Apr 30, 2021
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 Ure
Good morning, everyone. I'll begin by reviewing the first quarter's 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 considerable compared to Q3. The increase was primarily due to improved pulp and lumber pricing with average pulp list prices up over $150 per ton 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 products segment contributed record quarterly EBITDA of $31.7 million. Our wood products 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 ton up $246 from Q4. European list prices averaged $1,037 per ton in the current quarter compared to $880 per ton in Q4 and the average Q1 net eucalyptus hardwood price in China was $692 per ton, up $212 from Q4.
The hardwood list price in the US average, $1,020 per ton in Q1, which was up over $150 compared to the prior quarter. In total, our average pulp sales realizations were up over $80 per ton this quarter, positively impacting EBITDA by about $40 million compared to the prior quarter.
Pulp demand remains 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 of Q4. Our lumber realization has also increased considerably during the quarter, particularly in the US.
The random links US benchmark for Western SPF 2 and better averaged about $970 per thousand 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 $1300 per thousand board. Our Q1 average lumber sales realization was $622 per thousand board feet up $155 compared to Q4.
Our product segment continues to perform well. We sold about $108 million [ph] 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 mill joint venture which has 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 note issue as we took advantage of the strong debt market to prepare for the increased CapEx program, which David will speak to momentarily.
Our cash flow from operations was other line - 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 of planned maintenance downtime at our Celgar mill.
We originally intended to limit the shut to 20 days 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 at Peace River builds [ph].
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 report their results under IFRS are permitted to capitalize the direct cost of their annual maintenance shuts while we expense ours as cost in the period of the shut completion and while we noted this in subsequent - as a subsequent event in February I remind our listeners that in January, issued $875 million of senior notes that bear interest at 5% and 18% per year that 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 7.38% 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 have seen from our press release, our Board has approved a quarterly dividend of $0.065 [ph] per share 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'll now turn the call over to David.
David Gandossi
Yes, thanks, David. 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 more [indiscernible] 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 run 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 sustain the record high lumber prices that we've been seeing. Both 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 are seeing paper producer 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 are seeing indicators of future growth and assuming vaccine rollouts are successful global GDP is expected to rebound significantly in 2021.
Governmental economic support is also expected to help fuel this growth as a result, we are 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 expect that agent [ph] pulp production assets will continue to have unplanned downtime and transportation limitations that are creating supply constraints may not be resolved for several quarters.
March pulp 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, logistics, challenges to create a strong seller's market. US market supply-demand dynamics are expected to remain favorable for the near term as 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 produced 478,000 tonnes of pulp, down 46,000 tons from Q4. The decrease was primarily due to Celgar's planned maintenance shut.
Excluding the Cariboo mill our pulp mills produced 519 gigawatt hours of power down 49 gigawatts from Q4, again due to the maintenance and Celgar. Finally, with the Celgar's 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 that 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 $6 million board feet compared to Q4.
In Germany our would cost, particularly for pulpwood remain at historically low levels due to the abundance of beetle-damaged wood while we expect this pulp log supply dynamic to last well into 2021. We are seeing early indications of modest would cost inflation will come later in the year.
The situation for sawlogs is more current and we will begin to purchase more expensive, but higher quality logs as early as Q2. In Western Canada pulpwood supply remain steady and prices are modest due to sawmills running full out to take advantage of the strong US market.
Overall, we expect fiber prices to increase only modestly in Q2. We have a significant annual maintenance program planned for 2021, the majority of which is happening right now.
All of our major maintenance shuts carry significant risk as a result of the pandemic and the 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 Stendal is taking its 18 months shut which will last 21 days, it should be coming out of that this weekend. Cariboo will take a 11-day shut and Peace River will take a 63-day shut.
You'll recall that 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 tradespeople during the pandemic as a reminder of the costs associated with the recovery boiler rebuild will be reimbursed by insurance proceeds. In Q3 Rosenthal has a 15-day shut plan and Celgar will take a four-day mini shut in Q4.
Stendal 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 you're continuing to Stendal pulp mill expansion, roughly $60 million project that will increase our pulp production by 80,000 tonnes and power production by about [indiscernible] gigawatt hours.
At Friesau we are also in the process of commissioning the A4 sorter component of the Phase 2 expansion project, the new planer, sorter and that have been ramping up over the past few quarters are now been optimized. Production is approaching half a billion board feet and improved grade out turn for profile optimization and product sorting is pushing average realizations higher.
We've also commenced new projects that combined with the projects I've 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 expansion of the wood room at Celgar.
