6. greenfirst forest products

pink sheets: icltf

i can’t stop finding interesting ideas. as of today, this has become an experiment in opportunity sets and, like i said in post #4, staying in your lane or getting wrecked. as the morons running wall street (i.e. investors chasing quick bucks) continue to bid up these frauds, fads, and failures, more and more quality companies get overlooked because they aren’t “going to the moon” every day. well, here’s another one folks.

this weeks edition has been something i’ve kept my eyes on for a while and didn’t feel comfortable pulling the trigger on until now. one of the companies in my portfolio, btn, a big portion of my portfolio, is currently invested in icltf. naturally, i understood the company at a basic level prior to pulling the trigger on btn to understand the opportunity set. furthermore, similar management overlap with three of my portfolio holdings makes things even more logical for me, as i trust these guys to make the right decision for investors and stakeholders alike. even if you don’t own the cerminara/swets complex, this is probably just fine for a risk/reward on a stand alone basis. furthermore, management and the board are more than happy to talk with investors (or not investors), which is helpful if you have questions. what has changed between when i first started looking at this opportunity and today? prior to the rights offering and capital raise for the ryanier deal, you were buying an option on a business, and not an operational business. that is too much outside of my wheel house. as of today, you are now buying this for cheaper than you would have been prior to the deal and you get operations and cash flows. if you are interested in buying a dollar for a dime, this is for you. read on if you are interested, this is one spicy potato.

conclusion: this soon to be super sawmill owner and operator has structured a deal that should make your heart flutter. at current strip pricing, assuming 365 days flat, you essentially can buy the whole business back at the purchase price of the rayonier deal, essentially you get the kenora mill for free (don’t know what literally any of those words mean? don’t worry read on). need i say more? okay fine, i’ll say more. lumber prices are currently at all time highs. commodity businesses should trade at half cycle multiples from a finance 101 point of view, so 4-5x, which is how the deal was structured on a total asset pov (3.4x the assets purchased only), except it was structured at lumber futures >50% lower than strip. the deal closes in 3Q’21. if the deal goes through with strip pricing flat from here, by 2Q’22 management will have made their money back. yup, all of it. this is a free opportunity, with risk of course. needless to say, i’m in; 10% of my portfolio thus far (as i try to concentrate my portfolio more with 15-20% positions, this should equate to a half position). if it falls significantly, i’ll be renting a dump truck to haul the money to my broker, begging for more.

first, what does icltf do? icltf, i.e. gfp, i.e. greenfirst forest products owns and operates a mill in kenora canada. recently, management (interim ceo larry swets and current chairman kyle cerminara) structured a deal with ryanier to purchase 6 saw mills and a newsprint mill, all located in quebec and ontario. this deal, added on top of the kenora mill acquired in october of 2020, leads you to 7 mills and a newspaper print mill. so long story short, this is a softwood lumber mill company, capable of 905mmfbm pre modernization and another 205mt of paper throughput per annum.

second, let’s talk about that wild chart above. that monster pin on the chart at $2.50 was when management announced the ryanier deal. let’s discuss the deal(s) over the last year. kenora assets aren’t currently in operation, so no cash flows are being generated there, kenora was done in october 2020. the ryanier deal was acquired for 3.4x ~cad$80m 2020 ebitda, or ~cad$290m. add that to the cad$28m in Kenora, and the asset purchase price for all of its mills and inventory totals to cad$318m. once the deal was announced, naturally, the stock did some “mooning” as the wsb community likely says (not going to lie, never been on reddit but i’d assume these folks say these types of strange words). we’ll get to the valuations and implications pre and post deal next, and what is implied at the $2.50, $10, and $5.50 swing, and why all along the way its interesting. the lower it goes, the more interesting it gets.

third, let’s discuss the valuation going on here. so the kenora mill has been sitting idle, it’ll be back up and running this year. so the cad$28m purchase price was an asset purchase only with option value of future operations on 200mmbfm of capacity with some tweaks to machinery (150 pretweak). the rest of the 955 (pretweak) on the lumber side of the business plus the 250mt of newspaper print generated cad$80m of ebitda, so even though the purchase of the ryanier assets was a 3.4x ebitda deal, you aren’t buying this at 3.4x ebitda at the deal price, you are buying this at a 5.5x purchase on proforma 2020 ebitda, that equates to 47c of lifetime value per foot of capacity. at $2.50, you essentially were buying assets for 3x book and no operations. at $10 post the deal, you were buying 6x the deal ebitda with option value on kenora. at $5.50, you are getting pre deal value for half price. so you might be buying a share for 2x pre deal, it’s half price due to more stuff in the bag. as more details have come to light, this is getting so much more interesting. let’s talk ev, below is what we know.

