Mercer International Inc Q4 2007 Earnings Call Transcript

| About: Mercer International (MERC)

Mercer International Inc. (NASDAQ:MERC)

Q4 2007 Earnings Call

February 14, 2008 10:00 am ET

Executives

Jimmy Lee - President and Chairman

David Gandossi - EVP

Alexandra Tramont - IR

Analysts

Mark Bishop - RBC Capital

Herve Carreau - CIBC World Markets

Steve Chercover - D. A. Davidson

Brian Doyle - RBC Capital Market

Ben Carlin - A.G. Edwards

Eric Seeve - GoldenTree

Joe Pratt - A.G Edwards

Don Roberts - CIBC World Markets

Aaron Rickles- Oppenheimer

Marcelo Luna - Deutsche Bank

Patrick Wang - SCM Advisors

Andrew Shapiro - Lawndale

Operator

Good morning. My name is Regina, and I will be your conference Operator today. At this time, I would like to welcome everyone to the Mercer International fourth quarter 2007 Earnings 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) Thank you, Ms. Tramont; you may begin your conference.

Alexandra Tramont

Thank you. Good morning, and welcome to the Mercer International 2007 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 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 in 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 M. Gandossi, Executive Vice President, Chief Financial Officer and Secretary.

I would like to turn the call over to Jimmy Lee. Jimmy, please go ahead.

Jimmy Lee

Thanks, Alex. And I'd like to welcome everyone to Mercer International's fourth quarter and year end earnings conference call. As usual, I will begin by making a few prepared remarks regarding our results, followed by a question and answer period.

We're pleased with our operational performance for the year, as all three of our mills achieved annual production records and two mills also achieved production record into fourth quarter. The added production along with the higher prices was a significant contributor to our stronger sales in the year. Revenue in 2007 were up 13% to 704 million from euro 624 million in 2006. While we report our financial results in euros, it’s worthy to note that our sales now are nearly US$1 billion. Pulp markets have been strong all year which has translated into consecutive price increases, however we are not satisfied with the current NBSK pricing as it has still not kept up with the higher fiber prices and the weakness of the U.S. dollar.

Our fourth quarter operating EBITDA was euro 37.2 million, which was down euro 13 million from the same period last year. This is primarily due to the weaker U.S. dollar and higher fiber prices. For the full year 2007, our operating EBITDA was euro 126.2 million which was down euro 22.1 million compared to 2006. This was primarily due to higher pulp prices being more than offset by higher fiber cost and the impact of the weaker U.S. dollar.

For those of you who are interested in the U.S. dollar EBITDA, we achieved an equivalent of approximately US$53 million of EBITDA in the fourth quarter and US$173 million for the full year.

In the fourth quarter we reported net income from operating operations of euro 7.3 million or euro 0.20 per share, compared to euro 28.6 million or euro 0.85 per share in the same quarter last year. For the year we reported net income from continuing operations of euro 22.4 million or euro 0.62 per share compared to euro 69.2 million or euro 2.80 per share last year.

Our earnings in the fourth quarter included a net pre-tax gain of euro 5.1 million on our derivative instruments and the mark-to-market value of our foreign denominated debt. This compared to the same quarter in 2006 when we recorded a net pre-tax gain of euro 38.6 million. For the year, our earnings included a net pretax gain of euro 31.3 million on our derivative instrument and the marked-to-market value of our foreign denominated debt compared to a net pre-tax gain of euro 121.1 million.

Earlier in the year, we saw fiber prices increasing significantly due primarily to the deterioration of the U.S. housing market and its impact on the sawmill operation. But they stabilized in the second half of 2007. As a result our fiber costs were higher relative to the prior year.

Looking ahead in the short term we believe that weak housing market will create a large, will be largely offset by influences of lower residual supply from sawmills, but also lower demand for residual from other building material manufacturers such as [OSG]. We believe that this will mean that we'll continue to have relatively stable fiber prices in Germany. In D.C. the picture is less clear due to the bankruptcy proceedings and the potential sale of the two sawmills that supply over 20% of the fiber to our Celgar mill.

Currently it is unclear what impact these proceedings will have on, either our fiber supply or prices, but it has a potential to increase fiber our cost at Celgar, significantly as there is a significant curtailment at these mills.

We have been planning for this possibility and have increased our sources of fiber from alternative sources including additional overall chipping and more U.S. [outsourced chips]. In addition we believe that U.S. dollar will remain weak for the foreseeable future. And we expect U.S. dollar denominated prices to continue to face considerable upwards pressure. We have been dedicating considerable efforts to energy optimization and in 2007, we were able to generate and sale more energy than ever before as significant producers and consumers of energy, we are were-positioned to participate in the growth of the green energy supplies and are working on potential projects to advance these objectives at all of our mills. We hope to have more to report in the near future.

The market for NBSK pulp continues to be quite strong and we are optimistic that this will continue. Inventory levels for both the producers and consumers remain at historic lows at a time when higher cost producers are under pressure from fluctuations in currency and fiber cost.

The average list price for NBSK pulp in Europe increased during the quarter by about US$40 per ton from the previous quarter and currently it’s at about US$880 per ton. This compares to a $730 per ton one year ago. In addition, we believe that there is enough foreign exchange and cost pressure to support further increases in the next six months. Although form a U.S. dollar perspective NBSK pulp prices are at historic highs from the Canadian and European producers perspective, the prices are still at what we would be deeming trough prices. The bulk of the price increase to-date have been due to the weak U.S. dollar, as well as the increase in input cost such as wood fiber, and not really reflecting the supply-demand balance that presently exists. We believe that with continued demand growth prices will continue to increase. The fact that recent capacity increases for eucalyptus pulp have not resulted in any significant reduction in demand for growth for softwood pulp is a clear indicator of our belief in the continued demand growth for NBSK.

Looking forward our 2008 scheduled maintenance plans call for the majority of our costs to be spread evenly over the last three quarters of the year with only a small impact of on quarter one with the present depressed state of the lumber markets globally, the challenge for 2008 will be our fiber cost as large chips from whole log chipping will be consumed. We remain focused on increasing margins by reducing cost as well as increasing the mill availability at all operations and improving the return on our by products such as excess power.

That concludes my prepared remarks; so that on this note, I would be pleased to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will be from the line of Mark Bishop with RBC Capital.

Mark Bishop - RBC Capital

Thank you, Good Morning, Jimmy, just a couple of quick questions, first on the Celgar mill, may be, you can just give us a little bit more color into the nature of your current fiber supply contracts with The Pope and Talbot Mills and what, I guess, if those mills shut down, but if any obligations are to the new owner to supply fiber?

Jimmy Lee

Well, as you know, presently there is a sale with these conditional, of course, certain conditions being finalized, of the two saw mills through Interfor. We, of course, under the bankruptcy Interfor as the conditional that the acquisition has essentially not, or has proposed not to have any contracts, essentially assumed under the purchase agreement.

We are in discussions with Interfor in regards to, I guess the situation subsequent to their ownership and we are hoping that of course prior to all of these conditions being realized and them being the formal owner, that arrangement would be met in regards to the fiber contract. At this time, our expectations are that whatever the outcome is, the reality is these saw milling activity whether it's owned by Pope and Talbot or Interfor, at those mills will be quite insignificant because of the present condition of the lumber industry as a whole.