The projects will allow us to transform our supply chain, increase our capacity and reduce the cost to produce our own woodchips. The projects will also allow us to accept alternative forms of lower quality wood that were previously left in the forest.
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 Stendal's sawmill. The initial plan for the mill contemplates a $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 cost to be between $200 to $250 million and subject to board approval could commence foundation construction before year's 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 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 can take a moment to remind listeners that COVID-19 and its curious variance and mutations remain a significant risk to us all and I encourage everyone to get the vaccine when it is available to keep your families, friends, and colleagues safe.
Thanks for listening. I will now turn the call back to the operator for questions.
Operator
[Operator Instructions] Your first question comes from the line of Hamir Patel with CIBC Capital Markets.
Hamir Patel
Hi, good morning. Dave, could you speak to how lumber prices and some of the European markets and Japan today, how the returns would compare to what you would get in the US?
David Ure
Yes, sure, Hamir. Good morning.
Yes, we are not well - Europe is not what the US margins are, but they are improving and have been - and have been much when they've really, really moved compared to what would be normally the case. Europe's usually pretty flat and moves up 5% to 10% or down 5% to 10%.
So we've seen some really big moves in that market and it's continuing to tighten. Japan lagged a little bit but J-grades [ph] 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 that is going to be an important market for us, as I said before, it could be up to we're hoping to be up to about 10% of our volume could find that between that market.
Hamir Patel
Great, thanks Dave, and you know in Germany, I saw some trade reports about sort of changes in the I guess characterized as an allowable cut but what - 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 Ure
Yes, sort of in general terms, you could think of it's roughly 50% is state or federally owned and 50% would be privately owned and the beetle [ph] is - I mean it's a really regional, sort of the thing that really depends on where you are, if you're down in the Black Forest, that's one thing. If you're up North and around Stendal, it's predominantly pine forest.
So it is a totally different situation but, yes, 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 wood is going to continue to 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 in 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 Friesau and with timber supply up in the North in the Stendal region. There are a number of smaller saw millers around that have not continued to reinvest and not class mills that struggle with the dry beetle.
They don't produce products; they are usually producing a green product. So it's not all good for everybody in Germany with the situation but with our mills.
They - it runs really well with [indiscernible]; so I know I'm kind of wondering around the topic I don't have a lot of data to do specific by region Hamir, but there's lots of timber there for us for the future in our view.
Hamir Patel
Okay, great, thanks. Thanks, David and just the last question for me.
In British Columbia, the premier recently made some remarks, like a lot of media attention about long-term potential changes to how tenure is owned or controlled in the province. What impact do you expect there to have on Mercer and the BC pulp industry?
David Gandossi
Yes, it's hard to know. For us we've got the half interest Caribou which is our partners are West Fraser, massive sawmilling company in that region.
So I'm sure those taken the restructuring hits with the reduction [indiscernible]. I think that situation will be stable.
Celgar in the south east corner of the province has a green forest with lots of sawmills around us. I wouldn't imagine there would be much change down there where 60% or 65% of our raw material comes in the form of sawmill residual chips from sawmills around us in for clusters [ph] and the rest is the residual harvest of pulp heavy bulk stands or the knock down from saw log harvesting and that material is becoming more and more available in our view, I think the province system, a lot of good things around ensuring that material comes out of the bush.
We've talked about this on previous calls. It's really happening.
The harvesters pay either way. They bring about the stumpage, if they don't bring it off the stumpage.
So they can recover a few bucks and the cost of the stumpage on the stuff that is not a sawlog is being reviewed and adjusted and I think - I think the provinces are on the right track there. So, I think for us in British Columbia we're in a pretty good situation where we're comfortable with the situation.
The wood room project is going to be a real gamechanger from a cost perspective. So really what you're doing there is - what we've been doing is receiving these pulp logs at remote satellite yards and kind[ph] of receiving stations, if you like and 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 alignment can handle and the smaller, shorter and sort of tangled material it comes in from the byproduct or harvest bycatch; we call it and processing chips and bark for us and so it just streamlines all of logistics and rather than having trailer loads of chips coming at the mills we have we've got trailer loads of pulpwood coming in and it's - I mean it's a really significant cost saving on the raw material processing and handling.
So we're pretty excited about that.
Hamir Patel
Great, thanks. Thanks, David.
That's all I have.
David Ure
Okay.
Operator
Your next question comes from the line of Sean Steuart with TD Securities.
Sean Steuart
Thank you. Good morning.
