RE:RE:Scenarios for those shouting out demands: "WHAT'S IT WORTH?"*GLASS BREAKS* *Stone Cold's music comes on* Heck, I even made a meme for the occasion.
https://imgur.com/a/5ayczJG
Anyway, it's awesome you're weighing in -- your depth and insight is a huge value-add. The $650 COGS consideration is helpful and I'll use that. The geography in Mack is tougher than other operations that are closer to end markets so good point on logistics. I recall when I worked in Chetwynd nearby that they used a lot of trucks which is highest cost. Mack must have a rail spur, but vis a vis even an average Resolute mill it's a massive distance away.
I'm glad you agree on the BoD situation. I have been pleased seeing Dave Roberts buying as I've always been impressed with him having seen him speak at conferences in the past. But otherwise, totally unprofessional and borderline neglegent.
I'm amazed how slack the governance is. Something as simple as a WFG-style Equity Holding Policy for the BoD would drive far better decision making. Granted I haven't followed up on the current crew and it’s not broken out on the 2021 Annual Information Form. Nevertheless, it states “
Our directors and executive officers, as a group, currently beneficially own, directly or indirectly, or exercise control or direction over 1,823,316 (approximately 3.92%) of our outstanding common shares.” Ken has more than that counting the incentives, options, and restricted units so I suppose that would be excluded. Just tallying the common shares at Dec 31 2020 for Ken and Dave totals 1.732M, or 95% of the total held by the BoD and mgmt. A total of 90,000 shares for the remaining isn't ideal. Granted, I’m only attuned to it given the lax policies allowed guys like Jimmy Jia sit on the board, preside of the disaster in the US SE, and have zero shares to his name. I look at things like West Fraser’s policy which mandates skin in the game and realize this isn’t rocket science and doens't requrie a Nasim Talib fanclub membership to pull off.
https://www.westfraser.com/investors/corporate-governance/equity-holding-policy I do disagree on the tenure risk for a few reasons with one major caveat (First Nations).
- It's already happened.
- “The B.C. government clawed back 20 per cent of the tenure held by major forest companies and used much of that timber to create a new Crown-owned agency, BC Timber Sales, which auctions off that timber to logging contractors.”
- My experience is that undercutting your AAC is a major driver, and I don’t believe they undercut theirs.
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- They’d need the full lot, plus some from BC Timber Sales.
- My math is assumes a lower end lumber recovery of 260 fbm/m3 meaning they’d run 884,000 M3 annually to come out with 230 MMFBM.
- Whereas Western Forest undercuts dramatically and these traditionally have a ‘use it or lose it’ vibe.
- Mackenzie is politically sensitive and has lower timber demand It’s not worth messing with policitilly.
- I think this is why Ken makes references to FN partnerships – if they fired up a mill and needed fibre then there’s a risk. Aiming to get ahead of that and be partners is better.
- Mandated Capex would strain an already weak BC sector.
- It seems inconsistent with other goals such as this:
Biomass is something I’m also less worried about because it’s steady (not intermittent), Mack is a hot potato politically, CFF is BC-based unlike the other 81% of beneficiaries, and (eventually) it sounds like Ken wants to bolster the ESG credentials which further helps optics by hopefully better engaging/hiring Forest Nations people.
- “However, many of the projects are run-of-river, which generate intermittent power and peak during the spring freshet when Hydro has an overabundance of such power, read the report. That is combined with contract terms that have caused the Crown energy corporation to get locked into decades of overpayments”
- “When I see that (ratepayers) are paying an extra $200 a year for this scheme, for a total of $16.2 billion, a scheme where 80 per cent of that money is going outside of the province … not only is this a big huge boondoggle, but it’s just scandalous,” said Mungall. “It’s unacceptable.”
- “The IPP contracts are often for 30 years, with terms that could cost Hydro even more if the corporation tried to break free of them to stem its financial losses, Davidson wrote in the report. Three IPP contracts are almost 60 years in length.”
The full report is here.
bch19-158-ipp_report_february_11_2019.pdf (gov.bc.ca) - BC as a jurisdiction isn’t that great, agreed. But it’s a small factor in the overall (possible) supercycle notion. Moreover, it’s poor vs. a shifting benchmark. In 10 years time it’ll look far better as the US South costs escalate.