So, I think the focus is really to increase the amount of whole log chipping, that would be available to us from the sawmills, and of course that is something which is very outside of the existing type of arrangement and therefore there will be new type of short term arrangements which would have to be made. So to a large degree, although we don’t really expect any real issues, but clearly because of the state of the lumber industry, the reality is the bulk of the fiber moving forward likely for Celgar will come from whole log chipping.

Mark Bishop - RBC Capital

Okay. That’s fair enough. What was the whole log chipping percent of your fiber supply for Celgar in 2007?

Jimmy Lee

David do you have that number?

David Gandossi

No, I don’t. I don’t have it exactly, but I would say, going back in time, Mark. We were probably 90% sawmill residuals and over the course of the last couple of years that has continued to shift and really as Jimmy mentioned, what's happening is more and more our sawmills are making more chips than they are lumber and so that percentage has grown quite a bit and we are also ramping up our wood room significantly to fill in where the sawmills can't keep up. So, don’t know the percentage but it's significant.

Mark Bishop - RBC Capital

So, in 2008, is that fair to assume that we'll be at least half whole log chipping.

David Gandossi

Could be, yeah.

Jimmy Lee

Yes. I would say so.

Mark Bishop - RBC Capital

And some of your competitors out in that region had suggested that the differential cost is upwards of $30 a unit, is that something that would make sense to you.

Jimmy Lee

We are looking at of course the strategy in regards to whole log chipping to reduce the cost. The focus is to essentially optimize the production of chips, whether it is on a contracted basis or done by us. So, I would not dispute the type of increase in potential costs, but I would say that the focus is to try to of course bring those costs contains as much as possible.

Mark Bishop - RBC Capital

Okay, is there any additional capital that you might spend directed to whole log chipping plan for 2008?

Jimmy Lee

No, I think there is going to be some additional increase in maintenance cost to our own wood room, which of course has been under invested before. And we do have a program in regards to how we can significantly increase the volume available from our own operations at a nominal type of investment. It's not going to be that significant.

Mark Bishop - RBC Capital

As you look forward, are you still planning to fully utilize the additional capacity that you developed at Celgar or what would your expectation be for 2008 production?

Jimmy Lee

Well, we are continuing to increase the production side out of Celgar and our expectations are to continue to do that. We think that the fiber cost pressures are not just to us, but clearly, it’s an industry-wide issue. And therefore, part if not all of the cost pressures will ultimately have to be translated in to price. And of course, now at the end of the day wood is available is just the question of what is the price your are going to pay. And of course there’s kind a feeling to that price is amount that you going to have to whole log chipped. And the better we get it done of course the less cost pressures we’re going to have. So there’s not an issue in regards to fiber availability as such it’s really an issue of what is that cost for fiber and thus demand and supply balance as well as the trends in industry as a whole support for the increase is to compensate for those cost pressures. And we believe it does because the cost pressures are actually even more acute for some of the other producers on the coast.

Mark Bishop - RBC Capital

Okay one more question and I’ll turn it over Jimmy, just the CapEx project at Rosenthal, if there has been anymore progress? We’ve obviously seen industry commentary on it but haven’t heard much from the company directly on it?

Jimmy Lee

Yeah I mean of course we have investigated the potential to increase the production volume in Rosenthal I think those decision have been deferred for various reasons I think one of the primary reasons is the fact that our run rate both at Stendal and Celgar on a daily maximum type of basis which continue to break records, indicate that the potential at those two mills is significant with very little investment. So, just not maximum daily rates Stendal has potential to get to the 700, almost 1000 tons. And Celgar certainly has potential to get to the 600,000 type of tons. So, I think that if you look at the cost of investment for the additional tons, of course, it’s clear that Stendal and Celgar will continue to produce more tonnage with very little money. So, of course, any increase at Rosenthal, because it will require a capital. At this time we felt that it, the decision should clearly be deferred although from a margin increase perspective and other benefit, certainly it’s clear that the payback potential certainly for Rosenthal is quite sure but I think there is other opportunities for us, and various factors went into play, and looking at the right time for those investment we need to occur.

Mark Bishop - RBC Capital

Okay, thanks, Jimmy, I'll get back in the queue.

Jimmy Lee

Thank you.

Operator

Your next question will be from Herve Carreau of CIBC World Markets.

Herve Carreau - CIBC World Markets

Yes, thank you. Just a question on the fiber bud, on the -- in Europe, the Russian tax on logs is expected to increase to 25% in April of this year, and just wondering if you think that this increase is going through and if yes, do you foresee any additional pressure on fiber prices on that side?

Jimmy Lee

I think because of the political aspects right now, in Russia, with the Presidential election et cetera, its probably not likely that there will be any kind of change and if they've announced the tariff regime. So my expectations, clearly is that those tariffs are likely to be implemented. The fiber situation certainly in Finland and Sweden is tight for various reasons. It isn’t just the Russian tariff issues but it's also weather related as well as the lumber activity.

Fiber is going be a big issue for them. For us, we've already had the impact and the other activities like OSG certainly is reduced and they've been our main competitor for round logs, so I think that the situation will kind of off balance each other (Inaudible) Austria, a storm very recently. So, I don't think that the Austrian end users will be as anxious to purchase wood coming out of southern Germany. So, I think all in balance we think that the condition is, certainly is Germany for us in terms of fiber will remain stable at these type of elevated level.

Herve Carreau - CIBC World Markets

Okay. Thank you.

Operator

Your next question will be from the line of Steve Chercover of D. A. Davidson.

Steve Chercover - D. A. Davidson

Thanks for taking my questions. First of all, in the quarter you produced about 40,000 tons more than you sold and evidently that’s not due to scheduled maintenance in the quarter. So, can you discuss that a little bit. Was there any difficult in shipping or was that strategic?

David Gandossi

I think, most of the built up was a result of shipping issues and logistics issues. Some of it was also related to credit issues of our customers, but let say the bulk of the issues were related to logistics and more than half of the inventory buildup was that our Celgar mill and that was really the congestion at the port, additional type of volumes which were trying to be shipped by containers from producers which traditionally did not rely on that and availability of empties hardly enough at that time. We are working through that. We are looking at alternative. It's funny because we'll say clear that the bulk carriers were going to withdraw a tonnage out of PC. So, it's surprising that arrangement had not been made by these producers which would been impacted, much earlier and but clearly there was a bit of chaos and you had difficult in chipping out contracted volume and the congestion fairly resulted in inventory build-up at Celgar.

Negotiations in terms of shipping rate at the end of last year for Stendal facility to China resulted in us deferring certain amount of contracted volume because of the, let's say that the initial type of rate increases that chipping lines we are looking for and the balance of small amount has really cut a delays in getting the credit approvals on certain customers because of financial issues clearly at these operations. So, it's really more logistics issue rather than anything else.

Steve Chercover - D. A. Davidson

So, when you characterize the global softwood pulp inventories as type, your’s is so reasonably [type II], this is going to go away.

David Gandossi

Celgar side is a little bit higher than what we would’ve wanted, but I would say that we are not producing for inventory. We are producing and we have contracted arrangements. It is just that getting these shipments to our end customers that’s being problematic.

