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Executives

Jimmy S.H. Lee - Chairman, Chief Executive Officer

David M. Gandossi - Executive Vice President, Chief Financial Officer and Secretary

Analysts

Steven Chercover - D.A. Davidson

(Aaron Rickles) - Oppenheimer

Mark Wagner - BDJ Capital

Rich Sherman - Oppenheimer

DeForest Hinman - Walthausen & Co.

Paul Quinn - RBC Capital Markets

Andrew Shapiro - Lawndale Capital Management

Bob Wetenhall - Royal Bank of Canada

Herve Carreau - CIBC World Markets

Steve Chercover - D.A. Davidson

Peter Ehret - Invesco

David Post - Llenroc Capital

Bruce Klein - Credit Suisse

Daryl Swetlishoff - Raymond James

Ben Carlin - Wachovia Securities

Ronnie Kaplan - Wolf Point Capital

(Pit Barton) - (Upper Valley Capital)

Mercer International, Inc. (MERC) Q4 2008 Earnings Call February 12, 2009 10:00 AM ET

Operator

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 2008 fourth quarter earnings conference call (Operators Instructions). Thank you. I would now like to turn the conference over to Miss Alex Tramont. Ma’am, you may begin.

Alex Tramont

Thank you. Good morning and welcome to the Mercer International 2008 fourth 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 remain 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 U.S. 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.

David Gandossi

Thanks Alex, and welcome everyone to Mercer’s fourth quarter earnings conference call. As always I’ll begin with some prepared remarks on the key financial aspects of the quarter. And then I’ll pass the call on to Jimmy who will speak about the particulars of the market, our operating performance, and some of our more strategic initiatives.

As well we’d be remiss if we didn’t comment on the current financial turmoil we are experiencing, and how we are managing our mills to lower our costs and maintain liquidity. As always we will be pleased to answer any questions you may have following our remarks.

Let me begin by saying this was clearly a difficult quarter, despite a reasonable quarter from the mill operating perspective, including the large maintenance shut at our Stendal mill.

We experienced a global collapse of pulp prices which has been very dramatic. As you know currency markets have been very volatile in recent periods as well. 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 59 million euros for the quarter or 1.63 euro stems per share. That 1.63 euros per share compared to net income of 37.4 million euros or 20 euro cents per share in the same quarter of 2007.

As you know our earnings are sometimes heavily influenced by the market to market gains and losses on our hedging instruments. The most significant of these instruments is our interest rate swap; help up by our 70% on Stendal operation, which is designed to fix the interest rate on the Stendal debt at 5.28% through the year 2017.

Our earnings in the quarter included pre tax accounting losses totaling 29.7 million euros on this instrument compared to a gain of 1.4 million in the same quarter in 2007. While this instrument is serving its intended purpose of providing interest rate security, it occasionally creates a significant mark to market accounting adjustment when interest rates shift.

Our interest expense is noticeably lower than the same period a year ago, as we continue to reduce our level of borrowing on the Stendal facility. This is despite the fact that due to the recent strengthening of the U.S. dollar, our U.S. dollar denominated interest is higher in euro terms than a year ago.

We also acknowledge the rapid decline in market pulp prices in evaluation of our pulp and raw materials inventory by recording an 11.3 million euro provision in the quarter. Now this is made up of finished goods and fiber. The breakdown on them is 4.2 million under finished goods and 7.1 million for fiber. All of the fiber was for Celgar. And the finished goods breakdown was 2.6 for Stendal, .4 for Rosenthal, and 1.2 for Celgar.

We incurred an EBITDA loss of 7.5 million euros compared to the positive EBITDA of 24 million euros in the third quarter. For those of you interested in the U.S. dollar equivalents, this is about a $10 million loss in EBITDA in the fourth quarter compared to about $36 million positive EBITDA in Q3.

The largest contributors to the reduction were the inventory provision of 11.3 million euros and almost 40 million euros of net U.S. pulp priced deterioration. The price reduction was cut in half by a concurrent strengthening of the U.S. dollar.

We achieved positive improvements in the sales of carbon emissions and green energy. We sold four (inaudible) in the year, about 5.6 million of carbon emission credits. And we realized about 4.5 million euro on forward sales which were made possible under our new energy arrangements in Germany.

If I can switch to cash flow for a moment, we consumed a total of about 33 million euros of cash in the quarter, reflecting the weaker EBITDA and higher working capital balances, including accounts receivable, which were very high after strong December sales.

We also progressed our high return capital spending program during the quarter. We consumed about 8 million euros in cash. We currently have liquidity of about 98 million euros, which is comprised of approximately 55 million of cash and 43 million of undrawn revolvers maintained by Rosenthal and Celgar.

And given the rapid decline in pulp prices, we took significant steps during the quarter to create additional liquidity in our capital structure.

First we successfully negotiated certain amendments to our non recourse Stendal facility. The amendments allow U.S. to defer approximately 164 million euros of principal repayments to the maturity of the facility in 2017.

As you know this is an important facility to U.S. as it is low cost, government guaranteed and non recourse to the Mercer shareholders. The amendment secures the efficient financing and creates some flexibility if pulp markets do not improve quickly.

In consideration of the deferral, there were new measures to provide protection to the lenders, including an additional 10 million in euro capital contribution from Mercer, and a cash sweep mechanism in the event that there is excess cash beyond the requirements of the mill.

The second important step we took during the quarter was to extend the Celgar revolving facility. This 40 million Canadian facility is now being extending on identical terms to 2010. And as you know we have been working on new financing for the Celgar green energy project.

After disappointment early in the quarter when our proposed lender had to back out, we initiated a competitive process which will come to a conclusion in the near future. We have considerable new interest in the project and hope to have good news on this front shortly.

So with that quick overview of the financials let me turn the call over to Jimmy to talk about our operational market and strategic developments.

Jimmy Lee

Thanks David. Good morning everyone. As David mentioned this will surely be a historic few months. As you would expect the condition of the financial markets and its impact on our customers and U.S. has dominated our focus during the quarter.

Cost control projects that have been in place for some time have been a new sense of urgency and the profile of our liquidities much greater than our day to day decision making process. But while we are preparing ourselves for a difficult year, we are also forging ahead with certain strategic initiatives.

After several consecutive quarters of a generally stable trend in productivity improvements, the fourth quarter was not that strong. After taking into consideration the impact of the annual maintenance shut at Stendal, our average daily production rate was down slightly in the fourth quarter.

