Good morning and welcome to Mercer International's second 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 conference over to David Ure. Please go ahead.
Good morning, everyone. Before David begins, I would like to remind you that in this morning's conference call, we will make certain forward-looking statements. 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. David?
Yeah, thanks, David. Good morning, everyone. Q2 was a remarkable quarter for us. We advanced key elements of our strategy, growing our annual pulp capacity by 80,000 tons at Stendal, rebuilding our recovery boiler at Peace River, improving our ESG ratings, and demonstrating the potential of our Friesau sawmill. We delivered solid operating earnings and executed three large maintenance shuts, all while navigating the complexities of a global pandemic, wildfires in Western Canada, and flooding in Germany. Now, despite these challenges, including the current volatility of end product markets, we were very bullish on our future, and I'd like to take a few minutes to step away from the quarterly earnings to discuss why. For many years, we have been pursuing a strategy to create long-term value for stakeholders.
We have focused on market-building products, clean energy, and chemical extractives because we believe that in the fullness of time, these products produced in modern facilities with a focus on long-term sustainability will outcompete the many weaker players in this space and deliver superior performance. We invest only in large and modern facilities that have the potential to be world leaders. We focus on timber supply, procurement, and logistics in making our investment decisions. We promote a values-based approach to our human resource development that honors health and safety, innovation, boldness, accountability, sustainability, and the pursuit of excellence. We maintain our mills to a very high standard. We look for and execute on high-return projects that provide superior returns, not just financially, but environmentally, including resource efficiency. We don't buy junk. We don't pay too much.
We have a point of view on the future and are seeking growth in areas where we have a strong commitment and where we feel we have sufficient core competencies to be successful. We do this while remaining true to our commitment to maintaining a strong balance sheet, carrying at times what might appear to be excess liquidity, but which could ultimately be described as dry powder for those opportunistic ideas that can come at any point in the cycle. We focus hard on sustainability. We know the planet is struggling under the weight of climate change. We believe our assets and activities are part of the solution, and this will become ever more apparent as science and policy converge to fight climate change. We support and promote sustainable forest management practices.
We have a track record of going above and beyond when it comes to ecosystem-based management practices, promoting biodiversity and forest health. We also understand how critical it is for us to focus on our people. If you've taken the time to explore our website, you will recognize us as a progressive company working hard to develop our teams to maximize our team members' experiences and engagement with us. Mercer is a truly unique company of exceptional people, and we strive to ensure that every one of our employees is proud to be part of the team. From our website and disclosures, you will also recognize a company committed to transparency regarding important and relevant ESG performance indicators. We understand that we need to continuously improve, and we have a good track record of doing this.
I see many of our competitors underperforming in this area, and time is catching up on them. I'll have more to say in a few moments, and I know listeners will be interested to discuss our product market fundamentals. But first, let's give the floor to David Ure to review our financial performance.
Thanks, David. Our second quarter EBITDA was comparable to Q1, despite the significant planned downtime we took this quarter to facilitate capital projects and annual maintenance. Combined, we took about 16 weeks of planned downtime in the second quarter, which negatively impacted EBITDA by approximately $80 million. In addition, our Q2 operating results were negatively impacted by the effects of a weaker U.S. dollar on our foreign currency-denominated operating expenses. More than offsetting these negative impacts were higher prices for our pulp and lumber products, with those higher lumber prices driving record earnings for our lumber business. We generated EBITDA in the second quarter of almost $84 million compared to EBITDA of about $82 million in Q1. Our pulp segment contributed EBITDA of $41 million, and our wood product segment contributed record quarterly EBITDA of $46 million.
Our wood product segment benefited from strong demand and record U.S. sales prices in Q2. Recently, the U.S. market has weakened significantly, and David will speak more about that shortly. And as usual, you can find additional segment disclosures in our Form 10-Q, which can be found on our website or that of the SEC. Average quarterly softwood and hardwood pulp prices increased significantly in all of our major markets this quarter. In China, the Q2 average NBSK net price was $962 per ton, up almost $80 from Q1. European list prices averaged $1,288 per ton in the current quarter compared to $1,037 per ton in Q1. And the hardwood price in the U.S. market averaged $1,297 per ton in Q2, which was up $277 compared to the prior quarter. In total, higher average pulp sales realizations positively impacted EBITDA by about $62 million when compared to the prior quarter.
Pulp demand remained steady in the quarter. However, our sales volume was down compared to the previous quarter due to our planned downtime. Our Q2 sales totaled almost 361,000 tons, which was down about 127,000 tons from Q1. In Q2, our mills were down a combined 117 days for capital and annual maintenance work. This is roughly the equivalent of 173,000 tons of production. Our Peace River mill was down 79 days in Q2. The majority of this time related to the rebuild of the mill's recovery boiler and will be covered by insurance. The claim settlement process is ongoing, and while we have recognized about $4 million of business interruption insurance recovery in the current quarter, we currently expect the final business interruption claim to be in excess of $15 million.
