Last June, the CEO of Fortress Paper, Chad Wasilenkoff, appeared before a Canadian Senate committee to explain its various business projects. This group of senators seeking solutions to the  problems of the forest industry were very impressed with his presentation. In my opinion, this is the best explanation I have read about the activities of Fortress Paper. I want to thank Eddie Chandonnet, a reader of this blog (and experienced investor) for his discovery of this document.

You can access the complete document here.

Here are some interesting excerpts on …

… Wasilenkoff’s past investments

My background is as a contrarian investor, first and foremost, and an entrepreneur. I typically look for investment opportunities in areas that are heavily out of favour, where other investors typically would not like to tread. When gold was $275 an ounce, I was able to secure two gold mines. When oil was $15 a barrel, I built up two oil and gas companies. When copper was 80 cents and seemed to be going lower, I bought a copper mine. When uranium was $8 to $9 and no one was looking at that space, it having been in a 25-year decline, I was able to secure assets from Cameco.

… the Thurso project

These assets we were able to acquire and secure for $1.2 million. A lot of people thought we were crazy and probably spent too much. However, their replaceable insurance cost is $851 million. These assets are more than 95 per cent ideally suited for our new product, dissolving pulp. As we turn this project around and convert to dissolving pulp, we are able to take these $1.2 million assets that were heavily underutilized by the previous owner, and, once we are fully converted to dissolving pulp, even at the initial stages, given the current or spot price of dissolving pulp, the mill will generate just over $200 million in profit.

… looking at things differrently

If we look at the Thurso project and what we will produce there, this concept is a bio-refinery producing multiple chemical products and co-products from biomass feedstock. This concept is gaining acceptance worldwide. It offers possibilities for creating new value chains and diversifying the forestry sector. The concept is analogous to today’s petrochemical refineries, where multiple products are produced from a single raw material.

… India and China

A large chunk of the population in India and China are moving into middle-income status. The first thing they buy is a cell phone, and then they improve their wardrobe. In these hot regions like India and Indonesia, they want fabrics that breathe better and are more absorbent. The industry is growing at about 10 per cent per year. We will no longer be relying on the structural decline taking place in the paper industry.

… the Dresden mill

As an example, I bought a mill in Dresden, Germany. It was manufacturing wallpaper. They had good inroads and a strong, deep understanding of the wallpaper industry, the sales cycle and the customers, but they were making a standardized simplex paper, which is not that dissimilar to photocopy paper. It was for a different use, but any paper machine in the world could make it. Through research and development, we developed a non-woven type of product (a dry strippable wallpaper).

With that, if we look at the wallpaper industry globally, it is still in a 1 per cent or 2 per cent decline. Most people say it is not a great area for investment. Within that industry, though, this non-woven product is taking off and displacing the old product. We are growing at between 15 per cent and 20 per cent per year. Since acquiring the mill, I have made three upgrades. We have more than doubled the capacity. We now represent 55 per cent of the global production of this non-woven wallpaper, and we command 20 per cent profit margins. With the old product, we would lose about 1 per cent, no matter how efficient we made it. It was the wrong product mix.

… a Senate proposal

One of your proposals that caught my attention was to try to grow and promote the biomass and biofuels industry for heating and electricity. Look at the innovation and growth that has occurred in the computer industry in the last 20 years. Exciting things happen in leaps and bounds annually, which attracts young people. In contrast, in the forestry sector, when creating heat and electricity from biofuels, we are basically only burning wood in one form or another. After 300 years of Canadian forestry and billions of dollars spent through profits and government subsidies, our great light-bulb idea is to burn the wood? The caveman came up with that.

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