MERCER INTERNATIONAL INC. - Quarter Report: 2013 June (Form 10-Q)

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No.: 000-51826

MERCER INTERNATIONAL INC.

(Exact name of Registrant as specified in its charter)

Washington

47-0956945

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

Suite 1120, 700 West Pender Street, Vancouver, British Columbia, Canada, V6C 1G8

(Address of office)

(604) 684-1099

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

The Registrant had 55,853,704 shares of common stock outstanding as at August 1, 2013.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED JUNE 30, 2013

(Unaudited)

FORM 10-Q

QUARTERLY REPORT - PAGE 2

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands of Euros)


	June 30,			December 31,
	2013			2012
ASSETS
Current assets
Cash and cash equivalents	€	134,433		€	104,239
Receivables		97,028			110,087
Inventories (Note 2)		108,190			118,300
Prepaid expenses and other		12,830			7,907
Deferred income tax		3,812			4,465

Total current assets		356,293			344,998

Long-term assets
Property, plant and equipment		788,818			808,878
Deferred note issuance and other		12,630			12,162
Deferred income tax		14,758			17,565

		816,206			838,605

Total assets	€	1,172,499		€	1,183,603

LIABILITIES
Current liabilities
Accounts payable and other	€	96,002		€	89,950
Pension and other post-retirement benefit obligations (Note 4)		780			813
Debt (Note 3)		44,346			45,662

Total current liabilities		141,128			136,425

Long-term liabilities
Debt (Note 3)		680,087			665,741
Unrealized interest rate derivative losses (Note 8)		39,798			50,678
Pension and other post-retirement benefit obligations (Note 4)		31,158			32,141
Capital leases and other		13,599			13,936
Deferred income tax		6,892			5,757

		771,534			768,253

Total liabilities		912,662			904,678

EQUITY
Shareholders’ equity
Share capital (Note 5)		248,923			248,371
Paid-in capital		(3,568	)		(3,547	)
Retained earnings		15,464			25,800
Accumulated other comprehensive income		14,585			25,181

Total shareholders’ equity		275,404			295,805

Noncontrolling interest (deficit)		(15,567	)		(16,880	)

Total equity		259,837			278,925

Total liabilities and equity	€	1,172,499		€	1,183,603


Commitments and contingencies (Note 10)
Subsequent events (Note 11)

The accompanying notes are an integral part of these interim consolidated financial statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 3

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands of Euros, except per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Revenues
Pulp	€	193,659		€	186,036		€	373,779		€	385,475
Energy and chemicals		16,487			18,026			34,639			36,945

		210,146			204,062			408,418			422,420
Costs and expenses
Operating costs		186,880			162,617			351,978			340,387
Operating depreciation and amortization		14,744			14,525			29,475			28,812

		8,522			26,920			26,965			53,221
Selling, general and administrative expenses		9,363			8,624			18,258			18,682

Operating income (loss)		(841	)		18,296			8,707			34,539

Other income (expense)
Interest expense		(13,139	)		(13,863	)		(26,287	)		(27,996	)
Gain on derivative instruments (Note 8)		5,293			1,343			10,113			2,219
Other income (expense)		6			(368	)		(64	)		(778	)

Total other income (expense)		(7,840	)		(12,888	)		(16,238	)		(26,555	)

Income (loss) before income taxes		(8,681	)		5,408			(7,531	)		7,984
Income tax benefit (provision)
Current		(192	)		(6,281	)		3,079			(6,337	)
Deferred		(433	)		4,016			(4,571	)		3,340

Net income (loss)		(9,306	)		3,143			(9,023	)		4,987
Less: net income attributable to noncontrolling interest		(605	)		(1,628	)		(1,313	)		(2,299	)

Net income (loss) attributable to common shareholders	€	(9,911	)	€	1,515		€	(10,336	)	€	2,688

Net income (loss) per share attributable to common shareholders (Note 7)
Basic and diluted	€	(0.18	)	€	0.03		€	(0.19	)	€	0.05

The accompanying notes are an integral part of these interim consolidated financial statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 4

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands of Euros)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income (loss)	€	(9,306	)	€	3,143		€	(9,023	)	€	4,987
Other comprehensive income (loss), net of taxes
Foreign currency translation adjustments (net of tax effects of (€285), €1,118, €289, €1,208)		(7,703	)		(1,334	)		(11,231	)		813
Change in unrecognized losses and prior service costs related to defined benefit plans (net of tax effects of €nil in all periods)		745			(485	)		652			(336	)
Unrealized gains (losses) on marketable securities, arising during the period (net of tax effects of €nil in all periods)		(27	)		(66	)		(17	)		2

Other comprehensive income (loss), net of taxes		(6,985	)		(1,885	)		(10,596	)		479

Total comprehensive income (loss)		(16,291	)		1,258			(19,619	)		5,466
Comprehensive income attributable to noncontrolling interest		(605	)		(1,628	)		(1,313	)		(2,299	)

Comprehensive income (loss) attributable to common shareholders	€	(16,896	)	€	(370	)	€	(20,932	)	€	3,167

