Mercer International Inc (MERC) 2008 Q3 法說會逐字稿

Good morning. My name is Kristin, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International third quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Ms. Alexandra Tramont. Please go ahead, ma'am.

Thank you. Good morning, and welcome to the Mercer International 2008 third quarter earnings conference call. Management will begin with formal remarks, after which we will take your questions.

Please note that in this morning's conference call, management will make forward-looking statements that were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks related to these statements, which are more fully described in the press release and with the Company's filings with the Securities and Exchange Commission.

Joining us from management on today's call are Jimmy Lee, President and Chairman, and David Gandossi, Executive Vice President, Chief Financial Officer, and Secretary.

I will now turn the call over to David Gandossi. David, please go ahead.

Thanks, Alex, and welcome, everyone, to Mercer International's third quarter earnings conference call. We'll be following the similar format to that of previous quarters. I will begin with some prepared comments on the key financial aspects of the quarter, and then I'll pass the call to Jimmy, who will speak about the particulars in the markets, our operating performance, and some of our strategic initiatives.

As well, we'd be remiss if we didn't comment on the current financial turmoil we are experiencing and what this means to Mercer. As always, we'll be pleased to answer any questions you may have following our remarks.

Let me begin by saying that it was clearly a difficult quarter. Despite another good quarter from a no-operating perspective, including the smooth maintenance shut at our Rosenthal mill, we experienced a fairly dramatic widening or weakening of global pulp markets, which has taken away some of the pricing advantages we have achieved in recent quarters. And as you know, currency markets have been particularly volatile in recent weeks. Jimmy will speak more about this in a moment, but first, let me talk about the numbers.

As you will have seen in our press release, we reported a net loss of EUR17.2 million for the quarter or EUR0.47 per share compared to net income of EUR10.7 million or EUR0.30 per share in the same quarter in 2007. As you know, our earnings are sometimes heavily influenced by the mark-to-market gains and losses on our hedging instruments and foreign currency-denominated debt.

Our earnings in the quarter included pre-tax mark-to-market accounting losses totaling EUR17.8 million on these instruments, compared to a loss of EUR1.1 million in the same quarter in 2007. Driving this is the impact of reducing short-term interest rates opposite our fixed-rate swap for Stendal, which is at about 5.2% and the strengthening US dollar, as its affects our US-denominated senior notes and convertible debentures.

Our interest expense is also noticeably lower than the same period a year ago, as we continue to reduce our level of borrowing on the Stendal facility. Interest expense is also influenced by foreign exchange rates, as our US dollar-denominated interest is lower in euro terms than a year ago.

We achieved EBITDA of EUR24 million compared to EUR19.8 million in the second quarter. For those of you interested in the US dollar equivalence, this is about $36 million in EBITDA in the third quarter compared to about $30 million in quarter two.

An analysis of the EUR4 million improvement can be summarized as about EUR7 million of average price deterioration, which was more than offset by a lighter annual maintenance program in Q3 and the positive EBITDA impact of a recently weaker euro.

When compared to the same quarter in 2007, the foreign exchange impact is negative. We experienced about EUR9 million of unfavorable currency movements, which when combined with the energy-induced inflationary impact on shipping and chemical costs, more than offset the pricing gains that were made over the past year. EBITDA of EUR24 million in the current quarter compares to EUR35.8 million in the same quarter of 2007.

Despite our stable EBITDA, we consumed just under EUR3 million of cash for our operations, as we begin to build wood inventories for the winter season when our availability or ability to consistently harvest is not always certain. We also progressed our high return on capital spending program during the quarter, which consumed about EUR9 million in cash. In accordance with our Stendal loan facility, we made principal payments during the quarter of approximately EUR17 million.

We currently have liquidity of about EUR119 million, which is comprised of approximately EUR76 million of cash and EUR43 million of undrawn revolvers maintained by Rosenthal and Celgar. Given the global focus on liquidity, I'm going to review the unique financing structure of Mercer.

First, two-thirds of our debt is low cost, government guaranteed, and non-recourse to Mercer. This has been established with German government support to build Stendal. That leaves the balance of our debt financing in the Restricted Group that includes Celgar and Rosenthal. Within that Restricted Group are our senior notes, convertible debentures and working capital revolvers for Celgar and Rosenthal. While they are generally plain instruments, we are going into a period of economic turmoil that makes these facilities quite valuable. Let me go through them one by one.

The first is $310 million of US-denominated unsecured notes. These notes don't mature until 2013 and pay interest at a rate of 9.25%, twice per year. While the indenture governing the notes contain certain restrictions on our ability to buy stock, pay dividends, or make investments, we don't have any financial maintenance covenants, which could put us in default, other than, obviously, the non-payment of interest.

We also have outstanding $67 million of US-dollar denominated convertible notes, the notes based on the annual interest of 8.5% and are convertible at the holder's option at a share equivalent of $7.75 US per share. Like the senior notes, there are no mandatory payments or redemptions until their maturity in the fall of 2010, and there are no financial maintenance covenants which could trigger an event of default.

We also have two smaller revolving facilities, a CAD40 million denominated facility at Celgar and a EUR40 million facility at Rosenthal. Both facilities are secured against certain working capital and are subject to borrowing base limits. Reliance under the facilities are available in several forms, and interest is variable and based on LIBOR, Euribor, and Canadian prime interest rates.

The Rosenthal revolver is currently completely undrawn and matures in 2010. The Celgar facility is currently about [CAD35 million] drawn and matures May 25, 2009. The maturity date may be extended for excess of one-year periods upon request and lender acceptance within 30 days of receiving an extension notice.

With that, let me turn the call over to Jimmy to talk about our operational market and strategic development.

Thanks, David. So as David mentioned, this has been a remarkable few weeks. If you had asked me several weeks ago what I wanted to talk about on today's call, I would have said our operational performance, our safety record, or our capital expenditures. I will do that, but I would be remiss if I didn't take time to talk about the markets in considerable detail.

While we were pleased with our operational performance during the quarter, the rate of deterioration in the pulp market has been a bit of a surprise. The downturn in most economies is a blunt reminder of how global our economy is; so we continue to push through operational improvements. We will be promoting and accelerating our high return CapEx initiatives, and I'll talk about these efforts here in a moment.

We continue to be satisfied with the rate of improvement in productivity; the production numbers we report often need a little explanation, since they are impacted by maintenance shuts and varying number of calendar days. But after taking into consideration the impact of the annual maintenance shut at Rosenthal and an extra calendar day in the quarter, we maintained our average daily production rate once again in the third quarter and achieved another one-month production record at Celgar.

The improved level of productivity equates to about 9,000 tonnes higher production in Q3 2008 than the same quarter in 2007. Year-to-date after removing the impacts of the shuts, our production is approximately 23,000 tonnes higher than in 2007.

During the quarter, we completed the annual maintenance shut at our Rosenthal mill, which was concluded without incident. And while the impact won't be noticed until the fourth quarter, we're in the final days of Stendal's annual shut, and this has gone well, as well.

Let me talk about the pulp markets for a moment. While we believe that the pulp markets for softwood has been in balance, the recent economic turmoil has really put a chill on buying. Probably of greater concern is the slowing of the global economic activity, which will likely impact future demand. This effect is probably most pronounced in China, where despite relatively low inventories, buying activity is light, as there is a reluctance to contract until the perceived market price becomes more apparent.

This instability is amplified by some producers who are selling at spot prices that are not maintainable at current input cost levels. Some of these producers are traditional, non-integrated suppliers who are trying to re-enter the market after a period of curtailment or shuts. Others are mills that were integrated with paper mills; they are placing pulp in the market that were previously consumed by paper machines.

The tightening of the credit market has left certain producers no choice but to sell into unstable spot markets. Both sources of additional supply are introducing volume at a time when further demand has some uncertainty. Hardwood pulp production is even more out of balance than softwood and prices for these grades are falling significantly. This situation is not helpful, as there is a possibility of some substitution of NBSK, which may shrink demand.

Our sales volumes have bounced back from the slower summer season and total about 364,000 tonnes. Our stronger level of production has left us with higher inventories than we would like, and total inventories approached 140,000 tonnes. Much of this inventory is a reflection not of the market, but the congestion of certain of our important ports, primarily Vancouver container ports.

We have taken steps to seek alternative shipping arrangements during the quarter, and this has had a modest improvement in Celgar inventories. Given the current economic situation, we now do not expect the congestion to relieve itself until next year.

