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Tembec poised to benefit from rising pulp prices

Jacques Boissinot/Jacques Boissinot/CP

Tembec Inc. continues to scour its balance sheet as it invests in new equipment and systems to take advantage of rapidly rising prices for some forest products.

The pulp, lumber and paper giant said Monday its U.S. subsidiary has filed for bankruptcy protection even though the division, Tembec USA LLC, no longer has any operating assets.

Tembec shut the coated-paper mill in St. Francisville, La., that was a key part of Tembec USA in 2007 and two years later sold the property and equipment for about $12-million (U.S.). Tembec USA still has pension and other obligations of $81-million.

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The move is one more piece in Tembec's lengthy restructuring. The company was hit hard by a host of problems that started before the global economic downturn of 2008, including a high Canadian dollar, soaring energy and wood-fibre costs and a declining newsprint market.

Over the past several years, Tembec has sold or shut several mills, restructured its debt and invested in more energy-efficient and environmentally friendly systems and machines.

In the process, it has positioned itself to reap big dividends from soaring pulp prices.

"Tembec has a great run ahead of it," said analyst Paul Quinn of RBC Capital Markets. "They did a great cleanup job on their assets."

Prices for dissolving pulp are "on fire," reaching $3,000 per tonne on the spot market as global demand explodes, said Mr. Quinn. Dissolving pulp, which has a cellulose content of more than 95 per cent, is used in applications ranging from textiles to binding agents for pills and toothpaste.

Meanwhile, the company has been lowering its energy costs. One example is a $25.7-million (Canadian) biofuel and electric-boiler project at its pulp mill in Matane, Que.

Tembec is also investing in new areas; it recently announced an $8.4-million pilot plant to develop a stronger and more durable structural material using pulp and resin.

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Michel Dumas, Tembec's executive vice-president and chief financial officer, said pulp now accounts for more than half the company's sales. Lumber is the other major product, but the slump in prices - mainly as a result of the U.S. housing downturn - is expected to continue through 2011, he said.

Tembec's saw mills are running at half their capacity, he said. As for pulp, the company decided to focus on the specialty dissolving-pulp market, which is less volatile than the commodity-pulp market, Mr. Dumas said.

Customers include pharmaceutical companies that use pulp products to make a binding agent for pills.

Mr. Dumas said Tembec is in talks with Hydro-Québec about a potential contract to sell the utility green power that would be produced at a facility in Témiscaming, Que. Tembec is prepared to invest $160-million in an energy-efficient high-pressure boiler that would replace three aging boiler units, he said.

Tembec (TMB)

Close: $5.06, down 20¢

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