INTERIM CONSOLIDATED STATEMENTS OF RETAINED EARNINGS

(Unaudited)

(In thousands of Euros)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
Net income (loss) attributable to common shareholders	€	(9,911	)	€	1,515	€	(10,336	)	€	2,688
Retained earnings, beginning of period		25,375			39,158		25,800			37,985

Retained earnings, end of period	€	15,464		€	40,673	€	15,464		€	40,673

The accompanying notes are an integral part of these interim consolidated financial statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 5

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands of Euros)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Cash flows from (used in) operating activities
Net income (loss)	€	(9,306	)	€	3,143		€	(9,023	)	€	4,987
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized gain on derivative instruments		(5,681	)		(1,343	)		(10,376	)		(2,219	)
Depreciation and amortization		14,810			14,588			29,604			28,938
Deferred income taxes		433			(4,016	)		4,571			(3,340	)
Stock compensation expense		306			(6	)		573			862
Pension and other post-retirement expense, net of funding		212			(41	)		333			(55	)
Other		970			73			2,153			866
Changes in working capital
Receivables		21,749			12,338			12,045			15,023
Inventories		2,147			(8,296	)		7,893			3,442
Accounts payable and accrued expenses		(1,570	)		805			9,027			3,454
Other		(5,708	)		(86	)		(6,490	)		1,338

Net cash from (used in) operating activities		18,362			17,159			40,310			53,296

Cash flows from (used in) investing activities
Purchase of property, plant and equipment		(10,982	)		(9,838	)		(22,377	)		(18,303	)
Proceeds on sale of property, plant and equipment		2			113			15			339
Proceeds on maturity of marketable securities		—			2,008			—			2,008

Net cash from (used in) investing activities		(10,980	)		(7,717	)		(22,362	)		(15,956	)

Cash flows from (used in) financing activities
Repayment of debt		—			(1,584	)		(20,545	)		(11,710	)
Proceeds from borrowings of debt		7,000			—			17,000			—
Repayment of capital lease obligations		(401	)		(448	)		(1,101	)		(1,059	)
Proceeds from (repayment of) credit facilities, net		6,986			(3,759	)		12,954			—
Payment of note issuance costs		—			—			—			(1,621	)
Proceeds from government grants		3,417			1,692			4,147			2,322

Net cash from (used in) financing activities		17,002			(4,099	)		12,455			(12,068	)

Effect of exchange rate changes on cash and cash equivalents		(615	)		1,348			(209	)		543

Net increase in cash and cash equivalents		23,769			6,691			30,194			25,815
Cash and cash equivalents, beginning of period		110,664			124,196			104,239			105,072

Cash and cash equivalents, end of period	€	134,433		€	130,887		€	134,433		€	130,887

The accompanying notes are an integral part of these interim consolidated financial statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 6

MERCER INTERNATIONAL INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Unaudited)

(In thousands of Euros)


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013		2012			2013			2012
Supplemental disclosure of cash flow information
Cash paid during the period for
Interest	€	21,713	€	21,439		€	24,463		€	26,266
Income taxes	€	863	€	411		€	1,528		€	3,019
Supplemental schedule of non-cash investing and financing activities
Acquisition of production and other equipment under capital lease obligations	€	245	€	774		€	415		€	774
Increase (decrease) in accounts payable and accrued purchases for property, plant and equipment	€	457	€	1,439		€	(2,442	)	€	1,901
Increase (decrease) in receivables of government grants for long-term assets	€	—	€	(1,695	)	€	—		€	(2,333	)

The accompanying notes are an integral part of these interim consolidated financial statements.

FORM 10-Q

QUARTERLY REPORT - PAGE 7

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 1. The Company and Summary of Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements contained herein include the accounts of Mercer International Inc. (“Mercer Inc.”) and its wholly-owned and majority-owned subsidiaries (collectively the “Company”). The Company’s shares of common stock are quoted and listed for trading on both the NASDAQ Global Market and the Toronto Stock Exchange.

The interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). The year-end Consolidated Balance Sheet data was derived from audited financial statements. The footnote disclosure included herein has been prepared in accordance with accounting principles generally accepted for interim financial statements in the United States (“GAAP”). The interim consolidated financial statements should be read together with the audited consolidated financial statements and accompanying notes included in the Company’s latest annual report on Form 10-K for the fiscal year ended December 31, 2012. In the opinion of the Company, the unaudited interim consolidated financial statements contained herein contain all adjustments necessary to fairly present the results of the interim periods included. The results for the periods included herein may not be indicative of the results for the entire year.

The Company has three pulp mills that are aggregated into one reportable business segment, market pulp. Accordingly, the results presented are those of the reportable business segment.

In these interim consolidated financial statements, unless otherwise indicated, all amounts are expressed in Euros (“€”). The term “U.S. dollars” and the symbol “$” refer to United States dollars. The symbol “C$” refers to Canadian dollars.

