Good afternoon, ladies and gentlemen. Welcome to the Conifex Timber Inc 2021 Q1 Results Conference Call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.
Well, thank you, and good afternoon, everyone, and welcome to this call covering our Q1 2021 results. With me today, we have Chief Financial Officer, Winny Tang and Operations VP Andrew McLellan. I'm going to make some opening remarks, and then I'll hand the call over to the two of them, and then I'll have some closing comments, at which time all three of us will be pleased to respond to your questions. Before moving ahead, first, we wish to reemphasize that our number one priority continues to be protecting the health and safety of our employees and their families. The men and women at our harvesting locations, our sawmill site, our power plant, they all deserve the credit for ensuring a safe work environment during this unprecedented global pandemic. Second, let's quickly deal with a housekeeping item.
We will be making forward-looking statements and references to non-IFRS measures, therefore call your attention to the warning statement set out on pages one and two of the MD&A document that we released earlier today. Turning to our first quarter, net earnings were CAD 4.5 million, or CAD 0.10 per share, and EBITDA was CAD 9.7 million. I know many of you skilled and knowledgeable forest product analysts on this call were expecting stronger results from us in the first quarter. One reason our Q1 results came in below consensus was that we expensed 13 weeks of power plant costs but produced electricity for only six weeks. On our last call, we alerted you that the proceeds from our business interruption insurance claim will likely be booked in Q2 or Q3 of this year.
Had we booked what we estimate the insurance proceeds to be, Q1 EBITDA would have been right in line with consensus. The other reason that our Q1 results came in below consensus was that we only shipped 10 weeks of the lumber we produced in the 13-week reporting period. Although Q1 lumber production climbed to 51 million board ft, shipments of 37.8 million board ft were much lower. Our ratio of SPF shipments to production was 74%, far below the 90% shipment to production ratio BC's two largest SPF producers averaged in Q1 of 2021. Clearly, CN railcar delivery shortfalls were more pronounced in the Mackenzie region than in other parts of the province. To mitigate the buildup in finished lumber inventories, our sales and logistics team stepped up truck deliveries, and by doing so, we incurred extra delivery costs in the quarter.
Subsequent to the quarter end, we've shipped the lumber that was built up. The mill net selling prices we realized on these shipments were CAD 200 per 1,000 board ft higher than we achieved on our Q1 shipments. The key point here is that besides lowering revenues, railcar shortages added to our costs and lowered the mill net selling price realizations we recorded in Q1. Had we achieved a ratio of shipments to production in line with the two majors, we would have exceeded consensus Q1 EBITDA forecasts. We are encouraged that to date in the current quarter, railcar deliveries have improved, and weekly shipments have consistently exceeded production. Should this continue for the next few weeks, our lumber production and shipments are expected to be in balance by the time we report results for Q2 in this year.
I now have the pleasure of turning the meeting over to Andrew McLellan, our Vice President and General Manager, Northern BC Operations for Conifex.
Thank you very much, Ken, and good afternoon, everyone. Let's start with lumber. Our Q1 lumber production was 5% higher than Q4 of 2020. However, our shipments were approximately 23% lower. On my last call with you, I explained how we and certain other sawmills in the Northern Interior region of BC experienced challenging weather conditions last winter, which led to log harvest and delivery shortfalls and retarded lumber production in the first half of 2021. We plan to boost lumber production as soon as we have the benefit of summer log delivery starting next month, and we continue to anticipate our full operating rate will exceed 90% of our two-shift rated capacity of 240 million board feet in 2021. Any number of pandemic-related or unanticipated production and/or shipment disruptions could hold us back and prevent us from achieving the production target.
On a full-year basis, 2021 lumber production is anticipated to be 70% higher than our 2020 results. The BC Ministry of Forests has a timber supply review underway for the Mackenzie timber supply area, and Chief Forester expects to release a new harvest level determination sometime around the end of the year. We have two major studies underway at present that are related to this coming announcement. One focusing on the characteristics of the sawlog supply we expect to process over the next decade and beyond at our sawmill facility, and a second study focusing on the potential to boost our lumber production capacity at Mackenzie by approximately 25%, lower our cash conversion costs, as well as improve our lumber recovery and grade out turns at our Mackenzie facility.
We expect to settle our plans for expanding and modernizing our Mackenzie sawmill site shortly after the release of the new harvest level determination. I'll turn now to the power generation business. Our power plant continues to achieve its daily power production targets since the plant restarted in late February. At this time, I'll turn the discussion over to my colleague, CFO Winny Tang. Thank you.
Thank you, Andrew. Good afternoon, everyone. Just so we're turning to finance, overall debt at our quarter-end totals approximately CAD 62 million. This is mainly represented by a long-term power loan with limited recourse to our lumber operations, a fixed interest rate, and a lengthy amortization period. After deducting cash balances, we ended quarter four with net debt of CAD 49.9 million, a net debt to capitalization realized ratio of 29%, and available liquidity of CAD 16.4 million. The CAD 10 million revolving credit facility we had arranged late last year remains undrawn. In December 2020, we had commenced our normal course issuer bid, which allowed us to repurchase and cancel up to 2.9 million shares. To date, we have repurchased and canceled 922,800 shares at an average price of around CAD 1.60 per share.
