Good morning. My name is Christine and I will be your conference operator today. At this time, I would like to welcome everyone to the Mercer International second quarter 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator instructions) Thank you. I would now like to turn the conference over to Ms. Alex Tramont. You may begin your conference.

Thank you. Good morning, and welcome to the Mercer International 2008 second quarter earnings conference call. Management will begin with formal remarks, after which we will take your questions. Please note that in this morning's conference call, management will make forward-looking statements that were made in the press release. According to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, I would like to call your attention to the risks related to these statements, which are more fully described in the press release and in the company's filings with the Securities and Exchange Commission. Joining us from management on today's call are Jimmy Lee, President and Chairman, and David Gandossi, Executive Vice President, Chief Financial Officer, and Secretary. I will now turn the call over to management. Please go ahead.

Thanks, Alex, and welcome everyone to Mercer International's second quarter earnings conference call. We'll be following a similar format to that of the last quarter. I'll begin with some prepared comments on the key financial aspects of the quarter, and then I'll pass the call to Jimmy, who will speak about the particulars of the markets, our operating performance, and some of our strategic initiatives. And, as always, we'll be pleased to answer any questions you may have following our remarks. Let me begin by saying that it was clearly a difficult quarter. Despite another good quarter from a mill operating perspective, including a smooth maintenance shut at our Celgar mill, the U.S. dollar continued to weaken, which seems to be taking away the operating and pricing advantages we have achieved in recent quarters. Jimmy will speak more about this in a moment, including the pulp markets, which, as is often the case during the summer months, have been resistant to price increases. But let me talk about some numbers first. As you noted in our press release, we reported net income of EUR0.9 million for the quarter, or EUR0.02 per share, compared to net income of EUR3.2 million, or EUR0.09 per share in the same quarter in 2007. As you know, our earnings are sometimes heavily influenced by the mark-to-market gains and losses on our hedging instruments and foreign currency denominated debt. Our earnings in the quarter included pre-tax accounting gains totaling EUR20.8 million on these instruments compared to 19.4 million in the same quarter in 2007. Our interest expense continues to creep down as we reduce our level of borrowing on the Stendal facility. Interest expense in the current quarter also includes a EUR0.5 million non-recurring benefit that we received on certain notes receivable due to us were…

Thanks, David. As David mentioned, while we were pleased with our operational performance during the quarter, it has been impossible to keep pace with the deterioration of the U.S. dollar. As we have learned too well over the past few years, achieving NBSK pricing that reflects the reality of current currency markets is happening; it just seems to happen at a – not as fast as the currency changes. So we continue to push through the operational improvements we are promoting, and I'll talk about those efforts here in a moment. While certain aspects of our business have been discouraging, we continue to be satisfied with the rate of improvement and productivity. The production numbers we report often need a little explanation since they are impacted by maintenance shuts and varying numbers of calendar days. But after taking into consideration the impact of the annual maintenance shut at Celgar, we improved our average daily production rate once again in the second quarter, and we're extremely close to another record quarter. The improved level of productivity equates to about 8,000 tons higher production in Q2 2008 than the same quarter in 2007. Year-to-date, after removing the impacts of the shuts, our production is 24,000 tons higher than 2007. We will be performing our annual maintenance shut at our Rosenthal mill in the third quarter, and while this shut is slightly smaller in scope than the larger Celgar mills, it will nonetheless be noticeable in our results. Let me talk about the markets for a moment. While we believe that pulp markets for softwood generally remain balanced, the timing of recently announced price increases has been difficult. As you know, history tells us that price increases in the four [ph] summer months is more challenging, and we have been forced to defer…

(Operator instructions) Your first question is from the line of Bruce Klein with Credit Suisse. Bruce Klein – Credit Suisse: Hi. Good morning. I was trying to figure out just the – I guess on the Restricted Group what the impact was from the FX hit versus the first quarter of '08.

No, I don't have that number for you, Bruce. I'll work it out offline. Bruce Klein – Credit Suisse: Okay. And then the Celgar, what – I guess the production or the maintenance downtime, any sense of what kind of a hit that was in the second quarter? And was Celgar EBITDA positive in the second quarter? Could you share that?

Well, it was 11,000 tons. A maintenance shut at Celgar typically runs about $8 million Canadian, and so the net result was Celgar was not EBITDA positive in the quarter. Bruce Klein – Credit Suisse: And the German fiber, could you just help us – I know the Russian export tax you mentioned is up to 50 bucks. What's the mitigant to that? I didn't quite follow whether you thought there was – or what the rationale was why you didn't think there was going to be much impact on your wood basket.

No, I mean right now, it's still not up at $50 yet, but of course, it's coming. It seems that there's really no present outlook for a change in that position and, therefore, of course, the Finnish industry has been looking at many alternatives to supply their wood-related industries. They have, of course, made some attempts to take some wood from Northern Germany, but this has been very much on a very limited basis and has really not impacted the pricing overall for wood in Germany. And, therefore, so far, all of the things that have been occurring to try to increase wood availability in Finland have still have really no noticeable impact in terms of our wood pricing and wood volume availability at our German mills. Basically, that's what I wanted to say. Bruce Klein – Credit Suisse: But the tax hasn't come into effect yet, correct?

Not the 50.

