Mercer International Inc (MERC) Q1 2021 Earnings Call Transcript

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Mercer International Inc (MERC 1.27%)
Q1 2021 Earnings Call
Apr 30, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to Mercer International's First Quarter 2021 Earnings Conference Call. On the call today is David Gandossi, President and Chief Executive Officer of Mercer International and David Ure, Senior Vice President, Finance, Chief Financial Officer, and Secretary.

I will now hand the call over to David Ure. Please go ahead.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Good morning, everyone. I'll begin by reviewing the first quarters' financial highlights and following my remarks, I'll pass the call to David, who will comment on our ongoing response to the COVID-19 pandemic, market conditions, operational performance, progress on our strategic initiatives, along with our outlook for the second quarter of 2021. Please note that in this morning's conference call, we will make forward-looking statements and according to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I'd like to call your attention to the risks related to these statements, which are more fully described in our press release and in the company's filings with the Securities and Exchange Commission.

Our first quarter EBITDA improved considerably compared to Q4. The increase was primarily due to improved pulp and lumber pricing, with average pulp list prices up over $150 per tonne in all markets, and lumber prices in the US hitting new highs in the quarter. The positive impact of higher product prices was partially offset by the impact of a larger annual maintenance program in Q1 when compared to Q4. We generated EBITDA in the first quarter of about $82 million, compared to EBITDA of about $49.5 million in Q4. Our pulp segment contributed EBITDA of $52.3 million and our wood product segment contributed record quarterly EBITDA of $31.7 million.

Our wood product segment continues to benefit from strong demand and increasing sales prices in all markets and relatively low sawlog prices. As usual, you can find additional segment disclosures in our Form 10-Q, which can be found on our website and that of the SEC. Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets this quarter. In China, the Q1 average NBSK net price was $883 per tonne up $246 from Q4. European list prices averaged $1,037 per tonne in the current quarter, compared to $880 per tonne in Q4.

And the average Q1 net Eucalyptus hardwood price in China was $692 per tonne, up $212 from Q4. The hardwood list price in the US averaged $1,020 per tonne in Q1, which was up over $150 compared to the prior quarter. In total, our average pulp sales realized $0.08 were up over $80 per tonne this quarter, positively impacting EBITDA by about $40 million compared to the prior quarter. Pulp demand remained strong in the quarter. However, our sales volume was down compared to the previous quarter due to our annual maintenance shut at Celgar compared to record sales volumes in Q4. Our Q1 sales totaled about 488,000 tonnes, which was down about 75,000 tonnes from that in Q4.

Our lumber realizations also increased considerably during the quarter, particularly in the US. Random links US benchmark for Western SPF two in better average about $970 per 1000 board feet in Q1, which was up over $270 for last quarter. US lumber prices rose steadily through the quarter. The benchmark lumber price is currently over $1,300 per 1,000 board feet. Our Q1 average lumber sales realization was $622 per 1,000 board feet, up $155 compared to Q4. Our wood product segment continues to perform well. We sold about 108 million board feet of lumber in the quarter, which was up over 4 million board feet from our sales volumes in Q4.

Our electricity sales totaled 217 gigawatt hours in the quarter, which was down relative to Q4, primarily due to the lower production at our Celgar mill as a result of our annual maintenance downtime. Our Cariboo Pulp joint venture, which is accounted for using the equity method, contributed another eight gigawatt hours to this total. We reported net income of almost $6 million for the quarter or $0.09 per share, compared to a net loss of $13 million or $0.20 per share in Q4. The increase in income reflects our stronger EBITDA and was partially offset by the recognition of a $30 million or $0.46 per share loss on the early extinguishment of debt as a result of our senior note refinancing.

Cash generated in the quarter, totaled almost $34 million, compared to $16 million in Q4. The principal contributor to the increase was the modest top up of the new senior node issue as we took advantage of the strong debt market to prepare for an increased CapEx program, which David will speak to momentarily. Our cash flow from operations was otherwise flat as our stronger EBITDA was offset by increased working capital. Our strong results and prudent cash flow management in 2020 have left us with a solid liquidity position at the end of this quarter totaling about $672 million, comprised of $395 million of cash and $277 million of undrawn revolvers. This liquidity will support the seasonal growth and working capital, along with the bulk of our ambitious 2021 capital spending program in the next two quarters.

In Q1, we completed 27 days planned maintenance downtime at our Celgar mill. We originally intended to limit the shut to 20 days of maintenance this quarter, but elected to extend the shut to complete additional work to address some elements that were revealed upon inspection. This compares to a total of 16 days of planned maintenance in Q4 at our Rosenthal and Peace River mills. The impact of the Q1 maintenance, including lower production and higher direct costs reduced Q1 EBITDA by almost $16 million compared to Q4. As a reminder, our competitors have report their results under IFRS, are permitted to capitalize the direct costs of their annual maintenance shuts, while we expense ours as costs in the period of the shut completion.

And while we noted this in subsequent as a subsequent event in February, I will remind our listeners that in January issued $875 million senior notes that that bear interest at 5.180% per year and will mature in 2029. The net proceeds from this offering were used to redeem both of our outstanding 6.5% 2024 senior notes and our 7.380% 2025 senior notes, with the remainder being used for general corporate purposes. The transaction extends our earliest senior note maturity to 2026 and lowers our annual interest cost by about $12 million per year. And as you've seen from our press release, our board has approved a quarterly dividend of $0.065 per shares for shareholders of record on June 30, 2021, for which payment will be made on July 7, 2021. That ends my overview of the financial results.