We view share buybacks as an appropriate use of the excess cash we anticipate generating in Q2 through to the balance of the year. We continue to believe our share price trades well below our estimate of fundamental value. I will now turn the meeting back to Ken.
Well, thanks, Winny and Andrew. Just as a reminder, we differ from the major public SPF producers in the sense that we pay duty deposits on nearly all our lumber shipments. The other public SPF producers do not. Duty deposit expenses impact our pre-tax earnings to a much greater extent than the other public companies. We achieved pre-tax income of CAD 6.3 million in Q1 of this year after expensing CAD 2.5 million in duty deposits. For us, duty deposit expenses represented just under 40% of our pre-tax income, while it ranged between 3.5%-5.2% of pre-tax income for the larger, more diversified SPF producers. If there is a resolution of the trade dispute, if duties are eliminated, it's clear that the impact on cash flow generation in our company will be considerably greater than for the other public companies.
As a corollary to this point, we are building an off-balance sheet asset in the form of potential duty refunds, and these duty refunds will likely represent a greater proportion of our equity market capitalization than is true for the larger, more diversified companies. We now have $12.3 million on deposit that is potentially refundable to us. Given our expectations for lumber prices and shipments for the balance of 2021, this number will likely exceed $20 million by the end of the year. This will represent a materially higher percentage of our present equity market capitalization than is true for the other companies. While we appreciate that the timing of a settlement and the likelihood of a full or partial refund of duties is highly uncertain, history suggests it's highly likely that our balance sheet will be further strengthened at some future date.
Before turning the meeting over to your questions, we're pleased that we have the ability to release our inaugural ESG report this afternoon. All of us at Conifex are very proud of the track record we've compiled in terms of each of the metrics covered in the report. In closing, lumber markets are strong, and we expect to report record Q2 and full-year earnings for the reasons set out on slide 11 of the presentation we released an hour ago. Thank you for taking the time today to learn more about Conifex. We're pleased to answer any questions you may have, we'll turn the meeting back over to Roxanne, our operator.
Thank you. 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. There will be a brief pause while participants register for questions. Thank you for your patience. We will take the first question. Please go ahead.
Hamir Patel. Thanks. Hi, Ken. Ken, you brought up a point about your duty burden being higher than some of your peers. I guess I'm just curious, in this very strong market, what is even compelling you to sell into the U.S.? I'm assuming there's no Canadian discount. Why wouldn't you try to place all the products domestically?
Well, first of all, when we reviewed that this morning at our board meeting, we found that the mill net sales price realizations, depending on the product, were pretty similar between the two markets. We're selling roughly 80% in the U.S. The customers that we have in the U.S. have been loyal to us for a long period of time, effectively lumber's on allocation, and the people that have been supporting us through good and bad lumber markets are being served now. We have about 8% of our lumber going to Japan. There's a definite lower realization on Japanese lumber prices because those prices are set up in advance. As you well know, cash lumber prices have increased CAD 500 per thousand board ft in the last five weeks, and they'll be up again when they're reported tonight.
Japan has low realizations, but it typically has fully competitive realizations. That's how we're looking at the business, Hamir.
Okay. Thanks. That's helpful. Andrew, I wanted to follow up on the capital project that you mentioned, a potential capital project at Mackenzie, which could potentially drive a 25% capacity increase. If you were to go down that road, what would be the CapEx and timing of how quickly that production growth would come on?
At this point, Hamir, we're engaged with an engineering firm in preliminary design, and general arrangements are available, and we're currently working on identifying lead time for equipment. It would be a bit early for me to give an indication in terms of timing or capital at this point. We have committed the funding to do the front-end engineering work and come up with those answers, likely in Q2 or Q3.
Great. Just a last one from me. Ken, the Premier made a lot of comments about how he wants things to evolve in BC with forestry policy and tenure. Just curious to get your thoughts as to how that potential changes could impact Conifex and your fiber basket specifically.
Okay. Well, that's a very meaty question that you posed, Hamir. Here's our take on the situation. There are two important announcements expected later this month. One is the release of the intentions paper, which I think will provide more detail on some of the comments that the Premier made at the COFI convention in early April. The second is the allotment of the harvest in the Prince George Timber Supply Area, which is the largest TSA in the interior region of BC. About three and a half years ago, the chief forester concluded that the harvest level needed to be established at a considerably lower level than it was previously when there was still some pine beetle salvage harvest activity underway.
The ministry has never disclosed how they intend to divide up the harvest between BC Timber Sales, between First Nations, and what portion would be remaining for licensees. It seems clear to me that certainly Conifex's expectation is that in order to remain at your present level of fiber self-sufficiency, you're going to have to have some log purchase agreements or arrangements with First Nations. The effect in BC, one thing we know for sure is that the harvest levels are going down over the next few years because the salvage programs are close to being exhausted.
