May 4, 2012
Operator
Good morning, and welcome to Mercer International's First Quarter 2012 Earnings Conference Call. On the call today is Jimmy Lee, President and Chief Executive Officer of Mercer International; and David Gandossi, Executive Vice President, Chief Financial Officer and Secretary.
I will now hand the call over to David Gandossi.
David Gandossi
Thank you, Stephanie. Good morning, everyone.
As usual, we'll begin with formal remarks, after which we will take your questions. Please note that in this morning’s conference call, we'll make forward-looking statements similar to those that were made in the press release, according to 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 the press release and with the company’s filings with the Securities and Exchange Commission.
David Gandossi
Let's all begin with some prepared remarks and -- on the key financial aspects of the quarter and then I'll pass the call to Jimmy. As you've seen from our press release, our first quarter results were encouraging.
Relative to the fourth quarter of 2011, NBSK pricing was down, however all our mills ran at near record levels. In addition, the cost of many of our key inputs were down this quarter, including our fiber cost.
So despite the lower pulp prices in Q1, we're generally pleased with our overall operating results. We're also encouraged that we have been able to implement a number of price increases so far this year, and we believe the market fundamentals will improve as China and Europe work through their adjustments.
David Gandossi
I'll be going over our financial results in more detail in a few moments, but first I wanted to highlight that in the 3 months ended March 31, 2012, we repaid approximately EUR 10 million of standalone term debt. In addition, cash is increased by approximately EUR 19 million during the quarter, assisted partly by a short-term revolver draw of approximately EUR 4 million for short-term working capital needs.
David Gandossi
Operationally, our mills ran very well in the quarter. Pulp sales volumes were down approximately 15,000 tonnes.
However, I need to put that into perspective by reminding readers that our Q4 sales volumes were at record levels as Chinese buyers and traders took advantage of low prices to refill inventories. Pulp prices dropped in the quarter, primarily driven by Europe's weakness as it continued to struggle with a slow economy and weak paper demand.
The average European list price fell to USD $837 per tonne, while the China price fell to USD $687. We estimate that these price reductions reduced our EBITDA by about EUR 11 million comparing to Q4.
David Gandossi
Jimmy will discuss the short-term outlook for pulp in more detail, but we continue to believe that pulp prices have bottomed out. And although there has been a large shift of inventory from producers to customers in China, ongoing strong demand from the Chinese market will drive further price increases as we move through the year.
David Gandossi
As you will have seen in our press release, we reported net income of EUR 1.2 million for the quarter or EUR 0.02 per basic share compared to a net loss of EUR 1.8 million or a loss of EUR 0.03 per basic share in Q4. Our Q1 2012 net income includes approximately EUR 0.9 million of a noncash gain related to the mark-to-market valuation of our fixed interest rate swap.
Before this noncash item, basic EPS was EUR 0.01 per basic share. We recorded quarterly EBITDA of EUR 30.6 million or approximately USD $40.1 million.
This compares to EUR 17 million, or about USD $22.9 million in the fourth quarter last year. As I alluded to earlier, there were a number of positive influences on EBITDA when compared to Q4 after allowing for the negative impact of the lower prices.
The most notable were lower fiber cost, energy costs were also down, as were our freight costs.
David Gandossi
Stendal had a large maintenance shut in Q4, while there were no maintenance shuts in Q1, which creates a positive variance when comparing the 2 periods. We also experienced a small foreign exchange variance due to the weakening of the euro in the quarter.
David Gandossi
Switching to cash flow. Overall, our cash position is about EUR 19 million higher than at the end of Q4, sitting at nearly EUR 136 million or approximately USD $182 million.
Overall, the quarterly working capital movements increased cash by about EUR 18.5 million on a net basis, primarily due to decrease in inventories and accounts receivable. Capital expenditures drew EUR 8.5 million, which was lower than Q4 by approximately EUR 3 million.
David Gandossi
Summarizing our working capital movements. Relative to our cash build in the 12-month period ended March 31, our working capital excluding cash and short-term debt increased by about EUR 27 million, up from EUR 111 million at the end of Q1 2011.
