All participants, please stand by. Your meeting is ready to begin. Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc. Q1 2022 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.
Well, thank you, Eric, and good afternoon, everyone, and welcome to our call covering our Q1 2022 results, which happen to represent the second-best quarterly results we've ever had the pleasure of reporting. On revenues of just over CAD 70 million, we achieved EBITDA of CAD 20.1 million and net earnings of CAD 11.4 million, equivalent to CAD 0.28 per share. We are pleased with these results considering the ongoing transportation and pandemic headwinds we faced throughout the quarter as well as the extremely harsh winter weather conditions we contended with in January. These quarterly earnings boosted our book values from something like 3 to 3.25 at the end of the year to just over 3.50 per share presently.
We also added CAD 5 million or CAD 0.12 per share in duty deposits in the quarter, bringing our potential refundable duties on deposit to $23+ million, which works out to CAD 0.73 per share Canadian. Of course, that number is before any potential holdbacks and income taxes are received. While we appreciate that the likelihood and timing of a full or partial refund is highly uncertain, we expect that our future finances will be further strengthened when this off-balance sheet asset is monetized. Andrew McLellan, who heads up our operations, and Winny Tang, our CFO, are here with me today to recap our Q1 performance, to preview our Q2 performance, and all three of us will respond to questions that analysts and shareholders may have.
The three of us also wish to reemphasize that our number one priority continues to be protecting the health and safety of employees and their families. The men and women at our harvesting sites, sawmill complex, and power plant deserve the credit for ensuring a safe working environment while we work through the numerous challenges we face, and despite the challenges, delivered a strong opening quarter to the 2022 fiscal year. Let me quickly deal with a housekeeping item. We will be making forward-looking statements and references to non-IFRS measures and therefore call your attention to the warning statement set out on pages one and two of the MD&A of today's date that we released earlier. I will now turn the meeting over to Andrew McLellan, our Vice President and General Manager for operations at Conifex.
Thank you very much, Ken, and good afternoon, everyone. Our power business performed as expected during Q1, except for a two-day unplanned outage, which meant we achieved approximately 99% of our target production and experienced a minor EBITDA shortfall in Q1. All production targets have been met so far in Q2. Recently, we took our power plant offline and will remain offline until early July in accordance with the typical BC Hydro dispatch. We are confident that our power plant will produce solid results in Q2 of 2022 when we record the benefits of the take-or-pay feature of our contract that we have with BC Hydro while the plant is offline. Moving to our forestry operations, we had a very successful winter logging season and have ample supplies of greener, lower-cost logs at our site in Mackenzie.
Our hourly production at the sawmill has improved every month this year, initially because weather conditions improved after a very cold period in January, but more recently because of the benefits of processing greener sawlogs with fewer defects. Our Q2 lumber production is expected to comfortably exceed Q1. Early in Q2, we successfully updated the technology associated with our automated lumber scanning and grading system and are now capturing the dual benefits of a richer grade outturn and improved net, mill net selling price realizations. The sawlog supply available to us, we have no intention of reducing our operating hours and are looking forward to a strong Q2. I'll now turn the discussion over to our CFO, Winny Tang.
Thank you very much, Andrew, and good afternoon, everybody. In terms of some financial considerations, one of the single largest uses of cash that we had in the Q4 of 2021 and the Q1 of 2022 was to build up our log inventories, which we boosted by CAD 17 million in Q4 and by CAD 15 million in the most recent quarter. We believe that this investment supports our target to achieve a 90% capacity utilization rate at our sawmill complex throughout the 2022 year. With our increased sawlog deliveries and higher lumber production, we are expected to spread our fixed costs over a larger number of units, which has the effect of lowering our cash costs on lumber production. Turning to our balance sheet now.
Overall debt was CAD 64.4 million at the end of the Q1 , and this is mainly represented by a long-term power loan, which has limited recourse to our lumber operations. This loan, of course, is at a fixed interest rate and has a lengthy amortization period. As well, we had a CAD 6.5 million draw against our secured revolving credit facility. After deducting cash balances, we ended our Q1 with net debt of approximately CAD 42 million, debt to capitalization ratio of 23% and available liquidity of just over CAD 23 million. Clearly, with the lumber inventories returning to seasonal lows through the Q2 , our lumber business will be in a substantial net cash position after completely paying down the drawdowns on our secured credit facility.
We currently anticipate our capital expenditure, expenditures in 2022 to slightly exceed our annual amortization charges of approximately CAD 12 million. We continue to fund capital expenditures necessary to maintain compliance with safety and environmental obligations and to prepare sites for future harvest. We're also focused on smaller, quick payback projects that are designed to improve the reliability of our saw mill operations. Now, I will turn the meeting back to Ken.
