Summary: I bought Fortress Paper (FTP.TO) starting Oct 15, 2013 and exited my position on Jun 5, 2014. The average buy price was CAD$4.57 and the sale price was CAD$2.83. I lost CAD$881 on an investment of CAD$2,291. This post will detail some of the lessons I learned from the fiasco.
Investment case: The investment case for Fortress was not very complicated. It was a jockey stock with significant amount of assets. The owner had already successfully turned around the wallpaper making factory in Dresden (Germany) and was close to doing a similar thing with the note printing factory at Landqart, Switzerland. The company owned a Dissolving Pulp mill at Thurso, which was facing some operational difficulties and a threat from China about duties. Both of the issues seemed overblown — if the management were to be believed. It turned out that the first one was but the second one was not. The company had a book value of CAD$25 per share when I started buying.
The Chinese levied a charge of 13% on Thurso mill and near 50% on the yet to be developed LSQ mill — completely making LSQ unviable. The continuing low cost of DP persisted, making the Thurso mill unviable for long. Fortress sold the Dresden mill at a significant profit. But now, they could use the profits to continue investing money in their loss making mills i.e., Thurso, Landqart, and LSQ.
- The company was one of the low cost producers of DP. Price pressures would have made the competition disappear and at some point FTP would have generated significant cash. Unfortunately, the Chinese duty took away this significant advantage. It was believed that China will not risk putting duty because it will open up opportunities for duties by Canada on Chinese goods. But, they did it anyway. The lesson here is to be wary of government intervention.
- The jockey i.e., the CEO had some questionable compensation practices. He rewarded himself amply with stock options and such. I do not back away from paying a good management well. But it seems that the greed puts the manager in a questionable light.