At March 31, 2012, we had approximately EUR 26.4 million of undrawn revolvers available at Rosenthal and approximately CAD $31.1 million available at Celgar. Our EUR 136.4 million of cash at March 31 is comprised of approximately EUR 65.8 million for the Restricted Group and EUR 70.6 million at Stendal.
Net debt to equity on a consolidated basis at March 31 is at a little over 2x, the Restricted Group net debt is about 0.5x equity at March 31, 2012.
David Gandossi
As a reminder, many of our competitors now report using IFRS, International Financial Reporting Standards, which replaced Canadian GAAP on January 1, 2011. And while the implications of this change is that many of our competitors that we benchmark ourselves against now account for major maintenance using a different method than us.
Currently, in accordance with U.S. GAAP, we expense all noncapital major maintenance costs in the period they are incurred, while for those reporting under IFRS, noncapital major maintenance costs are capitalized as property, plant and equipment and then amortized to the next major maintenance through depreciation and amortization expense, which in our industry, is usually about one year.
David Gandossi
As a result, financial performance measures comparisons to many of our competitors who are no longer an apples-to-apples basis. However, in this particular quarter, we did not have any major maintenance expense so our results are fairly comparable.
David Gandossi
That ends my review of the overall financial position and development so let me turn the call over to Jimmy now to talk about operational market and strategic developments.
Jimmy Lee
Thank you, David. Good morning, everyone.
As David mentioned, we're encouraged with our first quarter results. We increased our cash balance this quarter despite making our scheduled debt repayments.
I'm also pleased that our focus on reliability has resulted in another strong production quarter. We still have some work to do in this area, but we're continuing to move in the right direction.
We also achieved our highest quarterly electricity revenues this quarter, suppressing the previous record set last quarter. Another way of looking at our energy revenues is that in the first quarter, they exceeded our interest expense by EUR 2 million, a very positive result considering the pulp markets are still relatively weak.
Jimmy Lee
In the first quarter, we've lost [ph] average NBSK list price has continued to decline, with the European Q1 average list price falling USD $31 to USD $837 per tonne; in North America the average price fell USD $50 to USD $870; while in China the quarterly average list price fell USD $26 to USD $687 per tonne. All 3 mills ran very well in the quarter.
It is not surprising that on top of the record-setting energy revenues this quarter, we also achieved record energy production. And that is in spite of nearly 3 days of long energy production due to repairs on one of our turbines.
Jimmy Lee
In total, we produced 380,000 tonnes of pulp this quarter compared to 365,000 tonnes in the fourth quarter, and 359,000 tonnes in the first quarter of 2011. In addition, the mills produced 436 gigawatt hours of electricity in the quarter compared to 410 in Q4.
Jimmy Lee
Turning back to the pulp markets for a moment. We believe that the NBSK pulp markets have bottomed since we have seen a number of recent price increases.
Also, as market statistics are suggesting a balanced pulp market, and as we headed into the spring maintenance season, we believe that markets will continue to tighten. And as a result, we should see support for the additional price increases.
Jimmy Lee
Producer inventories were at 29 days at the end of March, and we believe that number will come down slightly when April numbers are released. In addition, hardwood pulp inventories were down a day to 34 days.
The price spread between hardwood and softwood have also narrowed, which we believe is very positive for NBSK of price indicators. However, Europe continues to struggle with sovereign debt issues, which are slowing economic growth, and European paper demand continues to be weak.
Jimmy Lee
As I noted last quarter, the current dynamic in Europe has resulted in previously integrated pulp being sold at market pulp. Consequently, we believe that a supply-side reduction is required in the short term to bring this market better balance.
While in North America, the high cost mills that are down stayed down or risked further damage to a still fragile global market.
Jimmy Lee
Currently in China they're absorbing the majority of the world's excess tonnes. And although we don't believe that current volumes are sustainable, we do think this market is continuing to grow.
We also expect Chinese demand to stay strong through Q2. In the medium to long term, we continue to believe that the growth in China and similarly growing economies will increase market tightness as consumers increase their use of tissue-based products.
We're seeing a number of reports that supports this belief. Indeed, when I visit our customers in China, I'm always surprised at the economic activity.