I will now turn the call over to David.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Thanks, Dave. Good morning, everyone. As you all know, COVID-19 continues to be a critical global health risk. National Vaccine programs are making progress but getting rolled out quickly continues to be a challenge. This continues to be a significant concern for us as we manage through our heaviest major maintenance quarter. We remain focused on our protocols to ensure the safety of our employees, contractors and the ongoing operation of our mills. I would like to once again thank our employees for continuing their efforts to keep themselves, their families and our colleagues safe. Overall, our mills all running well. But the main driver of our results this quarter was strong product demand. Strong demand in all our markets drove significant pulp price increases and sustained the record high lumber prices that we've been seeing. All softwood and hardwood pulp prices rose steadily and significantly through the quarter.

A number of factors have aligned to create favorable supply demand fundamentals, including low paper producer inventories, unusually high pulp producer downtime, much of which has been unplanned, a global shortage of containers that has limited the volume of pulp into China and a relatively strong Chinese currency. In addition, on the demand side, we're seeing paper producers successfully implementing price increases. This upward pricing pressure was originally focused in China but ultimately pushed prices up in Europe and North America as well. The pandemic continues to negatively impact global economic activity. But we're seeing indicators of future growth. And assuming vaccine rollouts are successful, global GDP is expected to rebound significantly in 2021. For mental economic support is also expected to help fuel this growth. As a result, we're optimistic that steady economic growth and strong market fundamentals along with the weak US dollar will continue to support pulp prices.

Adding to the positive pulp market fundamentals, we expected ageing pulp production assets will continue to have unplanned downtime and transportation limitations that are creating supply constraints may not be resolved for several quarters. Market statistics reflect strong demand for both NBSK and hardwood. The hardwood statistics highlight a very tight market and the NBSK inventory statistics reflect a slightly heavier producer inventory level, but this indicator is lagging what we are seeing on the ground. We believe the extra days of NBSK inventory are the result of tonnes put aside by producers in advance of their Q2 maintenance outages combined with pulp stuck in the supply chain due to COVID related logistics challenges. Our wood products business once again achieved record operating results due to the strong US market pricing, which is now also pushing prices up in other markets. The European lumber market experienced modest upward pricing pressure in the quarter, while the US market remains at historically high levels.

The strong lumber prices in the US, despite some volatility continue to be driven by solid housing market -- solid housing market and steady home renovation related demand. This strong demand has been combined with the reduced supply of lumber due in part to reduce global annual cuts in regions such as Western Canada, and pandemic related production logistic challenges to create a strong seller's market. The US market supply demand dynamics are expected to remain favorable for the near term, as the largest American homebuilding companies continue to predict strong sales this year, due to low home inventory levels in many areas of the US and what are widely expected to be sustained low borrowing costs.

We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can. In Q1 44% of our lumber sales volumes were in the US market with the majority of the remainder of our sales in the European market. We expect the European lumber market to remain steady with some modest upside as certain European lumber manufacturers move inventory to the US market. Despite this, we expect the US market to stay strong. Our mills ran well this quarter in spite of the pandemic related challenges, including our Cariboo joint venture we produce 478,000 tonnes of pulp, down 46,000 tonnes from Q4. The decrease was primarily due to Celgar's plant maintenance shut. Excluding the Cariboo mill, or pulp mills produce 519 gigawatt hours of power down 49 gigawatts in Q4, again due to the maintenance of Celgar.

Finally with the Celgar shut -- finally -- while the Celgar shut was completed without incident. We struggled to restart the mill in April due to a number of unfortunate issues. While the mill is running well now it took us a better part of two weeks after the shut to return the mill to full production, resulting at an even tighter order book than existed prior to the shut. Our wood product segment achieved another production record as we continue to commission and optimize our new production equipment, producing almost 180 million board feet of lumber, which is up six million board feet compared to Q4. In Germany, our wood costs particularly for pulp wood remain at historically low levels due to the abundance of beetle damaged wood. While we expect this pulp block supply dynamic to last well into 2021. We are seeing early indications that modest wood cost inflation will come later in the year. The situation for saw logs is more clarinet and we will begin to purchase more expensive, but higher quality logs as early as Q2.

In Western Canada, puppet supply remains steady and prices are modest due to sawmills running full out to take advantage of the strong US market. Overall, we expect cardboard prices to increase only modestly in Q2. We have a significant annual maintenance program plan for 2021, the majority of which is happening right now. All of our major maintenance shots carry significant risk as a result of the pandemic and a large number of contractors required in the mills. We have developed strict safety protocols to mitigate these risks. So we are confident this maintenance can be completed safely and effectively. Our remaining 2021 major maintenance schedule is as follows. In this quarter, Stendel was taking its 18-month shut which will last 21 days. We should be coming out of that this weekend. Cariboo will take an 11 day shut and Peace River will take a 63 day shut. You'll recall it this extended shut to rebuild recovery boiler was deferred from last year due to the inability of contractors being able to guarantee the availability of skilled trained people during the pandemic. As a reminder, the costs associated with recovery boiler rebuilt will be reimbursed by insurance proceeds.

In Q3, Rosenthal has a 15 day shut planned and Celgar will take a four day mini shut. In Q4, Stendel has a two day mini shut planned. And so while the majority of our annual major maintenance work will be behind us in the next couple of months, capital expenditures to grow the company are now ramping up. As Dave mentioned, after a full year of carefully managing capex to protect our liquidity in response to the pandemic, reducing our expenditures to some core high return projects, the strength of our balance sheet liquidity and our markets are allowing us to pivot back to our strategic plan, and more specifically, the objective of adding shareholder value by growing the company in areas where we have core competencies. To summarize, some of the project related work that has been ongoing during the pandemic, we're continuing the Stendel pulp mill expansion, a roughly $60 million project that will increase our pulp production by 80,000 tonnes, and power production by about 70 gigawatt hours.

