SFK with 2/3rds of St. Felicien's required fiber at market prices. So, 2/3rd's of their fiber costs are locked into a contract at market prices. Even with $1000/tonne pulp prices, they are barely getting into the black in Q2 with the current costs of fiber. If pulp prices begin to retreat over the coming quarters (expected) then fiber costs must decline too to hold the margins and keep the company profitable.  Annually, SFK requires 775,000 tonnes to operate to capacity. So, in terms of tonnes, SFK gets 520,000 tonnes from ACCC and the remaining 255,000 tonnes from other suppliers in the area. The AIF actually says, "The remaining required volume of wood fibre for 2010 is currently contracted with other suppliers in the region."

 

 

 

Does the wood fiber supply agreement get renegotiated in a change of control scenario? Are they required to buy through the agreement if a wood chip supplier is involved in some sort of combination?

[oldye]

NBSK is no different than jet fuel, if the U.S government gives out another 200$/ton subsidy that encourages all out production then yes pulp prices will tank.  But when consumer stocks are low and port inventories are at all time lows theres just not going to be a sudden build up in supplies that can cause meaningful relief.  China and India consume about 22-24% of the worlds paper capacity yet per capita they only consume about 10% of what we use (India consumes about 1% as much per capita)...assuming they like paper as much as us they'll have import an additional 3-4 million tons of nbsk every year by the end of the decade. 

[SharperDingaan]

We need to recognize that the RBK plants were an opportune investment, but they don't really reach their full potential within a cross-border ownership structure. They would be better off under a US buyer, & SFK wouldn't have the debt load - or ongoing quarterly FX impact.

 

The real question is what is the highest & best use for the NBSK plant. (1) Buy up woodlots to drop the fibre costs & operate as stand-alone plant ? or (2) Vertically integrate into another Cdn producer at the top of the cycle ? Long term, vertical integration is a lot more certain & less risky.

 

We know there are moving parts, they have master capital allocators behind them, its a small community, & mgmt is incentivized to get over $3.50-$5.00. There is growing evidence of share movement into stronger hands (todays early trading), & increasing conviction that Q2 may well be a blowout.

 

SD

 

[oldye]

http://www.glgroup.com/webcast.aspx?title=Webcast:+China's+Dependence+on+Imported+Wood+Fiber+(10+AM+HKT,+GMT%2b8)&data-ipsquote-timestamp=5/11/2010&presenter=GLG+Expert+Contributor&src=051110_W_Chinas+Dependence+on+Imported+Wood+Fiber.flv

 

Fantastic webcast on China's wood fiber needs, currently around 70% of Canada's total capacity. 

[tyska]

http://www.glgroup.com/webcast.aspx?title=Webcast:+China's+Dependence+on+Imported+Wood+Fiber+(10+AM+HKT,+GMT%2b8)&data-ipsquote-timestamp=5/11/2010&presenter=GLG+Expert+Contributor&src=051110_W_Chinas+Dependence+on+Imported+Wood+Fiber.flv

 

Fantastic webcast on China's wood fiber needs, currently around 70% of Canada's total capacity. 

 

Interesting webcast. To bad he didn't give the time line for all the pulp projects in Brazil coming on line like he did for the China projects. Seems like demand should be strong in the interim though.

 

Dan

[gordoffh]

we have some insider purchases recently - I trust this is positive

 

May 21/10  May 21/10  Paradis, Dany  Direct Ownership  Trust Units  10 - Acquisition in the public market  10,000  $1.310 

May 21/10  May 20/10  Côté, Pierre Gabriel  Direct Ownership  Trust Units  10 - Acquisition in the public market  25,000  $1.390 

 

[SharperDingaan]

 

Nice to see the insider buying just after we rolled some of our debs into additional common ;D

 

Good catch, gordoffh

 

SD

[lessthaniv]

we have some insider purchases recently - I trust this is positive

 

May 21/10  May 21/10  Paradis, Dany  Direct Ownership  Trust Units  10 - Acquisition in the public market  10,000  $1.310 

May 21/10  May 20/10  Côté, Pierre Gabriel  Direct Ownership  Trust Units  10 - Acquisition in the public market  25,000  $1.390 

 

 

Also done two days after the refinancing and rights offering announcement. Obviously, they are not sitting on any other material, undisclosed information about possible asset sales then.

 

 

[Guest Dazel]

 

http://www.paperage.com/foex/pulp.html

 

prices up again for the week!

 

cdn dollar and pulp prices are giving SFK a cash windfall! I would like to see them hedge the Canadian dollar now that they are coverting their U.S debt.

 

Dazel.

[tyska]

Has any one heard if they are still changing over to Fibrek on the 25th like they had planned in their last press release. That would have it trading under a new symbol tomorrow if everything is in place.

 

Dan

[lessthaniv]

yes, they issued a press release today. should begin trading by Thursday under FBK