In addition, there is significant paper and tissue capacity scheduled to come online in the next few years to support the expected increase of demand. Our sales volume totaled 385,000 tonnes in Q1 compared to 400,000 tonnes in Q4 of 2011 and 309,000 tonnes in Q1 of 2011.
Jimmy Lee
Let me now take a moment to discuss developments in the wood markets. European fiber prices remain at elevated levels, but we're experiencing a price decline in Q1, primarily due to reduced demand from the board and pallet industry.
We anticipate that strong sawmilling activity and minimal competition for fiber from board producers will maintain downward pricing pressures through Q2. We continue to be able to source the fiber we need.
And as a result, we are satisfied with our current fiber inventories in Germany. As they work through their winter stockpiles, we will continue to monitor them closely.
Jimmy Lee
At British Colombia, our fiber costs decreased slightly in Q1 relative to Q4 due to running an effective shift in Celgar's woodland throughout that quarter. We continue to build our roundwood inventory to allow us to continue to run effective shift.
We currently expect Celgar's fiber cost to remain stable through Q2 with some downward price pressure made in that quarter. We are currently satisfied with Celgar's fiber inventories but we'll continue to monitor them closely.
Jimmy Lee
In January, we announced our Blue Mill project at Stendal. We are very excited about this project because it will create an additional 30,000 tonnes of pulp production capacity and includes the installation of the 40-megawatt turbine.
We expect to invest approximately EUR 40 million in this project, with EUR 12 million of that coming in the form of nonrefundable government grants.
Jimmy Lee
Overall, we're anticipating this project will pay for itself in about 2 years. We also expect the benefit from excess generating capacity going forward as each incremental investment in pulp production will also increase our energy output.
We will provide regular updates on the status of the Blue Mill project over the course of its construction.
Jimmy Lee
We have spent the majority of the grant allocated to us by the Canadian government under the Green Transformation Program. At March 31, 2012, we have about CAD 2.4 million that we expect to receive in Q2 as a result of small investments qualifying, yet highly accretive projects.
Jimmy Lee
We regularly get questions about the timing of our annual maintenance shuts, so I would like to highlight what our 2012 shuts will look like. Rosenthal will have their annual shut in Q2 and it's scheduled to be longer than usual, in 21 days due to work being done to enhance their recovery boiler.
And we believe this capital investment will qualify for the wastewater fee offset program. Celgar's shut will be in Q3 and Stendal in Q4.
And both are scheduled to be approximately 10 days long.
Jimmy Lee
I'd like to take a moment to briefly comment on our takeover bid as we have disclosed previously. Our bid was made with the full support of the Fibrek's Board.
We continue to believe our bid was of superior value and are very disappointed in the Québec regulatory process that has frustrated us at every turn. Consequently, we let our offer expire in February -- April 27.
We have recovered CAD $2.4 million of expenses in keeping with our support agreement negotiated with Fibrek's Board.
Jimmy Lee
Switching now to our asset claim. On Tuesday, May 1, we filed a request for arbitration to the government of Canada for breaches of its obligations under NASDAQ regarding the treatment of energy generation facility at our Celgar mill.
I would like also to mention that Celgar's labor agreement expires on April 30. It is our current understanding that chemical pulp has been selected as the target for negotiating a patent agreement.
[indiscernible] at this point, we are not anticipating any significant labor disruptions as a result of this negotiation process.
Jimmy Lee
If I can close with a few of observations. We continue to watch the NBSK game market very closely.
We believe NBSK prices have bottomed out, and that we'll see prices continue to slow climb. We remain strong believers in the medium- to long-term NBSK supply/demand fundamentals, which we foresee as being driven by the increasing economic standards of the emerging markets.
That is the conclusion of my prepared remarks. And I will turn the call back to the operator so we can open up the call for questions.
Thank you.
Operator
[Operator Instructions] Your first question comes from the line of Graham Meagher with TD securities.
Graham Meagher
First question. Jimmy, maybe you can just talk a little bit about what you're seeing in China and Europe in May and specifically on the volumes and the pricing?
Jimmy Lee
Well, we are of course in discussions in regards to the recently announced price increases, both in China as well as in Europe. Certainly because of the economic activities in Europe being rather weak, there's a lot of pushback.