Use of Estimates

Preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant management judgment is required in determining the accounting for, among other things, doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

FORM 10-Q

QUARTERLY REPORT - PAGE 8

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 2. Inventories


	June 30,		December 31,
	2013		2012
Raw materials	€	40,688	€	46,028
Finished goods		32,053		38,169
Spare parts and other		35,449		34,103

	€	108,190	€	118,300

Note 3. Debt

Debt consists of the following:


	June 30,			December 31,
	2013			2012
Note payable to bank, included in a total loan credit facility of €827,950 to finance the construction related to the Stendal mill (a)	€	432,907		€	452,907
Senior notes, interest at 9.50% accrued and payable semi-annually, unsecured (b)		218,571			215,670
Credit agreement with a lender with respect to a revolving credit facility of C$40 million (c)		7,311			4,574
Term bank facility for a project at the Stendal mill of €17,000 (d)		17,000			—
Loans payable to the noncontrolling shareholder of the Stendal mill (e)		37,556			36,620
Investment loan agreement with a lender with respect to a project at the Rosenthal mill of €4,351 (f)		1,088			1,632
Credit agreement with a bank with respect to a revolving credit facility of €25,000 (g)		10,000			—
Credit agreement with a bank with respect to a revolving credit facility of €5,000 (h)		—			—

		724,433			711,403
Less: current portion		(44,346	)		(45,662	)

Debt, less current portion	€	680,087		€	665,741

As of June 30, 2013, the maturities of debt are as follows:


Matures	Amount
2013	€	22,174
2014		43,802
2015		47,584
2016		64,895
2017		545,978
Thereafter		—

	€	724,433

Certain of the Company’s debt instruments were issued under an indenture which, among other things, restricts its ability and the ability of its restricted subsidiaries to make certain payments. These limitations are subject to specific exceptions. As at June 30, 2013, the Company was in compliance with the terms of the indenture.

FORM 10-Q

QUARTERLY REPORT - PAGE 9

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 3. Debt (continued)

(a)

Note payable to bank, included in a total loan facility of €827,950 to finance the construction related to the Stendal mill (“Stendal Loan Facility”), interest at rates varying from Euribor plus 0.90% to Euribor plus 1.80% (rates on amounts of borrowing at June 30, 2013 range from 1.39% to 2.14%), principal due in required installments beginning September 30, 2006 until September 30, 2017, collateralized by the gross assets of the Stendal mill, with 48% and 32% guaranteed by the Federal Republic of Germany and the State of Saxony-Anhalt, respectively, of up to €372,907 of outstanding principal, subject to a debt service reserve account (“DSRA”) for purposes of paying amounts due in the following 12 months under the terms of the Stendal Loan Facility; payment of dividends is only permitted if certain cash flow requirements are met. See Note 8 – Derivative Transactions for a discussion of the Company’s variable-to-fixed interest rate swap that was put in place to effectively fix the interest rate on the Stendal Loan Facility.

On March 13, 2009, the Company finalized an agreement with its lenders to amend its Stendal Loan Facility. The amendment deferred approximately €164,000 of scheduled principal payments until the maturity date, September 30, 2017. The amendment also provided for a 100% cash sweep, referred to as the “Cash Sweep”, of any cash, in excess of a €15,000 working capital reserve, the Guarantee Amount, as discussed in Note 10(a) – Commitments and Contingencies, and other amounts as contemplated in the amendment, held by Stendal which will be used first to fund the DSRA to a level sufficient to service the amounts due and payable under the Stendal Loan Facility during the then following 12 months, which means the DSRA is “Fully Funded”, and second to prepay the deferred principal amounts. As at June 30, 2013, the DSRA balance was €32,992 and was not Fully Funded.

Pursuant to the terms of the Stendal Loan Facility and Project Blue Mill facility (Note 3(d)), the Stendal mill is required, among other things, to maintain a stipulated semi-annual leverage ratio of total debt to trailing 12-month EBITDA (as defined in the facilities) and a senior debt to EBITDA cover ratio (the “Ratios”). The Stendal mill will report on its compliance with the Ratios on November 15, 2013 for the trailing 12-month period ended September 30, 2013 (formerly June 30, 2013). The Company will continue its discussions with the agent bank to obtain a satisfactory amendment of the Ratios.

(b)

On November 17, 2010, the Company completed a private offering of $300.0 million in aggregate principal amount of senior notes due 2017 (“Senior Notes”). The Senior Notes were issued at a price of 100% of their principal amount. The Senior Notes will mature on December 1, 2017 and bear interest at 9.50% which is accrued and payable semi-annually.

In June 2012, the Company’s Board of Directors authorized the purchase of up to €50,000 in aggregate principal amount of the Company’s Senior Notes from time to time, over a period ending June 2013. During the six month period ended June 30, 2013, the Company did not purchase any of its outstanding Senior Notes. During the twelve month period ended December 31, 2012, the Company purchased $2.0 million of its outstanding Senior Notes.

The Senior Notes are general unsecured senior obligations of the Company. The Senior Notes rank equal in right of payment with all existing and future senior unsecured indebtedness of the Company and senior in right of payment to any current or future subordinated indebtedness of the Company. The Senior Notes are effectively junior in right of payment to all borrowings of the Company’s restricted subsidiaries, including borrowings under the Company’s credit agreements which are secured by certain assets of its restricted subsidiaries.

