Mercer International (MERC) is the world’s second-largest producer of high quality Northern Bleached Softwood Kraft (NBSK) market pulp, selling to customers who manufacture a wide range of premium paper and tissue-based products. Mercer operates three of the world’s most modern and efficient mills, with approximately 1.5 million air dried metric tonnes (“ADMT”) of total annual capacity at Celgar, British Columbia (500K ADMT), and Rosenthal (330K ADMT) & Stendal (645K ADMT) in eastern Germany. All are located near excellent fiber baskets and in close proximity to key global markets. Mercer’s pulp operations also produce a significant amount of excess renewable carbon-neutral electricity that is sold to third parties at premium “green energy” rates.
Mercer's recently released outstanding Q2 results, fueled by both a continued surge in pulp prices and favorable currency moves during the quarter. The press release for Q2’s results can be found on Edgar (here).
Mercer’s Q2 2010’s operations turned in their highest gross and EBITDA margins since the end of 2006. Even after adjusting for the increased imputed share count, assuming conversion of Mercer’s Jan 2012 convertible notes, which are deep in the money, Mercer's market cap and enterprise value today remain at far lower levels then the Q4 2006 period, despite substantially higher cash flow and superior cash flow prospects today.
A transcript of the Q2 conference call can be found on Seeking Alpha (here).
For upcoming/current Q3, continued strong results and de-leveraging will accrue to benefit shareholders and the stock price, offsetting some decline in pulp pricing as supplies from temporarily shuttered Chilean producers (earthquake) and inefficient producers (pricing) have reopened. However, pulp industry inventory levels remain near their record lows, well below equilibrium, and Mercer has some of the most efficient and low-cost pulp facilities in the world. Moderate pulp price declines result in continued substantial cash flow generation and de-leveraging for Mercer. Alternatively, a severe drop in pulp prices would result in industry-wide re-shuttering of substantial pulp capacity that is less efficient than Mercer’s low cost production, especially in the US where uneconomic producers no longer have the US Gov’t black liquor subsidy that kept them operating and amplifying the pulp industry's 2008-2009 price decline.
Starting next Q4, Mercer will enjoy the beginning of $CAD20-25 million of annual incremental cash flow from the startup of energy sales to BC Hydro from Mercer’s new Celgar (BC, Canada) bioenergy facility, being constructed primarily with ‘green energy’ grants from the Canadian Government.
Mercer’s most recent investor presentation for the Jefferies August 10 conference can be viewed here.
Disclosure: Author is long MERC 8.5% convertible sub debt due Jan 2012. Author may buy or sell securities of this issuer at any time.