Steve Chercover - D. A. Davidson

And switching gears a bit, Jimmy, the energy sales opportunity. Can you quantify maybe how big it is and I know that even Celgar had the opportunity when it was running at full capacity to be more than self sufficient so are you selling anything any power in to the grid in British Columbia as well?

Jimmy Lee

Yes we are presently selling a power out of the Celgar operations because of course the production volumes that we presently have this of course is reducing our energy cost as a whole because we still use the natural gas for the kiln. Our goal ultimately is to actually have a positive contributions from the energy side and we’re looking at both the opportunities coming from BC’s announced call for green power, as part of that which means that we are tightening up the steam consumptions. So there will be a significant amount of excess steam that we will have available for potential new turbine as an example. There is other non-investment related type of programs that we see potential for in terms of our area where we can better sell the power and get a better rate. If we do get the green power type of rate clearly with the new turbine the opportunity is to be quite significant you know upwards.

It’s just [an estimate] because at the end of day, it’s dependent on really what the long-term contracts will be. But it will be upwards of the 10 million plus, so clearly significant type of opportunity there. In our German area as you know we will get compensated for carbon credits, presently we don’t have the allocation yet, but based on the carbon credit prices moving forward again, it is likely that they will again have some contribution. At the same time, we're looking at additional type of revenue potential from green power type of rate, for the future. So, I think, and again, that would be quite significant in the sense of, euro 10 million plus type of addition, so I'm just giving you a ballpark type of magnitude number here, but certainly, quite significant if we can implement those energy type of program.

Steve Chercover - D. A. Davidson

One last question and I'll turn it over and this may be big picture, but how do you think that the Sinar Mas acquisition of the Pope and Tablot Mills is going to impact just the general dynamic and I suppose, had one or more of those mills just closed in that tightening situations and that's good but will this displace any of your pulp into Asia, I assume that they're doing from a integration strategy?

Jimmy Lee

Well, I wouldn't call it an integration strategy, I would call it really more of guaranteeing fiber supply for the future. It’s very clear that their long-term strategies integrate as much as the pulp production into other paper grade, big focus in regards to tissue as part of that strategy. They've made it very known that if they continue to expand on the tissue side, their requirement for additional softwood fiber will be somewhere in the range of 300,000 plus to 400,000 tons from additional fiber requirement. They see that there is really no new capacity coming on, in fact additional potential for capacity closure. So this is really more of a strategic occurrence for them in regards to supply rather than pure integration issue offsetting existing volume. I think this is really looking forward to what their demand picture looks like based on their product strategy and they feel insecure and therefore they wanted to buy a west coast pulp mill.

What it means is that here really you have a buyer which is not strictly there for the economics of selling pulp but really there through sheer fiber availability and so, clearly the competitive structure on the coast will change in the sense that they are driven not because of just the P&L issues but really driven by fiber security and so that means, clearly the other producers on the coast have to look at it in a different type of reality where you really have a competitor who is not looking at strictly on the earnings out of number.

Steve Chercover - D. A. Davidson

So, is it a -- a one word answer, is it a good or a bad thing?

Jimmy Lee

Well I mean it would have been a good thing for those old mills those who closed for everyone, but at the end of the day I think the fiber situation and the other costings will probably mean that there will be capacity closures, it just means that the competition is really for the fiber on the coast for the other guys has changed, because I think everyone was of the opinion that it's likely that [Harmac] really was a weak producer and so they need to assess whether they want to continue to operate in this business, where clearly fiber cost and other costs are going up.

Steve Chercover - D. A. Davidson

Okay, thank you.

Operator

Your next question will be from the line of Brian Doyle with RBC Capital Markets.

Brian Doyle - RBC Capital Market

Thank you, Michael my question has been answered.

Operator

Your next question will be from the line of Ben Carlin A.G. Edwards.

David Gandossi

[Jimmy?]

Ben Carlin - A.G. Edwards

Yes, I was wondering if you could address the balance sheet a little bit, I know there has been significant debt pay-down. What is the expected structured debt pay-down in 08 and your interest cost which came down from 91 million to 71 million, 06 to 07. What you see that interest number declining to in 08.

Jimmy Lee

Most of the reduction in debt was the result of the scheduled principal repayments, I understand our facility and if you look at the interest rate decline, of course that was a lot more significant than the actual principal reduction. And the bulk of that decline in interest cost was the result of the unwinding of the currency swaps that we had versus 2006 and 2007.

The swap became more expensive as you know because of the increase in interest rate in U.S. versus the European interest rate environment and that was one of the reasons this year, although we felt that weakness in U.S. dollar was still going to be an issue. It was more expensive for us to carry such an insurance and that's why we didn’t enter into any swap this year. The interest rate clearly are, probably going to be similar in 08 as what they were in ‘07 because of course the Stendal loan has been swapped for a long-term fix interest rate so that’s not going to change, and our other debt of course are all fixed. So not much change in the interest rate, the principal reduction on the Stendal for this year substantially, it’s about 30 something million euros so that’s really the only [burden].

Ben Carlin - A.G. Edwards

Thank you.

Operator

Your next question will be from the line of Eric Seeve of GoldenTree.

Eric Seeve - GoldenTree

I have a few questions, first I was hoping that you could break down both sales volumes and reduction volumes by mill?

Jimmy Lee

David you want to?

David Gandossi

Sure, okay. We’ll do production first, with Rosenthal had 85.5, Stendal at a 160.1 and Celgar had a 123.6 so those are thousands of tons produced in the quarter and on sales volumes for Rosenthal 75.5, Stendal 147.8, Celgar 99.6.

Eric Seeve - GoldenTree

Great and just a quick follow up on the previous discussion on higher inventory levels is that an issue that is, are the shipping constraints is that an issue that has been resolved and do you expect that those levels to come down by the end of the first quarter it is something that will last longer and also can you elaborate a bit on you alluded to some customer credit concern issues?

Jimmy Lee

I mean we’re making arrangements in regards to the logistics issue so that and also the availability of empties have - that has been improved so it’s a process which will take time so it’s not something that all of a sudden we’re going to get this massive shipments out of our warehouses so we’re going see a similar dramatic drop. It’s a process that will continue through the first half easily before inventories start to become more in line with what we traditionally has had run with.

In terms of the credit issue, I wouldn't call it a significant problem, it’s just that, lot of the customers are close to the maximum insured limits that we have and so until they pay down, of course we have to defer our shipments, so it's a question of timing, rather than any expectation that any of our large customers are going to have a problem, it impacts more of the smaller types of customers but at the same time, one or two of the larger ones also have, because of the timing of the payments, sometimes, we have to delay shipments.

Eric Seeve - GoldenTree

Thank you, next question can you address SG&A expense on a higher books on a consolidated basis and a restricted basis in the fourth quarter than had been in the third quarter, is the rate in the fourth quarter, is that more indicative of what we'll see going forward or was it abnormally high for any reason?

Jimmy Lee

Our SG&A contains other items, that David can clarify that for you.

David Gandossi

Yes, Eric, we have reclassified some of our selling expenses that we used to report in cost to sales so its purely an accounting thing, so the run rate going forward in SG&A is, I think what you should expect to see, its a fairly stable thing, it’s not a lot of junkie stuff in there, it’s just accounting reclassification.

