Yawning all the way to the bank

While the pulp sector may appear quiet, the market players are “yawning” all the way to the bank. “Between 2002 and 2006, world exports of wood, pulp and paper products grew at an average annual rate of 10.6%,” reports Global-production.com Inc., a business economics consultancy. Despite the volatile economy, the upward price trend in market pulp continues across the world.

“The fundamentals of the pulp market continue to be very strong,” reports PulpWatch, a leading provider of business information and consultancy services to the international pulp and paper industry. “Pulp prices increased by $30-50/t in May, and are set to reach new records in Europe and North America in June. Producer inventories reached record lows in April, and consumer warehouses are similarly bare. European paper demand and order books have improved and prices for most grades are moving upwards, albeit at a slower pace than fiber prices.” This is currently a temporary cyclical high, but we will be getting out of this old product in approximately one year.

As a contrarian investor, I keep focused on industries widely considered to be depressed with an eye on purchasing world class assets at deeply discounted prices. My company recently paid $1.2 million to Fraser Papers for a facility in Quebec with an insured replacement cost of $851 million in assets. We are converting this operation into a specialty dissolving pulp operation. Dissolving wood pulp is chemically refined bleached pulp composed of pure cellulose fibers extracted from trees. Dissolving pulp is the major source for the natural cellulose used in the production of rayon.

Rayon – a very promising future

I believe rayon demand is at a tipping point around the world. The declining global production of cotton is insufficient to meet global textile industry demand; particularly with the rapidly expanding middle class in China and India. Industry analysts indicate that the rayon market has grown at 7% globally and over 10% in China for the last 5 years. Rayon is typically blended with other fibers and can logically displace the cotton shortfall. Rayon has high uniformity which leads to significant improvements in productivity in spinning and textile plants.

Rayon demand has revealed a gap in supply. Total dissolving pulp capacity in late 2007 was 2.4 million tonnes according to the CCF Group (China Chemical Fibers & Textiles Consultancy). Expansions and conversions with plants in Brazil, South Africa and Canada added 0.6 million tonnes of dissolving pulp capacity in 2008, but closures of many higher cost dissolving mills resulted in limited capacity to fill the increasing demand.

A specialty producer

Driven by overall textile demand and increasing preference for rayon over cotton, over one million tonnes of additional rayon capacity (dissolving pulp customers) was built in China in 2009 and an additional 0.5 to 0.7 million tonnes in China is planned to start-up in 2010. There is a current shortfall of approximately 0.5 million tonnes in annual rayon supply which is expected to continue during the next several years.

Rayon, derived from wood pulp, is a textile made from cellulose whose future is looking very promising which is why we sought to invest in this sector. With our Quebec facility, we are transforming an asset which was previously underutilizing its potential by operating as a high cost producer into a specialty product producer which is low-cost and globally competitive. Over 90% of the existing mill equipment is ideally suited to produce high quality specialty cellulose for the rayon textile industry.

The consumer advantages of rayon are clear as it is woven into soft, absorbent and comfortable fabric which supports vibrant colors and wears well. Rayon is one of the most widely used fabrics in the world which can be blended with man-made or natural fabrics. For many centuries, people have relied on plants and animals, such as silkworms, sheep and buffalo, to provide the materials needed for clothing. In our 21st century world, we look to technology and chemistry to create our fabrics. Rayon, dubbed “laboratory’s first gift to the loom” is widely considered to be one of the most versatile and economical man-made fibers available.

–Chadwick Wasilenkoff, Chairman & CEO of Fortress Paper Ltd.

SOURCE:
RISI: “Pulp Growth Ain’t Pulp Fiction – Embracing New Opportunities”

With its recent acquisition of the idled Thurso pulp mill located in the Outaouais region of western Quebec, Vancouver-based Fortress Paper plans not only to make a splash on the market, but a significant profit, too. By ditching the production of northern bleached hardwood kraft pulp in favour of manufacturing dissolving pulp, the company is confident it won’t fall prey to the relentless profit losses so many Canadian forestry companies have witnessed.

“We’re expecting to generate $60 million (EBITDA) but could potentially see profits in the order of $200 million,” says Chad Wasilenkoff, president and CEO of Fortress Paper, with a confidence not often heard in this industry.

Wasilenkoff refers to himself as a “contrarian” investor, as he keeps a punctilious eye on industries widely considered to be depressed, only to pounce on opportunities to grab world class assets at heftily discounted prices. For his $3 million* purchase price, Wasilenkoff pocketed $85 million worth of assets in buying the Thurso facility from insolvent Fraser Papers.

