Dow Jones interview with CEO
DOW JONES NEWS
NEW YORK (Dow Jones) - Building a business based on selling recyclable
materials is a noble aim, but it hasn+t been a path to big profits for many
companies. Kafus Environmental Industries Ltd. (KS) thinks it has found
the way.
To support its goal of becoming a leading producer of superior commodity
materials made from recycled and alternative resources, tiny Kafus has
devised a landfill-sized strategic plan. It calls for the Vancouver-based
company, which reported just $300,000 (Canadian) in revenue last year, to
have more than $1 billion (U.S.) worth of capital projects on line or
financed by the end of the year. Kafus wants to develop up to $10 billion
in projects over 10 years.
How will a small, 6-year-old company lift this much weight? With a bit of
help from an enviable list of heavyweights in the financial and industrial
sectors, Kafus is financing its plants with bonds underwritten by Merrill
Lynch & Co. (MER) and debt equity and power generation supplied by
Houston-based Enron Corp. (ENE), which owns 30% of Kafus, Boston-based
Stone & Webster Inc. (SW) has signed on to build some Kafus plants.
Kafus is making newsprint out of the fast-growing kenaf plant instead of
trees and is converting urban waste wood, which would otherwise be
landfilled, into medium density fiberboard, or MDF.
-We are trying to build a Fortune 500 or Fortune 1000 company without
(inflicting any) negative impact on the environment,- President and Chief
Executive Michael McCabe told Dow Jones.
Whether Kafus makes it up the steep hill to profitability depends on it
getting its many plants on line in a timely fashion and finding buyers for
its commodity materials. McCabe said Kafus is making significant strides
on both fronts. He also said Kafus is on track in developing its many
projects.
Earlier this month, Kafus received an additional $3 million in bond
allocation to expand an MDF facility in New York. In late August, Kafus
closed on a $12.5 million credit facility from Enron, signaling a big step
in Kafus+ development, according to McCabe.
-We are now in a position to borrow money at the corporate level and avoid
dilution to shareholders rather than issue stock to finance activity,- he
said. The facility will provide Kafus with enough capital to fund its
operations for the next 12 months, the official said.
Last month Kafus completed a $60 million cement fiberboard plant in Texas,
which will become fully operational by the first quarter of fiscal 1999,
which ends Dec. 31. The facility was built in partnership with
Temple-Inland Inc. (TIN).
McCabe said the company had made -significant progress- in getting its
Riverside, Calif., plant on line during the first calendar quarter of 1999.
Kafus is spending $125 million to build the plant, designed to produce 80
million square feet of MDF a year.
Kafus+ only operational plant is in LaSara, Texas. The facility, which has
been in development for two years, will produce 35,000 tons of fiber from
kenaf this year. Much of it will go to Europe to be made into car-door
moldings, replacing fiberglass.
The plant supplies car makers such as Volvo AB (VOLVY) and Saab. McCabe
said Kafus is talking to domestic car makers and expects a -breakthrough-
in those discussions -shortly.-
By the end of the year, Kafus hopes to have a permit to build a mill in
Texas to produce 110,000 tons of kenaf a year for newsprint. The $180
million facility is scheduled to come on line in the fourth quarter of
2000, said Chief Executive McCabe.
In a smaller venture, Kafus is building a $1 million facility in Lakeland,
Fla., to convert food waste into animal protein supplements. McCabe sees
the plant, which should start up in the first quarter of fiscal 1999,
generating $1 million in revenue and $400,000 in earnings annually.
Kafus+ larger plants are expected to produce an average annual revenue of
$50 million and $20 million of profits.
All Kafus+ operations are based in the U.S.
The projects under development could generate $236 million annual net
distributable cash flow on more than $580 million in revenue by the year
2002, according to Kafus.
If all goes according to plan, Kafus expects to swing sharply to
profitability for fiscal 1999. McCabe said the company could earn 30 cents
to 60 cents a share for the fiscal year ending next Sept. 30, on revenue of
$30 million to $40 million. Kafus reported a loss of 29 cents (Canadian),
including several extraordinary items, for fiscal 1997 and should show a
loss for fiscal 1998 as well, according to the official.
Probably the most interesting part of Kafus+ business is the company+s
ambitious plan to use kenaf to make newsprint and car parts. The company
said, for example, that newsprint made from kenaf is cheaper and cleaner.
Kenaf is fast-growing hibiscus, is indigenous to Africa and thrives in warm
climes, such as Southern Texas, where Kafus plans to grow 20,000 acres a
year. Kenaf is already used for rope and twine, but the need to find
alternatives to wood and paper products to save forests is spurring
interest in kenaf for more sophisticated uses.
Kafus is leading the charge, saying it plans to make kenaf the industrial
fiber of choice. -No one grows kenaf on the scale we do,- McCabe said.
Kafus sees its kenaf-related operations generating one-third of its business.
There are several potential speed bumps to the Kafus story that may give
investors pause, such as agricultural and fiberboard pricing risks. In
addition, Kafus is a relatively untested company that is juggling many
balls, a daunting task for even the most seasoned management team.
However, McCabe said Kafus has plugged many of the potential holes in its
business plan. McCabe said, for example, that it+s experienced in growing
the kenaf plant, which is so hardy that it can grow in even sever drought.
The company also said pricing for its quality medium-density fiberboard has
been stable and is expected to remain so.
Furthermore, Richard Robinson, a director at Enron Capital and Trade
Resources Corp., told Dow Jones that Enron will help Kafus hedge against
volatility of newsprint prices.
To ensure a market for its products, Kafus is trying to sign up buyers now
before its plants go into production. The company signed a 20-year deal
with an Oregon company to buy the output of the Riverside and New York MDF
plants, and a five-year deal with Miracle Feeds of Canada for its
animal-feed supplements produced at its Florida plant. Kafus said it+s in
final talks with a -major- pulp and paper merchant for its kenaf-made
newsprint.
Kafus is also targeting Europe, which has stronger environmental laws. The
company has selected a site in Amsterdam for a $150 million MDF plant.
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