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Industry News (October 01, 2006)

CAP EX

$200M POTENTIAL INVESTMENT IN KRUGER TROIS-RIVIERES

TROIS-RIVIERES, QC — A total of $200 million is set to pour into a new deinking facility at Kruger’s Trois-Rivires mill.

At a press conference, the minister responsible for the Mauricie region, Julie Boulet, confirmed the government is indeed working with Kruger on the project and that it is making progress.

According to a story published by Le Nouvelliste, there is a possibility the mill will be eligible to benefit from an energy efficiency program entitled PAMUGE (Programme d’amlioration majeure d’usine -Grandes Enterprises), whereby industrial users can save up to $30 million on their energy costs per project.

Although the project is in the works and an official announcement by Kruger has not yet been made, the plant is expected to meet increasing market demand for paper made from recycled fibre.

MILLS

NEW START AT NEUCEL

VANCOUVER, BC — Neucel Specialty Cellulose has cause to celebrate.

Since the opening of the mill on May 5, 2006 the company has brought back 350 jobs to Port Alice, while substantially improving its financial position.

The facility, which produces high-purity cellulose, was bought by Neucel as part of an over $100 million long-term investment plan that was designed by the company’s new ownership. So far, over $60 million has been invested in capital and technological upgrades to the property. More money will be directed to the facility in the near future.

MILLS

MARKET STUDY ON LEBEL-SUR-QUEVILLON

LEBEL-SUR-QUEVILLON, QC — Nothing is definitive, but according to a recent Montreal Gazette report, Quebec’s Minister of Natural Resources has ordered a market study to determine the feasibility of reopening Domtar’s Lebel-sur-Quevillon mill.

The Gazette confirmed during the week of September 4, that Pierre Corbeil has allotted accountants a total of 30 days to assemble a report on production costs and market conditions.

The Lebel-sur-Quevillon mill closed its doors last November, effectively eliminating 425 jobs.

The report further indicated Corbeil as affirming the study is separate from the negotiations on a collective agreement that are before the courts.

MILLS

STRIKE AVERTED AT PINE FALLS

WINNIPEG, MB — Tembec’s paper mill in Pine Falls, MB narrowly escaped a strike, and workers voted to accept a newly proposed contract.

A tentative labour agreement was struck on August 30, after employees had already formed picket lines for the scheduled strike deadline, Reuters reported. However, an eleventh-hour settlement between the United Steelworkers and Tembec effectively squashed any opportunity for a strike.

The four-year agreement carries wage increases of 2.5%, plus 60 cents an hour, which comes into effect now. An additional 2% increase will go into effect on September 1, 2007, and 60 cents an hours on September 1, 2008. The workers’ long-term disability plan has been revamped, as has the life insurance plan.

FINANCIAL

CATALYST BID REJECTED

VANCOUVER, BC — The board of directors of Catalyst Paper has unanimously recommended that shareholders reject the unsolicited offer made by Third Avenue Management.

The bid, to purchase up to 39 million shares of the company, is viewed as “inadequate from a financial point of view,” Catalyst CEO Russell Horner said in a conference call. The recommendation, contained in a director’s circular, includes opinions from financial advisors, CIBC World Markets and UBS Securities Canada.

“The board is concerned about the price,” Horner confirmed. “It doesn’t reflect the company’s value. Also, Third Avenue’s plans for the company are unclear. The lack of clarity is troubling.”

Third Avenue already owns close to 20% of Catalyst. However, the proposal for increased ownership would grant control and dictatorship over the paper firm’s activities to a level that Catalyst contends is not advisable.

“Catalyst has proven to be profitable in a very tough environment, and we will continue to be so,” Horner said. “We feel the value of these improvements would be lost,” he said of the bid.

The Third Avenue bid has sparked interest in several other potential buyers, and Catalyst is in the process of evaluating those offers.

MILLS

CLOSURE AT RED ROCK

SAINT-BRUNO, QC — Roughly 300 people in North West Ontario are out of a job as Norampac’s management handed down the official announcement. The company’s Red Rock mill will close for what’s being labeled an ‘indefinite’ period of time due to challenging economic factors.

The announcement came on August 30, and the closure is scheduled to take place within 90 days of that date, at the latest.

The mill manufactures unbleached kraft linerboard and produces 300,000 short tons per year, which is sold primarily to Norampac’s corrugated products plants. During the shutdown period, several suppliers will accommodate the closure by taking over supply responsibilities for corrugated products.

“We do not have any other choice at this point,” Marc-Andr Dpin, president and CEO said of the decision.

MILLS

DOMTAR AND WEYERHAEUSER’S FINE BUSINESS

MONTREAL, QC — In what’s being hailed as an historic agreement, Domtar and Weyerhaeuser are partnering up some of their assets.

Domtar is merging with Weyerhaeuser’s fine paper business, positioning the ‘new’ Domtar as the largest manufacturer of uncoated freesheet paper in North America. It will be the second largest producer in the world.

