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How Fortress Paper became a TSX star Add to ...

I know Chad Wasilenkoff's secret: He doesn't sleep. Back when he was a teenager, the CEO of fast-growing Fortress Paper tried every sort of solution for his insomnia-sleep clinics, acupuncture, hypnosis. Nothing worked.

And nothing works now. This explains why, around midnight recently, I received an e-mail from Wasilenkoff. Lying awake, he'd figured out the solution to a problem in one of the deals he's trying to stitch together. Why waste time counting sheep when you're vibrating with a self-described "drive to find a better solution for everything"?

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Wasilenkoff has accomplished what no one thought was possible: He has made a fortune in forestry, a sector that has been dead money for years. Building on an $8-million private offering in 2006 and a $46-million IPO in 2007, Wasilenkoff's creative deal-making has rocketed Fortress to a $770-million market capitalization. An astounding stock-price surge of 306% in the past year is bested by only one other name in the 244-member S&P/TSX composite, the benchmark index that Fortress is poised to join, and in the past three years Fortress has outpaced all comers with its 817% gain. As investors have piled in, Wasilenkoff's own fortune-he owns about a sixth of the company he founded-has jumped to $130 million.

No mere hewer of wood, Fortress is a unique animal that makes money in three cherry-picked specialties. The first is making banknote paper at a mill in Switzerland that also manufactures high-security paper for other uses: passports, visas, lottery and train tickets. The second business is non-woven wallpaper, produced at a mill in Germany. Fortress dominates this quality niche.

The third, and latest, leg is the most counterintuitive of them all: the rag trade. Wasilenkoff scooped up a pulp mill in Quebec dirt cheap and is overhauling it, with the bulk of the money supplied by the Quebec government. The plan is to make dissolving pulp, a suddenly hot commodity used to produce rayon, which is a popular substitute in China for cotton.

Wasilenkoff's title is CEO, but he's more like a good hedge fund manager-a relentless value hound, in other words. It's always been this way, says his mother, Nina. When he was 8, while on a family holiday in Hawaii, he asked to borrow $20 to buy a supply of watermelon bubble gum, which wasn't available back home in Calgary. The stuff wasn't for chewing; it was for flipping. Wasilenkoff quadrupled his money selling the gum to classmates. "He was always looking for action," says Nina. "His mind never stops. He's constantly searching."

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By the time he was a teenager, Wasilenkoff was in the habit of wearing a suit, and his arbitrage had moved past gum to everything from video-game cartridges to Robert Bateman prints to beater cars. He earned enough to buy a used Porsche 911, canary yellow, for $14,500. The occasional presence of the car in the school parking lot and the frequent absence of its owner from class led the school's vice-principal to suspect Wasilenkoff was dealing drugs. He hauled mother and son in for a chat. "School wasn't the place for him," says Nina. They discounted the drugs notion in no time. "Chad and I left smiling. They had no clue what he was about."

Wasilenkoff arrived at the University of British Columbia in Vancouver with ambitions of becoming a real estate developer. But on graduation, he realized he couldn't abide the wait to get to the top of that business. Curious about the stock market, he got a two-month gig at Canaccord Capital, the legendary brokerage on Howe Street, stapling stock receipts. He got into an introductory broker's course after he finished the Canadian Securities Course in a dizzying three weeks. He had convinced Canaccord's chairman, Peter Brown, that he could sprint the marathon.

Wasilenkoff is a famous persuader, though not a voluble one. "You get sold before you realize you're being sold," says Richard Whittall, a Fortress director and Vancouver investment banker. "Chad's a tremendous listener. He chooses his words very carefully. He'll sit patiently. I don't want to call it a poker face, but he's basically very good at not betraying any emotion."

Wasilenkoff himself professes that there is no guile in his taciturn style. "I'm reluctant to add my two cents unless it's valuable," he says. "It's the way I've always done business. I like to be the dumbest guy in the room."

In his first years as a broker in the late 1990s, Wasilenkoff took several hard hits on junior gold (it was the time of Bre-X) and then in ephemeral tech stocks. He blames himself for having followed the advice of Canaccord analysts too closely. Chastened, he started to do his own research and build his own deals. He asked "a million questions" of industry veterans and memorized the rule book for upstart ideas, the TSX's Capital Pool Company program. "I read it so many times," says Wasilenkoff. "I could have quoted section 3.8.2: 'It says this and that's why we're doing it this way.'"

