SFK pulp

[Grenville]

http://sfkpulp.com/EN/docs/CPDistr/2010/2010_0224%20Q4%202009_FINAL.pdf

[triedtestedand]

Q4 #'s are out ...

 

http://www.sfk.ca/EN/docs/CPDistr/2010/2010_0224%20Q4%202009_FINAL.pdf

 

Thought they would be stronger ... looks like RBK is acting as bit of a counter-balance?

[Uccmal]

Where is the balance sheet? 

 

That was not real impressive.  I want to get a read on whats happening with book value etc. 

 

 

[alertmeipp]

Balance sheet and MD&A can be found on their website..

 

i don't see anything that stands out either positively or negatively.

[Guest Dazel]

 

 

We knew that it was going to be more of a 2010 story...but we expected much more in the forth quarter! It would be nice to get a break down of what

the Hydro Quebec deal is worth. The first quarter we know is much better but we would like them to give us some idea on the call. They certainly cannot

deliver those results and not give us an idea of what effect the cost cutting and price increases are having now. They were positive for once on pricing

and the pulp environmnet going forward. They also said that wood chip prices in Quebec were showing signs of falling for the frist time in awhile.

 

If I were Fairfax and the major holders I would be shopping this company now as they are looking at converting to a corp in the next quarter. Either way should be a good 2010 but

2009 was a disaster!

 

Dazel.

[oldye]

I'm comfortable with cash at 19 million going forward with market prices up more than 100$ on average from last quarter I think we'll like what we see 2010 as well!  During Q3 08, Ebitda was at 16 million, the cost savings from all phases of cost cutting will start to really show up in the results during Q1.    

Selling energy should give them about 6-7 mil per year starting 2013.

[alertmeipp]

the poor pricing of RBK is partly due to the black liquor subsidy.

so i expect to improve through out the year.

 

unless the the CC is very positive, I am betting we may see a pullback given the share price has run 50%.

[FFHWatcher]

I'm comfortable with cash at 19 million going forward with market prices up more than 100$ on average from last quarter I think we'll like what we see 2010 as well!  During Q3 08, Ebitda was at 16 million, the cost savings from all phases of cost cutting will start to really show up in the results during Q1.    

Selling energy should give them about 6-7 mil per year starting 2013.

 

How did you estimate the value of the energy deal with Quebec Power?  Two more full years until revenue starts to kick in, at best.  9.5MW @ 11.2 cents/kWh.  How does that convert or is it convertible?

 

 

[Guest Dazel]

 

 

The market will do what it will do...but we think this company has a "for sale" sign on it...and may be sliced

up and sold in pieces to get value for the big book value.

 

Dazel.

[Cardboard]

I am quite disappointed with the results. I suspected that RBK would be a hold back, but nowhere near that. This acquisition has certainly not paid off so far. Anyhow, as some have mentioned, I expect that it will look quite different beginning with this quarter of 2010.

 

The other thing that I don't like is this conversion to a corporation so quickly. Why not waiting for the deadline to convert and extracting as much tax reduction as possible?

 

Regarding a take-over of SFK by CFX, I would not hold my breath. CFX is profitable, but they don't have cash lying around and Canfor which holds 50% is just seeing recent improvements in lumber pricing. There is also quite a difference in margins between the two as recent results indicate. In any case, if there is a take-over, I will take cash, pay my taxes and invest elsewhere. By that point, I figure that there will be better opportunities in other industries. These are cyclicals and we have seen how bad it can get. I would not count on pulp going well above $1,000 a ton.

 

Cardboard

[finetrader]

What is the situation concerning the black liquor subsidy?

I know SFK management said last summer that they expected that the subsidy to be renewed in december.

Was it the case?

 

Thanks

 

[alertmeipp]

wow.. down to 1 buck.. that's getting cheap :)

 

subsidy artificially lowers the price of non-recycle papers.. make RBK less attractive?

