Making mess into money: Resolute Forest Products enters the tissue business

MONTREAL – Resolute Forest Products is hoping to wipe its way to profits by entering the paper towel and bathroom tissue business as it continues to seek ways to offset decreasing demand for newsprint and commercial paper.

The Montreal-based company said Monday it is making its largest investment since it exited bankruptcy protection five years ago by spending US$270 million at its pulp mill in Calhoun, Tenn.

“We believe this is the right move for this company at the right time and it is absolutely the biggest announcement out of this company since the bad stuff of 2010,” vice-president Seth Kursman said.

He said the company’s strategy is to use money from its traditional operations to diversify to paper markets that are gaining strength over ones that are declining.

The mill will divert some of the 100,000 tonnes of pulp produced for paper annually to make 60,000 tonnes of premium tissue that will be sold in the growing U.S. private label market for customers like Walmart, the company said.

Resolute (TSX:RFP) said production is expected to start in early 2017.

The company expects to add more than 100 new jobs for the tissue operation in addition to 50 as part of a previous $105 million investment. The mill currently employs 556 workers.

Resolute joins Georgia Pacific, Kimberly Clark, Procter & Gamble and Kruger subsidiary KP Tissue (TSX:KPT), which is building an operation in Memphis for US$325 million.

The move to tissue comes after about two years studying the 8.5 million tonne per year tissue market and evaluation of its own network of seven pulp mills. Kursman said the company will continue to evaluate internal expansion opportunities and tissue acquisitions.

The Tennessee mill was selected because of the availability of fibre and proximity to customers, he said. The company said it also received financial support from the state for employee training, though it declined to say how much.

While he wouldn’t rule out making tissue in Canada, Kursman highlighted what he said were the challenges of investing in Quebec because of its policies that make fibre costs among the highest in the world.

“If Quebec wants to attract large capital for additional projects we have to have transparency, certainty and longevity and there are serious questions now when you can’t get access to the fibre and the fibre is as high cost as it is.”

Analyst Paul Quinn of RBC Capital Markets doubts Resolute will open tissue plants in Canada and will instead remain close to large U.S. tissue customers by adding another machine in Tennessee, followed perhaps by its pulp mills in Alabama or South Carolina.

“They’ve got some pretty decent plants in the U.S. so if I’m putting in a tissue plant I’m definitely doing it in the U.S. as opposed to Canada,” he said from Vancouver.

Quinn called the investment a good move that will deliver about US$90 million a year in pre-tax operating profits. Instead of shipping dried and baled pulp to producers that rewet them to make tissue, Resolute will save money by sending wet pulp directly to its own tissue machine.

“It makes total sense and they’ll have a significant cost advantage versus somebody without pulp,” Quinn said.

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