Fortress Paper (TSX: FTP) is an international producer of security and specialty papers and wallpaper base. The Company’s Landqart Mill in Switzerland produces security papers, which includes paper currency, passports, visas, cheques, share certificates and lottery tickets. The Landqart Mill has been the sole provider of banknote paper for the Swiss currency since 1979 and is one of only nine authorized suppliers of various denominations of the Euro currency. The Company’s Dresden Mill in Germany produces primarily non-woven wallpaper base that is sold to Eastern Europe and the former Soviet Union. Although global demand for wall paper is declining, these markets are experiencing growth, especially in the non-woven segment.

Fortress Paper became a TSX-listed Company on June 28, 2007, after purchasing the Landqart Mill and the Dresden Mill from Mercer International Incorporated. Mercer, a European softwood and kraft pulp producer that trades on the NASDAQ (MERC) and the TSX (MRI.u), divested the mills to focus on its pulp business. A Canadian entrepreneur, Chad Wasilenkoff, reviewed the assets, conducted due diligence and negotiated the transaction. Mr. Wasilenkoff then installed experienced European management, led by Dr. Alfonso Ciotola as Chief Operating Officer and Erich Sulser as Chief Financial Officer.

We believe that Fortress Paper is a net asset value story, where the replacement value of the two mills and the related equipment is well above the Company’s current market capitalization. The Landqart Mill is situated in the town of Landquart, 100 kilometres east of Zurich in the scenic Swiss Alps. After poring through the initial public offering prospectus we discovered that the fire insurance value of the property was CHF (Swiss Francs) 66.5 million for the building and CHF 163 million for the inventory and equipment. At the current exchange rate this totals approximately CAD $200 million.

The Dresden Mill is located in the town of Heidenau, 12 kilometres south of Dresden on the Elbe River. The mill has total capacity of 36,000 tonnes and a 12,000 tonne machine costs approximately EUR 30 million. Therefore the total replacement value of three 12,000 tonne machines is EUR 90 million or CAD $125 million. Additionally, the Dresden complex includes land, a hydroelectric plant and a water treatment facility, which were appraised at CAD $50 to CAD $100 million combined.

Putting all of the pieces together, we believe that the Company’s assets are worth between CAD $375 and CAD $425 million compared to the current market capitalization of only CAD $86 million. We are not suggesting that the stock should trade at replacement value, but we believe that a 75% discount to net asset value is excessive for assets that are both cash flow positive and profitable.

On August 14, Fortress released second quarter results that supported our net asset value analysis. Reported sales of $35.4 million were down from $38.3 million in the prior quarter due to foreign exchange and the timing of shipments. However, EBITDA improved to $4.3 million from $2.4 million in the first quarter of 2007. Similarly, net income grew to $1.7 million from $1.1 million in the first quarter. To be fair, we need to adjust the first quarter net income to reflect a one-time sale by prior management, which had a negative impact of approximately $0.4 million. Excluding this item, net income still grew almost 14% quarter over quarter.

Based on the number of shares outstanding post-IPO, Fortress earned $0.17 per basic share and $0.16 per fully diluted share in its first quarter as a public entity. Annualized and ignoring any additional sequential growth through the balance of the year, the stock is trading at approximately twelve times earnings. Looking at the Company’s historic results, net income grew to $1.8 million in 2006 from $1.5 million in 2005. Based on a 20% growth rate, consistent with management’s outlook, we believe that Fortress could trade at 20 times earnings. This implies a potential valuation range of $12.80 to $15.00 over the course of the next twelve to eighteen months.

We believe that Fortress Paper is a deep value story that is under-followed and accordingly, under-valued. The shares have been thinly traded post-IPO and have been quite volatile, which is perhaps unsurprising given the general market conditions. However, Fortress is an intriguing small-capitalization story, with solid net asset value support and potentially decent earnings growth going forward. Interestingly, with the TSX listing, Fortress is positioned to bid on contracts to print the Canadian currency in the near future. We plan to patiently hold the stock over the course of the next few years and hope to be well rewarded.

ABC Funds
September 28, 2007