The list price for NBSK pulp in Europe fell about $50 US per ton during the quarter and ended the quarter at approximately $850. While this compares remarkably with pricing that was $50 lower only a year ago, the increases haven't really kept pace with the falling US dollar and rising input costs.

Although from a US dollar perspective NBSK prices are at historic high levels from the Canadian and European producers' perspective, the prices are still at what we would be [to trough] prices. The bulk of the price increases to date have been due to the weak US dollar as well as the increase in input costs, such as wood fiber and not really reflecting the supply/demand balance that existed until a few weeks ago.

With the recently strengthening US dollar, the upward pressure has come off pricing. Given the economic uncertainty we are currently experiencing, we do not expect any upward movement in prices for the next few quarters. While foreign exchange in cost pressures are supportive of further increases, the current supply increase and likelihood of demand reductions will likely take the upward pressure off pricing for several quarters.

The greatest potential positive influences are the most uncertain. We believe that the current pricing and over-supply situation is not maintainable at these prices. Current costs in addition to the escalation of the Russian export tax will put added pressure on producers to take high cost supply -- to take off high cost supply.

While we expect the volatility of financial markets to settle relatively quickly, we are less certain about the length of economic slowness in our key markets, which may influence demand.

Let me now take a moment to discuss developments in the wood market, as they have become quite complex and volatile.

When compared to the second quarter, our fiber costs were virtually unchanged. If you were to look back one year ago, our wood costs are only slightly higher. But looking into the particular markets in Germany and BC yields some interesting developments. Wood pricing in Germany is developing as we described at our previous conference call and continues to fall. Our average wood cost is lower than the second quarter and significantly lower than the same quarter one year ago.

The deterioration of global housing construction that has had a dramatic impact on board producers continues to reduce our competition for fiber. Our ability to consume wood in either whole log form or residual chips has meant that we have been able to shift away from less abundant residual chips and focus more heavily on the whole log supplies that were previously the target of the board manufacturers.

Looking forward, there remains a little more uncertainty -- the Russian export tax, which is quickly being escalated to EUR50 per cubic meter, has virtually closed the Russian border to wood trade. That being said, to this point, we have not noticed significant pressure on the market in northern mainland Europe. The experience of recent months now seems to confirm our early assertions that the tax will have limited impact on our markets due to the considerable cost of transportation between Germany and Scandinavia.

In British Columbia, the overall outlook for fiber is improving but it will take another quarter for us to see noticeable benefits. We have been working hard to develop new supplies of whole log pulpwood for Celgar. However, we experienced some significant delivery cost increases in the past few quarters, as the Arrow Lakes towing operation had not been operating since the Pope and Talbot's bankruptcy.

The consequence of this has been a need to haul a large volume of wood by truck. We have since reached an agreement with Interfor, the new owners of the towing operation, to commence the more-efficient towing program, and we expect wood costs to drop. But it will take another quarter for the lower costs to work their way through the inventory.

We are also excited that the wood room upgrade at Celgar is in its final weeks of construction, and we expect some significant improvements in wood costs and our ability to source an optimum fiber supply.

The lumber market in North America remains depressed, and as a result, residuals from sawmills are at historic low levels. We're working diligently with the provincial government and [10-year] licensees in our area to develop alternative supplies of fiber. This lumber market downturn and our sometimes unique initiatives to find alternative sources of fiber has highlighted significant deficiencies in the government's regulations with respect to pulp manufacturers' access to wood.

Our work with government officials centers around how to provide a supply of low grade, often bug-killed wood to pulp producers at a time when the lumber industry is incapable of facilitating that supply. The government's response would best be described as supportive and committed to do the right things.

Many of the changes will require direct hits from senior levels of government, and we have been given assurances that this will be done. We are optimistic that we can find a solution to add value to a source of fiber that may otherwise have decayed in the woods.

If I can talk a little bit about energy for a moment. In case some of you missed our call in July, we are pleased to receive word late in Q2 that the German government approved the amendment to its legislation governing the promotion of green energy that we had expected will have a significant positive impact on our EBITDA at our German mills.

For several years, Germany has promoted the production of new green energy sources through a tariff system that provided electricity purchase pricing that was significantly higher than the prevailing market. The previous legislation, however, was directed at small power producers of less than 20 megawatts; therefore, leaving the larger co-gen supplies at Rosenthal and Stendal ineligible.

The most significant modification to the legislation in June is the removal of the 20 megawatt limit, which will allow us to participate in the program in the future. The amendment is scheduled to take effect on January 1, 2009.

While participation in this green energy program by design will prohibit our participation in the carbon credit market, we expect this development will improve our EBITDA from electricity sales by an order of magnitude of about EUR16 million as compared to 2007 electricity sales contributions.

The EUR35 million green energy project at Celgar is progressing on schedule. The new turbine generator has been commissioned. Construction is continuing. And we believe that we are near completion of a power purchase agreement with the provincial electricity utility -- the first of several options for the sale of the 30 megawatts of new biomass-generated electricity.

If I can take a moment to add my thoughts to David's comments about the financial markets, I would like to emphasize our satisfaction with our capital structure to weather this difficult period. I'm not uncomfortable with the volatility of the currency markets, input costs, and pulp prices; my only frustration is that the pulp prices tend to react slower to the positive influences of a weaker US dollar and higher energy prices, than the relatively quick decline in spot markets we have experienced in recent days.

I believe that this economic turmoil had temporarily interrupted a pulp market that was quite balanced prior to a few weeks ago. So, we will now have to wait until the global economy and credit markets settle before resuming a price structure that reflects a long-term supply/demand balance for NBSK.

And as David mentioned, we believe that our liquidity is sound and our capital structure is appropriate. This, combined with our German government support of Stendal and our low cost structure will help us carry it through. We're forging ahead with our various strategic projects, so that when the market settles, we're ready to take advantage of the demand for the NBSK and energy.

So looking forward, despite the challenging global economy and the continuing depressed markets, the Mercer mills are well-positioned to continue to deliver stable cash flows in the short-term. While inventory levels imply shorter-term market weakness, we believe the longer-term fundamental outlook for NBSK and softwood demand remains positive. We remain focused on increasing margins by reducing costs as well as increasing the mill availability at all operations, and improving the returns on our by-products such as excess power.

That concludes my prepared remarks. So, on that note, perhaps, I can turn the call back to the Operator where we can then open the call for questions.

(Operator Instructions). Bob Wetenhall, Royal Bank of Canada.

Thanks for taking the questions. Just wanted to ask you -- why is the discount between -- or the size of the discount between pulp list prices in Europe and average pulp sale realizations increasing?

In terms of the European market or --? Basically the list prices, of course, reflect the price set in US dollars. And, of course, the mill net realizations are, of course, booked at the time that we receive the actual sales. And, of course, there's currency impact and, of course, you do have increase in spot selling at Stendal. And, of course, the Chinese markets tend to be weaker than the European market. So I think it's a combination of underlying currency movements during the period as well as the fact that there has been slightly increased sales to, let's say, non-contract buyers.

Understood. And just to clarify, you said an incremental $16 million -- sorry, EUR16 million from selling on the grid in Europe from Stendal and Rosenthal, as opposed to participating in the carbon credit program?

Yes, I mean, that would be the estimate of the increase in electricity sales as compared to 2007. And of course, as you know, the carbon credit sales we believe would have contributed something in the order of about maybe [4 million] this year and declining as we go through the period.

So, it's difficult to estimate what the contribution for next year would be, but the estimate in terms of the carbon sales for this year was approximately [4 million]. And of course that will come down. So, EUR16 million is a very conservative number for us because, of course, we can sell the green energy during periods when electricity prices in general tend to be weaker. So there's not a specific time that is allocated that we need to sell it at. So we believe that the EUR16 million probably represents a very conservative type of revenue increase.

Fair enough. And I think that number that you guys have provided is [CAD38 million] to build out the energy facility at Celgar. And I was just curious, it sounds like you're going to get a PPA agreement in place. How are you financing the CapEx (technical difficulty) out of this?

Well, I mean, we are in discussions with completing a financing with a large lending institution. And our hope is that with the conclusion of the purchase contract, that we will also then have the finalization of the loan facility so that we can essentially replace the cash that we have, of course, spent toward equipment and also to, of course, continue the ongoing construction.

Great. Thanks. I'll hop back in the queue. Appreciate it.

