FOUNDER, CHAIRMAN AND CEO OF FORTRESS Paper, a
specialty paper company based in Vancouver, Canada, Chadwick
Wasilenkoff considers himself a contrarian investor. Before
launching Fortress in August 2006, Wasilenkoff bought a series
of out-of-favor assets and sold them at a tidy profit; they
included South American gold mines, properties in the
natural-gas-rich Barnett Shale in Texas, a copper deposit in
British Columbia and a uranium company with assets in
Saskatchewan and Nunavut, Canada.
Wasilenkoff then led a group of investors that bought a
paper mill in Landquart, Switzerland, that produces security
paper and a Dresden, Germany, mill that makes nonwoven
wallpaper. With these assets in hand, Wasilenkoff took Fortress
public in July 2007 through a C$46 million
($46.3 million) equity offering, even though forestry had
had a devastating couple of decades characterized by what he
calls huge erosion of capital and a near-total loss of
investor confidence. The C$105 million loan Fortress
needed to finance the acquisition and conversion of a key
production mill in Thurso, Quebec, at the end of 2011 came from
the provincial government because no bank would touch the
request. The company has gone back to the government to finance
development of a second mill in Quebec.
That environment hardly sounds promising for Fortress.
Wasilenkoff, 40, is the first to admit that newsprint is going
away, the paper telephone directory is doomed, and the future
of books, in his view, at least, is online. So whats the
upside in paper? Nonwoven wallpaper and security paper
chiefly, banknotes along with Fortresss other
major product, dissolving pulp (the feed product for rayon)
defy characterization as commodities, although they were tarred
as such along with less profitable paper when the CEO created
Nonetheless, two of the companys product lines face
serious challenges. To be sure, rayon is fast replacing cotton
in clothing, especially among Chinese manufacturers. But
because rayon is tied to cottons price, which took off a
few years ago, leading to a big increase in pulp supply,
Fortress now finds itself with intense competition for
dissolving-pulp sales, which account for 36 percent of its
total 2011 revenue of C$309 million. Now the company is
offering clothing makers volume discounts in hopes that it can
drive higher-cost competitors out of business. Meanwhile,
production has suffered in recent months because the Thurso
plant was shut down for maintenance and then struck by
lightning after starting back up.
Fortress also faces a major obstacle in security paper
sales, which account for 17 percent of revenue. The value of
the Swiss franc has soared against the euro, in which the
companys main competitors costs are based. Some
help has come from the Swiss central bank, which imposed a
ceiling of 1.20 to the euro on the currencys value in
late 2011, and from European Central Bank efforts to support
the euro. The moves have stabilized Fortresss margins in
this business, but at a much lower level.
All this has shown in the companys financial results:
It reported a net loss of C$18.9 million in the third
quarter of 2012, compared with income of C$12.5 million in
the previous quarter and a loss of C$7.2 million in the
year-earlier period. Not surprisingly, its shares, listed on
the Toronto Stock Exchange, were trading on December 5 at
C$7.20, down 82 percent from their 52-week high of C$40.12.
Even a contrarian cant enjoy results like that.
Institutional Investor Executive Editor Ronald Fink
interviewed Wasilenkoff recently to find out how he expects to
turn them around.
Institutional Investor: Lets start
with Europe. Tell us about your security paper operation
Wasilenkoff: When I bought the mill in
Landquart, they had 3,000 products coming off of it. They were
trying to make photocopy paper, trying to compete against
million-ton machines in South America. So we were losing a ton
of money on that machine but also a ton of money on a small
banknote machine. So we upgraded the banknote machine and at
the same time made a major investment of C$50 million to
rebuild the commodity machine to a triple-width banknote
machine. Its now the widest, fastest state-of-the-art
Where does the strength of the Swiss franc leave
Weve achieved about a tenfold increase in banknote
capacity but gone from 20 percent-plus profit margins to a
current range of a little less than 10 percent all the way to
break-even, because with the erosion of confidence in the euro
zone, everyone flooded into the Swiss franc for safety. At one
point, the increase in its value was 50 percent. Its been
stabilized now, but its still at 35 percent. About 80
percent of our costs are in Swiss francs. Most of our
competition is euro-based, so all their costs are now in
undervalued or depreciated euros. When were bidding on
international tenders around the world, their cost structure is
35 percent better than ours on labor, on insurance. Its
devastated our ability to compete on a global basis.
To what extent will your new product, Durasafe,
Our low-end banknotes go for C$10,000 a ton. Our midrange
banknote, which would have the same amount of security as the
euro, the Canadian dollar, the U.S. dollar youre
looking at C$20,000 to C$25,000 a ton. The Swiss franc is more
like C$35,000 to C$40,000 a ton. And our new paper, Durasafe,
is C$65,000-plus a ton.
Durasafe is an eight-year project now. Its getting
close to C$20 million of R&D. We take two thin sheets
of banknote paper, and just before we bond them together, we
cut holes in each side and put polymer in the middle so it
bonds together. The polymer infiltrates the paper, so
theres no glue or laminating. Ink is not going to fall
off, you cannot break this apart, you can put security features
inside, and wherever you cut windows on both sides, you end up
with a transparent window. So it eliminates the color
photocopier and scanners and things like that, and it adds
significantly more security. Also, having this polymer core
will triple the life of the banknote, which makes it very
cost-effective for a national bank.
Unfortunately, it takes multiple years to convince
risk-averse national banks to adopt new technologies.
You dont have these problems in your German
operations. How are they performing?
People are reluctant to buy traditional wallpaper because
they fast-forward and say, I never want to take this off
the wall, even when its full of tears and holes,
because that requires steaming. But nonwoven wallpaper is
strippable when dry and comes off in one pull. So worldwide
demand for the product is growing at a rate of 15 to 20 percent
a year, faster than originally anticipated.
What are you doing to take advantage of
Every August we have our annual ten-day maintenance
shutdown. During every one of these shutdowns, we have
implemented capacity increases. We are now at 60,000 tons per
year. And we have just committed to go to 70,000 over the next
Your real emphasis is on dissolving pulp.
When we looked at this business about six years ago, I fell
in love with it. Dissolving pulp is a chemically modified
product, so its perfectly designed to replicate cotton,
only with double the absorbency and the dryability. It dyes
better, and it holds those dyes better. We break it down to the
cellular level and make these strands any shape, size, strength
or characteristic. Cotton has impurities, so for the spinners
and weavers, rayon improves their runability.
Meanwhile, the population is growing and moving into cities,
reducing arable land and putting pressure on food prices.
Thats going to drag down cotton. And cotton is going to
face more-extreme challenges because it is the most aggressive
user of water, the most aggressive user of herbicide,
fertilizer and pesticide, and all the prices of those are
Yet people moving up in income want cotton. Around a third,
maybe as much as 40 percent, of the global textile industry is
cotton. Its breathable, its airable. Regions like
hot, humid India, Bangladesh, Indonesia, southern China, which
represent just about half the worlds population and are
seeing big increases in disposable income , want these dry,
breathable types of fabrics.
Where does Fortress come in?
While dissolving pulp typically trades at a premium to
cotton, our cost structure is dramatically lower. Pulp comes
from trees, which dont require any watering or
fertilizer. Cotton is very, very volatile, so companies that
make T-shirts and underwear and things like that experience a
lot of volatility in their results trying to predict cotton
futures and whats going to happen to the weather in Texas
or Bangladesh. Whereas trees just grow. Our cost structure is
very stable and consistent.
But your results have been
Pricing is poor, so weve actually presold all of our
product into, depending on our production level, the first half
of January, maybe all of January.