In a conference call held the morning of the announcement, Weyerhaeuser chairman, president and CEO Steven Rogel referred to the agreement as ‘the most value-creating option’ of the numerous possibilities it investigated prior to embarking on this venture.

“Domtar will enter its first day as the number one player,” Rogel said, “and this agreement allows each company to do what it could not have done alone. Domtar will be a force to be reckoned with on the market,” he added.

The $3.3 billion deal is additionally expected to create roughly $200 million in synergies related to transportation, logistics and other opportunities. It is these synergies, however, that are raising some questions concerning possible job cuts and a loss of Canadian corporate control.

Professor at McGill’s Desautels’ Faculty of Management Karl Moore assuaged fears caused by the news of the Weyerhaeuser-Domtar agreement. “It is possible that there will be job losses because of these synergies, but at the same time, it’s possible that they will provide the companies with more revenue,” he said. “This means there will be more work, which means more jobs, meaning we likely won’t have to lay off as many people as anticipated, but yes, it’s possible that there will be some initial layoffs.”

Concerns have also been raised regarding the location of the ‘new’ Domtar head office.

While the company’s head office will be located in Montreal, operations headquarters will be stationed in South Carolina. “This will provide us with solid exposure in the U.S., bring us closer to our customers, and away from the fluctuations of the Canadian dollar,” Domtar CEO Raymond Royer said. Although questions on what the U.S. presence implies in terms of a loss of control for Canada have been raised, as Moore noted, in a globalized market, if a company intends to sell its product in other countries, it cannot have all of its assets located in a single country.

As Moore highlighted, mergers and acquisitions are often problematic by nature. “Research tells us the majority of mergers fail; only a majority are successful. This is largely due to two reasons; either the companies are not able to deliver on the cost savings they promised, or there is a cultural cla
sh between the companies. And so mergers are never without risk.”

In terms of a possible trend towards consolidation within the pulp and paper industry, Moore said competitors will be watching the results of this merger with a keen eye. “Other competitors will be looking at why Domtar and Weyerhaeuser decided to do this, and how it’s going. If there are too many plants in the industry, competitors will be evaluating whether or not the industry can support consolidation.”

FINANCIAL

CANADA PAPER, FOREST EARNINGS SHOOT UPWARDS

VANCOUVER, BC — In an earnings summary released by PricewaterhouseCoopers on the global forest and paper industry, Canada’s figures were up a powerful 825%.

Canada’s forest and paper sector posted earnings of $453 million, compared to the corresponding quarter’s $62 million loss. The strengthening Canadian dollar resulted in a pre-tax foreign exchange gain of $398 million in the quarter on the translation of U.S. dollar denominated debt.

In Western Canada, seven of the nine largest public forest and paper companies saw positive results during the second quarter. In aggregate, the Western Canadian industry achieved earnings totaling $262 million up from $40 million in the second quarter of 2005. The major component of the 2005 earnings were gains on foreign currency denominated debt, as companies in the west reported $172 million in pre-tax foreign exchange gains. In Eastern Canada, the six largest public forest and paper companies pulled in aggregate earnings of $191 million in 2006, up 287% from a loss of $103 million in 2005.

However, as Craig Campbell, leader of PwC’s performance improvement practice for the global forest and paper industry noted, “a big piece [of these figures] was in foreign exchange. That’s really where the gains came from.”

In terms of expectations for next quarter, or for 2007, Campbell was candid. “The third quarter won’t be nearly as good. Newsprint is starting to flatten, pulp is doing reasonably well, but lumber and the solid wood sectors are falling. They’re all facing the same fundamentals; excess capacity, competition from emerging sectors, declining markets and tightening supply.”

PAPERCLIPS

THE LOG STOPS HERE

Gord Black is giving new life to the meaning of water-logged. According to a report by the Montreal Gazette, the Ottawa-based log aficionado has a successful underwater log recovery business called Logs End, with a sawmill near Bristol, where the recovered logs are cut and milled, and a showroom in Ottawa, where a variety of wood products are sold.

The idea was borne out of a fishing expedition, the Gazette confirmed, when Black and a friend happened to notice the striking number of logs that were under the water. Curiosity prompted them to look into the value of the drowned timber, and they were duly surprised to note the quality of the wood that was pulled up. After an investigation indicated the number of logs lost in the water was in the millions, Logs End was launched.

The business has been up and running for seven years, and manufactures high-quality, environmentally friendly products. The Gazette further reported that the company focuses on three primary goals: to clean up the river, to create local employment, and to encourage appreciation of the logging history in the Ottawa valley.

The process is costly and painstaking. However, as student employee at the mill Steve McCord said, “I think people appreciate what we’re doing just because they realize how many (of the logs) did sink, and all the work of the people who lost their lives during that time,” he said in reference to the men forced to walk across the logs when they were piled on the river, and how many of them drowned in the process.