It's EUR15 a cubic meter today, and it goes up to 50 on January 1 of 2009 if nothing changes. And just to sort of add to Jimmy's comments, we've seen the scans [ph] in the German market in the past but in a small way, and the limitation has always been the availability of equipment to move the volumes of wood that they need. In fact, they bought wood in the past and ended up calling our guys and saying, "We can't move it. Will you buy it back?" So the buying that they'll be doing, if they do much, will be limited to the Baltic region, Northern Germany, and there's just no way they could be buying the volumes that they'll be missing from the new developments in Russia. So it remains to be seen how hard they try, but our view of it is that physically it's just impossible for them to replace their lost fiber sources, so they're going to have to think about capacity reductions. Bruce Klein – Credit Suisse: Okay. That's helpful. And then, lastly, the energy situation, I guess, the Celgar project and then the biomass situation in Germany. How do we – can you help us – how do we think about what kind of impact – favorable impact it's going to have on you guys? Is that a reduction of energy, of cost of X per year at Celgar, or is that selling excess, or how do we think about what kind of –?

Yes, I mean presently there's not going to – it's just basically going to be offs [ph] – they'll be included in the reduction of costs of operation. So it's not segmented in terms of the reporting as to the energy. So it'll be essentially a positive contribution from the energy side, which basically will be all lumped in, in terms of the cost to manufacture. The energy side of it, of course, clearly, will become more and more significant, especially once Celgar's power plant is up and running, so at that point, of course, there will be some discussions as to whether this type of information will be, I guess, segregated. Bruce Klein – Credit Suisse: And remind us when this Celgar project is up and running.

Well, it should be up and running by beginning of '10 – 2010. Bruce Klein – Credit Suisse: Okay. But you haven't – I mean you're spending – was it $35 million?

Well, we're – it's roughly about $55 million Canadian, so it's about EUR38 million. It is ongoing. We've ordered the turbine. All the long-lead items have been essentially placed on order, so the schedule for completion by the end of '09 seems right on time so far.

Your next question is from the line of Daryl Swetlishoff with Raymond James. Daryl Swetlishoff – Raymond James: Well, thanks, and good morning. A couple questions, Jimmy. One was, I wouldn't mind your perspective on the major pulp markets that you ship to, maybe just some additional color on what you're seeing in the market today.

Yes, I mean the year started quite, let's say, slow, surprisingly, and typically, the beginning of the year tends to be slower for various factors, one of which, of course, is the Chinese New Year. But then it started to pick up in the second quarter, and we were able to, of course, remove some of the inventory, which, of course, had been building because of our increase in production volume, together with a bit of a slowness in terms of actual shipment volumes in the first part of the year. Things normalized. Volumes are pretty okay. The shipping issue out of Vancouver has made life, of course, very difficult, but the order inflows seem to be pretty much normal. The price increases in China have been very difficult in the first half, and there seems to be a significant amount of southern softwood and Radiata, which seems to be available not just in China but being offered as a whole. But I would say that the Southern softwood has been really more of the issue rather than Radiata. And therefore, because of this increase in supply for the lower grade of softwood, NBSK producers have had difficulty pushing price increases, even in the Chinese market. And a lot of that is deintegration of some of the paper production. The paper markets continued, especially in the publishing type of grades, to be very difficult, so certain producers who traditionally produce paper are shifting to more market pulp, and of course, that little bit of incremental volume, together with certain switches, like IP's mill meant that we actually had more volume that came up from unexpected sources. The closures of the Pope & Talbot mills certainly helped a lot, but it was really more psychological than actual physical because, of course,…

Yes, you know, if the currencies are at today's type of numbers – we've got significant cost pressures not just in the wood but also in terms of chemical and freight in Canada. You know, the container rates have more than doubled, and these are, of course, cost pressures that are being felt by all producers in Canada. We have essentially significant fuel surcharges even from our truckers, our railcar operators, from everyone. And then coupled with that, the continued weakness in terms of the lumber markets in the U.S. means that wood prices certainly in B.C. are not going to really drop much from where it is. We're taking some operational efficiency issues, and I think with now the Arrow Lakes towing open, we can – clearly, we can do better, and we think that discussions with government will certainly improve our access to pulp logs. But all in all, it's still going to mean the input costs will be still very high, and it will continue to probably move upward. So I can't possibly see how softwood pulp prices, certainly for NBSK, can drop significantly for an extended period of time from these levels. I mean it may drop 50 plus, maybe a little bit more, but clearly, it's going to bounce back quicker than one would expect because you're going to have capacity closures.

There's a lot of capacity out there that's got a cost structure. Could be $100 a ton higher than Celgar if you go back to Eastern Canada and some of these other mills. So there's not a lot of room for downward momentum for any prolonged period of time before those operators will give up. Daryl Swetlishoff – Raymond James: Thanks. That's very helpful. Thanks, guys.

Your next question is from the line of Bob Wetenhall with Royal Bank of Canada. Bob Wetenhall – Royal Bank of Canada: Thanks for taking the question. Could you just run through again the Renewable Energy Resources Act, and what was the EBITDA contribution you expected in Germany?

Yes, the amendment in terms of the Green Energy Act in Germany meant that we are able to qualify the first 20 megawatts of export power that we presently produce under the biomass tariff rates, and these are higher even today than the input rates that we have on the spot market and, of course, significantly higher than the rates that we had in 2007. So netting out what we had expected in terms of the CO2 contribution, based on today's tariff rates, we think that we will have a gain from the electricity side in the magnitude of about EUR15 million from the two – roughly about 10 for Stendal and about 5 for Rosenthal. Bob Wetenhall – Royal Bank of Canada: Terrific. And on Celgar, for the EUR38 million CapEx you're putting in, if that goes on line in 2010, what kind of EBITDA pick up do you get from that?