Our Stendal mill was down a total of 26 days, which is longer than the mill's regular maintenance downtime. The extra time was needed to finalize the installation of two new batch digesters that will add 80,000 tons of incremental capacity. Our lumber realizations also increased considerably during the quarter, particularly in the U.S. The Random Lengths U.S. benchmark for Western SPF 2 and better averaged over $1,342 per 1,000 board feet in Q2, which is up $370 from last quarter. U.S. lumber prices rose steadily through the quarter, and it was the largest contributor to our Q2 average lumber sales realization, increasing to $789 per 1,000 board feet from $622 per 1,000 in Q1. The benchmark lumber price is currently $490 per 1,000 board feet. Our wood products business continues to perform extremely well.
We sold about 109 million board feet of lumber in the quarter, similar to the strong level of Q1. Our electricity sales totaled roughly 152 gigawatt-hours in the quarter, which was down relative to Q1 due to lower production related to our planned downtime. Our Cariboo Mill Joint Venture, which is accounted for using the equity method, contributed another 17 gigawatt-hours to this total. We reported net income of $21 million for the quarter, or $0.32 per share, compared to a net income of $6 million or $0.09 per share in Q1. The increase in income reflects the absence of the Q1 $30 million, or $0.46 per share, loss in the early extinguishment of debt as a result of the senior note refinancing. Cash used in the quarter totaled approximately $11 million compared to cash generated of $34 million in Q1.
Our cash usage in Q2 was primarily the result of our ambitious CapEx spending and the repayment of our revolving credit facilities, which were partially offset by working capital movements in the form of higher accounts payable balances. We invested $62 million of capital in our mills this quarter, and we remain on course to invest between $150 and $185 million in our mills this year. David will provide an update on our CapEx progress shortly. Our strong results and solid cash flow have led to a modestly improved liquidity position at the end of the quarter, totaling about $695 million, comprised of $385 million of cash and $310 million of undrawn revolvers after paying down $42 million of short-term debt in the quarter. Our strong liquidity position will support the planned seasonal growth in working capital, along with the remainder of our ambitious 2021 capital spending program.
As I noted, we completed 117 days of planned capital and maintenance downtimes in our mills in Q2, and this compares to a total of 27 days of planned maintenance in Q1 at our Celgar mill. The impact of the Q2 planned downtime, including lower production and higher direct costs, reduced Q2 EBITDA by almost $50 million when compared to Q1. As a reminder, our competitors that report their results under IFRS are permitted to capitalize the direct costs of their annual maintenance shuts while we expense our costs in the period of shut completion. As you will have noted in our press release, our board has approved a quarterly dividend of $0.065 per share for shareholders of record on September 29, 2021, for which payment will be made on October 6, 2021.
With that, it ends my overview of the financial results, and I'll turn the call back to David.
Thanks, Dave. I'm encouraged by the global rollout of COVID-19 vaccines and the positive effect this is having on global economic activity. Unfortunately, though, there remains uncertainty about the impact of the COVID-19 variants and the increases in infection rates, and as a result, we remain focused on our protocols to ensure the safety of our employees, contractors, and the ongoing operation of our mills. I'm pleased with all that we accomplished this quarter. As I said earlier, we've added 80,000 tons of NBSK pulp production at our Stendal mill. We rebuilt Peace River's recovery boiler, effectively giving the mill a new boiler. Combined, we completed 117 days of capital and major maintenance work, and we successfully completed all this work without allowing COVID-19 into our mills.
Overall, our mills ran well, but a significant level of planned downtime resulted in lower than normal production levels, which was a drag on our results, obviously. However, strong demand for our products and related price increases when compared to Q1 more than offset the impact of our planned downtime, with our lumber business leading the way with record quarterly earnings. Both softwood and hardwood pulp prices rose steadily and significantly through the quarter. Favorable supply-demand fundamentals, including low paper producer inventories, unusually high pulp producer downtime, much of which was unplanned, logistical challenges due to the global shortage of containers that has limited the volume of pulp into China, and a relatively strong Chinese currency all factored into favorable supply-demand dynamics during Q2.
Late in the quarter, pulp prices began to retreat in China, primarily due to speculative forces, but the supply-demand factors that have created a soft landing. While in Europe, we successfully implemented a $40 price increase, taking the list price to $1,340 per ton. Overall, we feel pulp prices globally will trade in a narrow band through the traditional slow summer months. Supporting our views are the May pulp statistics, which continue to reflect good demand for both NBSK and hardwood. The hardwood market statistics highlight a tight market, and the NBSK inventory statistics reflect a balanced market after factoring in shipping delays caused by limited container availability. In addition, we're seeing more indicators reflecting growing global economic activity and supporting analysts' predictions for significant GDP growth in 2021, which will support the demand for all commodities, including pulp and lumber.
