An opportunist investor with flair
You may be familiar with the name Chad Wasilenkoff. The CEO of Fortress Paper is most likely unavailable for interviews these days. With the salvage of two paper mills to his credit in four years, and more recently the former Fraser Pulp mill of Thurso, the investor hailing from Vancouver, BC, is now renowned in the business community.
Forced into bankruptcy at this time last year, the kraft pulp mill is currently producing 250,000 tons/year. And the foreseeable future is very promising. The entire production will be devoted to cellulosic pulp (dissolving) starting in July 2011. Given that the pulp market is currently experiencing a bull market cycle, Fortress has chosen to take advantage of this up-cycle and proceed with the construction of an addition to the mill that will receive new pulp making equipment imported from Finland; this will not affect current production levels.
During the course of our interview of more than half-hour, Mr. Wasilenkoff, 38 years old, repeatedly described himself as an investor, not a rescuer. Organized, methodical, the former broker with Cannacord focuses his operations on world-class assets in sectors in difficulty and not the other way around. In the case of the Thurso mill, Mr. Wasilenkoff admits to having unearthed a precious stone which, in addition to offering a highly qualified technical team, corresponded in many respects to the type of assets Fortress was seeking in the niche (and expanding) market of cellulosic pulp.
PA: Mr. Wasilenkoff, how do you differ from a takeover entrepreneur or a firm specializing in business reactivation of assets in difficulty?
Chad Wasilenkoff: I am first and foremost interested in the product. The product should provide some growth curve in the long term. Then I look at the company and/or its assets. Fortress' strategy for growth is predicated on its acquisitions and investments, not disinvestment or resale. That said I am a businessman. I still own securities in a gold producing company which I would be prepared to sell subject to a reasonable offer. But the resale itself is not the objective.
PA: What prompted you to invest in the pulp and paper industry?
CW: Like any good investor, I identify growth industries and in particular products offering prospects for high returns. I invested in gold when the market was at its lowest, around $275 an ounce. I did the same in the uranium and petroleum products sectors. In 2005-2006, after cautiously examining the forest products industry, we identified paper mills operating in promising niche markets, which could allow us to become a dominant player in the field. In 2006 we took action and purchased a German factory that produces non-woven wallpaper. We have since achieved four increases in production with the plant equipment. We are currently the lowest cost producer for this type of product with a 55% market share. Then we invested in security paper used primarily in the issuance of currency, a market experiencing a 4% annual growth. We bought a factory in Switzerland, equipped with a security papermaking machine having a production capacity of 2,500 tons/year as well as a commodity papermaking machine. By next November, the latter machine, which has triple-width capacity, will be converted to security paper thereby quadrupling our production capacity. I would surmise that with selling prices of up to $45,000 a tonne for security paper this constitutes a strategic investment.
PA: How about rayon pulp? What is the reasoning behind Fortress Paper setting its heart on this niche market?
CW: Of course, the current business re-engineering of the paper industry creates investment opportunities toward valuable assets. Despite current difficulties, some markets are performing well with excellent prospects for long-term growth. This is the case of cellulose pulp or rayon pulp, which is mixed with textile production. Global demand for textile, primarily rayon, is strong and consumption growth in India and China exerts pressure on the textile industry. Cotton producers, however, are unable to respond to this increasing demand. This is where rayon comes to the rescue. Furthermore, a garment containing rayon behaves better and breathes easier. This textile is highly sought after by women's clothing manufacturers.
PA: And the Thurso mill? How did it become the subject of Fortress' third pulp and paper company acquisition?
CW: As the saying goes, planetary alignment was key. The Thurso mill closed and the company bankruptcy proceedings enabled us to reach a good deal. In the absence of competition, we paid $1.2 million for a plant that had an estimated replacement cost of $850 million. Then, the closure of the plant near Pontiac freed an extra supply of wood fiber. The Thurso plant was already well equipped to produce kraft sulphate pulp (by vatful), so it gained an enviable reputation in photographic papermaking pulp. What we needed to do was invest an additional $150 million earmarked for the conversion to cellulose pulp, 2/3 of which is secured by a loan from Investissement Québec. I should also mention Hydro-Québec keeping an open-mind about the power co-generation project which will enable us to reach a level of self-sufficiency and provide the ability to sell surpluses to the Crown Corporation for the next 15 years (starting in 2012).
PA: What is the conversion schedule for the Thurso project? When will rayon pulp be produced, and who are the target markets?
CW: Operations resumed last June according to plans and everything is progressing normally. We expect to start production of cellulose pulp as early as July 2011 and the power co-generation plant a year later. Moreover, a window of three weeks has been allotted after start-up with a view to achieving full production of cellulose pulp and stop manufacturing kraft pulp. The soil developmental work on the site of the new plant is underway. We anticipate closure of the three-storey building next October to accommodate the five kraft digesters. These digesters were purchased for $30 million from a Finn producer. They are only slightly used and meet our needs in every respect as well as the plant configuration. Complete with piping systems, the digesters are scheduled to arrive in the Port of Montreal from Finland in late September. The digesters, weighing 110 tons each, will then be loaded on barges and shipped up the Ottawa River to Thurso. As for production, it will be sold entirely in India and China based on a 70% - 30% ratio respectively.
PA: Who will partner in the Thurso project?
CW: With the exception of the engineering firm Jaako Poyry responsible for the production of cellulose pulp, no other collaborator has been selected. Other partners will join in the coming weeks. We are also contemplating a turnkey contract for the engineering and construction of the co-generation plant within the month. Truth be known, we are very excited about this project. Fortress is counting on high-quality technical teams and management expertise. The plant is under the leadership of Marco Veilleux and a team of enthusiastic workers. Peter Vinall, a colleague with three plant conversions to his credit, oversees the conversion of the Thurso plant. We are very confident about the future.
PA: Fortress Paper is operating within three distinct pulp and paper markets. What are your expansion plans over the short to medium term?
CW: We are always on the lookout for good business opportunities that fall within the scope of the company's growth strategy. The forestry sector is of particular interest and we may consider expanding our product range via the acquisition of one or several assets toward the production of forest products. Where paper is concerned, the selection is more limited. We will continue to monitor our market progress and make the necessary adjustments. As an example, investing in the newspaper industry is out of the question. We will nurse a lame duck and consider conversion toward a more profitable operation; however, we will not invest in declining markets.