Well, we're thinking that it will contribute something in the order of about 16 million Canadian. Bob Wetenhall – Royal Bank of Canada: So like EUR 10 rough?

Yes, roughly. Bob Wetenhall – Royal Bank of Canada: So you're really talking about, in aggregate, picking up EUR25 million on a run rate from 2010 due to energy. Would that be a good ballpark estimate?

Yes, just in magnitude orders, it's a good estimate. I mean there are things we can do in terms of max – further improving the electricity power rate that we get because, of course, we're able to participate some of the power sales in the spot market. So better managing our sales certainly will have a meaningful impact, but in terms of magnitude, I would say that number is fine. Bob Wetenhall – Royal Bank of Canada: And one final question. How long do you anticipate it will take to work through the excess inventory in B.C. at Celgar given what's going on in Vancouver?

Well, you know, we are making further arrangements in regards to the shipping. We have another bulk carrier that we're going to ship out in Q3. So those actually make a significant dent on our inventories. So I think by the – towards – by the end of the year, we will be more normalized. I mean we will still have probably higher levels of inventory than what we had in the prior year, but we would've caught up quite significantly in terms of our inventory level. And coupled – because of the higher production volume, of course, it means that we're actually shipping quite a lot out in the third and fourth quarter. Bob Wetenhall – Royal Bank of Canada: Understood. Thanks very much.

Okay.

Your next question is from the line of Andrew Shapiro with Lawndale Capital Management. Andrew Shapiro – Lawndale Capital Management: Yes, hi. A few questions. Okay. On your power generation, I think you just gave the breakup between Rosenthal and Stendal, and – but on Celgar, can you give some idea on the – I guess the – your plans for the capital required to do the project and the timing of that? In other words, we talked about it being 35 million. You mentioned on a prior call, this being a project financing. What would the timing be of the project financing, and what's the timing for the RFPs or the power contracts? And that potentially implied we’re tied to the timing of a low-cost project financing.

Sure, so – hi, Andy. So, on the financing side, our Treasurer's run a process. She's had about 20 expressions of interest. Went through signing copies, gone through the due diligence materials, and we're expecting to make a selection on Friday and award that to one single institution to put it together. Through the process, we've got a couple pretty good alternatives and had one in particular I'm quite keen on, so I think it's very doable. I think it's going to be a good rate. It's going to be competitive. And roughly half of it will be taken, I think, by a bank, and the other half will be syndicated by that bank out to interested parties. It's a very – we've learned a lot about how much money there is for renewable energy projects out there. There are a lot of mandates that specifically are looking for these kinds of projects, and the fact that we've started ours and committed to it makes us a winner in their eyes because I think they suffer at least a 50% degradation when they go through these projects. Second question you asked, with sale of the power, so we bid our power to BC Hydro, which is our local utility here in British Columbia. We know those guys pretty well. We know what the cost of power is for other sources, and we bid to win, and they're going through their due diligence on all the presentations right now, and they've committed to have all contracting for power finished by October 15th of this year. So high level of confidence, but nothing much concrete to say other than that. Andrew Shapiro – Lawndale Capital Management: Will that be a long-term contract that their RFP was for?

Yes, we bid for 10 years. Andrew Shapiro – Lawndale Capital Management: Okay.

You can bid anywhere from 5 to 20 under their rules. Andrew Shapiro – Lawndale Capital Management: And then in terms of the financing that you've just described, which is further along than we thought, can you give a scope or a range of the dollar amount to get a handle on? The total project costs 35, you've put so much down, and the financing would be a certain amount –

Yes, we're going to finance – Andrew Shapiro – Lawndale Capital Management: How much more cash are you going to put out?

Our plan is to finance the full thing, the full $55 million Canadian. Andrew Shapiro – Lawndale Capital Management: So you'll recover – how much have you put in already that you would then recover and extract out?

Well, this year, we'll have put in EUR9 million, but – and we'll close – the agreement will be – the financing will be subject to a BC Hydro Power Purchase Agreement. Andrew Shapiro – Lawndale Capital Management: Sure.

And as soon as we get that done, then we'll have a funding program, but we'll recover – we'll have all our liquidity in line with the construction costs of 2009, which is when most of the money gets spent. Andrew Shapiro – Lawndale Capital Management: And what has been spent to date off our balance sheet already on the turbine –

About EUR4 million or EUR5 million. It will be up to EUR9 million by the end of the year. Andrew Shapiro – Lawndale Capital Management: So EUR4 million or EUR5 million that you've put in now, once the financing's done, would come off of today's current balance sheet back on?

That's right, yes. Andrew Shapiro – Lawndale Capital Management: Okay. All right. I think that answers my energy questions. A few other follow-up questions, if I could, from what was talked about. You mentioned – Jimmy mentioned in the Q and A as well as the script, the Celgar costs were – fiber costs were expected to drop "next quarter," and I didn't understand if that was the current quarter, Q3, or that was Q4 as a result of the initiatives.

Yes, it would be from Q3 on moving forward. Andrew Shapiro – Lawndale Capital Management: So the current quarter. And could you better explain the timing and, I guess, the scope of the impact of this whole project of dragging the logs over the lake with, I guess, this Interfor, which you've mentioned would save a substantial amount of money? You mentioned or implied a scope that I wasn't clear if it was a huge savings on all of your logs or was this – it was a huge savings just on the Interfor logs?