The Company may redeem all or a part of the Senior Notes, upon not less than 30 days’ or more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) equal to 104.75% for the twelve month period beginning on December 1, 2014, 102.38% for the twelve month period beginning on December 1, 2015, and 100.00% beginning on December 1, 2016 and at any time thereafter, plus accrued and unpaid interest.

FORM 10-Q

QUARTERLY REPORT - PAGE 10

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 3. Debt (continued)

(c)

Credit agreement with respect to a revolving credit facility of up to C$40.0 million for the Celgar mill. The credit facility matures May 2016. Borrowings under the credit facility are collateralized by the mill’s inventory and receivables and are restricted by a borrowing base calculated on the mill’s inventory and receivables. Canadian dollar denominated amounts bear interest at bankers acceptance plus 1.75% or Canadian prime plus 0.25%. U.S. dollar denominated amounts bear interest at LIBOR plus 1.75% or U.S. base plus 0.25%. As at June 30, 2013, this facility was accruing interest at a rate of approximately 3.25%, C$10.0 million of this facility was drawn, C$1.7 million was supporting letters of credit and approximately C$17.6 million was available.

(d)

A €17,000 amortizing term facility to partially finance a project, referred to as “Project Blue Mill”, which is expected to increase the Stendal mill’s annual pulp production capacity by 30,000 air-dried metric tonnes and includes the installation of an additional 40 megawatt steam turbine. The facility, 80% of which is guaranteed by the State of Saxony-Anhalt, bears interest at a rate of Euribor plus 3.5% per annum. The interest period for the facility, at the choice of the Company, will be of one, three or six months duration and interest is paid on the last day of the interest period selected. The facility, together with accrued interest, is scheduled to mature in September 2017. The facility will be repaid semi-annually, commencing September 30, 2013, is collateralized by the gross assets of the Stendal mill, and will be non-recourse to the Company. As at June 30, 2013, the facility was fully drawn and accruing interest at a rate of approximately 3.61%.

As part of the term facility, the Company was required to open an investment account with the lender for the purpose of managing project costs and is required to deposit all funding associated with Project Blue Mill in this account. As at June 30, 2013, the balance in the investment account was €6,053.

(e)

Loans of €26,760 payable by the Stendal mill to its noncontrolling shareholder bear interest at a rate of 7.00% per annum and are due in 2017, provided that the Project Blue Mill facility (Note 3(d)) and the Stendal Loan Facility (Note 3(a)) have been fully repaid on such date. The loans are unsecured, subordinated to all liabilities of the Stendal mill, non-recourse to the Company and its restricted subsidiaries. One of the loans, which has a principal amount of €440, may be repaid prior to October 1, 2017 if the DSRA has been Fully Funded for the first time and this loan is subordinated to all liabilities of the Stendal mill only until such time as the DSRA is Fully Funded for the first time.

As at June 30, 2013, accrued interest on these loans was €10,796. As at December 31, 2012, accrued interest on these loans was €9,860.

(f)

A four-year amortizing investment loan agreement with a lender relating to the wash press project at the Rosenthal mill with a total facility of €4,351 bearing interest at the rate of Euribor plus 2.75% that matures February 2014. Borrowings under this agreement are secured by the wash press equipment. As at June 30, 2013, the balance outstanding was €1,088 and was accruing interest at a rate of 3.13%.

(g)

A €25,000 working capital facility at the Rosenthal mill that matures in October 2016. Borrowings under the facility are collateralized by the mill’s inventory and receivables and bear interest at Euribor plus 3.50%. As at June 30, 2013, this facility was accruing interest at a rate of approximately 3.61%, €10,000 of this facility was drawn, approximately €1,300 of this facility was supporting bank guarantees leaving approximately €13,700 available.

(h)

A €5,000 facility at the Rosenthal mill that matures in December 2015. Borrowings under this facility bear interest at the rate of the three-month Euribor plus 3.50% and are secured by certain land at the Rosenthal mill. As at June 30, 2013, approximately €1,000 of this facility was supporting bank guarantees leaving approximately €4,000 available.

FORM 10-Q

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MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 4. Pension and Other Post-Retirement Benefit Obligations

Included in pension and other post-retirement benefit obligations are amounts related to the Company’s Celgar and Rosenthal mills. The largest component of this obligation is with respect to the Celgar mill which maintains a defined benefit pension plan and post-retirement benefit plans for certain employees (“Celgar Plans”).

Pension benefits are based on employees’ earnings and years of service. The Celgar Plans are funded by contributions from the Company based on actuarial estimates and statutory requirements. Pension contributions during the three and six month periods ended June 30, 2013 totaled €405 and €902, respectively (2012 – €511 and €1,012).

Effective December 31, 2008, the defined benefit plan was closed to new members. In addition, the defined benefit service accrual ceased on December 31, 2008, and members began to receive pension benefits, at a fixed contractual rate, under a new defined contribution plan effective January 1, 2009. During the three and six month periods ended June 30, 2013, the Company made contributions of €117 and €291, respectively (2012 – €159 and €320) to this plan.