The sequential impact of the larger Stendal shut in quarter four when compared to the Rosenthal shut in the third quarter was approximately 11,000 tons. The balance of our lower production, about 18,000 tons, was due to a variety of smaller roundability problems which we believe have been corrected.

Year-to-date however, after removing the impacts of the shut, our productivity is a full 20,000 tons higher than 2007.

As mentioned, during the quarter we completed the annual maintenance shut at our Stendal mill, the shut wasn’t as smoothed as we had accomplished in the past. And our costs were slightly higher as a result of the slower start up.

But its thorough completion was particularly important as we are expecting to complete the entire year of 2009 without a shut at the Stendal Mill. A maintenance practice that can only be achieved under high proactive and complete shut down process.

And as for our other mills, their annual shuts are scheduled presently for the third and fourth quarters.

We expect 2009 shuts to be somewhat longer than in the recent past as we will be tying in the important requirements for the green energy project at Celgar, and we’ll be performing a thorough maintenance of the power turbine at Rosenthal.

Let me talk about the pulp market for a moment. The last time we spoke three months ago, I told you that the markets were particularly unsettled and that there was very little buying, particularly in markets such as China.

Our belief was not that the demand had vanished, only that the buyers were waiting for stability. We also believed that the uncertainty would be short lived as inventories were not that high.

Now after three months the stability in the markets is returning somewhat, and volumes are trading. Of course as you know the stability is at extremely low pricing.

We believe that this pricing is at levels that are not maintainable at current interest cost levels for other high cost producers. Some of these producers are traditional, non integrated suppliers, who are trying to reenter the market after periods of contaminant or shuts. Others are mills that are integrated with paper mills that are placing pulp in markets that were previously consumed by paper machines.

The tightening of credit markets has left certain producers no choice but to sell into weak spot markets. Those sources of additional supply are introducing volume at a time when further demand has become uncertain.

Hardwood pulp production is even more out of balance than softwood. And prices for these grades have fallen significantly. This situation is not helpful as there is the possibility of some substitution of MBSK, which may shrink demand further.

We enjoyed another particularly strong sales quarter in terms of volumes and totaled about 364,000 tons. Our stronger levels of sales were due in part to some recent congestion relief at one of our most important ports in Vancouver.

The relief resulted in particularly high sales volume to China in the quarter to prices which were of course low, but were not at the bottom of the Dens spot market.

We entered the year with more manageable inventory levels which will allow U.S. now to be more selective in destinations if the market doesn’t improve quickly.

The list price for MBSK pulp in the year fell about $180 U.S. per ton during the quarter and ended the quarter at $635 where it has remained.

As David mentioned foreign exchange has moved in our favor with the U.S. dollar strengthening by about 14% in the quarter. But it was not nearly enough to make up for the price movement.

Given the economic uncertainty we are currently experiencing, we do not expect any material upward movement in prices for the next few quarters. While foreign exchange and cost pressures are supportive of further increases, the recent supply increase and likelihood of demand reductions will likely keep the upward pressure off.

The greatest potential positive influences are the most uncertain. We believe that the current pricing and oversupply situation is not maintainable at these prices.

Current costs in addition to the possible reinstatement of the Russian export tax will put added pressure on producers to take out high cost supply.

While we expect the volatility of financial markets to settle relatively quickly, we’re 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 recently been more stable and there is a downward pricing trend that will soon be becoming more evident when compared to the third quarter.

Our fiber costs were on average slightly higher at all three mills. In Germany, wood pricing is developing as we described in our previous conference call and continues to fall for both full logs and residual wood chips.

Our average wood costs remain significantly lower than the same quarter one year ago. The deterioration of the global housing construction that has had a dramatic impact on board producers continues to reduce our competition for fiber.

And our ability to consume wood in either whole log form or residual chips has been that we have been able to shift the way from less abundant residual chips and focus more heavily on the whole log supplies that were previously the target of board manufacturers.

But while log prices have fallen and chip prices have fallen, there remains a cost premium for whole log chips. And as we shift from purchasing chips to whole log chips, we’re moving to a higher cost mix. We expect that our mix shift is now complete and that our average consumed wood costs would be noticeably lower moving forward as a result.

In British Columbia the overall fiber cost trend is remarkably similar. We are being very successful in developing new supplies of whole log pulp wood for Celgar. And we believe that we have addressed a delivery cost issues that we had faced with the Arrow lakes towing operation ceasing after the Pope and Talbot’s bankruptcy.

But like the German mills, while our costs for logs and chips are both falling, the impact on our financial statements will not be evident until the first quarter when our mix settles. We’re also excited that the wood room upgrade at Celgar is in its initial days of start up. And I expect 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 saw mills are at historic low levels. We’re working diligently with the provincial government and tenured licensees in our areas to develop alternative supplies of fiber.

This lumber market down turn and our sometimes unique initiatives to find alternative sources of fiber has highlighted significant deficiencies in the government’s regulations with respect to pulp manufacturer’s access to wood.

Our work with government officials centers around how to provide a supply of low grade, often bug kill 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 thing.

Many of the changes will require directives from senior levels of government, and we have been given assurances that this will be done.

We’re optimistic that we’ll find a solution to add value to a source of fiber that may have otherwise been decaying in the woods.

If I can talk about energy for a moment, we were pleased to be able to announce a few days ago that we had signed a green energy power purchase agreement with the BC Power utility, BC Hydro. This agreement is an important piece to Celgar’s green energy project, and allows U.S. to sell at preferred green energy rates the full capacity of our new turbine for a 10 year period.

And the project itself at Celgar is progressing well. The new turbo turbine is under construction, and on site preparations are continuing on schedule.

As far as our energy market activities in Germany are concerned, we’re participating as planned in the new green energy program, effective January 1. You will recall that this program will give U.S. access to green energy (inaudible) that until now had been unavailable to U.S. because of our unusual large size.

Our participation in this program will occasionally allow U.S. to contract in the spot market when opportune, and we did so in December when we settled forward sales contracts for a net gain of approximately 4.5 million euros.

We continue to believe that this economic turmoil has temporarily interrupted a market for soft wood pulp that was quite balanced prior to the fourth quarter. So we’ll now have to wait until the global economy and credit markets settle before resuming a price structure that reflects long term demand supply balance for MBSK.

