SFK pulp

[Myth465]

THanks for the Write up its very helpful.

 

 

 

 

The best I have found for my odd securities is Think or Swim and the Pink Sheets. I hold options and foreign security based pink sheet shares at TOS. My regular US Exchange securities are held at Wells Fargo which gives 100 free trades per acct when assets hit $25k, they charge $75 for foreign securities which is what made me start looking.

 

Per Share Commission*

$.015 per share ($5.00 minimum)

OR

Flat Fee Trading**

$9.95 per trade (market or limit orders; 5,000 shares maximum)

 

Think or swim doesnt charge extra to buy pink sheet securities or low dollar securities. They dont do foriegn securities, but most of the ones I want have a pink sheet equivalent.

 

I purchased ATSG under a dollar at TOS for $9.95.

I own LRE.L which is a UK stock, purchased as LCSHF on the pink sheets for $9.95.

Bought SFKUF instead if SFK Pulp for $9.95.

You have FRFHF for FFH.

 

I am watching these and may buy soon on the pinks - BYD.UN, CEN.V, CAA, RYL.UN. Boyd and Royal have market caps less than $60 million and I can still buy them. The only problem I can think of is volume is very tight on alot of these should you need alot of shares. LRE doesnt trade most days.

 

There may be a slight cheaper option, but so far this works out well and keeps commissions fairly low. TOS also allows option trading in the Roth which should be useful at some point.

[oldye]

_{There is a great write-up on SFK posted on SumZero:}

_{http://www.sumzero.com/quick_ideas/view/2563}

 

_{(If you don't have access, see the attached PDF file.)}

 

_{Disclosure: Long SFK.}

 

_{Nice write up and summary of past transactions.}

[lessthaniv]

Yes, thanks for posting.

Good read.

[SharperDingaan]

 

Very nice analysis.

 

Keep in mind that some of SFK's senior management has now retired, & an all-equity takeout would have to have a floor value at a fairly high % of the current replacement cost; especially if there were also material synergies..... And that new entity would be equity heavy, & able to do long-term refinancing at much lower costs; producing immediate & reliable interest savings, & a interest rate cap going years out. 

 

Gets more & more interesting each day!

 

SD 

[txlaw]

Excellent analysis.  Thanks for posting!

 

I didn't realize how the technical factors would be in our favor after conversion to a corporation.

[Vanshon]

A shuttered pulp mill in B.C to be re-opened in the fall with its production headed to affiliated Asian mills:

 

http://www.vancouversun.com/news/thewest/Mothballed+mill+sold+autumn+opening+breathe+life+into+northern+town/2916623/story.html

 

 

[lessthaniv]

http://seekingalpha.com/article/199069-paper-stocks-poised-to-rally

 

Excerpt:

 

Finally, we like SFK Pulp Fund (SFKUF.PK).

 

SFK owns an NBSK pulp mill in Northern Quebec, and two RBK (Recycled Bleached Kraft) pulp mills in the US, in Michigan and West Virginia. The units closed at $1.54 Canadian.

 

SFK generated $389 million in 2009 revenues on curtailed production, versus $532 million in 2008.

 

This company was an income trust organized in 2002 for the tax-free income flow through. Unfortunately, they picked a very cyclical business to package, as a stable income entity, and predictably, cash flows were hammered and the distributions disappeared.

 

However, after several equity raises in the past at higher prices, the company restructured its debt covenants and has survived, and is now converting to a corporation.

 

The company is running at capacity in Quebec, and is enjoying the best product and input pricing it has had in its history. The company received $20.9 million under the aforementioned Green Transformation Program to build a third co-generator and sell electricity into the grid.

 

The recycling mills in the US had a tough time last year as producers reverted to virgin pulp to gain the aforementioned black liquor government subsidies. Wastepaper costs have been volatile. These negatives are probably disappearing and these plants usually have positive operating margins.

 

In 2008, SFK earned $47 million in EBITDA, and that was a year that slumped in the last quarter. At 10 times $50 million EBITDA, the stock would be worth over $3.30, without assuming any repayment of their $200 million in debt. Debt reduction would add to equity value as the mills require only moderate amounts of maintenance capital expenditures.