We also believe government economic support will help fuel this growth, and as a result, we are optimistic that steady economic growth and strong market fundamentals, along with a weaker U.S. dollar, will continue to support pulp prices. Our wood products business once again achieved record operating results due to the strong U.S. market pricing. The European lumber market also experienced upward pricing pressure in the quarter. Recently, U.S. lumber prices underwent a significant correction, bringing the framing lumber composite benchmark down by roughly 70%. This decline was likely due to the record high prices beginning to have a negative impact on the do-it-yourself lumber demand and fears that this negative outlook could spread to the housing market. Higher COVID-19 infection rates in certain parts of the U.S. also created negative sentiment.
U.S. lumber pricing appears to have hit a floor due to recent BC sawmill curtailment announcements, with more expected due to the heavy wildfire activity and high stumpage fees. We see some pricing upside as well due to the reduced BC supply, low inventory levels, and a strong U.S. housing market. The European lumber market has shown steady price increases through the year and remains strong today, and we expect this to continue even if some European producers reduce their exports to the U.S. .We will continue to optimize our mix of lumber products and customers to achieve the strongest sustainable realizations that we can. In Q2, 39% of our lumber sales volumes were in the U.S. market, with the majority of the remainder of our sales in the European market.
Looking forward, we have taken down our turbine generator at Rosenthal for maintenance following a service interruption, which has damaged some parts of the equipment. The timeline for returning the generator to service could be as long as 100 days. We've therefore decided to conduct what would have been a required maintenance shut in 2022 this year. This will save 37 days from next year. During this time, Rosenthal will need to purchase all of their electricity needs. There will be an insurance component of this, but that's not determined at this time. Our wood products segment achieved another strong production result, producing almost 117 million board feet of lumber, which was comparable to Q1. In Germany, our wood costs, particularly for pulp wood, remain at historically low levels due to the abundance of beetle-damaged wood, and we expect this pulp log supply dynamic to continue well into the fall.
We are seeing saw log costs. We are seeing saw log cost inflation early in Q3, but we expect prices to begin to moderate again due to early indications of heavy spruce beetle activity this summer. In Western Canada, pulp wood supply remains steady, and price changes have been modest in our fiber baskets. However, this year is shaping up to be another significant forest fire year, which could potentially have negative impacts on both supply and prices of fiber. We will be monitoring this situation closely. Today, there are no direct forest fire threats facing our operations, but the fires are negatively impacting rail logistics in the region. This will slow down our ability to get pulp to market as we use less efficient and ultimately more expensive alternatives. In addition, the logistical challenges could impair our ability to move raw materials to our mills.
And for those of you following weather news in Germany, you will know that the problem there is not fire, but water. While the floods that have been severely impacting many regions of Western Germany have restricted some logistics channels, our operations for the moment have not been impacted. The majority of our heavy 2021 maintenance program is now behind us. I'd like to remind listeners that we have had major maintenance at Celgar, Stendal, and Peace River in the first half of the year. This has been unusual to have this much maintenance clumped together, but was the result of a number of reasons, including our migration to 18-month annual revisions versus 12 months previously, and also due to the necessary timing for the Peace River boiler rebuild. Our remaining 2021 major maintenance schedule is as follows. In Q3, Rosenthal has a 15-day shut planned.
Cariboo will take a 16-day shut, and our Friesau sawmill will take its traditional summer rolling department maintenance outages. In Q4, Stendal has a two-day mini shut planned, and Celgar will also take a four-day mini shut. While the majority of our annual maintenance work is complete, significant capital expenditures to grow the company are ongoing. We're using our well-managed liquidity and strong balance sheet to continue to pursue the growth aspect of our strategic plan, and more specifically, the objective of adding shareholder value by growing the company in areas where we have core competencies. We have commenced the construction of two new wood rooms, one at our Peace River pulp mill and one at Celgar. These projects will allow us to transform our supply chains, increase our capacity, and significantly reduce the cost to produce our own wood chips.
The projects will also allow us to accept alternative forms of lower quality wood that were previously left in the forest. The total cost of these projects will be between $65 and $70 million. These projects are also eligible for a number of carbon reduction grants that could exceed $20 million. And even without the carbon reduction grants, these projects will create significant shareholder value. We expect the projects to be largely complete by mid-2022. We continue to advance the engineering and permitting process for our Stendal sawmill. The initial plan for the mill contemplates a 400 million board feet capacity with a product lineup 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. Inflation and delivery of key equipment timelines are now becoming considerable.