Fortress Paper currently owns and operates two pulp mills in Europe — in Germany and Switzerland. With an emphasis on specialty papers, the company’s product portfolio includes non-woven wallpaper base products, graphic papers, and technical papers. Fortress officially incorporated in 2006, with the intention of taking a closer look at investments in the forestry sector. The company was not specifically seeking to invest in Canada, but had been observing the dissolving pulp market for a number of years. When the Thurso pulp mill came on the market, the timing and price were compelling.

The acquisition is also welcome news to the 320 people formerly employed by the mill, who will, with only a few minor exceptions, be back on the job in June 2010.

“The Quebec government was very interested in getting people back to work,” Wasilenkoff confirmed. “We were informed that not only does the mill provide work for 320 people, but an additional 2900 indirect jobs are supported by the operation, as well.” The provincial government’s motivation to see the facility up and running translated to a cash infusion of $102 million, in the form of a 10-year loan.

It’s money that Wasilenkoff anticipates no difficultly in repaying. “We’re extremely comfortable with the underlying fundamentals,” he says, explaining the overall growth in the market his newly purposed mill will be supplying. “Asia will be our biggest market, and the textile industry there is very strong. As more and more people move into middle income brackets, research indicates consumption of clothing increases, and yet, cotton is an expensive material to produce. Rayon has very similar characteristics to cotton but is more absorbent and breathable, and is less expensive to produce. As a result, the finished product almost always trades at a premium compared to cotton. We consider this to be a very, very low-risk and high-return venture.”

Fortress has two additional multi-million dollar goodies in its bag: the company is entitled to $10 million from the federal Green Transformation Program, as well as $15 million from the Green Infrastructure Fund. Both are initiatives designed to encourage green energy generation and environmentally-friendly production upgrades. Fortress’ decision to construct a biomass-based cogeneration plant at the facility to produce green electricity positioned the company to benefit from these grants.

The mill won’t be making an immediate switch from NBHK production to dissolving pulp, however. Thurso will continue to churn out kraft pulp for another full year before producing its new product line starting in June 2011. Once the transition is over, the mill will produce 200,000 tonnes of air-dried product annually. The company plans to capitalize on bolstered demand for NBHK first. Wasilenkoff expects the restructuring to be a smooth process, however, as it requires very little in the way of retrofitting. Much of the equipment currently in the mill will be suitable for the production of dissolving pulp as it shares much in common with the process of manufacturing NBHK.

With a secure and reasonably priced fibre source (the company has a 50% Crown allocation), a ready-made labour force, and strong market fundamentals, Fortress appears poised for success. Coupled with Chad Wasilenkoff’s unstoppable “can-do” attitude, Canada’s pulp and paper sector may have a new market leader, and mentor, for the future.

* After price adjustments, Wasilenkoff notes, the final price paid for the Thurso facility may be in the order of $900,000.

By Heather Lynch for Pulp and Paper Canada. June 2, 2010.

SOURCE:
Pulp and Paper Canada: “Thurso’s Future Secure with Fortress”

The Thurso mill was sold to Fortress Paper. The Edmunston facility was sold as part of the specialty papers business, along with a mill in Madawaska, Maine, and two New Brunswick sawmills, to Twin Rivers Paper Company. Twin Rivers was formed by creditors of Fraser Papers.

Once Fraser Papers sells its remaining U.S. assets, the company will use the proceeds to settle the remaining secured claims, prior to distributing any remaining proceeds to unsecured creditors.

Fraser Papers was formed in 2004, from some assets of Norbord.

SOURCE:
Pulp And Paper Canada: “Fraser Papers Exits Canadian Scene After Six Years”

Under the Agreement, the Company will construct a cogeneration facility to provide net 18.8 megawatts of green power to Hydro Québec over a 15 year term, with deliveries estimated to commence in the fourth quarter of 2012.

Chadwick Wasilenkoff, CEO of Fortress Paper, states, “The signing of the Agreement represents an important step in achieving our business plan at the Thurso Mill, which includes the building of a cogeneration plant that produces green electricity that in turn will ultimately benefit Québec residents.  We believe that the results of this partnership with Hydro Québec will be beneficial to the environment and the economy of Québec, as well as providing net energy savings (income) to Fortress Paper.”

The Agreement is subject to final approval by the Régie de l’énergie in Québec which is expected to be received in the third quarter of 2010.