Information about the Celgar Plans, in aggregate for the three and six month periods ended June 30, 2013 and June 30, 2012 is as follows:


	Three Months ended June 30,
	2013					2012
	Pension Benefits			Post- Retirement Benefits		Pension Benefits			Post- Retirement Benefits
Service cost	€	27		€	145	€	28		€	140
Interest cost		353			213		378			217
Expected return on plan assets		(411	)		—		(406	)		—
Recognized net loss		277			22		280			1

Net periodic benefit cost	€	246		€	380	€	280		€	358


	Six Months ended June 30,
	2013					2012
	Pension Benefits			Post- Retirement Benefits		Pension Benefits			Post- Retirement Benefits
Service cost	€	53		€	291	€	55		€	278
Interest cost		708			427		751			431
Expected return on plan assets		(823	)		—		(807	)		—
Recognized net loss		555			45		557			3

Net periodic benefit cost	€	493		€	763	€	556		€	712

The Company participates in a multiemployer plan for hourly-paid employees at the Celgar mill. The contributions to this plan are determined based on an amount per hour worked pursuant to a collective bargaining agreement. The Company has no current or future contribution obligations in excess of the contractual contributions. During the three and six month periods ended June 30, 2013, the Company made contributions of €380 and €761, respectively (2012 – €463 and €940) to this plan.

FORM 10-Q

QUARTERLY REPORT - PAGE 12

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 5. Share Capital

Common shares

The Company has authorized 200,000,000 common shares with a par value of $1 per share.

As at June 30, 2013, the Company had 55,853,704 common shares issued and outstanding. As at December 31, 2012, the Company had 55,815,704 common shares issued and outstanding. During the six months ended June 30, 2013, the Company issued 38,000 restricted shares to directors of the Company.

Share Repurchase Program

In July 2012, the Company’s Board of Directors authorized a share repurchase program (the “Program”) to repurchase up to approximately $14.4 million of the Company’s outstanding common shares from time to time over a period ending August 2013. During the six month period ended June 30, 2013 and the twelve month period ended December 31, 2012, the Company did not repurchase any of its common shares.

Preferred shares

The Company has authorized 50,000,000 preferred shares with $1 par value issuable in series, of which 2,000,000 shares have been designated as Series A. The preferred shares may be issued in one or more series and with such designations and preferences for each series as shall be stated in the resolutions providing for the designation and issue of each such series adopted by the Board of Directors of the Company. The Board of Directors is authorized by the Company’s articles of incorporation to determine the voting, dividend, redemption and liquidation preferences pertaining to each such series. As at June 30, 2013, no preferred shares had been issued by the Company.

Note 6. Stock-Based Compensation

The Company has a stock incentive plan (the “2010 Plan”) which provides for options, restricted stock rights, restricted shares, performance shares, performance share units (“PSUs”) and stock appreciation rights to be awarded to employees, consultants and non-employee directors. As at June 30, 2013, after factoring in all allocated shares, there remain approximately 1.1 million common shares available for grant pursuant to the 2010 Plan.

During the six month period ended June 30, 2013 there were no changes to the issued and outstanding options, restricted stock rights, performance shares, PSUs or stock appreciation rights.

The following table summarizes restricted share activity during the period:


	Number of
	Restricted Shares
Outstanding at January 1, 2012		238,000
Granted		36,500
Vested		(78,000	)

Outstanding at December 31, 2012		196,500
Granted		38,000
Vested		(76,500	)

Outstanding at June 30, 2013		158,000

FORM 10-Q

QUARTERLY REPORT - PAGE 13

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 7. Net Income (Loss) Per Share Attributable to Common Shareholders


	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
Net income (loss) attributable to common shareholders:
Basic and diluted	€	(9,911	)	€	1,515	€	(10,336	)	€	2,688

Net income (loss) per share attributable to common shareholders:
Basic and diluted	€	(0.18	)	€	0.03	€	(0.19	)	€	0.05

Weighted average number of common shares outstanding:
Basic⁽¹⁾		55,670,034			55,593,314		55,651,610			55,574,072
Effect of dilutive instruments:
PSUs		—			267,013		—			329,737
Stock options		—			13,878		—			20,927

Diluted		55,670,034			55,874,205		55,651,610			55,924,736

(1)	The basic weighted average number of shares excludes 158,000 restricted shares which have been issued, but have not vested as at June 30, 2013 (2012 – 196,500 restricted shares).

The calculation of diluted net income (loss) per share attributable to common shareholders does not assume the exercise of any instruments that would have an anti-dilutive effect on net income (loss) per share. The following table summarizes the instruments excluded from the calculation of net income (loss) per share attributable to common shareholders because they were anti-dilutive.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2013		2012		2013		2012
PSUs		786,129		—		786,129		—
Restricted shares		158,000		196,500		158,000		196,500
Stock options		175,000		75,000		175,000		75,000

FORM 10-Q

QUARTERLY REPORT - PAGE 14

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 8. Derivative Transactions

The Company is exposed to certain market risks relating to its ongoing business. The Company seeks to manage these risks through internal risk management policies as well as, from time to time, the use of derivatives. The Company currently manages its interest rate risk and a small portion of its pulp sales price risk with the use of derivative instruments. The derivatives are measured at fair value with changes in fair value immediately recognized in gain on derivative instruments in the Interim Consolidated Statement of Operations.