And as David mentioned we believe that our liquidity is reasonable and our capital structure is supportable, unless we continue to have depressed prices for the foreseeable future.

This combined with our German government support of Stendal and our low cost structure will help U.S. to carry through. We are forging ahead with our various strategic projects so that when the markets settle we are ready to take advantage of the demand for MBSK and energy.

So looking forward despite the challenging global economy and the continued 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 that the longer term fundamental outlook for MBSK and soft wood still remains positive.

We made focus 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.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from the line of Peter Arot (ph) with Invesco.

Peter Ehret - Invesco

Hi good morning. A couple of questions here. The BC hydro deal. Can you just walk U.S. through from right now, from the quarter end I guess, how much more cash has to be outlaid and when does EBITDA start to flow from that project, and maybe just a guess about how much EBITDA that would be contributing?

David Gandossi

Yeah, so the capital spending will trickle through in the second quarter and then the bigger amounts would be the third and fourth quarter, and there’s about 35 to 40 million to go. And EBITDA for that quarter, for that project, will really start to hit in 2010, sometime in the first quarter when we start up the turbine.

Peter Ehret - Invesco

Okay, and can you put an amount on that expected EBITDA?

David Gandossi

Well, we’ve been pretty careful, and I think the number on the last conference call that Jimmy Lee used was 20 million Canadian annually.

Peter Ehret - Invesco

20 million annual EBITDA from that project?

David Gandossi

Yeah.

Peter Ehret - Invesco

Okay. And the 35, 40 million that you have yet to spend, can you just remind U.S. where that’s coming from?

David Gandossi

Well, our plan is to raise a 45 million Canadian project finance loan for the CapEx. And if on previous calls we had announced that we had a lender, we were fairly far along, and with the turmoil in the financial markets, the lender we selected backed off. And we reinitiated a process just as soon as we got back from New Year’s. And we’ve got about 14 lenders competing. We’re expecting term sheets by next Wednesday, and we’ll see what the pricing is from there.

Peter Ehret - Invesco

Okay. Great, and the additional capital contribution to Stendal, did you get, you don’t own 100% of that, right? It’s 70%? Did your safe go up?

David Gandossi

That’s still under negotiation with the minority interest.

Peter Ehret - Invesco

Okay, but at least at this point that asset isn’t going to burn cash for you?

David Gandossi

No, that’s right.

Peter Ehret - Invesco

Okay, and now that your stocks are $1.00 share, I would imagine you would do your optimist for raising additional capital as being largely foreclosed at this point?

But having said that, it’s a fairly tight ownership set here for the company. Any ideas for exploring additional capital there, perhaps, well Ford for example, they raised stock to buy bonds back. Any sort of creative thinking like that going on there?

David Gandossi

There’s lots of thinking, but nothing that we should really talk about on this call today, I don’t think.

Peter Ehret - Invesco

Okay, so it’s just pretty much gut it out mode and hope this passes.

David Gandossi

Just ideas at this time.

Peter Ehret - Invesco

It’s pretty much just gut it out mode and hope this passes?

Jimmy Lee

No, we’re reviewing various alternatives. Of course from an operating perspective it’s important that we focus on liquidity and reduce cost, but on the financial side of course we are looking at what is realistically available to U.S. to strengthen our liquidity and also to improve I guess our balance sheet for the future.

David Gandossi

And on the operational side, one of the things that’s hard to see just at this point where we are in the reporting series is you know with the price of our product coming down, prices of a lot of the inputs globally are coming down as well.

And that’s going to take a little time to see in our results, but things like fiber, gas, a lot of the chemicals, even suppliers, it’s not just the end product pricing that’s being depressed, it’s everything throughout the supply chain in all industries.

So that’s like a resetting of cost inputs at the same time the price of the product is going down.

Peter Ehret - Invesco

Okay and you talked about Vancouver port getting better. Is it back to normal? Would you go that far? Or is just simply better?

Jimmy Lee

Well, I think if you look at what we were able to do at the end of the year was the result of really the charter vessel program that we had undertaken in the early part of the year. And of course we were able to line up charters for the second half.

That allowed U.S. to ship a significant quantity in the fourth quarter while others were really quite tied up because of the port congestion. It was really more the container and the rail car issues.

We still have issues related to weather related problems in BC, because you know we’ve had significant avalanches, which has resulted in rail car issues. And therefore it has been difficult in terms of the first part of this year for Celgar to ship, not because of the port but really more rail car availability as well as even the highway accessibility.

Peter Ehret - Invesco

Okay, good, thanks.

Operator

Your next question is from Steve Chercover with D.A. Davidson.

Steven Chercover - D.A. Davidson

Thanks, good morning. First of all, I was wondering is there any potential for asset write downs, I mean I know you don’t have good will, but

David Gandossi

Yeah, so, no Steve, we did a very thorough review of all of our impairment risks. And we don’t have any long term asset write downs.

Steven Chercover - D.A. Davidson

Secondly, on the Stendal shut, can you attempt to quantify what the financial impact was in Q4?

David Gandossi

Well, we don’t really disclose all that kind of stuff, but you know it’s about 11,000 tons of production that was curtailed through the maintenance.

Steven Chercover - D.A. Davidson

Sure, and then you said it was a tougher than usual start up, so that impacted costs, right?

David Gandossi

So there was a heavy maintenance period of a very full maintenance and a little bumpy on the start up.

Steven Chercover - D.A. Davidson

And 2010 is a million miles away, but since you don’t have to shut Stendal whatsoever in ’09, is it subject to the same constraints as taking down time in the winter? Does that mean it’s not going to shut until Q2 or 3 of 2010?

David Gandossi

No, it’s going to run. I mean occasionally you’ll go down, parts of the mill will go down for short periods of time for things like water wash or whatever the particular procedure is that needs to be done, but it’s not going to have conventional maintenance shut until 18 months from the last one.

Steven Chercover - D.A. Davidson

18 months, got it. Okay, and then finally with energy prices coming down, and you know there are many stories how cellulose gethanol (ph) is no longer on the front burner for anyone, does it, I’m sure you don’t re access your BC hydro plans or anything else, but if you weren’t already half way through these things would you still be full bore on them?

Are the projects still attractive as they were a year ago?

Jimmy Lee

Currently they’re more attractive now because although the normal input prices have dropped, the green energy rates have not dropped at all. So we have with the BC hydro a fixed energy pricing for a 10 year period with inflation adjusted indexing.