Eric Seeve - GoldenTree

Thank you, next question is about; I would have thought based on your commentary on the European fiber markets given that it sounds like residual ships should be more available than whole lot of ships given what we're seeing in the OSB industry. I would have thought I would have boded -- it would have implied Rosenthal would have had a strong quarter and Stendal would have had a more challenging quarter. Yet it seems like the reverse was true. Is that statement fair and if so what are the factors that led to that?

Jimmy Lee

No, I don’t think that the quarter was more challenging for Rosenthal. In fact, it was more challenging for Stendal. Moving forward we believe that the sawmilling activity certainly in Germany will be significantly reduced. And so availability of chips will be constrained. So, even Rosenthal which traditionally ran the bulk of their production through sawmill residuals we’ll likely have to increase the component of chips produced from whole log.

Stendal which relied more on pulp logs in the past, it had been in competition with OSB manufactures because they, in Germany they produce OSB primarily from the whole log as the material and because they of course don’t have quite the pricing powers like in the past, we think that pulp log certainly in terms of prices probably will start to moderate and that’s why on balance we think the net impact will be a stable type of fiber at these type of levels.

Eric Seeve - GoldenTree

Okay. Thank you very much.

Operator

Your next question will be from the line of Joe Pratt of A.G Edwards.

Unidentified Company Speaker

--installations, in other words.

Jimmy Lee

Yeah, [Steve] will probably know. Do you have an extension for him, I'll call?

Unidentified Company Speaker

Yeah, it's 8693.

Jimmy Lee

8693

Unidentified Company Speaker

Steve Baker, Branch Installations.

Jimmy Lee

Alright, thanks.

Operator

Mr. Pratt, you may ask your question.

Joe Pratt - A.G Edwards

Okay, question answered. Thank you. It was on the pulp production in the fourth quarter versus sales.

Operator

Your next question will be from Don Roberts of CIBC World Markets.

Don Roberts - CIBC World Markets

All questions have already been answered. Thank you.

Operator

Your next question will be from Aaron Rickles of Oppenheimer

Aaron Rickles- Oppenheimer

Yes, good morning. As I have a bunch of early point question, can you guys just give us the maintenance schedule on a mill-by-mill basis as well as how many days of downtime you expect to take?

Jimmy Lee

David, you want to? It is scheduled throughout the year. So, it's going to be pretty much consistent. But the actual…

David Gandossi

Celgar is going to do, they’re shut in the second quarter. And it will about 11 days, and then Rosenthal is going to be the third quarter for ten days and Stendal will be in the fourth quarter for nine days.

Joe Pratt - A.G Edwards

Okay, the CapEx for the fourth quarter as a restricted group and then if you could talk about CapEx for 2008 on both consolidated and restrictive basis?

David Gandossi

Yeah, CapEx in the fourth quarter for Rosenthal was 1.3, for Stendal was 0.2, and for Celgar was 1.5.

Joe Pratt - A.G Edwards

And for 08?

David Gandossi

For ‘08, our budget is 20 million which is 5 at Rosenthal, 10 at Stendal, and 5.7 at Celgar and some of that money at Stendal obviously is part of EPC settlement funds that we got last year that will spending on the projects this year.

Joe Pratt - A.G Edwards

Okay, I noticed that you’ve booked in the [emission] credits fourth quarter. Can you talk about 2008, where your expectations are for that?

Jimmy Lee

Basically we had so forward significant amount of [emissions] credit nearly on and at the year end close to, came for settlement at the end of the year and that’s why we of course had a higher level of revenue from the [emission] credit, then one would expect based on the fact that the credits are trading into pennies or $0.07 or so to date. So, we’re fortunate there we really don’t quite know what the allotments will be yet for ’08 and forward but we believe that there will be some contribution certainly and more or so in terms of our Stendal operations because of the fact it is a new mill et cetera than Rosenthal.

Joe Pratt - A.G Edwards

Okay that’s helpful. The balance outstanding on the Celgar credit facility at the end of the year and Rosenthal, if there was one?

David Gandossi

Aaron it’s a 40 million Canadian facility and it has 22 million drawn on it.

Joe Pratt - A.G Edwards

(inaudible) and anything in Rosenthal in terms of…

David Gandossi

Rosenthal is at euro 40 million facility and there’s nothing drawn on it.

Joe Pratt - A.G Edwards

Okay hopefully this ends this, really [boring] questions. The cost to implement the Celgar energy program that you talked about, it sounds pretty interesting, do you have a sense of sort of how those play out over time? How long do you think it would take to sort of achieve that kind of 10 million contribution rough numbers and what it would cost you to get there?

Jimmy Lee

Well it is very much dependent on actually getting a firm understanding of the energy purchase arrangement that’s the problem that we feel will have in regards to new renewable green type of power. But we feel comfortable that we should proceed with the type of projects, though these type of things are based on equipment delivery issues and the most sensitive issues really the turbine and turbine delivery time can be somewhere in the range of 18 months plus, but this is not a project that will happen clearly this year and even if it does happen, it will be in more like 2010 type of in fact rather than 2009.

Joe Pratt - A.G Edwards

Are you, I mean, do you have to currently spend in 2008 to prepare for that, or put on deposit, what's the sort of expense that we should expect?

Jimmy Lee

Well, we do have certain, let say, for us to, insured delivery time, you said, for there is some deposits that we are likely to make, we don't think that is material in anyway, we don't really have to spend any real material amount in regards to the engineering or anything else so in that regard, its not going to have an impact in regards to our cost.

Joe Pratt - A.G Edwards

Okay, the other topic, there’s two others, the one is, I guess sticking with Celgar anyways, I think, people sort of start to ask about this but the ports - it sounds like they were backed up in Q4, are they currently backed up, in a way that you're continuing to build additional inventory at Celgar or is it at least sort of imbalance on a run rate basis?

Jimmy Lee

Well, I think what we had was a build up, which build up and it started to thaw out so, I guess its in the first part of the year, you probably, will see inventory build up, higher than what we had at the end of the year and now, we're starting to see, either way at it and I think, once the Chinese New Year, which is now over, will get additional volumes which did accelerate the process of reducing those inventories.

Joe Pratt - A.G Edwards

But for Q1, we should probably look for shipments and production at Celgar to be roughly equal or not so?

Jimmy Lee

Well, I think, we had the first part of the year, we still had this backlog so, I would say that we still would have an imbalance.

Joe Pratt - A.G Edwards

Okay, sure. Last one, it was interesting that you mentioned that you were expecting German sawmilling activity to slow and I was wondering what sort of timeframe are you referring to because, I mean, going back I think you had talked about and actually several new German sawmills coming online and potentially over the long run additional German fiber being available to the markets. So, how does those comments sort of jive with the slowdown in terms of (inaudible).

Jimmy Lee

I mean, there is some mills there basically have continued to implement their capital investments, so in terms of the capacity, certainly with the capacities that we had, given in regards to future expansion has occurred or will conclude because, of course the fact that these projects were put on the drawing board much earlier. What we are faced with really is at the end of last year, we saw the lumber market even in Germany undergoing weakness and their ability to export into other non-traditional areas also became weak because of competition from many suppliers. And as a result, they had a sudden type of a weak market condition which resulted in them taking production curtailment and this type of activity is likely to continue. So, although the capacity expansion has occurred, the reality is they are taking full advantages of those capacities because of the general market conditions, and it's not likely until the global housing market conditions stabilize, that the sawmilling activity will ratchet up to the levels that they had anticipated.