David Gandossi
Good morning Sean.
Sean Steuart
A couple of questions. David you gave several puts and takes in the 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 in the mid to high 30-day range given shipping constraints is that closer to what we normally think of 30 days in a normal environment, any context, you can give on that element, and how much you mentioned if that is the market?
David Gandossi
Yes, sure. We've been watching that and thinking about it quite a bit and so I think the hardwood - 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 that is being done 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 American and European customers. So, you've got that issue and then you've got the Scandinavian mills that are finding it really difficult to get their pulp to China and if you can get containers your best - your next option is you have to reserve some breakbulk, you don't ship hundreds of tonnes on breakbulk like you do with containers you need to, they put 15,000 tonnes or 20,000 tonnes aside and ship it all in one big chunk.
So it's really, 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 my gosh, it is really tight.
We are sold out. We can't think of supplying to anybody, and we're just trying to keep up with the commitments that we've made on contract, 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 market is super tight. This is no question about it in my mind with, that's an indication that consumption is clearly moving along.
Sean Steuart
And on the softwood side, do you expect the carry-on restart impacting at all. Is there enough volume?
David Gandossi
It's not very big, that is like 3000 tonnes. So I'm not worried about that.
Sean Steuart
Got it.
David Gandossi
Puts and takes in our business exceed that every quarter anyway.
Sean Steuart
Yes. Yes, Dave on the Peace River.
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 Gandossi
Yes. So it does.
The insurance is designed to cover the majority. Obviously, there is two elements to it.
There is property and there is 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 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 idle invoices or final determination on exactly which sales we lost and exactly what the PI should be but in general it's pretty - it's pretty efficient and the fact that this shut 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 will be returning the mill to production.
So we'll have a month to work for the insurers to try to dial in that clean. So my expectation is that you want - if all goes well it will be pretty - pretty seamless but we might have some of the proceeds.
It might be a little bit lumpy from Q2 to Q3 but our expectation is, we'll try to limit that for sure.
Sean Steuart
With the other way of thinking about it, I guess is the Q2 expense hit should really be limited to Stendal with respect to the downtime program this quarter?
David Gandossi
Right. Yes.
David Ure
Except that. No, I just correct that little bit, Dave.
There is a regular maintenance component to the Peace River shut. So if you would have otherwise had a 14 day or 12 or 13 day shut that'll be - that will be major maintenance in the quarter.
Sean Steuart
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
Hey guys, thanks for taking my questions. As you roll through the remainder of the year as you generate free cash flow.
How do you think about the priority uses for that cash? You've got obviously the 5.5 to 2026 that we can later this year.
When you look to target that which got small amount of revolver that you could pay down. Could you look at M&A, how do you think about where you focus your priorities.
David Gandossi
Yes. So thanks Sam, and we've got a balanced capital allocation strategy.
We are growth-oriented company, we've got - we've got a number of really exciting projects in front of us. I've really kind of pulled the covers off to Stendal 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 will be balancing our allocations to delever when and if and how it makes sense to do that and that's kind of the direction the balance of those two priorities is really how we're thinking about our capital allocation right now.
Sam McGovern
Okay, great thanks.
David Gandossi
Along with not getting ourselves pregnant, recognizing the volatility of the world these days. We also want to be conservative.
We don't want to get too far ahead of ourselves and proving too much capital and having the bottom fall out of the global markets for a year or something. So 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 much - how we're balancing this.
Sam McGovern
Okay, great, thanks so much. I'll pass the line.
Operator
Your next question comes from the line of Andrew Kuske with Credit Suisse.
Andrew Kuske
Thanks, good morning. David, you mentioned a little bit in your prepared comments and it's also in the notes on the grants you perceived in relation to GHG reductions and really other related activities.
Could you maybe give us 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 helping reduce costs in a longer-term basis.
David Gandossi
Yes, sure. So, so for Celgar, the capital for the modernization of the wood room is about $21 million and we have a nice grant of $4.5 million.
So a net 16 call it with a cost saving roughly of about a $15 million EBITDA impact from just lower transportation and processing costs and better yield by putting wood through a big electric modern shipper as opposed to grinding it up with the diesel fired mobile chipper out in the bush. These 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 that you get a better chip from a centralized wood and get much more wayward recovery and it's just it's - and so that's, so this is the carbon calculation in that that ties into these grant applications.
For Peace River we're rebuilding the mill had wood run way back when under the [indiscernible] 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 with new equipment innovations.
