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Fortress to earn big profit from selling bank note security division for $17.5M

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MONTREAL - Fortress Paper Ltd. is selling operations that make security film used in bank notes to Nanotech Security Corp. in a cash and share deal valued at up to $17.5 million, a big increase over the $750,000 in paid in acquiring the business from the Bank of Canada in 2011.

Fortress Optical Features makes the colourful security threads contained in some Canadian paper currency and various international denominations. Developed in co-ordination with the National Research Council of Canada in the early 1980s, the material was first used in Canada in 1988.

Nanotech Security Corp. (TSXV:NTS), which is buying the division, offers its own security features from certain wavelengths of light that create an image from very small "nano holes" perforated in notes or documents.

"We're very confident that the two companies together will be a better, stronger entity," Fortress (TSX: FTP) CEO Chadwick Wasilenkoff said in an interview.

He said the workforce at the division's plant in Thurso, Que., could more than triple over the next six months to 60 or 70 if the buyer secures a large new contract from an undisclosed potential customer. The plant uses less than 20 per cent of its capacity but could sell out completely with the contract.

Nanotech has entered into an agreement to continue to supply optical variable thin film material to the Vancouver-based company's Switzerland bank notes and high-security paper mill.

The deal, expected to close around Sept. 10, includes $7 million cash, a $3 million secured note and five million shares in Nanotech to be held in escrow and released over five years.

Wasilenkoff said it approached Nanotech about the plant's sale after deciding to focus on its dissolving pulp and security paper segments and to improve the company's liquidity.

Fortress plans to use proceeds for working capital, perhaps reducing its $250-million debt and seeking acquisitions after its dissolving pulp operations, also in Thurso, recover over the next three to six months. Dissolving wood pulp is used to make cloth, cellophane, tires and other products.

The company's dissolving pulp business has struggled for a couple of years, culminating in a 10-week shutdown earlier this year as it faced low pulp prices and 13 per cent dumping duties for goods sold to China. The company reduced its dissolving pulp workforce by 16 per cent to some 270 workers as it moved to reduce costs.

"We are making good progress there so even in a very depressed dissolving pulp market we will be on a run rate of break-even before the end of the year," Wasilenkoff said.

Fortress is also in talks to sell its inactive Global Cellulose mill in Lebel-sur-Quevillon, Que., while a Norwegian mill was recently sold and will be dismantled and moved to Vietnam. The Quebec mill might or might not remain in the province if sold.

In November, China threatened to impose a 50.9 per cent interim duty on dissolving pulp from the FGC mill if the facility were converted to make dissolving pulp. Fortress is also prevented from making paper pulp under the agreement with the mill's prior owner, Domtar (TSX:UFS).

Mark Kennedy of CIBC World Markets said the sale of the optical business seems like a "pretty reasonable deal" for Fortress, but it could be a while before it realizes the full value.

"Getting some extra liquidity is not a bad thing for them for sure, but still the whole value of the Fortress story still hinges more on the Thurso (dissolving pulp) operations," he said in an interview.

The analyst cut his target price for Fortress to $1.40 per share on anticipation that it will realize $25 million from selling assets like the optical division and LSQ.

On the Toronto Stock Exchange, Fortress shares rose nearly 14 per cent, gaining 29 cents to $2.38 in Tuesday afternoon trading.

Follow @RossMarowits on Twitter

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