At Friesau, we're also in the process of commissioning the A4 sorter component of the Phase II expansion project. The new planer, sorter and kilns that have been ramping up over the past few quarters are now being optimized. Production is approaching 0.5 billion board feet and improved grade-out turn from profile optimization and product sorting is pushing average realizations higher. We've also commenced new projects that, combined with the projects I just noted, will create significant value over the next couple of years. We have commenced a construction of a centralized wood room at our Peace River pulp mill and an expanding -- expansion of the wardroom at Celgar.

The projects will allow us to transform our supply chain, increase our capacity and reduce the cost to produce our own wood chips. The projects will also allow us to accept alternative forms of lower quality wood that were previously left in the forests. The total cost for these projects will be about $50 million and we are eligible for a number of carbon reduction grants that could exceed $20 million. We expect the projects to be largely completed by mid 2022. In addition, we have advanced the engineering and permitting process for our Stendel sawmill. The initial plan for the mill contemplates at 400 million board foot capacity with the product line up and flexibility of our Friesau mill, but we expect to build the mill in such a way that will allow for incremental capacity increases in the future.

We expect construction costs to be between $200 million and $250 million and subject to board approval, could commence foundational construction before years end. We're now entering the more sensitive permitting wood supply and equipment procurement process. And we have much more to say on the timing at our Q2 call in July. All- in and depending on the speed of certain construction prerequisites and deposits, we expect total capital expenditures to be between $175 million and $200 million in 2021. I remain confident that the effective execution of our strategy will continue to bring us success. We will remain focused on our world class assets and our sustainable operations will continue to serve us well as we focus on optimizing our fiber handling and logistics and controlling our costs. This completes our prepared remarks. But if I could take a moment to remind listeners that COVID-19 and its various variants and mutations remain a significant risk to us all. I encourage everyone to get the vaccine when it is available and keep your families friends and colleagues safe.

Thanks for listening. I'll now turn the call back to the operator for questions.

Questions and Answers:

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

[Operator Instructions] Your first question comes from the line of Hamir Patel with CIBC Capital Markets.

Hamir Patel -- CIBC Capital Markets. -- Analyst

Hi. Good morning. Dave, could you speak to how lumber prices in some of your European markets in Japan today, how the returns would compare to what you would get in the US?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yes, sure. Hamir. Yes. Good morning. Yes, they're not -- well, Europe is not what the US margins are, but they're improving. And they've been -- I mean, they've been much when they've really, really moved compared to what would be normally the case, like Europe's usually pretty flat and moves up 5% to 10% or down 5% to 10%. But we've seen some really big moves in that market and it's continuing to tighten.

Japan lagged a little bit, but J-grades are really starting to improve as well. Great margins in that market. We're not a huge J-grade producer just yet. We're working on our J-grade program as we speak with all the new equipment. But, yes, that is going to be an important market for us. As I've said before, it could be up to -- we're hoping to be up to about 10% of our volume could find its way into that market.

Hamir Patel -- CIBC Capital Markets. -- Analyst

Great. Thanks, Dave. And, in Germany, I saw some trade reports about sort of changes in the, I guess, characterized as an allowable cut, but what are you seeing in terms of long term fiber availability in Germany? And can you remind us maybe how much of that forest is privately owned?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yeah, sort of in general terms you could think of it's roughly 50% of state or federally owned and 50% would be privately owned. And the beetle is I mean, it's a really regional sort of a thing, it really depends on where you are, you know, if you're down in the workforce, that's one thing, if you're up north and around Stendal, it's predominantly a pine forests. So it's a totally different situation. But we've been studying the long term expectations, we run quite a few different consultants through all the data, and our feeling is that this beetle would -- continue to be support lower prices, until the bark beetle really resolves itself.

In the fullness of time, there will have been areas where there's been heavier harvesting than would otherwise have occurred. So there will be lower volumes available in some regions, and other regions not impacted. For us, we're feeling very comfortable with the situation of free shall, and with timber supply up in the north in the Stendal region, there are a number of smaller saw miller's around that, you know, have not continued to reinvest and are not real class mills that struggle with the dry beetle wood, they don't produce a plain or kiln dried product, they're usually producing their green product. So it's, it's not all good for everybody in Germany, with the situation but with our mills, they are freezing and melt, it runs really well with beetle kill. So I know I'm kind of wandering around the topic. I don't have a lot of data to be specific by region here. But there's lots of timber there for us for the future in our view.

Hamir Patel -- CIBC Capital Markets. -- Analyst

Great. Thanks, David. And so last question for me. In British Columbia, the premier recently made some remarks that got a lot of media attention about long term potential changes to how tenure is owned or controlled in the province. What impact so you expect that to have on Mercer and the BC pulp industry?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yeah, it's hard to know. For us, we've got the half the Christian Cariboo, which is our partners, or west Fraser, massive sommelier company in that region. So I'm sure those -- they take into restructuring hits with the reduction of AC, so I think that situation will be stable. Celgar, in the southeast corner of the province is in a green forest with lots of somnolence around us. I wouldn't imagine there would be much change down there, you know, we're 60%, 65% of our raw material comes in the form of saw no residual chips from saw mills around us [Indecipherable] and the rest is the residual harvest of pull heavy log stands or was or you know the knockdown from saw log harvesting.