Joe Pratt - A.G Edwards

Okay, that makes sense. Thanks.

Operator

Your next question will be from the line of Marcelo Luna of Deutsche Bank.

Marcelo Luna - Deutsche Bank

Good morning Jimmy. I am interesting in hearing your comments on what you see is the outlook for the pulp markets going forward, especially in light of, with an increasing substitution where paper companies have been increasing consumption of eucalyptus pulp and betterment of NBSK? And also would be interested in hearing your comments on your views on pricing going forward? Thank you.

Jimmy Lee

Yeah, I mean, I wouldn't necessarily say that you have substitution of NBSK by hardwood. I think what you have of course is continuing substitution by the papermakers who used to cheaper fiber. So, you are going from NBSK to radiata types of grades and Radiata guide is going more to the hardwood guide. So, it is not a one-to-one substitution where all of a sudden eucalyptus end-users all of a sudden replace it with eucalyptus. It's really a process type of, I guess the less premium type of grade being used for the same production. If you look at actually the rate of growth in terms of softwood demand considering the increase and gap in prices last year, in fact there was a reversal in terms of the rate of demand growth. In fact the opposite has been occurring in the sense that although the price gap between soft and hardwood become wider. All of a sudden the consumption rate was increasing, and I think what is happening really is the fact that last year we had of course new capacity in Radiata, which had to be absorbed, it got absorbed.

We of course had significant closures at the end of ’06 and throughout ’07 and I think we will further see that. Oddly enough the eucalyptus grade is very tight and this is probably the result of several unexpected type of events. The Indonesian wood situation the strikes in Korea, probably the fact that everyone was expecting that prices will drop for eucalyptus so they reduced the purchasing. So everybody was running and in anticipation that prices will reduce so, clearly inventory levels were very, very low.

You also had a issue related to closures of highly polluting pulp mills in China, but I think all this factors played in quite significantly in maintaining the support for eucalyptus pulp demand and that’s why you’re seeing increases in China right now actually the price differential between eucalyptus and NBSK is such that it’s essentially the same it’s not eucalyptus maybe even slightly higher. That will mean that there is really more motivation on the part of paper makers to actually buy softwood and NBSK rather than eucalyptus because clearly it’s easier to use more premium fibers than weaker fibers in many of these instances.

So we don’t think moving forward that the present situation is negative for softwood and NBSK in fact we think it’s a positive development because the eucalyptus issue was the one which has always been the argument for why softwood prices will have to drop so we’re seeing that rather than a drop in hardwood price we’re seeing now an increase in hardwood prices and for the reasons I’ve given and I think that this should support clearly, a further type of strengthening in some of the softwood. I hope that answers your question.

Marcelo Luna - Deutsche Bank

No, exactly in terms of, I mean, it seems that last year, the trends for the demand for eucalyptus pulp year-over-year was growing at may be, above 15% and NBSK apparently flat or declining on that year-over-year basis, would you expect that to continue to happen going forward or you would expect a recovery in the demand for NBSK in '08 and '09?

Jimmy Lee

I think that, basically, if you look at the overall softwood demand growth, it has averaged at a positive. If you look at just NBSK demand growth and it was flat to possibly a little bit negative and that's because clearly the substitution issue in terms of the radiata because of the increase in capacity, out of Chile last year accounts for that. So, if you look at the overall softwood supply and demand balance, it is still quite positive and the demands certainly for softwood is continuing to grow at about 1.5% to 2% range and this has been kind of, like the historic softwood growth rates and so we don't really expect that to change, it’s gradual process in terms of the eucalyptus grade, clearly the demand growth will be probably similar but at the same time, capacity is also of course is significant.

Marcelo Luna - Deutsche Bank

Great, just a last quick question, in terms of pricing, your near term, you, it also seems that just by in our conversations with eucalyptus, hardwood producers it seems that there is still a lot demand company have not been able to meet all the incoming pulp orders and on the other hand on the soft wood and maybe NBSK side it seems that the market is a little more balanced now, so would you expect prices to continue to move up in softwood and NBSK in the near term or you would agree with the fact that may be the market now is more balanced and prices could stay where they are?

Jimmy Lee

I think towards the end of the year there was of course certain issues that took place which kind of has influenced I think the perception in regards to spot market availability of softwood and in particular NBSK. I mean if you look at Pope and Talbot’s bankruptcy, clearly that results in lot of volume that all of a sudden is going to be available for liquidation, and that’s one. The second is with the amount of volume which was de-integrated in a sense that, they were not using it for paper production so you had swap tonnages to come available.

So, I think in the short term, their perception that there is more supply than demand I would say probably in the short term there is a slight imbalance because of this issue, but moving forward the balance still is very positive. So, we don’t think this short term type of situation will have really an influence in regards to the present price momentum which continues to be upward because, the cost pressures are acute, whether you talk about fiber or a freight.

So, I don’t see how softwood prices can all of a sudden drop because people will lose a hell of a lot of money if prices drop from here and that’s the reality. So, I don't think that weakness per se for an extended period of time, whether the supply and demand balance is not imbalanced is likely to occur for a length of time.

Marcelo Luna - Deutsche Bank

Okay, great, this is very helpful. Thanks very much.

Operator

Your next question will be from Patrick Wang of SCM Advisors.

Patrick Wang - SCM Advisors

Jimmy, a question on the fiber situation at Celgar, what’s the current ratio between the chips and logs on a fiber supply to Celgar?

Jimmy Lee

You mean in terms of the ratio of chips that we used versus pulp log?

Patrick Wang - SCM Advisors

Right.

Jimmy Lee

Well, historically Celgar’s operational is 90% plus chips, and pulp logs were very small component of that. But, moving forward, we think that clearly it is going to be a much larger component to our raw material until the sawmilling industry recovers.

Patrick Wang - SCM Advisors

Right, correct. So, you mentioned 50-50. You are thinking that’s more like a plan for 2008.

Jimmy Lee

Well, it’s certainly moving forward in 2008, we don't think that there going to be a recovery. So, 2008 probably that’s case, 2009 is real, it will depend on when the housing situation starts to turn in the U.S.

Patrick Wang - SCM Advisors

And then the cost inflation of chip versus logs, is what $20 per cubic meter or what's the cost difference?

Jimmy Lee

They are in that type of range. It really does depend on the location of the chip supply, et cetera, pulp log, chip, or et cetera. But you know the magnitude clearly is in those type of ranges.

Patrick Wang - SCM Advisors

Right, okay. And then on the accounting treatment of the production volume versus sales shipment volume, so the production cost will hit your cost of sales but if you don't ship it, it stays in inventory. You don't get to recognize the revenue, is that correct?

Jimmy Lee

Yes.

Patrick Wang - SCM Advisors

So the 34 million shortfall in the restricted group, you know if you think 850 per ton sales price that’s potential 34 million that the revenue your missing out on, that didn’t get recognized that could be recognized in the second quarter or the first quarter rather, if your ship goes inventories to China.