The second conclusion is that for many companies, their degree of fiber self-sufficiency, as measured by the tenures under their control and direction as a percentage of their total log requirements, that degree of self-sufficiency is going lower and there'll be a heavier reliance on purchases from other tenure holders, namely BC Timber Sales and First Nations. That's what we see happening, Hamir, and that's why we have, as Andrew explained, we're commissioning these reports, so we can come up with an ideal optimization plan for our Mackenzie site. It's important to us that we know more about the volume and characteristics of the fiber available to us in Mackenzie before we can finish our engineering work.
That's why it'll be late this year, likely following the release of the TSR review, before we can precisely set the specifications for a modernization and upgrade, and before we can estimate what the costs are. We see no reason why we would be out of line with the industry in terms of modernizations and upgrades typically have a three to five-year payback in terms of EBITDA. We should be in that range based on everything I see today.
Great. Thanks, Ken. That's all I had. I'll turn it over.
Thank you. Once again, please press star one at this time if you have a question. We will take the next question. Please go ahead.
Marcus Campeau at RBC Capital Markets. G ood afternoon. Thanks for taking my questions.
Hi, Marcus.
Just with the midyear stumpage revision coming up, do you expect that to impact your production costs at all? If so, is there anything that you can do to help offset that?
We were, again, scrubbing those numbers this morning. We have estimated that our delivered log costs in the calendar year 2021 will be about just somewhere between 20% and 25% higher than in the previous year. 2% or 3% of the increase is due to a greener, better log mix. We've got a slightly better quality log coming into the mill this year. A bit of the increase is due to some general inflation in costs. Something in the high teens to perhaps as much as 20% is due to escalating stumpage costs. That's how the numbers play out for us, and it's consistent with the possibility of a CAD 30 per cu m increase in province-wide stumpage rates taking effect on July 1.
Great. That's helpful. Just on lumber futures, they took a bit of a dip today and caused some concern. What are you seeing in the market today, and do you think we've hit a turning point yet?
We had a discussion about that as well at our board meeting today. What we found is that at various points in time, the futures market both pulled up cash prices or pulled them down. Our sales desk reports that the cash market is stronger on Tuesday of this week than it was on Thursday of last week when Random Lengths reported the last cash prices, even though the futures have sold off the last two days. There's a bit of a divergence there. We don't know exactly how everything's going to shake out through the balance of the year. What we've experienced, of course, has been incredibly beneficial to Conifex. On January 1 of this year, we had an equity market capitalization of CAD 66 million and an enterprise value of about CAD 115 million.
Looking at where prices are at I suspect our EBITDA this year will be greater than the CAD 66 million. I don't know if it'll make it into triple digits or not, but it's a whopping number relative to the value that our equity base was accorded at the beginning of the year. We're feeling very good about how things are shaping up and what the increase in tangible net worth will be in our company. That's the reason why we'll be back in the market on a buyback program as soon as the buyback period opens.
Okay. Sounds good. Just on that share repurchase program, could you just remind us how you think about it? Do you have a target valuation that you're looking at, or just taking the current market price as a fair value?
One number that is often discussed is looking at book value because we find that a lot of the forecasts have these companies, including us, probably coming in at three times earnings, perhaps even lower, and not a terribly different enterprise value relative to 2021 EBITDA. We look at book value, and our book value is going to be, certainly by the end of the year, it's going to be above the current market trading price. The other lumber producers are at 60%-80% premiums over book value. We don't have any trouble tracking or having a repurchase program that tracks our book value increase over time.
Okay, thanks. I appreciate the details. Good luck with the current quarter.
Thank you.
Thank you. We will take the next question. Please go ahead.
Brian Potecker. Hi, Ken. Congratulations on a great quarter.
Thank you.
I'm curious as to, and if you answered this previously, I got on the call late, but curious as to whether with these high lumber prices, you're hedging in any of those prices, and if so, could you give us a description of your hedging program?
Okay. Well, it's a matter of public record that I think we're sort of in the middle of the pack in terms of hedging. We lost approximately CAD 900,000 on our futures position in Q1 of this year, and we disclosed that. I'm aware of one other company that lost a little over CAD 1 million per sawmill on hedging and another company that did far worse than that. I'm also aware of some companies that don't hedge. We think that we currently are hedged on a portion of our production. It's way less than 10% of our production. I think that we are going to use hedges to achieve a better balance between log costs and lumber prices. Earlier you heard that stumpage rates in BC were going up a material amount per cubic meter of logs effective July 1.
We don't want to find ourselves paying stumpage rates based on, say, CAD 1,300 lumber and only be getting CAD 700 or CAD 800 for that lumber. We think there's a business argument to be made to work to try and achieve a balance between your anticipated stumpage costs and the prices that are available in the market, to be sure you can cover those higher log costs.
Great. Thank you.
Thank you. There are no further questions registered at this time. I'd like to turn the meeting over back to Mr. Shields.
Okay. Well, thank you, Roxanne, for your service today. Winny, Andrew, and I all thank you for your interest in Conifex and look forward to speaking to you when we release our Q2 results. Enjoy the rest of your day. Bye now.