Pulp and bank note producer Fortress Paper Ltd. is selling its operations that make security film used in bank notes to Nanotech Security Corp. for up to $17.5 million in cash and shares.

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

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., 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  CEO Chadwick Wasilenkoff said in an interview.

Quebec-based plant

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.

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 says Fortress Paper is selling the optical features operations to focus on its dissolving pulp and security paper segments and improve the company's liquidity.

Assets of the Bank of Canada's Optical Security Material division were purchased by Fortress in 2011 for $750,000 to complement its Swiss business, but the supply agreement provides access to security material at favourable prices.

Fortress Paper's dissolving pulp business has struggled for a couple of years, culminating in a 10-week shutdown earlier this year of its Quebec-based mill, also in Thurso, to lower costs, as it faced low pulp prices and punitive dumping duties from China. Dissolving pulp is used in some types of clothing and other products.