Jimmy Lee

Yes clearly there is a build up of potential revenue based on the inventories and it but it won’t happen in the first quarter it will be throughout probably the first half of the year.

Patrick Wang - SCM Advisors

Great has the recent storms in Southern China disrupt any of this shipments lately?

Jimmy Lee

The shipments really have been influenced by availability of empty containers and as poor congestion and rail cars if anything else.

Patrick Wang - SCM Advisors

Right, and have those issues been resolved and was the shipping rates in the credit approvals have those been resolved lately as of today.

Jimmy Lee

Well, it’s an ongoing issue because of course we need get more railcars being allotted, we need to get more empties being released and scheduling the vessels. So this is something ongoing, it’s not something that all of a sudden it gets solved. It’s a process, we’re looking alternative type of shipments, looking at larger rate bulk type of shipments rather than individual lot orders that we kept in the past or there is a lot of things happening to address this logistic issue.

Patrick Wang - SCM Advisors

Did the shipping rates, the inflation will be absorbed by Mercer or Chinese buyers?

Jimmy Lee

Well, we sell on the net basis so clearly it’s the cost side of that we need to contain and as I said the combination of much higher, this is a industry problem, it isn't just isolated to Celgar, it’s an impact which affects all of the West Coast producers and therefore, the fiber and the freight issue will translate ultimately fiber prices in China.

Patrick Wang - SCM Advisors

Alright, and last question on the CapEx on the restricted group, so it’s 1.3 for Rosenthal and then 1.5 for Celgar, so total is 2.8 for the quarter?

Jimmy Lee

Yes

Patrick Wang - SCM Advisors

Okay, but that significantly below your D&A of 7 million, so what's the guidance for '08 for the restricted group CapEx?

Jimmy Lee

It’s 5 million for Rosenthal and 5.7 million for Celgar.

Patrick Wang - SCM Advisors

Okay, got you, alright, thank you.

Operator

Your next question will be from Andrew Shapiro of Lawndale

Andrew Shapiro - Lawndale

Hi, good Morning, I'm trying of put together here if we can, to understand your balance sheet and cash policies, little bit better going after the, [events] earlier questions, you've said the CapEx for 2008 is going to be around 20 million. Your current interest expense because much it's fixed, it's around 60 million, I want to first off confirm this is euros or dollars?

David Gandossi

Euros

Andrew Shapiro - Lawndale

Euros, okay, so we’re on apples-to-apples. Alright, and you have an EBITDA run rate here that is quite a bit, more sizeable within all that so, we’re building up cash, your balance sheet shows it already. This last quarter it ended with around 85 million and you also paid down some debt. So the enterprise value of the company given that our stock price has been somewhat stagnant or down, has declined and our EBITDA has come up a bit. The company's stock seems to be an interesting value for which there would be a buyback or ought to be a buy back or the issue of a dividend policy needs to take greater precedence. What is the discussions amongst the Board and the views here of management regarding the company's builds up of cash balances or pay down on debt for the coming year and the timing of discussion of a creation of a recurring and, but modest dividend?

Jimmy Lee

Yeah. I mean clearly we are looking at what the restrictions are in terms of our senior notes and the historic type of ratios that we presently have, which would allow the flexibility for us to do share buyback, distribution as well as even considering repurchase of the convertible debt etcetera, and because of the fact that the recent kind of ratios with our average go over the 12 months type of period, the actual availability of discretionary cash under the senior note covenant still is not that significant. It’s there, but it is not something that we feel that is really of a nature that we can move forward and implement a certain, like a buyback policy that would have any real meaning or even a distribution at this time.

Clearly, it is clear and up front in our thinking and it is something that as we move forward, we have to continue to update the ratios and see what room that we have because of course, there is availability in the facility, but these are ones which do not give the flexibility for us to reload and should really be there for emergency type of issue. And so, in stead of real free cash, right now because of 12-month type of our history really not having a significant number. That probably will change and as we move forward, clearly we will see what type of policy that can be adopted as a result of those ratios.

Andrew Shapiro - Lawndale

Well, it sounds like one of the triggers here is that trailing 12-month measurement which as we all know, as one new quarter rolls on or, an old quarter or bad quarter rolls off. The picture can change quite sizably, quite quickly regarding, I guess, we'll call that excess measurement. But let's just look at the particular debt structure if you could recall for me here this issue, there’s two different items. It sounds like you need to describe senior notes, as these are the notes that are of what outstanding dollar or euro balance, and what interest rate. If these are the high interest rate senior notes, that are the impediment?

Jimmy Lee

Yeah.

Andrew Shapiro - Lawndale

So, there’re already the high-cost paper and what's the size of this tranche and what are the terms under which the company can buy, use its excess cash and buy back or retire that debt piece?

Jimmy Lee

Yes it’s clearly that is a lot more flexible in terms of the senior note repurchases.

Andrew Shapiro - Lawndale

That’s not cheap paper anyway that’s very costly to the company already.

Jimmy Lee

It is expensive and before this year in fact of course they did trade at parity and even with the sub-prime crisis has traded above the 90 plus type of range for an extended time. It’s only recently that we’ve seen that the market have deteriorated more to the 80s and that’s something clearly we’ve indicated in the past is an interesting type of…

Andrew Shapiro - Lawndale

You’re not precluded from buying those right?

Jimmy Lee

Yeah. We have no…

Andrew Shapiro - Lawndale

Hey guys, why won’t you guys be buying those things like eat cereal in the morning.

Jimmy Lee

Well, until recently as I early indicated the bonds were not at this type of levels in fact we did enjoy a reasonable type of pricing and it’s only recently that we kind of deteriorated to these type of levels.

Andrew Shapiro - Lawndale

Well in the bond market you guys could just be the bid. The price won’t necessarily deteriorate why play games, just be there at 85 or what ever the prices the Board decides and bonds will never go lower but at the same time you’re buying every bond that you see.

Jimmy Lee

Clearly, we have built up in cash but at the same time we are in a cyclical business and we have to look at what we have to do in regards to raw material issues.

Andrew Shapiro - Lawndale

Right, But you’re generating huge amounts of excess cash from that you are taking out Jimmy.

Jimmy Lee

Pardon me?

Andrew Shapiro - Lawndale

You are generating sizable and increasing amounts of excess cash well and what you’re taking out is debt. I appreciate the concern about the cyclical business and the buying back and retiring of shares.

Jimmy Lee

Yes.

Andrew Shapiro - Lawndale

But, when you’re taking out debt you’re actually addressing a risk to a cyclical business.

Jimmy Lee

Yes. I mean clearly, the senior notes, they’re a very interesting proposition at this time so, it's something that has just developed, if you look at the last few months, it's only started to deteriorate and it's something that clearly is of good interest to us. I would never preclude the possibility that we are more active in that market.

Andrew Shapiro - Lawndale

I mean, why wouldn't you just call special meeting of the Board of Directors, get authorization and go in there and now you're on the bid and yeah, you're getting some bounce here and there but why wait until after the market to deteriorate, you want to be there when the market deteriorates?

Jimmy Lee

Yeah, it's clearly something that we are looking at and we need to focus in terms of the best use of cash resources.

