SFK pulp

[Guest Dazel]

 

 

We agree with your sentiment on earnings because of the obvious inventory cycle for pulp...after the drastic selll off 6 months ago. We also see big insider buying at Canfor pulp in the $3 range...which have followed pulp prices...We also like the way management got through D day with relatively little effect on the capital structure.

 

We would disagree with share price calls. We think that there is a default discount in the price or it would trade at $1 or above. It is the management's responsibility to share holders, customers and suppliers to let us know if things have improved...Ie covenants, bank line and cash position are of the utmost importance here. So if yu are right and we think you are...There are two catalysts.

 

First and most important...is balance sheet stability and public confidence...this is imperative to their business but it will also move the stock price.

 

Second is the earnings picture which would add to gains above the $1 range that a viable company should trade...remember plants are worth less than zero when they are not utilized but when they come back on stream...they are cash machines and real book values jump at crazy mulitiples...as there is no way that new plants will come on stream for many years.

 

 

disclosure we took a bath got a nice big tax loss and we have more than tripled our shares as well at these low levels.

 

Does anyone know what the short postion is?

 

Dazel.

 

 

[SharperDingaan]

 

We're on the same page.

 

Agreed there's a big default discount in the current pricing, but its too hard to quantify.

What is likely though is that as the economy improves, that discount will unwind fairly rapidly (confidence, improved volume, etc.) - but because we're holding so many shares (for us) we prefer to effectively treat it as a moat. If the discount is currently 65% & goes to 35%, we multiply our estimate by 1.86x [(1/(1-.65)/(1/.(1-.35)]. Obviously, a 'healthy' moat.

 

Agreed that over the short-term (Q3 & Q4) the BS will very likely improve, but what it looks like at 06/30/2010 when the interest capitalization stops? - too early to say. Its highly likey to be very much a function of the magnitude of Q4 & Q1 CF.

 

We also put a small probability on SFK doing a deal with someone else next year. Depending on how strongly they come out of it, there may well be some activity where they essentially end up acting as an industry conduit. Very different game if it happens, & another positive - but for now a wait & see.

 

Much the same investment risk as FFH was at $70.

1) The larger risk was in not owning it, versus it going bankrupt. 2) The secondary risk was in allowing the magnitude of the gains to overly influence the ongoing holding decision.

 

SD   

   

[Guest Dazel]

 

 

SD,

 

One very large difference between FFH at 70 and SFK....FFH had a billion dollar gain that could have been liquified at an instant...It was and that is what stabalized the business prospects..

 

SFk's massive assets are illiquid and worth less than zero at times...Our point is this would change everything

if they were once again considered at their replacement value...Fairfax bonds were replaced with cash in 3 months....

 

I however, love the comparison....I guess the other forgotten point is that it is worth $100's of millions to Fairfax to have sfk return to health.

 

Dazel.

[SharperDingaan]

 

We're looking forward to us all getting rich  ;D

 

SD

[finetrader]

What about an eventual canadian dollar appreciation versus USD?

 

Could this be a big factor? What proportion?

 

I know SFK bought US mills(Fairmount) and this help offset the pressure that a canadian dollar apreciation can create. is it enough?

 

[triedtestedand]

Sharper:

 

A bit of a friday afternoon segue ...

 

Regarding your comment ... "We're looking forward to us all getting rich" ... it got me to thinking ... how does that translate to you, generally speaking?  I read reports that "rich" in the USA is on order of having $2M to $3M of investable assets (besides your home), while "super-rich" is having on order of >$10M ... of course it's all relative, as in N. America we've won the passport lottery already. 

 

And then there's the question of if you get "there" ... then what? 

 

 

 

[SharperDingaan]

 

Finetrader:

 

$CDN appreciation will make the returns on the US plants look worse, over & above the margin change on the recycled paper that they are selling. Its not a given - but assume that they lose more from $CDN appreciation than they make on whatever additional volume they've been able to sell.

 

Triedtested:

 

The reference is to the portfolio impact of a large number of shares suddenly pricing at many multiples of what you paid for them. A 50K investment @ $0.40/unit is a modest $ exposure - but 125,000 shares. If the share price suddenly runs up to $2.50 its 312K - & significant $. 

 

Most folks see their relationship with their family, peers, community, & health etc. as being their 'wealth' - the size of the bank account, or investment portfolio is pretty far down the list.

 

SD

 

 

[triedtestedand]

Sharper:

 

Agree wholeheartedly ... was just thinking along lines of achieving financial independence (which of course varies depending on lifestyle, etc.) and the flexibility that such can offer ...

[alertmeipp]

SFK convertible debt is still priced at 50cents on a dollar. A double from here if SFK is to survive til 2011 while collecting 15% interest.

Seems better risk/reward ratio to me.

[watsa_is_a_randian_hero]

SFK convertible debt is still priced at 50cents on a dollar. A double from here if SFK is to survive til 2011 while collecting 15% interest.

Seems better risk/reward ratio to me.

