BUSINESS
04/30/2013 01:15 EDT | Updated 06/30/2013 05:12 EDT

Resolute completes mill network realignment with Gatineau reopening

MONTREAL - Resolute Forest Products says it has completed the major realignment of its paper mill network with Wednesday's restart of its facility in Gatineau, Que.

The mill is reopening as a lower-cost operation due to a new labour agreement, the use of a single-paper machine and a co-generation power plant set to begin operation in June.

The facility will employ 130 workers, down from 330 when it was shut down in April 2010.

Chief executive Richard Garneau said the mill will produce newsprint that can be sold in North America or for export, a market that has grown to represent 47 per cent of sales.

"There are a lot of containers that return empty from Montreal to Asia, so one of the advantages we see is the flexibility and opportunity also to ship overseas," he said Tuesday.

The reopening in Gatineau follows the restart of operations in Dolbeau, Que., and the closure of less efficient plants and machines elsewhere in the U.S. and Canada.

Overall, the changes have trimmed the Quebec-based pulp and paper producer's newsprint capacity.

Although Garneau doesn't foresee other reopenings, he said production could still be tweaked at its 22 mills to adjust to market dynamics.

Among the mills that face uncertainty is one in Thunder Bay, Ont., whose 300 employees produce about 500,000 tonnes annually of paper and pulp.

Resolute (TSX:RFP) last week announced a two-week idling of the remaining paper machine there. But Garneau said the mill's access to only the North American market puts it at risk as newsprint demand continues to fall.

"It is a mill that may be affected by some temporary outages to adjust our supply with our customer demand," he said.

The company is also seeking a tax reassessment that would lower the value of the mill in northwestern Ontario to $29 million, retroactive to 2009.

The mill was once worth $100 million but is now valued at $72 million. Garneau said that's still too high given how the operations have effectively been cut in half.

Resolute reported a first-quarter net loss Tuesday of US$5 million, reversing a net profit of $23 million in the same quarter last year.

The company said the net loss amounted to five cents per share on sales of $1.074 billion. In the first quarter of 2012, Resolute reported earnings of 23 cents per diluted share on sales of $1.054 billion.

Excluding $33 million of special items, Resolute said net income for the quarter was $28 million, or 30 cents per share.

Paul Quinn of RBC Capital Markets said the results were below expectations as the adjusted EBITDA of $72 million was $24 million below the consensus of analysts.

However, analysts expected 16 cents per share in adjusted profits.

Resolute faced lower demand in all of its products except lumber which is benefiting for the gradual recovery in U.S. housing starts.

"We believe that our efforts over the last two years strengthen our competitive position to better mitigate the challenges facing the North American forest products industry," Garneau said during a conference call.

"Resolute will not stand still. We will always be looking for ways to improve our network to reduce costs."

The startup of co-generation operations at four plants are expected to add $65 million to $70 million in annual pre-tax operating earnings (EBITDA). That would represent 12 to 14 per cent of its overall numbers.

"It's going to provide more stability and it's green power," said Garneau. "It's a significant development for the company. It just allows us to run the mills better."

Resolute also announced Tuesday it has reached an agreement in Quebec and is finalizing a deal in Ontario to make incremental pension contributions.

The company would pay $80 million a year through 2020 for past service contributions in Canada, up from $50 million in each of the last two years. It also paid $20 million after selling some hydro assets.

Overall, the company will pay $160 million a year for current and past service pension contributions in Canada and the United States.

The agreement with stakeholders, the provincial governments and their regulators would prevent payments from fluctuating depending on interest rates and actuarial deficits in the pension plans.

"It gives us more time to reposition the asset and we'll have liquidity hopefully to reinvest and improve profitability going forward," said Garneau.

On the Toronto Stock Exchange, Resolute's shares closed up eight cents at $14.72.

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