 

The company reports its Q1 earnings on May 4th.

 

[Guest Dazel]

 

pulp prices up again $947.21

 

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

 

dazel.

[tyska]

 

pulp prices up again $947.21

 

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

 

dazel.

 

As is the price of sfk.

[SharperDingaan]

 

Look at the Dec-31-2009 MD&A, pg 7, Selected Annual Information. Compare 2009 against 2007. Add operating profit to sales for each of NBSK & RBK to get Cost of Sales, & divide incremental sales by incremental tonnage to estimate COS sensitivity to volume.  About -1.334 for NBSK, and -.476 for RBK.

 

Look up the list price/week for NBSK & RBK over Q1-2010 & calculate the average for the quarter. About 860 for NBSK and 780 for RBK, depending on assumptions. Assume the NBSK plant ran for 3 months at 90% capacity, less 4 days of downtime. Assume 85% capacity for the US plants. You now have estimated tonnages, you can derive average COS for each of NBSK & RBK, & can calculate estimated CM for both NBSK & RBK.

 

Look at the 2009 S&A, subtract the 2009 charge off, & subtract 1.8 million of 2010 savings; divide by 4. Best guess the Q1 distribution number & calculate the Q1 EBITA. Then compare it to Q1-2007 when conditions were `roughly` similar. Illuminating.

 

Now for fun:  Multiple the Q1 EBITA by 4, divide by the number of shares, & multiply by 5, isn`t this pretty much the lower number to beat if they were to be taken out.  Now discount the EBITA by 30% (for MOS) & stay with the 5x multiple (additional MOS), isn`t this about where we should be before the technical factors from conversion kick in. Look at the deb - if it converted there would be roughly an additional 10.7 million shares outstanding; price at the lower estimate & what seems pretty obvious.

 

Speculation, but arithmetic works pretty well for everyone.

 

SD     

 

[gordoffh]

The story is getting around - Making the business news programs

 

http://watch.bnn.ca/commodities/april-2010/commodities-april-20-2010/#clip291477

 

[FFHWatcher]

 

Look at the Dec-31-2009 MD&A, pg 7, Selected Annual Information. Compare 2009 against 2007. Add operating profit to sales for each of NBSK & RBK to get Cost of Sales, & divide incremental sales by incremental tonnage to estimate COS sensitivity to volume.  About -1.334 for NBSK, and -.476 for RBK.

 

Look up the list price/week for NBSK & RBK over Q1-2010 & calculate the average for the quarter. About 860 for NBSK and 780 for RBK, depending on assumptions. Assume the NBSK plant ran for 3 months at 90% capacity, less 4 days of downtime. Assume 85% capacity for the US plants. You now have estimated tonnages, you can derive average COS for each of NBSK & RBK, & can calculate estimated CM for both NBSK & RBK.

 

Look at the 2009 S&A, subtract the 2009 charge off, & subtract 1.8 million of 2010 savings; divide by 4. Best guess the Q1 distribution number & calculate the Q1 EBITA. Then compare it to Q1-2007 when conditions were `roughly` similar. Illuminating.

 

Now for fun:  Multiple the Q1 EBITA by 4, divide by the number of shares, & multiply by 5, isn`t this pretty much the lower number to beat if they were to be taken out.  Now discount the EBITA by 30% (for MOS) & stay with the 5x multiple (additional MOS), isn`t this about where we should be before the technical factors from conversion kick in. Look at the deb - if it converted there would be roughly an additional 10.7 million shares outstanding; price at the lower estimate & what seems pretty obvious.

 

Speculation, but arithmetic works pretty well for everyone.

 

SD     

 

 

When you eventually sell your SFK stake, take 10% of your profit and buy a nice (used, of course) sports car with the license plate ***SFKGURU*** and find a new hobby.  You wake up in the middle of the night thinking about SFK...I know you do :-)

 

p.s. Thanks for all your input on this one. Extremely Valuable. Value is certainly hard to see sometimes.  I believe this one is playing out faster than any of us thought, thanks to the perfect storm for pulp pricing.  I am sure there are a dozen or so of us who can chip in $5/ea to buy you dinner if you are attending the FFH Dinner with Sanj?  Heck, probably even a plane ticket and a hotel :-)

[Guest Dazel]

 

Sfk is not the only pulp stock moving....Canfor pulp is now at $13.48 or $475m!!!!

