Tembec says Temicaming upgrade a “game changer”

The Quebec-based forest products company has put its most expensive capital spending project in years up for rebidding after high submissions forced it to delay construction last September.

The cornerstone of its two-phased upgrade is a $190-million installation of a high-pressure boiler and turbine that will raise its operating profits (EBITDA) by 40 to 50 per cent.

It has spent $78 million to date, but the planned May 2014 production start is being delayed because of difficulties in finding required construction workers at acceptable cost, CEO James Lopez said Thursday.

He said there has been a change recently because mining companies have altered their own expansion plans in the face of weaker prices for iron ore and other metals.

"We have people bidding on projects now that refused to bid when we went out six moths ago for the same construction project so I think the mining pullback is going to help us," he told reporters ahead of Tembec's annual meeting.

The project is key to the company's long-term success. Lopez said the company is willing to consider selling non-core assets as it focuses on energy projects and the specialty cellulose business that extracts from pulp material that is used in cosmetics, explosive and paint additives.

It announced Thursday plans to sell its pulp mill in Skookumchuck, which employs about 150 workers and contributes about $150 million in annual revenues.

"It's the only mill like it that we have in the company so it's a bit of an orphan for the company," said Lopez.

"There are a lot of companies out there that operate multiple kraft mills like Skookumchuck is, and this mill will probably be better off owned an operated by one of those companies."

He said proceeds from the sale will be reinvested in the company, primarily in the Temiscaming project.
Lopez said Tembec is in talks with several potential buyers but won't say how much it expects to generate from the sale.

"After hearing interest from several parties we said maybe the time is right and the market's right that we can get a value that's greater for the shareholders than what we value it internally based on the financial returns."

Paul Quinn of RBC Capital Markets expects the sale could generate up to $135 million, which could accelerate capital spending plans at its lumber operations and help fund the boiler and turbine upgrade in Temiscaming.

Meanwhile, Tembec cut its net loss by more than a third to $10 million in the first quarter, despite a six per cent drop in sales.

The company lost 10 cents per share for the period ended Dec. 29, compared to a 16 cents per share loss in the prior year.

Adjusting for one-time items, it lost five cents per share.
Tembec said the results were in line with its expectations, but analysts had expected a $3 million loss on $373 million of sales, according to analysts polled by Thomson Reuters.

Revenues fell $25 million to $376 million and adjusted pre-tax operating income (EBITDA) was $19 million, up from $12 million in the 2012 quarter, but down from $23 million in the prior quarter.

Tembec expects the first quarter will probably be the "low water mark" for the fiscal year.

"The results won't be great (this year) but they will be better. We think this will be our weakest quarter," chief financial officer Michel Dumas told reporters.

The company has high hopes to profit from the recovery of the lumber business due to slowly improving U.S. housing starts and still sees lots of potential in its specialized cellulose segment.

But it says tonnes of new paper pulp capacity being added in South America will drive down prices for several years.

And it criticized the recent restart of two newsprint mills, including White Birch's operation in Stadacona, Que., for threatening future newsprint prices that have been stable over eight quarters.

"We don't think it's a very responsible thing to do because ultimately these companies have their own EBITDA margins they have to protect and they're only eroding their own margins as well as everybody else," Lopez said.

He also said it's hard to compete when the Quebec government provides financial assistance to companies like White Birch, which recently exited creditor protection.

"It is an unlevel playing field when you get the government to step in to do special favours for certain companies."

On the Toronto Stock Exchange, Tembec's shares lost six cents, or nearly two per cent, at $2.96 in afternoon trading.