Capital Expenditure Program - Conifex Timber Inc.

Capital Expenditure Program - Conifex Timber Inc.

Conifex Timber Inc.August 30, 2010 Update1

Cautionary Statement Regarding Forward-Looking Information Transaction• Certain statements in this presentation may constitute "forward-looking information"or "forward-looking statements" which involve known and unknown risks,uncertainties and other factors which may cause the actual results, performance orachievements of the Company or industry results to be materially different from anyfuture results, performance or achievements implied by such forward-lookinginformation. When used in this presentation, such information uses such words as"estimates", "expects", "plans", "anticipates", and other similar terminology. Thisinformation reflects the Company's current expectations regarding futuredevelopments, including the upgrading and operation of its convertingfacilities. Forward-looking information involves significant uncertainties, should not beread as a guarantee of future performance or results, and will not necessarily be anaccurate indication of whether or not such results will be achieved. A number orfactors could cause actual results to differ materially from the results discussed in theforward-looking information. Although the forward looking information in thispresentation is based upon what management of the Company believes arereasonable assumptions, the Company cannot assure investors that actual results willbe consistent with this forward-looking information. This forward-looking informationis provided as of the date of this presentation and, subject to applicable securitieslaws, the Company assumes no obligation to update or revise such information toreflect new events or circumstances.2

Highlights• Mackenzie Acquisition Completed• We now have 300 million board feet of two-shift lumber capacity at Fort St. Jamesand 445 million from the two acquired mills at Mackenzie.• The mills are supported by cutting rights to 1.57 million cubic metres of sawlogsannually, as well as good access to purchased wood.• Financing Completed, Listing Obtained, and Balance Sheet Strengthened• We secured $89 million in gross proceeds at an offering price of $8.25 per share.• Our 15.7 million issued and outstanding shares are listed under the symbol CFFX.• As at June 30, 2010, we had $50 million of cash versus $7.3 million in low-cost debt.• Mid Year Results Hurt by Capital Expenditure and Low Operating Rates• Q2 production, shipments, and EBITDA adversely impacted by a major capitalinstallation.• We are presently producing lumber at an annual rate of 160 million board feet, butincurring fixed costs associated with 745 million of lumber capacity.• We are implementing a $30 million modernization project at Fort St. James with theintention of moving to a two-shift operation in early 2011.• Our intention is to re-start one of the two sawmills in Mackenzie prior to the end of2010.3

Capital Expenditure Program• Summary Comments• We have approved a $30 million capital expenditure program for ourmanufacturing complex at Fort St. James (FSJ).• $6 million was completed in 1H 2010 and the $24 million balance is to becompleted by the end of the year.• The fundamental issue at FSJ was that our sawmill is capable of exceeding 300million board feet of annual production running two eight-hour shifts per day for atotal of 80 hours per week. The planing and finishing throughput wasapproximately one-half the sawmill capacity, so these operations would have torun 10-hour and 12-hour shifts for seven day periods to process the two-shiftsawmill production. The labour cost premiums and lower efficiencies associatedwith this unusual operating format lead to unacceptably high unit costs, and haveprevented us from adopting a two-shift operation in the sawmill.• Speeding up the planer would have required more manual graders capable ofmaintaining constant concentration for extended periods of time. A betteralternative was the installation of a GradExpert System.4

GradExpert Installation Completed• The effectiveness of our mill’s finishing and grading operations has a significantimpact on lumber quality and value, as well as on customer satisfaction.• Recent developments in vision technology have improved automated gradingsystems making it possible to determine the grade of kiln-dried, surfaced SPFlumber pieces with a minimum of human intervention. This produces fewerlumber grading errors and contributes to increased product values.• The key benefits of the GradExpert is an increase in planer efficiency, throughputand grade outturns, a decrease in trim loss, and reduced manning costs.• The GradExpert Systems also gives us the potential to broaden the range ofproducts we produce as FSJ. Adopting new grading specifications for newproduct introductions would have increased the level of difficulty for our manualgraders.5

Capital Expenditures Underway• Amount: $13 million at Fort St. James• Project: To increase the productivity of the planer to match sawmill production• Components: Increase planer speedsInstallation of a second BinSorter/Stacker LineInstallation of a second Packaging LineUpgrading the existing BinSorter, Stacking and Packaging Lines• Benefits: Reduced labour costs due to higher productivityReduced labour costs due to theelimination of a third shiftIncreased value from a“cut-in-two” capability• Timing: Some benefits by October 1, 2010Full benefits upon projectcompletion on January 1, 20116

Capital Expenditures Underway cont’d• Amount: $7 million at Fort St. James• Project: To increase lumber drying capacityand to improve lumber drying quality• Components: Install new natural gas fired thermaloil heating systemConvert two existing dry kilns tothermal oil, “zone controlled” heatingInstall a new thermal oil, “zonecontrolled” 150 foot dry kiln• Benefits: Reduced drying defectsImproved grade outturnsIncreased lumber drying capacityReduced natural gas consumption• Timing: Thermal Oil heating system start-upin October, 2010New kiln operational in October 2010Kiln conversions and total projectcompleted December 1, 20107

Capital Expenditures Underway cont’d• Amount: $4 million at Fort St. James• Project: Add a fourth debarker line to theFort St. James sawmill• Benefits: Increased log throughput at thesawmillReduced overtime expenseImproved residual chip revenuesdue to reduced bark contaminationHigher lumber recovery due toreduced fibre tear• Timing: On line December 1, 20108