Herve Carreau, CIBC World Markets.

David, you mentioned that the Celgar facility, which matures in May '09, could be extended by a year if the Bank agree. Just wondering if you are looking at other options there or are you comfortable that the Bank will be supportive?

Yes, I'm comfortable the Bank is supportive. We've had preliminary discussions with them and so we're going to go through the process of an early extension. And I think actually we'll get a little more coverage on some of the log inventories that we have, that we previously had available. So there seems to be a real willingness to carry on with it. I mean it is secured by inventory and receivables, so it's not one of those things that's caught up in this credit crisis.

Okay. And another question on fiber costs. You did talk about the towing and the reassumption of the towing operations on the Lake. I'm just wondering what could be the impact on your fiber costs there if it's resumed next year?

Well, it could be quite material, Herve. Towing -- hauling logs by truck can be anywhere from (technical difficulty) [15 to] cubic meter. And the towing costs are sort of in the $7 to $8 a cubic meter range. So $10 to $12 a meter of wood cost [to] production or that component of the sourcing.

And what would that represent in terms of your volume?

Probably 400,000 to 500,000 meters.

Okay, great. Thank you.

DeForest Hinman, Walthausen & Co.

Can you talk about the inventory situation with Celgar in a little bit more detail?

And then just thinking about that in terms of the port. I'm a little bit confused, because it seems like bulker rates are falling drastically. And then also container rates are falling as well. And it seems like there's an over-supply of those type of boats. Is there a lack of customer demand? Or we really cannot get that inventory off the docks? That's my first question.

Well, I think the port congestion started during the early part of this year, because there was a withdrawal of these bulk carrier traffic from the coast. And so many of the producers which had been reliant on bulk carriers all of a sudden shifted to the container. And, of course, container availability became restricted mainly because of weather-related type of reasons. And therefore, the rail lines were not able to actually supply sufficient containers, one; and second, there was, of course, congestion at the stuffers in the sense the facilities which take the pulp and stuff it into the containers also.

And because of this mad rush in the early part of the year, there was a really inability to ship out volumes that were even contracted for. And so, if you look at Q1, we started the year with something like almost 70,000 tonnes at Celgar. And we, of course, have tried to wither this down. And in the second quarter, we've been able to bring it down to more like the 65,000.

And in the third quarter, unfortunately, the situation really hadn't changed, although we took the initiative of chartering bulk carriers that we participated together with other producers, but mainly it was our charter and we had arranged for it. And as a result of that, we've been able to maintain the inventory levels still probably in the 67,000 type of range. And we have not been able to wither that down [marketably], mainly because of the continued problems in terms of shipping out of the port as well as the sudden downturn after Q2, after the summer, in terms of China.

So what has happened, of course, is the expected volumes that we thought we could sell were delayed in the Chinese market. And therefore, the original forecast really reduced the inventory levels significantly at Celgar in Q3 did not really occur. In fact, we're still at the same type of levels that we started the year at. And again, the container ports in Vancouver are completely full.

Yes, container rates as well as carrier rates are coming down, but the availability of the smaller bulk carriers also has been reduced. So it's not like they're making them available.

We have taken continued initiative to charter the carriers. So, we have another one which is scheduled to be available to us at the end of November, early December. So that we will be able to move significant amount of volume again. But I don't think that the port situation in Vancouver will actually improve, because there's still a lot of other producers which are, of course, scrambling to get their products into the container stuffers. And this has created additional problems because, of course, the spot market is the only area that they're trying to sell, because the traditional markets, unfortunately, have become less reliable.

Now, going into that a little bit further, you talk about chartering the boats with the container rates and the bulk rates falling by such a large amount. It sounds like we have a fairly consistent amount of demand out of China on a more normalized basis. Are those charters spot charters? Or have we actually entered into some type of longer-term time charters? Or have we even thought about that?

No, right now, there is no real committed tonnage on the part of the vessel owners. So presently, it is more spot. But the prices, of course, reflect the slowdown in the global trading activity, so the pricing actually still is quite -- it's coming down to quite favorable type of prices as compared to even the container rates that which also have come down.

The China market -- unfortunately, I would say is more complicated. You have a combination of deliveries which are contracted but at the same time, a lot of the contracted volume have been canceled or kind of, let's say -- there has been a lack of performance, if I may say that, in the sense that a lot of the contracted buyers are kind of reneging.

At the same time, there is, of course, reliable ones which continue to take, which tends to be more the tissue and hygiene area, which we have, of course, focused as a producer. So the hygiene area continues to take a reasonable amount of the volume that has been committed.

We are, of course, selling more in terms of the spot because, of course, we are moving on volumes. And the spot market, unfortunately, is deteriorating quite marketably because, of course, everybody is trying to move volume. And every time you enter into pricing discussions, the prices seem to be dropping faster than the Canadian dollar is dropping.

All right. Kind of a different question -- I don't know if I missed this -- can you talk about those -- the convertible debt? I guess it was due on October 15 or it's going to be due on October 15 next year -- how are we thinking about that coming up, given the cash we have on the balance sheet?

Yes, so it matures in the fall of 2010. And the October 15, 2008 date is the first date where we have the right to call them. But under our trust indenture, given where our stock is trading, we don't have a carve-out for that. So today there's nothing to be done and we'll just have to wait to see how our stock performs in the future and how the world unfolds as to what our options are there.

All right. So at this time, we can't really do anything from a call perspective?

No, that's right. Because under the trust indenture, there is a carve-out. If the stock is trading at 120% of the strike price, then there is a carve-out, because the indenture anticipated that nobody would take cash, they would only take stock -- indenture protecting the bondholders on their liquidity in these kind of scenarios. So there's really nothing the Company can do at this current juncture.

All right. Thanks.

Aaron Rickles, Oppenheimer.

Can you just run through on the mill by mill basis, the shipments, production and CapEx for the quarter?

Sure, Aaron. So, production volumes third quarter 2008 for Rosenthal were 75.6; Stendal was 162.8; Celgar, 130 for a total of 368.4.

Sales volumes for Rosenthal were 82; Stendal 154.5; Celgar 127.3 for a total of 363.8. And CapEx for the three mills in the quarter were EUR3.4 million for Rosenthal; EUR1.2 million for Stendal; and EUR3.7 million for Celgar.

Helpful. And was Rosenthal, I guess, because of the downtime this quarter, was that mill EBITDA-positive in Q3?

Yes.

Okay. And taking a step back on the energy process for 2009, I think you said EUR16 million of incremental to what you realized in 2007, which I think was roughly EUR4 million, so you're talking about EUR20 million?

No, it's only -- 2007, Stendal was about EUR22.3 million and Rosenthal is about EUR8.5 million. So compared to that, we are adding EUR16 million on top of that. And one other feature to it is now that we'll be selling under the Green Energy Resource Act, we're not at risk of lower revenues from declining energy prices in the green market in Europe.

So we've got a floor, which is a stipulated rate that we can sell our power at. So we've -- EUR15 million delta from what it would have been in 2009 compared to what it will be under the new legislation, it could be more.

And how does that roll in between Rosenthal and Stendal?

Slightly heavier to roll up to Stendal, but Rosenthal has about 20 megawatts of incremental power to sell.

Got you. Then in terms of the project at Celgar, I think that that is expected to kick in early 2010? Is that still on track?

In the first quarter, yes.

Yes, we expect completion at the end of '09.

Okay. And can you just remind us of the magnitude of what you expect to realize in terms of EBITDA there?

Well, I mean we conservatively have kind of looked at CAD15 million as being the contribution, but we know that based on the numbers that we have offered to BC Hydro and the expected production volumes at that time, we think that the contribution will be significantly higher than that. It will be more -- closer to the CAD20 million than the CAD15 million.

And what is the expected date in terms of locking in a power purchase agreement?

Well, what we know so far is that BC Hydro is briefing the government by the end of the month as well as their Chairman. Their Board packages are mailed out November 7 and their Board meeting is November 19. And we're told that's the meeting where they will be making their approvals of the power purchase contracts, as recommended by Hydro. And the Power Acquisitions team at Hydro have told us that they would expect our contract would be signed by November 30.

As you think about trying to securitize that, I mean, is that process sort of wrapped up with the Celgar revolver in any way, in trying to extend that? Or are those two completely separate --?

