ICLTF - O'Keefe Stevens - GreenFirst Forest Products: Hidden Assets Offer Downside Protection

• In Q2, we initiated a new position in GreenFirst Forest Products.
• While we are bullish on the primary lumber mill assets of the company, several hidden assets give downside protection should our lumber bet turn out poorly.
• While recent price declines in lumber hurt near-term earnings, we believe the underbuilding of single-family homes post the GFC will result in sustained demand for lumber.

The following segment was excerpted from this fund letter .

GreenFirst Forest Products ( OTCPK:ICLTF )

In Q2, we initiated a new position in GreenFirst Forest Products ( OTCPK:ICLTF ), a $300m Canadian lumber producer. While we are bullish on the primary lumber mill assets of the company, several hidden assets give downside protection should our lumber bet turn out poorly. We had the opportunity to spend several hours with Management at a dinner event. The added insights gave us added confidence in our position. We came away thrilled to be partnered with this team.

The company's three non-core hidden assets are as follows.

1. 114 acres in Kenora worth between $40-80m. ICLTF has $23m in capital loss carryforwards to offset capital gains associated with the sale.
2. 203,000 acres of timberland in Kapuskasing. GreenFirst is potentially the only Canadian lumber mill with excess timber supply. The Canadian government controls 93% of timberlands with rights to harvest acquired through permits and annual harvest allotments. GreenFirst has no use for the timber; however, other lumber producers with spare capacity could harvest the land, increasing utilization rates and profitability. The value of the land will be compared to what it could generate through a carbon credits program. The land could generate $5-6m in annual EBITDA. At 15x, the land on an ESG basis could be worth $75-90m. A company that could not only use the timber but benefits from the ESG aspect would find this land more valuable, potentially resulting in a higher sale price. After speaking with Management, the Kenora and timberland assets should be sold by the end of the year.
3. GreenFirst exports over 50% of lumber production to the US, subjecting them to tariffs imposed on Canadian softwood exports to the US at a 20% rate. Canadian lumber companies are appealing the rate to lower or eliminate it. With the cost of new home construction up dramatically over the past several years, we see the potential for rollbacks in this tariff to give some reprieve to new home buyers. These tariffs and ongoing appeal has resulted in ICLTF depositing $25m and growing into a depository account. Should the tariffs remain, the cash would be paid to the US government, and nothing would change for GreenFirst. On the other hand, should the tariffs get reduced, they would recoup the difference between the reserved and tariff payment. Companies have been selling these deposited funds between $0.45-0.55 per $1 deposit, receiving capital while shifting the legal dispute risk to a counterparty. After speaking with Management, selling these deposits does not sound like something they are interested in, foretelling how they view the outcome of the tariff dispute, which has a resolution date in early to mid-2023.

In our opinion, these assets range from $130m to $200m in value.

Before getting to the core lumber and paper mills, we potentially have 33-50% of the company's value in non-cash generative assets actively marketed. While recent price declines in lumber hurt near-term earnings. We believe the underbuilding of single-family homes post the GFC ¹ will result in sustained demand for lumber. Ongoing mill operating improvements will lower breakeven costs and improve utilization rates resulting in higher returns and safer assets. Our full writeup can be accessed with a SumZero membership here .

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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