Andrew Shapiro - Lawndale

I mean the debt level of this company are a continual issue to many equity investors on this call and those who are thinking of investing and even though they don't understand the attractive structure et cetera, that you have that German government guarantees on your Stendal debt, low subsidized interest rates and all that. These people don't understand that.

Jimmy Lee

Yeah.

Andrew Shapiro - Lawndale

You got high cost, senior debt that’s out there, that apparently is being cited as an excuse not to be able to establish a dividend policy on and it is also something that causes risk for cyclical economies and cyclical...

Jimmy Lee

Yeah, but if you look at our overall debt and what we’ve been able to do in terms of cash, I mean, we continue to reduce our long-term debt, I don't think, that company has not addressed the issue in regard to trying to reduce long-term debt, we have, we continue to pay down, the Stendal debt as you know. We bought back the convertible note, so it is an issue that the company clearly is addressing and we’ll continue to do that.

Andrew Shapiro - Lawndale

I know, I guess from your vibes here though that it's not, I don’t feel like is the action item is either high priority or is aggressively being sought when it's the dealing of taking out debt in a cyclical economy where there is concern may be of weakness et cetera out there. And the debt levels do get in the way of some analytical attention, and we see $85 million of cash and cash built up. Those senior notes are saying, well we are -- opportunity might come, it might not. It just seems like, it's like yeah, there is an opportunity. We are going to have a Board meeting. It's really seems like, could to be a good use of cash. So…

Jimmy Lee

Yeah, I think you know we have to look at the fact that that we have a billion dollar business. We've got significant amount of debt in the cyclical industry. Although, you know the cash that we've got presently and the cash flow expectations are clearly safe. But it is important for a company that has a much larger gearing than the equity that we do have to - [has been] our cash resources, because clearly the equity markets are not favorable for us to tap easily. And we need to conserve the cash resources at a time where you know the credit market as well as the equity market clearly may not be easily available for us if there was unexpected issues. And we need to off balance the [husbanding] and the security issue against clearly the attractiveness of buying back high cost debt. And so we are saying that this is not an issue that clearly is on the table, it is on the table. But it is one of the issues that we have to see how comfortable we are in regards to the market conditions moving forward. We only are into February and with the Chinese New Year and it’s difficult to estimate what the Chinese market conditions are likely to be. It looks positive. So, all of these factors have to take into consideration before we can really move forward and say, okay this is what we would like to do with the present cash flow and cash resources.

So, we're looking at, we're doing some of the way we purchase our wood supply which will require certain amount of cash and this is to reduce cost and credit is not so easily available to replace some of these type of things.

Andrew Shapiro - Lawndale

How big are your senior notes that this costly senior note, what's its interest rate?

Jimmy Lee

Well, the senior notes, it’s 310 million and of course it's nine 9.25. And today it’s, on the market it’s probably yielding 12%.

Andrew Shapiro - Lawndale

12% okay, and then you have a convert and this convert well it's due in 2010, it is of what size, and it’s in the money and you can call it early in what October of this year, only six months from now?

Jimmy Lee

Well, there is a call provision as long as the stock is trading, 20% to the conversion rate for a 20 days period. So, the size is about 50 million less.

Andrew Shapiro - Lawndale

Okay, 50 million

Jimmy Lee

50 to 60 or so, 50-60 something yeah.

Andrew Shapiro - Lawndale

Okay, and the rate on this thing.

Jimmy Lee

The interest rate.

David Gandossi

8.50.

Andrew Shapiro - Lawndale

Okay, so it's high cost convert and the strike price is 775 and you're allowed to call it in October if the stock price is where?

Jimmy Lee

20%

Andrew Shapiro - Lawndale Jimmy

20% through it.

Jimmy Lee

If the conversion price rate is about. It has the trade in the 9 and something for a 20 days period.

Andrew Shapiro - Lawndale

Okay, so if it trades in the 9, and you’re in October, which is when I think it is, you can call it and all of a sudden $50 million of debt is gone, because we’re already counting the fully diluted shares against the company.

Jimmy Lee

Right.

Andrew Shapiro - Lawndale Jimmy Lee

So because it’s the money, so the fully diluted shares are killing us on the EPS side. This would be another good piece of debt to be removed…

Jimmy Lee

Absolutely, that part of the debt would be very important to remove.

Andrew Shapiro - Lawndale

And that’s about 4 million -- 4.5 million a year of cash interest cost. So know we talked about your CapEx, we talked about your interest expense. Your excess cash flow that you’re currently on a run rate, dividend buyback debt policy, my next question is then you mentioned optional opportunities that you might have to generate electricity for sales of the grid. Can you a give a handle on what you think the capital investment would be in the payback periods with the for such an investment and is it just solely just a British, Colombia, Canada or is it also a German project.

Jimmy Lee

Well I mean the German is not really related to capital but really more in regards to the all of these -- of the government in regards to renewable energy type of pricing though. Depending on the outcome of their legal polices we make at a break of course 2009 in terms of their renewable energy program which will have a bump but that means that also at the same time, we will not get covered credit -- emission credit, so it’s a positive but it also takes away, negative but clearly carbon emission credit is most cyclical and it’s better to have to something which is more of assurance. So that would have, a more stable type of cash flow, but that won't happen until after '09 so it's not going to be this year. In terms of capital investment at Celgar, as I said, a new turbine, you're talking capital cost which will be, close to the 50 million Canadian type of range and this won't happen at least for two years. Now, a lot of that clearly could be financed through alternative means, we don't need to have a lot of capital because clearly, it’s going to be how I sell to you to let in, there is other ways to finance such projects.

Andrew Shapiro - Lawndale

Well if that's the case, you're actually helping define or refine the issue for us and we're now almost a 5% shareholder which is this Board and the company needs to aggressively deal with, it’s investment opportunities which seem to me to be one of them is, a high cost debt to be more aggressively managed taking down, and to the extent, anyone fears this economy. And I'm not fearful about what you guys are doing, I'm happy with what you're doing but if you're fearful of the economy then take out someone who’s debt that’s maturing anyway, not in the too far distant future but taking it out early isn't a bad idea.

Jimmy Lee

I mean, clearly, it is a cost that we will address, and right now, we do have the benefit of the fact that we don't have debt, which are going to mature in a very difficult market though we do have the luxury of that. And at the same time, we know, based on the present market conditions that we do have to look at the use of the cash and have some reasonable amount of stability for unexpected type of events and the raw material issue as I said earlier is really going to be the main issues moving forward.

Andrew Shapiro - Lawndale

What's the cost of drawing on those revolver facilities for you?

Jimmy Lee

The revolvers, certainly in Celgar are actively used in regards to the receivables et cetera. In terms of the Rosenthal, it is low cost and we intend to look at that as a key component in terms of our raw material strategy moving forward.

Andrew Shapiro - Lawndale

Right.

Jimmy Lee

So, it is important that, with the changing raw material environment that we have to rethink the way that we purchase raw materials.

Andrew Shapiro - Lawndale

I mean, your debt was put in before Stendal was up and running. You've proven Stendal, it’s up and running, you've improved your production capacity at Celgar, Canadian capacity has closed down; I am at a loss as to why this company could not restructure or refinance it’s high cost debt with a lower cost package?

