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Fortress Paper shares plummet as plant delayed

Chad Wasilenkoff, CEO of Fortress Paper, is seen here at his North Vancouver office in this file photo.

Rafal Gerszak/Globe and Mail

Fortress Paper Ltd. shares plummeted Friday following the company's announcement that the start up of a Quebec co-generation plant has been delayed and the project's cost will be over budget by as much as 20 per cent.

The company's stock on Friday closed down more than 19 per cent, or $2.07 a share, at $8.69 on the Toronto Stock Exchange.

Fortress said overall construction of the 18.8 megawatt energy project at its speciality cellulose mill is about 94 per cent completed, but start-up is being delayed due to unforeseen piping issues, worker shortage and other issues.

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Fortress also said Friday it expects to soon resolve "minor technical issues" as it continues to ramp-up production of dissolving pulp at the new facility in Thurso, Que.

It now expects power will begin to flow from the co-generation plant late in the first quarter or early in the second quarter. Costs will be 10 to 20 per cent higher than the previous forecast of $100-million plus contingencies.

After a promising start to dissolving pulp production in early December, the mill has faced challenges as it ramps up to full capacity. Fortress said it expects its efforts will soon improve the operating efficiency and productivity.

"Although the beginning of 2013 has presented certain minor technical issues and constraints beyond our control, we believe that these matters will be resolved in the near term and we will continue on with our progress towards full capacity," chairman and CEO Chadwick Wasilenkoff said in a statement.

In addition to challenges with its own operations, Fortress faces softer dissolving pulp pricing markets caused by weaker textile demand and increased supply from new entrants in China and elsewhere.

Paul Quinn of RBC Capital Markets downgraded his rating for Fortress and trimmed his target price for the company by $2 to $12 to reflect the weaker price outlook, slower production ramp-up at Thurso and higher cost assumptions.

"Disappointment ain't dissolving," he wrote in a report prior to the company's announcement.

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Quinn said the Thurso production ramp-up to 200,000 tonnes per year continues to be bumpy and doesn't expect them to be resolved until the second half of the year.

"We are growing increasingly less confident that management will be able to achieve its targeted cost position at Thursday (about $700 per tonne)," he wrote. Quinn forecasts delivered costs of $1,025 per tonne in the first quarter, $935 per tonne for the year and $910 in 2014.

Commodity dissolving pulp price have averaged US$890 per tonne year to date and Quinn has reduced his full-year price forecast by 2.5 per cent to US$975 per tonne. More than three million tonnes of capacity is slated to be added through 2014 above the four million tonnes produced in 2011.

In addition to a dissolving pulp mill in Thurso, Fortress recently acquired a cellulose mill in Lebel-sur-Quevillon, Que., which it intends to convert into a dissolving pulp mill and re-start the co generation facility.

The company also has a specialty wallpaper manufacturing business in Germany, a mill in Switzerland that makes paper for bank notes, passports and other uses, and optically variable thin film material at another plant in Canada.

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