Yes, Andy, so maybe just to review the geography a little bit and the sawmilling industry in our region, when the sawmill industry is healthy, Celgar has a diet of 100% sawmill chips, residuals from their process of making lumber. At a time like this, where the sawmill industry is operating at a lower level, we need to buy round wood, whole logs, and typically, the logs we're looking for are not saw logs. They're the smaller or the decadent rotting logs that are in the forest that need to come out when the forest is harvested. And then there are also stands that have that kind of material that don't have saw logs that can be harvested. So a lot of that material that we're looking for is north of Celgar. It's up in the Revelstoke area or over in Kamloops. The amount of dead pinewood in the Kamloops region – like we don't have it in our region, but in Kamloops, which is quite a distance away, there's about 200 million meters of dead pine needle wood, and to bring that down by truck is possible, but it's very expensive. It's probably $25 or $30 a meter. So if you don't have other options, there's always a source of wood there, providing the government can get their rules right so that it allows us to harvest it, and that's what we're working on the government. But the transportation issue is – there's lots of wood up there. You could run Celgar completely on round wood if you had to from up there. That's how much wood there is, but it's expensive to bring it down by truck. There's a lake called the Arrow Lakes that goes all the way up to Revelstoke. It comes straight down to right…

Yes, I mean there's still a significant amount of production which is probably losing money at today's type of pricing and costs. I mean we know that some of the Eastern Canadian producers are having more and more problems with their costs for softwood, so some are shifting back to hardwood. So, yes, there's still a significant amount of capacity that is likely, both in Europe as well as in Canada, that if continued input cost inflation at today's type of rates, there's going to be more closures. Andrew Shapiro – Lawndale Capital Management: How do these companies finance their losses?

Well, it's a very open question, Andy. I mean why would anybody look at the Harmac mills when it was losing money in the past, so what has changed? The only change is higher input costs. So labor clearly is a cost, but it's not the most significant cost. It's the wood, the freight, and other chemical costs. So I don't know how people view this industry, but why all of a sudden do you think you can do it better when really there's been no change in prices for the commodity and all the input costs have come up. And without further investments or other changes, you're not going to get the efficiency, and it takes time to get the efficiencies even if you make the investment. So, clearly, I don't quite understand where the thinking of many of the players are or where are they getting the money. I mean, clearly, Pope & Talbot went to the wall. They finally ran out of money, and they were forced to close. And, unfortunately, there is a cost to die, and that's the problem in this industry. Without the extra money, it's better just to run it until you absolutely run out of money and go broke, and that's what's happening. Andrew Shapiro – Lawndale Capital Management: Okay. And last question for now. I'm going to back out into the queue, and please come back to us on the inventory here. You've mentioned you have excess inventory to work down at both Celgar, and your press release implied that there was some excess inventory at Stendal. Can you give us an idea, quantify kind of the excess inventory level at Celgar? And we know why Celgar has it, but I didn't understand Stendal. And then what are – what's being done in the timing on the impediments of working down this inventory that you're quantifying for us?

Yes, so if we take Celgar first, so the challenge with the containers is as the world economy continues to struggle, the number of containers coming back over to North America are lower than they used to be, and if they come over to North America and they arrive in the East, then they get filled up with goods to go back, and the only containers we can get in the West are those containers that delivered product to the West. So it's just kind of been this steady deterioration. So we have shifted our focus to say, well, we're obviously taking every container we get, but we're now chartering break bulk vessels. Took us a while to convince some of our colleagues in the other forest products businesses around us to do that. I think they now understand that's a necessity. So we're – that's our strategy is we'll do as much as we can on break bulk. The cost to date for break bulk and containers is about the same. Containers have come up that much. So it's just a matter of arranging equipment to get our product to market. And we've done that. We've got a big shipment scheduled for September, and that will bring – our target for Celgar is to bring that rate down to about 37,000 tons by the end of Q3 and then further down to 32,000 tons by the end of Q4. So we'll be out of the inventory surge for Celgar. For Stendal, it's just been a little bit different. We've had a few customers who we've had to delay orders for because of credit issues, like some of those companies are struggling, and we won't, because of our – we insure our receivables, we have effectively established a limit for all these customers, and we just won't ship them over that limit. So we end up building some inventory and also the mill's been running really well, so we've got some inventory that wasn't contracted for. And we've been pushing price, so we've been being quite disciplined about not pushing that product into the market at bigger discounts. We have a plan to work it out. Our plan is to be down to about 39,000 tons by the end of the year, but most of that improvement will happen in the fourth quarter when markets are a little tighter than they are as under these current conditions. Andrew Shapiro – Lawndale Capital Management: Can you provide kind of a dollar value on that inventory tonnage that you're speaking about? You said that you had a certain amount you thought you'd bring down in Celgar in Q3, like in Q4, and then the Stendal by Q4. What's the excess dollar value here kind of on that – when I say dollar value, what cash do you think you'll generate from this inventory?

No, I don't have a number calculated for you, Andy, so I'd be throwing numbers around, but it's a significant improvement in liquidity, not that we have a liquidity problem, but – Andrew Shapiro – Lawndale Capital Management: No, but the more cash you build, the more bonds you can take out or refi here at the end of the year.

Yes. Andrew Shapiro – Lawndale Capital Management: Okay. I have more questions. I'll back out of the queue. Please let us back in later on. We'll reenter.

(Operator instructions) Your next question is from Herve Carreau with CIBC World Markets. Herve Carreau – CIBC World Markets: Yes, I thank you. Just a question on conversion cost. You have some maintenance shuts planned for, I think, Rosenthal in Q3 and Stendal in Q4. Just wondering how do you think your conversion costs will evolve during the balance of the year relative to Q2, for example?

