Fortress Paper shares on Nov. 5 fall 40% after revealing problem with Thurso, Quebec, dissolving pulp mill, cooled demand from China for specialized pulp, excess supply; Fortress says mill produced 4,500 tonnes more than it could sell

OTTAWA , November 6, 2012 () – Fortress Paper shares plunged more than 39 per cent Monday after it revealed a new unexpected problem hitting a major mill at Thurso, east of Gatineau.

Demand from China for specialized pulp has dramatically cooled with the slowdown in the frantic growth pace of the giant Asian economy.

The weak demand for dissolving pulp, which can be spun into clothing, has driven down the global price below levels negotiated with major Fortress customers.

A related problem is excess supply as new competitors chase a market that promises to clothe a rapidly growing middle class in China and India with a product that is cheaper and environmentally more attractive than conventional cotton.

Even with a scheduled maintenance shutdown during the quarter, Fortress said the Thurso mill produced 4,500 tonnes more than it could sell. It expects to sell the pulp this quarter.

Fortress hinted it could be forced to reduce the price in deals with customers, who bought much of the Thurso production two years ago, to keep them happy.

At the worst, the sudden change in market conditions, if prolonged, could potentially have an impact on another Fortress project to convert a second mothballed pulp mill in northern Quebec to produce the specialized pulp.

Shares of Fortress Paper fell to $7.84 Monday, down 39.88 per cent from the closing price Friday. The catalyst was financial results for the September-ending quarter disclosing a significant decline in revenues and a big jump in losses.

The stock had traded as high as $62 in February 2011 as investors bought into the Fortress story promoted by Chad Wasilenkoff, a Vancouver business leader with an eye for undervalued market assets.

Two years ago he bought the former Maclaren-Fraser newsprint pulp mill, which had closed in mid-2009, putting more than 300 people out of work. Backed by provincial and federal assistance, he snapped up the moribund operation for $1.2 million - a fraction of scrap asset values. The deal included extensive Ottawa River land frontage with the capability to start hydroelectric production.

But the process of conversion took longer than expected before the specialty pulp production started a year ago. While production levels have gradually risen, there were other issues. In the latest quarter there was an unexpected boiler repair bill during a maintenance shutdown at the Thurso mill.

A year ago, Wasilenkoff was confidently predicting Thurso production would drive 90 per cent of Fortress profitability this year - a hope that now seems highly unlikely.

Elsewhere in Fortress operations, there were other problems including a foreign exchange squeeze which hurt results further at a struggling Swiss banknote paper plant.

The result was Fortress sales fell 13 per cent to $72.9 million and losses more than doubled to $18.9 million in the September quarter compared to a year earlier.

On the brighter side, Fortress said a German wallpaper plant is doing well and it will start putting electricity into the grid from new Thurso cogeneration equipment in January.

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