Pacific Trader: Mercer International is poised for landslide profits

Mercer International has been a surprise beneficiary of supply chain disruptions in pulp and paper.

Credit: Courtesy of Mercer International

You may think paper is on the way out. Not so fast

Supply disruptions could help the value-priced pulp maker turn the page

The stock: Remember the early days of the pandemic, when there was a run on toilet paper? That was a rare moment of joy for pulp and paper, an otherwise forgotten niche of the materials sector. Many investors have dismissed it as a sunset industry, what with the secular decline of newspapers, phone directories and hard copy of all kinds. But as stock markets teeter on the transition to rising interest rates, value-priced Mercer International (NASDAQ:MERC) may present at least a short-term buying opportunity.

The drivers: Vancouver-headquartered Mercer is one of the world’s leading producers of NBSK (northern bleached softwood kraft) pulp, a benchmark grade in the paper industry. It has two pulp mills in Germany, one in each of Alberta and B.C., and a half interest, with West Fraser Timber (TSX:WFG), in the Cariboo Pulp & Paper mill in Quesnel. It also operates a large sawmill in Friesau, Germany. That, combined with side hustles selling mass timber and electricity, helps diversify the company’s revenue beyond its core commodity.

Lately, though, Mercer has been a surprise beneficiary of supply chain disruptions in pulp and paper, not least from B.C.’s flooding and landslide-related highway and rail closures since November, which idled rival West Fraser and Canfor Pulp Products (TSX:CFX) mills. Combine that with a strike in Finland, and pulp futures in faraway China, where Mercer sells nearly a third of its output, have soared. Meanwhile, the startup of new capacity in South America has been delayed, opening a window for lucrative pulp pricing this year.

If you believe in buying on rumour, selling on fact, take note that Mercer is releasing fourth-quarter and full-year 2021 financial results on February 17. The stock closed at US$12.47 on Tuesday, leaving it with a more than 2-percent dividend yield.

READ MORE: Dunder Mifflin who? This B.C. company turns sugar cane into sustainable paper

Word on the street: RBC Dominion Securities analysts Paul Quinn and Marcus Campeau bumped up their rating two levels to Outperform, with a price target of US$15. Since they last rated the stock Underperform in October, “disruptions have dramatically altered the supply-demand balance,” the pair explained in a January 30 note to clients.

Coming and going: Struggling Vancouver-based biotech Zymeworks (NYSE:ZYME) has appointed Kenneth Galbraith as chair and CEO, succeeding founder Ali Tehrani. A UBC commerce grad and former QLT executive, Galbraith has management experience at several life sciences companies around North America. One of his first moves at Zymeworks was a new, US$100-million share offering to stabilize the company’s balance sheet and further the development of its two leading drug candidates.