Those discussions, of course, are ongoing. In terms of China market, I think there has been a significant amount of tonnage in the first quarter, which will shift in from areas which traditionally have not really shift that amount of tonnes.
And as a result, we know that the buying pattern was such that there's probably been excess buying on the part of some of the purchasers. And therefore, it probably will result in some difficulty in pushing prices in China upwards.
But we believe that this is more of a short-term issue because as you know, the hardwood producers are also pushing extremely hard for similar types of price increase. And therefore, the price of hardwood and software, of course, would be such that it would be preferable to actually run with more softwood.
So I think it's going to rebalance itself in a shorter period than a lot of people think. There's been significant amount of capacity in China that will come online.
And therefore we do believe that this demand is going to be continuing to grow and the volume increase is not speculated type of inventory. So I think there will be initial problems [ph] to -- a little bit of a rough patch in the short term in China, but overall, we think it will progress for the balance of the year quite well.
Europe is kind of holding up at these kind of lower levels. So we're not seeing any real pickup, but we're not really seeing any real weakness either.
So it's going along at this kind of lower kind of level of activity.
Graham Meagher
Great. Next question, you noted the German fiber cost declines in Q1.
Can you give us a sense of the magnitude of that decline, maybe on a percentage basis or so?
David Gandossi
Yes. Probably the best way I can do it for you, Graham, is for Rosenthal, they dropped about EUR 4 per tonne of pulp and Stendal about EUR 15, quarter-over-quarter, fourth quarter to first quarter, and in Celgar, it was about EUR 10.
Graham Meagher
Okay, great. Next question, on the Blue Mill project.
Is there any downtime associated with that in 2012 or 2013 beyond the normal maintenance shut in Q4?
Jimmy Lee
We're not expecting any significant downtime for connecting up all of the necessary new equipment.
Graham Meagher
Great. And maybe, David, just the last one.
Can you provide the shipments by mill?
David Gandossi
Okay. So sales volumes for Rosenthal for the first quarter were 84.9 thousand tonnes, Stendal was 171.4 thousand tonnes, Celgar was 128.6 thousand tonnes, for a total of 384.8 thousand tonnes.
Operator
Your next question comes from the line of Gary Madia with Gleacher and Company.
Gary Madia
It's a good quarter, difficult environment. I just got a quick question.
Sequentially on the energy revenues, I know that you were flat sequentially from -- on a reported revenue basis despite the actual energy sales going up about 13,000 megawatts. Can you speak to that a little bit?
Is there anything in that, because I would've expected a little bit of more contribution?
Jimmy Lee
We don't really have a lot to say about that, Gary. All the mills ran well and generation was up and price is stable.
Gary Madia
Okay. All right.
And second question is, as you look to the Rosenthal shut in the second quarter being longer than expected, I would've thought maybe that there would've been a inventory investment in the first quarter in terms of building up in front of that shut but I didn't really see it. How should we be thinking about that as it relates to shipments and I guess do you feel comfortable that your inventory level is going into the shutter find?
[ph]
Jimmy Lee
I think what I said maybe is the reduction in raw materials inventories in Germany. Coming out of the winter, the guys really maybe work hard to get the log yards down and then with a shut in Rosenthal, they push really hard particularly to move around without.
But there is a heavier load of finished goods at Rosenthal to look after customers during that shut. So net-net, I guess they balance out.
David Gandossi
But we will be having to run very, very hard after the shut to rebalance our inventory a bit to levels that are more sustainable. We will be extremely low coming out of this based on forecast.
Gary Madia
So as we think about shipment levels, versus what you guys produced and -- I'm sorry, actually shipped in the first quarter looking into 2Q, are you hopeful or confident that the shipment levels are going to be consistent or how should we be thinking about that on a trend basis?
Jimmy Lee
It's pretty flat.
Operator
Next question comes from the line of Bill Hoffman with RBC Capital Markets.
Bill Hoffman
Just talking about the Rosenthal downtime in the second quarter, what are you specifically doing for the extended downtime? Can you remind us?
Jimmy Lee
Basically, we are adding certain additional parts to the recovery border. So in effect, we're increasing the capacity slightly at the recovery border.