And that material is becoming more and more available in our view. I think the province has done a lot of good things around ensuring that material comes out of the bush and we've talked about this on previous calls. It's really happening. It's -- the harvesters pay the rate -- they bring it out, they pay stumpage, if they don't bring it up, they pay stumpage and so they can recover a few bucks. And the cost of the stumpage on this stuff that is not a saw log as is being reviewed and adjusted. And I think I think the provinces on the right track there.

So, I think for us -- and in British Columbia, we're in a pretty good situation where we're comfortable with the situation. The Woodroom project is going to be a real game-changer from a cost perspective. So, really what we're doing there is -- what we've been doing is receiving these pulp logs at remote satellite yards, and kind of like receiving stations if you like in different regions and then shipping them up with mobile shippers and shipping them to the pulp mill. This is kind of a standard procedure for pulp mills in British Columbia.

What we're doing is we're going to put in a different type of debarking system and a line that can handle the smaller, shorter and sort of tangle material that comes in from the byproduct or harvest by-catch, we call it and process it ships in bark for us and so it just streamlines all the logistics and rather than having trailer loads of ships coming at mill, we've got trailer loads of pulpwood coming in. And it's a really significant cost saving on the raw material processing and handling. So, we're pretty excited about that.

Hamir Patel -- CIBC Capital Markets. -- Analyst

Great. Thanks. Thanks David. That's all I had.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Okay. Thanks Hamir.

Operator

Your next question comes from the line of Sean Steuart with TD Securities.

Sean Steuart -- TD Securities -- Analyst

Thank you. Good morning. A couple of questions. David, you gave several of the puts and takes in pulp markets right now. And I guess I'm hoping you can gauge how much of the current market momentum is shipping constraints versus overall solid demand. And I suppose what I'm looking at is if I'm looking at days of supply for softwood pulp and made the highest 30-day range giving -- given shifting constraints, is that closer to what we'd normally think of as 30 days in a normal environment? Any context you can give on that element and how much mention of that is the market?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yeah, sure. We've been watching that and thinking about it quite a bit. And so -- I think the hardwood -- the softwood inventories could be maybe eight days higher than what would -- you would normally expect in a really tight market. But if you reflect on the amount of second quarter maintenance being down and you think about producers like ourselves, we put pulp away to be able to service our contract volumes. This is particularly true in North America and then European customers. So, you've got that issue. And then you've got Scandinavian mills that are finding it really difficult to get their pulp to China. And if you -- if you can't get containers, your best -- your next option is you have to reserve some breakbulk. You don't you don't ship hundreds of tonnes on breakbulk, like you do with containers, you need to put 15,000 tonnes or 20,000 tonnes aside and ship it all in one big chunk.

So it's really not -- it shouldn't be a surprise that the producer inventories are higher than what would otherwise be considered to be a tight market. But on the ground, it's a tight market. And oh my gosh, it is really tight, we're sold out. We can't think of supply spot tonnes to anybody. We're just trying to keep up with the commitments that we've made on contracts. So that's how I see that. On the hardwood side, it's really low. And then when you think about all the new capacity in the southern hemisphere, and how long that supply chain is to get to its natural markets, you would expect a growing sort of normal inventory level and yet it's been shrinking and shrinking, so that markets super tight. Like there's just no question about it in my mind. That's an indication that consumption is really, really moving along.

Sean Steuart -- TD Securities -- Analyst

And on the software side, do you expect the caviar restart to infect things at all? Is it enough volume that?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

No, it's not it's not very big. So it's 300,000 tonnes. Not worried about that.

Sean Steuart -- TD Securities -- Analyst

Got it.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

I mean the puts and takes in our business for exceed that every quarter anyway, right.

Sean Steuart -- TD Securities -- Analyst

Yeah. Dave on the Peace River shut. I'm hoping you can help us with a little bit of guidance on the Q2 EBITDA impact, and I guess specifically around insurance coverage you have there. Does that offset the full impact this quarter? Or is there a timing lag on how that will flow through?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah, so it does. The insurance is designed to cover the majority. Obviously, there's two elements to it. There's property and there's the business interruption, which is what I think you're referring to and the insurance is designed to cover the vast majority of the business interruption. And it's pretty efficient. And generally we can expect that the timing will be because we've been talking to the insurers. So as you might imagine, we've been talking to them regularly about our schedule. They know the work we're doing work right now. They know the business interruption is happening right now. And we're expecting that that for accounting purposes, we'll probably see that offset in Q2. Sometimes, with these programs, there is a little bit of a time lag. If we're still settling, the final invoices or final determination on exactly which sales we lost, and exactly what the BI should be. But in general, it's pretty efficient.

And the fact that this shut has -- as David had mentioned, we're into this shut right now the too much shut is happening right now. So we'll sort of have June, we'll be returning the mill to production. So we'll have a month to work with the insurers to try to dial in that claim. So my expectation is that you won't -- if all goes well, you will -- it'll be pretty seamless, but we might have some of the proceeds might be a little bit foggy from Q2 to Q3. But our expectation is where we'll try to limit that for sure.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

The other way of thinking about it, I guess is the Q2 expense hit should really be limited to spend all with respect to the downtime program this quarter.

Sean Steuart -- TD Securities -- Analyst

Right. Yeah.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Well, except that. No, I just cut there a little bit Dave, there is a regular maintenance component to the peace Peace River shut. So the -- so if you would have otherwise had a 14 day or 12 day or 14 day shutdown, that'll be major maintenance in the quarter.