We are seeing delays in the delivery of sawmill equipment, along with the potential for higher costs, particularly for steel, concrete, and electrical installations. We remain committed to the project. However, we will continue to consider the timing as this development work progresses. In addition, you will have likely seen the court filing about our stalking horse bid for Katerra's Spokane, Washington cross-laminated timber plant. We have agreed to a stalking horse bid price of $50 million and a draft asset purchase agreement. Strategically, we feel this asset will be a material addition to our growing company and has the scale to be the first step of a significant pillar in our building products competency, particularly considering the expected growth and demand for mass timber construction. The facility will no doubt garner interest from other parties, and we are in no way assured of success.
We'll have more to report on this as the process progresses. Excluding our bid for the CLT plant and depending on the speed of certain construction prerequisites and deposits, we expect total capital expenditures to be between $150 and $185 million in 2021. Our strong financial position that we vigorously protected during the pandemic gives us significant financial flexibility as we put our sights back into growth. I remain confident that the effective execution of our strategy will continue to bring us success. We remain focused on our world-class assets, and our modern sustainable operations will continue to serve us well as we continue to focus on optimizing our fiber handling and logistics and controlling our costs. So this completes our prepared remarks, but if I can take a moment to remind listeners, COVID-19 mutations continue to be a significant risk.
I encourage everyone to get the vaccine and continue to keep your friends and family and colleagues and neighbors safe. This pandemic is not over yet. Thanks for listening. I'll now turn the call back to the operator for questions. Thank you.
Thank you. And as a reminder to ask a question, you will need to press star one on your telephone. Again, that's star one on your telephone. Please stand by while we compile the Q&A roster. Your first question comes from the line of Hamir Patel from CIBC Capital Markets. Your line is open.
Hi, good morning. David, you referenced kind of rising inflation for the sawmill projects under consideration. So for Stendal, do you have a sense as to maybe what that updated build cost would be if you go forward? I know we had a recent greenfield announcement in the U.S., and it looks like, at least in the U.S., that that project was around $750,000. I don't know if that's a similar benchmark that you're seeing in Europe.
Yeah, I think 650-750 could be the zip code. There's options to stage things, build the mill in phases. I don't want to build something that doesn't have all of the appropriate bells and whistles. We know how important that is to get the grade profile out. So we're working our way through all the final quotes and adjusting scope as we can. It may be there's a slight delay in pulling the trigger on this. We're not going to do something crazy, obviously, but it's really remarkable how rapidly the cost of steel and just equipment in general has gone up. I don't think it'll stay where it is, but for the moment, it's really been a really remarkable increase. So we're just going to monitor it. We're doing the work, and we'll be in a position to make decisions.
But again, I think it would be prudent to take a really cautious approach to it.
Fair enough. And given the escalation on the greenfield side, has that maybe increased your appetite for considering buying an existing sawmill? And have you seen maybe the pipeline of opportunities improve as lumber prices have come off?
Yeah, it certainly factors into our thinking, Hamir, absolutely. Having said that, we just don't want to buy junk. And everything that we've looked at has been pretty expensive and hasn't really been at a scale, at least in North America, hasn't been at a scale that would make sense for us from our strategic point of view. There are still a few targets in Europe that we continue to monitor. And you're right, with changing conditions, those could come back into focus and make more sense for us. So they're also on the table for consideration.
Fair enough. Just a last question for me, David. With the capacity increase now at Stendal, and then just given the sort of cycle of the various shuts, what level of production would you be targeting for 2022?
A wall of shuts and things like that, I could just read my report here. Just give me a second unless David has it open. Yeah, sorry, Hamir, I don't have that just easily handy, but.
That's all right. I'll follow up after.
Yeah.
Okay. That's everything I had. Thanks.
Great.
Your next question comes from the line of Sean Stewart from TD Securities. Your line is open.
Thanks. Good morning, guys. David, I wanted to revisit NBSK markets in Europe. It looks like you got about half the proposed June price hike. And I'm trying to gauge your thoughts on the ability to hold prices through the summer as things have corrected in China and to a lesser extent North America. Do you think the industry will have an ability to tread water through the summer in Europe as those other regions weaken?
Yeah, that's a great question, and the way I'm thinking about it, and some of my colleagues here in Mercer, we've been putting some time into thinking about what's the same and what's different about the last two cycles: the 2017-18 cycle where we had peak prices and the current cycle, so one of them is the differences here is at the end of the 2017-18 cycle, pulp stocks were very high, whereas today stocks are well-balanced. At the end of 2018, the global economy was cooling off considerably, particularly in China. There was the trade conflict with the U.S. going on and so on, and today, in 2021, all major regions are expected to grow and grow strongly. And there's a very different sentiment in the market today. Paper inventories in 2018 were very high, particularly in China. Today, those are at normal levels.
