Filed under: Chadwick Wasilenkoff, Thurso Pulp Mill

The Ottawa Citizen: “Sniffing Out Hidden Value”

by on Aug 18th, 2010

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For contrarian Chad Wasilenkoff, a nose for overlooked potential led him to a pulp mill in Thurso. Bert Hill reports for The Ottawa Citizen.

OTTAWA — From golf courses to art auctions and old mill towns, value can hide in unexpected places.

Just ask Chad Wasilenkoff, the 38-year-old chief executive officer of Fortress Paper Ltd.

When he was a child in Calgary he built a savings account fishing golf balls out of ponds and buying and selling video games, BMX bikes and other popular products he found in want ads.

He learned market timing. He and a friend snapped up Robert Bateman prints for a few hundred dollars each at a deserted auction in the middle of a Calgary snowstorm and sold them for more than $1,000.

That might seem a long jump from Fortress’ latest coup — a mothballed pulp plant in Thurso that, for generations, was the bane of the capital region because of its smelly rotten-egg emissions.

The mill, which stood empty for a year because of the forest industry collapse, is now back in production. The 300 employees are producing hardwood pulp, suddenly profitable because of a strong — but likely temporary — increase in demand in Asia.

Early next year, it will start producing dissolving pulp to feed the developing world’s demand for rayon used in clothing.

Though Thurso has yet to produce the new pulp, Wasilenkoff said he got “multiple overtures” during a recent business trip to China from investors who wanted to buy the whole mill or a minority stake.

He said textile industry customers are lining up to negotiate for the specialized pulp with starting offers he considers surprisingly high.

With all the production likely to be committed soon, he is looking to convert other mills. There are no other suitable mills in the Ottawa area, but “we are searching the planet for more of these opportunities,” he said.

Wasilenkoff said he plans to stay in dissolving pulp, unless an attractive offer comes along.

“We are in this for the long haul. But money talks and at the right price, everything is for sale.”

Fortress shares have quadrupled this year as investors discovered the magic of a tiny profitable player in an industry still covered with red ink. The firm just snapped up $44 million in a new stock offering.

Trading at $28 this week, the company now has a market capitalization approaching $400 million.

Wasilenkoff owns 23 per cent of the Vancouver-based company.

The rapid acceleration of the stock from below $10 in January has some analysts worrying.

TD Newcrest analyst Sean Steuart downgraded the stock to “hold” from “buy” this week, although Fortress beat his sales and profit forecasts for the June quarter.

With the price up 31 per cent in less than a month since he put on the buy recommendation, Steuart took action because of concern that the stock valuation is running ahead of underlying business.

“Management has earned our benefit of the doubt, but there are several major projects on the go right now.

“We would prefer the company deliver on current capital expenditure plans before looking at additional expansion opportunities.”

Wasilenkoff says he is a contrarian. When the investing public is chasing the latest hot stocks and investment ideas, he looks elsewhere.

It was a philosophy he learned the hard way: He read weighty analyst reports during the technology boom and lost heavily when prices collapsed.

It is a philosophy that has allowed him to benefit from buying gold, copper and other assets when prices were deeply depressed. It takes nerve and patience to stay away from the herd.

He also learned never to fall in love with an asset. If his analysis said the prices had passed sustainable levels, as it did with uranium and a stake in Cameco, he sold and the market eventually followed.

Now he has embraced the pulp and paper industry, a business loved today only by bankruptcy lawyers.

Canada is rapidly shedding a world-class industry that for 90 years supported tens of thousands of jobs and billions of dollars in global sales.

Governments, which rushed to bail out the auto industry, are taking a hands-off attitude to the forestry industry, its unemployed workers and underfunded pension funds.

Mills across Ontario and Quebec that would cost billions to replace are selling today for a few million dollars each. An empty Thunder Bay mill recently sold for just $100,000. Production machinery is being sold for scrap or shipped abroad.

“There are a lot of smaller mills that were considered too uncompetitive to survive against the big mills,” Wasilenkoff said.

“But markets have changed. Now there is opportunity and good profit margins in the small mills with the right products and technology.”

He doesn’t see the traditional newsprint, photocopying or related pulp markets recovering soon in North America.

But mills with profitable specialty products have a future.

He tried to buy the former Concert Industries mill in Gatineau, which makes air-laid paper used in diapers and incontinence and feminine hygiene pads. Glatfelter, a small specialty Pennsylvania producer of everything from labels to tea bags, won the asset.

Fortress owns a wallpaper plant in Germany and a bank-note plant in Switzerland, where it is investing to expand production.

Wallpaper must be due for a turnaround because it has been out of fashion so long, particularly in North America.

But in eastern Europe demand continues to grow though assets are depressed.

Fortress bought a mill in Germany that makes dry-strippable paper, a profitable niche.

“We spent less than $5 million but now it is generating $3 million a month in business.”

The latest coup was the former Fraser Pulp kraft mill in Thurso, originally a key part of the old James Maclaren and Noranda empires.

It makes hardwood pulp, a market commodity that has been losing ground steadily to softwood pulp.

The mill closed in June 2009 when Fraser Pulp tumbled into bankruptcy protection, laying off hundreds of employees.

It appeared headed for the scrap heap, like other older mills in Ottawa, Gatineau, Cornwall and Portage du Fort.

Fortress bought the old mill — with buildings, land and machinery worth $45 million — for just $3 million.

It embraced a plan, promoted in the local community,

to generate electricity from biomass for sale to Hydro-Québec.

Fortress will spend $153 million converting the mill to dissolving pulp production. Investissement-Québec is providing a $102.4-million loan, to be combined with

$25 million in federal tax credits and other incentives. When it opens, it will be second-largest of its kind in the world, behind only a plant in Brazil.

Wasilenkoff got a great deal on the enormous digester tubes and other sophisticated equipment needed to make dissolving pulp. They will arrive by barge next month.

Russia shut off exports of pulp logs in a move that stranded a Stora mill in Finland.

Fortress bought the machinery for $3 million, or less than 10 per cent of replacement costs.

The company is also enjoying the luck of a sudden pick up in pulp demand and prices. Global demand has snapped back from the 2008-2009 recession. With production permanently reduced by many permanent closings, prices have jumped 50 per cent in the last year.

When Fortress hired 300 former employees and started production in late May, it caught the new market demand.

Wasilenkoff does not expect the prices to hold because the global industry is only profitable one or two years every decade.

But he believes the prices will hold up until it completes the conversion next year.

With a strong push from the Thurso products, Fortress adjusted profits jumped almost 60 per cent to $4.3 million in the June quarter and sales rose 22 per cent to $60.5 million compared to a year earlier.

SOURCE:
The Ottawa Citizen: “Sniffing Out Hidden Value”

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