So we certainly received significantly higher rates than what the market today is prepared to pay. And that’s also true in Germany as well.

David Gandossi

And from the jurisdictions point of view, while times are tough, the carbon economy is coming very rapidly. The developments with the western climate initiative for example, is they’re smoking along, and they’re going to measure carbon. And carbon is going to be a liability.

And this jurisdiction is very focused on green energy, carbon neutral energy. That’s happening around the world, and I think we might see some leadership coming out of the United States in that front as well. So we’re just early participants in something that’s a wave coming at us, for sure.

Jimmy Lee

In fact it has no real consequence in terms of what today’s electricity prices are, because we are guaranteed a certain pricing environment for a very long period.

Steven Chercover - D.A. Davidson

And final question before I turn it over, I know difficult to opine on other people’s positions, but we’re well aware of one mill up in McKenzie that BC government basically took over to overt environmental catastrophe, do you have any idea of how many mills you think are going to go down once and for all?

Jimmy Lee

Well, we know that a significant number of mills are essentially negative cash flow with today’s pricing. And I think if you look at Celgar, Celgar essentially without the energy project in place, probably in the middle of the pact, so if you look at the MBSK production market, you’ve got something like just over 14 million tons, so clearly Celgar being on that kind of middle, that means you’ve got about 7+ million tons which are on the other side of the balance.

Steven Chercover - D.A. Davidson

Thanks Jimmy.

Operator

Your next question is from the line of Aaron Rickles (ph) with Oppenheimer.

Aaron Rickles - Oppenheimer

Morning. If you guys can just run through at the mill level, the CapEx production shipments for the quarter?

David Gandossi

Okay, Aaron, the production volumes for Q4 for Rosenthal were 83.5, Stendal was 134.7, and Celgar was 120.8. And the sales volumes for Rosenthal were 71.6, for Stendal 140.5, and Celgar 152.

And then on CapEx, we’ve cut CapEx back at Rosenthal and Stendal to bare minimums, and the CapEx for Celgar which was just finishing off the wood room in the beginning of the first quarter and the green energy project will be 31 million euros in 2009.

Aaron Rickles - Oppenheimer

What was it in the fourth quarter of ’08?

David Gandossi

Fourth quarter spending at Celgar was 4.4.

Aaron Rickles – Oppenheimer

Okay, so that was 31 million euros, roughly?

David Gandossi

Yes.

Aaron Rickles – Oppenheimer

The inventory right down towards the 11 million euros, how did that break out between the mills or even just restricted versus unrestricted?

David Gandossi

Yeah, so at Stendal finished goods went down about 2.6 million euros, and that reflects the cost of the shut. Going forward our expectation is we won’t see any more of that. For Rosenthal it was a very small .4 unfinished goods, and for Celgar 1.2 unfinished goods, 7.1 on fiber.

And the fiber story there is that for a lot of the year we were accumulating inventory at remote locations and preparing to chip those with remote chippers and haul them in chip trucks to the mill. That’s a pretty expensive way to go, both in terms of logistics and the cost of those chippers.

So that fiber we’ve had to write down due to collapsible prices, but we believe that the new logistics we have set up, and our access to fiber, and with the wood room running is going to produce a scenario where we’re not going to have further write downs of raw materials going forward.

Aaron Rickles - Oppenheimer

That is helpful. When you talked about the shuts that you expect in 2009 for Celgar and Rosenthal being a little bit longer and more intense, can you give U.S. a little more color around the tonnage that you expect to lose or the potential impact to cost?

David Gandossi

Yeah, the Celgar shut’s going to straddle the third and the fourth quarter and it could be as long as 16 days, which would be about 25,000 tons. That’s all subject to planning again, but that’s our current estimates. The Rosenthal shut is on the books for 11 days in the fourth quarter and that’s about 10,000 tons.

Aaron Rickles - Oppenheimer

When you look at your ability to potentially borrow more money, I was looking at this this morning with the indenture, I guess the test is 85 million U.S. or the borrowing base for secured debt on top of the bond. Can you give U.S. a sense of how much room there is? It didn’t look like there was much at this point.

David Gandossi

Well, there’s a number of things. You’re right. It’s the greater of 85 million U.S. or borrowing base as calculated under the indenture for working capital, plus there is a 20 million U.S. basket for other debt, things like project debt, that kind of thing. There’s another 20 million basket that’s again that’s variable.

And, then there’s a 15 million leaseback basket. And, those are available. Then on top of that, there’s an EBITDA test where if your EBITDA coverage exceeds two to one, then you've got additional indebtedness room. Today, we don't have any room under that measure. But we have room under the other four measures I've mentioned.

Aaron Rickles - Oppenheimer

So, if you're able to secure the 45 million Canadian, that would tap into some of those additional baskets that you just—

David Gandossi

Yeah, we’ve, for sure, we’ve got lots of room for that.

Aaron Rickles - Oppenheimer

Okay. The Rosenthal credit facility, is there any near term maturities there that we need to think about or when does that come due?

David Gandossi

Well, it does mature in 2010. So, we’ll be working on that this year, replacing it with a receivable and an inventory backed revolver. You know, not something that I’m overly concerned about.

Aaron Rickles - Oppenheimer

Okay. And, then I guess just maybe the last question, Jimmy, in some of your comments in the press release you talked about taking a variety of actions to conserve cash and maybe some of that is the CapEx that you haven't touched on. But, can you go into a little bit more depth about some of these things that you think you're doing and maybe tie SG&A into that, ‘cause it looked like SG&A was very, very low this quarter.

Jimmy Lee

Well, I mean, I think there’s a lot of things which go into SG&A, so that’s, you know, not necessarily indicative of really the cost cutting measures that we’re taking but clearly we’re focused in terms of preserving the cash and therefore any nonessential projects essentially are stopped. So, only those which are absolutely critical are going to take place. That’s one measure, clearly. There is of course a certain amount of reduction of employment.

In Germany, we are able to use some of the government-supported programs so we don't really have to undertake layoffs. We just have—you utilize more short time type of programs which allows U.S. to tap into some of the federal supports so that we’re paying only 40% of the wages for a certain number of our employees. And, we’re also of course looking at our staff levels at Celgar very closely in terms of reduction of staff.

And, in terms of salary freezes, of course, we instituted essentially all freezes on salaries. We are in discussions with the union in regards to the agreed escalation of their wages to see if we can also agree to essentially freeze on that. That, of course, as well as other issues are being discussed with the union.

