New facilities behind Pinnacle’s Q2 bump in production and revenue

Higher sales volumes in the second quarter (Q2) of 2019 from new wood pellet facilities coming online are behind a 22.4 per cent year-over-year increase in Q2 revenue for Pinnacle Renewable Energy, the company reports.

“The second quarter of 2019 marked a strong period of production and revenue growth with the ramping up of our new facilities in Smithers and Aliceville. We also continued executing our growth strategy by securing two new Asian contracts, entering into a joint venture with Tolko to build our second pellet mill in Alberta, and progressing on the fourth quarter restart of the full Entwistle facility,” said Rob McCurdy, CEO of Pinnacle. “Our second quarter production growth occurred during a challenging period as many of our B.C. fibre suppliers curtailed operations, resulting in a transition to increased amounts of harvest residuals to replace sawmill residuals. Our team continues to implement procurement strategies in the B.C. market and operating improvements in our mills, and we believe we will successfully manage our operations and costs as the fibre basket transitions.”

The company’s revenue for Q2 2019 totalled $104.2 million, an increase of 22.4 per cent compared to $85.1 million for Q2 2018. The increase was primarily attributable to higher sales volume as the company produced and sold higher volumes of pellets from its Smithers and Aliceville facilities in Q2 2019, both of which had no sales in Q2 2018.

Adjusted Gross Margin was $21.2 million, or 20.4 per cent of revenue in Q2 2019, compared to $18.1 million, or 21.3 per cent of revenue in Q2 2018. The company reported a net profit of $2.4 million in Q2 2019, compared to $6.5 million in Q2 2018. (Find more information on these numbers here.)

During Q2 2019, Pinnacle entered into a new long-term, take-or-pay contract with GS Global Corporation of South Korea for 100,000 metric tonnes per annum (MTPA) commencing in 2022.

“To date, only three long-term, take-or-pay contracts for industrial wood pellets have been entered into in South Korea, all with Pinnacle,” the company states.

Subsequent to the end of the second quarter, Pinnacle entered into a long-term, take-or-pay contract with Mitsubishi for up to 120,000 MTPA commencing in 2021. The Mitsubishi contract is Pinnacle’s eighth contract signed with customers in Japan since the beginning of Fiscal 2018.

According to the company, negotiations are on-going with various other parties to secure long-term take-or-pay contracts in Asia and Europe to meet growing demand.

Production facility upgrades

In Q2 2019, Pinnacle began upgrades at its Williams Lake and Meadowbank production facilities in the Cariboo region of B.C. The upgrades, which cost $34 million, include the installation of new fibre drying and air filtration equipment, as well as improvements to access infrastructure.

According to Pinnacle, the upgrades will allow the two facilities to process more fibre sources available in the region, and to achieve a series of safety and environmental advancements. Once the upgrades are complete, the Williams Lake and Meadowbank facilities are expected to have an increased capacity of 80,000 MTPA.

“This strategic investment will enhance the operating flexibility of the Williams Lake and Meadowbank facilities and position Pinnacle to adapt to cyclical changes in wood fibre supply within the B.C. interior. Further, the equipment, technology and infrastructure improvements will result in improved facility operating efficiencies, lower emissions, local employment opportunities and greater overall facility safety,” the company stated.

Entwistle incident

Pinnacle continues to progress on the Entwistle recovery following the previously disclosed incident in the dryer area of the facility. The company is currently rebuilding the dryer and restoring the facility at a total estimated capital cost in the range of $13 million to $15 million and remains on schedule to restart the dryer in the fourth quarter of Fiscal 2019.

“The Entwistle Facility is expected to continue to produce pellets from dry fibre at 25-30 per cent of full run-rate production capacity while the dryer is being rebuilt. The project remains on schedule and is expected to be completed in Q4 2019 at which time we expect to return the facility to its pre-incident commissioning curve. We continue to make progress working with insurers in obtaining business interruption insurance,” the company stated.

Outlook

Pinnacle expects production and revenue growth to continue through 2019, but also expects a similar margin compression as what was experienced in Q2 2019 as the company adapts to manage the impact of fibre transition in its B.C. facilities.

“Our fibre procurement team has successfully replaced sawmill residual reductions and we now have sufficient fibre for all of our facilities. We are very focused on improving our fibre processing, haulage and cash conversion costs,” the company stated.