In connection with the acquisition, Fortress Global intends to enter into arrangements with 9109 allowing Fortress Global to have full and unconditional ownership and access rights to the LSQ Mill assets. Fortress Global intends to convert the LSQ Mill into a low cost dissolving pulp operation. Concurrently, Fortress Global will acquire a 30 MW non-operating cogeneration facility at the LSQ Mill that it intends to restart, resulting in material net energy savings (income). An additional cogeneration project will provide up to 50 MW of total power for which the company is seeking a long-term power supply agreement with Hydro Quebec.
Upon completion of the acquisition of the LSQ Mill, the corporation intends to invest estimated capital expenditures of approximately $222 million to convert the non-operating northern bleached softwood kraft pulp mill into a low cost, high quality dissolving pulp mill and to increase the capacity of the cogeneration facility. In connection with the proposed capital expenditures, Fortress Paper has arranged certain financing initiatives to fund the conversion and cogeneration projects.
The LSQ Mill is planned to have an annual production capacity of approximately 236,000 a.d. metric tons (ADMT) and is expected to be completed in late 2013. The LSQ Mill would significantly increase Fortress Paper's annual dissolving pulp production capacity to more than 437,000 ADMT, initially targeting viscose fiber (rayon) products.
Chad Wasilenkoff, CEO of Fortress Paper, noted that "the acquisition of the LSQ Mill and its planned conversion into a dissolving pulp operation represents an important milestone towards Fortress Paper becoming a leader in the global dissolving pulp industry. This project demonstrates the insight and perseverance of the Quebec Government and Fortress Paper in developing a unique opportunity that has been latent for several years, but when completed will revitalize the community of Lebel-sur-Quevillon and the surrounding areas of Northern Quebec. We are very pleased to be able to partner with Investissement Quebec on this project to build from our recent successful conversion of the Fortress Specialty Cellulose Mill, and also look forward to working closely with the city of Lebel-sur-Quevillon."
According to terms of the APA, at closing Fortress Global will pay a nominal cash amount and agree to contribute pursuant to a trust agreement in escalating tranches over the next five years an aggregate of $7.5 million and an additional contingent amount of $2.5 million only in the event of a permanent closing of the LSQ Mill in respect of environmental remediation costs.
The closing of the APA is subject to various conditions, including (1) Fortress Global entering into a collective agreement with the unionized employees of the LSQ Mill, (2i) Fortress Global entering into a loan agreement with Investissement Quebec securing financing to implement its proposed business plan at the LSQ Mill, (3) the parties to the APA entering into a trust agreement, (4) Fortress Global and 9109 entering into satisfactory lease and other ownership and access agreements, (5) Fortress Global finalizing satisfactory fiber supply arrangements with the Quebec Government, (6) an order in council by the Quebec Government authorizing the transaction, and (7) Domtar completing its agreement with the City of Lebel-sur-Quevillon in respect of certain property taxes. The closing of the APA is expected to occur within 75 days.
The cost structure of the LSQ Mill will be materially impacted by the ability of Fortress Global to upgrade the cogeneration facility and to service the facility through a long-term power supply agreement with Hydro Quebec on satisfactory terms. In addition, Fortress Global is negotiating with the City of Lebel-sur-Quevillon for a mutually beneficial, long-term municipal tax arrangement in respect of the capital expenditure program at the LSQ Mill, which will assist in revitalizing the Northern Quebec region. Training and relocation grants discussions are ongoing with various government agencies, although no formal commitments have been provided at this time.
Investissement Quebec (IQ) has committed, by way of an agreement in principle, to grant Fortress Global a loan in the amount of up to $132.4 million comprised of two tranches to support Fortress Paper's proposed business plan in respect of the LSQ Mill. The loan will be secured by the capital assets of Fortress Global and will accrue interest at a fixed rate of 5.0% per annum for the first five years, followed by a rate not to exceed 5.5% per annum for the remaining five years, and will include an equity compensation in the form of 715,000 share purchase warrants of Fortress Paper on terms to be determined. The first tranche of $102.4 million will have a term of 10 years and the second tranche of $30 million will have a term of three years. The loan is subject to completion of definitive documentation. As no definitive agreement has been entered into with respect to the IQ financing, there can be no assurance at this time that such financing will be completed on terms acceptable to Fortress Global or at all.
Fortress Paper has also signed a subscription agreement with a Quebec financial institution providing for the subscription of an unsecured convertible debenture of Fortress Paper in the aggregate principal amount of $25 million maturing in five years with an interest rate of 7% per annum. The Quebec financial institution will have the option to convert its debenture, in whole or in part, into common shares of Fortress Paper at any time after closing of the APA at a conversion price equal to the volume weighted average price of the common shares of the corporation on the Toronto Stock Exchange for the five trading days immediately preceding the closing of the APA plus a premium equal to 50% of such trading price.
TAPPI
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