Considerable overcapacity in the European printing and writing sector in 2018 has been really offset in 2021 through massive purchase of paper capacity, primarily in 2020. Back in 2018, you remember Suzano, the market leader, just completed a merger with Fibria. They were pretty busy with themselves, and I mean, most would say they misjudged the market and created some of the problem we had to work through in terms of inventory overhang. I think another important factor, particularly as your question relates to Europe, is ocean freight challenges favor the European paper producers in 2021. By that, I mean paper imports into Europe are very limited. So the paper producers are busy, and they're profitable. They've been successful raising prices more or less across the board.
And so it's a much stronger market without much influence coming in from paper producers in China, for example, that they would have previously been competing with. And then finally, I think another big difference is the dissolving in the fluff markets this year are pretty strong, unlike in 2018. So there's really no swing tonnage coming into the paper grade side. So there's a lot of differences. And generally, just the tone of our customers in Europe tells us that we're going to trade at a pretty narrow band here through the summer, and I'm optimistic about the back half of the year.
Thanks for that detail. That's really helpful. I also wanted to follow up on your comments with respect to the CLT asset you're bidding on. Help me understand, I guess, that opportunity. Have you been looking at other engineered wood opportunities, or is it as a result of the Katerra bankruptcy that this one fell into your lap potentially? And how do you weigh the appetite for this type of expansion versus sawmills in North America because you have kicked the tires on opportunities on that front as well?
I'm really bullish on mass timber. It's been a sort of a current steady area of business for Europeans. It's growing very rapidly in North America. When you're at the FPAC table or COFI or listening to the Premier or the Prime Minister talking here in Canada, mass timber is something that's really supported. It's a green building product. It's got a much lower carbon footprint to steel and cement. I think we all think there's a tremendous growth opportunity here. We've been really focused on the value-add space for some time. As I've spoken about in the past, we've got an empty hall coming at Friesau, and the opportunity there would be to take the lower profile material and put it into the CLT or glulam or something like that, do some finger jointing and so on.
And so we've been really looking for opportunities in that area. So we understand the business, I think, pretty well. We've done a lot of work in it. And the Katerra thing is an opportunistic situation, clearly. It's a big plant. It's really big. So we always say we don't want to be a small fish in a big pond. We'd rather be a big fish in a smaller pond. But if there's really good growth, market dynamics, and we can establish ourselves as leaders and use that as a platform for further growth in that area, that's kind of what we dream about. It's going to be competitive. I mean, I'd be shocked if others don't show up. So that means there'll be an auction. And as we were with the K1, we'll need to be disciplined and not overreach. It's still a growing market, CLT.
So if we don't get this one, we'll possibly find other value-added products we can go into. So we'll see. It's a cool opportunity. It's a very well-invested plant with equipment that we know. It looks a lot like a sawmill except it just doesn't cut timber. But all the sorting and planing and continuous kiln drying and all that kind of stuff, it's all the same equipment we run in Europe, basically.
Okay. Thanks for that detail. I appreciate it. That's all I have, guys.
Yeah. That's it.
Your next question comes from the line of Paul Quinn from RBC Capital Markets. Your line is open.
Morning, guys, and thanks for taking my questions. Maybe starting with Paul Quinn. There's quite a bit of hardwood capacity coming online over the next few quarters. How do you think that will impact the market? And can you remind us how you think about the relationship between hardwood and softwood pulp prices?
Yeah. Great question. Yeah. So between Arauco and UPM and a bit of Bracell, there's hardwood coming. Hardwood's going to struggle a bit or at least has the potential to. It really depends on the discipline of the producers, in my mind. And there's a couple of angles in the whole thing. And they're adding capacity because they believe, and I think they're right, that the demand for virgin fiber is growing significantly. Hardwood right now is growing at more than a million tons a year every year and has been doing that consistently. You may remember three or four years ago, we thought, again, big lump of capacity was going to destroy the market. Well, it didn't until we had a behavior issue that really kind of got in the way. So it's going to be lumpy, and it's going to wind its way through.
I mean, I think we do have some hardwood pulp in Mercer and our opportunity with our wood room and possibly some other aspen extraction material product opportunities that we have up in Peace River. I think we can get our cost structure down to where we can really compete on the hardwood side. And we've got softwood swing capacity up there as well. So that mill is still a great mill and will be a contributor in the next couple of years. But for a couple of years, hardwood will be the drag generally on virgin fiber. I think the demand for virgin fiber is going to be strong enough, and particularly for softwoods, that the gap between the two grades will widen and kind of end up at a delta that's probably something we've never really experienced for prolonged periods of time before.