No, we -- it's a separate process and we've selected a lender. We feel comfortable that we've got the right type of lender for this particular project and we're just working through the stages of that. It's all subject to -- obviously that if our purchase agreement with BC Hydro and we're told by this lender that the challenges in the credit markets are not affecting this particular source of money because it's mandated for green energy projects, and ours is a good one, so, we still remain optimistic we're going to get it done.

Is there any sort of like a firm commitment letter contingent on realizing that [BPA] or --?

No, it's in the final stages of term sheet negotiations at this point. There's nothing committed.

Got you. And then I guess maybe one last -- a little bit of a broader question. As you think about Celgar and the demand coming out of China and how that's sort of shifting, I mean, what are you guys able to do strategically other than just sell to the stock market, in terms of maybe reallocating some of those [condits] to other markets, if anything?

Well, I mean, we've made significant progress in pushing a lot of volume into the North American market, especially to some of the, I guess, strongest consumer products type of companies. So we are making very good progress in terms of North American market.

Unfortunately, as you know, also, some of the paper producers in North America have closed, which of course has an impact on their original suppliers. And these suppliers are of course trying to move tonnage into the non-traditional markets, like into China.

So that has of course had an impact where the volumes that traditionally found their homes in North America, all of a sudden have shifted to the China market. And this has of course created this instability at a time when the economic activity as a whole has started to maybe also show some weakness. And that's been some of the main problems in terms of the China market.

We do have very good relationship with pretty much all the big producers in China. And they have been very reliable customers to us through an extended period of time. And although we talk about China as a spot market, a lot of our tonnes that had been sold into China was under established contract with known volumes and pricing.

It is only recently that there has been a significant deterioration in terms of certain number of paper producers which are experiencing, let's say, their own issues. And as a result, of course, their reliability has been less.

But I don't think that we are reliant really on the spot selling. We've only been doing more spot selling because of the nature of where the economic activity is today, as well as some of the problems I think some of the papermakers in China are facing.

Is there any way to think about your percentage sales on the spot versus contract, maybe what you've seen in the past couple of weeks versus the average or what you saw in Q3?

Well, I think moving forward into next year, I think that you're going to see that there will be probably more of a desire on the part of the papermakers to reduce the amount of contracted volume and go more on the spot.

And that's mainly because they believe that -- they have their own credit issues. And second, they believe that the economic activity as a whole will probably mean that prices will be favorable, so they don't believe there's going to be a tightness of supply. So they're not so worried about having prices spike on them.

So I think that moving forward, certainly in China, there is going to be a larger component of our business which will likely be not contracted but more spot or reserve type of arrangements.

And how should we think about that in the context of where you are today and how that might effect the business?

Well, I think clearly the volume is not going to be the issue because I think that we traditionally have been able to move the volumes that we expect to move. I think it's more in terms of the pricing.

And of course, spot pricing in China tends to be much weaker. So I think that your expectation moving certainly in the shorter term, next six months, probably indicates that we are going to have probably further price weakness, although this price weakness may not be as severe but the spot price weakness will be a lot more significant. And therefore, certainly Celgar's revenue stream will be impacted more than our German operations, because the German operations are more reliant on the European market which, of course, tends to be less of a spot market.

We think that with the production readjustments, which will likely occur as a result of this occurring in the next few months, where producers -- high cost producers will take downtime, et cetera, and some production actually essentially being shut down permanently, hopefully, but certainly shut down for an extended period of time, that the capacity to demand will readjust. And therefore, the second half of the year probably would be much better, reflecting a balance between supply and demand.

Got you. Okay, very helpful. Thanks.

Steve Chercover, D.A. Davidson.

Just a couple quick things. First, I guess, more of a request than a question. Can you please put the share count somewhere in the release, probably on the income statement? It would be helpful.

And secondly, with respect to the use of beetle-kill wood, does it change your recoveries due to more chemical use or in any way harm the equipment?

No, we have not really used a lot of beetle-kill wood, but our expectation is that the chemical consumption and other type of issues will not really be significant.

And as far as we are aware, based on, let's say, the type of dry wood that we have when we started off Stendal as an example, when we've had wood which actually was extremely dry for an extended period of time, we didn't really have quality kind of related problems or any production-related issues. So we don't think it would be that significant.

It doesn't turn blue pulp or anything?

No, no. Nothing like that.

But my understanding -- I used to have a map, I can't find it -- was that Celgar was quite a bit south of the primary kill zone. So is that correct in --?

Yes, it is quite south of the kill zone but also there is, of course, still pine in our forest and, of course, they have been impacted.

Yes, Steve, remember the Arrow Lakes run from Revelstoke all the way down to the mill, that's more than 100 kilometers from the North. So what we've been discussing earlier was purchasing dead pinewood in the [Camelots] region, moving it across to a dump on the Lake, and then towing it down the Lake. It's quite an efficient source of fiber for us.

And with some modification to the woodroom to handle small diameter logs, that will significantly reduce our log costs and with, then, volume available. And that scenario where we're working with the government to ensure that those logs, which would never otherwise be harvested, don't attract [stump excess].

The issue today is that even though it's coming from somewhere that's never going to become lumber, it's still somehow attracting some stumpage, and so there's $8 to $9 a meter of costs there that we can eliminate if we're successful in our discussions with the government.

And sorry, was it up to Interfor to revamp the Lake --?

Well, they purchased the Marine Towing division from Pope and Talbot. And in the early days of their ownership, it was probably a six-month closed process where they really didn't have access to run it. And it's now open. And logs are now flowing to our mill from that region. You know, imagine like 80 bundles of logs per tow that come down the Lake. It's a very efficient way to do it.

But we have a fair amount of inventory built up on a location called [Lumby], which is what we were doing in the interim until it was opened. And we have to chip that with remote chippers and haul it to the mill. So as Jimmy was saying, it will take a quarter to work through all that, but we'll see some -- a fair degree of relief once we're through that inventory.

Is it your sense that the government feels a sense of urgency that they've got to get rid of the beetle-kill wood any way they can, as opposed to just letting it rot or burn?

The issues for the government are that it's a -- I mean, at the leadership level, they get it; at the bureaucracy level, they're slow to move. And some of the constraints that they have to study are [things that's off] the lumber agreement and the fairness principles to ensure that they have a fair market.

So we've got absolutely the business size -- the correct business side of the argument. It's just -- I would have liked to have seen more movement than we've seen so far. But having said that, I know the Minister himself is very supportive and receptive to these ideas, and looking forward to getting some progress on it.

I should think that to the extent the Minister wants to avoid any kind of impact on the softwood lumber agreement, putting through a pulp mill is a great solution.

Absolutely. And so they're doing things like they've got some products for lump sum sales and some forestry tomorrow trial runs and so on. So, I mean they're definitely moving in that direction, taking the early steps to make sure they understand how the market will react to it. But even despite that, the combination of moving the logs down the Arrow Lakes into our woodroom is going to be a significant cost reduction from where we are today.

Great.

As well as the modernization of our woodroom will significantly have an impact in terms of our costs.

And Steve, one last comment for you, I don't want to embarrass you, but we did put the share count on page five of the press release.

Oh, well, there you go. See, that's what sleep deprivation will do for you. Thank you.

And final question, I don't know to what extent you can elaborate on it since we're -- the markets are moving so quickly, but how do you think that some of the mills that are even contemplating starting back up in British Columbia or in the Eastern US, Canada -- it doesn't make sense probably to start these things back up, but I guess it depends how low things go. So what's the fallout of this whole turmoil?

Well, you know, based on what I've seen in terms of the China prices where they just recently came back, the prices today essentially are at levels where many of the high cost producers cannot make any money. In fact, it would be cheaper for them to shut down.

And therefore, we are pretty close to the bottom in the sense that I'm not just talking cash breakeven, but it is at levels where many of the producers would essentially have to pay to get rid of the pulp. So at that type of pricing, it implies that after they sold whatever inventory they got [to grade] cash, it's not likely that they're going to continue to run; because it's cheaper just to keep paying the labor and other fixed costs than to sell the pulp.

So, from --

You know, one of the bright sides, Steve, is that this downturn is going to -- I mean it's going to wipe out another 1.5 million or 2 million tonnes of softwood, probably. And it's also going to prevent about 4 million tonnes of hardwood getting built. So when we come out of it, it will be a much stronger fundamental than it would be if it hadn't happened, so.

