Sale of French mills expected to allow Tembec to ride pulp price wave

MONTREAL — Tembec's impending sale of two French pulp mills will allow the Quebec-based forestry company to reduce its debt and better ride the current wave of rising global pulp prices, an industry analyst said Monday.

Paul Quinn of RBC Capital Markets said the likely sale of two kraft pulp mills by European subsidiary Tembec SAS will give the parent company more leverage as it looks to improve its financial results.

The sale of the mills in Tarascon and St-Gaudens to Paper Excellence BV is valued at C$137 million in shares and assumption of debt.

They were purchased in 2000 from La Rochette for about $106 million.

"Maybe they sit on lower debt and just take advantage of the markets right now because pulp markets are extremely hot," Quinn said in an interview from Vancouver.

Pulp prices have soared since the global supply was squeezed by an earthquake in Chile and a docker's strike in Finland. Additional price increases are expected through the summer and fall.

Demand for lumber could soon pick up as U.S. housing starts exceeded expectations with an 8.2 per cent pickup in February.

"They need to put together a number of quarters but at this standpoint, the immediate future looks very bright for them," Quinn said of Tembec's prospects.

Tembec (TSX:TMB) said the deal should close after the company has consulted with mill employee committees, as required under French law.

Company president James Lopez couldn't be reached for immediate comment. But he said last week in a statement that the transaction was consistent with a strategic plan launched following Tembec's February 2008 recapitalization.

Tembec doesn't segment the financial performance of its individual mills. The two mills being sold have taken roughly eight weeks of down time in the past year but are currently running at capacity.

A specialty pulp mill in Tartas, France, that is unaffected by the strategic review was shut for two weeks.

Quinn believes Tembec could exit France altogether and focus entirely on North America if it gets the right price for the remaining asset.

The sale of European operations aren't part of the company's plans to sell about $70 million of assets this year. They include the company's turboprop airplane, hydroelectric facilities, buildings and some lands.

Tembec lost $9 million or nine cents per share for the three months ended Dec. 26. That's an improvement from the loss of $60 million or 60 cents per share in the comparable period of 2008.

However Tembec's overall sales were down 19 per cent, falling to $412 million from $511 million in the fourth quarter of 2008.

The company also plans to sell or permanently shutter its Pine Falls mill in Manitoba after workers rejected a 10 per cent wage cut.

Despite its challenges, Tembec's situation has improved since last spring when half of its nearly 6,000 employees were laid off.

Tembec has 6,300 employees and 30 manufacturing units in North America and France.

Its shares fell four cents at $2.30 in early afternoon trading on the Toronto Stock Exchange.