And, we, of course, have significant programs in regards to our most costly issue, which is the raw material supply. As you know, our wood room now is operational and we’ll be ramping up to full capacity soon. And, therefore, we have a lot of flexibility in terms of the type of wood that we need to purchase. We also of course sit on a significant amount of inventory, as you know. So we will be making very good headway in terms of wood cost inputs at our Celgar mill. We hope that the government also would refocus in terms of how pulp logs are being sourced and priced. We’re not really, you know, depending on that, but I think that there’s certainly room for improvements there.

Freight issues, we of course are tightening down significantly. We are expecting also our suppliers to look at their pricing to us, considering the severe economic downturn, and we hope that we’ll make progress in all of our suppliers, whether it’s chemical or other type of services. So, yeah, you know, we’ve tightened down quite a bit in terms of all costs, all areas and at all mills.

Aaron Rickles - Oppenheimer

That’s good helpful color. Is it possible, you know, I guess there’s a couple things that you've already done, the wood room being one and some of the labor issues in Germany. Is it possible to quantify how much you might expect to save in a dollar per ton basis from those actions that you've already taken?

Jimmy Lee

No, I mean, there’s lots of things happening. I mean, there’s lots of things happening. I mean, I think our primary focus is to make sure that we have adequate liquidity going forward. That’s very important. And, of course, we’re focused on preserving cash.

And, costs of course is a big component to that and therefore, you know, each of the mills has got a program and we have, you know, of course, a plan and I think overall, although it’s gonna be a tough market, we’re confident that, you know, whole world kind of further implodes, we should be able to get through this. Although, it’s not going to be, of course, the most comfortable type of situation.

Aaron Rickles - Oppenheimer

Thanks. Good luck, guys.

Jimmy Lee

Thanks.

Operator

(Operator Instructions) You're next question is from Mark Wagner with BDJ Capital (ph).

Mark Wagner - BDJ Capital

With regards to the amendments to the Celgar facility, were there any modifications to the agreement other than the extension on the maturity date?

David Gandossi

No, there weren’t, Mark, no.

Mark Wagner - BDJ Capital

Okay, great, thank you.

Operator

The next question is from the line of Rich Sherman with Oppenheimer.

Rich Sherman - Oppenheimer

Hi. In regard to the project financing for the energy thing that you're referring to, assuming that does go through, do you have a general timetable when you think it will happen and would it return, assuming you were able to take down 45 million, would it return any net cash to you for outlays already?

David Gandossi

Yeah. A couple questions in that. So, the total spending is 55 million and we’re looking for 45 million. Okay? So we won’t get back everything we’ve spent but 45 million is the number that we think is the right number in the circumstances. And, in terms of timing, we’re expecting term sheets by next Wednesday. It’ll probably take a couple of weeks of answering questions and, you know, due diligence type of things to get towards a commitment letter, maybe three weeks. And, then facilities like that typically take two to four weeks to fund. So, puts U.S. up to the end of the quarter.

Rich Sherman - Oppenheimer

Have you already laid out the 10 million difference or is that still yet to come?

David Gandossi

Oh, yeah, we’ve spent more than 10 million Canadian on the project so far.

Rich Sherman - Oppenheimer

Okay. Good luck. I hope you're just preparing for the worst and hoping for the best. I hope that’s your philosophy.

David Gandossi

Yeah, well, we’re preparing for the worst and hoping for the best. And, that’s true also with the Green Energy Project.

Rich Sherman - Oppenheimer

Well, that’s what you got to do now.

David Gandossi

Right.

Rich Sherman - Oppenheimer

Okay. Thanks a lot.

Operator

Your next question is from the line of DeForest Hinman with Walthausen & Co.

DeForest Hinman - Walthausen & Co.

Hi. You talked about working to get down our inventory levels, but looking back a little bit historically we’ve been able to get inventory levels down much lower on a dollar basis, you know, just looking back at 2006, we were in the low to high 60 million euros.

With inventories with the way that fiber costs are falling and, you know, being proactive with how much whole logs and chips we want to hold, how much more working capital can we squeeze out of that inventory line?

David Gandossi

Well, on the raw materials, there’s got to be 15 million of liquidity just by managing the inventories. And, it’s the kind of thing that we think is possible in this environment because our suppliers are going through just as dramatic a downturn in their businesses as we are in ours and programs that describe to them what their allocation, what their maximum volume of delivery is and periods of curtailment and all these other measures.

I mean, it has to be a very proactive approach all the way through the supply chain, but we’re expecting to cut our raw material and inventories by 50% in terms of what we have in front of the mill, and eliminate risk by having suppliers geared up and ready to supply to U.S. as and when we need it. And, that’s just, that’s what we’re doing. I think that’s what they’re doing with their harvesters.

And, you know, it’s just everybody’s going to have to tighten up. And, there’s more savings in managing the working capital liquidity than there is in cost reductions in the near term anyway for the next couple of quarters. That’s where you'll see the biggest cash infusion come from.

DeForest Hinman - Walthausen & Co.

All right. And, then on the receivable side, we talked about getting some boats out of Vancouver, I think, in December. How much of the increase in the accounts receivable that we’re seeing is timing or did we have to extend some of the payment terms to get some of those inventories off the balance sheet?

David Gandossi

It’s not extending terms, it was a big, big push on Celgar in the fourth quarter, in December rather. We sold 151,000 tons for the quarter compared to, you know, averaging 115 to 120 in the previous three quarters.

DeForest Hinman - Walthausen & Co.

So, we should see a wart and gavel (ph) benefit from inventories in the first quarter of ’09? Does that make sense?

David Gandossi

Absolutely. (Inaudible)

DeForest Hinman - Walthausen & Co.

All right. And, then you talked about inventories being low for the industry. With the decreased outlook for demand, are people willing to take down their inventory levels even further or do you think they’re kind of as low as they can go?

Jimmy Lee

Well, I think if you look at the end user’s inventory levels, they were quite modest. I mean, if you look at China, essentially and our customers were drawing down on all of their inventory and not buying for an extended period of time and then rebuilding that supply. I don't think that the inventory levels certainly for our end users have really been rebuilt and I think they’re going to continue to run at these very low levels.

