Conifex Timber Inc.

Well, thank you, Omar and good afternoon, everyone and welcome to call covering Q3 results. CFO, Winny Tang, is here with me in Vancouver.

And Operations VP, Andrew McLellan will join us from our Mackenzie site. And both of them are available to help me 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 BC.

Let us deal with a housekeeping item. We will be making forward-looking statements and references to non-IFRS measures and therefore call your attention to the warning statements set out on Pages one and two of the MD&A dated today that we just released.

For the third quarter, we incurred a net loss of CAD900,000 or CAD0.02 per share EBITDA was CAD3.3 million. Lumber production was helped by a two-week market curtailment and laid offs.

Lumber shipments were 15% lower than production because we fortified buildup lumber inventory by around CAD5 million in anticipation of being able to attract higher sales realizations by liquidating the inventories in Q4 which is exactly what we are 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 about $480 in Q3. And I agree with the analysts who maybe on this call who have the opinion that prices at this level trigger operating losses of around 100 per 1,000 board feet of lumber produced at Ontario and BC sawmills.

But our consolidated results indicate that we shipped 34.1 million board feet in the quarter and achieved CAD3.3 million of EBITDA which on a lumber run basis translates in EBITDA of CAD100 per 1,000 board feet. And then vividly demonstrates the mission critical role that our green power generation plant plays in moving our Mackenzie site to a much lower ranking on a global softwood lumber industry cost curve.

softwood rate increases took effect at the beginning of Q4 for this reason and also reflecting seasonal factors. We built up our log inventories by CAD14.7 million in Q3 and this is the main reason that cash balances was down by CAD12.5 million to CAD23.4 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 net selling prices realization to be largely unchanged.

Our shipments to the high-priced Japanese market will be a lower portion of our shipments in Q4 than in Q3 while we all know we have higher duty deposit rates kicking in December. And for those two main reasons, we expect our mill net sales would be will track the change in benchmark prices in Q4.

Turning to industry development. One week ago, the government in BC announced its intention to differ 2.6 million hectares of BC'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 deferrals. As you would all expect, of our forestry team is hard at work evaluating how harvest levels in the Mackenzie TSA could be impacted by this development.

More importantly, however, our forestry team is working on a priority basis with local First Nations in the Mackenzie to ensure that we fully understand their perspective and to offer our support in the analysis of review underway. In the region where we operate, we truly believe that it's entirely possible to adhere to best-in-class forest sustainability and conservation regime while concurrently maintaining good paying, family supporting jobs for residents of the indigenous communities.

As we go into in some detail on pages 14 to 16 of the MD&A we released earlier today, we explain how long an error in a ministry assumption underpinning a hardest determination led to unnecessary hardship to forest sector stakeholders as well as the local community at Mackenzie and nearby First Nations community. 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 sawlog and provide good potential for sawmill complexes operating in Mackenzie to migrate to a lower ranking 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 has taken concrete steps to restore competitiveness in the Mackenzie timber supply area and the ministry is doing a better job meeting the competitiveness obligations legislated in the Ministry of Forests and Range Act. 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 our Mackenzie power plant site.

Against a background of having a location on a relatively cool climate, the availability of a lot of affordable and renewable from BC Hydro as the load to its traditional resource sector is waning. Adding to that is that we have got a large site that skews to the portion of the site occupied by our power plant.

And we have a highly flexible and technical work force 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 or other high performance computing operations such as cryptocurrency bots.

The expertise of our power engineers yes and technicians operating on a 7/24 basis are applied completely to this new business opportunity. Later this year, in partnership with Tsay Keh Dene First Nation, we intend to host approximately three megawatts of bitcoin mining activity on a trial basis.

Should we as host and the experience bitcoin mining operator conclude that the trial ha been successful, we plan to build and host a larger data center operation. We expect the initial capital outlays will be modest because we are going to redeploy the legacy power transformer and other infrastructure components that presently sit idle at the site.

The potential exists to build out our hosting business in phases and utilize a portion of the cash flow from the initial phases to fund the development of additional hosting capacity. Although there is no assurance that we will establish a material data center hosting operation, we are extremely excited about the potential and look forward to sharing more details with you on our next call or early in 2022.

As you no doubt heard yesterday, our Board approved the commencement of the substantial issuer bid for four million shares or just over 9% of our capitalization at a purchase price of $2.25 per share. All the analysis we have undertaken concludes that we can afford to fund a substantial issue bit at this quantum and concurrently maintain our strong lumber balance business sheet and also funds projects that are necessary to remain compliant with enhanced safety and environmental regulations as well as smaller quick payback projects that improves the operating reliability at our sawmill complex.