Agreed. And I promise this is the last one then. You can only speak for yourself, but in terms of establishing a list price, does it make any sense to cut your list price towards where spot is? Or just say, the spot will work itself through the system and list price is really not going to move that much from October, because it doesn't -- it doesn't --

No, I mean, the list prices are starting to move down. And our expectation is that it will move down for the balance of the year; not as significantly as some of the spot type of price movement.

The problem in terms of China right now is that one -- it's not an issue of over-inventory of the raw materials. In fact, the inventory levels that many of our customers are still low or normal. It's just that the paper side of their business all of a sudden has been impacted significantly. So they're sitting on a lot of finished product which they can't sell.

And the credit issue also has created shortages of liquidity. So they are not interested in buying a lot of pulp. One of the benefits we have now is the fact that we've been able to move tonnages into China. We are able to deliver smaller lots. And that means it will relieve them of the credit issues, because traditionally, they would have to open up large orders, have the [LTs] open and wait 30 days before the pulp got delivered. For us, we have pulp supply, which is much closer to where their needs are and we can ship in much smaller lots. So that is working in our favor.

The other thing that I think is important to understand in China right now is that the hygiene side of the business is not that bad. So, the tissue guys are taking advantage of this and essentially driving the spot prices down. Because they're the only guys with the liquidity and the ability to essentially buy large orders. And therefore, they're essentially having the Canadian guys bid down prices to the level where ultimately they're prepared to buy.

And everybody is essentially falling over each other trying to reduce prices to get volumes moved. And clearly, they are in a position where they say, okay, at this price, I'm prepared to give you guys a decent order. And we're all tripping over ourselves trying to satisfy that. And that's the problem. That's why spot prices are dropping like a stone.

Well, I guess they really haven't changed their stripes after all.

No, [but I mean that is not mentioned] that to every buyer would do the same thing. If you were in a position that you're the only one which can take volume and everybody else wants to deliver, then why shouldn't they take advantage of that? And therefore, the prices will drop to the level where it doesn't make any more sense.

They're fantastic. I just remember a few years ago, we thought that their needs were going to be more constant and they wouldn't gain the system. Anyhow, I promised that was my last. Thank you.

Paul Quinn, RBC Capital Markets.

Just a couple questions. One, can you remind us of your geographic distribution of sales at Celgar?

Yes, I mean, about half of the sales go to our Asia/China market and the other half would be North America et al.

Okay. In terms of -- there's a number of producers that have announced market-related downtime. Is that something you guys are considering at this point given the weak markets?

No, we stated that we believe we are one of the lowest cost producers on average. And therefore, there's really no reason for us to take downtime. We intend to run right through this cycle because if we take downtime and we take product off the market, all we're doing is benefiting the marginal players to continue to prolong this agony.

You made a comment about the effect of the falling Canadian dollar has been not enough to offset the falling price of pulp. Is that just specific to the Chinese market? Or is that your [international] market for you guys?

No, that's specific to the spot markets. And I think that the problem, of course, for the weaker players is that if you look at the new startups and re-directing some of the tonnage that they've lost in the North American market, a lot of it has to find a home in China. And therefore, that is really the area that is under the most pressure right now.

Great. That's all I had. Thanks, guys.

Rick Sherman, Oppenheimer.

I think on the last call, you said the only swaps you had were on Stendal. But you had a foreign exchange loss on your European debt. Can you give a little color on that?

Rick, that's the US dollar-denominated debt and that's for senior notes and the convertible debentures, and that's the effect of converting them into euro, which is our functional currency.

I see, okay. Also, do you take any participation at all in the wood pulp futures market at all?

No, we haven't for various reasons. One, of course, we do have to have the credit availability. So, only our German mills actually have the credit availability to actually execute.

And the other part of it is that with the complexity of the currency issues and other type of issues, we found it very difficult really to figure out what the proper hedging strategy should be. And to date, really the amount of volume on the market other than swap arrangements directly with certain institutions was really not available.

I mean, we could do certain swaps with the large institutions, but then we'd have to figure out what really is the right pricing strategy. And you've got to factor in currency and other things, which is so complicated today in terms of volatility that we felt the risks didn't really justify the rewards.

Is the prices -- like, I'm looking there at 12-month pricing at $686 US, as of this morning. Is that more reflective of current spot prices?

Well, I think -- you mean in terms of what the price is in terms of stock price or what? I don't quite --

Well, the list price right now is, let's say, it's still over $800, but the futures price even three months out is at $753 and going all the way out to $686 a year out is -- that's a pretty negative number relative to a year out from now.

Yes, I mean, they are anticipating further weakness in terms of the spot -- not the spot, but the pulp pricing, mainly because of the currency issues. They believe that the US dollar will continue to be strong relative to euro and the Canadian dollar, and therefore it's natural that pulp prices will start to reflect that.

And the other part, of course, is the weakening in global economic activity. So, the list prices are list but you still have to factor in the normal discounts which, of course, will widen, and therefore that price is reflecting prices after the normal discounts from the list.

Is there some inflection point pricing where -- I understand you're in much better shape than maybe your competitors will be, but is there a price where you guys just can't make money either on a -- even on a cash basis? (multiple speakers)

Well, as an NBS [coal] producer, we believe we rank amongst the best in terms of production costs in this business. And therefore, there will be a lot of production which would have to suffer a lot more losses, and are likely to be shut before we start to actually lose money.

So it would be very difficult to imagine that amount of production curtailment without really -- in the sense that there would be that much demand disruption before we would end up with a scenario where we'd actually start to lose money as a whole throughout all three facilities.

No, I'm just hoping that the industry doesn't go into shared destruction. I mean, where nobody is -- common sense goes out the window completely.

Well, I mean, the only way that you would end up with this kind of scenario is if the low cost producers voluntarily in fact reduce their own production volume. And everybody else essentially shared in the pain. And then, of course, as prices will continue to drop because -- drop to the level where it is the average of everybody rather than the cost of the weakest player.

If we were saying that demand disruption as being 0.5 million tonnes, well, you only have to destroy 0.5 million tonnes of production and that's going to be the highest cost producers, which represent that 0.5 million tonnes. You only have to run faster than the other guy, that's all. This is a relative game. It's not an absolute game, right?

Right. Okay. There was also -- you mentioned in the last call about people in Britain creating these power plants that were running on woodchips.

No, I said that in the Southern US, there is being some movement towards converting coal-based power into wood-based power.

Right. I see that there is a plant, though, in Britain that has just gotten funded to open up in 2010 or '11. It's going to be in northern Britain.

Yes. Well, Northern England traditionally had a lot more wood residuals that were not presently being consumed, so that would make sense.

Yes, there was a German power giant, RWE --

Yes.

He agreed to pay [EUR50 million] to Helius Energy for controlling stake of a 65 megawatt biomass power plant in northern England. (multiple speakers) It's supposed to be a 380 wood pulp fueled plant due to start operating in 2011. How does any of that affect, if anything at all, the problems with your basic chip costs and things like that?

No, it has no impact. I mean, the chip suppy from England is not really an area that would have any impact on us because the wood transportation issue from that area is so significant that it really doesn't involve us at all.

So their sourcing, primarily, that would be sourced domestically for them?

Yes, I mean, there is a lot of pine and other type of softwoods in northern England, in Scotland area. And there is some milling activity there. And there has been some studies of building a small NBSK pulp mill there, which was being promoted over several years. Unfortunately, the wood availability was such that you can't build like a modern size mill, but more like the smaller size, more similar to Rosenthal size.

But, of course, the same type of costs. So, unfortunately, it wouldn't justify that level of investment. You know, EUR1 billion for 300,000 tonnes doesn't make a lot of sense.

And lastly, you had also mentioned that you're finding other uses for the liquor coming out of the residual use of some of the pulp?

Yes, I mean, we are, of course, looking at various by-products coming out of the black liquor stream. Aside from the electricity, there is already tall oil that we sell. There is the potential to upgrade the methanol and sell that as a refined biomethanol type of product.

But these are not going to be some significant revenue contributors presently; we're just, of course, studying whatever by-products make meaningful potential margin contributions. The electricity clearly is the easiest one and that's why we focused on that and the area that we've clearly demonstrated is going to have a significant margin contribution in the very near future.

Andrew Shapiro, Lawndale.

Yes, a few questions. We got dropped from the line by accident so forgive me if I repeat one or two. I hope I don't have any more than that repeated.