Well, thanks, Andrew and Winny-. For you listeners, on our last call, we spent considerable time reviewing some forest industry regulatory developments that could have an impact on saw log supply in our operating area in the Mackenzie Timber Supply area. We continue to await the release of what I would classify as a long overdue public discussion paper that, once released, will set out the Forest Ministry's view on potential harvest levels in our operating area. Turning to our diversification initiative. On our last call, I outlined the value-added opportunity available to us to host, and I emphasize the word host, high performance computing customers in Northern BC.
We're evaluating the results of the trial program and are well advanced in the design of a business plan that we anticipate will enable us to increase and stabilize cash flow generation at our Mackenzie site. Our aim here, of course, is to position Mackenzie to generate positive EBITDA over an even wider range of commodity lumber prices. I would encourage you all to participate in our annual general meeting of shareholders, which is scheduled for 2:00 P.M. Pacific Time on Tuesday, June 21. We have an important board meeting scheduled for that day. At the board meeting, we intend to, number one, review management's assessment of the likely future quality and cost competitiveness of the saw log supply available to us in Mackenzie, and that will enable us to revisit our saw mill modernization and upgrade plans.
The second key agenda item at our board meeting is to review the final results from our trial hosting initiative and settle on an optimal path forward for making maximum use of the underutilized power infrastructure assets we have in place in Mackenzie and our strong power operating team. The third item is that we will make some decisions around capital allocation, including the merits of additional share buybacks as well as other means that are available to us to return surplus capital to shareholders. Before turning it over to your questions, we're pleased to report that we're off to a very good start so far in Q2.
There's been a little bit of slippage in our mill net in May, although April was right in line with the Q1 mill net realization, and we expect a little more slippage in mill net as we progress through the closing months of Q2. Our Q2 shipments are off to a good start, and railcar deliveries have improved a great deal, so our Q2 shipments could be as much as 30% higher than in Q1. Based on what we see happening to mill net, sales realizations and shipments, we have every reason to expect to report a sequential improvement in net income when we release our Q2 results to you in early August this summer. Thank you all for your interest in Conifex.
Winny, Andrew, and I would be pleased to answer any questions you have. On that basis, I'll turn the meeting back over to Eric, our operator.
Thank you, Mr. Shields. Please press star one at this time if you have a question. When prompted by the system, please clearly state your name to register your question. We will take the first question. Please go ahead.
Paul Quinn.
Yeah, thanks very much. Ken, I know you're waiting on this AAC decision ultimately, but can you remind us what the process is? They release the public discussion paper, and then what's the timeline from that period to actually getting the AAC determination itself?
Okay. Well, I can give you an idea as to what the timelines are supposed to be, Paul. After the public discussion paper is released, there's typically a two-month period for the public to provide feedback, and then there is a two-month or so evaluation period by the Chief Forester's office to consider the impact and do their final analysis. Against that background, we expect that the final harvest level and mix determination will be released right about the end of the calendar year. The follow-up to that, of course, is how that harvest is apportioned between the various licensees, including the new First Nations licensees that are part of the provincial government policy. My best guess is that that will not be happening until early in 2023.
Lastly, the situation in Mackenzie is complicated because as you talked about on our last call, Paul, the Conifex Timber Inc. has sold its Mackenzie tenures to two First Nations. Based on everything we see, that appears to be moving forward. There will be some public hearings on the Bill 22 tenure transfer approval taking place while the harvest level determination and apportionment of work is underway. It's clear that our forestry team will be quite busy dealing with these developments over the next several months.
Okay. Thanks for that. Maybe you could just help us understand the power side. You know, it looks like you've done a trial for 3- MW. You've got a 36-MW power generation facility. What requirement or what? How big can your, I guess, your high performance computing portion be while you can still maintain your agreement with BC Hydro?
Okay. Well, I will answer that, Paul. For some context, first of all, our generator capacity is a 36- MW per hour capacity. We have sustained an operating rate of delivering 25- MW to the grid and 3- MW being used for our internal consumption. Should we proceed with this new venture, there will be no fundamental change in those arrangements. We will continue to deliver power to the grid, and the HPC operation will secure power from the grid. We're looking at 25- MW, which coincidentally is the same amount of power that we deliver to the grid. There isn't necessarily a one-to-one relationship between what we deliver to the grid and what power is delivered through our HPC operations.
Putting it another way, it's quite likely that the HPC operations could be down, and we could still be delivering power to the grid. Alternatively, we could be in a maintenance shutdown at a power plant, and there'll be some power still going to the HPC operation.
Okay. That's helpful. I'm still slightly confused as what the. You know, you've always talked about CAD 14 million in EBITDA from power generation. What is the potential, the way you look at it, you know, provided everything happens, lines up, and goes your way?
Paul, you know, if you listen closely, the 25- MW at our existing Mackenzie site was viewed as phase one. There are other locations in Northern BC adjacent to our Mackenzie operations, where there's considerable surplus hydro power. You may be aware that a public digital asset company called Iris Energy has an 85-MW facility that is under construction and recently commenced operations in Mackenzie, and they have another one in Prince George. We think that we have the power expertise and the HPC industry contacts to develop something along those lines.