Now, in terms of the producer inventory levels, although they are higher than normal but they’re not significantly higher than what would be, you know, kind of normal conditions, but clearly they’re above what would be tighter type of conditions. And, this was at a cost of significant amount of closures in the fourth quarter where the producers, especially the high-cost producers, took a significant amount of down time to adjust the production levels so that inventory levels would not rebuild.

And, you know, if you look at the inventory levels, although there was a significant amount of downtime, the inventory levels didn’t come down. But, you know, it’s good that at least it wasn’t going up either.

So, I think we are now making some headway in trying to address the demand reductions that we’ve seen. You know, they are further curtailed what’s going on. And, as a result of that, you know, it’s going to rebalance where hopefully we can start to now move the producers’ inventory levels to levels which would indicate much more balanced type of market and with the end user’s inventory levels being quite low.

I think we got much more flexibility than the hardwood guys, where the hardwood inventory levels are extremely high and it’s going to take significantly more closures in the near future to really rebalance that position. So, I think although the hardwood prices and inventory levels will continue to pressure the softwood, we think at least on the softwood side, the oversupply is not as large and certainly much more manageable going into this downturn because there was really not that much near capacity which had come on line.

DeForest Hinman - Walthausen & Co.

Now, when I think about capacity going forward, it seems like there’s, from what you guys are saying, is there’s overcapacity. In your mind, how much tonnage needs to exit the market for there to be kind of this equilibrium again?

Jimmy Lee

Well, it’s very difficult to say what the demand destruction’s going to be because of course we’re seeing continued weakness in the global market. We don't have a good lead as to what that impact is on China because we’re just coming out of the Chinese New Year. Although the shipments have been stable into China, they have been at very depressed prices, but we’ve been able to move the level of volumes that we would have expected.

Europe continues to be weak and we think there will be further weakness there. So, we don't really know what that demand destruction is going to be. But, I think that we have enough room in the sense that we have a lot of very marginal production out there, which represents significant amount of tons of capacity.

And, clearly, you know, it will only rebalance essentially if we have production curtailments throughout the industry and that’s happening already. And, I think you will see a balancing based on that. So if demand continues to drop, you’ll see further capacity essentially being forced to take downtime to correct for that.

DeForest Hinman - Walthausen & Co.

You talk about a lot of these marginal players, I mean, is it a situation where they do capacity curtailments but they manage to squeak out, you know, with enough working capital where they can do a prolonged shot and then they can come back. And we’re kind of in the same situation again or is there something different this time around with the credit markets being so tight where either out of bankruptcy or just equity holders or debt holders continue to give these guys more money to try to operate these—

Jimmy Lee

Well, clearly, the financial markets are very tight. So, the availability of traditional type of financings are not really available. So, it would certainly be more difficult for, you know, mills who are forced to close to really get new money to maybe reopen. But, you know, this industry has always been plagued this issue where mills which have been shut, they find new buyers.

Somehow they come up with working capital, financing and off they go again. So, I would never say that these things will be permanently shut. However, we know that every time that these mills do go into a closure, it’s becoming more and more difficult to restart them, for various reasons, whether it’s financial availability or really the need to bring in new capital for equipment maintenance and other issues, which are not available anymore.

DeForest Hinman - Walthausen & Co.

All right. Thank you.

Operator

The next question is from the line of Paul Quinn with RBC Capital Markets.

Paul Quinn - RBC Capital Markets

Just trying to get a feel for pulp markets globally. It sounds like you're expecting further weakness in Europe and you're hopeful things are balanced in Asia and China. But, what’s your read on North America?

Jimmy Lee

Yeah, I mean, we do have pressure in North America too. We think that at least in the short term, we probably are close to floor everywhere, Europe, North America and Asia. So, I don't think that we’re going to get any real further material weakness in terms of pulp pricing. Assuming, we’re at these type of currency rate, exchange rates right now. Of course, if the dollar continues to shrink then materially then from a dollar base price we’ll have adjustments.

But, with present prices probably this will be kind of representing the floor. We think the second half will improve. We don't think it’s going to be a material improvement, though. We don't think that the balance is going to be as strong as we’ve seen in the past when we come out of these situations. But we’re reasonably optimistic that we will fairly get a better pricing environment than the second half of this year. But, not a material benefit.

Paul Quinn - RBC Capital Markets

And, just a rough cash burn in Q4 was about 40 million euros?

Jimmy Lee

Yeah, in order of magnitude.

Paul Quinn - RBC Capital Markets

What do you expect that going forward? Is that going to appreciably come down given that we’re not seeing any—really not going to—you're not expecting any big price increases in 2009, are your costs going to come down to lower it?

David Gandossi

The costs are coming down. We’ve reduced the principal requirements on Stendahl. Expecting some cash infusion from the Celgar Green Energy Project. And, when we balance the whole thing together, it looks like it fits, subject to not being any further significant deterioration in prices.

Paul Quinn - RBC Capital Markets

Okay. And, just, do you have a rough breakdown – a geographic breakdown? I’m just trying to figure out where shipments are going into which markets at which prices? Do you have a rough breakdown?

Jimmy Lee

Yeah, I mean, Celgar almost half of it goes into China. And, you know, in our German mills, basically about 40-something percent goes into Germany and then the, you know, Stendahl may export maybe 10% overseas. The balance is rest of Europe. Relevant though 40 to 50% Germany the balance Western Europe doesn’t really export. And, Celgar 50% China, about, you know, maybe close to 35-40% to North America and then the balance to rest of Asia.

Paul Quinn – RBC Capital Markets

Thanks guys.

Operator

(Operator Instructions) Your next question is from the line of Andrew Shapiro with Lawndale Capital Management.

Andrew Shapiro - Lawndale Capital Management

Hi, good morning. I have several questions. But, I want to immediately follow up on this last questioner. David, if you could help. You talked about a $42 million cash burn in Q4. You highlighted that some of this is Stendahl. We got some fiber costs cuts coming this year. We’ve got incremental cash flow from the Green Energy in Germany in ’09. Can you kind of just break some of that down in pods so that we can get a feel for what the adjustment or the adjusted cash burn might be? You have to assume we’ll call it our stable pricing at these levels?

David Gandossi

Yeah. First, Andy, it’s almost like you're asking me to forecast our first quarter cash flow statement and I’m just really not in a position to do that here.

Andrew Shapiro - Lawndale Capital Management

How about let’s go backwards looking then and just say, okay, of the 42.4 million of this cash burn, how much of this is activities that have been fixed or changed, aka, you know, the Stendahl principle payments and you're fiber cost reductions? Can you quantify that at least from a current reported quarter point of view without expectations then?

David Gandossi

Yeah, we haven't disclosed the cash flow for the fourth quarter yet, Andrew, so I am struggling with your question.

Jimmy Lee

Let’s say the first quarter cash burn is outside from continuing to invest in terms of Green Energy Project.

Andrew Shapiro - Lawndale Capital Management

Yeah, not CapEx. I’m just talking about -

Jimmy Lee

Yeah. In terms of our operating side, we don't think that you're going to see realistically a significant cash burn.

Andrew Shapiro - Lawndale Capital Management

Okay.

Jimmy Lee

Because, you know, we don't have a maintenance closure in the first quarter. You know, we are adjusting our costs. So, you know, of course January was a tough month, but we think that the subsequent months should improve slightly and overall we shouldn’t have a real cash burn.

Andrew Shapiro - Lawndale Capital Management

Okay. ‘Cause what I’m trying to get at is a comment you made earlier on is that the industry pricing is a loser for many participants and it’s down at levels that are below their cash costs and it’s been said that Mercer is one of the more cost efficient, lower cost producers around and if we’re producing—how close are we to our cash costs?

If we’re producing below our cash cost (inaudible) everyone must be hemorrhaging and it can't last forever.

Jimmy Lee

Yeah. I mean, if you look at the prices in China that we saw at the end of the year, and based on Celgar’s type of cost inputs at that time, Celgar was losing money. While our German mills were, aside from Stendahl because of the shutdown, without the shutdown it would have made, you know, money.

And, Rosenthal would have made money. So, if you look at the December numbers, if Celgar is kind of like in the middle of the pack globally in terms of delivered costs, then you saw that about half of the mills globally were probably losing money.

Andrew Shapiro - Lawndale Capital Management

Mm-hmm.

Jimmy Lee

And, that represents more than seven million tons.

Andrew Shapiro - Lawndale Capital Management

Mm-hmm.

Jimmy Lee

At what was the prices in China at the end of December.

Andrew Shapiro - Lawndale Capital Management

Okay. So, now, can you remind U.S. of the percent of contract business you have at each of our plants and how much higher is this contract business in price terms than the current spot and how much contract business would be beginning to roll?

Jimmy Lee

Well, I think most of our business in our German mills are contract. But, I think the trouble right now is whether it’s contract or not contract, you're getting a lot of pricing discussions. So, the traditional stability of having a contract price in a very weak market doesn’t really (inaudible).

So, I think what we would say is that essentially contract volumes really just don't have any real meaning presently, whether it’s on a volume base or even a price base. Essentially, we’re getting discussions with all of our end users on a regular basis in terms of volume and price.

Andrew Shapiro - Lawndale Capital Management

Well, like (inaudible) is rolling off, are you saying is that we’re right now selling our products on a mix that is comparable to its mix given the current spot markets and what would be on contract and regularly negotiated every month? I mean, subject to a big rent roll off in a sense?

Jimmy Lee

No. I mean, you're getting some producers, I mean end users which actually will adhere to their contracts. They’re more your larger consumer products that of companies. And, of course, they are very dependent on having the right pulp supply and they match their products to the pulp suppliers. So, typically, these would be more stable. Although, you will have discussions about potential reduction in prices, but they tend to be far less pressures.

The other ones, especially the coded grade guys, they are under enormous pressure. So, you're going to get pricing discussions all the time.

Andrew Shapiro - Lawndale Capital Management

But, how much higher in our contract pricing?

Jimmy Lee

I can't give you an exact number, Andrew, because each of them are - it depends on the end user and whether they’re tissue, whether they’re North American or whether they’re Italian, they’re Chinese, and each of the coded grade guys are all different too.

So, I cannot give you that type of a guesstimate, because that also would kind of key into what is our end users actually getting in terms of what list prices and what are the spot price gaps?

Andrew Shapiro - Lawndale Capital Management

Okay, fair enough. When will the winter have eased enough that we might begin to see some of these higher cost competitors to be able to close your facilities? ‘Cause in the winter, there’s all kinds of environmental issues of really shuttering these things down. And, are you surprised that we haven't seen some preliminary announcements already for additional capacity shuts?

Jimmy Lee

The thing that has surprised me is that the mills that I thought would probably be shut already have not really announced real closures. And, the ones which I thought would probably continue to run actually did take closures. So, that has been quite surprising. Also, the level of closures to date has really not been as big as I would have thought going into this market.

So, there’s a lot of things which clearly are happening where it’s very unusual. But, with the continued weak markets, knowing the cost structure and the financial strength of these organizations, it’s not likely that this can continue to be the case. So, you know, we’re seeing significant closures by many of the other guys already where half of their production is down for short periods of time.

Andrew Shapiro - Lawndale Capital Management

Mm-hmm. Now, can you clarify the comments you made regarding fiber costs particularly? I guess it’s really German and Canada. You mentioned that the fiber cost benefits were occurring, you kind of implied they’re incurring now.

And, I’m just trying to get a handle on did they start occurring here midquarter and this is a partial quarter gain in Q1 and then full quarter in Q2? Or, did you get a full quarter of benefit from the reduction in the fiber pricing for Celgar?

David Gardossi

Well, the way to think about it is on the log purchasing, essentially, the liquidity measure would be you turn that tap off for a while, and we have 400 meters of log inventory in front of the mill. So, we’re going to run through that for several months. And, then when the log buying comes back on, it’s going to be at a lower price. At the same time, the chip supplies are on a lower level because of the continuing curtailments in the saw milling industry.

But, our bid for chips for the mill are lower, much lower than they’ve been historically because fiber is replacing itself along with the realities of the values of the end products of the producers. If fiber costs come down, the producers won’t buy it. There won’t be activity. So, as I mentioned earlier in comments, the price of pulp drive it’s way all the way back to supply chain to all the suppliers and everybody has to reprice or activity stops.

Andrew Shapiro - Lawndale Capital Management

Mm-hmm. Now, you’ve also mentioned you took primarily at Celgar and primarily in raw materials an inventory write down here in Q4 that you just reported. Would that imply going forward the raw material cost of goods sold for Q1 would indeed have a full quarter drop because of the write down?

David Gandossi

Yeah. That’s right. The way to think about that is the value of that inventory that was written down in the fourth quarter won’t produce positive EBITDA in the first quarter. You can't write it down to the point where you're producing income again from it. So, the positive EBITDA comes from lower prices on the new inflow.

Andrew Shapiro - Lawndale Capital Management

Mm-hmm. But you are allotted to the accounting principles basically had you write it down to break even?

David Gandossi

You write it down to a net realizable value which is you go through all the way through to what your mill nets are and that’s where you stop.

Andrew Shapiro - Lawndale Capital Management

Okay. A few more questions, then back out into the queue. Capital injection into Stendahl Joint Venture you mentioned was 10 million. That was 10 million Euro I presume and is that Mercer’s share is 10 million?

David Gandossi

Yes, that’s right.

Andrew Shapiro - Lawndale Capital Management

Okay. And, you’ve also implied in answering someone else’s question, that the – our percentage ownership in Stendahl might change. Is that a result of this being in a sense a capital call and if the minority partner doesn’t put up dough our percentage ownership would rise?

Jimmy Lee

Well, basically, the loan modification is not subject to the minority holder participating. So, if we are putting new capital in, then, we do have the flexibility of converting that into share and diluting the interest of the minority. We are presently in discussions with the minority in regards to what they would like to do. So, nothing has been concluded.

Andrew Shapiro - Lawndale Capital Management

Okay. And, the timing of the 10 million, was that in our current quarter Q1 was it 10 million of outflow from the parent company goes in?

Jimmy Lee

Yeah. I mean, the deal will be closed before the March 31, because as you know there is a payment scheduled for that date. So everything below modification will occur before the end of the first quarter.

Andrew Shapiro - Lawndale Capital Management

Okay. And, restricted cash dropped quite a bit for the quarter and what’s that a function of?

Jimmy Lee

Well, that’s because Stendahl of course had to draw on that two-fund part of the requirement to pay down the principle.

Andrew Shapiro - Lawndale Capital Management

Okay. And, so, that just gets replenished or that’s going to go away as a result of the loan modification?

Jimmy Lee

No, the load modification basically reduces the principal repayment schedule for the next several years as you know. It’s detailed out. But, we have a loan reduction in terms of principal repayment this year by 20 million euros. And, whether that restricted cash or not is depleted or rebuilt is going be dependent on how we perform for the balance of the year. But, clearly, we’re not let’s say optimistic that based on today’s forecast that likelihood of that restricted cash being replenished this year is likely.

Andrew Shapiro - Lawndale Capital Management

Okay. And, the PT&E drop from third quarter is a sizeable one. Is that all just currency or is there other factors? (Inaudible) 904 to 880, was about a $23 million drop.

David Gardossi

Just currency and accumulated depreciation, Andrew.

Andrew Shapiro - Lawndale Capital Management

Okay. And, last questions on the energy here. Can you walk through each of the energy initiatives at the facilities to tell U.S. the EBITDA contribution and clarify the currency in which it’s coming and the reason is of course you can't just do Germany and Canada because one of the German facilities is in the restricted group.

David Gandossi

All that information is going to be filed in the K, Andrew. But, real big picture, the numbers that we’ve talked about before, in Germany, about €16 million of incremental energy revenue compared to 2007. And, if you're going to compare it to what we would have been next year if we didn’t have it, it would be much more significant, because obviously energy prices in central Europe are dropping, but we have a floor, which is higher than that, in our EEG rules.

So, very much a big positive for U.S. over in Germany because it’s a stable supply and it won’t go down with the energy prices. It has a floor.

Andrew Shapiro - Lawndale Capital Management

Mm-hmm. And, the 16 million between the two facilities breaks out?

David Gandossi

Yeah. We’re at half and half. We’re at a little more at Stendahl actually, but both are selling close to 20 megawatts of premium power and then Stendahl has another 30 say EBITDA to selling at that floor price, which is right now above the grey market price.

And, for Celgar, what we’ve said on the call today and on the previous calls, the EBITDA from it is roughly about 20 million Canadian and we have costs to make that power. Obviously, we buy the wood and make the pulp and everything. But compared to the way we ran the mill historically, this was all incremental EBITDA for us.

Andrew Shapiro - Lawndale Capital Management

Okay, excellent. And, can you clarify the German Green Energy, you sold some credits and it’s not clear if you sold some energy forward in December? And, if it was energy that you sold forward in December, is that at the Green Energy rate? That is, then sold forward?

David Gandossi

Yeah, so, without getting too complicated, when you know what your price of power is in the future, if the current price of power goes below that, you can enter into forwards to buy.

And you can sell and you can do all kinds of things because you have certainty and you know you're going to consumer power as well. So, essentially, we took advantage of the changing market in the latter part of the year to enter into some forwards that we have since closed that capture some of that difference.

Andrew Shapiro - Lawndale Capital Management

Okay. And, can you clarify how these streams will work in terms of their variability in how the cash is received? Is there a lot of volatility? Obviously, it doesn’t compare to the pulp volatility, but just in terms of the energy volatility. How smooth is it or is there some seasonality?

David Gandossi

Well, there is some seasonality, but the revenue stream is smooth. You know, it’d be like a gentle curve obviously, higher demand periods set higher energy prices, so there will be some seasonality.

Jimmy Lee

Okay. All of the German energy is under the renewable energy. Remember only 20 megawatts are. So essentially be excess which is primarily in Stendahl, has to be timed in terms of when it’s sold. But in today’s type of program really there’s no benefit in selectively timing it, but we did look at last year the optimum program in terms of when to sell the Green Energy versus just spot. And, it’s the combination of those two which will maximize the revenue stream coming out of that.

At Celgar, basically what we have essentially all the new energy being sold at a particular rate. We do of course produce certain amount of access when we run quite steady state, not a lot at Celgar but that is sold on the spot market and that’s varied depending on the season. You know, winter months tend to be more higher energy. Summer, depending on where you are, sometimes far less.

Andrew Shapiro - Lawndale Capital Management

Thank you.

Operator

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

Jimmy Lee

Well, I thank everyone for participating in today’s call. I think everyone is very much aware of course of the extremely difficult market conditions that we are operating in. But, as I said, we are optimistic that we will weather this and hopefully after this year there will be rebalancing and we will see much better improvements in terms of our product, prices, etc. And, thank you again.

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Source: Mercer International, Inc. Q4 2008 Earnings Call Transcript
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