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Shutdowns hamper Fortress Paper

For the second quarter of 2012, EBITDA was $2.3 million and for the third quarter of 2011, EBITDA loss was $0.8 million.

Excluding corporate costs, the three business segments’ combined EBITDA loss was $5.3 million in the three months ended September 30, 2012. The Specialty Papers Segment contributed $8.3 million EBITDA, while the Dissolving Pulp Segment and the Security Paper Products Segment generated EBITDA losses of $5.6 million and $8.0 million, respectively. Corporate costs contributed to EBITDA loss in the amount of $1.1 million.

Net loss for the third quarter of 2012 was $18.9 million or basic and diluted net loss of $1.31 per share. In the prior quarter, net income was $12.5 million or diluted net income per share of $0.83. In the prior year comparative period, net loss was $7.2 million or basic and diluted net loss per share of $0.51. The current period result was significantly lower compared to the previous quarter due in part to the gain realized in the prior quarter on the sale of certain non-core assets in the Security Paper Products Segment and the scheduled annual extended shutdown for maintenance as well as an unplanned shutdown due to a recovery boiler issue in the Dissolving Pulp Segment in the third quarter of 2012.

Dissolving Pulp Segment

The Fortress Specialty Cellulose mill continued to ramp up dissolving pulp production during the third quarter of 2012. A comprehensive seven day planned annual extended maintenance shutdown was completed towards the end of the quarter. Maintenance expense for the shutdown was approximately $3.5 million. As a result of an unplanned shutdown due to repairs required to the recovery boiler and slower than expected ramp-up, production was impacted. With the annual maintenance completed, the Company anticipates continued progress towards full capacity. During the shutdown, all process and high voltage tie-ins were completed for the new cogeneration facility. Production for the quarter exceeded sales by approximately 4,500 air dried metric tonnes as various trials were completed and product was held for testing. This inventory build is expected to be sold in the fourth quarter.

The net 18.8 megawatts cogeneration project is nearing completion with overall progress at approximately 76%. The new boiler has passed hydrostatic testing. Turbine tests are expected to commence in late November and power generation connectivity to the electrical grid is expected in January 2013. Projected final costs are expected to be approximately $100 million excluding contingencies.

The Fortress Global Cellulose mill project continues to progress substantially as planned on all fronts. Detailed engineering and process design continues for the conversion to dissolving pulp production and commitments have been made for major long-delivery equipment required for the conversion. On-site, the workforce is refurbishing the plant and equipment to bring the asset to full operational condition and preparing the assets for the upcoming winter.

Dissolving pulp markets softened during the third quarter due to weak textile demand and increased supply of dissolving pulp from new entrants. Among other factors, the weakening viscose staple fibre market in China has driven down dissolving pulp prices to below US$1,000 as at the end of September 2012. Given existing market conditions and in order to maintain good customer relations, a significant portion of our sales orders for the fourth quarter is expected to be below the floor prices set forth in our supply agreements with our three major Chinese purchasers. These supply agreements are currently under review with the counterparties to reassess each party’s obligations going forward.

Specialty Papers Segment

The Specialty Papers Segment continues to perform well. The capital expenditure plan for 2012 was successfully completed during the general maintenance shutdown in August. The Dresden mill has now reached a manufacturing capacity of 60,000 tonnes per annum of non-woven wallpaper base.

Management believes that market demand will continue to be strong in the coming years. The displacement of traditional paper-based wallpaper with non-woven wallpaper base appears to be progressing faster than originally anticipated.

Security Paper Products Segment

Market conditions for security papers remain difficult. Cotton and other raw material costs have stabilized compared to the extreme volatility experienced from their historic highs of 2011. The Swiss franc appreciation against the Euro has abated due to Swiss National Bank intervention, however, the strength of the Swiss Franc has been a disadvantage to the Landqart mill in terms of costs and expenses as the Euro is the principal trading currency for the mill. Overcapacity continues to be an issue in the banknote paper market. The fierce competition for orders has led to a significant erosion of banknote prices and margins during 2012. Significant tenders in the near term should absorb some of the excess capacity. These less than favourable conditions have impacted the results of the Security Paper Products Segment.

There have been some positive developments such as new customers and the first order of substrate that included optically variable thin material. Interest in Landqart’s composite substrate, “Durasafe”, remains strong. A small order has successfully been produced and is now being printed with the expectation for these banknotes to be issued before the end of the year and becoming the first Durasafe banknotes in circulation.

The Landqart mill continues to produce banknote paper for its most substantial contract, which had previously been in abeyance earlier this year, with four deliveries to date. This long running contract should contribute to the optimization of the mill’s operational efficiency over the next year.