- FEA has a 2019 report on this showing the high costs driven by the madness of the 2018 MPS system which is a bizarre tool designed to appease the Americans.
- https://www.cofi.org/wp-content/uploads/FEA-BC-Interior-Public-Final-August-2019.pdf
- They say:
- “BC mills also face political and forest policy uncertainty. There are significant uncertainties with respect to First Nations “Rights and Title”, caribou protected areas, and “public interest” policies surrounding timber tenures2 . These uncertainties affect investor confidence, having a stifling effect on the injection of new capital within the BC forest sector. Given potentially low returns and heightened risks, in the absence of change we expect lumber companies will deploy capital to regions outside of BC. Under this scenario, ripple effects throughout the broader provincial forest sector are likely to occur as the interior lumber industry serves as the primary impetus for harvesting and provides key inputs to other parts of the domestic supply chain including pulp mills, pellet plants and secondary manufacturers.”
- I agree and have always opposed Capex into that mill.
- It means they shut it down when the times are bad.
- If the gov’t wants it to run rain or shine, they can pay for Ken’s new board edgers.
- The advantage here is it means ultimately less competition for fibre.
- Sawmilling is hard work. If I was an enterprising FN band I might look elsewhere in usual times.
Nevertheless, these are exceptional times and the US South will get hairy in the coming 5-10 years as timber crops don’t return post harvest (why would they?) and demand ratchets up. The cure for low timber prices is low timber prices, and that's going up in a big way. Moreover, so will labour costs given the staggaring numbers at sub min wage currently. I see BC based CFF as being a deserved discount to a WFG, but if they go from 7x to 9x valuation, I’d expect CFF to go from 5x to 7x.
Interesting point about believing “that lumber prices drive the value of the lumber producer's equity.” I did, but it’s certainly decoupled now giving me pause. It’s a good dilemma to have though as it creates a certain arbitrage opp for those with debt albatrosses. I have RFP as it's going to benefit most by a mile. I also have WFG as big one -- that and RFP are dominant and outsized positions – both are well led. WFG’s OSB assets are staggeringly good, and I'm too old and cranky to take flier risks on any material basis (though, I bought a few tousand shares of GreenFirst as it seemed cool... lo and behold a few months later is +350% so go figure. Anyway, RFP’s little run lately hasn’t scratched the surfact. (I use “little” on purpose despite being pretty lucky with low-to-mid single digit cost averages and some underpriced call options that I almost felt like a predator buying back in late summer). It’s for these reasons:
- Full deleveraging is nowhere near priced in; pension hangover can end (perceptually it reality it’s irrelevant and requires a max of $100M catch-up payments a year or so away and it falls off from there).
- The duty is under pressure.
- The cross-listing will finally pay off (NYSE and TSX). Other than WY, that's the #2 lumber name on the US Listings.
- A discount to the market value of the sawmill still remains, implying the pulp mills, tissue mills, and 10x the power gen of RFP is $0.
- Swapping an old company man with no vison for a sharp Wall Street guy who knows the mills? Excellent. I have big hopes there, esp on capital allocation.
- Pulp’s 20 year disaster of sub-3% ROCEs + Covid’s effect on demand has set the stage for a generational run in NBSK.
- Oh and the Reddit brigade is there too. Roaring Kitty aka DFV aka Keith Gill of GameStop fame has it as his 3rd largest positon. Retail demand is so tepid I wonder what even a semblence of demand from the public could do.
Lot of thoughts on RYAM too. Rick Doman picked RYAM’s pocket on that one. I’m always amazed by the bumbling of RYAM and how those guys can be so out to lunch. What an awful deal. I’m floored. I can’t fathom how short-sighted it is to sell these assets at peak cash earnings for a bottom of through pricing. Mills with fibre are always worth a basic $/mfbm and that’s what these went for (the same as the Dunkley acquisition of those old C&C mills in 2019). Newsprint is a paper tiger – that asset was allegedly top quartile, but RFP shuttered two similar ones for about $10M each all in so it’s not that costly to give up the ghost. But I see the conversions to lineboard for 30 cents on the dollar of greenfield being a better bet.
Anyway, I had a longer piece on this that I’ll PM as I can’t readily de-identify it and I haven’t geared my cranky rants on Stackhouse accordingly.
Great insights throughout though, thanks.