We're able, our project is going to be, it's close to $45 million. We have about 8.5, and we have SI eMoney which is - which is a carbon grant of about 5.5, so net 32 and the cost savings are about $20 million a year and what we're doing instead of harvesting aspen and bringing poultry links into a satellite yard, spring it, putting it down, picking it up, putting it through mobile shippers and moving the ships to the mill will be using these logging trucks that are approved in Alberta now asset trucks and we'll do everything cut to length.
So we'll look at the trees to roughly 20-foot lengths and we'll get about close to 40% more wood on one haul and will 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 the - from everything we handle. We don't have to handle it twice and return on all the cost of all this remote satellite yard and so forth and end with a better chip and about 8% better yield of multiple chips for the same amount of tree that we're harvesting so there is grant money for that.
We have an outstanding application for some additional grants through Alberta. We will know if we're successful.
We've been shortlisted. We won't know if we are successful until June but we're hopeful there might be a little bit more there.
These are - these are projects at the provinces and the Federal Government of Canada very excited about. We've been very successful with grant applications because of the innovation aspects and the carbon aspects of these projects.
Andrew Kuske
That's very helpful. Sorry.
David Gandossi
Yes, I was just maybe going to mention a couple of the things, in Alberta there is an offset program. It is called the tier program and so we generate credits that are confirming 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 at a slight discount to the carbon cost. So we got about $6 million of credits in the process of selling for past years and those numbers will grow particularly with the wood room with an 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 Celgar there's the provincial government is very interested in renewable natural gas and fuel switching and carbon reduction in all these kinds of things. So as we're finding a real shift in government's attitude towards supporting and providing incentives to do some of these future looking project.
So we're all with that right now a lot of is sort of work in the kitchen trying to imagine how to - how to do things that meet the needs of government how that could be really economically beneficial and contribute to our sustainability in the long term. So it's an exciting time actually.
It gives a lot of opportunity for us to participate these programs. Same thing in Europe there's going to be massive amounts of money for the right kinds of projects as governments 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
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 given your power generation is basically waste heat-related, do you have qualification for green power or carbon offsets from that and when you think about the expansion of not just the pulp mill at Stendal but the power side of it do you get an uplift as it relates to either carbon reduction or some offset benefit.
David Gandossi
Well, there is the - I'm not sure how to answer that exactly the carbon offsets really come like each program is going to be different. But I think the tier program is kind of like years of benchmark of what your emissions would be, the 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 signature on the right side of that, then you have excess credits, which you can have audited and sell them into a compliance grade offset program.
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 we are pretty low already like the only natural gas that Mercer burns is in our lime kilns and a little bit in our 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 exist 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 line to possibly producing syngas or extracting malignant employing that into the kiln as a fuel source as opposed to the natural gas and get away from - get away from the carbon cost of doing things and these are decent type of programs, I'm sure that there'll be support for and we don't want to - you don't do them too soon.
You do it when it makes economic sense to do it and in our view is we want to be an early movers because you know there won't be incentives for everybody, but certainly those that are out in front of everything and our shovel ready projects will be the months to get the support and going to be able to make the changes.
Andrew Kuske
I appreciate the color. Thank you.
David Gandossi
Yes. Welcome
Operator
[Operator Instructions] Your next question comes from the line of Andrew Shapiro with Lawndale Capital.
Andrew Shapiro
Hi, 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, and just if you can quickly clarify any timing differences and all of that and flows of it regarding the reimbursable amount is not going to be a capitalized flow through. It's going to go through the income statement.
Is that correct?
David Gandossi
Yes, for the business interruption, Andrew. Yes, it will - it will go where it will be matched into the P&L to the extent that it's covering cost or covering loss revenue and will go to P&L to the extent that as you covering property it will go to the balance sheet.
Andrew Shapiro
Got it, okay and then regarding the new large construction projects sawmill in particular when is your current expectations of that large enterprise to begin operations and start generating a payback?
David Gandossi
Yes, sawmill equipment suppliers today are on a two-year lead time. So it's really, really become quite competitive to order equipment.
So that's why we're in this early, you can get in the line-up early if without release any kind of material deposits until you get closer to the window. But it's all about getting in line, so we're two years from starting to receive equipment and then a year holding all that together, I guess, if you take general terms.
So it's, we're really three years out before you're going to.
Andrew Shapiro
Okay. And then once it starts operations, you obviously have a projection of why we're making this investment in terms of cash - incremental cash flows and all of that, what is the payback rate that you guys were using or anticipating, for such a large investment to get a feel for what we think are incremental returns should be for this.