I've seen the difference at 200 in previous cycles. Recently, we've seen it as high as 220. Today, we're down below the 200 level, but I could see that being the case for some extended period of time. I don't think it's going to be a ball and chain on softwood. Softwood's too small a market, and it's too important to so many different paper grades. It will trade based on its own supply demand dynamic. It'll become a niche pulp, trade that way. And hardwood will be the big benchmark grade. And the way to be successful in the hardwood space is you've got to be a low-cost producer, a high-quality producer. And the consolidation of the hardwood producers should exert some discipline into the market that allows everybody to make reasonable margins.
Thanks. That's helpful. Maybe going back to the CLT side, are you able to help us understand what kind of profitability that you think a CLT plant like the one in Spokane could generate under normal market conditions? And what have been some of the key challenges with that facility, and where could you help address those problems?
Yeah, sure. Well, CLT is, I mean, its largest input cost is wood, obviously. And so when somebody bids on a project, they take the wood cost, they calculate what the cost to convert that wood into panels is, and then they add a margin. And how much margin they add is a function of what they think the customer is willing to pay. And that comes into comparing what you're producing and providing to other building products and also who you might be bidding against to get the job. So it really depends on a whole number of factors. The Katerra business model before the bankruptcy was really an integrated model. So they had the engineers and architects, project ownership. They ran the projects. They underwrote the risk of the projects. They produced the raw material, the CLT for the projects.
That's a very different business model to the way Mercer would run that mill. We would be marketing. We would be building products for project owners. And we would be competing with others who would have similar facilities who might be in the geographic area that we're working in. Given its scale, as you get it wrapped up, it would be a low-cost producer. It would be, like I say, a big fish in a smaller pond and lots of growth potential. We could imagine plugging on a glulam line and running a lot of finger-jointing material through it and doing all sorts of stuff. So it has the potential to produce a really nice steady margin, I think. What that will be, we'll take time to determine.
As I say, the business is really raw material cost plus conversion cost and then what the market will bear based on competition and value to the buyers.
Yeah. That makes sense. Maybe I'll sneak in one more. With lower North American lumber prices, do you expect to sell more lumber in the European market, or is that sales mix going to remain steady, sending lumber over to the United States?
Yeah. So I talked about this before. So we're really committed to a number of markets. So we've done very well in the U.S. We've got a tremendous customer base, and we're going to honor that and supply them through thick and through thin. So I would expect our U.S. supply to range between 25%-40% of Friesau's availability. The European market, which has traditionally been much less volatile, serves us well through thick and through thin. At the current moment, it's really strong. It's held up. It hasn't fallen the way the U.S. market has. Having said all that, the U.S. market's still very profitable for us. The European market's profitable for us. And with all the new bells and whistles at Friesau, we're really ramping up our J-grade business as well. And J-grade, for those who follow lumber in Japan, is very high.
Tremendous margins on that product. So we're pushing out as much of that as we can. And I expect we'll just continue to move in this direction. Core of Europe, 25%-40% in the U.S. and as much J-grade as we can get through thick and through thin. Hopefully, somewhere between 8% and 10% of Friesau could be J-grade in the fullness of time.
Great. Very helpful. Good luck with the current quarter.
Thank you.
We have your next question coming from the line of Roger Spitz from Bank of America. Your line is open.
All right. Thank you. And maybe you said this, but regarding the remaining Peace River BI insurance proceeds, did you give a timing on expected receipt?
Do you want to cover that, Dave?
Yeah. Yeah, we didn't. But we would expect that it would be something that would be settled out in the next two quarters.
Got it. Okay. And can you give any insight into cash taxes given the material difference in your numbers this year versus last year?
Yeah. I think for guidance, or I guess for building models, you could probably count on our cash taxes being in the range of 15%-20% of pre-tax income.
Okay. Great. Thank you very much.
Thanks, everyone.
Thank you. And your next question comes from the line of Andrew Shapiro from Lawndale Capital. Your line is open.
Hi. Thank you. A few follow-ups here and then a question. Regarding the stalking horse bid at Katerra, with the auction set for Monday, how does this bankruptcy court and this particular bankruptcy case, how do you see it proceeding in terms of the timing of the determination of, we'll call it the winner of the auction? Would there then be an additional breakup fee protection all the way through the reorg vote, etc., and when do you think that all takes place? I don't know how complex a case this is and if this is just one small asset sale that is going to have the gavel banged down long before the overall restructuring is done or what?
Yeah. Hi, Andrew. Yeah. It's going to be a very rapid close, is what we've been told. So the auction will be Monday, and I think they're hoping to close within a week of that, more or less. So we'll either own an asset or we'll have a break fee right away.