Jimmy Lee

You mean the senior note package?

Andrew Shapiro - Lawndale

Seniors, converts, the whole caboodle.

Jimmy Lee

Well, it will be difficult

Andrew Shapiro - Lawndale

Other than if you leave Stendal alone, of course.

Jimmy Lee

That one will be difficult, but the other -- clearly it's something that given better credit market we would certainly, probably feel a lot more comfortable that, that would occur. I'm not sure whether the present credit market conditions are supportive. It's not something that, you know we would be adverse to. There is no question about that. But given the volatility in the credit market and especially for the type of businesses that we are in, we really don’t see the possibility that you, of a significant reduction in terms of our present cost would occur. And that’s demonstrated by the fact that our senior notes are trading in the 80 something, 80 -- clearly there is an adverse environment right now. And this is only started to happen at the end of last year. So this was never the issue moving in, until we got this whole year finished and you know we are just finishing now at the year end. So, I 'm not saying that this is not on the table, and I think we are moving forward in that direction. But lot of things has happened and they’ve only happened very recently.

Andrew Shapiro - Lawndale

Can you talk about the industry capacity picture, give us an update, last we talked with you about it, it was in last call or even two calls ago, or six months ago about if the pricing in the pulp markets has only really improved commensurate with fiber cost increases that everyone suffers from or everyone has to use as well as currency which everyone is also subject to. Can you give us some inside as to what you are hearing and seeing in terms of additional shuttering of capacity?

Jimmy Lee

We still believe that there is a possibility that over a million pounds that are likely go out in the near future and so Stora Enso has announced the closure first half of this year of Apollo NBSK market pulp mill. That is about a three hundred type of thousand tons. At the same time there is the possibility that Chinese-based half, not quite half but about 70% softwood and 30% hardwood may come up this year. So, that means that this can the Stora’s closure will be offset possibility of this capacity coming on. There is of course the coastal pulp mills which have a lot of issues written of the bills in the eastern Canada, again because of fiber issues as fiber cost has potential for closure. So, there is still at least about a million tones in our mine that could go down, of that about 300 has already been announced for closure and possibly another 700,000 hopefully will be announced.

Andrew Shapiro - Lawndale

Thank you.

Operator

Your next question will be from [Peter Arat] of AIM Investments.

Peter Arat - AIM Investment

Hi, good morning, just, sure maybe you don’t want to it, but a little bit more going on the same theme from the previous call. The company’s credit ratings are far below investment grade indicating of course a very high degree of financial risk. At current prices in the market you are close. It’s about 12.5% yield on the notes but what is interesting there too is in terms of how the market proceeds with the company, that yield is even higher than the yield on the rest of the high yield market place, meaningfully. Taking debt out obviously would save interest, but because you are doing it at a discount you would also book earnings. But again underneath all this is just a broader question and to put it bluntly do you plan to be single B rated forever?

Jimmy Lee

No, that’s not our goal. I mean clearly that is very high in our objective in terms of getting much better credit rating. Of course we’ll face with the reality we’ve a high gearing. Not so much in terms of the restricted group, but as a company we do a have much higher gearing than one would expect. But it’s very well controllable because the Stendal debt is a project financed base. And I think in terms of restricted group debt we don’t that ratio is that ratio is that extreme. But we’ll be looking towards improving our credit ratings and that’s high in our program.

Peter Arat - AIM Investment

Yeah, but somewhere there is a pretty big disconnect, that I certainly respect that you don’t think that the debt metrics are very high, but the rating agencies season and then consensus of the market, I think they are very high.

Jimmy Lee

Yeah, but this is only be kind a like a recent type of event in terms of the pricing, if you look at our debt price for most of last year we traded on par if not higher. So just to look at the market at the end of January or going into February and talking about an 80 something type of pricing and say, well why didn't you guys address that. I think that is not necessarily fair, we were dealing with prices which were more in the 90s throughout that period. Yes, it is an issue that's clearly is upfront in our mind.

Peter Arat - AIM Investment

Yes, I agree. It is more recent, the bond hasn't traded at par since late spring of '07 of course, but its dipping through 80s, it is only probably a month, month and half or so old.

Jimmy Lee

Yeah, and above that, it was always in the 90s. So for us to look at this, clearly is something that is higher on the agenda but it’s not - this was event which have occurred in the last couple of months. And we're now at the year end, we're moving into this year so, clearly it’s an item that we will look at very seriously and that's what I'm saying. I think it’s unfair to just say, well, you guys should be buying back bonds when it’s only been in the last couple of months that we have had these type of pricing. And we are now going into the beginning of a new year and just getting all our financials in it and looking at what are plans are for this year and beyond in terms of both our cash and what our forecast is going to be.

Peter Arat - AIM Investment

Okay, well, I'm not suggesting a course of action, that's for you to decide, I'm just really asking questions around but okay, well, thanks for the answers.

Operator

Your next question will be from Steve Chercover of D.A Davidson.

Steve Chercover - D.A Davidson

I'll be brief, just on fiber, in British Columbia where at least lumber prices, or, sorry, logs are determined by lumber prices. Are you seeing whole log prices go down? Can you take advantage in some small way the weakness in logs in general?

Jimmy Lee

It’s a very complicated question, because of course logs are priced by sawmilling activity but at the same time if there is not a lot of sawmilling activity then there is lot less harvesting. So, one doesn’t quite necessarily mean log prices will drop. Yes, log prices have been dropping because there is still excess availability, but at some point you are going to have further curtailment in regards to forest harvesting activity which will offset that. So, you are going to stop logging if you are not making any money, that’s the reality.

Steve Chercover - D.A Davidson

Okay.

Jimmy Lee

What we are looking at is that there is different programs which are going to be looked at in BC because of the whole pine beetle issue, the severity of the downturn in the sawmilling industry. And so we think that there will be more accessibility and more availability of pulp log moving forward.

Steve Chercover - D.A Davidson

And on that same theme, Jimmy; the storms that ripped through the Pacific North West in December did a lot of damage, Weyerhaeuser was talking about it. Is there any salvage logging in British Columbia that you can access or are you too far inland?

Jimmy Lee

No, we are too far inland to have any kind of impact with the coastal storms, etcetera. It's really more based on the forestry policies and programs that are going to be adopted by the BC government.

Steve Chercover - D.A Davidson

Okay. Last question, I think Mass Financial had sent you 33 odd letters or so. Are they up to 50 yet or have they slowed down.

Jimmy Lee

No, I mean we get regular letters, but we haven’t increased the rate of receipt of letters, lets say it that way.

Steve Chercover - D.A Davidson

Thank you again

Operator

There are no further questions at this time. I'll now turn the call over to management for closing remarks.

Jimmy Lee

Well, I thank everyone for participating in today's call. Hopefully I was able to answer most of the questions and needless to say, I think that we are of course very comfortable that the market conditions moving forward seem to be stable in light of the fact that there is of course a lot of weakness as a result of the subprime market. But, so far we feel pretty comfortable that the pulp markets are stable and therefore looking forward to a reasonable year. We don't expect that we'll have developments which will be significantly different than the year that we just closed. So, on that I would say thank you again and goodbye.

Operator

This concludes today's conference. Thank you for your participation. You may now disconnect.

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