Can you give us a feel of how you see the market progressing in the next couple of months and quarters from the perspective of the high cost guys, both in Canada and in Scandinavia, closing down as a potential benefit versus, obviously, the offset of paper capacity and paper demand deteriorating and having -- I guess you'd call it D-integration?

Yes, I mean, there is, of course, the integration of certain facilities, but I think where we are seeing the market right now is less of a pressure certainly from the softwood producers in Southern US in the China market because of the appreciation of the US dollar. And therefore, I think they're going to be less interested in trying to sell in the spot market in China, aside from, of course, the weakness in price already.

Spot prices to move volume in China are at levels where only the very low cost producers will be able to supply without losing a significant amount of money. And therefore, I think that there's going to be additional capacity closures because we probably have reached prices which are not sustainable for long periods of time. So I think the next six months, you will see further announcements by many producers for production curtailment as well as absolute closures of facilities.

And after that period, then of course the supply and demand balance should be in better balance again. And we will start the rebuilding process of the price. And that's going to be dependent a lot on where the currency exchange rate is going to be, because of course, if the dollar continues to be strong, then the cost certainly from the European and the Canadian side is going to be quite attractive. And therefore, we probably won't get the high US dollar base prices that we've seen in the recent years, but our margins will be much more improved.

That's why I think the first six months is going to be the weakest until this kind of production adjustments go through the system. And then the balance of the second half of '09 should certainly be more steady and better.

Okay. And touching on that, you've touched on the currency in China and those things. A little bit more specific, I guess, is the -- can you update us on the situation in Scandinavia -- is that we've heard already that the log supplies at pulp mills were getting to dangerously low levels. Is this true?

And is the situation there -- if the Russians implement the tariffs, capable of -- I think you mentioned transport costs are just too much to disrupt European log supply for you, but are they going to have to do more capacity closures in Scandinavia?

Yes, I mean, the Russian tariff issue will have a significant impact in terms of what the supply side will be coming out of Finland. And therefore, if Russia sticks with the tariff arrangements in January, which clearly, we still don't know, but all indications seem to be that they're not really changing anything. And therefore, if that occurs, then there will be a significant amount of capacity in Finland, which will likely be shut down. And the Finnish industry, as far as I know, essentially is not going to make the decision as to what's going to happen until the Russian tariff situation becomes real or not real.

And so we will not know until after January 1. And after that, of course, they will be in a process of figuring out which mills will be shut. And I'm sure they already have. And they will be entertaining discussions with government and workers and whatever is necessary. And then there will be a gradual process of essentially shutting down those facilities. But it will have a big, big impact on both the paper as well as the pulp supply/demand balances.

Okay. What was the [dollar, euro] and dollar Canadian, David, that you used in the financials and where are we now?

Well, I think it was the average -- the [140] (multiple speakers) level and we're down now in the [124] range, so it's moved quite a bit since the quarter, even.

So what you use is an average in your financials, right?

Yes, well, it tumbles through. It reflects an average.

And the dollar to Canadian dollar for the quarter ended September, what was the number there?

Well, it started at [CAD1.04] for the average and we've (multiple speakers) -- adding either [$0.13] or [$0.14] on top of that now, so.

Okay. And can you discuss your inventories on a tonnage basis at each of the facilities? Trying just to know which ones were stable, which ones went up and which ones went down, and your plans to get the inventory tonne levels down?

Okay, well, Rosenthal inventories moved down nicely. They're at actually record low levels right now. Stendal moved up from the second quarter; they're at 58,000 tonnes. And Celgar moved from about 65,000 tonnes to 67,000 tonnes.

So we shipped what we produced in the quarter but we did have a minor build. Celgar inventories projected for the year and they continue to build as we work our way through these challenging China markets. But as Jimmy said, our strategy is to move our inventory over there so we can be the just-in-time supplier, so we can avoid some of the credit issues that these buyers have and become a preferred supplier.

And we also have a big component of tissue and the, call it, more sophisticated buyers that will continue to take their tonnes from us to preserve the relationship for the future.

And I think you mentioned Stendal is in the middle of its -- middle or the end of its maintenance shut for the Q4 already. Where's Stendal inventory tonnes tracking now? Is it already down?

It's down but it's likely that it will rebuild in the fourth quarter to slightly less than the levels that we had in the third quarter. And that's really more of a seasonal issue, too.

As you know, Christmas time in Europe, paper production stops. And it's a weaker period in December. And therefore, although we're dropped in inventory, it's likely to rebuild up to close to the third quarter type of levels by the end of this fourth quarter.

Okay. Can you clarify on this issue a little bit -- where is the shipping container and storage capacity in Canada right now? Is it in -- that capacity in excess? Or is that capacity on shortage?

Well, the problem in the Vancouver port right now is that a lot of the containers stuffing capability essentially is completely full. And because the Chinese orders have been unpredictable, the shipment has not been regular. So we've got a lot of volume going in for containerization and yet they're not being shipped out. So essentially, the Vancouver port is clogged. There's very little room for additional volume.

We've been able to sidestep a lot of that problem because we've already had containers that we had contracted through this year. And therefore, we've been able to move volume into China through the bulk carrier process rather than having to go through the container issues.

So right now, if there it is no real movement in the Vancouver port, even if the market improved in China, you couldn't get the shipment out because there is no containers stuffing availability. So you -- essentially, it's going to be interesting what happens, because essentially the port is clogged, completely.

So, does that mean that Canadian producers other than Mercer, which has already done an end run and has pre-positioned pulp in China, that the other Canadian producers might have to put in production cutbacks, even though regardless of the pricing, just because the port is clogged?

Yes, there's a logistics issue. And luckily for us, we do have inventory there and also we have a shipment which will go out in December. And therefore, our ability to move product into China certainly is much more flexible than many of our competitors right now.

So have you heard of other competitors because of the port -- that basically even if they have a decent low cost, they can't -- they've got to do curtailments because the pulps are backed up down the street?

Yes, well, we don't know whether these announced production curtailments are the result of the port congestion issue or just cost issues, but there has been, on a daily basis, announcements as to some production curtailments already. So we expect further and much more larger type of announcements to come.

Okay. If you've got questions for me -- you clarified. I understood when David said that you can't force a conversion of the convertible notes until the stock price was at levels it was at earlier in the year, unbelievably where we are today.

But I just want to confirm -- does your indenture prevent you from redeeming these convertible notes and basically paying them off and replacing them with, let's say, lower cost financing, if you could find it?

Yes, it does. The indenture has baskets and ratios and, for example, cumulative net income basket which goes up and down based on net earnings. And we just don't, under this current operating environment, have room in that, in those baskets to do anything meaningful with the converts on a redemption basis.

You're saying you're limited from redeeming them as well?

Well, remember the trust indenture protects the bondholders from leakage from the system. So it has a cargo that says that if the stock -- if our stock is trading at a premium to the strike price of the convert, you can call them; you can force redemption because you know that the convert holders will take stock instead of cash. Under those conditions, you have a carve-out.

But when you are below the strike price, then you have to look to the baskets for the ability to leak cash out of the indenture. And because of our cumulative debt income baskets being zero right now, we don't have anything other than the predetermined original baskets what really are our dry powder, our safety. And thus we really at this stage, at this particular point in time, don't have room to buy the convertibles for cash.

So this is the trust indenture for the senior notes that is prohibiting the redemption on the converts?

That's right.

Okay. Now that makes sense. Thank you on that one.

Another question on the debt side here -- can you give us a little bit more guidance -- I know you can't determine the rate yet and maybe you're not ready to disclose because it's just term sheets on the project finance for the Canadian power, but can you give us a feel for the type of spreads that you're talking about in the term sheet to get a handle on how much relative lower costs this project financing would be to your current cost of capital in your other debt instruments?

Well, I promised Jimmy it would be cheaper than our converts. And the price has gone up from our early indications but I still believe it is going to be cheaper than the 8.5%.

Okay, excellent. And assuming you do get a deal signed with BC Hydro by the end of November, what is the amount of timing that you think is necessary until you get the project financing in place?

Well, I would say the 45 to 60-day period and maybe allowing a bit for Christmas. So it will be fairly quick in the new year, I'm hoping. We are fairly advanced on our term sheet. We've got a few last details we need to sort out around the security side because it's -- security doesn't attach until we have finished the turbine type of deals. We've got a little bit of a complication there, but I think we've got ways around it.

Okay. And you mentioned the project financing was going to be 100% of the deal. So how much Mercer cash has already gone out the door to date that will come back as net cash back to Mercer upon closing of this project financing?