 

Dazel.

[lessthaniv]

 

Look at the Dec-31-2009 MD&A, pg 7, Selected Annual Information. Compare 2009 against 2007. Add operating profit to sales for each of NBSK & RBK to get Cost of Sales, & divide incremental sales by incremental tonnage to estimate COS sensitivity to volume.  About -1.334 for NBSK, and -.476 for RBK.

 

Look up the list price/week for NBSK & RBK over Q1-2010 & calculate the average for the quarter. About 860 for NBSK and 780 for RBK, depending on assumptions. Assume the NBSK plant ran for 3 months at 90% capacity, less 4 days of downtime. Assume 85% capacity for the US plants. You now have estimated tonnages, you can derive average COS for each of NBSK & RBK, & can calculate estimated CM for both NBSK & RBK.

 

Look at the 2009 S&A, subtract the 2009 charge off, & subtract 1.8 million of 2010 savings; divide by 4. Best guess the Q1 distribution number & calculate the Q1 EBITA. Then compare it to Q1-2007 when conditions were `roughly` similar. Illuminating.

 

Now for fun:  Multiple the Q1 EBITA by 4, divide by the number of shares, & multiply by 5, isn`t this pretty much the lower number to beat if they were to be taken out.  Now discount the EBITA by 30% (for MOS) & stay with the 5x multiple (additional MOS), isn`t this about where we should be before the technical factors from conversion kick in. Look at the deb - if it converted there would be roughly an additional 10.7 million shares outstanding; price at the lower estimate & what seems pretty obvious.

 

Speculation, but arithmetic works pretty well for everyone.

 

SD     

 

 

SD, it must be late in my day because I have been staring at your comments and in regards to the following ... I can't seem to grasp how you got your numbers.... Can you kindly enlighten me!

 

"divide incremental sales by incremental tonnage to estimate COS sensitivity to volume.  About -1.334 for NBSK, and -.476 for RBK."

[lessthaniv]

SD,

 

I understand where you are going with your comments. Trying to estimate how much the cost of sales may change with changes in volume. And then estimating volume to arrive at an estimate for operating profit. And finally adjusting the 2009 annual S&A for savings and one time items to work towards and estimate of 2010 EBITA where you can slap on an appropriate multiple to value the company.

 

However, I am not understanding something in your comments: " & divide incremental sales by incremental tonnage to estimate COS sensitivity to volume.  About -1.334 for NBSK, and -.476 for RBK."

 

Your ratios of NBSK and RBK are -1.334 and -.476,  respectfully. They seem to have been derived from the following math (Broke out the case for NBSK here but the calculation for RBK is the same):

 

(Change in tonnage 2009-2007)/(Change in Cost of Sales 2007-2009). For example looking at NBSK: (309,299-323,845)/(249,089-238,186)= -1.334

 

Firstly, I think you mean - "& divide incremental cost of sales by incremental tonnage to estimate COS sensitivity to volume.

 

However, I remain confused. Your ratio of -1.334 has units (vol/cos$) but your wording suggests the ratio should be expressed as (cos $/vol) which makes more sense to me. Don't you want the inverse to understand how the COS may change with changes in volume?

 

 

<IV

 

 

 

[SharperDingaan]

 

It should be incremental tonnage/incremental COS. ie: For NBSK, every additional 1000 tons sold reduces COS by 1334.

 

Compare pg 7 to pg 11 (operating loss of 52,584) & you'll notice that this COS number actually allready includes Distribution, S&A, & Amortization. Calculated COS of Total Sales - Total Operating Profit (pg 7) is 441,883; Total COS per Pg 11 is 346019. COS is 27% overstated [(441883/346019)-1] & projected EBITDA is higher than you think. Additional MOS.

 

We do a very rough back-of-the-envelope calculation every quarter, test it against the scuttlebut & determine a probability. The outcome decides if we hedge (positive or negative) or not. We're only more attentive than normal as our weighting is getting extreme. Ordinarily we'd be rebalancing.

 

No counting chickens untill we see them hatch!

