SFK pulp

[Cardboard]

Yes indeed, completed as of today.

 

http://www.stockwatch.com/newsit/newsit_newsit.aspx?bid=Z-C%3aSFK-1724491&symbol=SFK&region=C

 

It will start trading Thursday under FBK.

 

Assuming that today meant closing for the conversion, then we should see the preliminary prospectus for the rights issued tomorrow or Thursday.

 

IMO, the final prospectus won't take long to be issued afterwards (10 days?) since all is needed is regulatory approval for listing, etc. Unless Fairfax waives the condition and decides to delay along with SFK to hopefully get better pricing. Looking ugly right now: 80% of $1.30 is $1.04 or 38.5 million new shares.

 

Makes me regret sometimes my decision to switch from CFX to SFK in December/January due to relative valuation. It is still blue sky for these guys and look at us.

 

Cardboard

[alertmeipp]

In my past experience, stocks often trade poorly during a conversion. I think the reason is because trust funds won't buy those (may have to liquidate) and typical mutual funds normally won't invest on trusts. On top of that, we have that pending right offerings that we are still lacking the details. Of coz, the general market did not help.

 

If euro doesn't blow up and the econ stabilized, SFK will be a cash flow machine worth significant more than today's price.

[alertmeipp]

 

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.

 

These prices are better than those when SFK was trading at 5 bucks. I believe their current wood chips price are locked in; the prices they paid are quite a bit higher than market (that's the impression I got from last CC). Those contracts will end end of this year, so next year will really be transformation for this co. Expect to see more insider buys in coming weeks.

[Cardboard]

Forget about NBSK or St-Felicien. That is not our issue. The gap in total cash cost there in Q1 vs CFX was only $10 a ton. Then if you look at sales, the gap is $7.

 

The issue is the RBK mills were SOP cost or wastepaper is way up. These mills were generating an EBITDA margin of 16-17% when they were purchased by SFK in 2006. In Q1, which was arguably a very strong quarter for pulp generally, the EBITDA margin was only 5.3%. I suspect that Q2 will be a lot better for these mills, but we cannot afford to make reasonable money on them only 1 quarter out of what, 20? And, I am talking EBITDA margins. With costs in USD and sales in USD, the margin is not influenced by foreign exchange.

 

The fundamentals for scrap paper seem to have changed a lot, thanks to China's appetite for wood fibre of all kinds.

 

So this is my big concern longer term. Of course, if there is some kind of wonderful transaction in a month or two, then we don't care, but if we are stuck with this puppy for another few years... we might want to figure out how they can make these mills more profitable.

 

Cardboard

[doc75]

The fundamentals for scrap paper seem to have changed a lot, thanks to China's appetite for wood fibre of all kinds.

 

 

I've been reading a few articles lately that suggest waste paper prices are up for the simple reason that paper use is down far below pre-recession levels.  These same articles state that the CEOs of the major paper companies do not expect paper markets ever to return to early 2008 levels.  I personally find this type of "market has peaked" call a little questionable, particularly just after (or in the midst of?) a nasty recession, but I think they're basing their claims on the ongoing trend towards electronic media.  There certainly seems to be a ridiculous amount of excess capacity out there.

 

The recycled paper game is interesting, because demand seems to be held "artificially" high due to the environmentalists' desire to have the recycle logo on every piece of paper (a situation which is, of course, impossible).  I'm all for protecting the environment and eliminating waste, but it's purely a political game to insist on using recycled fibre even when it's measurably more environmentally costly to do so.

 

Speaking of paper in general:  I've been investigating Catalyst (TSE:CTL), particularly after their nasty Q1.  Their restart of the second pulp line at the Crofton mill will help them in Q2, and paper prices have continued to slowly edge up, but there's still so much curtailment (particularly newsprint/directory) and they really have to get some costs own.  Has anyone else done any noodling into this one?  The last paper company I invested in was Fraser Papers, so that gives you some idea regarding the accuracy of my analysis. :)

 

What are the board members' thoughts on newsprint?  In particular, who is going to survive?  What a brutal business over the past couple years! 

 

 

 

 

 

 

 

 

[Cardboard]

I have money into CTL. Made a little bit, but it has been a very poor use so far of my capital relative to everything else.

