Thursday, January 19, 2006

Pioneer Companies, Inc.

In the form of a trade letter to the board

Hey guys,

Bought 550 Shares of Pioneer Companies, Inc. -- Ticker PONR -- at today's closing price of 29.55.

Pioneer Companies seem like a regular commodities business at first glance. They specialize in the production of Chlorine and Caustic Soda (baking soda and the like). One might expect the super cyclicality and the macroeconomics of the business to make this investment suck. But...

Ever since the emergence of bankruptcy, Pioneer Companies has focused on the reduction of costs and closing unproductive and uncompetitive production plants within its portfolio. It is now a formidable player in the industry due to:

1.) Monopoly-like presence in the western part of the U.S. -- They have the only producing plant of Chlorine and Caustic soda there, and are able to out-price most of the competitors located in southern U.S. because of their geographic proximity to their markets. Plus, there's a huge issue with railroads that prevent their competitors from entering their markets effectively. Pioneer also own three pipelines in the area that allow them to transfer products more efficiently than competitors who have to use trucks and rails.

2.) Industry capacity being reached. As of Dec 2004, 97% of the industry capacity is filled. Prices have been on the rise like mad. Pioneer still has a 20-something percent discount relative to market average prices because of their geographic location. They expect their price to become the market average in time, AND THEY DON'T HAVE TO WORRY ABOUT COMPETITORS while raising prices... at least, not for another year or two. The industry isn't expected to increase their capacity though.

3.) Strong cash position/balance sheet by the end of 2005. Most of these will be used to exclusively pay down their 10% senior debt (issued during bankruptcy), thus reducing interest expense and improving free cash flow to equity. Also... since the notes are due in 2006, the company should have no problem refinancing them on better interest rate terms due to its good financial performance.

On top of it all, the company is also selling 60-acres worth of empty land sometime in 1Q 2006. They recently sold a 11-acre land for 2x the book-value... so we can expect a pretty nice cash inflow from those things. Management stated that the proceeds will be used to pay down existing debt.


With all these things in mind, the company trades at a market cap to free-cash-flow multiple of just 5-6x, and an EV/EBITDA multiple of 3-4X

I think its cheap because chemical companies and the industry as a whole is seen as a super-cyclical business... and earnings are generally unreliable. Pioneer Companies, specifically, might have been mistaken for a "general" chemicals producer, and the special situation of Chlorine and Caustic Soda may not have been taken into consideration. Also, there is virtually no analyst coverage for Pioneer.


Our target price for this investment holding will be $44.90

If any of you want more details, please let me know.

Best regards,

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