Sean Steuart -- TD Securities -- Analyst

Okay. Okay. That's all I have. Thanks very much, guys.

Operator

Your next question comes from the line of Sam McGovern with Credit Suisse.

Sam McGovern -- Credit Suisse -- Analyst

Hey, guys, thanks for taking my questions. As you roll through the remainder of the year, as you generate free cash flow, how you think about the priority uses for that cash? And you got obviously, the 5.5 to 2026 that become callable later this year. When you look to target that which is a small amount of revolver that you could paydown? Could you look at M&A, how do you think about where you focus your priorities

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah. So thanks, Sam. We've got a balanced capital allocation strategy. We're a growth oriented company. We've got a number of really exciting projects in front of us. I really kind of pulled the covers off to Stendhal. So I know today, we've got more like that in the hopper. And we also -- so we want to grow. We also would like to delever to some extent. So as we generate free cash flow, we'll be balancing our allocations to delever. When, and if, and how, it makes sense to do that. And that's kind of the direction that a balance of those two priorities is really how we're thinking about our capital allocation right now.

Sam McGovern -- Credit Suisse -- Analyst

Okay. Great. Thanks.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Along with not getting ourselves pregnant, recognizing the volatility of world these days, we also want to be conservative we don't want to get too far ahead of ourselves. And, approving too much capital, and having the bottom fall out of the global markets for a year or something.So we -- we are trying, we are doing this in a very safe way. We don't want to ever risk the company. But we do want to aggressively grow. So that's kind of, how we're balancing this.

Sam McGovern -- Credit Suisse -- Analyst

Okay, great. Thanks so much. I'll pass it on.

Operator

Your next question comes from the line of Andrew Kuske with Credit Suisse.

Andrew Kuske -- Credit Suisse -- Analyst

Thanks. Good morning. David, you mentioned a little bit in your prepared comments. And it's also in the notes on the grants you've received in relation to GHG reductions and really other related activities. Could you maybe give a bit of a glimpse in the investment potential you have for that? And the interplay with carbon Taxes as they exist in Canada? And how do you see this as helping reduce costs, costs and a longer term basis?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah. Sure. So for Celgar the capital for the modernization of the width room is about 21 million. And we have an issued grant of 4.5 million. So a net 16 call it, with a cost saving roughly of about $15 million EBITDA impact from just lower transportation and processing costs and better yield by putting wood through a big electric. Modern ship is opposed to grinding it up with a diesel fired mobile chip road in the bush is diesel chippers run about 300 liters of diesel an hour. And we've got about six of them running at any point in time and you get a better chip on the centralized woodroom. You get much more weight with recovery.

And so that's -- so there's a carbon is a carbon calculation and that that ties into these grant applications. for Peace River, it's -- we're rebuilding, the mills had a woodroom way back when under the die shallow days, but it hasn't, it was dismantled 10 years ago or something like that, and they went to the satellite yard strategy. We've analyzed this and with new equipment innovations, we're able -- our projects going to be -- it's close to $45 million. We have -- I said money of about 8.5, and we have SIEE money, which is which is carbon grant of about 5.5. So net 32. And the cost savings are about 20 million a year. And what we're doing there is instead of harvesting Aspen and bringing full tree lengths into a satellite yard, spurring it there, putting it down, picking it up, putting it through mobile chippers, and moving the chips to the to the mill. We'll be using these 10 axle logging trucks that are approved in Alberta now through acid trucks. And we'll do everything cut to length.

So we'll cut the trees to roughly 20 foot lengths. And we'll get about close to 40% more wood on one haul. And we'll bring that all the way into the mill instead of stopping at the satellite yard. And we'll be processing it at the mill again, much better recovery of wood from everything we handle, we don't have to handle it twice, and return off all the costs of all this remote satellite yard and so on and so forth, and end up with a better chip and -- but at 8% better yield of multiple chips for the same amount of trees that we're harvesting. So there's grant money for that. We have an outstanding application for some additional grants in Alberta. We will know if we're successful, we've been shortlisted, we will know if we're successful until June. But we're hopeful there might be a little bit more there. These are projects that the provinces and the federal government are very excited about, we've been very successful with our grant applications, because of the innovation aspects and the carbon aspects of these projects.

Andrew Kuske -- Credit Suisse -- Analyst

That's great. It's helpful. Sorry.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah, we're just going to mention a couple of the things. In Alberta, there's an offset program, it's called tiered program. And so we generate credits that are confirmable that they get audited, and like a compliance based credit system that we are selling these credits to other industry players who need carbon offsets basically, they traded a sight discount to the carbon cost. So we got about $6 million of credits, we're in the process of selling for past years. And those numbers will grow particularly with the woodroom at Peace River will earn additional credits on that. So there'll be a revenue stream, unless things change going into the future, which will be quite noticeable.

And then as far as, you know, at Celgar, there's -- the provincial government is very interested in renewable natural gas and fuel switching and carbon reduction and all these kinds of things. So we're finding a real shift in government's attitude toward supporting and providing incentives to do some of these future looking projects. So we're all over that right now. A lot of its, sort of, working in the kitchen, trying to imagine how do things that meet the needs of government and how they can be really economically beneficial and contributed to our sustainability in the long term. So it's an exciting time actually and it's a lot of -- a lot of -- a lot of opportunity for us to participate in these programs. Same thing in Europe, there's going to be massive amounts of money for the right kind of projects as governments really, really wrap their heads around how to get to carbon neutral in 2030 to 2050. So great time to be innovative and to be a growth company, if you figure out the right types of projects can be quite accretive.

