BUSINESS
10/06/2011 05:16 EDT | Updated 12/06/2011 05:12 EST

Tembec looking to invest $100 million to expand pulp production in Temsicaming

MONTREAL - Forest products producer Tembec Inc. announced plans Thursday that could lead to a further $100-million investment to expand its pulp facility in Temiscaming, Que., by 2015.

Chief executive James Lopez told a New York investor conference that the second phase of changes at its key facility would add 30,000 tonnes of annual capacity of specialty dissolving pulp.

"It's under study and not yet approved, however all the signs are looking very, very positive for that project," he said.

The expansion would add 10 megawatts of electricity that would be sold to Hydro-Quebec, would generate $41 million of annual pre-tax operating earnings (EBITDA) and have a 2.4-year payback.

Funding is to come entirely from cash flow generated from operations.

Timing of the expansion will be tied to the company's performance and could be advanced if profits soar ahead of expectation.

It wasn't immediately clear where the expenditure would have an impact on employment.

Specialty dissolving pulp is one of Tembec's (TSX:TMB) growth products because prices are high and it's difficult for competitors to enter the business.

Lopez said its customer are calling in need of more specialty pulp. "I think there all going to be relieved to hear this announcement," he said.

The expenditure would raise the company's forecasted capital spending in Temiscaming to nearly $300 million.

The first phase of the expansion calls for $190 million to be spent replacing three old, low-pressure boilers with one new device, adding up to 40MW of incremental electricity output.

The Quebec government has provided a $75-million loan at rates that Lopez said are "substantially better than the market."

Most of the remaining funds will come from free cash flow. The project is expected to generate $42 million of EBITDA.

Overall, Tembec has more than $500 million of capital investments planned on 83 projects over five years that would generate $236 million of EBIDA and reposition the company's cost structure no matter the economic cycle.

Tembec is a producer of pulp, lumber and paper with about $2.3 billion of annual sales and operations in Canada, France and the United States. Since a recapitalization a few years ago, it has reduced expenses and cut its debt by $203 million.

Lopez said the company has lots of growth potential once its lumber business is accelerated by a recovery in the U.S. housing market.

On the Toronto Stock Exchange, Tembec's shares closed up nearly seven per cent, gaining 15 cents to $2.31 in Thursday trading.