 

The stock ran up with the announcement of the 2nd pulp line restart then plunged following Q1 results. The pulp mill will bring very much needed cash, but the real turnaround never seems to come with very little improvement in paper prices. They are one of the lowest cost producers of newsprint, directory, coated/uncoated papers in North America having generated enough EBITDA throughout the crisis to pay their interest and more. Their newsprint competition can't say the same and is mostly bankrupt: AbitibiBowater, White Birch.

 

Unless the creditors at Abitibi start to wake-up and really force the shutdown of their more unprofitable mills, the situation won't get much better. The trend for less paper usage in NA and Europe are clear. Maybe that China will help with demand, but so far it seems muted.

 

The other concern that I have is that the company itself does not seem to believe in its chances: they had a rights offering in November that they then postponed. If they go ahead again with this thing, the dilution on a per share basis will be so high that the upside left in the shares won't be worth the risks. Only 3rd Avenue can help there, but these guys are incomprehensible having sold shares in the low $0.20's over time. Why buying a huge stake at $2-3 and then selling tiny pieces at a very low price?

 

Cardboard

 

 

[SharperDingaan]

 

There are at least 5 longer term secular trends: (1) More digital & less print advertising reducing global paper demand (2) More consumer packaging in the developing world increasing global demand (3) Rising fibre costs as trees become worth more alive (carbon credits) (4) Municipally driven green substitution to paper versus plastic packaging (rising landfill fees) raising global demand (5) Rising environmental focus on transport costs/energy usage increasing the premium on nearness.

 

The short game is P&P consolidation into vertical integration - & size matters. Fewer, bigger & greener plants, & multiple ‘other’ income streams. Volume to spread the FC over, & income from both electricity generation & the sale of annual carbon credits. 

 

The long game is the paper recycling business, but very different from today. Essentially a few local plants, drawing their SOP from nearby cities, & part of the urban waste collection system. Market rate for the SOP, less a municipally paid disposal fee. Production going primarily to low quality packaging & grocery bags. The plants themselves acting very like utilities in public/private partnership.   

 

Obviously we think the NBSK plants should go. They are very good plants, & run by very capable people, but we just don’t think that SFK is really capable enough to give them the support that they really need to move forward. Selling to a US buyer - or diluting to a smaller stake in a much larger but independent entity, makes far more sense.

 

SD

 

[lessthaniv]

We are officially Fibrek:

 

Time  Price  Volume  Buyer  Seller

10:26:00 1.430 100 Anonymous National Bank

 

 

[alertmeipp]

so the right offering details will be coming out any days now?

[triedtestedand]

Looks like the preliminary prospectus is being filed.

 

http://www.digitaljournal.com/pr/44572

 

 

[Cardboard]

I am not too pleased with that:

 

"Each of the components of the refinancing transactions referred to above is conditional upon the closing of all other components of the refinancing transactions."

 

Unless I missed it in the original press release or in the agreement with Fairfax, this condition was not mentioned before. It was mentioned that all components of the refinancing transactions were conditional upon the conversion and that the rights offering was conditional upon the SGF financing and at least $55 million by way of revolving credit facility. Now everything is conditional upon one an other in full.

 

I suspected that it could be the case since the rights offering would make the SGF and GE more secure with their loans, but I had to guess that. It was not disclosed. Why?

 

Now, there is no way to back out of this unless everything is cancelled. The whole deal seems to be structured in a way to ensure the maximum issuance of shares to raise the $40 million: no fixed price, in a down market, very time consuming since conditional upon conversion process. Was there not a better way to raise $40 million?

 

We are at risk here of increasing the share count from 90 to 130 million or by 44%. And possibly more. I don't understand how Fairfax can be happy with that. They paid $4-5 a share for their 19% stake. How do they plan to recoup that money with such massive dilution? If they have to backstop by a lot, it will allow them to average down and increase their percentage of ownership, but the intrinsic value per share goes down. To see $5 a share again becomes near impossible.

 

Cardboard

[alertmeipp]

It was there in the org press release.

is the over-subscription an option before?

[SharperDingaan]

 

Might we suggest waiting untill we actually see the peliminary prospectus (Sedar, website, etc). All that we actually know is that it has been a work-in-process, it now appears to be complete, & we should see the actual details in a day or so.

 

SD

[Cardboard]

"Each of the components of the Refinancing Transactions is conditional upon the closing of the reorganization of SFK Pulp into a corporation, which is subject to the approval of SFK Pulp's unitholders at our annual and special meeting to be held on May 19, 2010, and upon the closing of all the other

components of the Refinancing Transactions (collectively, the "Closing").

