Mission: To build B.C.’s next major forestry player
Assets: Three mills, a strong fibre basket and a veteran management team
Yield: A successful career in investment banking, notably as CEO of Raymond James
By Joel McKay
The classic maxim for any businessperson is to buy low and sell high.
That, in essence, is Ken Shields’ entire business plan.
A few years ago, the 62-year-old former investment executive convinced a few of his colleagues to enter the one industry that most folks in B.C. were deserting: forestry.
The idea was to buy sawmills that other companies were unloading for rock-bottom prices as the mountain pine beetle infestation devastated Interior forests and the U.S. housing market spiralled downward.
Conifex Timber (TSX-V:CFF) was birthed with the idea that mills could be bought cheaply and the leftover capital could be reinvested in the assets to take advantage of the full range of wood products.
Although the company mainly manufactures lumber, Shields believes the leftover parts of the tree – the chips, sawdust and bark – can create sustainable wealth for shareholders.
That’s why Conifex launched a $45 million bioenergy power generation project at its Mackenzie sawmill last month.
“That, we think, is a real source of differentiation for us,” chairman and CEO Shields said during a recent interview. “When you take a look at all of the public [forestry] companies, many of them have a lumber segment and a pulp and paper segment … we’re the only one that has a lumber segment and … bioenergy segment.”
The plan is to use the wood waste to generate power that can be sold back into the grid.
Conifex is also looking to manufacture wood pellets that can be sold to European power markets.
“Bioenergy is really crucial because … your revenue stream when you sell onto the grid is denominated in Canadian dollars, it’s not subject to a softwood lumber agreement and it’s steady-eddy revenue.”
Conifex’s ambitious strategy is predicated on the fact that it’s already executed the first part of its plan: acquiring cheap assets.
The company snapped up its Fort St. James mill for $12.8 million in the summer of 2008, far less than the $40 million Pope & Talbot paid for it in 2005.
Last year, Conifex bought two sawmills in Mackenzie for $33.5 million.
Shields said the same assets cost $200 million a decade ago.
While nearly every other forestry company shrunk during the downturn, Conifex expanded.
“Even though it was easy to get discouraged because of the tough financial markets and the difficulty in raising capital, any negative feelings I had about that were offset by the incredible value opportunities that were available,” said Shields.
The company’s stock value has increased 43% to $11.75 since it first issued shares last June.
Two of its three mills are up and running, and Conifex has zeroed in on China’s demand for B.C. wood.
In 2010, 46% of its lumber was shipped to Asian markets.
“I’m not aware of any B.C. company that’s anywhere near where we are in terms of the China market,” Shields said.
But his ability to execute on the Conifex plan is no accident.
Shields knows the quality of the timber in B.C.’s Interior forests better than most, having grown up in Prince George and spent years working in the mills.
After high school, he attended the University of British Columbia for finance and afterward became a forest products analyst.
In 1989, he co-founded Goepel, Shields and Partners, a brokerage that was later bought by investment dealer Raymond James Ltd.
Shields became CEO of Raymond James, a position he held until retirement in 2006.
In that time he remained connected to the forestry sector through deal-making, and also served as a director of TimberWest Forest Products (TSX:TWF), Mercer International (NASDAQ:MERC) and Slocan Forest Products.
“I’ve always had the forest sector, some people say I’ve had sawdust in my hair all my life,” he said.
After a short retirement, but no shortage of boredom, Shields rounded up some old colleagues with an idea for a new company.
“The mountain pine beetle was clearly the most unusual development in the history of this industry, and we thought if there was a way we could be a beneficiary of the beetle rather than a victim of the beetle we could do a good job for our shareholders,” he said.
And so Conifex was born.
“They’ve achieved a couple of major coups here in terms of the business plan,” said Gerry Van Leeuwen, vice-president of International WOOD Markets Group. “One, buying [annual allowable cut] for cheap … and, two, getting very good timber.
“You could say it’s a bit of a contrarian play, but he’s been in the investment business all his life and he understands the business cycles pretty well, better than you or I.”
Former Canfor (TSX:CFP) CEO Jim Shepherd sits on the board with George Malpass, the former CEO of Primex Forest Products; Brad Johansen, president CEO of Welco Lumber; and Dave Roberts, formerly of Raymond James.
Assets aside, Conifex has a way to go before it’s a major player in the B.C. forestry sector.
The company shipped 153 million board feet of lumber last year, realizing $57.3 million in revenue.
That resulted in a $10.8 million loss for the year.
The fact that Conifex operated at 23% capacity last year hurt operating results, but Shields hopes to increase lumber shipments this year to 130 million board feet each quarter in the second half of the year, or 520 million board feet on an annualized basis.
As for its bioenergy segment, Conifex has yet to secure an electricity purchase agreement with BC Hydro.
But it’s still early days, and Shields is convinced that a combined lumber-bioenergy venture is a business plan that will pay off.
“It’s a way to get more value out of each and every log we produce,” he said. “That’s what we’re committed to.”