Resolute Weighs Forest Products Purchases as Costs Drop
Resolute Forest Products Inc. (RFP) Chief Executive Officer Richard Garneau says the world’s largest newsprint maker will consider acquisitions as lower borrowing costs aid a push into more lucrative products.
Garneau is betting that a focus on wood, pulp and specialty papers can help boost profit as it pares its exposure to newsprint, where demand has slumped as publications switch to the Internet. Last year, Garneau acquired Fibrek Inc. to add three pulp mills and bolster Resolute’s position as the third-largest North American pulp producer.
“We now have the flexibility to be able to do something else in terms of growth opportunities,” Garneau, 65, said May 8 in an interview at the Montreal headquarters of Resolute, formerly known as AbitibiBowater Inc. “We had Fibrek last year and it’s a good example of what could be done.”
Resolute, 30 percent owned by Prem Watsa’s Fairfax Financial Holdings Ltd. (FFH), sold $600 million of 10-year, 5.88 percent bonds last month to replace more expensive debt. The move will save about $15 million a year, the company said.
The supplier of newsprint to The New York Times and Brazil’s O Globo newspapers, has surged 43 percent in the 12 months through yesterday, the best-performing among five Canadian forest-products stocks, according to data compiled by Bloomberg. It owns and operates more than 40 pulp and paper mills and wood products facilities in the U.S., Canada and South Korea.
Resolute rose 1.5 percent to C$16.48 at the close in Toronto today.
“We have very low leverage and it’s 10-year money, so we will see what is going to become available,” said Garneau, who said he likes potential for expansion in lumber and wood pulp.
Resolute’s predecessor, AbitibiBowater, filed for bankruptcy protection in 2009 after being unable to pay $8.8 billion in debt or negotiate a restructuring amid a drop in newsprint demand. AbitibiBowater was formed in the October 2007 merger of Abitibi-Consolidated and Bowater Inc. in a transaction valued at about $4.8 billion.
Resolute last month reported a first-quarter loss of $5 million on revenue of $1.1 billion. Total debt fell to $532 million as of March 31, down from $620 million a year earlier.
Resolute’s notes were rated Ba3 by Moody’s Investors Service and BB- by Standard & Poor’s, both three levels below investment grade. Central bank policies to stimulate economies have depressed bond yields, with a gauge of junk-rated debt that includes Resolute peers yielding almost a record low of 4.9 percent.
Prices for lumber used in homebuilding are poised to extend gains next year as the U.S. housing recovery gathers pace, Paul Quinn, an analyst at RBC Capital Markets in Vancouver, said yesterday in a note to clients.
Chicago lumber futures have risen 18 percent in the past year as U.S. demand for the building material rose amid a recovering housing industry. Lumber futures for July delivery fell 0.24 percent to $337 per 1,000 board feet yesterday on the Chicago Mercantile Exchange.
New-home construction in the U.S. climbed in March to a 1.04 million annual rate, the most since June 2008, and Garneau said the pace could accelerate to as many as 1.2 million within the next year -- echoing a forecast made by S&P last month.
“Richard does like pulp, and he does like lumber, and the lumber side looks very good now,” Quinn said in a telephone interview yesterday. “I don’t think he’s going to buy any more newsprint.”
Newsprint remains Resolute’s largest unit, accounting for a third of total sales. Newsprint revenue fell 14 percent in the quarter to $356 million as the unit posted a $2 million loss, Resolute said April 30. Pulp and specialty papers made up 22 percent of sales each, with wood products adding up to 13 percent.
Standard & Poor’s last month forecast a 7 percent drop in global newsprint demand in 2013, followed by annual declines of 3 percent to 5 percent.
“At some point there is a floor somewhere, but I don’t know where that floor is,” Garneau said, adding that newspapers are unlikely to regain readers and advertisers lost to the Internet.
Resolute has focused on cutting costs, including renegotiating labor agreements, while exporting to markets that continue to expand, such as Brazil and China. Resolute has shuttered about half of its production capacity since before Abitibi and Bowater merged, Garneau said.
Paul Rivett, a spokesman for Watsa’s Fairfax, didn’t immediately return a phone call seeking comment on Resolute’s strategy yesterday.
Resolute’s cost of sales for newsprint improved by $30 million in the first quarter, including savings of $8 million on production costs, according to a May 10 Canadian regulatory filing. Some mills have been able to lower expenses by reducing use of water and electricity, Garneau said.
“They are a low-cost producer,” said RBC’s Quinn. “I have no trouble with the company, I have trouble with the industry. The biggest issue he’s got is that he’s in newsprint and groundwood papers, which are in secular decline, and declining quite rapidly.”
Garneau said the company’s portfolio of assets is well-balanced. “I’m optimistic that pulp is a good segment, lumber is a good segment, and all our specialty papers, flyers and inserts, are going to come back at some point,” he said. “With newsprint, we have the flexibility to export.”
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