ev = market cap + debt - cash (in cad$m)

ev = 156 public float + 96 rights offering + 5 management equity injection + 40 equity roll + 147 credit facility

ev = cad$444m

you are buying assets plus inventory, and they have contracts in place for throughput. this is no longer option value, but operations. if you buy this now, you assume the deal goes through in 3Q’21 and operations get underway, with capacity reached in early 2022. i’m willing to make that bet.

fourth, let’s talk about those 2020 numbers. cad$580m in sales resulted in cad$80m so you have cad$500m of fixed costs (maybe some variable in there, but lets keep this simple). those numbers are based on cad$641 on lumber pricing. let’s do some sensitivities on 2022 proforma (so we can understand a full year, and the assets will be owned for >1 yr by 12/31/2022). let’s say there is ramp time and delays and yada yada, and we don’t get near capacity until 1/1/2022. next, let’s do a sensitivity analysis on ebitda. if this doesn’t pique your interest, i don’t know what would.

fifth, here’s the layout of the following analysis on ebitda to make typing easier for me…

column a is capacity
row 1 is lumber pricing
the $numbers are calculating cad$ebitda(m)

…….a………………b……………c……………d…………………..e……………………f

1…………………..$500…….$750……..$1,000……..$1,250………..$1,500

2.850,000……$17.3……$229.8…….$442.3……….$654.8………..$867.3

3.900,000……$42.3……$267.3……..$492.3……….$717.3………..$942.3

4.950,000……$67.3……$304.8……..$542.3………$779.8…………$1,017.3

5.1,000,000…$92.3…...$342.3……..$592.3………$842.3………...$1,092.3

okay what does this mean? its just a bunch of numbers. well, at current strip which is >$1,300 and non enhanced capacity of 950mmfbm, you could buy the company (ev = entire company) today at 0.5x ebitda, that’s right. you read that right. yes, the bat (a louisville slugger of course, we are talking lumber) just connected squarely with the side of your head. using last years lumber prices, next year’s capacity expectation of 950 throughput, this is a 2.0x multiple. let’s talk thought process on commodity businesses and why i think this company has interesting value.

sixth, let’s think about some concepts. with commodity businesses, i’m in the camp that a company’s multiple should be half of the time frame of the commodity cycle. if its a 10 year commodity cycle, a company with multi-decade inventory potential should yield a 5x multiple. if you have 5 years of bull market, you’re making money, 5 years of bear market, you are losing money; so the best companies, all else equal, probably make enough over the cycle to capture that multiple. conceptually, i’m kosher with that thought process.

okay, so back to our sensitivity, we are looking at cad$779m of ebitda on a cad$444m ev assuming slightly lower pricing vs. strip today. management has essentially laid a silver platter for us all, all you have to do is eat. if we assume 950 capacity and pricing scales from $1,250 to $500 over the next 4 years in increments of $250 down per year, that’s an average of cad$423m of ebitda, i.e. you are getting this today for 1.0x multiple. let’s disentangle this. if we take our ebitda numbers from the analysis above, apply a 5x multiple (remember the deal was done at 5.5x proforma) to our ebitda math, and extract the market cap from those numbers (ev = market cap + debt, so market cap = ev - debt), we get some pretty fancy stuff here. at $500 lumber and full capacity, in usd terms (seeing this is the pink sheets i’m buying) converting at 1.21 fx usd/cad, this is a $260m market cap, or a double. at 950 and $750 lumber, this is a 10 bagger, at $1,000 this is a 20 bagger. let’s just assume $641 is mid cycle for this crazy commodity cycle boom, this translates into a 7 bagger. what’s that i hear in the background? is that someone backing up the truck? beep beep beep.

the beauty of this idea is the lack of material assumptions you have to make to justify the price. the company bought these operational assets at 3.4x ebitda and 5.5x proforma implied. i’m not assuming anything greater, actually its half a turn less on the multiple assumption. further, i’m not saying this is a 10 bagger where you need all time high lumber prices to make this work. this is a 6.5 bagger on 2020 pricing and 950 throughput, 7.8 bagger on 1,000. if you get multiple expansion, this thing gets really crazy really fast.

after you do your own homework, pull out your louisville slugger, go rent a dump truck, and pat yourself on the back. you made it through another edition of the trash can. happy hunting.

if you liked this weeks episode of the deep value trash can, tell a friend, smash the subscribe button below, or don’t, whatever, its free, forever.

holler at my email @ deepvaluetrashcan@gmail.com
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RIDER ………. POST ORIGINAL ……… RIGHTS OFFERING MATH

okay i’ve gotten some emails on the ev calc, so here’s the details folks. the way i saw it above is the cap table math, so assumes not 100% of the rights are triggered, which is flawed as senvest will backstop it all. let’s assume all of them are triggered. i have tossed a chart in detailing all of the math necessary to get from a to b, this took ~5 minutes, so you too can do this even quicker with the help here.

so at the 578 calc, this is a 2.5x bagger at $750 lumber. nothing really changes based on how things shake out.

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