Canfor is out to wheel and deal....The except below (Canfor’s Q2-2020 CC) is worth a read. Canfor is aggressively after M&A opportunity, with some mill improvement and debt reduction thrown in. However, they really don’t have much debt esp. when expressed and debt-to-cap in a rising share price backdrop.
Mark Wilde at BMO is incredulous. They are throwing off a lot of cash. A LOT. And they are refusing to give any back to shareholders. That's a problem for CFP shareholders, and an opportunity for us sad CFF gang.
CFP could easily make north of a billion cash in the next year. They cite the Berg takeout as being ideal, and that was $200/MFBM CAD just for a mill (way below market, so not much of a mill or mills from what I can tell). So there you go, there's $50M ( a buck a share) for the Mac mill. Add the tenure at full price (yes, it's back to full godddam price with this market) of $150/M3 so there's about $150M.
Boom, there's $200M for the CFF lumber asset. It has no debt, that is all with the power plant.
CFP will take the plant too of course, they'd pay likely 10X EBITDA which is about the value of the thing new. Net out the $60M debt and there's ~$80M for shareholders left.
So, call it a day, sign me up for my $280M net payout or $5.95 a share, and let's go find new ways to get ourselves rich.
I'm cutting some corners on the analysis, but the CFP boys are DUG IN about not returning capital to shareholders. I love it. (Context: they rarely do, but then again it's rare they are poised to make such a boatload of cash in such a short period). They prize geographic diversification, so maybe it's not CFP but Tolko or Hampton or EACOM or Resolute that come in, but same dif. Resolute is compelling too as they have dealt with CFF before AND have deep expertise in power generation. If Canfor is a non-starter, then my money is on Tolko – they are due to move the market.
In short, I am thrilled CFP has publically ruled out special divs, share repruchances, and whatnot. Those things are great for CFP sharehodlders so this is such good news. It means they are going to go on a buying spree and CFF may just get swept up directly or indirectly. The latter as now the other firms think "ahhhhh sheeet, now I gotta get on the M&A horse too before Jimmy's boys clear out the cupboard".
**
Your next question comes from Mark Wilde of Bank of Montreal.
--------------------------------------------------------------------------------
Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [37]
--------------------------------------------------------------------------------
It's a much different situation than we had 3 months ago.
--------------------------------------------------------------------------------
Donald B. Kayne, Canfor Corporation - President, CEO & Director [38]
--------------------------------------------------------------------------------
Yes. That's a good thing for sure.
--------------------------------------------------------------------------------
Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [39]
--------------------------------------------------------------------------------
I wanted to start off by just kind of talking about the capital allocation priorities. I mean it looks like you're going to throw off a lot of, lot of cash in the third quarter. I'm just curious about how you're thinking about prioritizing that in terms of debt reduction, M&A, share repurchase, special dividend, all the different options there.
--------------------------------------------------------------------------------
Donald B. Kayne, Canfor Corporation - President, CEO & Director [40]
--------------------------------------------------------------------------------
For sure. Maybe, Alan, I know you've been -- we've been working a lot on this. Why don't you speak to that with -- to Mark's questions?
--------------------------------------------------------------------------------
Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [41]
--------------------------------------------------------------------------------
Yes. No, for sure. Yes. I think we typically have -- we've tried to be fairly disciplined as to how we allocate our cash, and clearly, the challenges have been more pronounced in more recent times. But to answer your question, I think it's fair to say that debt reduction will remain a key area of focus for us. We accept that we took out more debt, obviously, with respect to the Vida acquisition and, to a lesser extent, the Elliott acquisition as well. But debt reduction clearly is a top priority for us. I think on the M&A front, I think what you've seen through the Bergs announcement is our desire to be able to take advantage of attractive smaller acquisition targets. But we think those will be more selective and, to Don's earlier point, more targeted, obviously, in Europe and potentially in the U.S. South as well.
And then we have to obviously maintain our focus on capital for our existing operations as well. Mark, you appreciate that we've curved to spend there this year, and it's important that we go back to a more normalized targeted and disciplined spend in that arena as well. So those are the 3 big areas of focus, I would say, for us, as we look out right over the balance of the year and indeed into 2021.
--------------------------------------------------------------------------------
Donald B. Kayne, Canfor Corporation - President, CEO & Director [42]
--------------------------------------------------------------------------------
Alan, I think -- and Alan, you covered it well there. And I think the thing, though, just to emphasize, though, is on the debt reduction piece of all of those areas. Like we -- our focus is going to continue to be because there's still uncertainty out there for sure beyond Q3, perhaps even into Q4. But debt reduction is going to continue to be a focus for sure. And then if there's an attractive target, as Alan mentioned, comes up, we'll certainly look at it on a very specific way, but debt reduction clearly is our #1 focus.
--------------------------------------------------------------------------------
Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [43]
--------------------------------------------------------------------------------
Yes. I'm just -- I'm kind of curious on the share repurchase side. I mean it's hard for me to imagine that you can make an acquisition of lumber capacity as cheaply as your own equity right now. Any thoughts on that?
--------------------------------------------------------------------------------
Donald B. Kayne, Canfor Corporation - President, CEO & Director [44]
--------------------------------------------------------------------------------
Yes. Go ahead, Alan.
--------------------------------------------------------------------------------
Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [45]
--------------------------------------------------------------------------------
Yes. So Mark, I think I'll just echo what I said a few minutes ago. I think we believe there's higher priorities today. And I would say, just in terms of your comment around share repurchasing, I think we're very encouraged by what we see in respect of the Bergs announced acquisition. We believe that the economics of that are very compelling. The synergies are very attractive and the payback period likewise. So one could discuss the merits of both for some time, Mark, but we're very comfortable with what we've outlined as our key priority, certainly for the foreseeable future.
--------------------------------------------------------------------------------
Mark William Wilde, BMO Capital Markets Equity Research - Senior Analyst [46]
--------------------------------------------------------------------------------
Let me just press on this just a little bit further because if I go back 2 years ago, you were buying your stock at almost twice the price it's at today. And so I'm just kind of curious, I mean, we're kind of getting a -- an unexpected windfall, and I wonder if there isn't some merit in taking a portion of that windfall and being opportunistic right now about the stock.
--------------------------------------------------------------------------------
Alan R. Nicholl, Canfor Corporation - CFO and Executive VP of Finance & Canfor Pulp Operations [47]
--------------------------------------------------------------------------------
Yes. I think, I mean, again, Mark, not maybe the best forum to have that conversation. But I think the diversification angle that we're taking here, to Don's point earlier in the call, is a key part of really driving value across our company. And we believe that we're seeing the benefits of that through, not just more stable earnings, but also improved earnings in many parts of our business. So we're comfortable with the approach, as I say, that we're adopting there. And there's so much uncertainty. Ther