The chief executive at Fortress Paper says the pulp and paper producer’s survival is not at stake despite withstanding a “perfect storm” that has shaken investor confidence and caused the company’s share price to sink to an all-time low Tuesday.
“We’re frustrated, challenged but… we’re confident that we’ll be in a different place within a month or two,” said Chadwick Wasilenkoff in an interview.
Pulp shipments plunged 78 per cent from the third quarter as the company shut down its mill in Thurso, Que., for 10 weeks in mid-December as part of efforts to materially lower costs. The mill was re-started on March 4 and is expected to ramp up over the next two weeks.
Wasilenkoff said the company expects to improve the mill’s operations and break even on a cash basis by April even if a 13 per cent Chinese anti-dumping duty is maintained.
It is targeting a $100 to $150 per tonne cost improvement by rectifying a dozen problems that undermined its reliability. It is also driving out costs through procurement, logistics and energy initiatives. Selling another 5.2 MW of co-generation energy to Hydro-Quebec would add $4 million of annual pre-tax operating earnings (EBITDA) on top of the $15 million to $18 million expected to be realized from the current contract for 18.8 MW of power.
Wasilenkoff said the past couple of years have been challenging and culminated in a poor end to the fiscal year as it faced “trough dissolving pulp” prices and the threat of punitive dumping duties from China. Challenges are expected to continue in the first quarter and only be resolved when a final duty ruling is issued in early April.
The Vancouver-based company lost $54.7 million in the fourth quarter while its severely eroded cash position caused its shares to hit $2.74 in early trading. They closed down nearly 13 per cent, or 42 cents to $2.83 in heavy trading Tuesday on the Toronto Stock Exchange.
Wasilenkoff said the “material reduction” in cash and accelerated losses made outsiders question how long the company can survive, but he said the company remains confident that it has hit bottom and will recover.
The fourth-quarter loss amounted to $3.76 per share for the three months ended Dec. 31. That brought the full-year loss to $107.8 million, including discontinued operations.
Fortress (TSX:FTP) makes various types of fibre, or pulp and paper for banknotes. It has divested its specialty papers segment, which is listed as a discontinued operations.
It recorded a $32.9 million writedown on the value of its closed Fortress Global Cellulose mill in Lebel-sur-Quevillon, Que.
In November, China threatened to impose a 50.9 per cent interim duty on dissolving pulp from the FGC mill if the facility is converted.
Wasilenkoff believes China’s hefty duty is designed to prevent a new dissolving pulp supply in Canada, the U.S. and Brazil. But the move could ultimately boost prices that would help its specialty cellulose mill in Thurso.
That mill currently faces a 13 per cent interim duty but the CEO is hopeful it has convinced Chinese officials who visited the plant that the duty should be reduced.
“We remain very cautious but hopeful and optimistic that we’ll get some relief but because there are some political aspects to it I don’t think we would get a full elimination of the duty.”
Mark Kennedy of CIBC World Markets said the two challenges facing Fortress is getting some duty relief and generating some free cash flow at Thurso.
Kennedy also described the Lebel-sur-Quevillon mill as “dead” under current conditions. A high Chinese duty prevents the mill from being converted to produce dissolving pulp, while Fortress is prevented from making paper pulp under the agreement with the mill’s prior owner Domtar (TSX:UFS). Fortress is considering other options.
It is also negotiating with Investissement Quebec to give it more room on the repayment of a $105-million loan whose first $16 million annual payment is due in April.
Excluding certain items, Fortress had an adjusted net loss of $21.2 million or $1.46 per share in the quarter, compared with a loss of $11.2 million or 77 cents per share a year earlier. Its revenue dropped to $37.2 million from $58.7 million a year before.
The company was expected to report 99 cents per share in adjusted losses in the quarter, according to analysts polled by Thomson Reuters.
For the full year, Fortress had sales totalling $207.8 million, up from $163.9 million in 2012.
It had $54.5 million or $3.75 per share in net income last year, including $162.4 million from discontinued operations, compared with a $21.7 million or $1.51 per share loss in 2012, including $20.7 million of net income from discontinued items.
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