Bill Hoffman
And this is also to help for future expansion on the energy side, is that correct?
David Gandossi
Yes. And also it all sets -- it reduces the amount of discharge into the wastewater system as well.
So it is going to have a beneficial impact in terms of the environmental side and also produces a little bit more pulp. And therefore, of course, it will allow us to produce a little bit more electricity as well.
And just to remind, for those who don't know, there's a wastewater fee program in Germany where you're charged an amount based on effluent flow. And if you can identify a project that allows you to reduce those emissions effectively, you have those waves.
So the way to think about this recovery border, I believe, is 7 million, roughly half of the expenditure, is paid for as an offset of these wastewater fees. So it's very accretive to us.
So as Jimmy says, it adds capacity and it reduces cost, gives us more steam output.
Bill Hoffman
And how does that roll for the financial savings?
Jimmy Lee
I'm not sure what you mean, but I mean, it's just a capital expenditure that reduces cost and will have a slight lift on energy revenues.
David Gandossi
But you will get a portion of that capital cost, which is being offset by the accrued wastewater fees. So you're not going to see the full amount of the actual expenditure because of course that will be credited against the -- on the balance sheet against the wastewater liability.
But only that portion that we will fund, which is roughly, what, the $3.04 million, roughly.
Jimmy Lee
Sorry, Bill, I misunderstood your question. So it's grant accounting.
Bill Hoffman
So what will be CapEx in the second quarter then effectively? Just part of the...
David Gandossi
Yes, it's a heavy quarter. It's about EUR 17.8 million in total.
And at Rosenthal, it is EUR 10 million of that, EUR 10.4 million. There's some lags there, but there's EUR 6.5 million of grants being offset throughout the remainder of the year.
Bill Hoffman
So the EUR 10.4 million is the gross number?
David Gandossi
Yes.
Bill Hoffman
Okay. So your Restricted Group should be in, whatever, $6 million to $7 million kind of range total?
David Gandossi
About $5 million. If you're looking at the impact that has been funded from our side, roughly around $5 million can be rigged.
Bill Hoffman
Okay. That's helpful.
And then, Jimmy, can you just talk about the power sales dispute under NAFTA? What the response has been from BC Hydro and the government and everybody else at this point.
Jimmy Lee
Well, I think the government of Canada certainly has been very responsive in defense that, I think they totally understand the issues. And of course, under the NAFTA agreement, there is a requirement that the parties tries to make some preliminary, or at least try to resolve it without having to go through the arbitration process.
So clearly we have gone through that. Unfortunately, the meetings did not come to any real or clearer type approach just because we felt -- actually we don't think the problem is actually was well prepared.
So I think the problem clearly, they are not taking it as seriously as the federal government. Hopefully through this arbitration, claim now being filed, but the province, as well as county agencies will take it a lot more seriously.
So I think that's where we stand.
Bill Hoffman
And then any risk to you guys on this -- your current power sales out of Celgar?
Jimmy Lee
No. I mean, it's completely different.
I mean the issue basically is one of the base load. What we're saying is that unlike every other pulp mill, which essentially doesn't have to sell supply all of its power needs and still sells power to BC Hydro, we are the only mill, which is essentially forced to, because of what BC Hydro did, to basically supply all of our power before we can actually sell any excess.
So really, this is quite a contentious issue because prior to BC Hydro stepping in and changing what used to be a situation where we could, under the former agreement that existed between us and Fortis, which is our utility, essentially we could sell pretty much all of our power as long as we could get it to that client through the transmission. And while this transmission availability was there and pricing was agreed to, we could spend that power and by industrial heritage power from Fortis.
And that was the original understanding and we had entered into a contract with Fortis. And unfortunately, BC Hydro intervened, because of course, Fortis is very much dependent on a big chunk of their power from BC Hydro.
And that's how we ended up in the BCUC process and we continued to, of course, hope for a resolution in that arena, but we still have not been able to reach a satisfactory conclusion. And also, of course, because of the time statute of limitations in terms of NAFTA, we were forced to file a formal claim so that we protect our overall interest in the event things do not progress in all of these various processes from a regulatory perspective.
