Conifex Timber Inc.

Good afternoon, ladies and gentlemen. Welcome to the Conefax Timber Inc. Q3 2021 results conference call. I would now like to turn the meeting over to Mr. Ken Shields. Please go ahead.

Well, thank you, Omar, and good afternoon, everyone, and welcome to our call covering Q3 results. CFO Winnie Tang is here with me in Vancouver, and Operations VP Andrew McClellan joins us from our McKenzie site. And both of them are available to help you respond to questions that you may have later. Before moving on, we wish to reemphasize that our number one priority continues to be protecting the health and safety of employees and their families. And the men and women at our harvesting locations, sawmill site, and power plant deserve tremendous credit for ensuring a safe work environment and mitigating the risks arising from the recent upsurge in COVID infection rates in northern D.C. Let's deal with the housekeeping items. We will be making forward-looking statements and references to non-IFRS measures, and therefore call your attention to the warning statements that are on pages one and two of our MD&A dated today that we just released. For the third quarter, we incurred a net loss of $900,000, or two cents per share. EBITDA was $3.3 million. Lumber production was held back by a two-week market curtailment in late August. Lumber shipments were 15% lower than production because we purposefully built up lumber inventories by around $5 million. in anticipation of being able to attract higher sales realizations by liquidating the inventories in Q4, which is exactly what we're doing and is well underway. Our power generation business performed well in the third quarter and we expect another solid performance in Q4. Benchmark SPF prices were around $480 U.S. in Q3. And I agree with the analysts who may be on this call who have the opinion that prices at this level trigger operating losses of around $100 per thousand board feet of lumber produced at interior VC sawdust. But our consolidated results indicate that we shipped 34.1 million board feet in the quarter and achieved $3.3 million in EBITDA, which on a lumber equivalent basis translates into EBITDA of around $100 per thousand foot feet. And this vividly demonstrates the mission-critical role that our green power generation plan plays in moving our McKenzie site to a much lower ranking on the global software lumber industry cost curve. Stumpage rate increases took effect at the beginning of Q4 for this reason and also reflecting seasonal factors. We built up our log inventories by $14.7 million in Q3, and this is the main reason that our cash balances in the quarter declined by $12.5 million to $23.4 million. Looking ahead, we expect our financial results in the closing quarter of 2021 will be similar to our third quarter results. Although benchmark SPF prices will be higher in Q4, we expect our mill mint selling price realizations to be largely unchanged. Our shipments to the high-priced Japanese markets We'll be a lower portion of our shipments in Q4 than in Q3. Well, as we all know, we have higher duty deposit rates kicking in in December. And for those two main reasons, we expect our no-ment sales receipts will not track the change in benchmark prices in Q4. Turning to industry development, one week ago, the government in B.C. announced its intention to defer 2.6 million hectares of B.C.' 's old growth forest. With respect to next steps, the ministry has indicated details of the old growth locations have been shared with First Nations rights and title holders. And the province is requesting that First Nations indicate within the next 30 days whether they or not support the deferral. As you would all expect, our forestry team is hard at work evaluating how harvest levels in the McKenzie TSA could be impacted by this development. More importantly, however, our forestry team is working on a priority basis with local First Nations and the McKenzie TSA to ensure that we fully understand their perspective and to offer our support in the analysis and review underway. In the region where we operate, we truly believe it's entirely possible to adhere to best-in-class forest sustainability and conservation regimes while concurrently maintaining good-paying, family-supporting jobs for residents of Indigenous communities. As we go into in some detail on pages 14 to 16 of the MD&A we released earlier today, we explained how an error in a key ministry assumption underpinning a harvest mix determination led to unnecessary hardship for forest sector stakeholders, as well as the local community of McKenzie and nearby First Nations communities. We also outlined how recent ministry disclosures provide us a strong indication that the upcoming harvest determination will enable us and other licensees to access higher quality saw logs and provide good potential for sawmill complexes operating in McKenzie to migrate to a lower ranking on the global softwood lumber industry cost curve. We trust you understand and agree with us that we have no choice but to put our sawmill modernization and upgrade plans on hold until we have solid evidence that the ministry's taken concrete steps to restore competitiveness in the McKenzie timber supply area. And the ministry is doing a better job meeting the competitiveness obligations legislated in the Ministry of Forest and Rain Jack. While we await the harvest level redetermination we are taking advantage of an opportunity to explore how we can further enhance cash flow generation at a McKenzie power plant site. You know, I think the background of having a location and a relatively cool climate, the availability of a lot of affordable and renewable power from BC Hydro as the modes to its traditional resource sector is waning. Adding to that, that we've got a large site relative to the portion of the site occupied by a power plant. And we have a highly flexible and technical workforce at the power plant. For all those reasons, we concluded that our power plant site is ideally suited to host, and I emphasize the word host, data center for other high-performance computing operations, such as cryptocurrency mining. The expertise of our power engineers and technicians operating on a 7x24 basis are applied completely to this new business opportunity. Later this year, in partnership with the CKDMA First Nations, We intend to host approximately three megawatts of Bitcoin mining activity on a trial basis. Should we as hosts and the experienced Bitcoin mining operator conclude that the trial has been successful, we plan to build and host a larger data center operation. We expect the initial capital outweighs will be modest because we're going to redeploy the legacy power transformer and other infrastructure components that presently sit idle at the site. The potential exists to build out a hosting business in phases and utilize a portion of the cash flow from the initial phase to fund the development of additional hosting capacity. Although there's no assurance that we'll establish a material data center hosting operations, We're extremely excited about the potential and look forward to sharing more details with you on our next call early in 2022. As you've no doubt observed yesterday, our board approved the commencement of a substantial issuer bid for 4 million shares or just over 9% of our capitalization. at a purchase price of $2.25 per share. All the analysis we've undertaken includes that we can afford to fund a substantial issue or bid at this quantum and concurrently maintain a strong lumber business balance sheet and also fund projects that are necessary to remain compliant with enhanced safety and environmental regulations as well as smaller, quick payback projects that improve the operating reliability in our cell mineral complex. Obviously, we launched a substantial issuer bid because we believe our shares trade at a material discount to our underlying fundamental value. Coming up, we believe that Conifx remains well-positioned We enjoy a strong safety culture, a very high degree of solid fiber self-sufficiency compared to any other timber supply area in the interior region of BC. We've got near-term opportunities to benefit from improvements in fiber quality, availability, and delivered costs. We own and operate industry-leading power generation assets. We've got exciting opportunities to diversify and strengthen cash flow generation. And at the same time, we have entirely manageable debt service obligations. So thank you all for taking the time today to learn more about our company. And Winnie, Andrew, and I would be very pleased to respond to any questions that you may have, so we'll carry the meeting back to Omar, our operator.

Thank you very much. We will now take questions from the telephone lines. If you have a question and you are using a speakerphone, please lift your hands up before making your selection. If you have a question, please press star one on your device keypad. When prompted by the system, please clearly state your name to register your question. Please press star one at this time if you have a question. Once again, please press star one on your device keypad if you have any question. Thank you very much. And our first question is from, please go ahead.