Pinnacle to buy 70% stake in Alabama wood pellet plant

Canadian industrial wood pellet manufacturer Pinnacle Renewable Holdings Inc (TSE:PL) announced on Thursday it has agreed to buy a 70% stake in a production facility in the US state of Alabama.

British Columbia-based Pinnacle will buy the majority stake from diversified land resources firm The Westervelt Company, which will retain a 30% interest in this industrial wood pellet production facility, located in Aliceville. The buyer did not say how much it will pay for the controlling interest, but noted it will fund the purchase through a draw on its credit line and cash on hand.

The agreed acquisition is expected to help set up a platform for Pinnacle's future growth in the US Southeast, according to CEO Robert McCurdy. "Geographic diversification of our asset base provides us with enhanced flexibility to cost-effectively allocate supply to our customers in Europe and Asia," he added.

The Aliceville plant has the capacity to produce about 270,000 tonnes of industrial wood pellets a year, with 210,000 tonnes of that committed to “a major European utility” under a long-term off-take contract. The remaining production volume will be sold through the company's contracted backlog of long-term, take-or-pay deals.

The facility has now entered into long-term wood fibre supply deals for residuals with a number of large local sawmills. Westervelt's Moundville sawmill in Alabama will continue to be an anchor supplier.

Westervelt is as of now ensuring the increase in production at the facility, and the two companies are partnering to optimise asset configuration, distribution logistics and fibre supply.

Run-rate earnings before interest, tax, depreciation and amortisation (EBITDA) per metric ton is expected to match the parameters of Pinnacle's other production facilities. The capital cost of the plant will also be within the company’s target range of 4.0x to 5.5x run-rate EBITDA.

The asset purchase transaction is seen to close in early October 2018 and is expected to provide accretive free cash flow per share on an annualised basis.

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