Derivative assets are presented in prepaid expenses and other, and derivative liabilities are presented in unrealized interest rate derivative losses in the Interim Consolidated Balance Sheet.

Interest Rate Derivative

During 2004, the Company entered into certain variable-to-fixed interest rate swaps in connection with the Stendal mill with respect to an aggregate maximum amount of approximately €612,600 of the principal amount of the indebtedness under the Stendal Loan Facility. Under the remaining interest rate swap, the Company pays a fixed rate and receives a floating rate with the interest payments being calculated on a notional amount. As at June 30, 2013, the contract has an aggregate notional amount of €332,684 at a fixed interest rate of 5.28% and it matures in October 2017 (which for the most part matches the maturity of the Stendal Loan Facility).

The interest rate derivative contract is with a bank that is part of a banking syndicate that holds the Stendal Loan Facility and the Company does not anticipate non-performance by the bank.

Pulp Price Derivatives

In May 2012, the Company entered into a fixed price pulp swap contract with a bank. Under the terms of the contract, 5,000 metric tonnes (“MT”) of pulp per month was fixed at a price of $915 per MT. The contract expired in December 2012. In November 2012, the Company entered into two additional contracts. Under the terms of the contracts, 3,000 MT of pulp per month is fixed at prices which range from $880 to $890 per MT. These contracts expire in December 2013.

The following table shows our gains and losses by instrument type as they are recognized in gain on derivative instruments in the Interim Consolidated Statement of Operations:


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Interest rate derivative contract	€	5,715		€	(276	)	€	10,880		€	600
Pulp price derivative contracts		(422	)		1,619			(767	)		1,619

	€	5,293		€	1,343		€	10,113		€	2,219

FORM 10-Q

QUARTERLY REPORT - PAGE 15

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 9. Financial Instruments

The fair value of financial instruments is summarized as follows:


	June 30, 2013				December 31, 2012
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents	€	134,433	€	134,433	€	104,239	€	104,239
Marketable securities		167		167		184		184
Receivables		97,028		97,028		110,087		110,087
Pulp price derivative contracts – asset		245		245		745		745
Accounts payable and other		96,002		96,002		89,950		89,950
Debt		724,433		715,322		711,403		700,001
Interest rate derivative contract – liability		39,798		39,798		50,678		50,678

The carrying value of cash and cash equivalents and accounts payable and other approximates the fair value due to the immediate or short-term maturity of these financial instruments. The carrying value of receivables approximates the fair value due to their short-term nature and historical collectability. Marketable securities are recorded at fair value based on recent transactions. See the Fair Value Measurement and Disclosure section below for details on how the fair value of the pulp price derivative contracts, interest rate derivative contract and debt was determined.

Fair Value Measurement and Disclosure

The fair value methodologies and, as a result, the fair value of the Company’s investments, debt and derivative instruments are determined based on the fair value hierarchy provided in the Fair Value Measurements and Disclosures topic of the FASB Accounting Standards Codification, and are as follows:

Level 1 – Valuations based on quoted prices in active markets for identical assets and liabilities.

Level 2 – Valuations based on observable inputs in active markets for similar assets and liabilities, other than Level 1 prices, such as quoted commodity prices or interest or currency exchange rates.

Level 3 – Valuations based on significant unobservable inputs that are supported by little or no market activity, such as discounted cash flow methodologies based on internal cash flow forecasts.

The Company classified its marketable securities within Level 1 of the valuation hierarchy because quoted prices are available in an active market for the exchange-traded equities.

The Company’s interest rate and pulp price derivatives are classified within Level 2 of the valuation hierarchy, as they are valued using internal models that use as their basis readily observable market inputs, such as forward interest rates, yield curves observable at specified intervals and commodity price curves. The observable inputs reflect market data obtained from independent sources. In addition, the Company considered the risk of non-performance of the obligor, which in some cases reflects the Company’s own credit risk. The counterparty to our interest rate and pulp price derivatives are multi-national financial institutions.

The Company’s debt is recognized at amortized cost. The fair value of debt classified as Level 2 reflects recent market transactions and discounted cash flow estimates. Discounted cash flow models use observable market inputs taking into consideration variables such as interest rate changes, comparative securities, subordination discount and credit rating changes. The fair value of debt classified as Level 3 is valued using a discounted cash flow model which requires significant management estimates. These estimates are developed using available market, historical, and forecast data, including taking into account variables such as recent financing activities, the capital structure, and the lack of marketability of such debt.