It's kind of a separate 363 sale outside of the rest of the restructuring process?
Correct.
Okay. Excellent. Kind of along these lines, which is, again, the use of pulp in a variety of other uses than the standard Mercer business line, you have a joint venture with Resolute in Performance BioFilaments. And can you remind me what percentage Mercer has of the joint venture? And more importantly, I think the last that we might have heard about this was that the Quebec plant, the initial plant in Quebec, is under construction, and maybe it has now been completed, and they anticipated making, I think, products production and sales commercially here in 2021. What's the status of all of that?
Yeah. Yeah. Well, so Performance BioFilaments is a joint venture that we have with Resolute Forest Products. And both companies were very interested in the technology. We have access to all the patents and everything through our membership and FPInnovations. And we decided that let's work on, let's co-develop applications versus competing with each other in the market. And so we put our resources together in Performance BioFilaments, hired the team, and I think somebody used the word it's an incubation hub, I feel like, of products for the future. And filaments provide papermakers value either through strength or different properties that you can manipulate the surface features of filaments. It goes into non-wovens. It can go into cement. It can go into drilling modules, just all kinds of applications.
And so Performance BioFilaments is all about working with end users, industries and companies that can benefit from biofilaments and helping them develop applications for it. And then the vision is that we would have the exclusive capacity to provide a material, like a chemical material, if you want to call it that, that creates value for them for whatever their application is. Our partners in Resolute felt strongly enough that they are building a plant, and that plant will provide material to Performance BioFilaments. It will also provide material to operations in the paper space that they operate. And I think they're pretty excited about it. I can't talk too much about it. It's really their project in a way. And so I'll leave it at that. But we continue to, I wouldn't say plug away is the wrong word.
I mean, we still feel there's lots of potential in high-performance strengthening agents for papermakers and other special applications. And so we just let these things take time, so.
Is the plant's construction completed?
I can't talk. I don't know the exact status of it, Andrew. Mercer doesn't have any ownership of the plant itself.
Oh, you don't have anything of the plant. Your ownership is the venture that provides raw material to the plant.
We're on the application side with them. Yeah.
Okay. And then lastly, in light of the persistence of the pandemic, I think things are going to continue virtual for quite a while, perhaps in the investment conference side and all that. What are the company's plans for virtual or in-person IR activities in the coming months and quarters?
Yeah. Dave, do you want to cover that off?
Yeah. Yeah. We'll be participating. These are all virtual conferences. But we'll be participating in the Jefferies Industrials Conference next week. Pardon me.
Okay, Dave, we got a little volume of noise.
We've got TD coming up, and we'll participate in all the bank. I think there's a BofA conference coming, so we'll participate in the bank virtual conferences, and we're pretty active with shareholders on a daily basis anyway. I won't be making a tour into New York or Boston or down your way in the next few months, but I really do look forward to being able to travel again and getting out and seeing everybody, but for now, Google or Zoom is what it's going to be for the next few months, I'm afraid.
Okay. Great. Thank you very much.
You're welcome.
Thank you. And again, to ask a question, you'll need to press star one on your telephone. Again, that's star one on your telephone keypad. Your next question comes from the line of DeForest Hinman. Your line is open.
Hi. Thanks for taking my questions. Can you give us an update in terms of your thoughts on the production capacity of Friesau? I know you have the summer holidays with the maintenance, but I know we've been adding a lot of equipment there. Has it changed our thoughts in terms of what can that facility do from a production perspective?
Yeah. Great question. Well, I mean, it's everything we thought it would be, and it really depends on how you run it and how you staff it, what it's going to produce, so maybe to give you the guidance that I think you need for your models, of course, so for the third quarter, we've got our summer maintenance. Sawmills are a little different than pulp mills. We kind of rotate through departments, so we'll work on the log line for a while, work on one of the saw lines, get it back, work on the other saw line, work on sorters, work on dryers, work on planer, that kind of thing, and we can also double-shift some of these lines, so when one is down, we can work hard on the other to produce product.
So our production target for the third quarter, despite having all this maintenance, is about 123-124 million board feet of lumber, which is what we'll produce in the three months.
Okay. That's helpful. And then in a quarter where we don't have to do something like that, has it step-functioned higher?
Yeah, it has. I mean, we're running it at around the 500-550 million board feet rate is our plan. We could go up significantly. We could get up to the 750 if we want to put more shifts on. Difficult to do and not always the best thing for the equipment. So it's kind of like you want to run like a boat. You want your motor running at a good rate, but you don't want to be pushing it too hard all the time. So our focus is on really fine-tuning all of the optical grading, the 3D scanners and things like that so that we get the maximum value out of the profile and really tune up the precision edge trimming and getting a J-grade grading as crisp as it can be.