Operator
Next question comes the line of Richard Kus from Jefferies.
Richard Kus
Can you guys tell me a little bit about what the expected cost on the maintenance is that's going to run through the income statement in the second quarter?
David Gandossi
That's awkward because we don't really typically disclose those costs, Richard. So not prepared to answer that directly.
Richard Kus
Okay. And then from a more strategic perspective, any thoughts -- now that the Fibrek offer is off the table, do you have any thoughts on what you might do with cash generated specifically at the Restricted Group going forward?
David Gandossi
Yes. I mean, clearly with the separate deal essentially having expires, we have to look now at what will be the best return for our cash presently on the balance sheet.
So the Board and management, of course, will be discussing, I guess, both issues in the coming weeks. And depending on what we believe is the best use for any excess cash, I'm sure we'll be dealing with that in the coming quarters.
Richard Kus
Okay. So nothing to report right now, then?
David Gandossi
No. I mean, we just thought there's a great potential acquisition, as you know.
And of course, we are now reviewing all of the long-term capital investment requirements or planning. There's various things that are occurring and all of that, of course, are being discussed and we will then have a better and clear picture as to the comfort zone in terms of really a lot of the cash and where we should be deploying those cash reserves in the coming quarters.
Jimmy Lee
And we still do have board authority for our bond buybacks, if we see a securities trading at interesting levels.
Operator
Next question comes from the line of Andrew Shapiro with Lawndale Capital Management.
Andrew Shapiro
David and Jimmy, despite standout debt entirely sends [ph] off in holding company Restricted Group, why do you think that most of the key analysts that cover Mercer formally choose to apply a valuation multiple only across the entire consolidated results rather than just valuing their Restricted Group and use $10, the one-way call option, to enterprise value that it is and what might you guys do better to communicate this way of thinking?
Jimmy Lee
That's a difficult question because, I mean of course we've clearly laid out in terms of both the press release and in terms of our earnings statement. Of course, we have the requirement under the bond indenture to clearly lay out all of those figures.
It's very clear, we've made it very well. And very clearly, separated in terms of the recourse and nonrecourse nature of our Stendal debt.
But we don't control what the others chooses to write, and so on that note, you should probably ask them rather than us. That's why they do it that way because that's clearly beyond our control.
All we can do is essentially try to communicate to the best of our ability and certainly we would appreciate if you have any inputs in terms of if we're not really communicating correctly and of course whatever we put out there has to be within the balance of the regulatory requirements. But as long as it's within those bounds, we'll be more than happy to hear any suggestions from anybody as to how we may be able to better improve that fact.
Andrew Shapiro
So you don't disagree then with that type of analysis that in fact Stendal is a call option, which has upside optionality. But should that necessarily, if one was put in a lower elevation...
Jimmy Lee
Well, I wouldn't call it a call option. What I would look at -- we should not look at it going below 0 value so you shouldn't take away from value because clearly if there's no value because of the cycle, then of course because of the debt being quite high, then of course, you should be the 0 value and not the negative value issue, because of the debt, and the upside, of course, because of the leverage, you should attribute the positive value going forward.
So I look at it only as really only positive and then you got either 0 or any positive number.
Andrew Shapiro
Well Jimmy, you just communicated as I was hoping you might on that. Let's go forward on the Stendal cash flows.
What are your thoughts on the completion date and the ramp-up time for Blue Mill?
Jimmy Lee
I think Blue Mill is scheduled to be up and running next year, third quarter next year.
David Gandossi
Q3 next year.
Andrew Shapiro
Is the project still EUR 40 million total cost, EUR 12 million of that is grants. And how much of Mercer's 28 million has been and still remains to be funded from the Restricted Group down into Stendal, if any?
David Gandossi
It's all been done other than $1.5 million guaranteed for cost overrun, which we're not expecting to have to deal with.
Andrew Shapiro
So the March balance sheet and the income statements, et cetera and cash flows reflecting downstream up to that point already?
David Gandossi
That's correct, Andy.
Andrew Shapiro
Okay, great. And since your energy rates are fairly stable, where you can obviously project out the pulps prices, what's the range of incremental cash flow from the incremental energy production you currently feel this project is going to generate that would come up?
