Mercer and the Quarter that Didn’t Matter

Look, no matter how you slice it, Mercer International released a solid quarter yesterday.  Operating income of $36.2M was almost identical to operating income in Q1 of $36.6M.  Pulp price were higher than Q1 but downtime in Q2 was 16,000t vs. only 1,000t in Q1 so the steady earnings are exactly what you would want to see.

EBITDA is down from its peak but still very strong.  The quarterly EBITDA per share is almost obscene (though you have to consider the debt load to get a true picture on a Enterprise value basis).

Moreover, costs are steady from the last few quarters, which I think is pretty impressive in this environment.  Operating expenses were $468/t of pulp sold in Q2 vs. $448/t of pulp sold in Q1 and $461/t of pulp sold in Q2 2010.  Take into account downtime and expensed plant turnaround (Mercer expenses all maintenance including $7.7M in Q2) and you have a steady cost story in a world where commodity production costs are rising everywhere.

But none of this really matters on a day like today.  On a day like today the only thing that matters is that Mercer is a commodity play, and it produces what has been a historically volatile commodity.  Thus, whn

Mercer is a solidly run company. It is also a low cost producer of NBSK (perhaps even THE low cost producer, though I must say I have not done an exhaustive comparison.

They have a lot of debt, something which only adds to the volatility in a market like this.  Net debt has been trending down each quarter as they generate cash.  They really have paid off a substantial amount of debt in the last year.

Mercer remains upbeat about the NBSK pulp market.  Prices have been softening over the summer but this is seasonal.  June NBSK inventories remained at 28 days, which is historically low.  There is still no significant new supply additions coming on-line in the foreseeable future.

But the market doesn’t care about any of this.  A slowdown is here and fear of a recession is rising, and that’s all that matters.

Look, I’m down about 10% on Mercer.  Typically when I am down 10% I start to take money of the table.  Its one of my rules.  Today I didn’t.  I’m going to put up a bit of a stand here.  I don’t own that much Mercer, it won’t kill me if I’m wrong here, and I just can’t bring myself to sell the stock when its trading at what I would say is an unfairly cheap price.  So I hold, for now.