 

forward looking...

 

book value still around $4.5

sales increase will go to the bottom line as their fix cost are still high.

 

[Stove]

The black liquor subsidy, or 'alternative fuel subsidy' was not renewed, and ended at the end of 2009.  However there is a biomass provision that could essentially double the subsidy.  there is a provision in the senate jobs bill however to eliminate black liquor from the biomass subsidy.  This would close the 'black liquor' loophole.

[Uccmal]

Did anyone listen to the call.  I was out all morning doing my day job.

 

Alertmeipp -I think you meant that the any increases in sales will go to the bottom line.  This applies to the NBSK Mill where the costs are fixed for the most part but much less so for the US mills where the price of waste paper determines much of the profit margins.

 

re: cfx.un taking them over.  Why would they bother?  

 

The book value is around 4.50 but it looks like the price of 3 new mills would be closer to 7.50 per share - at least.  

 

I am in an internal debate at what price to buy more shares at.  My major concern is that prices start to drop off before SFK has their balance sheet back in order.  

[T-bone1]

simple back of the envelope math:

 

assume margins on NBSK and RBK are up $100 per tonne in 2010 over Q4 average (prices are up over $100, but between discounts, wastepaper prices etc. this is my best guess . . . hopefully there is upside to this) and calling Q4 cash-flow breakeven (I know it was a little lower, but there was a maintenance outage and a restructuring charge):

 

then SFK should generate $76 Million in cashflow in 2010 . . . not bad, and great if we are on the upswing.

 

please let me know if anyone sees a major problem with my (3rd grade) math.

 

I figure there is actually more margin improvement in NBSK than RBK and 10Q says a $10 move in each will move earnings by $3.8 million

[alertmeipp]

Uccmal - that was what I meant.

 

Re: RBK - that would not be an easy problem to solve unless all those subsidy stop.

 

During the CC, management mentioned that the two great negatives that greatly impact the profitablity of SFK are reversing:

 

1. US sibsidy (helps RBK)

2. High cost of Quebec wood chips. (helps NSBK)

 

 

Stove - are you sure the biomass is same as black liquor? The management didn't mention this one on their call.

 

2010 should be better than 2009 for sure. I am a buyer today *unfortunately, was a buyer yesterday as well*

 

[alertmeipp]

one thing I like to add:

 

their CF has a higher interest rate than normal as a result of previous covenant breach... i think by like 300bps.

 

If they can lower that somehow, it will be great!

[oldye]

 

How did you estimate the value of the energy deal with Quebec Power?  Two more full years until revenue starts to kick in, at best.  9.5MW @ 11.2 cents/kWh.  How does that convert or is it convertible?

 

 

What I first did was cheat a little and looked at the numbers provided by canfor for their 48 mw project and adjusted for 9.5 mw.  Another way is to just do it straight up, I assumed 20 hours of generation per day x 1000(kwh)*9.5*.112*360(operating days)= 7.2 mil.  I pulled hours of generation and operating days from thin air, I'm guessing on how many operational days they'll have.  Then to get todays value, you take the pv of a perpetual annuity (7/.1) then divided by (1.1^2) to discount it to today at 10% and you have a net present value of roughly 58 million dollars.  

 

[Renkane]

I was going through the Q4 MD&A and noticed on pg 28 that EBITDAs for prior quarters vary from those reported in the Q3 MD&A (pg 27):

2009 Q3: 6.4M vs 2.3M

2009 Q2: (16.3M) vs (20.3M)

2009 Q1: (2.4M) vs (2.8M)

 

Same thing for numbers reported in 2008.  There must be some disclosed explanation, but I can't seem to find it. Could someone point me to the source of the discrepancy? Thanks!

 

 

 

 

[FFHWatcher]

Uccmal - that was what I meant.

 

Re: RBK - that would not be an easy problem to solve unless all those subsidy stop.