Well, it's – Celgar's conversion costs will be lower in Q3 and Q4. Rosenthal's will be a little higher in Q3, and Stendal's a little higher in Q4, but we don't – Herve, unfortunately, we don't release individual mill conversion costs, so I'm not sure I can give you as much color as you'd like on that. But it'd be maybe – looking over past periods, you can sort of get a feeling for the fluctuations of the maintenance quarters. Herve Carreau – CIBC World Markets: Okay, thank you.

(Operator instructions) Your next question is from the line of Aaron Rickles with Oppenheimer. Aaron Rickles – Oppenheimer: Thanks, guys. Good morning. Can you just tell us what the production was at each mill for each quarter – for this quarter?

Yes, so here we go. Okay, Rosenthal in the second quarter was 84.5; Stendal was 157.9; Celgar, 114.4. Aaron Rickles – Oppenheimer: Okay, and then CapEx, same way?

Okay. So, CapEx for Rosenthal in Q2 was 1.3; Stendal was minimal; and Celgar was 2.4. Aaron Rickles – Oppenheimer: Perfect. Okay. This is sort of a question that was maybe already asked, so I'll try to do it a different way. If we look at the Restricted Group, the cost of goods sold, it looks like it went up about EUR10 million from Q2 – from Q1, sequential quarters. Is it possible to maybe bridge that cost increase? And I guess a lot of it was the Celgar take-down, but the other aspects of it? Can you put a little more color on that?

Well, I guess we sold about maybe 4,000 more tons in Q2 out of Celgar, and maintenance shut, you know, it's 7 or 8 million straight to the bottom line in a quarter, so I think that probably makes up for most of it, apart from the inflationary aspects of –

Some of the wood costs.

Yes.

And the freight costs. Aaron Rickles – Oppenheimer: Okay. Is it possible to tell us what the Rosenthal shutdown in Q3 is expected to cost?

It's a much smaller mill that Celgar, so its maintenance time is cheaper. I don't have a number, but it would maybe be two-thirds of what Celgar would be, I think, something in that order of magnitude. Aaron Rickles – Oppenheimer: So like $5 million to $6 million. Okay. And then just the math on the lower wood costs as you start getting it from up north, and maybe make sure that my conversions are right, but I think you said you're going to take wood costs from $25 per cubic meter down to $10? Is that accurate?

No, I mean what you've got, of course, is a whole mix of wood supply. Some of it comes from the very distant perimeters, and a lot of it is coming from very local sources. So the issue is to address the cost of the most expensive log supply, and of course, we being forced to truck a lot even from the very long distances. The fact that we're able to open up the lake means that those extreme distant-type of logs will have lower costs coming in to the levels that would be more in the 10 versus, let's say, the 30-plus. So we are going to reduce the cost on those volume of wood, and it's difficult to know how much of that is going to represent the overall pulp log percentage because we're getting ongoing purchasing, both in from that area and the local area, and of course, it's also, to a degree, species-dependent, log size-dependent, and many other factors. So, yes, you're going to see freight cost reduction, but I can't give you a magnitude number because we don't even know what the full impact will be. Aaron Rickles – Oppenheimer: Sure.

There is another way to think about it. It might help a little bit. So when the Erlicks [ph] weren't running and we were very concerned about getting fiber and we had – didn't have as many commitments from the government to work on these things as we did, we had to do heroic things, and sometimes we would pay $60 to $65 a meter to get wood onto the pile. I mean that's just what you had to do. And these might be remote chippers like way up in (inaudible) or some place like that. But our woodroom costs are going to be in the $45 to $50 on the pile maximum range. And as we've said before, that's our ceiling. That's what we're going to have to think about. That's the maximum we're going to be prepared to pay for fiber, so that's why we're doing that. It's our release valve. So that's the order of magnitude. Some of the higher-cost wood we can turn off and start processing cheaper wood. Aaron Rickles – Oppenheimer: What was sort of the average for Q2? Can you talk about that?

Yes, I've got that here. It's right here under my many pages of data. Aaron Rickles – Oppenheimer: You've got a lot of pages, it sounds like.

Yes, the average for Celgar in Canadian dollars for Q2 was $52 a meter. Aaron Rickles – Oppenheimer: 52, you said?

Yes. Aaron Rickles – Oppenheimer: Okay. I think that was it for now. Thanks, guys.

Your next question is from the line of Rich Sherman [ph] with Oppenheimer. Rich Sherman – Oppenheimer: I'd like to address – just philosophically, the return on investment for the industry has been relatively poor, and we're sitting here today – there hasn't been much return on investment relative to the stock return for the last 10 years. You mentioned a couple quarters ago that from a financial engineering side to address this, some of the things you were looking at was either using your cash flows to buy back some of the debt, buy back stock, pay a dividend, and you mentioned many things. Has any of that at all – it doesn't seem that any of that over the last nine months, when you first mentioned it, has been implemented. Are there any plans in that direction take advantage of the stock price now as substantially below book and still falling, bonds are coming back down, to look in that direction to help enhance returns?

Yes, certainly, I mean it's an issue that is now more and more upfront in our mind. Of course, we are constrained by the indentures on the senior notes, so clearly, we don't have complete flexibility in terms of the use of our cash. But with the stock levels at today's type of levels, certainly, it's very much a clear focus as to the use of our excess cash, and I think something is likely to occur. Rich Sherman – Oppenheimer: Okay. I'd recommend it, Jimmy, because – only because it's been tough for – you've done a lot of good things on the operational side, but other than the cogeneration of power, et cetera, it doesn't seem that investments in the industry itself, in plans or even buying – that there's really much incentive anymore for – to get the kind of returns you can probably get going in a different direction.