About Fortress Paper

Fortress Paper is a leading international producer of security and other specialty papers. Fortress Paper operates three mills, the Landqart Mill located in Switzerland, the Dresden Mill located in Germany and the Thurso Mill located in Canada. Fortress Paper’s security papers include banknote, passport and visa papers and its specialty papers include non-woven wallpaper base products, and graphic and technical papers. Fortress Paper’s pulp business currently includes NBHK with plans to convert this capacity into dissolving pulp production. Fortress Paper plans to build a biomass based cogeneration plant at the Thurso Mill.

Upon closing of the acquisition of the Thurso Mill, which will be completed through its wholly-owned subsidiary Fortress Specialty Cellulose Inc. (“Fortress Specialty”), the Corporation intends to incur capital expenditures of approximately $153 million to convert the non-operating NBHK mill into a high quality specialty cellulose mill and to construct a new cogeneration facility. In connection with the proposed capital expenditures, Fortress Paper is pleased to announce that it has pre-arranged specific financing initiatives to fund the conversion and cogeneration projects.

The specialty cellulose mill is planned to have an annual production capacity of more than 200,000 air dried metric tonnes and is expected to be completed in mid-2011. In entering into the specialty cellulose sector, Fortress Specialty will focus on producing dissolving grade cellulose for the textile industry, primarily targeting viscose fibre (rayon) products which have shown strong growth of approximately 10% in China and 7% worldwide over the past five years. Rayon is a technically evolved and versatile fibre with many advantages, particularly in the warmer and higher growth regions of the world.

Fortress Paper also plans to construct a 25 megawatt cogeneration facility to service a net 18.8 megawatt power supply agreement over a 15 year term. The location of the cogeneration facility provides it with access to on-site generation of biomass and an extensive local network of chip and other biomass suppliers. The cogeneration facility is expected to be supplying electricity in the fourth quarter of 2012.

Chad Wasilenkoff, CEO of Fortress Paper, states, “We are very pleased to announce this new acquisition which we believe will add significant shareholder value in the years to come. Both the Board of Directors and management of Fortress Paper feel that this new opportunity warrants the diversification of the Corporation into other specialty sectors as it has the potential to materially enhance shareholder value. Once the conversion and cogeneration projects are complete, we will be entering a new product segment which offers long-term growth prospects and attractive margins. During the interim period, we will capitalize on the current strength of the NBHK pulp market. We feel it is important to emphasize that this is not an acquisition to enter into the pulp industry, but rather the opportunity to acquire assets that are ideally suited to be converted into a bio-refinery and produce high value-added products. We intend to strategically enter this sector at a time when demand exceeds current capacity. We believe this trend will continue over the next several years given the limited announced new capacity.”

Pursuant to the terms of the APA, Fortress Paper will pay Fraser $3 million in cash at closing, subject to certain adjustments. The closing of the APA is subject to various conditions, including (i) as a result of Fraser and its subsidiaries having filed for creditor protection under theCompanies’ Creditors Arrangement Act (the “CCAA”) in Canada, the approval of the transaction by the Ontario Superior Court of Justice (Commercial List) in connection therewith, (ii) Fortress Specialty entering into renewed collective agreements with all unionized employees of the Thurso Mill, and (iii) the Corporation and Fortress Specialty securing financing as necessary to implement their proposed business plan at the Thurso Mill. Fortress is optimistic that it will be able to finalize mutually satisfactory renewed collective agreements with the three unions imminently and looks forward to building a mutually beneficial relationship with the community of Thurso. The closing of the acquisition is anticipated to occur on or about April 30, 2010.

Investissement Quebec (“IQ”) has committed, by way of an agreement in principle, to grant Fortress Specialty a loan in the amount of up to $102.4 million to support Fortress Paper’s proposed business plan in respect of the Thurso Mill. The loan will be secured by the capital assets of Fortress Specialty and will have a term of 10 years. Interest will be calculated at a fixed rate of 5.0% per annum for the first five years, followed by a rate based on the cost of IQ’s funds plus 2.0% for the remaining five years, up to a maximum of 5.5% per annum. The loan is subject to receiving the requisite approval of the Government of Quebec and is subject to completion of definitive documentation.

Fortress Paper has also signed a conditional commitment letter with a Quebec financial institution providing for the subscription of an unsecured convertible debenture of Fortress Paper (the “Debenture”) in the principal amount of $15 million maturing in five years with an interest rate of 7% per annum. The Debenture will be convertible, in whole or in part, at the option of the Quebec financial institution into common shares of Fortress Paper at any time after closing of the debenture at a conversion price equal to the lesser of 145% of the trading price of the common shares on the Toronto Stock Exchange (the “TSX”) and $20.00.

