This story is about Domtar but Repap has the real leverage to paper prices
Domtar Shares Surge to 10-Year High as Paper Outlook Improves
Montreal, Aug. 18 (Bloomberg) -- Domtar Inc.'s stock rose to
a 10-year high on optimism that the Canadian papermaker will
profit from rising paper prices, analysts said.
Domtar rose C$0.20 to C$16.50 in Toronto, its highest since
April 1989. A total of 1.8 million shares changed hands, making
it the sixth most active stock on the Toronto Stock Exchange.
Prices for paper and some packaging products, such as
linerboard, are rising as sustained economic growth in the U.S.
and strengthening economies in France and the U.K. bolster
demand. In addition, consumption is starting to recover in Asia.
''There are price increases going through or that have been
announced for quite a broad array of pulp and paper and
paperboard products,'' said Patricia Mohr, a commodities
economist at Bank of Nova Scotia in Toronto. ''I think we're
going to see a sustained recovery over the next couple of years.
I am quite bullish.''
Last month Canadian and U.S. papermakers announced plans to
increase prices for lightweight coated paper used for advertising
flyers by 10 percent, or US$60 a short ton. Part of the increase
took effect already and the rest is expected to be implemented
later this year.
Prices for linerboard, used to make cardboard boxes rose
last month 11 percent to US$410 a short ton in the eastern U.S.
''All the stars are falling in line for Domtar to have a
banner year in 2000,'' said Blaise Ganguin, an analyst at
Standard & Poor's Corp.
The Montreal-based company has reduced its production costs
and is benefiting from its acquisition of specialty papermaker
E.B. Eddy in July 1998, Ganguin said. The company said it's on
track to cut operating costs by C$60 million this year.
Eddy was a beneficial acquisition because it makes high-
margin products and generates stable returns, Ganguin said.
Domtar also is protected from rising pulp prices because it
makes its own, Ganguin said. Pulp is the key ingredient used to
make paper products. Pulp prices are set to rise another 5
percent next month to about US$570 a metric ton in North America.
Pulp sold for US$485 a metric ton as recent as February.
The stock advance also reflects optimism that the Quebec
government may soon sell its 19.8 percent stake in Domtar, said
Reid Carter, an analyst at Research Capital Corp. in Vancouver.
That would further increase its attractiveness as an investment
because it would be easier to buy and sell the shares, he said.
Weyerhaeuser Co.'s pending acquisition of MacMillan Bloedel
Ltd., Canada's largest forest company, has led to a search for
other investments in the industry. With the lumber market peaking
in recent months and the newsprint market still weak, the focus
has shifted to pulp and paper producers such as Domtar,
Scotiabank's Mohr said.
Investors also have a lot ''confidence'' in Domtar's
management, Carter said. That reflects its decision to merge its
packaging assets with Cascades Inc. in late 1997 and the Eddy
acquisition last year. ''There's a feeling that management won't
spend money foolishly,'' he said.
Carter said with paper and packaging prices rising and costs
kept in check, Domtar is expected to generate as much as C$300
million in free cash flow in 2000. That could lead to a higher
dividend or a stock buyback, he said. |