 

You are right Alertmeipp. It was disclosed in that paragraph. Sorry!

 

Now, regarding the over-subscription privilege, it was there before as well.

 

Cardboard

[tyska]

  Just thinking, not knowing what the terms are going to be exactly. If we are to assume that FFH is not happy with the rights offering and it is not in their interests, then there is really only a couple of scenarios that I can see. Either FBK  never had involvement from FFH in the planning process and basically turned their back and really stabbed in the back the biggest shareholder. Or FFH was involved in the planning process and the team they had in the process is completely incompetent. Hopefully it is neither of these scenarios and we will see the game plan as it unfolds. Also open to other theories.

 

Dan

[alertmeipp]

This deal sucks because it hurts the upside. But in theory, if u can fork up cash, you still own the same percent of the company and it will limit the downside when the econ turns bad.

I still think to re-capitalized is needed, but the execution is bad - but they have to disclose it once they reach an agreement with FFH and Quebec gov etc.

 

I think they want to acquire something... having 100million liquidity by year end seems non-sense if they plan to just sit on it.

[doc75]

 

I think they want to acquire something... having 100million liquidity by year end seems non-sense if they plan to just sit on it.

 

This is what I am also (naively) wondering.  It seems pretty clear that if our friends at FFH are steering the ship, then they aren't setting this up as a short term proposition.  Perhaps they have an eye on assets (e.g. wood chip supply) that would lower production costs long-term.  Personally I'd be okay with some more short-term thinking while pulp is at $1000/ton.

 

 

 

 

 

[Cardboard]

IMO, some interesting points from the prospectus:

 

1- Foreign holders (U.S. and other) will need to follow a special procedure to exercice their rights. I know we have some on the board.

 

2- Directors and officers are not committing to subscribe in full to basic subscription privilege. With their ownership already low at SFK/FBK, I wish we could have seen more rallying behind this offering. The risk here IMO with low ownership, is that to them what is paramount is the well being of the corporation. Shareholders/Equity and debt is just how the corporation is funded.

 

3- Conversion price for the debentures will be repriced following the offering down from $4.80. Although, I tried to figure out the formula, I have a heck of a time understanding how to calculate the new price with the way it is explained.

 

4- The new lending agreement with SGF/GE will allow for the convertible debentures to be redeemed. So after Dec 31, 2010, they will be able to call them at par (before that date need shares to trade at 125% of conversion price).

 

5- Not clear to me that Fairfax is obligated to exercise its basic subscription privilege. To clear the confusion, it should be simply stated that Fairfax rights are not part of the calculation of rights available under the over-subscription privilege. Or that Fairfax will exercise in full its basic subscription privilege. I don't know why they don't write it down clearly. So easy. Only in the "Significant shareholder" paragraph is there a mention of exclusion: "Assuming none of the Rights, other than those held by Fairfax, are exercised and..."

 

6- The dealer or TD is existing lender to SFK/FBK. So you can see some potential conflict of interest between how they recommend to raise cash in order to repay their own debt. 

 

Cardboard

[Cardboard]

FYI, there are large forest fires raging in Quebec right now or north of Trois-Rivieres due to lack of rain recently. Smoke has been travelling to Ottawa, Montreal and Quebec City over the week-end. The last time this was seen was in 2002.

 

2/3 of chip supply for the St-Felicien mill comes from sawmills in a radius of 100 km from plant. Therefore, there could be some risk to availability and cost of chips if these fires spread or last much longer. However, I could not find anything in the 2003 annual report related to impact from these fires at the time. SFK became public in 2002 just after these fires. I hope that disruption to production or costs will be minimal in this period of very high prices for NBSK.

 

Cardboard

[SharperDingaan]

We’ve looked over the preliminary prospectus at www.sedar.com,

& honestly don’t see any issues.

 

The offering record, commencement, & expiry dates are all undefined (p3). The only restriction is that the final prospectus must be filed by Oct-31-2010 (p-18) if the standby agreement is not to lapse. The 40 day record period could start as late as Sept-02.

 

The 20% discount applies only to FFH, only to whatever they take up under the standby, & they cannot resell anything they take up under the standby (p-4). FFH will be paid 400K for the standby, & had no involvement in the prospectus; it intends to exercise its proportional share of the offering, as do most of the FBK directors.

 

The Deb conversion privilege will be re-priced to reflect the dilution, but the call period remains Dec-31-2010. 40M of rights proceeds + 75M of SGF funds + 28M of GECap funds will retire 143M of existing revolver debt.