No, I agree, but if you look at the numbers, the stuff that we have to contend with in terms of the increase in costs, if you look at last year, this year, essentially the pulp prices remained flat in our euro and Canadian dollar terms, and yet, our EBITDA performance was – okay, it was lower, but it wasn't significantly lower. And the cost pressure on the input side was like in the magnitude of EUR25 million. So I think – Rich Sherman – Oppenheimer: Oh, no, I think you've done a –

– So, clearly, it is very tough. I mean, yes, if we could actually get that type of number to save. You know, we've worked extremely hard from an operation and – of course, we're disappointed in terms of that not being reflected in terms of our equity. And so we will do what we think is important. Of course, we're constrained, as I said, in terms of the cash availability. We will look at the equity buyback, debt buyback. I think, clearly, we are confident in terms of the strength of our business. But at the same time, it's unfortunate that we do have certain handcuffs in terms of the use of our free cash.

And just maybe adding to that, I mean I think we have to remember what we're doing here. This is a very low-cost group of three mills. It's more than 10% of the NBSK industry right now at a time of transition. The rest of the industry is in deep trouble, and these mills are moving forward and making cash. We're financially structured so that we could provide tremendous leverage to the pulp cycle to shareholders, and we're going to run this business so that we never are at risk, so that we maintain the liquidity we need to make it through these challenging times to provide the returns when the market and the world economy allows us to do that. So it's a great opportunity to buy back stock and to look at the bonds when they're cheap, and we will always do that, but we also have to remember that structurally every quarter Mercer gets stronger and stronger, and it requires a little patience, but that's part of the way you have to think about it. We're not an income trust, and I don't think we should be at this stage. Rich Sherman – Oppenheimer: I want to just state that, first of all, I'm long and have been for – I think Jimmy knows who I am, and I've been around for 10 – more than 10 years involved in your company, so this is not a criticism. It's just an observation that unfortunately the marketplace has given no return to your equity in a decade. And–

Yes. Rich Sherman – Oppenheimer: And the industry has gone through – well, you have done many different things, and I think from an operational standpoint, you've done a very good job. I just wonder whether – you can't – nobody can’t predict the future, but it doesn't look that, at least from an industry standpoint, there's no guarantee the pricing is going to get better. There's no guarantee that the dollar is ever going to get stronger again or the euro is going to come down. I mean you can't really plan for those things. So at some point, you almost have to look at it like the best use of capital sometimes is to generate cash and just simply pay down debt or buy in equity. So that's my only comment. I mean because it reaches a level of frustration at some point–

No, I agree. I mean there's probably nobody in this room who's less – more frustrated than I am because I feel that a lot has been achieved, but it's very frustrating, and I sympathize with my shareholders because I'm in the same boat. But at the same time, if you look at what we're trying to do is really to bring about more predictability of EBITDA and that's why our focus is really more on the byproducts, recognizing really the craziness of the pulp industry because it's clear; we have not done a great job, and I'm not sure when this industry will transform. So rather than trying to say, "Well, I'm going to wait," what we're doing is really focusing on more predictable cash flow, emphasizing byproduct streams. Let's get that as really our core focus, continue to make the EBITDA improvements that – because we're going to have the cost pressures. We're not likely to get better pricing, but we know what we can do in terms of improving our own efficiencies, and so it's very high in our mind. All of the mills have set objectives in terms of reaching significantly higher EBITDA margins, even with today's type of costs, and in terms of price for the finished product, and this will offset a lot of the cost inflations we're having. So, yes, clearly, it's frustrating, and we're going to look at in terms of the use of the cash as another tool because, yes, we're paying down debt. I mean Stendal pays down significant amount of debt every year. And, clearly, our balance sheet is improving. We have done some buybacks. We will focus on the equity side as well because clearly now it's not reflecting the true balance sheet either. So all of these areas, I think, we will be addressing. Rich Sherman – Oppenheimer: You say you have done some buybacks so far?

I mean we bought back some of the convertible notes, as you know. Rich Sherman – Oppenheimer: Oh, yes, that, okay, yes. Okay, well, thank you, and good luck.

Thanks.

Your next question is from the line of Peter Ehret with Invesco. Peter Ehret – Invesco: It's really the same point, so I don't want to beat on you too much about it. And, really, the same with the previous questioner; it really isn't an operational point, but it's just this frustration, this just questioning about the capital structure. EUR45 million coming back out as you get that financing done, and inventories are planned to have a cash flow impact, and cash on the balance sheet is what it is, and so you bought back some converts. Have you bought back any of the bonds?

Well, it's David here. We just don't want to spend money before we've got it, okay? So we've got a plan to raise money to spend on the capital for the energy project, but we started that energy project, and we don't have committed financing yet. So – Peter Ehret – Invesco: Oh, yes, I understand that.

Everything has to be done in its right order so that we don't put you guys at risk. That's all we're saying. Peter Ehret – Invesco: Yes, believe me, we appreciate that. That's a terrific thing. Earlier – in one of the earlier conference calls, one of the objections that the company had was that, well, the bond trading levels were kind of temporary and had just kind of been there and – well, they're there again, and it's sitting there. It's sitting there waiting for you. (inaudible)

No, but if you look at the bond prices, it recovered significantly. Peter Ehret – Invesco: Well, now it's bounced back. So to kind of – just to make note, it's there. That opportunity exists.