David Gandossi
Yes, well, we think about - we think about an investment like that in a number of ways, but if we look at trend pricing and we think about the synergies with the pulp mill that's better than three year payback on that capital potentially to hand and in peak pricing it will be better and then trough pricing it will be worse obviously but there is a tremendous synergy there if 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 why that's not really a pulp log that's a sawlog. That is a pulp log, that's a pulp log, this one's a sawlog.
So we're going to be harvesting sawlogs out of a pulp log would if you like, and there is - there is just a really strong maturing timber supply in and around the central region, so will be the - the main sawmill in the region, enjoying that and basically what you're doing is you're providing the lowest cost to the pulp mill and displacing its highest cost fiber. The stuff that you would have been bringing in from the Baltics and places like that.
So there's - it is a bit like - it's in relation to the EBITDA from the sawmill there is a real benefit to the pulp now. There is any anticipation by supplanting let's say the wood brought in from the Baltics and all that, that we will then develop an excess of all of those rail cars and all the other logistics that this company has built up no, no we're going to be using all that equipment.
In fact, we're continuing to strengthen and expand our logistics with current focus is to develop more wood terminals throughout Germany. So these are procuring sections of land on rail track that 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 rail car - trains as we need to and so we'll have inventory all over the place and it's all about controlling the logistics, you don't have to cut on the trees if you control logistics.
So we'll be - will be fully utilizing our fleet of modern round wood railcars, we also have a new fleet of modern chip railcars as well and will be fully utilized. Now, this is a very big project, you know it's hundreds of millions and it is also one that you've just discussed, is there is a long - there's a long to get into.
The company has recently wonderfully refinanced for lower cost and going 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 we're going to allocate capital you got 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 towards former levels, but also depending on the stock price when it makes sense to be buying back and retiring shares does such a long waiting line for such a large project put those to other capital allocation decisions on a longer-term hold or is there any more nearer term time horizon for when these other capital allocation items for shareholder - returning shareholder value can take an equal seat at the table.
David Ure
Yes, I think the latter for sure if there's I mean 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 the dividend under the right conditions and balancing our capital allocation strategy. There is lots of different moves that we can make in this kind of economy that continue to support our shareholder value and that's what we're all about.
So we'll be thinking about all those things.
Andrew Shapiro
Okay. So it's not off the table for that time horizon.
This is a near-term consideration. Now that was a bad issue, but now that the debt's been really put in a fine position and the company has really enhanced its cash flows for the foreseeable future.
David Gandossi
Yes. Yes, we just have to do things in the right order Andrew, but there is 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 commitment, get board approval, get the financing in place, then we can take that liquidity and do the things we need to with it.
Andrew Shapiro
Okay. And is there any update on the bio filaments venture, and the timing of cash flows.
David Ure
Yes, it's still - it's still an R&D project at this stage. So, no, we've got some small sales and lots of trials going on, but it's not developing into a commercial product.
No big news where it is in yet.
Andrew Shapiro
And then on the Stendal I think you said before the time period for the first harvest is around the end of 2022 and I can't imagine there'll be a shift or change in that, but what are the metrics is it premature or because pricing in costs are volatile or not. What are some of the metrics that will be involved in terms of acres, tons of trees that are annually harvesting the pounds of oil, that tons of oil that would be generated on an annual basis.
Around when might you be expected to provide an estimate kind of on the quantity of oil to be produced and potential price range, just so we can get a feel for it, because this is going to be coming in annuity another like recurring revenue stream just like our power generation, is not even more sustainable.
David Gandossi
Yes, yes, I guess it's 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 it without giving too much future looking guidance but the timing is still ramping up harvesting next year and in 2022 and then 2023 for four, five years it will be fairly heavy. And we'll be starting to see the EBITDA that we can talk about, it's not like a pulp mill, this is not a huge investment, but $9, $10, $11 million of EBITDA.
In those years would be quite certainly expected.
David Ure
Likewise it gives a handle of accounting the scope, I know it's small for the company. But hey, that's incremental and sustainable cash flow would be fueled by the Board or others once thinking of dividend policy or anything else so it's not.
Andrew Shapiro
Okay. I think that's all my questions.
Thank you.
David Gandossi
Okay. Thank you, Andrew.
Operator
Your next question comes from the line of DeForest Hinman with Walthausen & Company.
DeForest Hinman
Hey, thanks for taking the questions. Just a couple of follow-ups on the sawmill project at Stendal.