Results in Brief2010 2009Q1 Q2 6 Months Q2 6 MonthsShipmentsProduction32.839.530.741.363.580.828.$12.1(0.9)$12.6(0.9)$24.7(1.8)$8.4(1.1)$8.6(6.4)• Installation of our Grad Expert system in Q2 2010 meant that we were unable to finish andship the rough lumber produced during the quarter.• The main planer ceased operating on April 16, 2010, testing of the GradExpert commencedMay 10, 2010, and regular production resumed in July, 2010.• The introduction of the second shift upon the completion of the capital expenditure programis the key element in moving our Fort St. James mill to top-quartile status. Our analysisindicates that we will be able to double our lumber production at the facility with a 20%increase in current employment levels at this site. Since wages and benefits are the secondlargest component of costs (fibre is the largest), the lumber produced and sold from oursecond shift will contribute significantly to EBITDA, even at current price levels.9

Financial Position in BriefAs at June 30, 2010(millions)CashOther Current AssetsTotal Current AssetsCurrent LiabilitiesNet Working CapitalLong-term AssetsNon-interest bearing long-term liabilitiesLong-term DebtShareholders’ Equity$52.0$19.3$71.3$7.5$63.8$54.4$7.0$7.3$103.0• In November, 2009, we arranged $10.0 million of convertible note financing. The notes areconvertible at $8.00, have a five year term, and carry an interest rate of 2.5% for the firstthree years to be settled in common shares, and 10.5% payable in cash for the following twoyears. $5.0 million of the amount of convertible notes is recorded as long-term debt, and$5.0 million has been recorded as shareholders’ equity classified as “Conversion option onconvertible notes”.• In August, 2009, we secured a loan facility of $8.5 million under the Community AdjustmentFund (“CAF”) loan program. The loan is at a fixed interest rate of 3.75% and is repayableover five years commencing June 1, 2011. Funds are advanced as capital expenditures areincurred, and $2.3 million had been drawn down by June 30, 2010.10

Shareholders’ Equity Considerations• Conifex financial statements are presented using IFRS. One key difference betweenCanadian GAAP and IFRS is that the value of timber licenses is not grouped with property,plant and equipment, but is classified separately as an intangible asset on the balancesheet.• As at June 30, 2010, we had non capital losses of approximately $14.6 million for which nobenefit has been recognized in our financial statements due to uncertainty regarding thetiming of their realization.• Our balance sheet carrying values reflect the low acquisition costs of our fixed assets.When Canfor completed the sale of its Fort St. James sawmill and timber tenures to Pope &Talbot in 2005, it recorded the assets at $29.6 million. We recorded the identical assets for$11.6 million on our balance sheet.• With total shareholders’ funds of $103 million as at June 30, 2010, our book value is $6.82per share.11

BioEnergy Update• Our sawmill residuals and other sources ofwoody biomass at our two main sites continueto attract the interest of electric powerproducers in search of long-term, reliable andcompetitively priced energy supply sources.• The increased competition for biomass fibre ispushing up the prices of sawmill waste(sawdust, shavings, and hog fuel), in partbecause of a high portion of sawmill waste inthe Interior region of B.C. is already committedto pulp mills and to pellet producers.• Our extensive fibre resources and competitivedelivered sawlog costs position us as a stable,reliable, long-term biomass source, especiallysince we have access to a well-functioninginfrastructure to source, transport and preparebiomass fibre.12

Power Production Potential at Mackenzie• The power boiler and steam turbine acquired aspart of the Mackenzie acquisition are recorded onour balance sheet for $10 million.• We expect to receive favourable consideration forour electric power initiative since the effect willbe to preserve and stabilize the high-payingforest products industry jobs that are so criticalto Interior B.C. communities such as Mackenzie.• As our plans evolve, these and related activitiesmay form a separate reporting segment.13

Start Up Considerations for Mackenzie• Our original thinking was to consolidate the two sawmill sites into a rebuilt site adjacent tothe power assets we plan to upgrade and operate at Mackenzie. However, it appears thatthe sawlog supply could be so plentiful over the next decade to justify the operation of thetwo sawmill sites.• A specific start-up date has not yet been determined. Negotiations on a new labouragreement, a chip sales agreement, and a power purchase agreement need to progressfurther before the scope and timing of a start-up can be determined.• Our target is to resume production at one of the two sawmill sites in Mackenzie before theend of the calendar year.14

Capital Expenditure Perspective for Fort St.James• Over the 2004 to 2009 period inclusive, the major public lumber producers all incurredsignificant capital expenditures to modernize and upgrade their converting facilities, asindicated below:• Over the same period, only a nominal amount was spent at Fort St. James because Canforwas committed to divest the assets, and because the purchaser, Pope & Talbot, did not havesufficient funding capability.Company2004 – 2009 CapitalExpendituresOperatingRateEBITDAMarginWest FraserCanforInterforConifex$454 million$413 million$293 millionnominalHighestSecond HightestSecond LowestLowestHighestSecond HighestSecond LowestLowest• The above table indicates that current cash flow margins are importantly tied to historiccapital expenditures and to capacity utilization rates.• Conifex is embarking on a significant capital expenditure program, and has plans to movetowards capacity operations. These initiatives will cause cash flow margins to expand.15

Key Investment Highlights• We have an experienced, competentboard of directors with significant financialcommitments to the company providingguidance and advice to our managementteam.• We have further strengthened an alreadystrong management team and Board ofDirectors.• The secular contraction in softwoodlumber supply which underpins ourinvestment thesis is proceeding asplanned; however, lumber prices may notshow the effect of the contraction until UShousing starts return to a level of around1 million units.• We have the potential to develop asignificant and growing revenue streamfrom the sale and utilization of sawmilland logging waste to producers ofrenewable, carbon-neutral energy.17

Conifex Timber Inc.August 30, 201018

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