Wasilenkoff pivoted to a school of thought that was out of favour at the time: deep-value investing. And as he became successful at it, his contrarian soul was tickled to the core. His first big deal after quitting his job at Canaccord was in gold, when the yellow metal was still in its decades-long bear market. The creation of Dynasty Metals & Mining in 2003 was Wasilenkoff's first score.

His attention then turned to uranium, another out-of-favour commodity. Wasilenkoff didn't know much about the stuff, so he cold-called a world expert. That was the start of a two-week instant education that convinced Wasilenkoff uranium's price would be rising. The plan, as with Dynasty, was for Wasilenkoff to structure a small company and attract investors-but not be directly involved in management himself. But at Titan Uranium, the 32-year-old dealmaker ended up as CEO.

As of 2006, Titan had properties but no mines in production. But then Wasilenkoff got nervous when uranium prices not only rose but spiked. Deals at reasonable prices evaporated, and he sensed a bubble (he was right) and wanted out. He stepped aside. "I was doing the company a disservice by remaining on as CEO, when I didn't believe in the future prospects," says Wasilenkoff. "I didn't think if the price was going to crash, it was when."

Wasilenkoff had been casting an eye to forestry. As a side gig while running Titan, he and a group of investors bought two underperforming paper mills in Switzerland and Germany from Vancouver's Mercer International. Two months after he left Titan, Wasilenkoff had Fortress in business.

Wasilenkoff, already a multimillionaire when he founded the company, was entering a new period. He was becoming a builder, not just a broker making deals. After a due-diligence visit to the wallpaper mill in Germany, Wasilenkoff had tossed and turned at night more than ever. "I have a lot of confidence," he says. "I'm not really scared. I'm thinking: 'Let's go.' But after touring the mill, I thought, 'Okay, this is a big facility. A lot of people work here. Better not screw this up.'"

To avoid botching the biggest move he'd ever made-in which he sank $2 million of his own money, a quarter of the purchase price-Wasilenkoff quickly replaced management and brought on a veteran paper mill operator, Alfonso Ciotola. The assets were whipped into shape.

The mill near Dresden made non-woven wallpaper, which is easier to put up and remove than regular wallpaper. The operation has been a major success: The mill's share of the global market has doubled to 50% since the purchase, generating most of Fortress's profit (a share that will change with the addition of dissolving pulp to the mix). At Wasilenkoff's prompting, the mill is now developing "energy-saving" wallpaper that retains heat.

The Swiss mill was the one that first garnered attention for Fortress. The security paper business is an old and insular industry populated by a small number of companies, led by United Kingdom-based De La Rue. Fortress's mill in the postcard-pretty town of Landqart has been the sole provider of banknote paper for the Swiss franc for three decades; it also produces the euro for 10 countries.

As a rambunctious newcomer, Wasilenkoff was somewhat stymied by the stodginess of the banknote business. He wanted to quickly expand via acquisition but couldn't persuade anyone to sell. Instead, he decided to retool the mill at Landqart to quintuple the mill's production capacity. The plan is underpinned by the mill's proprietary Durasafe technology, which attracted Wasilenkoff in the first place. A polymer core lengthens the life of the bills and allows for the introduction of transparent windows to discourage counterfeiting.

While Ciotola was running the mills in Europe, Wasilenkoff searched for new business. His focus turned to China, the world's biggest printer of money. He cold-called the Chinese authorities and continued building a relationship over the next five years, trying to sell them on Durasafe.

Before Fortress was founded, he had attempted business in China but was too aggressive, too Western, and was rebuffed. He retreated to better learn the customs, like the practice of quietly rapping one's knuckles on the table-an ancient sign of respect. Wasilenkoff brought this learning to his delicate push of Durasafe in China, and says he's now finally coming close to finalizing a technology licensing deal for a new series of the yuan.

"It's an extraordinarily strange company," says Whittall, the director. "There's no rhyme or reason between a wallpaper mill and a banknote mill. And now we have a dissolving pulp mill."

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Wasilenkoff had been angling to get into dissolving pulp since he started Fortress. He saw something in the commodity others didn't. World cotton production was in decline, Wasilenkoff's research indicated, and he knew that rayon, made from dissolving pulp, was the go-to substitute. His delving convinced him dissolving pulp was undervalued, but it wasn't until 2009 that he spotted the in.

He made a pitch to his board (on which he serves as chairman). Presented in late 2009 with a five-page plan to buy and renovate a closed-down mill in Quebec, the board said no. "I remember some of the board members, their eyes rolling back, saying, 'We're going to buy a rusty old pulp mill in Canada? What are you thinking?'" says Wasilenkoff.