 

During the CC, management mentioned that the two great negatives that greatly impact the profitablity of SFK are reversing:

 

1. US sibsidy (helps RBK)

2. High cost of Quebec wood chips. (helps NSBK)

 

 

Stove - are you sure the biomass is same as black liquor? The management didn't mention this one on their call.

 

2010 should be better than 2009 for sure. I am a buyer today *unfortunately, was a buyer yesterday as well*

 

 

From Wikipedia...

Biomass sources

 

Biomass energy is derived from five distinct energy sources: garbage, wood, waste, landfill gases, and alcohol fuels. Wood energy is derived both from direct use of harvested wood as a fuel and from wood waste streams. The largest source of energy from wood is pulping liquor or “black liquor,” a waste product from processes of the pulp, paper and paperboard industry. Waste energy is the second-largest source of biomass energy. The main contributors of waste energy are municipal solid waste (MSW), manufacturing waste, and landfill gas. Biomass alcohol fuel, or ethanol, is derived almost exclusively from corn. Its principal use is as an oxygenate in gasoline

[Renkane]

Could the unexpected conversion to a corporation be related to a company sale strategy?  Are there any limitations imposed on potential buyers under the current structure (such as inability to strip away certain assets or limitiation in the nationality of buyer)?

[Cardboard]

The conversion to a corporation was expected since it has to be done by law by January 2011. My point was that 2010 should be profitable if pulp prices remain this high or go higher and being a trust would eliminate taxes on this income.

 

Now, most of the trusts are converting now or soon, so they must all fear that if they wait by the deadline that there might not be enough time/outside resources to get it done on time due to a surge in demand.

 

Regarding the structure impact on a sale, I can't see any. Trusts have been bought before by foreign companies. If it causes any issue, then the acquirer can convert this new sub from a trust to a corporation at any time.

 

Cardboard

 

 

[Uccmal]

I think you are on the money on that Cardboard.  It is probably has to do with having to hire resources, and a little bit of anxiety on the part of the trust managers.  On the other hand there is no legal requirement to convert at all, so what's the hurry, especially when you have an enormous amount of tax loss carry forwards to shield your income. 

 

Renkane, I haven't had a chance to look at the accounting concerns you have bought up.  I want to do that today. 

 

Suggest you call the company's IR person or the CFO for the answer. 

[Uccmal]

Renkane,  I believe the discrepancies have to do with exchange rates.  For the Quarterly report they use the Q-end rates, and for the annual they use the year end exchange rates.  The year end rates are the ones used to determine everything else so I would consider them to be the more accurate ones.

 

Very sharp eye BTW.

[Renkane]

Cardboard, Ucc--thanks for the input.  Agree with your assessment on the rationale for the change to a corporation.

 

In regards to the discrepancies in reporting, I finally got an answer back from the Company:

"We have changed the calculation of our EBITDA to reflect operations and exclude financial and non cash items.  The definition of EBITDA is included on page 1 of the MD&A under the heading «Non GAAP measures».  This method of calculating EBITDA is in line with other public entities in our industry."

 

As the company states, the definition is properly disclosed on pg 1 of the MD&A:

"References to “EBITDA” are to earnings before amortization, financial charges and income taxes and, effective with this MD&A, also before other non-operating income and expense such as gain or loss on derivative instruments, disposal of capital assets and foreign currency translation."

 

Unfortunately, this tells me that absent this change in reporting method, EBITDA would very likely have been negative for Q4.  I'm not very fond of a management team that changes its method of reporting for aesthetic purposes rather than for business reasons, but I guess it's up to the investor to do his/her homework--and at the end of the day EBITDA should not be a substitute for cash-flow.

 

From a business standpoint, aside from the outage, it seems to me that RBK prices were the biggest headwind facing the company during Q4.  Does anyone have any market data on the trend for RBK prices?  Has anyone been able to point out any other major issues/headwinds from the Q4 release?