The CAD 14 million of potential is my guesstimate as to what sort of EBITDA could potentially be available to us if we had 100- MW of power from the BC Hydro grid utilized in hosting operations. If we are doing 25- MW at the end of phase one, realistically, we'd expect to capture about one third of that CAD 14 million dollar target.
Okay. Hey, that's helpful. Just, it sounds like in your commentary, you're still pretty positive on lumber markets here. You know, prices have come off from Q1 levels. What do you expect for the balance of the year?
Well, you know, we spend a lot of time looking at our EBITDA. In our disclosure. You know, there's some estimates floating around that have lumber prices at around $600 in the back half of the current year. We truly believe that is unlikely to happen. It strikes us as it being too low, not because we have any particular deep insight into the demand side, but based on what we know on the supply side in terms of old-growth harvest deferrals, other regulatory uncertainty, and a continued underperformance by BC Timber Sales in supplying auction wood to the market. The harvest level in northern BC is definitely going down.
On the last call, we noted that in the two-year plan from the Ministry of Forests that were approved by the provincial budget, that there would ultimately be 1.4 billion board feet of lumber withdrawn from the BC market. We also have a lot of evidence of several mills that are operating on reduced shifts which are going to lead to less supply going forward. We think the supply-demand balance is, you know, favors producers much more than would be associated with a $600 lumber price. We think it's gonna be higher than that. Paul, my best guess is that last year we had CAD 51.7 million of EBITDA, and that was just a tick under CAD 1 million a week.
I am hoping and believe that lumber prices could be sufficiently robust in the closing six months of this year to enable us to match last year's consolidated EBITDA. That's a long-winded answer to a short question, but that's our thinking.
Well, that's helpful, and I hope you're right. Best of luck, Ken. Thanks.
Thanks.
Thank you. We will take the next question. Please go ahead, Hamir Patel.
Hi. Yeah, good afternoon. Ken, could you give us a sense as to how your export business you know what share of the mix is that? It seems like prices are actually holding up quite well in Japan. Do you expect to you know maybe increase your weighting there?
Well, my recollection from looking at the tables, Hamir, is that we have a pretty significant share going to Japan in the past two quarters that we reported. Part of that robustness was delays in shipping containers, so we were a late shipper into Japan. My understanding is that today we are doing virtually zero business in China, and we have the preponderance of our shipments by far going into the U.S. market, where we're very pleased with the pricing and demand.
Great. Thanks. Thanks, Ken. That's helpful. Andrew, a quick question for you. I just wanna get your sense as to, for sort of BC Interior as a whole, what kind of stumpage increases are you expecting July first? On an annual basis, how do you see Conifex stumpage varying 2022 versus 2021?
A good question, Hamir. Thank you. Our stumpage forecast is actually in Q2. We should see a drop here in terms of our stumpage in northern BC. In Q3, Q4, we'll see an increase. You know, we're expecting our stumpage to be around CAD 33 in Q3 and drop off to about CAD 18 in Q4. It's fairly close to what we saw in 2021 in terms of the variation in stumpage kind of quarter-over-quarter. We expect our log costs to come in essentially the same as 2021.
Related to that, Hamir, I just wanted to point out that, I was just reading some ministry information the other day, and you know, in Mackenzie, we have a heavy harvest orientation still to salvage wood. It looks like the stumpage rates in Mackenzie are about CAD 10 per cubic meter lower than they are across the Interior BC as an average. If you're guesstimating what our stumpage costs are doing, just take your BC average and adjust it by CAD 10 to pick up the heavy salvage orientation.
Great. Thanks. Thanks, Ken. That's all I had.
Thank you. Once again, please press star one on your device's keypad if you have a question. We will take the next question. Please go ahead.
Whit Duguid.
Hey, Ken. It's Whit. Just a quick question. If I'm doing the math correctly here, after the Conifex sale, I mean, the market's basically pricing in the saw mill at, you know, it's closer to zero valuation. Even if the new AAC comes out favorably, would it still make sense to buy back shares at this price instead of using the, you know, some growth CapEx money to expand capacity? We're just wondering what you were thinking around those lines.
Well, Rick, thank you for your question, and it's a very good question. We had a good exchange of views at our board meeting earlier today addressing those questions that you posed. As a board, we agree on one thing unanimously, which is that we think our fundamental value per share is probably 50% greater than our book value of CAD 2.50 per share. What we are charged with is, for our June meeting, identifying action we could take to attempt to have the market trading price come closer to what our estimate is of the fundamental value. I'm not averse to hearing from a significant shareholder such as yourself on what to do.
I'm sure I'll be in touch with you on that topic early in June.
All right. Thanks so much, Kem.
Thank you. There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Shields.
Well, thank you, Eric, and thank you, all of you on the line for your interest in Conifex. I look forward to speaking to you along with Andrew and Winny at our AGM in June. Enjoy the rest of your day. Thanks.
Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation.