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A Site Selection Web Exclusive, September 2010
WEB Exclusive story

Through the Mill

Investors take a chance on redeveloping multiple pulp and paper mill sites in Canada.

Project Watch
Illinois-based Green Investment Group, Inc., is investing in the redevelopment of multiple former Smurfit-Stone mill sites, including the 2,200-acre (890-hectare) Pontiac site in Portage-du-Fort, Quebec.
Photo courtesy of Green Investment Group
by Adam Bruns

ith a GDP of more than $300 billion*, Québec represents nearly 20 percent of Canada's economy. For most of its existence, the province's wood products, pulp and paper sector has played a major role in that GDP. But thanks in part to the slowdown in U.S. housing starts brought on by the recent recession, hundreds of sawmills and factories have closed across Canada.

Jobs in the sector have fallen like so much ripe timber, with 85,400 lost across Canada between 2006 and 2009: "The industry is currently suffering through one of the deepest economic downturns in several generations," reports the Forest Products Association of Canada in its most recent industry outlook. It comes as no surprise that Québec has borne the brunt of that downturn, accounting as it does for nearly 41 percent (106) of all establishments in the industry sector.

Québec Minister of International Relations Pierre Arcand told us earlier this year that the decline in pulp and paper had been the primary reason for the province's drop in exports, as well as a chief motivation for diversifying the province's economy. He also said that unions in Québec are a bit more realistic than they used to be: "If you look at the numbers in the last 10 years, unions now realize we live in a global world, and have accepted things they would not have accepted 20 years ago," he said.

The resilience of the sector and its work force are playing out in multiple mill site redevelopment projects across the province.

Makeover Artists

It was nearly two years ago that Smurfit-Stone announced the closure of its Pontiac Pulp Mill and a reduction of 218 jobs in Portage-du-Fort, Que., just to the northwest and across the Ottawa River from the Canadian capital city of Ottawa. The closure was one of several across North America by the company over the past few years. Today, just as the St. Louis firm emerges from Chapter 11 bankruptcy, several of its shuttered sites are emerging with new industrial identities.

The transformations are a result of redevelopment efforts by Green Investment Group, Inc. (GIGI), a firm based in Alton, Ill. (just east of the St. Louis metro area). That's where GIGI's first successful redevelopment project — Alton Steel — today functions as a viable steel company on the former premises of Laclede Steel, which closed in 2002 and let go 400 employees.

"Honestly nobody thought it could happen, that a closed steel mill could be acquired, with all the environmental issues, and then actually start up and operate, which it still is today six years after the closing and restarting," says Ray Stilwell, principal, president and general counsel for GIGI. A longtime attorney with 30 years of experience advising clients in business and real estate matters, he was the founding shareholder and director of Alton Steel. Fellow GIGI principal Mark Spizzo, executive vice president, treasurer and secretary, brings to the table more than 20 years of experience in Illinois economic development.

What Stilwell calls a remarkable teamwork between labor and his management team was crucial to the steel project — as it is for the current pulp and paper mill projects.

"We started out that negotiating process sitting down with the steelworkers union," he says. "We said, 'If we can't work out an arrangement with you guys, we're not even going to bother.' That was a very good move, because they became our friends." At the time, the prospects for those workers were not bright, and most were either unemployed or underemployed. "To assist the new Alton Steel in consummating this transaction, many of those workers gave many hours of volunteer labor to help winterize and preserve the steel mill plant, before we had even negotiated our final deal. They knew if winter came — if all the pipes froze and burst — there wouldn't be anything for us to buy."

Stilwell says Smurfit-Stone was very familiar with his team's redevelopment success because it had a closed mill site located right next door to the Alton Steel site. Alton Steel moved to acquire it, says Stillwell, in part because some of the site's infrastructure would be beneficial to the steel mill operation. At the same time, Stilwell and Spizzo were forming GIGI as Alton Steel's board of directors was focusing more on the steel mill itself.

GIGI closed on the purchase of Smurfit-Stone's Alton facility in February 2006, and has since embarked on similar acquisition-and-redevelopment plans at Smurfit-Stone mills in Circleville, Ohio; and Carthage, Ind. In Canada, in addition to the Pontiac site, GIGI is pursuing redevelopment of mill sites in New Richmond, Que.; and Bathurst, N.B., two sites on either side of Chaleur Bay on the Atlantic coast. Stilwell says GIGI has not had direct discussions with the Canadian unions, but has seen great attentiveness from the communities to GIGI's needs in redeveloping the sites, each of which was so prominent in its respective town.