Obviously. We launched a substantial issuer bid locked stuff because we believe our share is traded at a material discount to our underlying fundamental value.

Summing up, we believe that Conifex remains well positioned. We enjoy a strong safety culture, a very high degree of degree of sawmill fiber self-sufficiency compared to any other timber supply area in the interior region of BC.

You have got near term opportunity to benefit some improvements in fiber quality, availability and delivery cost. We own and operate industry-leading power generation assets.

We have got exciting opportunity to diversify and strengthen our cash flow generation. And at the same time, we have an entirely manageable debt service obligations.

So thank you all for taking the time today to learn more about our company and Winny, Andrew and I would be very pleased to respond to any questions that you may have. So I will turn the meeting back to Omar, our operator.

Yes. Thanks.

Good afternoon Kenneth and Winny. Just maybe at a question.

it's been busy. So I haven't read through the whole MD&A.

But when are you expecting the AAC review on Mackenzie TSA?

We are expecting a public data package, the product that would have been delivered a few months ago still hasn't showed up. That will show their base case.

We expect the revised AAC determination to be available in Q1 of 2020. And then the other apportionment decision later in 2022 and.

That apportionment division is, of course, where they determine what AAC has allocated to First Nations BC timber sales and the licensees. Paul, the current AAC is 4.5 million cubic metres.

We expected the revised AAC will be up about cut in half because we are at the end of the pine beetle salvage program. So if its cut in half, we are still very confident about our sawlog self-sufficiency because the Ministry of Forests Documents indicate that at capacity Canfor has sawlog requirement of approximately 1.2 million cubic meters and the Ministry documents put our annual sawlog requirements at 875,000 cubic meters or something like that.

So we are just over two million of requirements and even with a 50% reduction in the AAC, we still have sawlog availability that exceeds the full capacity requirements of the sawmill capacity that's in place in the TSA.

Okay. Any indication that Canfor is looking to start up that Mackenzie mill?

Well, Paul, it's hard to speculate and there are companies that have disclosure obligations that there's some material developments. But the local people indicate to me that there are new occupants at that site and that a portion of the site might be dismantled.

But that's hearsay from people in Mackenzie. You would have to ask them what the status is.

Okay. And then over to the new development on bitcoin mining.

If the trial is successful, how do you suspect we model that in order for 2022?

Well, boy, that's a tough question. You know, Paul, we are at such an early stage that I can share with you, this is a personal target, this is not a Board approved, management opined and they haven't scrubbed all the numbers.

But we spent something like $100 million-plus to develop the power plant. And we regularly conduct that had $14 million of EBITDA potential.

And my personal objective or target here is, assuming the tests work out and our partner wants to move forward that we think we have got a shot at really spending one-third of the money we spend on the power plant and maybe get an EBITDA that's potentially very close to what we have at the power plant. It's to share some of the personal objectives that I have established for this initiative.

So just you are still right within that range that's incremental to the current power agreement that you have got with BC Hydro?

Completely incremental.

Okay. And then we have seen lumber prices in your area move up sharply off the lows in August.

Now they seem to be rolling over here. What's your expectations for the balance of year, Ken?

Well, for the balance of this year, I don't expect much change from where we are at. But, Paul, next year I am probably a bit more bullish than the consensus forecast.

And my positive view is a reflection of two factors. I don't think people that studied the supply demand balance, SPF lumber fully appreciate how the higher duty rate impositions are going to shift the cost curve for SPF producers in Canada.

So we probably have a steeper supply curve than what it was with a lower duty rates. And secondly, we have the impact of harvest reductions.

Certainly in the very short term, we sort through the development. And with the suspension of BCPF auction offerings, I think they, sawlog, bear some of the lumber production from BC will be lower in 2022 than most forecasters expect.

Okay. And then maybe a bonus question.

Now that you have brought up softwood lumber, any movement on the file or do you expect any movement on file going forward?

Well, first of all, I am not aware of any communication from the government people of Suwannee. But I think that a base might be built in for some meaningful discussions on this file because we are in the next period of review.

There's every indication that both the countervailing duty rate and the antidumping rate will be materially lower than they are going to be when the new rates kick in on December 1. And so they are modest duty impositions.

It's less than the U.S. coalition.

And there is a chance it gets conclude that the duties aren't helping very much and there is a bunch of cash strapped in the U. S.

treasury and they may want to get a piece of that cash and support ourselves. So I think a year from now, would be pretty optimistic that something gets happened.

But in the immediate future, I think we are pretty much locked in to the current arrangement.