 

SD 

 

 

 

   

[Guest Dazel]

 

Does anyone know what Fairfax average cost is on SFK?

 

Dazel.

[lessthaniv]

 

It should be incremental tonnage/incremental COS. ie: For NBSK, every additional 1000 tons sold reduces COS by 1334.

 

Compare pg 7 to pg 11 (operating loss of 52,584) & you'll notice that this COS number actually allready includes Distribution, S&A, & Amortization. Calculated COS of Total Sales - Total Operating Profit (pg 7) is 441,883; Total COS per Pg 11 is 346019. COS is 27% overstated [(441883/346019)-1] & projected EBITDA is higher than you think. Additional MOS.

 

We do a very rough back-of-the-envelope calculation every quarter, test it against the scuttlebut & determine a probability. The outcome decides if we hedge (positive or negative) or not. We're only more attentive than normal as our weighting is getting extreme. Ordinarily we'd be rebalancing.

 

No counting chickens untill we see them hatch!

 

SD 

   

 

Got it. Thanks - I'm back on the rails and I see your point on the overstatement of cost of sales.

Much appreciated.

[tgmk54]

 

Posted today on the Yahoo Finance message board for SFK-UN.TO:

 

 

Buyout rumor mill    23-Apr-10 01:31 am   

 

From the New England private equity rumor mill: a a major investment firm from Boston is in discussion with SFK's management regarding a tender offer to purchase a majority stake in the trust once it converts to a corporation.

 

Apparently the long-term prospects of pulp demand have grown feet!

 

sbp322

 

 

 

[Grenville]

 

Posted today on the Yahoo Finance message board for SFK-UN.TO:

 

 

Buyout rumor mill      23-Apr-10 01:31 am     

 

From the New England private equity rumor mill: a a major investment firm from Boston is in discussion with SFK's management regarding a tender offer to purchase a majority stake in the trust once it converts to a corporation.

 

Apparently the long-term prospects of pulp demand have grown feet!

 

sbp322

 

General question regarding the acquisition of income trust by normal companies. Why don't all these interested companies by the income trusts before they convert? I know that income from income trusts are taxed at higher rates if a corporation owns them, but if they will be converting soon anyway why wait for the conversion to acquire? It seems like these trusts will be more expensive after the conversion than now.

 

Is there some funny tax laws if the conversion happens inside a corporation versus on a stand alone basis?

 

Thanks!

[Uccmal]

I dont know the answer Grenville.  Alot of institutions seem to have restrictions on owning income trusts for some reason. 

 

Regarding the rumour.  How and why does one make a tender offer for the majority (not the entire) of public company?  Sounds a little goofy to me. 

 

For a buyout I will hold out for $5.00 which should be adjusted book whence the debt is paid down somewhat. 

[SharperDingaan]

 

Look at the recent voting package that we all received; Share Option Plan, p 37 & 39

2.5% of the total outstanding float, vest at 3.50 if there's a termination without cause (ie: takeover). And another 2.5% vest at 5.00. Most would suggest that the minimum price for an interim treasury issue is 3.50, & 5.00 for a takeout.

 

SD

[lessthaniv]

I believe Canfor Pulp reports today which should give us our first good comp for Q1. Anyone going to the AGM tomorrow? I'm going to try and get there if I can make it work.

 

<IV

[lessthaniv]

Canfor had a strong Q1!

 

Canfor Pulp earns $32.5-million in Q1 2010

 

2010-04-26 20:18 ET - News Release

 

Mr. Terry Hodgins reports

 

CANFOR PULP INCOME FUND ANNOUNCES STRONG FIRST QUARTER 2010 RESULTS AND INCREASE IN MONTHLY DISTRIBUTION

 

Canfor Pulp Income Fund has released its first quarter 2010 results as well as the results of Canfor Pulp LP in which the fund has a 49.8-per-cent ownership.

 

The partnership reported sales of $239.5-million and net income of $32.5-million, or 46 cents per unit, for the quarter ended March 31, 2010. The partnership generated EBITDA (earnings before interest, taxes, depreciation and amortization) of $44.1-million in the quarter. The fund reported net income of $16.5-million, representing the fund's share of the partnership's net income and a future income tax recovery of $300,000

 

In the quarter, the partnership generated adjusted distributable cash of $41-million, or 57 cents per unit, and the partnership and the fund declared distributions of 32 cents per unit.