Yes, I think it is about EUR9 million so far. And maybe be in the mid-teens by the time we get our first tranche.

And is that 9 million to mid-teens euro or Canadian?

Euro.

Euro, okay. Only two more questions here I think, if you don't mind. The debt metrics at Stendal are consolidated into Mercer even though it is non-recourse. And it certainly has impacted Mercer's overall perceived liquidity, as evidenced by the amazing stock price that we are suffering from right now. This debt is government guaranteed, so that the German government is involved in this. And we see the German government helping others in the credit markets out quite a bit.

What opportunities are there for Mercer to refi this Stendal debt to match its maturity and principal payments with, frankly, the longer duration and useful life of the facilities that Stendal [then] supports?

Well, I think one of the things that we all have to remember is that, of course, although the government, of course, is very supportive, it is still bound by the subsidy rules governing the whole EU. And as such, the flexibility of course isn't completely there.

But what we are, of course, looking at is [certainly] matching the debt principal repayment schedule more in line with the useful life of the facility. As you know, the original design of the finance structure was a 15-year maturity. And of course principal interest being paid pretty much over a 10-year type of period. And of course, that is quite short in relationship to the useful life of the facility and it is very aggressive.

And therefore, we believe that there is room to look at a principal repayment schedule, which is clearly more reflective of that useful life and allowing essentially Stendal to have more flexibility of the free cash flow, and rather than not having to completely devote pretty much all of the cash generation into paying interest and principal over a very short period of time.

So that certainly we think is something that is worthwhile discussing with the banks. And we think that it is supportive in light of, clearly, the fact that the mill is running very well. And these facilities last for decades -- to have a payment schedule, which is that aggressive and short on such a long-life asset certainly is not necessary, doesn't make any sense.

And have you already embarked on this initiative? And how receptive does the government seem to be?

Yes, I mean, of course, the discussion in terms of the government's side I think it's very receptive. And we've had, of course, ongoing discussions in terms of modeling on our side what we think would be probably something that's workable for us. And hopefully, through the process of discussions with the bank, we think come to something that makes sense for both parties.

Okay. Last question. You filed 8-K's over the last three months I think once or twice, kindly providing us copies of your roadshows of your investor presentations you've gone and done. I want to first off to thank you and the Board for doing that. It's been very helpful.

And I was just wondering now that this conference call is -- the earnings are out and the pricing is where it is, one, are there thoughts of the insiders -- I saw that you bought shares a bit last time in the last open window and, of course, at much higher levels like the majority of us -- what the thoughts are about insider acquisitions on some more shares as well as what the next calendar slate of investor roadshows and updated presentations might be?

Yes, I mean, we are scheduled in the middle of November to go again to the Eastern part of the US as well as to the Midwest and also into the western part. We try to do as many as we can. So, the November schedule is one clearly we have done last year and we intend to do it again this year.

In terms of insider buying, I guess it's difficult for me to comment on other people's decision. All I can say right now clearly is that the price of the share certainly is extremely low and certainly much lower than the prices I've paid only very recently.

I think one of the reasons that we've tried to accelerate the earnings announcement, of course, is to get the information out there, as well as give other people the flexibility that would not otherwise be there because of the whole blackout period.

But also I think one has to recognize that there is issues ongoing in the Company that sometimes unexpectedly for some reasons creates blackouts, because of certain material discussions that would have an impact, which of course is not publicly available.

So I think one has to recognize that just because the insiders are not necessarily buying at a particular time or suddenly stop buying at a particular time, that it sends the wrong message. I think, unfortunately, there is periods of time where not just the earnings blackout periods, but just because of ongoing discussions of certain things that it may be deemed to be material in nature, but which may not actually conclude that during times like that, you may end up with unexpected type of blackouts.

In terms of that, now that you raise that issue, Mr. Michael Smith a while ago, when the common stock price of this Company was at far higher levels, came out and was, one, critical of Company progress and -- but secondly, made the comment that Mercer ought to consider maybe being sold and have a consolidation candidate and partner.

Can you comment at all about the Board's view or receptiveness to such offers, if one was to be presented?

I think the Board is only open to any constructive type of proposals, whether they may be from a potential buyer or for other type of constructive type of activity that would enhance shareholders' value. I think that the Board is very receptive to any of those type of concepts. And we've never been a, let's say, in any way blocking any of those type of communications.

No one is -- basically no one is banging on the door even despite this low valuation?

Well, there is nothing that is of a firm enough nature that I would say that we would have to take seriously. There has been really no constructive approach by any party at this point.

I think one has to remember that if you look at the pulp and paper sector, it isn't just us which actually is trading quite low. Unfortunately, a broad range of commodity type of producers unfortunately have suffered enormous drops in terms of their share value. Unfortunately, it is more pronounced because of the overall leverage that we have to the pulp cycle. And of course, we have been able to finance those investments because of the nature of the supports that we have had.

But the downside to that of course is during a perceived negative market, the enterprise value, unfortunately, the debt doesn't shrink; the shares shrink. So we've had -- they've kind of, let's say the cushion that some of the other producers who have very little debt but more equity, and of course they dropped in price. In fact, probably more so from an enterprise value than we've had.

Right. But we have seen of course in the paper side, substantial consolidation but not much at all on the pulp side.

Yes, and I think that there is certainly room for activity in that regard. But as you know, not many of the producers have, let's say, the resources. And of course, hopefully, the ones which do would look at this present environment as certainly one which is attractive for consolidation in this industry.

Right. Well, you know, you're one of the largest softwood players around and it would seem you make a very good fit with one of the largest hardwood players around.

Well, we always are open to any suggestions.

Okay. Well, someone should -- I know you've probably talked with them in the past, but maybe pick up the phone and talk to [Eracruz]. Thanks.

Peter Ehret, Invesco.

Thanks for taking the call. Okay, so if I heard this right, you've got about EUR9 million into the Celgar electrical plant now and you would hope to get that repatriated when the permanent financing closes?

Yes, that's right. We need to go back in time when some of the discussions we've had on the previous calls -- we have liquidity in our system to very comfortably handle this, but it is also a financing opportunity to put a new piece of debt on our balance sheet that's tied into energy generation. A green energy project like this has a price level that's attractive.

Oh, yes, sure. It's very interesting -- (multiple speakers) but so, just looking at the balance sheet right now, what we're going to see is we're going to see a little bit more cash go in, then that cash comes back out plus about the EUR9 million that's in there to date. That's how you think about it, cash flow-wise over the next (multiple speakers).

Yes, once we're started, we will recover what's in and then we will get funding from the facility to match our capital spending.

Okay. And I thought I understand you say earlier, EUR20 million expected contribution. When you think contribution, is that after the financing costs at that entity?

No, that's revenue from electricity sales.

And that's Canadian dollars, not euro.

It was in dollars, so Canadian dollars?

Yes.

Okay. And so all right. So that's just gross top line, CAD20 million in revenues. What sort of margin is against that? That's obviously high margin.

Well, I don't know (inaudible) things, so I don't want to talk about that too much, but we do have capital costs, depreciation and those sorts of things [against it].

Right, okay. And what's the total CapEx [not] of this project?

CAD55 million.

CAD55 million. Okay, so that helps just to cancel this thing out. All right and just speaking about capital structures and it's interesting to hear the conversations about the converts and taking it out and so on -- your bonds are 50 bid. So I mean that's probably just kind of a noise type bid, if you will, just somebody trolling for something that isn't real. I think many of us would recognize that.

But are you developing any sort of plan or any sort of interest in trying to capture that? Obviously, the Company is highly levered and --

That's a bet we can't make until we know we've got the financing for Celgar completed.

Okay, but thus far, you haven't had any discussions with anyone about how to try to capture something that would be so potentially large and so powerful in a potential deleveraging effect?

Yes, I mean, today what we of course have to look at is the overall availability of liquidity moving forward. And as you know, if you look at Goldman Sachs and these guys who certainly are much larger and have had traditional access to the capital markets paying 10% on preferred --

Nobody wants to play games in a financial crisis.

Yes, I mean, who are we to basically take on additional risk? I mean, it's important that we preserve a very conservative type of structure where we know we have more than enough liquidity to weather even further downturns in the economy as well as the possibility that all of these financings don't happen. I mean we are confident that we will get the project financed, but today, you don't have anything until the money is actually in the bank.