All right. That's all I have.

Best of luck.

Thank you.

Yes. Hi.

Good afternoon. Ken, just wondering from the work your team has been doing, do you have an early indications of what the impact might be of the logging restrictions in operating region?

Well, we have what I would call a guesstimate. And earlier I talked about the expectation that we have, essentially that there would be a likely 50% reduction in the AAC that will be released to determine, early in 2022.

And is our local First Nations, two of whom have significant investment, in logging equipment and wants some revenue to starting some programs to benefit their community, if on the offside chance that the local First Nations decided that they didn't want any deferral, there would be no change to my earlier estimate of a 50% reduction in the AAC. If the First Nations decide that want to keep harvesting in all of the Old Growth area that ministry mapping has identified and everyone's got a lot of questions about the accuracy of the ministry maps, but if the map, if they make the heroic assumption that they are accurate, there might be, say, 53% reduction in the harvest level.

It would be that order of magnitude. So we think it might impact the harvest in our area by lot less than 10%.

But maybe if there was a complete deferral, it probably be ticked of 5%. But those are very preliminary numbers and they apply only to the Mackenzie timber supply area and we make no comment on other timber supply areas.

Okay. Thanks for that color.

And then just looking at 2022, can you provide any preliminary CapEx figures for next year?

Typically, we do have our budget and business plan pretty well finished at this time of the year. But as I am sure you can appreciate that for the last eight days, we have down tools on our budget and business plan both and focused exclusively on attempting to gain a better understanding of the new developments unlocking.

So I am sorry I don't have any guesstimates for 2022 that I can share with you at this time. Clearly, we think we are going to have a satisfactory level of cash flow generation because we wouldn't have directed $9 million to purchase our purchase our own shares.

Okay. Always thanks for color and good luck in the quarter.

Thank you.

Hi Ken. Thanks for the clarity and the updates.

My question was really around the economics of the bitcoin or data hosting. My question was answered in the question from the previous analyst there.

So I will get back in queue. Thanks.

Take care.

Thanks.

Hi Ken. Just a follow-up.

I mean you have been around the BC portion issue since you have been a teenager. So you have gone through a number of different governments and restructuring.

Just wondered if you could give an overall content of what you think the current government is trying to do with the industry? And are they going to be successful at the end of the day?

Well, Paul, so the reason you mentioned, I have spent a huge portion of my career looking at timberlands and sawmills and chip mill and accordingly I haven't spent much time in Victoria. But the concern I have is that there are so many initiatives underway, whether it has to do with caribou protection, First Nations reconciliation.

Old Growth preservation, carbon mitigation, responding to climate change. And you know the old adage, if you try and prioritize everything, you end up prioritizing nothing and nothing gets done.

So that would be the concern that I would have. And what's your impression, Paul?

I am just wondering, with all these cuts at the harvest level, whether the industry can ever get to be competitive and return to cost of capital. It is just pushing the cost curve higher and higher in BC.

And I am just kind of nervous for the BC-based companies like yourself.

Yes. Well, in our case, Paul, the feeling I have is that I am very pleased and proud with that our leadership team and employees have accomplished.

When you do have time to read the MD&A, remember that we fibred up our mail with over 50% beetle damage, dead and dry wood last year. And that really hurt us in unit lot cost and it created lots of production disruptions which hurts our cash conversion cost.

And we had a way above normal amount of low-grade lumber which trades at a steep discount to construction rate lumber. So as I look forward, Paul, the way the numbers work, it's something like, there's probably $60 of additional duty deposit cost in 20222.

There is probably CAD90 of stumpage duty. And in our case, if we deposit the old profile of the timber inventory rather than this subsequently disproven harvest partition as been mandated, we could potentially it grows our cap margins by as much as $100 per 1000 board feet.

So I don't want you to view our recent margins as indicative as to what we are capable of producing what we are harvesting the profile of the remaining timber inventory. But we will have the ministry estimates the characteristics of the timber inventory to be available in the next few weeks.

Well, let's hope you get access to the profile. Well, let's see if that happens.

Just on the bitcoin, can you identify your crypto partners who got the expertise?

We cannot because we are subject to a non disclosure agreement. But clearly, if we get through the trial phase that will be publicly disclosed.

But they are experienced in there and they have got solid financials.

All right. That's all I have.

Best of luck.

Thank you Paul.

Omar, it sounds like we might be at the end of the call.

Okay. Well, listen, those of you that listened in, thank you so much for your interest in Conifex.

And feel free to reach out if there are other questions that come to mind that you would like some help on. So enjoy the rest of your day and so long until our next call.