By: Financial Post
Chad Wasilenkoff grew up in Calgary. The pulp and paper mills his company owns are in Switzerland and Quebec. His office is in Vancouver. His wife Laura and two boys, aged six and eight, “recently relocated,” to La Quinta, a suburb of Palm Springs, Calif. — good for the kind of riding Laura does, which is hunter/jumper.
Where is Mr. Wasilenkoff? Last week he was at the Trump Miami hotel, where he attended a conference hosted by Ekman, a Swedish pulp broker, and watched PGA golf.
“I am constantly on the move,” says Mr. Wasilenkoff, the 42-year-old president and CEO of Fortress Paper Ltd. “I don’t sit still very often. I spend six months of the year on the road. I am in China four or five times a year, Vietnam, Taiwan, Switzerland, Montreal and Ottawa for the mills, Toronto for investors … and a dozen trips a year to where the investment opportunities are.”
Mr. Wasilenkoff is a high-flying guy; a few years ago, so was his company. In 2011 Fortress Paper stock hit $62.89. The stock has since lost 97% of its value, closing Friday at $2.15. Fortress announces its year-end results on Monday; analysts expect the company will lose $4.05 per share.
The answer to what went wrong lies far from the glamourous world of the jet-set, in Thurso, Que., a village of 3,500 on the Ottawa River 40 kilometres east of our nation’s capital, buried right now under a metre of snow. Thurso is famous for two things: Guy Lafleur, the all-time leading scorer of the Montreal Canadiens; and its pulp mill, which opened in 1956 and emits an acrid stench one can smell several villages away.
Five years ago Mr. Wasilenkoff, a self-styled “contrarian” investor, convinced investors to buy the mill for $1.2 million and pour in $240 million to convert it from production of kraft paper to dissolving pulp, the raw material of rayon fibre. The investment included $150 million from Quebec and a union investment fund, he says.
“It was a great story while it lasted,” recalls one forest industry watcher in Western Canada. “You had floods in Pakistan and droughts in China, devastating the cotton crops. Dissolving pulp hit $2,500 a tonne. Thurso’s capacity times $2,500 a tonne equaled a lot of money.”
Then everything went wrong. Other mills converted to dissolving pulp. The price of dissolving pulp crashed to $800 a tonne. China slapped a 13% duty on imports from the Thurso mill. And the mill conversion job, Mr. Wasilenkoff says, “came in $100 million over budget by the end of it all.”
“It has been the most difficult thing I have had to manage in my life,” says Mr. Wasilenkoff. “I hired the wrong people to do the conversion. My management team gave me wrong financial forecasts. We kept running out of money.
“We have been fairly quiet in the capital markets because we wanted to clean up the mess we had made.”
Until fairly recently, Mr. Wasilenkoff had a remarkable run. To hear him tell it, he earned huge sums as a child, fishing golf balls from ponds, buying and selling Atari computer games, BMX bikes, skateboards, artwork, diamonds and gold. He bought and sold cars before he was old enough to drive.
But when he invested the proceeds in shares, he got his clock cleaned.
“I started investing in the stock market, reading all the analysts’ reports, and lost it all,” he says.
Mr. Wasilenkoff went on to do well. On graduation from University of British Columbia with a degree in urban geography and economics, he learned the investment business at Canaccord Capital in Vancouver. He invested in gold and uranium when they were undervalued. In 2006 he began investing in a very depressed asset: paper mills.
Initially he did well in the paper business, too. Fortress bought a wallpaper mill in Dresden, Germany for €5 million, and Landqart AG in Switzerland, which makes security paper to print euros and Swiss francs. “That company was losing $20 million a year. It’s now producing positive earnings in the $10 million per year plus range,” says Mr. Wasilenkoff. In 2013 Fortress sold the Dresden mill for €160 million.
Fortress also bought a company from the Bank of Canada that makes security threads for paper currency, for $750,000, and sold it last year for $17.5 million.
In 2011 a newspaper called Fortress “a TSX star.” That was then.
“We have had a lot of successes within Fortress, and one really bad investment,” says Mr. Wasilenkoff. “Thurso has been a disaster.”
Clayton Zacharias, a portfolio manager at Toronto-based Invesco, Fortress’s largest shareholder, declined to comment for this story.
Today, with spring in the air, there are signs of life at the Thurso mill, which employs 335. René Emond, president of the mill’s union, praises Yvon Pelletier, who came from competitor Tembec in 2013 to take over the Thurso mill.
“If we’d had him in 2010 we’d be in better shape,” Mr. Emond says. “He talks and listens to the guys on the shop floor.” The mill now also produces 18 megawatts of electricity for Hydro-Québec.
“I hope that investors can look at this over the medium and long term,” says Mr. Emond. Some workers have bought Fortress shares; he has not: “I’m not a gambler.”
Currency fluctuations buffet the company. Fortress’s Swiss mill has struggled because it earns income in euros and incurs costs in soaring Swiss francs. Through a “foreign exchange counter measure program,” Mr. Wasilenkoff says, “we have been able to claw back about 60% or 70% of the impact of the change in the currency.”
The loonie’s slide helps the Thurso mill, whose revenues come in stronger U.S. dollars. Daryl Swetlishoff, an analyst at Raymond James in Vancouver, last fall upgraded Fortress Paper from underperform to market perform and set a target share price of $2.50, “based on progress with the cost structure and reliability of the Thurso dissolving pulp mill, as well as our expectation of improving dissolving pulp prices by 2016.”
Investissements Quebec, meanwhile, has deferred payments on a $102.4-million loan.
Brian McClay, a global pulp market analyst based in Montreal, is cautiously optimistic about Fortress.
“Pulp is a simple business, but it’s never easy,” he says. “They’ve got the product quality where it needs to be. It could become a good investment.”
Mr. McClay has another reason for optimism.
“Microplastic pollution in the oceans is linked to polyester fibre. Rayon is based on food fibre and is biodegradable. If this research is there, people would start banning polyester fibre and it would be a game changer for rayon,” he says.
Mr. Wasilenkoff says, “We are on the verge of profitability.” The Fortress board had planned to meet Friday at the Thurso mill, but two directors couldn’t make it, Mr. Wasilenkoff says. They held the meeting by conference call.
Meanwhile, the CEO’s attention has started to wander. “I am finding new interesting investment opportunities in technology in the U.S.,” he says, including optimizing the efficiency of lithium batteries in iPads and cell phones and trying to improve the efficiency of solar panels.
Before he can convince investors to follow him down these new paths, Mr. Wasilenkoff may have to climb out of the deep hole he has dug himself in Thurso.
By: Financial Post