Resolute says lower costs will create incentive to harvest infected Quebec forest

MONTREAL – Quebec needs to heed the lesson of British Columbia and lower stumpage costs to create an incentive for companies to harvest sections of the province’s forests that are dying from a budworm infestation, the head of Resolute Forest Products said Thursday.

An estimated three million hectares of Quebec’s forest, mostly in the north shore of the St. Lawrence River, are infected by the budworm, which primarily kills balsam fir and white spruce. About one-third of the balsam fir trees in the area around Baie Comeau are diseased, which has forced Resolute to close two paper machines because of the poor quality of available fibre.

“I think the government or the bureaucrats don’t realize yet how much impact it is having on the industry,” CEO Richard Garneau said in an interview Thursday.

Garneau said the problem, which began in 2006, is worsening and could spread to between 10 million and 15 million hectares, based on a prior budworm epidemic in Quebec between 1968 and 1992.

Although the threat is large, it is unlikely to match the mountain pine beetle that is estimated to have destroyed more than 18 million hectares of B.C. forest, an area five times the size of Vancouver Island. The beetle, which burrows holes under the bark, has killed about 710 million cubic metres of timber since the infestation began in 1996, according the B.C. Ministry of Forests, Lands and Natural Resource Operations.

The Quebec government has directed forest companies to harvest infected wood but insists they pay stumpage fees of $11 to $12 per cubic metre.

Resolute recently bid on some blocks of wood but its $1 offer was rejected by the province as too low.

British Columbia reduced its stumpage fee to 25 cents.

Garneau said the government needs to let the market decide the cost through auctions to create the proper incentive to remove the infected trees and limit the environmental damage caused by the release of greenhouse gases from the decaying trees.

“If you adjust the stumpage like British Columbia, you are going to find a way to harvest the trees and really create the ideal conditions for the forest to recover quickly,” he said.

A spokesman of Forest Minister Laurent Lessard said the government is aware of the industry’s position but won’t say if or when there might be a change in policy.

Paul Quinn of RBC Capital Markets said the demand for lower costs by Resolute and other Quebec forest products companies is self-serving, but necessary to address the problem.

“If you want an industry you can’t penalize them,” he said from Vancouver.

Using infected wood is more costly because the fibre is a poorer quality and must be bleached to remove stains from the budworm to ensure an acceptable paper quality. Also, more tonnes of the wood is required to make a tonne of newsprint.

“It’s in the province’s best interest to come up with a competitive pricing system on wood so it allows companies to make money and, if they make money, there is long-term employment in Quebec.”

Black spruce is more resistant to infestations but the budworm also slows the growth of this species, which is widely used by forest companies.

Garneau said the infestation isn’t affecting neighbouring provinces, including Ontario which supplies mostly pine.

Meanwhile, Resolute (TSX:RFP) reported Thursday that it earned US$116 million or $1.23 per share in the third quarter, down from a loss of US$588 million or $6.22 per share in same prior-year period.

Excluding special items, Resolute’s adjusted profit was $17 million or 18 cents per share for the three months ended Sept. 30. In the comparable period last year, the Montreal-based forestry company’s adjusted profit was $29 million, or 31 cents per share.

Resolute’s sales slipped $34 million or three per cent to $1.09 billion from $1.13 billion.

The company bottom line was hurt by $85 million of costs, mostly related to the closure of its Laurentide mill and a $50-million writedown to the investment in Ponderay Newsprint Co., in which it owns a 40 per cent interest and acts as managing partner.

Garneau described the results as good, with the wood products group generating $24 million of operating income, a $9-million improvement over the second quarter and the highest since the 2007 start of the U.S. housing downturn.

Resolute is working to start production at two Ontario sawmills that are expected to generate profits in about a year.

“This is a great time to be building momentum in the wood products business where we have seen sustained demand despite the slow recovery in the U.S. housing starts,” he said during a conference call with analysts.

On the Toronto Stock Exchange, Resolute’s shares were up 26 cents at C$20.38 Thursday afternoon.

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