Fortress Paper Ltd. remains halted in midday trading on Tuesday after a sudden spike in the share price. The gains follow reports that the specialty paper maker – think banknotes and wallpaper – has bought a shuttered pulp mill from Domtar Corp. , with financial assistance from the Quebec government.
It isn't every day that investors get excited about lowly paper makers, but Fortress has already turned in an impressive gain of 41 per cent this year and Raymond James recently anointed the stock as one of its best Canadian stock picks for 2012.
According to Bloomberg News, Dundee Securities analyst Richard Kelertas noted that Tuesday's deal to restart the Domtar mill "should allow Fortress to substantially lower its production costs."
And according to a note three weeks ago from Daryl Swetlishoff at Raymond James, the company was already making the right moves with the recent completion of its Thurso dissolving pulp mill – a move that should reduce cash costs significantly midway through 2012.
"[Based on long-term pricing assumptions] we regard the Thurso mill value as covering the current share price, leaving the legacy Dresden wallpaper and Landqart currency paper mills (which we value at a cumulative $20/share) as 'free options' for investors," Mr. Swetlishoff said in a note earlier this month.
With investors now excited about the prospect of adding the Domtar plant to Fortress Paper's operations, the market is starting to a price on these free options.
David Berman