 

Improved partnership results compared with the fourth quarter of 2009 were attributable to higher prices for the partnership's pulp and paper products, lower unit manufacturing costs, and increased pulp shipments, partially offset by the stronger Canadian dollar.

 

First quarter results were negatively impacted by a shutdown at the Prince George pulp and paper mill, which reduced pulp production by approximately 22,000 tonnes and reduced EBITDA by approximately $11-million. Included in these amounts were approximately 4,000 tonnes and $4-million attributable to advancing the annual maintenance outage originally planned for the second quarter of 2010, which was moved to coincide with unplanned maintenance requiring the shutdown of the mill's recovery boiler. Mitigating the production loss was a record quarter at the Northwood pulp mill for both total tonnes and average daily rate.

 

Pulp markets remained strong as steady pulp demand coupled with large incremental supply side reductions maintained world inventories of pulp at very low levels throughout the quarter. The tight markets allowed producers to implement further price increases in the quarter. NBSK U.S. dollar North American list prices were $830 (U.S.) per tonne in December, 2009, rising to $910 (U.S.) in March, 2010, with announced prices for May of $1,000 (U.S.). Mitigating the impact of stronger global pulp markets for Canadian producers was the 3 per cent appreciation of the Canadian dollar in relation to the U.S. dollar from December, 2009, to March, 2010.

 

The pulp market is expected to remain strong through the second quarter of 2010 as inventories held by producers and customers are well below what is considered to be a balanced market. Industry downtime is expected to continue to impact the supply/demand balance. Factors impacting industry downtime include reduced production due to planned maintenance downtime in the second quarter of 2010, delays of Chilean mills returning to capacity after the Feb. 27, 2010, earthquake, and delayed restarts of idled mills.

 

On April 21, 2010, the fund announced the monthly distribution of 12 cents per fund unit for the month of April, 2010, to be paid on May 14, 2010. Today the fund announced an increase in the monthly distribution to 20 cents per fund unit for the month of May, 2010, to be paid on June 15, 2010, to unitholders of record at the close of business on May 31, 2010.

 

Additional information

 

A conference call to discuss the first quarter 2010 financial and operating results will be held on Wednesday, April 28, 2010, at 8 a.m. Pacific Time.

 

To participate in the call, please dial 416-641-2140 or toll-free 1-800-952-4972. For instant replay access, please dial 416-695-5800 or toll-free 1-800-408-3053 and enter participant passcode 4188430. The conference call will be webcast live and will be available at the fund's website.

 

CONSOLIDATED STATEMENTS OF INCOME (LOSS), COMPREHENSIVE INCOME (LOSS)

                      AND PARTNERS' EQUITY

        (in millions of dollars, except per-unit amounts)

 

                                                    Three months ended

                                                  March 31,    March 31,

                                                        2010          2009

Revenue

Sales                                                $239.5        $186.3

                                                    -------      -------

                                                      239.5        186.3

Costs and expenses

Manufacturing and product costs                        157.9        149.8

Freight and other distribution costs                    31.1          28.8

Amortization                                            11.6          12.0

Selling and administration costs                        6.4          5.5

                                                    -------      -------

                                                      207.0        196.1

                                                    -------      -------

Operating income (loss)                                32.5          (9.8)

                                                    -------      -------

Interest expense, net                                  (2.0)        (2.6)

Foreign exchange gain (loss) on long-term debt          3.4          (3.9)

Gain (loss) on derivative financial instruments          0.4          (5.7)

Foreign exchange gain (loss) on working capital        (1.8)          0.6

Other                                                      -          (0.2)

                                                    -------      -------

                                                          -        (11.8)

Net income (loss) and comprehensive income

(loss)                                                $32.5        $(21.6)

Net income (loss) per partnership unit

Basic and diluted                                      $0.46        $(0.30)

 

We seek Safe Harbor.

[manualofideas]

Very bullish earnings release, including increase in monthly distribution from $0.12 to $0.20.  Also mentioned in the press release are pulp prices of $1,000 for May.  Bodes well for SFK...