Cleared the desk, pulled out the abacus and came up with a few thoughts and some questions.
Some thoughts:
This isn’t a bad balance sheet situation but rather a P&L problem. However, the construct of the P&L is hopefully changing and by Q2/23 we’ll probably see the first evidence of a restructured P&L.
CFX has a decent little paper business. If you accept the cost allocations, paper has been cashflow positive for the last ten years with only two of those sub $20m. Apply your own multiple to this business.
I have no opinion on pulp prices.
CFF/Pattison is likely not the minority shareholder’s friend here. Caveat Emptor.
Questions:
I’ve run a regression analysis on CFX’s quarterly costs going back thirteen years. While the R Square is not very encouraging, it’s obvious the cost structure is heavily weighted to fixed costs vs variable.
Cost per unit ramped up quite dramatically starting in Q4/21.
So…
- Does shutting down Taylor and PG drop fixed costs disproportionate to production capacity? In other words, is Intercon/Northwood materially more efficient with respect to fixed costs than Taylor/PG?
- Do fibre supply costs (a variable cost) go down since scarce lower cost residual fibre will be used only for the remaining two mills rather than being combined with higher cost whole log chips and spread around three mills? (Apologies if my terminology is muddled).
- How much fixed cost in 2022 was incurred to keep Taylor (and to a lesser extent Intercon/part of Northwood) idle?
- The 12/31 Asset Retirement Obligation doesn’t capture the cost of shutting down PG.
“….no asset retirement obligations are recorded for these assets. These assets include wastewater and effluent ponds that will have to be drained once the related operating facility is closed and storage sites for which removal of chemicals, fuels and other related materials will be required once the related operating facility is closed. When the retirement dates of these assets become determinable and an estimate can be made, an asset retirement obligation will be recorded.”
Maybe with the paper mill running at PG no obligation will be created.
Any comments on the above might be useful in better projecting the 2023 P&L. Before Q2 results come out in Jul/Aug and the algos scrape the numbers, if they even care.
At 700-800 tonnes per annum, assume a very modest $100/tonne margin and an EV of $200m less whatever you value ascribed to the paper business, CFF appears very cheap.
With plenty of potential for upside.
GLTA