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Added to Fortress Paper (FTPLF) and NovaGold (NG)

January 29, 2013

I know I wrote about patience last time and here I am adding to my positions rather than adding to cash as I would have liked, but when shares I own get beaten down I really have to consider adding to those positions. And certainly one can say that shares of both Fortress Paper and NovaGold are getting beaten down.

After a nice runnup in the price of Fortress Paper shares in the first three weeks of the new year, the company last week came out with a press release announcing a delay and cost overruns for the Thurso co-gen plant as well as a delay in bringing Thurso to full operational capacity. Shares plummeted more than 15% on the news. Then yesterday the shares were downgraded by Cormark Securities. Again shares plummeted another 9%. The outlook appears terrible for the company; dissolving pulp prices are in the dump just when the company is ramping up two DP mills and their Landqart mill mired in red ink. So I’m thinking perhaps we are finally at the bottom. Can the situation get any worse? OK, OK so things can always get worse, but here there is some downside protection. It looks like the Dresden mill alone is worth far more than the market cap of the stock less liabilities to the parent company. They could just shut everything down and sell off the pieces and I think investors would at least get their money back. Plus I like knowing that Wasilenkoff has a lot of skin in the game and most at a price ($5) not that much below were the shares  trade today (well, in the grand scheme of things… they aren’t just options anyway). So I’ve added another 15% to my position here and I’m willing to add again if the share price falls into the $7 range.

I’ve also added 20% to my NovaGold position. I haven’t really ever gone into the investment thesis of NovaGold on this blog. It’s a rather short, simple one. This is a company that owns 50% of the Donlin Gold claim (with the other half owned by Barrick Gold) and is in the process of getting the necessary permits for the mine. Permitting is a 3-4 year process and the company has enough cash on hand to take it through the permitting phase but not enough to even start the actual mining operations. The normal course of events would be to obtain the mine permit and then find a partner to actually build and operate the mine. And who more logical than Barrick Gold as it owns the other 50% interest and is a respected operator in its own right?

The NG share price was as high as $14 two years ago, but has been trending down over the past few years. What has brought it down to earth? Not the price of gold, that’s for sure which is only about 10% off its highs of 2 years ago. Perhaps it was the deflation of inflated expectation. The pendulum swinging back.  The iceing on the cake was when Barrick issued a statement last summer to the effect that they weren’t sure they would pursue construction of the Donlin Gold mine. That sent shares of NG into a tailspin. And who picked up shares at that point? My favorite value investor, Seth Klarman. He even added to his shareholdings again last December when the share price dipped again towards $4. I view this as a highly levered gold play, almost an option. I haven’t done a DCF on the mine operations. It’s too complicated and way outside my field of competency. But I do think that for a long-term gold ‘option’, one that I might invest 3 or 4% of my portfolio as a kind of Armageddon insurance, this is a good one to play. This is a 3 or 4 to 1 upside vs. downside in my opinion. Yes, the ‘option’ could expire worthless, I’ll admit it, but as I have said before I do think the world’s debt problems will, at some point, come home to roost, and then I’ll be happy to be holding a bit of gold when all are clamoring for it. And in the meantime I’m only tieing up 3 or 4% of my funds.

  1. Jake permalink

    i agree with your thesis on NG. i have been adding whenever it gets to the 4.20-4.30 range. hopefully they can find a buyer for galore creek, which is a pretty solid asset (9 bln pounds of copper, 8 million ounces gold, 136 million ounces silver). a sale would raise a considerable amount of cash and would de-risk the donlin permitting process.

    also, i like that several people left Barrick to join NovaGold

  2. bob permalink

    interesting ideas. any thoughts on yukon nevada gold?

  3. bob permalink

    also, what do you think is the worst case scenario on splp?

  4. Bob,
    I don’t know anything about Yukon Nevada Gold. Sorry. As to the worst case for SPLP, it gets taken under by Lichtenstein at well below intrinsic value (but hopefully still at a profit for unitholders)… after a long time during which holders see the intrinsic value increase reasonably.

  5. What do you think about the anti-dumping probe from China in regards to Fortress Paper?

  6. My impression is that China is a large consumer of DP but not a large producer. It seems that ALL the large producers (US, Canada and Brazil) are being ‘investigated’ for subsidies. Since they make up ‘the market’ what does China really have to gain by imposing a tariff? Do they really want to build a DP infrastructure that has a higher cost structure than competitors? Possibly, but it isn’t a large industrial sector for China now. Or could this be a political move to use in negotiations for something else? I don’t know.

    At best this is another negative for Fortress that may or may not go away. We’ll just have to see how it plays out. More importantly I’m interested to see what Fortress management is thinking about doing (if anything) regarding the current low price of the shares (and thus the vulnerability of the company).

  7. Sid permalink

    I’m sorry I don’t understand – How can/do you value NovaGold?

    How would you know that at $4 it’s overvalued or undervalued? Yes I know Klarman is buying it. But I can’t get comfortable buying anything that I can’t value, and I’m curious how do you value it?

  8. Jake permalink

    NG getting hurt by the tepid gold market and the threat of Paulson’s gold fund imploding at any moment. klarman must be licking his chops at the thought of buying Paulson’s shares a firesale prices. forced selling by the largest shareholder = great opportunity.

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