Dawson Forest Products Case Study

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Contents

Executive Summary        2

Issue(s) Identification        3

Issues        3

Operating Environment        4

Qualitative analysis        4

Quantitative analysis        6

Alternatives and/or Options        6

Recommendations        9

Implementation:        9

Monitor and Control        10

Executive Summary

In order to address and solve the immediate project schedule and over budget issue I called a meeting with all project team members to discuss their status, the issues, and the potential solutions. I also advised the project sponsor to approve overtime budget for the crew to work longer hours in order to put the project back in track. While this will increase the project budget I believe the expense is justified in assuring that we meet the project timelines.

As a medium term action our procurement department is working on getting a qualified Biomass consultant to assist with the project.  The decision to complete the biomass project and co-locate the pellet manufacturing operation is a strategic importance to Dawson Forest Products since it may significantly affect the growth of the company in the future. By Converting waste streams into productive inputs this will in return assist Dawson reduce transportation costs and even provide revenue as the company will pay for the space needed for the pellet manufacturing operation. Also the income generated from Co-locating can be designated to further fund Biomass Conversion Project projects

The project will also include training of all our operators on the use of Biomass. Once the new the project is completed only certified and trained operators will be selected to work on mills.

Respectfully,

Jon Reed, CEO of Dawson Forest Products

Issue(s) Identification

Issues

The biomass conversion project is over budget by $1.2M and 3 months behind schedule- Phase 1 of the project which is Kiln conversion was supposed to take six months. Currently the component fabrication is 3 months behind schedule and is also over budget by 1.2 million. Project time line is critical since Dawson Forest intention is to complete Phase two during the slower winter months therefore not impacting revenue.

History of plant shutdowns due to high cost structure from outdated technology- Dawson’s BC mill operation has five natural gas-powered drying kilns with outdated technology. This is a huge issue since Kiln drying is a bottle neck of the production process. This step (Kiln drying) is time and energy-intensive process with drying times varying from 1 to 6 days, this has led to high usage of natural gas which over the years the cost of natural gas has increased therefore increasing Dawson production costs.

Purchase of the Kilns- A correct capital equipment acquisition process was not followed in the procurement of the Kilns. The Kilns are only 10 years into their 20-30-year life cycle and they are already outdated. This shows that an investment analysis of the acquisition of these Kilns as not properly performed to decide whether this capital equipment should have been purchased.

Expiration of Softwood Lumber Agreement- The Softwood Lumber Agreement between Canada and the U.S expired in 2015. There is expectation that the new agreement would mean increase of duties of at least 25%. With thee high duties Dawson may be forced to increase prices which in the end may lead to loss of US market sales.

Operating Environment

Qualitative analysis

Dawson Forest Products is a 75-year-old company with its head office in Vancouver. Dawson manages public lands throughout BC and operates mills in several BC locations as well as a newly acquired mill in the southern US.

Dawson Forest Products produce lumber used for residential and commercial housing. As wood residues are the byproducts of the lumber production process, the Dawson can maximize this waste by utilizing residues to generate energy for mill production, which is one of the purposes of biomass conversion project. Once executed, Dawson Forest Products would enhance efficiency, reduce the natural gas use and the associated greenhouse gas emission.

This will be a good step for Dawson given the fact that in 2007, the BC Liberal Government passed the Greenhouse Gas Reduction Targets Act that put into law BC’s targets for carbon reduction of 33 percent by 2020 and 80 percent by 2050. Dawson’s biomass conversion project was estimated to reduce GHG emissions by approximately 10,545 tonnes of CO2e per year for 10 years. This will also except the company from paying BC’s Carbon tax.

Some external factors that threaten Dawson Forest Products are expiration of the Softwood Lumber Agreement (SLA) with the US, and softwood lumber demand, supply and price.

From 2006 to October 2015, the Softwood Lumber Agreement between Canada and the U.S. meant there were no tariffs and no restrictions on softwood lumber trade, however this treaty expired in 2015. There is a lot of uncertainty in regard to if new treaty will be signed if yes what would be the impact/ restrictions. Some are projecting duties of at least 25 percent starting in mid-2017. The decrease in demand of softwood lumber in its two key markers China and USA is also a huge threat.

BC’s forest industry is struggling to balance production against shrinking timber supplies since the mountain pine beetle infestation that had wiped out roughly 60 percent of BC’s merchantable timber. A tightening timber supply was projected to lead to higher fiber costs as sawmill, panel, pulp and paper, wood pellet and bioenergy operations competed for a reduced supply of timber.

The Government of BC is entering a new phase which focuses on reducing greenhouse gas emissions. In 2007, the BC Liberal Government passed the Greenhouse Gas Reduction Targets Act that put into law BC’s targets for carbon reduction: 33 percent by 2020 and 80 percent by 2050. Without the carbon offsets, Dawson’s total project costs of $10.457M IS a significant barrier to the adoption of the biomass energy system.

Since, the biomass conversion project met the additionally criterion. The net present value (NPV) of the offsets is demonstrated to be a significant contributor to the positive NPV of the project. After including the revenues from carbon offsets in its capital budgeting decision, the biomass conversion project is financially feasible.