Running at the 500-550 million board feet is just kind of the optimal place for us to be for the next, call it, six or nine months. So that's what you can expect for now.
Okay. Great. I don't think anyone asked this, but I think it's important on the Stendal digester project. Can you give us an indication of how the mill is performing with the new assets in July?
Yeah. July was a little bit bumpy, but pleased to say it's running really well now, so the issues that we had at Stendal, a couple of things. I think the capital investment project was executed very well, and I'm really proud of the team. One of the areas where we struggled a little bit is these big mills have what we call DCS systems. These are the digital monitoring systems, all the loops that you use to control the equipment. Well, one of the vendors, the DCS team virtually couldn't make it because of COVID, and so we really had to support the DCS development work from our Rosenthal. Now, they're both Valmet systems, and so we got through it, but it took a little longer than we expected. But it was really some fairly specific reasons. The equipment's all what we expected. It's installed properly.
It's all up and running now. And it's just a matter of fine-tuning. And when you put new digester capacity in, and then for those things, we also increased the sprint capacity on the dryer, and we improved the washing capacity on the bleach plant. So what we're doing right now is just fine-tuning everything, finding those little bottlenecks and cleaning those up and just ramping up to the 740,000-ton annual rate. And we'll be at that rate within another three or four weeks, is our view. And so very successful project and also very accretive considering the level of government support that we had for the capital. I mean, it's probably some of the cheapest times we've ever built in Mercer, to be honest.
I guess I'm not aware of that. Is there a grant involved with that, or was it something?
Yes, there was. Yeah. So we have these wastewater fee offset programs in Germany. So if you put money into equipment that allows you to provide some environmental benefit or resource efficiency benefits, you avoid having to pay the wastewater fee. The capital kind of displaces the fee. So what we were able to do is negotiate six years' relief from wastewater by putting in this equipment, which gives us a lower environmental impact intensity. And a big chunk of that comes from the washing, the new washing equipment that we put in. So we're avoiding EUR 24 million of wastewater fees, which is six years' worth on a project that had a capital cost of about EUR 45 million.
Okay. Perfect. Just kind of aside, but just monitoring the Shanghai Exchange, there's a forward curve now. There's a lot of volume. It seems like a real futures market. Is there any possibility that we could use that and enter into forward futures contracts and actually deliver the tonnage? Is that feasible?
Yeah. I think, yeah, that's a growing market and both financial and physical opportunities there. Most of our investors like us to stay open. They don't want us to be taking speculative bets. They want to play the pulp market. So I'm not really anticipating participating there. We find it's becoming a factor in pulp pricing, though. And so we're having to monitor it pretty closely. I think what it has the potential to do is create a little more volatility in pulp pricing. So when prices are going up, they may go up a little faster and higher. And similarly, when sentiment turns and speculators get involved, when pulp prices are coming down, it might push it down a little harder and a little further. But that's just my view.
But yeah, no, I'm not anticipating DeForest taking big positions in that market to try to smooth out earnings or any of those kind of things, so.
Okay. Very helpful. And then last question, just on the CLT facility. Did you envision that facility as is, or do you see that? I know you mentioned earlier it looks like a sawmill. Is it possible that that could just be run as a sawmill and it's kind of a semi-turnkey asset that you'd be able to move on relatively quickly through this bankruptcy proceeding?
Yeah, we have lots of ideas about optimization and innovation in that facility. I don't want to talk about those too openly just at the moment because we may not get it. But we won't be putting a saw line in front of it. It buys timber packages from others and sorts through that and uses the material to produce and evaluate its products. So there's a lot of capacity in that facility. It's got a very big building, and the bottleneck is the press. So additional incremental volumes of CLT or other products are very possible without a lot of that other associated expense. If you were to do a greenfield glulam, you would be needing to put all the departments in place. This is, frankly, just the press is the bottleneck. So there's lots of potential for us in the future.
Just so I understand, I haven't gone through all the documentation within that bankruptcy proceeding, but is it just the physical asset you're bidding on, or is there a supply contract on the wood side that you just mentioned? That's one of the things you have to consider.
Yeah. No supply contracts.
Or that?
Yeah. No supply contracts. No liabilities. Minimal workforce. No marketing. I mean, it's a startup, but the asset is there, so.
Okay. Thank you.
Thank you, and there are no further questions. I would now like to hand the call back to Mr. David Gandossi. Please go ahead.
Okay. Yeah. Thank you, Patricia. And thank you all for joining our call. And as always, Dave and I are very happy to talk to you anytime, so don't hesitate to reach out. Look forward to speaking with you. And otherwise, we'll look forward to our third-quarter earnings call. Thanks again. Bye for now.
This concludes today's conference call. Thank you all for participating. You may now disconnect.