Andrew Kuske -- Credit Suisse -- Analyst

It's quite encouraging, given the numbers and just the extent of what you're doing. And then I guess maybe just on the offsets to build upon that. You've given your power generation is basically waste heat related. Do you have qualification for green power or carbon offsets from that? And then when you think about your expansion of not just the pulp mill standard, but the power side of it, do you get an uplift as it relates to either carbon reduction or some offset benefit?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Well, you know, there's the -- I'm not sure how to answer that exactly. The carbon offsets really come, you know, like each program is going to be different but like the tier program is kind of like a universal benchmark of what your emissions would be, your intensity would be for what it is you produce compared to your peers. And if you're on the wrong side of that equation, you have to buy carbon credits. And if you're on the right side of that, then you have access credits, which you can have audited and sell them into a compliance grade offset program. And I think what's coming globally in time is going to be getting really focusing on the scope one fossil carbon in industries and so, as an industry, the pulp industry, you know, we're pretty low already, like the only natural gas that Mercer burns is in our limekilns. And a little bit either recovery boiler or power boilers during start-up conditions or an upset conditions.

It's still profitable in some cases to burn a bit of natural gas, through the power that we sell, like, there's always limits on how much you can do but that still exists. Over time that will tighten up and carbon will become more expensive. And so we'll be decarbonizing the fossil carbon components by switching fuels from burning natural gas in the limekiln to possibly producing a sin gas or extracting lignin and blowing that into the -- into the kiln, as a fuel source as opposed to the natural gas and get away from -- get away from the carbon costs of doing things. And these are -- these type of programs I'm sure that there will be support for and you don't want to -- you don't do them too soon. If you do it would it makes economic sense to do it and try in our view is we want to be an early -- an early movers because you know, there won't be incentives for everybody. But certainly those that are out in front of everything and have shovel ready projects will be the ones that get the support and are going to be able to make the changes. So...

Andrew Kuske -- Credit Suisse -- Analyst

Appreciate the color. Thank you.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yes. You're welcome.

Operator

[Operator Instructions] Your next question comes from the line of Andrew Shapiro-Lawndale Capital.

Andrew Shapiro -- Lawndale Capital -- Analyst

All right, Thank you. I think you clarified the question I had regarding the timing of the Peace River boiler, rebuild reimbursement, how that's going to flow. It sounds I mean just if you can quickly clarify, any timing differences and all of that and the flows of it, regarding the reimbursable amounts is not going to be a capitalized flow through, it's going to go through the income statement, is that correct?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yeah, for the business interruption and --yeah, it'll go where it'll be matched -- yeah, into the P&L to the extent that it's covering costs or covering loss revenue, it'll go to the P&L to the extent that it's covering property, it'll go to the balance sheet.

Andrew Shapiro -- Lawndale Capital -- Analyst

Got it. Okay. And then regarding the new large construction projects in sawmill particular, when is your current expectation of that large enterprise to begin operations and generate start generating and payback?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yeah, it's sawmill equipment suppliers today are on a two year lead time. So you know, it's really become quite competitive to order equipment. So that's why we're in this early. You can you can get in the lineup early, if you without release any kind of material deposits until you get closer to the window. But it's a consult -- it's all about getting in line. So we're two years from starting to receive equipment. And then a year, building all that together, I guess it'd be like general term. So it's we're really three years out before you're going to be getting it

Andrew Shapiro -- Lawndale Capital -- Analyst

Okay. And then once it starts operations, you obviously have a projection of why we're making this investment in terms of cash flow -- incremental cash flows and all of that. What is the payback rate that you guys were using are anticipating for such a large investment to get a feel for what we think our incremental return should be for this?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yeah. Well, we think about an investment like that, you know, a number of ways. But if we look at trend pricing and we think about the synergies with the pulp mill that's the better than three year payback on that capital, potentially. And in peak pricing, it'll be better. And then trough pricing it'll be worse obviously, but there's a tremendous synergy there. You can imagine every log sitting in front of the pulp mill that's going to be going through a scanner and it's going to say, hey that's not really a pulp log, that's a saw log, that's called -- this one is a saw logs. So we're going to be harvesting saw logs out of a pulp log. While a wood if you like and there is just a really strong maturing timber supply in and around the central region. So it will be the main sawmill in the region enjoying that and basically what you're doing is, you're providing the lowest cost shift to the pulp mill displacing its highest cost fibre, the stuff that you would have been bringing in from the Baltics or places like that. So there's, it's a bit like free shell in that way. It's in relation to the EBITDA from the sawmill, there's a there's a real benefit to the pulp mill.

Andrew Shapiro -- Lawndale Capital -- Analyst

No, no, is there an anticipation by for planting, let's say the wood brought in from the Baltics and all that, then we will then develop an excess of all those railcars and all the other logistics that this company has built up?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

No, no, we're going to be using all that equipment. In fact, we're continuing to strengthen and expand our logistics, we're -- current focus is to develop more wood terminals throughout Germany. So these are procuring sections of land on railtrack that were previously industrial of some sort, where you can put wood down that's gathered in the region. So when harvesters are working in a region, they can put wood down at the terminal, and then we'll just load up our rope, our trains as we need to. And so we'll have inventory all over the place. And it's all about controlling the timber logistics, you don't have to own the trees, you control all logistics. So we'll be utilizing our fleet of modern round wood rail cars. We also have a new fleet of modern chip rail cars as well. And they'll all be fully utilized. Okay?