 

Speculation:

 

Following completion, they would seem to have more than ample capacity to call the Deb issue. If so, the Debs are effectively call options expiring Dec-31-2010 & paying a 7% coupon, that will retire at either 101 (default) or above (in stock). What’s not to like?

 

They can delay the issue long enough to include closing prices that reflect Q2 (& presumably better) results. Same thing if a RBK asset sale is announced over the interim. Reduced dilution & glowing analyst reports to further boost valuation. We’re also seeing evidence of recent insider buying, & declarations of further buying via the rights issue. Again, what’s not to like?

 

SD

 

[finetrader]

'The 20% discount applies only to FFH, only to whatever they take up under the standby, & they cannot resell anything they take up under the standby (p-4). '

 

I'm not so sure about that. To me the subscription price is the same for everyone.

 

The term subscription price is defined as : The Subscription Price per Common Share will be equal to $.

 

also we have:

Basic Subscription Privilege: Every 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".

 

In the Standby commitment, we have :

The Corporation and the Standby Purchaser have agreed that the SUBSCRIPTION PRICE per

Common Share WILL BE EQUAL TO the lesser of (A) the volume-weighted average price ("VWAP") of the

Common Shares (or Units, as the case may be prior to May 27, 2010) on the TSX for each of the trading

days on which there was a closing price during the five (5) trading days immediately preceding the date

of filing of the short form final prospectus (the "Final Prospectus"), less a discount of 20% and (B) the

VWAP of the Common Shares (or Units, as the case may be prior to May 27, 2010) on the TSX for each of

the trading days on which there was a closing price during the forty (40) trading days immediately

preceding the date of filing of the Final Prospectus, less a discount of 20%.

[SharperDingaan]

 

We're saying the same thing.

 

Everybody gets to subscribe at the same price; but if there's not enough subscription - FFH will take up the subscription shortfall at 20% off the subscription price, & is restricted from reselling any of these cheap shares back into the market.

 

SD

[StubbleJumper]

FYI, there are large forest fires raging in Quebec right now or north of Trois-Rivieres due to lack of rain recently. Smoke has been travelling to Ottawa, Montreal and Quebec City over the week-end. The last time this was seen was in 2002.

 

2/3 of chip supply for the St-Felicien mill comes from sawmills in a radius of 100 km from plant. Therefore, there could be some risk to availability and cost of chips if these fires spread or last much longer. However, I could not find anything in the 2003 annual report related to impact from these fires at the time. SFK became public in 2002 just after these fires. I hope that disruption to production or costs will be minimal in this period of very high prices for NBSK.

 

Cardboard

 

 

Mauricie is a fair distance from Saguenay/Lac St Jean, so I wouldn't be too concerned about the current fires.  However, if we don't get some rain soon, there's a risk of additional fires popping up.  The forecast is for rain this week in the Saguenay, so keep our fingers crossed....

[doc75]

 

We're saying the same thing.

 

Everybody gets to subscribe at the same price; but if there's not enough subscription - FFH will take up the subscription shortfall at 20% off the subscription price, & is restricted from reselling any of these cheap shares back into the market.

 

SD

 

I'm confused.  It seems like you're not saying the same thing at all.  And I thought this issue was settled (by finetrader) through direct contact with SFK's IR dept. 

 

Finetrader:  Did you not hear directly from SFK that the 20% discount applies to everyone? 

 

SD:  It looks like you feel the 20% only applies to FFH because this discount is only mentioned in the standby commitment.  I see where you're coming from (ie. why not define the pricing methodology earlier in the prospectus?), but no pricing scheme whatsoever is mentioned outside the standby commitment.  So if all words of the standby commitment are for FFH only, then the prospectus says only that the regular shareholders get a subscription price of X, where X is some as-yet-undefined number that is not necessarily linked to the 5-day or 40-day VWASP.  I can't see how you can pick out the 20% discount from the standby and say that that is the only part that specifically applies to FFH.

 

My feeling is that the term "Subscription Price" refers to only ONE number throughout the prospectus, and we learn more about its calculation in the standby agreement. This meshes with the information I thought we received from I.R., though I do feel that it would make more sense to mention the pricing methodology separately.

 

[Myth465]

The main reason why I think it applies only to FFH is because a 20% discount on all shares is not a discount. We will just have to buy more shares and the price will fall to the prospectus price.