Fibria: Brazilian Pulp Giant

| About: Fibria Celulose (FBR)

Summary

Fibria is the world's largest pulp producer.

Fibria's cost of pulp production is the lowest in the world.

In 2015, Brazilian real depreciated to US dollar from 2.65 to 3.95 BRL/USD, leading to an increase in profits for the company vs. 2014.

Click to enlarge

Fibria (NYSE:FBR) is a Brazilian company that operates four mills with annual production capacity of 5.3 million tons of pulp.

Source: Company presentation

Market pulp can be divided into several grades depending on the wood species. The two main groups are Hardwood, which is the species with short cellulose fibers, and Softwood, which is the other species with long cellulose fibers. Short fiber pulp is more prone to be produced in tropical areas, while long fiber pulp is only produced in temperate areas. Hardwood represents 54% of total market pulp demand with 31 million metric tons.

Fibria produces pulp from Eucalyptus, which is a species originally from Australia, but extremely well adapted to the Brazilian climate. Brazil is the country where Eucalyptus trees develop the highest yield in the world. Eucalyptus pulp is about 70% of the Hardwood market, with a demand of 21 million tons in 2015.

Fibria is the world's largest producer of pulp with capacity of approximately 5.3 million metric tons of eucalyptus per year.

Source: Company presentation, author research

Fibria supplies 90% of pulp produced for export; Asia 24%, Europe 43% and North America 24%.

Source: Company presentation

Fibria's mills are one of the most modern and large, and because of this, the company has the lowest production costs in the world.

As seen above, about 7 million tons of hardwood pulp capacity is above 25 years and with annual capacity below 500 thousand tons per year.

Source: Company presentation

In 2015, the company's management stated that the construction of a new pulp plant with capacity of 1.75 million tons was finally approved.

Source: Bloomberg

From December 2015 to March 2016, pulp prices fell; in Europe, from $811 per ton to $737; in China from $645 per ton to $528, resulting in lower sales price for Fibria. Usually, the sales price is lower than the average in China and Europe by about $160 per ton.

Source: Bloomberg

By the way, if you compare pulp prices in China and that imported from Brazil (China customs), you can see that they are about the same in recent years. And manufacturers in China sell the pulp at the same prices as the Brazilian producers. This is important because the cost of pulp production in China is the highest in the world.

Source: Company presentation, author research

The graph shows the BHKP cost curve of pulp manufacturers in different countries and the cost of production of Fibria's pulp, current price in Europe, China, and Fibria's average sales price of pulp. It is seen that in China, the price is lower than cash cost of Chinese, Canadian and American manufacturers. That gives hope that the current prices should compel the least efficient producers to cut production. That in turn could support prices and to stop the falling prices.

The devaluation of the Brazilian real

In 2015, we saw a dramatical devaluation of the Brazilian real from 2.68 to 3.96 BRL/USD, about 48%.

Source: Bloomberg

This devaluation led to higher prices of pulp in Brazilian Real.

Source: Bloomberg

Source: Form 20-F author research

The devaluation has led not only to an increase in the final prices of products, but also the cost. As a result, EBITDA grew faster. And if we look at how this is reflected in EBITDA expressed in dollars, we can see the following:

Source: Form 20-F author research

The price of pulp increased by $28 compared to 2014, the cost has dropped $71, and EBITDA increased by $100. As a result, financial performance improved significantly.

At the beginning of 2016, pulp prices declined. Current prices are below prices in 2014 by $40 per tons, but due to the devaluation of the Brazilian Real, EBITDA/ton in 2016 will be higher than in 2014 at $30 per ton.

2014

1Q 2015

2Q 2015

3Q 2015

4Q 2015

2015

2016

Sale price, $/t

Pulp, $/t

561

556

580

588

589

583

521

Pulp export, $/t

569

568

589

600

596

593

Pulp domestic, $/t

485

459

492

474

528

490

Cost related to production

379

303

310

275

274

290

274

DDA

148

109

103

Benefit to employees

37

29

27

Variable

194

152

143

Freight

65

55

55

52

51

53

51

Gross profit

123

204

220

267

269

245

247

Selling

29

27

27

24

25

25

25

Administrative

21

21

20

14

14

16

14

Cash cost, $/t

337

273

287

258

266

271

266

EBITDA, $/t

223

284

293

331

323

311

255

Click to enlarge

Source: Form 20-F author research

Fibria manufactures and sells 5.1 million tons of pulp per year. Thus, EBITDA in 2016 could reach:

255 ($ per ton) * 5.1 million tons = $1300 million.

In 2015, EBITDA was 311 ($ per ton) * 5.1 million tons = $1586 million.

Replacement cost

In December 2015, the management announced the purchase of 33 hectares of land for $120 million. That is $3700/ha. For reference, in 2013, the company sold 206 hectares for $705 million. Click to enlarge

Source: Company presentation, author research

In 2015, the company began construction of a new plant, Horizonte 2.

The Horizonte 2 is a brownfield project engaged in the construction of a new bleached eucalyptus pulp production line with capacity of 1.75 million tons per year. The total investment is estimated to be U.S. $2.2 billion.

Last transaction of forest

Area, kha

$/ha

US$M

Land acquisition

33

3 758

124

Replacement value industrial

Capacity, kt

$/t

US$M

Horizonte 2 Project (expansion Tres Lagoas)

1750

1 257

2200

Click to enlarge

Source: Form 20-F, author research

Replacement value industrial

Capacity, kt

$/t

US$M

Industrial plant

5 300

1 257

6 662

Aracruz

2 340

1 257

2 941

Tres Lagoas

1 300

1 257

1 634

Jacarei

1 100

1 257

1 383

Veracel

560

1 257

704

Replacement value forest

Area, kha

$/ha

US$M

Forest

969

3 758

3 642

Planted forests

568

3 758

2 135

Other land

401

3 758

1 507

Ports

Capacity, kt

$/t

US$M

Portocel (51% Fibria)

10 000

EV, US$M

10 304

Net Debt, US$M

2 821

Equity, US$M

7 483

Current MCap, US$M (8.6 $/share)

4 734

Upside to replacement value, %

58.06%

Click to enlarge

Source: Form 20-F, author research

Conclusion:

- Brazilian real depreciation against the US dollar had led to an increase in profits in 2015 compared to 2014.

- The fall in pulp prices will not lead to a drop in earnings lower than in 2014.

- So I think that the financial figures have not changed significantly in 2014-2016, and to use the method of replacement value is permitted.

- Upside to replacement value is above 50%.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.