Andrew Shapiro -- Lawndale Capital -- Analyst

Now this is a very big project, hundreds of millions and it is also one that you've just discussed is there's a long line to get into. The company is recently a wonderfully refinanced and for far lower cost and gone out eight years on the great chunk of the company's debt. So that's kind of behind us, but you have this very large investment that has a long line. Where does that fit into the idea that capital allocation is obviously best to be put into high return projects? When you -- when the Board members kind of decide where are we going to allocate capital, you have high return project, you want to put it there, but also we're balancing the issue of when does the dividend start going back up again, and toward former levels, but also depending on the stock price, when it's it makes sense to be buying back and retiring shares. Does such a long waiting line for such a large project put those two other capital allocation decisions on a longer-term hold or is there a more near term time horizon for when these other capital allocation items for shareholders -- returning shareholder value can take an equal seat at the table?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yes, I think the ladder for sure. There's lots of tools available these days for projects like the Stendal sawmill. We don't have to keep cash on the balance sheet all the way through three years to make that happen. We can get committed project financing, for example. We can continue to think about opportunities to delever. We can think about growing to dividend under the right conditions, and balancing our capital allocation strategy. It's -- there's lots of different moves that we can make in this kind of economy that will continue to support shareholder value. And that's what we're all about. So we'll be thinking about all those things.

Andrew Shapiro -- Lawndale Capital -- Analyst

Okay. So it's not off the table for that time horizon. This is a near term consideration now that the debt issue, and now that it was a bad issue, but now that the debts been really put in a fine position, and the company's really enhanced its cash flows for the foreseeable future.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yes. Yes. We just have to do things in the right order, Andrew, but there's lots of opportunities. We don't -- we're not stuck in the mud here from a liquidity point of view. We have -- once we get commitments, get a Board approval, get the financing in place, then we can take that liquidity and do the things we need to with it, so.

Andrew Shapiro -- Lawndale Capital -- Analyst

Okay. And is there any update on the status of the BioFilaments venture and the timing of cash flows?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yes. It's still an R&D project at this stage.

Andrew Shapiro -- Lawndale Capital -- Analyst

Okay.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

So no, we've got some small sales and lots of trials going on. But it's not developing into a commercial product

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

No big newsworthy thing yet.

Andrew Shapiro -- Lawndale Capital -- Analyst

Okay. And then on Santanol, I think you said before the time period for the first harvest is around the end of 2022. And I can't imagine there'd be a shift or change in that. But what are the metrics? Is it premature or because pricing and costs are volatile or not? What are some of the metrics that will be involved in terms of acres, tonnes of trees that are annually harvesting, the pounds of oil that or tonnes of oil that would be generated on an annual basis? Around when might you be expected to provide an estimate kind of the quantity of oil to be produced? And the potential price range, just so we can get a feel for because this is going to become annuity? Another like recurring revenue stream just like our power generation, if not even more sustainable?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah. I guess, maybe that's when we start seeing the EBITDA rolling in, and once we really start noticing it then I'll be able to start talking about without giving too much future looking guidance. But it'll -- the timing is still into wrapping up harvesting next year in 2022, in 2023 -- four or five years, it'll be fairly heavy. And we'll be starting to see the EBITDA that we can talk about. It's not like a partner, this is not a huge investment. But, 9 million, 10 million, 11 million of EBITDA in those years would be quite great, certainly expected kind of range. It gives a handle that kind of the scope. I know it's small for the company, but hey, that's incremental and sustainable cash flow that would be viewed by the board or others thinking of dividend policy or anything else, so it's nice.

Andrew Shapiro -- Lawndale Capital -- Analyst

Okay. I think that's all my questions. Thank you.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Okay, Thank you, Andrew.

Operator

Your next question comes from the line of DeForest Hinman with Walthausen and Company.

DeForest Hinman -- Walthausen and Company -- Analyst

Hey, thanks for taking the questions. Just a couple follow ups on the sawmill project, that standoff. Can you give us any color in terms of what the longer-term pricing realization that you're using to get that three year payback would be?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah, I don't. Of course, I shouldn't really run through the economics of everything on a call like this. I mean, if you look at Friesau as good example of what this mill is going to look like and how it's going to operate. This mill did 31 million in the last quarter, Friesau under peak pricing and under trend conditions that would be 15% EBITDA margin or so type of situation. So, yeah, I don't know what more I can say at this stage.

DeForest Hinman -- Walthausen and Company -- Analyst

Okay. That's fair. I understand. I think in the past, there was a discussion of making a separate subsidiary for the Stendhal sawmills, is that still the thought process around how that would be set up from a corporate structure?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Yeah. It'll be -- it'll be part of Mercer Timber Products that division be managed by our Managing Director, Carsten Merforth, sitting on land right adjacent to the pulp mill. We've purchased the land. That -- that's what the technical design, that's where it sits. How we put the subsidiary versus division and all the blocks together is still a bit complicated. It ties into -- EET lives and other things in Germany. So we're still working our way through that.

DeForest Hinman -- Walthausen and Company -- Analyst

Okay, very helpful. And this is going way back. But originally, when this Stendal Mill was built, I believe there was some government backed financing. There was also some government grants involved. Is anything like that still available as we're evaluating the project financing for that facility?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

There may be some incentives available. It's certainly not like there were when we built the Stendal Greenfield pulp mill just refresh the memory on that. We received about EUR276 million, I think. There were billion spend. For the sawmill -- there will be Germany's still pre-proactive when it comes to real costs. So I think there's about $10 million of real costs and the whole thing probably 50% of that will be covered by government subsidies, whether we can tap into some of these new funds or carbon funds or restart the economy funds -- there's a number of programs developing -- we'll be monitoring those very closely to see if we can participate. But at this stage, I can't say that we're -- we have any kind of line of sight on what that level of support might be.

