The following segment was excerpted from this fund letter.
(all numbers are in $USD)
GreenFirst Forest Products (TSX:GFP:CA, OTCPK:ICLTF) owns and operates four lumber mills in the Ontario providence of Canada. It is our thirteenth largest position in the fund and now has a market cap of $50m.
River Oaks ownership in GreenFirst still remains in good hands as Paul Rivett and his team’s ability to allocate capital – despite the continued decrease in market cap – has given us tremendous downside protection.
As mentioned in previous letters, since Paul and his team took over GreenFirst in 2021 the pace at which they have executed their turnaround strategy has been phenomenal.
Prior to 2024, they had sold ~$110+m of non-core assets, reduced debt by $60+m, refinanced their debt on more favorable terms, uplisted onto the Toronto Stock Exchange, significantly reduced corporate costs, turned around the paper mill to profitability and assembled a highly qualified lumber operating team lead by CEO Joel Fournier.
I had an in-depth conversation with Paul in May and he has by no means any thoughts of stopping his rapid capital allocation plans now.
Paul and his team’s talent for continuously finding ways to unlock value for shareholders is second to none for a micro cap company.
In the first six months of 2024, Paul and his team secured an extremely friendly $24m CAD loan for their Kapuskasing “Kap” Paper mill followed by an announcement they will be spinning off the Kap paper mill into a separate company.
Additionally, CEO Joel and his team have permanently removed ~$6m of costs from the four lumber mills mainly by reducing head count.
Now, Paul and his team are working on monetizing the $80m of duties (discussed in previous letters), selling their 118 acres of waterfront Kenora land (they almost sold 30 of the acres for $8m), and getting cash out of their $15m overfunded pension plan.
The timing of when we receive the cash back for all three of these items is still undetermined but even using very conservative assumptions it will be more than the current $50m market cap.
This means that investors are valuing GreenFirst’s four lumber mills – 510 MMfbm (million board feet) capacity – in Ontario plus $70+m of net inventory on the balance sheet at $0!
This may make some sense in the immediate short term as lumber prices are still in the breakeven range – $500-$550 Mfbm (per thousand board feet).
However, over an entire lumber commodity cycle, if prices average $550-$600+ Mfbm, GreenFirst’s four mills should be able to generate a combined average of $20+m of free cash flow to equity per year.
On top of that, given the historical prices of how much lumber mills are sold for, their four lumber mills in Ontario could be sold at $200+m – they are currently being valued at $0.
By just using basic math the downside protection we have is straightforward, but what most investors are truly missing is that GreenFirst is pretty clearly positioning itself to be sold to one of the major Canadian lumber players.
Recall that when GreenFirst bought their then six lumber mills from Rayonier (RYN), the major Canadian lumber companies bid on the Rayonier lumber mills as well – including Interfor (OTCPK:IFSPF) who now owns ~16% of GreenFirst’s shares and was in person at this year’s GreenFirst annual meeting.
Interfor and the other major Canadian lumber companies ended up not buying the Rayonier assets because of the two lumber mills in Quebec, the 203k acres of private forest land and the Kap paper mill.
GreenFirst has since divested all of these assets and now the company only consists of the four Ontario lumber mills that Interfor and the other major Canadian lumber producers were always interested in.
Lastly, GreenFirst has ~$120m of tax loss carryforwards to shield taxes on not only free cash from the business but capital gains in the event of a sale.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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