FORM 10-Q

QUARTERLY REPORT - PAGE 16

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 9. Financial Instruments (continued)

The following table presents a summary of the Company’s outstanding financial instruments and their estimated fair values under the hierarchy defined in Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification:


	Fair Value Measurements at June 30, 2013
Description	Level 1		Level 2		Level 3		Total
Assets
Marketable securities	€	167	€	—	€	—	€	167
Pulp price derivative contracts		—		245		—		245

	€	167	€	245	€	—	€	412

Liabilities
Interest rate derivative contract	€	—	€	39,798	€	—	€	39,798
Debt		—		702,177		13,145		715,322

	€	—	€	741,975	€	13,145	€	755,120


	Fair Value Measurements at December 31, 2012
Description	Level 1		Level 2		Level 3		Total
Assets
Marketable securities	€	184	€	—	€	—	€	184
Pulp price derivative contracts		—		745		—		745

	€	184	€	745	€	—	€	929

Liabilities
Interest rate derivative contract	€	—	€	50,678	€	—	€	50,678
Debt		—		687,184		12,817		700,001

	€	—	€	737,862	€	12,817	€	750,679

Note 10. Commitments and Contingencies

(a)

Pursuant to an arbitration proceeding with the general construction contractor (the noncontrolling shareholder) of the Stendal mill regarding certain warranty claims, the Company acted upon a bank guarantee for defect liability on civil works that was about to expire as provided in the engineering, procurement, and construction contract. On January 28, 2011, the Company received approximately €10,000 (the “Guarantee Amount”), which is intended to compensate the Company for remediation work that is required at the Stendal mill, but it was less than the amount claimed by the Company under the arbitration. Most of the claims have been settled; however, the arbitration proceeding is ongoing, and there is no certainty that the Company will be successful with its remaining claim.

The €10,000 was initially recognized as an increase in cash and a corresponding increase in accounts payable and other. As civil works remediation steps are agreed to with the noncontrolling shareholder an agreed to portion of the payable is reversed with the offset recorded in operating costs to offset the remediation expenditures. As at June 30, 2013, the Company had Guarantee Amount proceeds of €1,768 remaining in accounts payable and other.

FORM 10-Q

QUARTERLY REPORT - PAGE 17

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 10. Commitments and Contingencies (continued)

(b)

The Company is involved in a property transfer tax dispute with respect to the Celgar mill and certain other legal actions and claims arising in the ordinary course of business. Celgar had previously paid the property transfer tax assessment. During the second quarter of 2013, the Company lost its Supreme Court of British Columbia appeal of the property transfer tax assessment and as a result the Company filed an application to seek leave to appeal to the British Columbia Court of Appeal. The outcome of the appeal process is uncertain. In addition, while the outcome of any legal actions and claims cannot be predicted with certainty, it is the opinion of management that the outcome of any such claim which is pending or threatened, either individually or on a combined basis, will not have a material adverse effect on the consolidated financial condition, results of operations or liquidity of the Company.

(c)

The Company is subject to regulations that require the handling and disposal of asbestos in a prescribed manner if a property undergoes a major renovation or demolition. Otherwise, the Company is not required to remove asbestos from its facilities. Generally asbestos is found on steam and condensate piping systems as well as certain cladding on buildings and in building insulation throughout older facilities. The Company’s obligation for the proper removal and disposal of asbestos products from the Company’s mills is a conditional asset retirement obligation. As a result of the longevity of the Company’s mills, due in part to the maintenance procedures and the fact that the Company does not have plans for major changes that require the removal of asbestos, the timing of the asbestos removal is indeterminate. As a result, the Company is currently unable to reasonably estimate the fair value of its asbestos removal and disposal obligation. The Company will recognize a liability in the period in which sufficient information is available to reasonably estimate its fair value.

(d)	As at June 30, 2013, the Company had entered into capital commitments of approximately €6,800 at the Stendal mill as part of Project Blue Mill.

Note 11. Subsequent Events

(a)

In July 2013, the Company announced a workforce reduction at the Celgar mill. The planned reduction will affect both hourly and salaried employees and will reduce the workforce by approximately 85 employees over the next five years, with the majority of employees to be affected over the next 12 months. In connection with implementing this work force reduction, the Company currently estimates that it will incur pre-tax charges in the range of approximately $6.0 million to $8.0 million for severance and other personnel expenses, such as termination benefits, which are expected to occur primarily over the 12-month period commencing with the third quarter of 2013. More than 85% of such charges are expected to be recognized by the end of 2013.

(b)

In July 2013, the Company issued $50.0 million in aggregate principal amount of its Senior Notes. See Note 3(b) – Debt for a description of the Senior Notes. The additional notes were priced at 104.50% plus accrued interest from June 1, 2013. The net proceeds from the offering were $50.5 million, after deducting the underwriter’s discounts, offering expenses and accrued interest. The Company used the net proceeds from the offering to repay the revolving credit facilities of the Rosenthal and Celgar mills and for general corporate purposes.

FORM 10-Q

QUARTERLY REPORT - PAGE 18

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure

The terms of the indenture governing our Senior Notes require that we provide the results of operations and financial condition of Mercer International Inc. and our restricted subsidiaries under the indenture, collectively referred to as the “Restricted Group”. As at and during the three and six months ended June 30, 2013 and 2012, the Restricted Group was comprised of Mercer International Inc., certain holding subsidiaries and our Rosenthal and Celgar mills. The Restricted Group excludes the Stendal mill.