The Debenture will be redeemable, in whole or in part, at the option of Fortress Paper, from the second anniversary date of its issuance at par plus all accrued and unpaid interest, provided that the volume weighted average trading price of the common shares of Fortress Paper on the TSX is not less than 125% of the conversion price. The Debenture financing is subject to various conditions, including approval by the decision-making authorities of the Quebec financial institution, satisfactory due diligence, the concurrent completion of the IQ financing, the closing of the APA, receipt of TSX approval for the issuance by Fortress Paper of the Debenture and the completion of definitive documentation.

Included in the assets being purchased from Fraser is approximately $9.9 million in credits (black liquor credits) granted under the Canadian government’s Pulp and Paper Green Transformation Program (the “GTP”). The GTP aims to improve the environmental performance of Canada’s pulp and paper industry by funding approved capital projects with environmental benefits. Fortress Paper also intends to apply for approximately $15.2 million in federal credits under the Green Infrastructure Fund program of the Minister of Transport, Infrastructure & Communities relating to the planned cogeneration project.

As no definitive agreements have been entered into with respect to the financing initiatives described above, there can be no assurance at this time that the financing in connection with the Thurso Mill will be completed on terms acceptable to Fortress Paper or at all.

For more information on the Fortress Specialty Cellulose project you can access the Fortress Specialty Cellulose PowerPoint Presentation by going directly to the link atwww.fortress.presenternet.com

A prerecorded voice presentation is available to accompany the PowerPoint and can be accessed at:

Prerecorded Presentation dial-in number 1-877-353-9587 or from overseas 403-699-1055 and follow the prompts. When prompted, enter the 6 digit conference reference number 274464 followed by the number sign (#). The recording will be available for 7 days.

Future replays of the PowerPoint Presentation can be accessed by a link on the front page of our website at www.fortresspaper.com and alternatively at www.fortress.presenternet.com.

About Fortress Paper

Fortress Paper is a leading international producer of security and other specialty papers. Fortress Paper operates two paper mills, the Landqart Mill located in Switzerland and the Dresden Mill located in Germany. Fortress Paper’s security papers include banknote, passport and visa papers and its specialty papers include non-woven wallpaper base products, and graphic and technical papers. As an extension of its security papers business, the Landqart Mill has been actively developing and marketing innovative paper-based security products.

This news release contains certain forward-looking statements that reflect the current views and/or expectations of Fortress Paper with respect to its performance, business and future events, including statements relating to the Corporation’s completion of the APA and the outcome of its financing initiatives; its intention to convert the Thurso Mill into a specialty cellulose (dissolving pulp) operation; its plans to build a biomass based cogeneration plant and the financial results and production capacity expected therefrom; its ability to complete the necessary financing to make planned capital expenditures; the expected effects of the acquisition of the Thurso Mill on the business of the Corporation; the state of the market in the specialty cellulose and green bio-energy sectors; and its intended application for federal tax credits. Forward-looking statements are based on the then-current expectations, beliefs, assumptions, estimates and forecasts about the business and the industry and markets in which the Corporation operates, including assumptions relating to the Corporation’s ability to complete the APA; its ability to complete the necessary financing to successfully implement its business plan in respect of the Thurso Mill; the success and profitability of the specialty cellulose operation and cogeneration plant; the expected effects of the acquisition of the Thurso Mill on the business of the Corporation; the state of the market in the specialty cellulose and green bio-energy sectors; and the Corporation’s ability to obtain certain federal tax credits. Forward-looking statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Investors are cautioned that all forward-looking statements involve risks and uncertainties including, without limitation, that the Corporation will not complete the APA; will not obtain the necessary financing to complete its business plan in respect of the Thurso Mill; will be unable to implement its business plan in respect of the Thurso Mill as planned or at all; that the specialty cellulose operation and cogeneration plant will not be successful or profitable and will not meet anticipated production capacities; that the Corporation will not obtain the federal tax credits; and those risks relating to changes in the market, potential downturns in economic conditions, fluctuations in the price and supply of raw materials, foreign exchange fluctuations, labour relations, regulatory requirements, reputation, competition, dependence on major customers, and other risk factors listed from time to time in the Corporation’s public filings. These risks, as well as others, could cause actual results and events to vary significantly. Accordingly, readers should not place undue reliance on forward-looking statements and information, which are qualified in their entirety by this cautionary statement. Fortress Paper does not undertake any obligations to release publicly any revisions for updating any voluntary forward-looking statements, except as required by applicable securities law.