Spurred by the rejection, Wasilenkoff reapplied himself to the idea. The bankrupt mill in the town of Thurso, on the Ottawa River, had once turned hardwood pulp into high-end products like photographic paper, a business done in by digital cameras. Wasilenkoff figured he needed $150 million to retool the mill and build a green-energy biomass operation that would not only power the mill but also sell excess juice to Hydro-Québec.

But the plan needed more. So Wasilenkoff drafted a veteran Quebec forestry executive, Pierre Monahan, to liaise with the Quebec government, which was keen to see the mill survive. With the board now backing a more detailed plan, Wasilenkoff wrested the mill away from Fraser Papers, which was in court protection from creditors, for a paltry $1.2 million. With Monahan's help, he persuaded the provincial government to loan Fortress $102 million on the cheap through Investissement Québec, the province's economic development agency. Fortress also drummed up $15 million from Fonds de solidarité FTQ, a labour-sponsored fund that invests to drive economic growth in the province.

Joel Lusman, an Old Greenwich, Connecticut, hedge fund manager who has piled money into Fortress, calls the deal one of the best he's ever seen. "It's a very, very fine line between self-confidence and arrogance," says Lusman. And on that line, he finds that Wasilenkoff "is perfectly balanced."

Wasilenkoff believes there will be chronic shortages of dissolving pulp. Within months of the Quebec mill starting operations in the fall, he hopes to have pulled off as many as four more similar deals in North America and Europe. If he's successful, most of Fortress's profits could derive from dissolving pulp, transforming the company. "I'm pretty confident that by the end of this year, we're going to be the largest dissolving-pulp company in the world," says Wasilenkoff. "From nothing to the biggest, in a year and a half."

Alongside the soaring price of cotton and rayon-sparked by voracious demand in China-the price of dissolving pulp has nearly quadrupled in the past two years. Bay Street, inclined to ignore forestry of late, has started to pay attention. Brokerages such as Raymond James and Dundee Securities-which were the main backers of a $58-million share offering in February to bolster Fortress's balance sheet-are evangelical about Wasilenkoff. The stock has moved from $15 in March, 2010, at the time of the Quebec deal, to more than $60, although it fell recently to as low as $50. Raymond James analyst Daryl Swetlishoff predicted the price would rise to at least $75 if Wasilenkoff scores more deals. Other analysts are more measured. RBC in January called Fortress a "compelling growth story" but "fully valued." TD also liked the Fortress story, admitting it had underestimated the potential of dissolving pulp, but in February warned of additional supply drowning demand: "Nothing kills good prices like good prices."

Whittall waves it off. "It's Canadian in the psyche to wonder about when it's going to come off the rails."

Irwin Michael, the veteran deep-value investor, found a kindred spirit in Wasilenkoff. Michael was the largest investor in the 2007 IPO and calls it the best buy he's ever made. "He's made a heck of a name for himself. Next time he wants to do something, people will give him a blank cheque."

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Wasilenkoff may have worn suits in high school, but today he rarely wears a tie, even to his own board meetings; more likely, he sports Converse sneakers. His favourite toy is a Ferrari 360, but otherwise his instinct is bare bones, a beer-and-wings guy. The Fortress head office in North Vancouver sits atop a McDonald's and houses a mere five people (three of them accountants).

And a press interview is something Wasilenkoff conducts at his West Vancouver pile over a couple of beers. He's convinced the deals he has on the go could make Fortress a $300 stock and a $4-billion company-from an $8-million company in 2006. His outlook is wildly bullish but aired without the promotional fervour of Vancouver's Howe Street. "It won't be this year, but by the end of next year. It's a very clear runway."

At this point, Wasilenkoff's four-year-old son, Titan, wanders in. It's early Sunday evening, his dad has been away for a week and Titan wants to play. Wasilenkoff apologizes-he's busy, working. The young father worries he hasn't taught Titan how to make a paper airplane. They haven't tossed around a baseball. "I really feel I'm missing out." But Wasilenkoff's addicted to ramping up his company. He can't say no-and the game is finally really on. "The deals are getting bigger and better and easier."

The trader has embraced building. On a visit to his Quebec operation, a mill revived in a town that was otherwise doomed, a worker in his 50s embraced Wasilenkoff and thanked him.

"It's become a big part of the driving force of growing this company, to see if we can turn around some other mill towns that are dead, put thousands of people back to work. Several of the mills I'm looking at buying have been shut down for three or four years. At one of them, we're the only people looking. Otherwise, a bulldozer's going through."

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