"We've gotten nothing but great cooperation from every one of several communities in Canada," says Spizzo. "That goes for local elected officials, provincial and even federal level officials. We have found them to be extraordinarily cooperative in many ways. One of the real pluses Québec has going for it is the refundable tax credit. We had not been familiar with it when we purchased the [Pontiac] site. Essentially it's a program that operates geographically — as you move away from the population centers, the credit increases, so much so that the credit at New Richmond is a rate of 40 percent of the qualifying machinery and equipment. At the Pontiac site, the tax credit is some 20 percent. And in New Brunswick, we've been talking to them about a variety of tax incentives, loans, loan guarantees and other economic development tools. They are very open to working with us."

"The response to incentivize our efforts seems to be greater in Canada than in the U.S.," adds Stilwell. "They work harder." That goes for a separate project that might also be in the works in New Brunswick.

"Because of a potential energy project we have that could solve a province-wide energy problem," says Stilwell, "they have responded remarkably quickly in pulling together the governmental and utility authorities for a meeting to see how the project can be assisted."

Both men say that Smurfit-Stone environmental, legal and real estate officials also have been very cooperative throughout the processes involved with each mill site.

Spizzo says most of the Canadian incentives have focused on the investment and development side more so than environmental remediation and cleanup, and says Ohio's support in remediating the Circleville site has been exemplary in this regard. "The purely brownfield incentives may not be specific in Canada like they are in the U.S.," adds Stilwell, "but the economic development incentives which can be used on brownfields seem to be more aggressive."

Reload Mode

Each site purchased by GIGI follows the same business model and approach: Phase I — Scrap and Remediate, and Phase II — Redevelop & Repopulate. To date, the typical initial investment for each Smurfit-Stone site has been between US$3 million and $4 million. GIGI does not know a total investment cost for each property but estimates an approximate investment of US$15 million in Phase I of redevelopment, which includes the remediation, clean-up, restoration and reorganization of a site.

In Bathurst, the first Canadian Smurfit-Stone site purchased by GIGI, via its legal affiliate SSPM BATHURST, L.P., in January 2010, Phase I is under way and expected to take 18 months. The redevelopment focus is on renewable energy, whether it be energy generation, alternative fuels or waste-to-energy conversion. Among the 225-acre (91-hectare) site's advantages are its situation on Bathurst Harbor and close to the deep-sea Port of Belladune, and its position on the main railway for Halifax-Montréal of the New-Brunswick East Coast Railway.

The New Richmond site positioned across the Bay also boasts 225 acres, and roughly the same timetable. Among the possible early tenants is a maker of wind turbine towers. Among the site's advantages is a GIGI-owned-and-operated wharf.

On the 2,200 acres (890 hectares) at Portage-du-Fort, also acquired in January, Phase I is on essentially the same timetable as the others. GIGI has created its own jobs in redeveloping the large site into what eventually will become a regional industrial park. Meanwhile, Trebio (The Renewable Biomass Co.) is investing $19 million in a new operation to manufacture energy wood pellets to supply to the residential, commercial, industrial and institutional markets in Canada, the U.S. and Europe. The plant will have an annual production capacity of 130,000 tons. It's anticipated that Trebio will create nearly 150 jobs, 60 of which will be generated as direct positions the first year.

On April 26, Lawrence Cannon, Canada's Minister of Foreign Affairs, minister responsible for the Outaouais region and member of Parliament for Pontiac, announced on behalf of the Denis Lebel, minister of state for Canada Economic Development, an investment of $3.5 million in the form of a repayable contribution for the startup of Trebio. Added to this funding is a $500,000 repayable contribution from SADC Pontiac, the Community Futures Development Corporation serving the area.

"It is thanks to the emergence of new firms like Trebio that the Outaouais is able to strengthen its economy," said Minister Cannon. "I am pleased to see employment reborn on the site where Smurfit-Stone conducted its activities. Through this financial support, the Government of Canada is demonstrating the importance it places on the economic health of Pontiac and the crucial role the wood processing sector plays in the region."

Asked about renewable energy as a target sector for redevelopment, Stilwell says, "We see it as the best sustainable reuse of these properties for the long term. Without good clean sustainable energy, these sites are remote and very likely would stay undeveloped. These sites are not in Montreal or Toronto. They have to have a reason to exist for the long term. To use current technology using biomass from the local areas, such as forest products, is a great way to restore a lot of the economy that was there before."

New Picture Develops in Thurso

GIGI is not the only one taking a chance on Francophone mill sites. So is Fortress Paper Ltd., based in Vancouver, B.C., and headed by Chad Wasilenkoff, whose contrarian investment style has allowed his company to quadruple its value to $360 million in the past year, according to a recent profile in The Globe & Mail. He's aiming for $1 billion, and the redevelopment of a former Fraser Paper mill in Thurso, just northeast of Ottawa along the Ottawa River, is a big part of that effort.