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 Gandossi
Yes, I don't, because I should really run through the economics of everything on a call like this I mean if you look at Friesau is a 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 at 15% EBITDA margin or so situation, so I don't know what more I can say at this stage.
DeForest Hinman
Okay, that's fair, I understand, I think in the past there was a discussion of making a separate subsidiary for the Stendal sawmill is that still the thought process around how that would be set up from a corporate structure.
David Gandossi
Yes, it will be part of Mercer timber products that division be managed by our Managing Director [indiscernible] sitting on land rate adjacent to the pulp mill, we purchased a land with a 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 lives and other things in Germany. So we're still working our way through that.
DeForest Hinman
Okay, very helpful. And this is going way back but originally when the Stendal mill was built, I believe there were some government-backed financing, there is also some government grants involved is anything like that still available as we're evaluating the project financing for that facility.
David Gandossi
There may be some incentives available. It's certainly not like there were when we built Stendal, greenfield pulp mill just refresh the memory on that when we received about EUR276 million I think, out of $1 billion spend, for the sawmill there will be Germany is still proactive when it comes to rail costs.
So I think there's is about $10 million of rail costs in the whole thing, probably 50% of that will be covered by government subsidies whether we can tap into some of these new funds for carbon funds or restart the economy funds if there is a number programs developing will be monitoring those very closely to see if we could participate but at this stage, I can't say that we have any kind of line of sight on what that level of support might be.
DeForest Hinman
Okay. And you may or 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 Gandossi
Yes, so quick answer is the discount doesn't change during the year. So these prices are increases or the increases in the structure of all of the contracts 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 - this is announced in April for May business probably up 100 bucks. And when you have this kind of condition, if it continues what we'll be doing is we'll be but these are the type conditions that theoretically would allow us to reduce the discount when we get into those negotiations in November and December of this year.
That is too far early to tell, but you wouldn't have pulp prices increasing and discounts widening they would be the other way around.
DeForest Hinman
Okay. Maybe this is just really.
David Gandossi
This is a seller's market right now. So we're not working up anymore on discount.
DeForest Hinman
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 one million bucks of EBITDA today.
I mean, is that realistic number or is it much higher than that.
David Gandossi
Yes, I don't have that in my head I know what our forecast for the quarterly sort of here and I shouldn't comment on that. We don't give guidance, right.
DeForest Hinman
Okay, I'll just work on the math myself. Thanks for taking the questions
David Gandossi
You're welcome.
Operator
Your next question comes from the line of Austin Nelson with AIG.
Austin Nelson
Hi, thanks for taking the question. Actually, this is essentially a follow-up on the last question, just looking at where the indexes are on the pulp side versus the realization you reported 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. I guess is it reasonable for us to expect that the realizations were lower than what we can see in the indexes because it was earlier in the quarter and the downtime was later in the quarter.
And then you're given 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 just producing more pulp in the second half that is what released right now looks like there will be even higher prices.
David Gandossi
Okay, well, maybe to start, so when you talk about the indexes, I presume you're looking at those kinds of indexes and you're seeing like the topline price announcements. So whatever it is and the realizations are some lesser percentage of that and so there's two things and one, there is a structural industry discount off of list that for Europe and for North American can be in the high 30% range, for starters.
So that's a structural we all live in that world, you know the discounts that the producers provider there within a percentage of each other like it's like it's structural, it's a discount. So that's one factor and then the other piece is that the announcements, I'd say, is most of Europe is this way as when you announce a price increase, it's for the following months.
So it's, you'll see the announcement, but is for orders that will be taken and written in the following months. So there is always down a little bit of a lag.
And in the first quarter, we've had, you know like in the US market, January to February, up 115 bucks February to March. Up 120 bucks, same thing in Europe, January to February up 70, February to March up about 90, April to May, going to be up about 100.
So there is a lag effect as you, so if you're looking at the quarterly results. You have to so the 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
Okay.
David Gandossi
I don't know if that helps you or not.
Austin Nelson
No, that's very helpful, I guess the way to think about it, then that all else being equal on production, which isn't going to be the case in 2Q but all else being equal in an upcycle, you should because of the lag effect you should kind of keep giving a better until and then as the cycle turns, you'll actually be ahead of the downturn and kind of tracing it back down. That answers my question.
Thank you very much.
David Gandossi
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 Gandossi
Okay. 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 would be great to hear from you.
So, look forward to speaking to you again on our next earnings call in July. Bye for now.
Operator
Ladies and gentlemen, this does conclude today's conference call. You may now disconnect your lines.