 

How do you buy? I use interactive brokers and it does not appear.  Anyone know of a way to have good access to bond mark, cheaply?

[triedtestedand]

I have the same question as Watsa_is_a_randian_hero ... I use BMO Investorline, and could not find any doing a simple search (although haven't called yet to try and do a locate) ... thanks!

[alertmeipp]

I can't find it in IB neither. Questrade has it.

 

Here is the symbol.

http://cxa.marketwatch.com/tsx/en/market/quote.aspx?symbol=sfk.db

 

 

[SharperDingaan]

 

Keep in mind that the deb is a very different instrument, & that you could end with common. 

 

Not for everyone ..... but for those so inclined, you might want to look at a long position financed against portfolio margin.

 

ie. If the margin costs 5%; borrow 50 @ 5% & pay 2.5, buy the deb @ 50 & get 7.0, earn a net 4.5 cash spread on zero capital invested. On maturity you'll either have 100 in cash or shares, to pay off 50 in margin. In the meantime you've exposed yourself to SFK's ability to generate CF & leveraged up your portfolio with a positive spread - at the time when your investments are most likely to increase in value.

 

Disclosure: We are long both the deb & the common.

 

SD

 

 

   

[ubuy2wron]

SFK convertible debt is still priced at 50cents on a dollar. A double from here if SFK is to survive til 2011 while collecting 15% interest.

Seems better risk/reward ratio to me.

 

How do you buy? I use interactive brokers and it does not appear.  Anyone know of a way to have good access to bond mark, cheaply?

 

 

Its a listed bond  TSX exchange traded symbol is sfk.db it trades with about a 5 point spread and is not very liquid

[alertmeipp]

Are we suppose to hear more details on the Gov. Black Liquor tax credit plan this Quarter?

 

I think both CFX and SFK can easily double from here given the current price.

 

Low natural gas is helping CFX big time... but the CDN strength is big -ve.

[Cardboard]

I hold a good size position in CFX and a fairly small one in SFK.

 

IMO, both companies are suffering from a commodity that has come too late to the party. Copper, oil and others have started to rally much earlier than pulp. So we are way behind the stock market and even further away from other commodity producers. If the economy shows any sign of not recovering, pulp prices will return very quickly to non profitable levels. In the short run, not a big deal for CFX, but likely R.I.P. for SFK. The upside is still attractive which is what kept me there for now, but the risks are very high.

 

There are also quite a few announcements of pulp mill restarts despite a pulp price that is less than mouthwatering. Then you have this CAD$ to worry about.

 

It is a terrible business. It just convinces me even more that one should always stay away from a business impacted by a secular decline: decline in paper usage. It may turn up good again, but only when the "survivors" face little competition from mill restarts: become so old or expensive to run that they are scrapped. U.S. railways became attractive to invest in again, but it took over half a century for it to happen.

 

Cardboard

[SharperDingaan]

 

Keep in mind that 'Old School' practice is to produce as much as possible, force down the fixed cost/ton, lower the sale price/ton - & drive additional volume. Biggest was best, marginal cost of production ruled, but you had to have a sizeable & growing demand. We no longer have the volume.

 

Then came beetles that wiped out the trees & reduced the cost of Western Cdn feedstock to pennies. Marginal cost of production fell again, price/ton fell through the floor, the 'old school' biggest still made some money, & plants starting shutting as the price reduction couldn't generate enough volume. CFX.

 

Then came the 'New School' that uses low cost recycling, swift management, & state-of-the-art plant - because it CANNOT produce as much as possible (limited quantity of economic feedstock). SFK.

 

We may read fewer newspapers but we now use paper vs plastic bags to take home the groceries & that favors the new school (green marketing of recycled paper). You can have a severly damaged industry, but good players within it - as these two demonstrate.

 

Not as risky as first meets the eye  ;)

 

SD   

[smw397]

All I need to know when deciding whether to invest in pulp is revealed when I consider the last remaining mill in my region.  I long ago lost track of how many times it's changed hands.  It has been shut down more than it's run over the last several years, and at this point it doesn't look like it will ever fire up again regardless of which way the pulp market goes.  Here's the most recent story in our local paper:

 

http://www.times-standard.com/ci_13356249?source=most_viewed

 

 

[StubbleJumper]

I looked at the debentures shortly after Christmas, but IMO there were a great many better opportunities at that time.  As a result of this thread, I have taken a second look at them over the past few days.  I am having a little trouble understanding the possible outcomes and their likelihood of occurring.  As I understand it, there are three broad outcomes that could be anticipated:

 

1) Debentures are redeemed for cash sometime in 2011 (P<5%).  If you buy now at 52-cents on the dollar, this would be a wonderful outcome with a YTM>40%.  From what I can see, this is a highly improbable outcome as SFK does not have extra cash laying around, is unlikely to have large cash balances in 2011, and is unlikely to be able to refinance on favourable terms.