David Gandossi
That was in the 7 million to 9 million range.
Andrew Shapiro
7 million to 9 million would be on the energy incremental cash flow a year?
David Gandossi
Yes.
Andrew Shapiro
And then of course pulp is just an estimated production increase, but you can't clap an assumption on it. Although you do say that you made the investment and thought of this investment as a 2-year payback.
If one was to reverse engineer this, that means you made some assumptions on pulp cash flow for that?
David Gandossi
We considered our view of trend pricing and trend conditions in that statement.
Andrew Shapiro
All right. And then the NAFTA claim and the arbitration steps you're at now, what are the next steps and milestones in this process?
David Gandossi
I think there will be -- meetings will be scheduled and our expectation is that Canada will drag BC to the table and ask them, "Why aren't you taking this as seriously as we are?"
Jimmy Lee
Okay. We need a clear schedule in terms of what those prices supposed to do.
Of course we have to want to choose the venue as to where the process will occur. We have to choose the arbitrators, of course, and then choose the Chairman of the arbitration process, et cetera et cetera.
So this is not done -- if we go through the formal process, this is a multiyear type of procedure. We're hoping that we won't have to go through the full length of it, but if we do that, of course in a multiyear type of process, and fairly expensive, of course not a major expense, but still a significant expense, we're hoping that before we go through all of that process, that the parties will understand the potential ramifications as well as the issues that happened.
And overall settlements will occur way before that.
Andrew Shapiro
Do you have any signs already that the government of Canada is taking this seriously?
David Gandossi
The Government of Canada certainly is taking it very seriously, but at the same time as you know, the province is the one which has actually created this problem for the federal government. So of course, it is on their part a focus, I'm sure, because of course, the liability is the Federal, and I'm sure they're not exactly too happy with what's happening.
Andrew Shapiro
Okay. On the [indiscernible] expenses, with the reimbursement that's already taken place, I guess what are the net expenses Mercer will have spent on the attempted acquisition and also, what are the amounts and timing of these dollars as they flow through either Q1 or are going to be in the Q2 income statement?
David Gandossi
I guess the best way to answer that, Andrew, is not material on a net basis. As you know, we had a 2.4 million expense recovery.
We booked 2 million of that in the first quarter and 0.4 million in the second quarter due to the timing of the renegotiation of the support agreement. So on a net basis, on both quarters, the expenses are not material.
Andrew Shapiro
Got it, great. And lastly, you guys talked about or you mentioned, David, that the bond buyback authorization is still in effect.
I just wanted to clarify, is also the stock buyback authorization in effect and how much on that authorization is left? Is it a dollar amount, a share amount?
David Gandossi
Yes. We have 25 million on both.
We have 10 million left on the bonds and 15 million on stock. Our interest is more on debt reduction at this stage.
Operator
Your next question comes from the line of Paul Quinn with RBC Capital Markets.
Paul Quinn
Just have one last one. China has taken in a lot of pulp in the last 3 or 4 months.
What's your comfort level of current inventories over there?
Jimmy Lee
I think the problem with the situation right now is I think the buying happened a lot earlier and bigger than what should've happened in the first quarter, so there's going to be a probably a short period of adjustment. Let's say through the rest of the year, I think that certainly the demand side in China is continuing to grow because of the new capacity, as well as the fact that old capacity is being taken off.
I think the problem, what we're seeing in China is one where you have a nontraditional sellers increasing the amount of volume that they are shipping, which probably was volume that they couldn't place as paper in Europe, going and divert it to the China market. So I think there's probably a possibility of some overhang in terms of inventory in China.
But I don't think it's going to be a significant one where we're going to be faced with weak prices moving forward, because the hardwood side, of course, has come up significantly. The GAAP in China between hard and soft is very narrow, if not going to close.
And therefore, my guesstimate is that we should, after May, start to see significant improvement. Of course we're headed now into summer months too, but we also have a lot of maintenance downtime, including Rosenthal and everybody else.
So I think it's not so bad as a lot of people are worried about it.
Paul Quinn
Okay. And just I guess lastly, incremental, what's your estimate in incremental market pull from the integrated mills in Europe?