The site used to make photographic paper. Enough said. But Wasilenkoff, who's making money off other specialty paper mills in Europe (including a currency printing operation), has plenty to say about its potential.

His contrarian search into the world of pulp, lumber and commodity paper facilities began more than four years ago, with a particular interest in dissolving pulp, in high demand by the rayon industry as rayon production surges upward at cotton's expense. He says his team had looked at the Thurso mill before, but the timing wasn't right. Now it's spot on, he says, noting the dissolving pulp market's need for a facility with large digesters, good fiber supply and strong employee base.

"Thurso met all those requirements," he says of the $1.2-million purchase. "It was shut down, and the government would be very supportive of anybody who helped turn it on."

Fortress Paper's pulp business will include NBHK [Northern bleached hardwood kraft pulp] with the re-start of the Fortress Specialty Cellulose Mill, with plans to convert this capacity into dissolving pulp production along with the construction of a biomass-based cogeneration plant.

Important to the transaction was the ability of Fortress to not inherit legacy liabilities. As a consequence of the takeover and redevelopment, around 300 direct jobs are being created, and approximately 2,900 indirect jobs may be created as a result. The mill will receive approximately $150 million in investment as it's retooled, with the cogen plant expected to attract some $62 million of that total. The overall project is being helped along by a $102-million low-interest loan from Invest Quebec. Fortress in the end is on the hook for just $15 million in equity.

"I'd say Québec is the most proactive of any of the Canadian provinces," says Wasilenkoff. "I'm not saying the other ones aren't, but Québec has really stepped up for the people of the province. Generally, investors have shied away from the forestry sector for a decade or more. That's what attracts me to a sector."

He says half a dozen people considered among "the best on the planet for dissolving pulp" have been hired from outside and are relocating to the area. It's the same model he's used elsewhere: Find the asset first (whether in Africa or South America), then find the right people to run it, all the while measuring the risk/reward trade-off.

"There are a lot of benefits to operating in Canada, though it's less attractive with the price of labor," says Wasilenkoff, who says he hired an individual with deep experience in forestry, Québec politics and unions to help close the Thurso deal.

Asset Management a Global Affair

Equally difficult can be working with a site's former owner. Asked about that experience, Wasilenkoff reflects on the difficulties inherent in asset disposition and acquisition: "In general, it is challenging to go through these types of processes. They obviously see we are growing the business, and have bright future prospects ahead of us. But they have to spend the same amount of time and effort to work as diligently as possible to fulfill their fiduciary duties, and they're always viewed as the bad guys. It is a unique type of negotiation."

As part of the deal, Fortress negotiated a new seven-year collective agreement with all three unions active at the site, restructuring to add more flexibility and to change from a defined benefit plan to a defined contribution plan. Wasilenkoff says the unions would have preferred Fortress take on the pension plan, but they also understood how a shuttered asset could quickly become a vanished asset.

" 'We're here to build the future, and if you want us to restart the mill, here is what it would have to look like,' " says Wasilenkoff in characterizing the basic premise. "They asked for a few things, we accommodated them, and it was a fair deal. We've been incredibly pleased with everything that's transpired on the labor side. It started up and got going under budget, quicker than what we forecast, and that can only be attributed to the people."

In June Fortress completed a deal to purchase for approximately $3.8 million a collection of processing machinery from Stora Enso Oyi Cellulose Inc. "This equipment has operated for only 12 years and we are confident of its quality and performance, which should result in a material reduction in our overall capital investment requirements for the conversion to dissolving pulp," said Wasilenkoff in a press release. "We also believe that by acquiring almost an entire batch cooking system, we reduce the process risk for this transformation."

Asked if the current economic climate makes for a good market for such equipment and systems, Wasilenkoff says, "I think there is a ton of this equipment. There is no shortage of large manufacturing equipment. In general, we find that it all sells at scrap value or just over scrap value, and most of it is going to India and China."

He explains that most heavy industrial systems in North America and Europe typically went into service between 30 and 50 years ago and are no longer viable for a host of reasons. What made it viable for Fortress is the fact that it, like the site itself, was being repurposed toward a completely changed product mix.

"To restart to make [just] NBHK would have been financial suicide," says Wasilenkoff. "But switching to a completely new product, customer base and region — that made a lot of sense. So it really took a change in strategy, and a monumental one. It doesn't happen every day."

But his firm keeps looking every day.

"We continue to like dissolving pulp," he says. "Our mill doesn't end the story. We continue to look for other high-priority targets."

Story in Pictures

This map depicts all Green Investment Group, Inc. redevelopment sites in North America.
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