Yes, we understand that, and there's probably half on the call that would like us to do something with the bonds, and half would say, "Don't you dare."

Yes, just on the equity.

Everything in its right order. We get the points. We completely agree. We understand it. We're here to create value for all our investors. And you just – you need to be patient with us. We need to get this financing done. We need to see the future a little more clearly, and we think the future is very promising for Mercer. Peter Ehret – Invesco: Okay. And, again, just the numbers are off a lot, but certainly appreciate that it's good numbers given the backdrop and all the things that you've been fighting against. So thanks. Talk to you next time.

Okay.

We appreciate it. Thanks.

Your next question is a follow-up from Andrew Shapiro with Lawndale Capital Management. Andrew Shapiro – Lawndale Capital Management: It is a follow-up on the excellent questions from the guy from Oppenheimer and the recent – previous questioner. What percentage of Stendal do we own? It's about 70%?

That's correct. Andrew Shapiro – Lawndale Capital Management: Okay. So we own 70% of Stendal, and there's a minority stake out there, and I know that there's been some calls or talk of allocating towards the minority stake and getting that maybe acquired, and this is 100%. But I want to make sure that the board – and share a thought is that the board's considering the idea. You have a bunch of cash, and if you go by the minority's stake, it costs you a certain amount. And if you were to be able to buy your equity, which covenants and indentures might prohibit you, but if you're able to buy your equity, that investment is in buying the existing 70% stake of Stendal that you own at possibly more pennies on the – at a lower pennies on the dollar than you may be talking to the Stendal minority investors on. And I want to make sure that you and the board, because I know they're listening, consider those two alternatives in investments before one allocates and maybe takes out a minority when your majority stake might be available in the open market here at a cheaper pennies-on-the-dollar valuation.

Certainly – it's certainly part of the equation, Andy. It's not– Andrew Shapiro – Lawndale Capital Management: I just –

It's not all of the equation. Andrew Shapiro – Lawndale Capital Management: Right. You're sitting on a lot of cash. What kind of rate of return is that cash generating?

It's pretty low. It's 3.5% or 4%. Andrew Shapiro – Lawndale Capital Management: Okay. So the long – the time drag we have here on this big bucket of cash and the debt is – it's a negative float. Could you remind me again the timing of the project financing for the Celgar project? You don't collect the cash until a BC Hydro contract is actually cut?

Yes, it will be subject – that's correct, Andrew. It will be subject to a successful Power Purchase Agreement with BC Hydro. Andrew Shapiro – Lawndale Capital Management: And they target that for an October 1 signing with someone?

Yes, October 15 is their deadline, their expressed deadline, and we've been hoping it would be sooner, but I can't predict that at this –

You know, with these government-type of utilities you can never predict the actual timing. So I mean although their target is for mid-October, this thing could be much longer. Andrew Shapiro – Lawndale Capital Management: But the milestones again then on the Celgar project financing, somewhere near-term milestones, could you remind me again what those – kind of those milestones are?

Well, we're hoping that we will have a definitive understanding with BC Hydro sometime in October. We'll have essentially the financing arranged by the end of the year, and as you know, the bulk of the cash outflow is going to be '09, so essentially it means that we will not be injecting any further of our cash into that project and recover the cash we had put in, something in the order of 8 million to 9 million that we probably would have spent by that time. The project then continues throughout '09, and at the end of '09, the tie-in and start-up of the – Andrew Shapiro – Lawndale Capital Management: No, I meant, Jimmy, the milestones on the financing part, the stuff that occurs on the financing between now and the October 15 signing, which would be the hair-trigger on the subject, too. Are there milestones that will occur that you will then be able to inform us investors about?

Nothing that would really be that conclusive because, of course, there are significant discussions going on, but – on the offer we have made, and so that will continue throughout the period before we enter into final understanding with them. And there's no kind of further milestones that we're hitting. Andrew Shapiro – Lawndale Capital Management: And we noticed you had a convertible note receivable from Fortress Paper, and it was redeemed for – I think it was around $8.2 million. Maybe it was Canadian?

Well, let's see – yes. Andrew Shapiro – Lawndale Capital Management: And that cash is already reflected in your financials for the June quarter balance sheet or that was after the June quarter that that $8.2 million came in?

No, the cash came in, so it's included in the Q2 numbers. Andrew Shapiro – Lawndale Capital Management: Okay. And then, also, according to the Fortress press release, you got 105,000 shares of Fortress Paper, which might be around $9 Canadian today. Where are those shares reflected in your financials or if you still have the shares, or did those get sold, and was that in the quarter ended June or subsequent?

They're in our investments line. Andrew Shapiro – Lawndale Capital Management: Okay. You still hold about 105,000 shares of Fortress?

We do.

We do.

We do. Andrew Shapiro – Lawndale Capital Management: Okay. And its stock has taken a pretty sizable run-up. Is there a strategic – are there restrictions on it? Is there a strategic reason for a long-term hold, or what are your thoughts on that?

No, I mean it was issued pursuant to a private issue, so of course, there is the normal restriction, I think, four months, but beyond that, there's no other restriction for a sale. So I mean there's no strategic reason that this is a long-term investment. We will basically look at it based on what we think is a fair return and the price of the stock. Andrew Shapiro – Lawndale Capital Management: Okay. And the – I don't know if it's in the summer or in the fall. What are your upcoming road show and trade – when I say trade conference, we'll call it investment banker conference scheduled appearances set for?