 

2) Debentures are redeemed for units sometime in 2011 (p>90%).  At today's price, that would be about 100 million new units, which would dilute the hell out of existing unit holders.  Does the current unit price reflect this impending dilution (ie, are the existing units really worth $1, but currently sell  for $0.50 to reflect the fact that a stack of new units is inevitable?).  If each debenture is redeemed for about 2,000 new units, at what price could debenture holders dispose of those units?

 

3) SKF goes bankrupt and subordinated creditors get nothing (P<5%)

 

 

Obviously case#1 and case#3 are easy to figure out.  However, case #2 seems to be the overwhelmingly most liekly outcome and the economic returns strike me as exceptionally uncertain.  How are people valuing the units?  Is case #3 as unlikely as I think?

 

Maybe the debentures belong on the "too hard pile"....

 

 

SJ

[SharperDingaan]

 

The debs mature 12/31/2011. Principal is repayable in either cash or units at 95% of the 'then' 30-day average closing market price - at SFKs discretion.

 

The expectation is that by 12/31/2011 the common will be materially higher than it is today, & there will be fewer debs o/s than there are today. The higher the share price, the more likely the payout will be in cash. If its a cash payout, the common rises immediately as the dilution uncertainty is removed.

 

Current common pricing reflects the potential size of Q3 profitability x prob x 'uncertainty' discount. The 'uncertainty' discount is high & there's scepticism around the potential Q3 profitability. Once Q3 results are published, it may well look very different.

 

 

[oldye]

 

The debs mature 12/31/2011. Principal is repayable in either cash or units at 95% of the 'then' 30-day average closing market price - at SFKs discretion.

 

The expectation is that by 12/31/2011 the common will be materially higher than it is today, & there will be fewer debs o/s than there are today. The higher the share price, the more likely the payout will be in cash. If its a cash payout, the common rises immediately as the dilution uncertainty is removed.

 

Current common pricing reflects the potential size of Q3 profitability x prob x 'uncertainty' discount. The 'uncertainty' discount is high & there's scepticism around the potential Q3 profitability. Once Q3 results are published, it may well look very different.

 

 

 

SD,

 

I know the creditor agreement precludes them from paying dividends till next year, do you think there is a chance they'll can start buying back their debt for .50 on the dollar? 

[StubbleJumper]

I am really having a hard time imagining a cash redemption for the debentures.

 

For the four-year period from 2005-08, SFK only generated a grand total of $70m cash from operations.  Even if 2010 and 2011 are wonderful years, there will need to be a great deal of re-investment in working capital as inventories and receivables have been bled down over the past few quarters (and one would presume that discretionary capital replacement has been postponed).  In this context re-paying $40m in debentures for cash from operations would seem to be a real stretch.  For this very same reason, open market purchases of the debentures (at 52-cents on the dollar!) doesn't seem like a very plausible course of action either.

 

The other possibility would be to refinance the debentures....but that too would seem to be a bit of a stretch, particularly given that senior creditors have had to waive covenants.  Don't know whether there would exactly be a long line of lenders willing to step up to the plate....maybe FFH would be adequately motivated to avoid potential dilution?

 

SJ

[SharperDingaan]

Oldeye, SJ:

 

We really need to see the Q3 & Q4 earnings & cashflow. Untill then its a matter of opinion as to what might/might not happen - if you think these might be solid quarters you're probably bullish, if you're not sure you're probably bearish.

 

Institutional restrictions generally prevent portfolio investments in securities trading < $1/share. At the moment for most institutions that means either CFX common or SFK debs;  if SFK common goes > $1/share the dynamic will change - & the magnitude of the 'uncertainty' discount should decline. 

 

There is obviously some risk to both the deb & common. If you're not comfortable with it, you probably shouldn't be in either of them.

 

SD

 

 

[T-bone1]

Domtar and Canfor both raising their North American NBSK prices $30 to $800 per tonne effective October 1st

[T-bone1]

SFK Pulp to increase Oct. 1 NBSK, recycled pulp prices

 

SAN FRANCISCO, Sept. 25, 2009 (RISI) - SFK Pulp told US customers today that it will increase recycled bleached kraft, or market deinked pulp (MDIP) prices, effective October 1 until further notice, RISI has learned.

 

SFK Pulp, the world's largest MDIP producer, will lift US prices by $20/tonne next month, industry contacts said. The firm did not cite a specific price level to customers.

 

The small-capacity MDIP sector has seen US prices rise monthly as producers try keeping pace with an ongoing rise in recovered paper prices, which they use as fiber.

 

September's US effective list price for MDIP rose to $595-645/tonne FOB, the third straight month it increased, according to RISI's PPI Pulp & Paper Week.

 

SFK Pulp latest to move on NBSK. Also, SFK Pulp slated a $30/tonne price increase on northern bleached softwood kraft (NBSK) pulp in North America and Europe. The firm plans NBSK at $800/tonne in North America and $770/tonne in Europe.

 

SFK Pulp is one of several NBSK producers to come out with October price increases. All NBSK producers that have come out with price increases slated $800/tonne in the USA.

 

North American producers that export to Europe plan $770/tonne for NBSK on the continent, while the grade's European producers widely plan $760/tonne.