GreenFirst Forest Products' latest earnings call presented a mixed bag of record-breaking production figures and concerning challenges. While optimism surrounds the lumber segment, a looming issue has captured the attention of analysts: the delicate situation of GreenFirst's chip supply following several pulp mill closures in Ontario.

Initially, GreenFirst executives expressed confidence, highlighting their "strong contract" with Rayonier Advanced Materials (RYAM), which obligates RYAM to buy chips even after indefinitely suspending operations at its Temiscaming High Purity Cellulose plant in July. They assured investors that discussions with RYAM are ongoing and alternate options for the chips have been identified.

However, a closer examination of the transcript unveils a sense of urgency. The tone shifts from reassurance to a stark acknowledgement of the challenge for the entire industry in Ontario to find room for chips. Michel Lessard, GreenFirst's President, paints a grim picture using the phrase just going to be worst to describe the compounded effect of the RYAM closure on top of the Domtar Espanola and Birla AV Terrace Bay pulp mill shutdowns.

This convergence of events within the Ontario lumber ecosystem could severely impact GreenFirst. The company's strategy relies heavily on maximizing the utilization of all available logs in Ontario, a strategy deeply intertwined with a strong demand for residual chips. The removal of three major pulp mills from the market has created uncertainty on the demand side, forcing GreenFirst to urgently seek alternatives.

The financial implications further amplify the situation's gravity. GreenFirst's Q1 2024 adjusted EBITDA was a negative $3.5 million, despite the lumber segment's positive contribution. The paper segment, while exhibiting stabilization, continues to operate at a loss. Any disruption to chip sales, a key revenue stream, could worsen the company's financial standing.

Furthermore, relying on RYAM's good faith to find alternate buyers for the contracted chips adds another layer of risk. While Rayonier has proven to be a reliable partner, the present market dynamics, marked by a chip oversupply and limited buyers, could test the limits of even the strongest contracts.

The Financial Impact of Chip Sales to RYAM

GreenFirst has been notably silent about the financial details of their chip sales to RYAM. The transcript mentions "long agreements in place," offering no specifics on the volume or price of chips sold. For the sake of analysis, let's assume that GreenFirst's chip sales to RYAM accounted for 10% of their total lumber segment revenue in Q1 2024, which would equate to $6.9 million. If they fail to secure alternative buyers for even half of that volume, a potential $3.45 million blow to their top line could further amplify their losses.

This basic calculation highlights the precariousness of GreenFirst's current position. While they may navigate the storm in the short term, their long-term strategy hinges on finding a sustainable and reliable solution for their residual chips.

Pulp Mill Closures in Ontario: A Timeline

The RYAM situation is a ticking time bomb deserving of more scrutiny. It represents a test of contractual strength, market forces, and strategic foresight. GreenFirst's ability to navigate this challenge will determine if their ambitious plans for growth and profitability in Ontario can weather the turbulent lumber ecosystem.

"Interesting Fact: Wood chips are a valuable byproduct of lumber production. They are used primarily in the creation of pulp and paper products, particleboard, and as a source of biofuel. Efficient chip utilization is essential for sustainable forestry practices and maximizing resource value."