Jimmy Lee
Well, I'm sure that you saw the numbers in terms of shipments into China from Finland, right? And of course, already about half of what the total shipment were last year, it was about 250,000 tonnes.
Although last year was only 250,000 -- I mean 500,000 tonnes. So within the first 4 months, we're already half of what the full year amount was.
So clearly increased from even last year and last year's number was an increase from the year before of probably another 200,000 tonnes. So you know, the incremental amount seems to be about another additional, say, 200,000 tonnes.
It's an amount, a significant amount, but it's not a huge number that, if you know what I mean. It seems to be increasing annually at that type of rate.
Operator
[Operator Instructions] And your next question comes from the line of [indiscernible] with JP Morgan.
Unknown Analyst
I just wanted to ask about the additional capacity that's going to be coming on line later this year, early next year by Ilim. Obviously that's going to be all targeted at the China market, and the other can be some volatility there at times.
I'm curious how you receive [ph] that in the context of kind of the longer-term commentary that you gave us.
Jimmy Lee
Yes. I think towards the end of this year, we're going to start to see, of course, Ilim's production now starting to ramp up.
The incremental increase when they're at full capacity, we believe it's about an additional 500,000 tonnes, clearly targeting pretty much all through China. We believe that based on the growth of tissue, as well as coated and other grades of paper in China, that this incremental increase will be absorbed.
Now whether you're going to have some disruptions initially, it really depends on how Ilim, of course, approaches the market. My feeling is that net-net, as long as we transition right, the impact should not be that adverse into 2013.
Mainly because I think there is going to be continued tightness overall in terms of overall raw material. And I think the hardwood guys are doing a fairly good job hopefully.
And as long as both parties are controlling their overall supply, I think the increase supply out of Ilim will be not as adverse as one would expect.
Unknown Analyst
Okay, that's helpful. And I guess, just in terms -- in that same vein, in terms of China demand and with the machines that are coming online, how would you think about the long-term growth rate over there, over the next 2 to 3 years?
Jimmy Lee
If you look at the plans for China in terms of high [indiscernible] grade, of course their plans for the next several years is enormous. Now whether it should actually goes like that, we'll have to see.
But certainly this year, we know that the capacity increases, as well as capacity shutdowns of the old machines are such that there's going to be an increase in demand for virgin fiber, as well as waste paper. And so if you just look at a 9-million tonne number that the government of China has announced, a closure of all capacity, clearly a lot of that is going to be in packaging grade.
But there's going to be a lot which is going to be again in varying poor quality tissue and for again, writing. And even if there's not the packaging grade, it will suck out a lot of the waste paper.
So if waste is going to be sucked out to meet the demand coming out of China, and then of course it also means there's going to be a lot of waste and that will drive up all of the raw material pricing because clearly the alternative is virgin material. So this transitioning from old production, which was more agricultural type of raw material, as well as non-wood-based raw material to more of a wood-based type of material, is going to be what's going to continue to support this demand.
And we said, the reason that China is doing this is a combination of environmental issues, as well as the fact that clearly the living standards are improving. But I think what's clearly driving it is really the environment because, of course, these old paper mills are not just highly polluting from an energy perspective, but also extensive water pollution.
And of course, water issues are very serious over there.
Unknown Analyst
Just the follow on would be, do you think the China markets over the next, let's say, 2 years is going to grow enough to offset some of the clients we're seeing in the developed markets?
Jimmy Lee
Yes. Net-net, statistics clearly indicate that the decline in the developed countries have been more than offset by the growth in the China market.
So it's clear, even today, that the growth in China has essentially supported the overall demand in growth for paper, as well as pulp. And I don't see any particular reason why you have a sudden decline in consumption in the developed countries that could not be offset by the continued growth in the China market.
Certain categories, yes. But I think overall, I don't see that occurring.
So yes, we believe there's going to be a positive growth rate on a global basis in fiber because of the emergence of China.
Operator
There are no further questions at this time. Mr.
Lee and Mr. Gandossi, I'll turn the call back over to you.
Jimmy Lee
Well, I appreciate everyone for attending today's call. And thank you.
Operator
This concludes today's conference call. You may now disconnect.