DeForest Hinman -- Walthausen and Company -- Analyst

Okay. And you may not be able to answer the separate topic, but -- and the price, realizations -- very meaningfully announced higher prices in Europe from some of your competitors. Is there going to be abnormal discounts relative to those price announcements or more along the lines of historical levels of discounts to the list?

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Yes. So quick answer is the discount doesn't change during the year. So these prices are increases -- increases in the structure of all of the contracts that the company has with customers. So no change to discounts at all. You're right, I am expecting price announcements very shortly in Europe. I think everybody is -- this is announced April for a business probably up $100. And -- when you have this kind of condition, if it continues -- what we'll be doing is we'll be like -- these are the conditions that theoretically would allow us to reduce the discount when we get into those negotiations in November and December of this year. It's too far away to tell, but you wouldn't have pulp prices increasing and discounts rising. They would be the other way around, right.

DeForest Hinman -- Walthausen and Company -- Analyst

Okay. Maybe this is just really...

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

This is the seller's market right now.

DeForest Hinman -- Walthausen and Company -- Analyst

Okay.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

So, we're not going to give up anymore on discount.

DeForest Hinman -- Walthausen and Company -- Analyst

That's helpful. I mean, can you -- as investors, can you just help us just hypothetically is the math working out with pricing realizations? I know you have some more downtime than normal, but is the pulp business -- is just where pricing is now, is it making over $1 million of EBITDA a day? I mean, is it then realistic numbers or is it much higher than that?

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Million a day. Yeah. That don't have that in my head before. So, I know what our -- I know what our forecasts for the quarterly are in here. And -- but yeah, I shouldn't comment on that openly like this. We don't give guidance strength.

DeForest Hinman -- Walthausen and Company -- Analyst

Okay. I'll just work on the math myself. Thanks for taking the question.

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

Hey, you're welcome.

Operator

Your next question comes from the line of Austin Nelson with AIG.

Austin Nelson -- AIG -- Analyst

Hi. Thanks for taking the question. Actually, it's essentially a follow-up on the last question. So, just looking at where the indexes are on the pulp side versus the realizations recorded in the quarter. I guess I'm just trying to understand the mix between the discounts on contract and then just timing of sales in the quarter versus the downtime that you took. Is it reasonable for us to expect that the realization is little lower than what we can see in the indexes, because it was earlier in quarter, and the downtime was later in the quarter? And then, you've -- your commentary about nominations going out that you expect to be up pretty meaningfully that as you come out of the big shuts in 2Q that realization should be better, because you're just producing more pulp in the second half, and what least right now look like will be even higher prices.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Okay, well, maybe to start -- so I -- when you talk about the indexes, I presume you're looking at received list or those kinds of indexes, and you're seeing, like the top line price announcements of the $100. So, whatever it is, and the realizations are some lesser percentage of that. And I -- so there's two things in there. One, there is a structural industry discount off of list that for Europe and for North American could be in the high 3% range for starters. So that's a structural, we all live in that world. The discounts that the producers provide, or they're within a percentage of each other, like, it's a structural, it's a discount. So that's one factor. And then the other piece is that, the announcements that says most of Europe is this way, is that when you announce a price increase, it's for the following month. So it's -- you'll see the announcement but it's for orders that will be taken and written in the following month. So there's always a little bit of lag.

And in this-in the first quarter, we've had, like in the US market, we were -- January to February, up $115, February to March up $120. Same thing in Europe, January to February up about $70, February to march up about $90, April -- for May going to be up about $100. So there's a lag effect, as you -- so if you're looking at the quarterly results, you have to sort of blend forward, if you like. So I think that might be what's going on in your model if you're seeing realizations that are lower than what you would have otherwise expected, based on the index.

Austin Nelson -- AIG -- Analyst

Okay.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

I don't know if that helps you or not, as soon as that --

Austin Nelson -- AIG -- Analyst

No, that's very helpful. I guess the way to think about it then is that, all else being equal on production, which isn't going to be the case into 2Q. But all else being equal, if we're in an up-cycle, you shouldn't -- because of the lag effect, you should kind of keep doing better, until and then as the cycle turns, you'll actually be ahead of the downturn. And kind of chasing it back down. That answers my question. Thank you very much.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Good. You're welcome.

Operator

[Operator Instructions] There are no further questions at this time. I would like to turn the call back over to David Gandossi for any additional or closing remarks.

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Okay. Yes. Thank you, Samantha, and thanks to all of you for joining the call. And as always, Dave and I are available to talk more at any time. So don't hesitate to reach out to us. It'd be great to hear from you. So look forward to speaking to you again on our next earnings call in July. Yes. Bye for now.

Operator

[Operator Closing Remarks]

Duration: 65 minutes

Call participants:

David K. Ure -- Senior Vice President Finance, Chief Financial Officer, And Secretary

David M. Gandossi -- President, Chief Executive Officer, And Director Of Mercer

Hamir Patel -- CIBC Capital Markets. -- Analyst

Sean Steuart -- TD Securities -- Analyst

Sam McGovern -- Credit Suisse -- Analyst

Andrew Kuske -- Credit Suisse -- Analyst

Andrew Shapiro -- Lawndale Capital -- Analyst

DeForest Hinman -- Walthausen and Company -- Analyst

Austin Nelson -- AIG -- Analyst

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