Conifex and Canfor are pretty tight.This was a great deal for both in 2015 (presser pasted at bottom). Canfor opted to take the tenue as it was never a real loan – they needed the fibre. By implication (and now that we're booming in lumber) the CFF 782,500 M3 would be worth $117M or $2.50 a share alone.
The question is what to do in Mackenzie. CFF under Sheids wants to goof around with the mill and put in capital (gag). Canfor idled their facility. Pattison may want to lump the tenure together and build a fit for purpose operation that would consume the CFF wood and the CFP wood. It wouldn't be tough to do a real Cadillac operation with more flexible characteristics like:
1) Optimize the location. South of Mackenzie and closer to PG to bus in guys from a better labour pool? Closer to Dawson? Maybe keep in town and use the barging from Williston Lake but factor in the ability to have a lot of 'company accommodation' like CFP does in places like Houston?
2) Break the unions. They may opt to stay union but skill up the roles to prevent the wrong people from working there barriers to entry not called ‘seniority’). No idea what that would entail. But a modern mill would have a smaller workforce anyway. And common sense would be that if you took the best 50% from both operations, left the worst 25% behind, and minimized the damage the mediocre 25% can do, you'd be good to go.
Maybe this is the out for Sheilds and a cool project for Canfor to re-vitalize it's BC presence. Canfor is the big BC playe after all with WFT being lighter these days (and the Alberta player). It's political now with all the hand-wringing about outside of BC investments. Maybe this could catalyze the renegotiation of the Power Purchase agreement with BC Hyrdo too (they would reward such a forward-thinking BC-based champion of course). Plus, Canfor loves big vanity projects, and they have never had any serious interest in returning capital to shareholders. And hey, they have the cash rolling in and no pesky dividend to pay. The NCIB is weak and infrequently used as I recall. I recall the huge refund of duties maybe 15 years ago…. Shareholder didn’t get a dime. Management made some killer bonuses and the vanity projects spiked, however.
Last of all takeover price would not be anchored by current share price given the poison pill. So face-saving all around. So say Canfor pays that $2.50/share or so for the mill and tenure. One pragmatic move would be to keep the powerplant as CFF and re-badge as Conifex Power. Maybe Canfor doesn't want it? It might get difficult as the fibre secures the plant and whatnot, but say that was addressed via paperwork. The deal would be $2.50 per share to takeover for the mill and tenure, CFF shareholders keep the powerplant (and it's $60 some million in debt). So you'd get a new CFF-based spinoff co, plus cash per share.
In reality, I suspect Canfor would just take the Powerplant as they have done similar things with the three main pulpmills in BC. That’s the bone of contention as they may only want an acquisition price of not much more than $100M for that asset, so that’s only $1 a share or so once the debt is netted out. Maybe they toss in an extra dollar… but the math still doesn’t work at $4.50 ($2.00 + $2.50) as the BWC guys will be choked with their $6.00 ante. At least separating out the plant (that BWC can keep shares in ) from the fibre and mill would let them take $2.50 or $3.00 per share now to make things closer to right while keeping the powerplant for the longer run. Debt is overrated there anyway – they can have a net cash position easily in 5 years if they wanted to. I suspect they’d be better off paying a monster div and pushing up the value of it as an equity comprised only of the power plant that way. E.g. the power plant could still deleverage conservatively
and pay the $4M a year on debt, payout $8M to shareholders (yield of 17% currently), and take little effort to run. A power plant only entity would be worth at least $2.50 a share (that still pays 6.8% based on my math).
I’d be thrilled with this type of win-win deal. It let Sheilds save face and I’d send the old SOB a Christmas Card even. Give me $2.50/share in cash by selling the tenure and mill to Jimmy, let Jimmy be the new King of the North (not a GOT allusion, even though he looks like the white dude on the horse) and build an awesome mill that revitalizes the town, and let the CFF powerplant just be a cash cow that is fibred up by an ironclad agreement with the Canfor megamill that pays me $0.17 per year. That power asset would be suddenly worth at least 2x what the current combined CFF price is. Seems to be a win for me. Shoot, I’d be happy to keep Sheilds on the board if that was the case even – pay the guy $100k a year and give him a vanity title if he can extricate himself from this mess. I fairness his foray to the US South almost coulda worked…. If we had these prices in the period from May 2018 to May 2019. But they tanked and it exposed the El Dorado mill as a paper tiger, the purchase price as way too high, and the CFF operational limitations as being too acute. Didn’t have to be that way, but it happened. Now we need a constructive path forward. This presumes that anyone with any real skin in the game has bought some shares <$1.00 so it would very much reward them. I see Neeser bought a decent batch with his own money in the $0.40 range. Smart man, and he should turbocharge those with an annual div stream of $0.15+/share once the albatross of the mill goes away.
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Aug 04, 2015
Canfor Corporation (TSX:CFP) announced today that it has completed an investment agreement (the “Agreement”) with Conifex Inc. (“Conifex”), a subsidiary of Conifex Timber Inc. (TSX-CFF) pursuant to which Canfor loaned $30,000,000 to Conifex. The loan is represented by a senior secured note (the “Note”) which has a term of 5 years and is secured by a first lien on a forest licence with 200,000 cubic metres of annual cut held by a subsidiary of Conifex. Canfor has the option, exercisable after one year, to convert the loan into an ownership interest in the forest licence.