Yes, I see the same thing -- you obviously you want the wire to arrive. At $0.55, that's a -- if the market -- if you put a level like that on there, then the market is essentially saying your yield requirement is about 27%.

Yes, I mean, the level of our share price as well as our debt price we believe is completely ridiculous and does not really reflect the inherent strength of our present operations as well as the overall market for our products.

But unfortunately, if you look at what's happening globally and the type of shareholders we have had, unfortunately, we have had more hedge funds which were shareholders. Unfortunately, they have their own issues, and therefore I'm sure that there has been sales which have not necessarily done because they don't think that the business is good. But a lot of activity is the result of cash needs.

I would agree with your assessment. We see the same thing. Obviously, if you just get the right holder and they're getting redeemed in there for a seller.

A question about just some of the intercompanies. On the researcher group, you've got an intercompany receivable from the unrestricted side. That release you did recently. Can you explain how that works? And is there any sort of financing that can be done on the unrestricted group that could perhaps pay off that intercompany receivable? And would that free up some liquidity that potentially could go in and capture some of this deleveraging opportunity?

Yes, that basically is really the equity for the Stendal project itself. That intercompany receivable from the unrestricted group was really just the equity structure, if you may, in the sense that it is a subordinated shareholders' loan for the actual financing for the Stendal project.

So unfortunately, it is more like an equity rather than a loans type of structure. And it is not going to be available for us until a significant amount of the re-payment, et cetera, occurs on the Stendal facility.

And with the Stendal facility and the amortization that is happening there, just maybe I guess remind us how quickly will it be paid off?

Well, I mean, the maturity is such that it does not mature until, I think, 2017. And of course it's like a home mortgage so you have both interest and principal. And of course at the later stages, more principal than interest.

Yes, okay. And you mentioned that you have had some discussions with the lender there about using the amortization? They've --

No, I think what we are looking at is the potential to essentially match more of the life expectancy or the useful life expectancy of this facility to the repayment of the principal. And certainly, as you know, pulp mills last for decades. And when you have essentially a 10-year period where you're making a significant amount of re-payment, that we don't think truly reflects the useful life of the facility and certainly should be stretched over a longer period.

And certainly the value of Stendal after 10 years certainly was to be much -- still there because of course, the useful life in many cases lasts more than 30, 40 years. And therefore, we are looking at the model that we think makes sense for us in terms of giving us more flexibility and the use of cash flow coming out of the Stendal mill and yet gives the bank the assurance that there is adequate security available for them. And also allows them to maybe have even an accelerated type of re-payment if the market conditions are exceptionally good, which of course, in the pulp cycle, as you know, we've had some exceptional years.

Yes, okay. Okay, good. Thanks.

David Post, Llenroc.

Thanks for taking my call. Your NBSK list price in the third quarter was $878 and the spot is a little over $800 now and there was a comment earlier about the future -- I'm not sure if it was the six month future being around $750.

And Jimmy, I think you made a comment that a lot of the competitors and I thought it was at current prices would be losing money on incremental production; so they would sell their inventory but they'd have a real problem making any money, losing money on current production.

But I look at the NBSK list price, it was noticeably lower than $800 or even $750 back in early '07 and certainly before that. How does that fit with your comment where -- with (inaudible) comment?

Well, I think if you look at China's spot price today, to transact any reasonable volume business, you are looking at prices which are lower than $550.

Another added comment would be you need to take the currency into account and go back and look at what the euro list or the Canadian list is; remembering that 85% or 90% of the producers are in those two currencies. So looking at a US list price in a previous period, you would have to take into account the exchange rate. And you'll come back to what you'll find to be [forward] pricing in the euro or the Canadian terms.

But when I'm commenting about the prices that are today at levels which are not supportive of many of the producers, right now the China market price for non-contracted volumes, spot prices are below $550. In fact, getting closer to more like the $500 as the Canadian dollar weakens further.

The other part is even on a contract at the pricing, we think that the movement right now is more closer to the [$600] and it's probably going to be under that because of the strengthening of the US dollar relative to Canadian.

And of course, the European list prices and the US list prices are more stable. And this has been of course a more traditional market, but they are also weakening. And we think that this will continue to weaken through the balance of this year and certainly into the early part of the year.

So at $550 to $500, you have to be an extremely low cost producer to make any money. In fact, nobody makes money at those type of prices because that's including the -- you have to essentially deliver your product there.

And of your customers who are in contract in China, are they taking -- putting aside the issues in the port in Vancouver, but are they basically taking the volume that they are contracted for? Or is it really just a price and they can take whatever volume they want?

No, I think you have a mix. You have the producers, which continue to take the contracted volume. Many of them are more in the hygiene area because they're of course -- their business is much better.

The other producers like the coated grades, unfortunately, are not taking the contracted volumes, mainly because they do have a lot of finished product inventory. And therefore, they have, one, a lack of customers on their own side, which creates their own liquidity issues to buy more raw materials.

But we know that this issue of lack of buying is not driven by the fact that they're sitting on a lot of raw material inventory. It's just the fact that finished product inventory is significantly higher than what they of course wish and liquidity is dried up.

Okay. And what percentage of your costs are fiber? And by how much have fiber costs fallen since -- let's say from your average cost in the third quarter, where the -- where your current costs are?

Well, as we said on the prepared speech, the third quarter of fiber costs really didn't drop significantly. In fact, they're pretty much the same. And that was because fiber costs at our Celgar mill continued to increase. We expect that fiber costs moving forward will start to decline at Celgar. And this will have a noticeable impact. So clearly, moving, say, at Celgar, we should have wood prices which will drop more like -- [CAD335] Canadian? And you know it represents more than 50% of our costs.

And I'm sorry, so by how much would they fall do you think from your costs in the third --?

Yes, maybe between CAD20 to CAD30 Canadian.

Okay. To a level of [CAD335]?

Approximately per ton.

Okay. And the last question is, how much of your costs are transportation?

Well, it really depends on where the customers are. On the European side, our cost of freight is certainly much lower than our Canadian operations.

Yes, I'm really thinking of [trying out] your costs in the Canadian operations.

Yes, so, if you look at our European costs, they may be under the -- somewhere between EUR30 to EUR35. And if you look at our Canadian side, probably the average is north of CAD100. So, somewhere between CAD120 to CAD 140 Canadian, delivered.

And when I look at various freight indices, they've just gotten crushed in the last month or so; certainly down 50% or 60% versus average levels of the third quarter. Are you seeing those same kinds of freight reduction?

Well, we're seeing it in terms of the container rates coming down, because they did almost double and now they're going back to where they were. We're seeing of course charter rates for bulk carriers also coming down to the level that there's very little difference between container pricing and bulk carrier prices. (multiple speakers)

But we're not getting any headway in terms of like, rail. And so the real issue because we ship of course into the North American market by rail, that hasn't really come down.

Right. So by how much then have container prices or bulk -- container costs fallen for you since last quarter? Since the average of last quarter?

Well, they've only started to come down now. So they haven't really had an impact in terms of the freight costs yet. We think that this will gradually go through the balance of the fourth quarter and really have more of an impact next year. But container prices have come back to the levels that we used to have last year, that's all.

And is that because you're on some kind of contracts and you're not paying spot?

No, it's just because the containers -- availability issue was quite acute in the beginning part of the year. And also one has to remember that as global trade starts to contract, availability of container will also start to drop. So although container prices are moving downwards, at some point they're going to essentially stop because there will be less containers available. And everybody will be scrambling for the limited containers going back empty.

Okay. That's it. Thank you.

There are no further questions at this time. I would like to turn the call back to management for any closing remarks.

Okay. Well, I thank everyone for participating again in today's earnings call. Hopefully, I've been able to address many of the questions that everyone has had as well as David's been able to address a lot of the financial issues.

As I said, I think we live certainly in very interesting times. I think both the stock and the debt for the Company does not really reflect in any way the inherent strength of our activity, as well as the overall liquidity that we maintain in the Company, as well as the debt maturity schedules, et cetera, that we anticipate.

So I think that rest assured that we continue to focus on doing what we can do, which is really to reduce costs and remain competitive with the financial structure that can weather what we think is going to be probably more difficult conditions moving forward in the short-term, but correcting within a reasonable period of time, where we will, again, be probably at more stable type of markets and better pricing.

So on that, I thank everyone again and bye bye.

This concludes today's conference call. You may now disconnect.