So in September, we're going to do the Midwest, so we'll do Chicago, Milwaukee, and we're just putting all that together now. And that will be in the week of September 15th. And then our plan is after we've released the third quarter results, we're going to do the tour again to all our major shareholders in Boston, New York, and probably the West Coast. Andrew Shapiro – Lawndale Capital Management: All right. Well, we'll look forward to seeing you when you come out West. Thank you.

You bet. Yes.

Your last question is from the line of Michael Tannenbaum [ph] with Glenrock Capital [ph]. David Post – Glenrock Capital: Actually, David Post [ph]. I've got two questions. One is can you give us the sales volume by plant for the quarter?

Okay. Rosenthal, 81.8; Stendal, 145.7; and Celgar was 119.8. David Post – Glenrock Capital: Okay, thanks. And then the second question is in terms of NBSK capacity, what's the number that you have for '07 for Canada and for – and also for '07 for the worldwide total? And then sort of a follow-on to that.

Well, I don't have all the statistics here, but the way we think about it, generally, I think it was about 14.5 million pounds of global NBSK capacity, market NBSK, and Canada probably represents 4.5 million or something of that in '07. David Post – Glenrock Capital: 4.5 or 6.5?

4.5. David Post – Glenrock Capital: 4.5, okay.

Going by memory. Sorry, I don't have – David Post – Glenrock Capital: That's okay.

– the CPGC [ph] stuff here. David Post – Glenrock Capital: Then you made a comment earlier in the call that there is about a 1 million average daily metric ton capacity reduction from, I guess, the pulp mills and others. And, again, it's the anticipated closure of those mills. You said that it was offset by de-bottlenecking from the integrated producers that are, therefore, selling market pulp. Did I hear that correctly?

No, basically, if you look at the broad numbers, NBSK being, of course, the premium benchmark grade, but many of the producers in China of paper can take, of course, much less quality type of pulp. And, therefore, if you look at softwood as a whole, we had, of course, the closure of the Pope & Talbot mills, as well as the announced closure of the – one of the Stora Enso mills. And if you add that, it's roughly about 1 million tons of market NBSK. Offsetting that was softwood increases. You had IP, deintegration of their Louisiana mill, which is about 400 – just over 400-some thousand tons. You had 200,000 tons of unbleached converting into bleached from the Lee & Man capacity. And you also had some swing capacity out of Scandinavia, which of course, was producing more softwood rather than hardwood because, of course, they had more availability from storm-damaged wood, et cetera. And you also had Arelco’s [ph] approval to essentially go to full production at their Volbega [ph] mill, so – which probably is another 200,000 tons. So if you all add it up, you probably had about 1 million tons of softwoods, including Southern softwood, Radiata, as well as conversion from unbleached to bleached all of a sudden coming in. At the same time, you had about 1 million tons of NBSK going out. But, of course, the timing there is not overlapping, so that's why you have this transition, which has been fairly difficult, especially in the China market, to push through price increases because you still have inventory out there because although they shut, you still – you're not shutting tomorrow. So they announced closures, but the increase in volume coming from the other areas certainly offset all of the benefits that we're expecting. David Post – Glenrock Capital: Do you have any visibility into any further actions on the part of the integrated mills on a worldwide basis or any expectation there could be further type actions that might –

We're seeing – David Post – Glenrock Capital: – would it be greater in total than the NBSK capacity that might incrementally come out from here?

Well, I mean we're seeing actually swing going the other way because the availability of softwood has tightened in terms of raw material supply, though some of the Canadian guys, they're switching back – at least some of their line back to hardwood from softwood. We know that there's further closure of the second Stora Enso mill. There may be some deintegration of some of the paper production in Scandinavia where they may push through pulp sales at the expense of paper [ph] production. That's difficult to measure. But, presently, we're seeing at least a swing back because even the Scandinavians are now swinging back to hardwood from softwood. So, clearly, things are improving from the first half. David Post – Glenrock Capital: Okay. All right. That answered my question. Thank you.

Okay.

You have a follow-up question from the line of Aaron Rickles with Oppenheimer. Aaron Rickles – Oppenheimer: Hey, thanks. Just quickly, can you just remind us what the current inventories are at Celgar and Stendal?

Yes, into Q2, Celgar's inventory was 64,500 tons, and Stendal was 50,000 tons. Aaron Rickles – Oppenheimer: And then you said Celgar's could go down to 39 by the end of Q3 and then 32 end of the year?

Yes, 36.7, Q3, is our projection right now and 32.3 for Q4. Aaron Rickles – Oppenheimer: Okay. And then Stendal's same way?

Stendal goes up at the end of Q3 to 56.5 and goes down to 39 by Q4. And we're going to hold our marketing team to that. Aaron Rickles – Oppenheimer: You'd better. All right, guys. Thanks.

Thanks.

And there are no further questions at this time. I'd like to turn the call back to management for any closing remarks.

Well, I thank everyone for attending today's conference call. I know that it's a bit frustrating, but as I said earlier, we've come a long way in terms of operating efficiencies. So if we get a break on any of the other input numbers or in terms of currency, certainly we're well positioned to really benefit from it. So in the meantime, as I said, we are focusing on the byproducts frame, the power clearly being a very important component to that, and we're well positioned to weather the storm. So I think that, although it's frustrating, we certainly have a very good operation that will, I think, weather the most difficult conditions in terms of this market. So on that note, I thank everyone again and close the call.

This concludes today's conference call. You may now disconnect.