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PM 4 WILL BE ALLIANCE’S CORNERSTONE FOR GROWTH

As Donnacona’s PM 4 starts up, Alliance Forest Products president and ceo Pierre Monahan calls it the “cornerstone” of the company’s growth. The company’s strategy is to move all newsprint production …

As Donnacona’s PM 4 starts up, Alliance Forest Products president and ceo Pierre Monahan calls it the “cornerstone” of the company’s growth. The company’s strategy is to move all newsprint production to its Coosa Pines, AL, mill, leaving its two Quebec mills, Donnacona and Dolbeau, to produce specialty grades, including those that were produced at Coosa. Coosa’s PM 1 will be totally newsprint.

Since PM 5 was rebuilt at Dolbeau the company has seen a growth in the markets for the grades that this machine produces. “Today, we are in a position to say that we were right in assessing that new market. The demand is there,” Monahan added. “It’s very encouraging for the start-up of PM 4 in Donnacona. We always say timing is of the essence in life and I think that will be proved again because market conditions are very favorable.

“Not only that, the grade of paper itself is really successful so I’m very excited about the start-up and confident that it will be successful.”

With the closure of PMs 1 and 2 at Donnacona after the start-up of PM 4, there will be no need for extra pulping capacity. The project was developed on the existing pulping capacity. In the future, the mill may be pulp limited, so some may have to be purchased. This is based on the belief the machine will be able to exceed its stated capacity. This will be addressed “down the road”, Monahan said.

The spectrum of products for Donnacona will include magazines, inserts and catalogues. The latter is a very promising segment because of the growth of online shopping on the Net and the effect of E-commerce. This section of the market is growing rapidly, Monahan added and is a “perfect market” for Alliance.

Moving up

Monahan also sees end users moving up into the grades that the new machine will produce. “This was the whole purpose of making that investment. With the evolution of the technology, the whole market is shifting towards higher-quality grades. So, status quo for us would have meant the eventual loss of our market share.”

Monahan added that there is greater market segmentation. “People are looking for a very specific grade of paper that will do a very specific job for them.” Of course, he continued, they want it at a very specific price.

He explained that it used to be a simple differentiation, SC-C, SC-A, LWC. Now, an SC-B producer using soft nip technology brings an improved smoothness and printability; it can be considered an SC-B+. In the same vein, SC-A+ is “chasing” LWC. “It gives the customer a much wider range of quality grades. For a very specific job, they can pick a very specific quality of paper with a very specific price. It’s the technology that allows you to do this.”

That’s the reasoning behind Alliance’s decision to build PM 4 — to protect its markets. As a whole, the market is shifting to higher quality papers at a more competitive price. The line between the grades is getting fuzzier. Monahan cited the traditional SC-B, which uses a lot of kraft pulp in the furnish, versus the Alliance sheet, which contains minimal kraft. “The lines are fuzzier and it goes like this right up the scale”

There is a multiplication of grades. Monahan added that this is good for the market because it offers users and printers alternatives. It also makes the industry more competitive with electronics.

Donnacona made a name for itself with its ability to change grades rapidly and often. This will probably stay the same. “When you talk specialties, you talk flexibility, specifications. To a certain extent, it will be a tailor made product so we will have to deal with a lot of roll size changes,” Monahan said. “That’s one big plus we think we have with Donnacona. The labor force is geared to that compared to Dolbeau where it was a challenge because they were newsprint producers. We had to transfer the technology, knowledge and mentality. That’s something we won’t have to do at Donnacona.”

In 1998 Monahan said that Alliance was performing well financially despite the industry’s overall wretched performance because of “wise investments” and “targeting markets”. He is still a firm believer in that strategy, that it has been the best for the company. “The big challenge after Donnacona is Coosa. If we look at the individual mills, Dolbeau right now is giving its expected return on investment. The mill is sold out. Demand is strong for that grade of paper. We have no reason to believe Donnacona won’t be the same. The margins are there. We have increased our margins at Dolbeau compared to a regular newsprint sheet.”

The recent economic upturn in the industry means that Alliance will be able to accelerate the second phase of Coosa’s modernization program — speed-up of PMs 3 and 4. “It will also help us keep a strong financial position.”

The challenge for Alliance at Coosa will be to make that mill more competitive. It is a high-cost producer and that’s why Alliance is investing “substantially” at the pulp end to reduce its cost of furnish.

Alliance sold its timberlands holdings around the Coosa mill as a way to monetize an asset that was not being carried at “its real value on the balance sheet”, Monahan explained. “It was very much under-estimated.”

In the book it was valued at US$190 million; Alliance sold it for US$305 million. This allowed the company to receive the true value for its shareholders. Part of the proceeds were used to buy back $100 million in shares.

Also, with the decision to convert Coosa to a 100% recycled sheet, Alliance has less need for virgin fibre. In 1998, the Coosa mill was using four furnishes: kraft, TMP, groundwood and DIP. The groundwood, TMP and hardwood kraft operations at Coosa will be shut. Three paper machines will operate. DIP capacity will be increased to 460 000 t/y.

The softwood kraft pulp mill producing market fluff pulp will remain. Under terms of the original sale, Kimberly-Clark (K-C) agreed to purchase100% of the fluff pulp for three years then 75% and 50%. Alliance is negotiating with K-C to renew the contract for 100% of production.

After modifications to PMs 3 and 4, newsprint production will be 460 000 t/y (1300 t/d based on 355 operating days). This should be done by the end of 2002.

A planned co-gen project at Coosa will not be done immediately, but Monahan said it could be done within the next three years. It will be a third-party financing and operating project. The Coosa mill will be the “steam host” and will purchase the energy produced.

Status quo is not a solution

Monahan said he stood by what he said in 1998: in 10 years the company would be merged with another or would acquire someone else. “I still believe it.” But, will it take 10 years, considering the spate of mergers? “If you look at it from today’s perspective, it’s obvious that to remain static is not the solution. Status quo is not a solution.”

Monahan said that it’s obvious that once Alliance is finished with the PM 4 project, it will have to set itself back into an acquisition mode or look for a merger that would enhance shareholder value. “Right now we think we’re being wise, focusing on completing our program. Don’t forget that Alliance was a turnaround situation.” That is, its assets were two old paper mills and one non-competitive mill. “We had a job to do. We’re about done with the turnaround. After that, we have to be creative. We could set ourselves back into an acquisition mode or simply look for opportunities through mergers or other alternatives. We’ll definitely be back active on the market.”

In 1998, Monahan also said he wanted the company to be competitive within five years. This is a goal that has been achieved with the success at Dolbeau. Looking ahead, Monahan said, “Based on the Dolbeau experience, I am very confident that Donnacona will be a successful project and make us competitive. Dolbeau right now is a very competitive mill.”

Coosa Pines is a costs-driven project. It will use proven technology to reduce costs, so Monahan added, it should go well. “To me, in two years from now, the three mills will be very competitive.”