Even through COVID, natural disasters and the economic uncertainty of the past two years, the flow of potential capital investments considered by forest industry investors and clients remained steady.
These included installing another CDK (continuous dry kiln), replacing boilers, rebuilding paper machines, buying skidders and building, buying or expanding sawmills. What’s the decision exercise associated with each project, regardless its type? Specify criteria. Rank projects against the criteria. Draw a line somewhere on the ranked list that says, “we would invest in the projects above the line, and those below the line scare us or conflict with our objectives.”
Once we identify good, high potential projects, we must decide how to pay for them. Where do we find the capital? Recently, I have fielded questions about the use of joint ventures (JVs), where two or more independent firms pool capital for a specific project, in the forest industry. Motivations for these questions come from recent announcements, such as the JV between Louisiana’s Hunt Forest Products and Canada’s Tolko to build a 320 MMBF pine sawmill in Taylor, Louisiana. I make the following observations with respect to joint ventures.
Forest Industry JVs are Common
The forest products and timberland investment sectors have long used JVs. Examples, with an emphasis on deals in the U.S. South, include:
• In 2008, timber REIT Plum Creek (now part of Weyerhaeuser) entered a JV with The Campbell Group (a TIMO now called Campbell Global) to share resources and generate financing for a venture to managed 454,000 acres across six states in the South.
• That same year, Weyerhaeuser and Chevron formed a 50-50 JV called Catchlight Energy to co-invest in projects related using cellulosic biomass for producing liquid biofuels.
• More recently, in 2018, Enviva, the manufacturer of wood pellets, formed a JV with timber investment manager Hancock Natural Resource Group to acquire Colombo Energy.
• Around the same time, Southeastern Timber Products (STP), based in Jackson, Mississippi, formed a 50-50 JV with Tolko to expand STP’s sawmill in Ackerman, Mississippi.
• Tolko also formed a JV with Jasper Lumber to expand the Jasper, Alabama, sawmill.
• Later, Pinnacle formed a JV with Westervelt and Two Rivers Lumber to build a wood pellet facility in Demopolis, Alabama.
• Recently, in October 2021, The Westervelt Co. and Caisse de dépôt et placement du Québec (CDPQ), a Canadian-based global investment group, announced a partnership to acquire more than 76,000 acres of high-quality pine timberland from Superior Pine Products, a family-owned company headquartered in Fargo, Georgia.
Forest Industry Assets are Expensive
While we can question the real-time efficiency of markets, it can be hard to value assets during turbulent times. The acquisition, ownership and management of timberlands and wood-using mills are competitive. Investors constantly compare opportunities in the forest industry with other industries, and once they decide to buy timberlands or build a sawmill, they must often “get in line,” remain patient and open their checkbooks.
As part of our forest industry analysis, my team tracks the investment into mill technology and wood-using assets to maintain a current, relevant understanding of forest industry economics. The figure on page 35 summarizes analysis on the implied “price-per-MBF” paid by firms acquiring or building softwood capacity since around 2013, which comprises a subset of our research into this area back to 2007. The figure considers the market value of softwood lumber capacity by comparing capital investment into greenfield versus acquired sawmills.
The analysis proved timely to provide context related to Canada’s West Fraser’s recent $300 million acquisition of the Angelina Forest Products ~300 MMBF SYP sawmill in Lufkin, Texas. Not including the West Fraser deal, the weighted average “dollar per thousand” paid for capacity in the South was $503 per MBF for new mills and $473 per MBF for existing facilities. And these numbers have been trending up over time.
Conclusion: JVs Provide Access to Markets and Capital
The history of JVs in the forest industry show how they provide access to markets and capital. JVs help address these challenges simultaneously when firms are trying to grow. With the U.S. South offering opportunities to expand with both forest and manufacturing assets, operators outside of the region have been eager and strategic in efforts to secure a regional position.
For market watchers in the South, and in Louisiana, I like seeing capital stay within, and come from, the forest industry when possible. It indicates confidence and promotes resilience in our sector. When firms team up to invest in long-term forest assets with local players, they often point to commitment and sustainability, no matter where the firms are headquartered.
(Dr. Brooks Mendell is president and CEO, Forisk Consulting, www.forisk.com, which delivers forecasts and analysis of forest industry markets and timberland investments.)