MERCER INTERNATIONAL INC. (MERC) stock intrinsic value fair value estimate & owner earnings analysis

Mercer International makes kraft pulp and wood products. Its four pulp mills (Stendal and Rosenthal in Germany, Celgar in British Columbia and Peace River in Alberta) can produce about 2.1 million tonnes a year, mostly northern softwood pulp sold to tissue, specialty and printing-paper makers. It also runs two German sawmills (Friesau and Torgau, which also makes pallets) and mass-timber plants in Spokane, Washington; Conway, Arkansas; and Okanagan Falls, British Columbia. In 2025 revenue was $1.87 billion: $1.39 billion from pulp and $467 million from solid wood. China was the largest pulp market at $548 million. Pulp is a global commodity, so profits swing with pulp prices, wood costs and the dollar. How we measure earnings. We start from reported operating cash flow. We strip out working-capital swings, deduct stock compensation and deduct the capital spending needed to keep the mills running. Non-cash write-downs are added back, including the $215.7 million impairment in 2025 ($203.5 million of it on Peace River, after a long slump in hardwood pulp prices) and inventory write-downs. On that basis, owner earnings over the past decade ran from $3.44 a share in 2022 to minus $2.21 in 2023 and minus $2.10 in 2025. Peace River was bought in December 2018, so the business as it stands today dates from 2019. From 2019 to 2025 there was a slump, then a boom in 2021-22, then another slump. The median year in that stretch was $0.45 a share, and that is our starting level. The median year was 2024, when cash interest was $105.5 million, close to today's cost of about $110 million a year. Interest paid has risen from $59.7 million in 2019 to $108.0 million in 2025. At today's interest cost, the 2019-2025 record averages roughly zero for shareholders. We credit back about $18 million a year of capital spending, because spending ran at $84-89 million in 2024-25 and management plans $60-80 million for 2026, below the older average. The debt is what decides this case. At the end of 2025 Mercer owed $400 million of 12.875% notes due October 2028, $875 million of 5.125% notes due February 2029, and about $296 million under German and Canadian credit lines that mature in September and January 2027. The first half of 2026 brought no recovery. Operating cash flow was minus $100.8 million, and $51 million more of inventory was written down. Cash fell to $78.8 million from $186.8 million. Shareholders' equity on the balance sheet turned negative at minus $98.0 million, and $329.7 million of debt was classed as due within a year. The dividend was suspended in July 2025. Past acquisitions have also cost money. The sandalwood business was written off in 2023 ($33.7 million), and a goodwill write-off plus the loss on exiting a joint venture came to $57.9 million in 2024. In June 2023 it paid $82.1 million for the Conway and Okanagan mass-timber plants. In 2025 the solid wood segment, which includes them, lost $25.2 million before interest, tax, depreciation and impairments. Base case, $0.43 a share. Owner earnings improve from minus $2.10 in 2025 to about minus $1.80 in 2026. First-half 2026 was minus $0.72 a share against minus $0.78 a year earlier, and capital spending is lower. After a weak 2027, the 2019-2025 pattern repeats at today's interest cost, with a recovery starting in 2028. The 2028 and 2029 notes are refinanced at about 10.5%. That is below the 11.6% yield the company paid when it added to its 2028 notes in October 2024. On that path the mills' earnings across a full cycle barely cover the refinanced interest bill, so we credit nothing after 2035. The shares are worth close to nothing in the middle case. Bear case, minus $3.84 a share. The slump continues through 2027 at 2025-like levels, and the credit lines and 2028 notes cannot be rolled on terms that leave anything for shareholders. The company keeps burning cash until lenders take control in 2028, and shareholders are wiped out. On this path the company owes more than it is worth, by roughly $260 million beyond wiping out the shares. Bull case, $7.62 a share. Pulp prices recover in 2027 to 2021-22 levels. That peak cash retires the 12.875% notes, which the company can call at face value from October 2027, cutting interest by about $51 million a year. The 2029 notes are refinanced near 8.5%. The mills then earn about $0.65 a share across a full cycle for as long as they keep running. Each case uses a 6% discount rate. A bull case this far above a near-zero base, with a deeply negative bear, is typical of a highly indebted commodity producer at the bottom of a cycle. What happens to shareholders depends more on the lenders over the next two years than on how well the mills run. We could not confirm from the financial data alone why the credit lines were reclassified as current at June 30, 2026, whether because of their 2027 maturities or loan covenants. The German line limits net debt to 3.5 times EBITDA.