Combined Condensed Balance Sheets


	June 30, 2013
	Restricted		Unrestricted						Consolidated
	Group		Subsidiaries			Eliminations			Group
ASSETS
Current assets
Cash and cash equivalents	€	69,467	€	64,966		€	—		€	134,433
Receivables		49,674		47,354			—			97,028
Inventories		64,199		43,991			—			108,190
Prepaid expenses and other		7,883		4,947			—			12,830
Deferred income tax		2,178		1,634			—			3,812

Total current assets		193,401		162,892			—			356,293
Long-term assets
Property, plant and equipment		327,107		461,711			—			788,818
Deferred note issuance and other		6,832		5,798			—			12,630
Deferred income tax		8,876		5,882			—			14,758
Due from unrestricted group		107,108		—			(107,108	)		—

Total assets	€	643,324	€	636,283		€	(107,108	)	€	1,172,499

LIABILITIES
Current liabilities
Accounts payable and other	€	49,504	€	46,498		€	—		€	96,002
Pension and other post-retirement benefit obligations		780		—			—			780
Debt		1,088		43,258			—			44,346

Total current liabilities		51,372		89,756			—			141,128
Long-term liabilities
Debt		235,883		444,204			—			680,087
Due to restricted group		—		107,108			(107,108	)		—
Unrealized interest rate derivative losses		—		39,798			—			39,798
Pension and other post-retirement benefit obligations		31,158		—			—			31,158
Capital leases and other		5,855		7,744			—			13,599
Deferred income tax		6,892		—			—			6,892

Total liabilities		331,160		688,610			(107,108	)		912,662

EQUITY
Total shareholders’ equity (deficit)		312,164		(36,760	)		—			275,404
Noncontrolling interest (deficit)		—		(15,567	)		—			(15,567	)

Total liabilities and equity	€	643,324	€	636,283		€	(107,108	)	€	1,172,499

FORM 10-Q

QUARTERLY REPORT - PAGE 19

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Balance Sheets


	December 31, 2012
	Restricted		Unrestricted						Consolidated
	Group		Subsidiaries			Eliminations			Group
ASSETS
Current assets
Cash and cash equivalents	€	36,714	€	67,525		€	—		€	104,239
Receivables		61,212		48,875			—			110,087
Inventories		74,786		43,514			—			118,300
Prepaid expenses and other		5,811		2,096			—			7,907
Deferred income tax		2,188		2,277			—			4,465

Total current assets		180,711		164,287			—			344,998
Long-term assets
Property, plant and equipment		345,311		463,567			—			808,878
Deferred note issuance and other		6,607		5,555			—			12,162
Deferred income tax		9,179		8,386			—			17,565
Due from unrestricted group		102,311		—			(102,311	)		—

Total assets	€	644,119	€	641,795		€	(102,311	)	€	1,183,603

LIABILITIES
Current liabilities
Accounts payable and other	€	42,106	€	47,844		€	—		€	89,950
Pension and other post-retirement benefit obligations		813		—			—			813
Debt		5,662		40,000			—			45,662

Total current liabilities		48,581		87,844			—			136,425
Long-term liabilities
Debt		216,214		449,527			—			665,741
Due to restricted group		—		102,311			(102,311	)		—
Unrealized interest rate derivative losses		—		50,678			—			50,678
Pension and other post-retirement benefit obligations		32,141		—			—			32,141
Capital leases and other		6,073		7,863			—			13,936
Deferred income tax		5,757		—			—			5,757

Total liabilities		308,766		698,223			(102,311	)		904,678

EQUITY
Total shareholders’ equity (deficit)		335,353		(39,548	)		—			295,805
Noncontrolling interest (deficit)		—		(16,880	)		—			(16,880	)

Total liabilities and equity	€	644,119	€	641,795		€	(102,311	)	€	1,183,603

FORM 10-Q

QUARTERLY REPORT - PAGE 20

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Operations


	Three Months Ended June 30, 2013
	Restricted			Unrestricted						Consolidated
	Group			Subsidiaries			Eliminations			Group
Revenues
Pulp	€	105,541		€	88,118		€	—		€	193,659
Energy and chemicals		6,040			10,447			—			16,487

		111,581			98,565			—			210,146
Operating costs		103,558			83,322			—			186,880
Operating depreciation and amortization		8,258			6,486			—			14,744
Selling, general and administrative expenses		5,644			3,719			—			9,363

		117,460			93,527			—			210,987

Operating income (loss)		(5,879	)		5,038			—			(841	)

Other income (expense)
Interest expense		(5,880	)		(8,907	)		1,648			(13,139	)
Gain (loss) on derivative instruments		(422	)		5,715			—			5,293
Other income (expense)		1,620			34			(1,648	)		6

Total other income (expense)		(4,682	)		(3,158	)		—			(7,840	)

Income (loss) before income taxes		(10,561	)		1,880			—			(8,681	)
Income tax benefit (provision)		(611	)		(14	)		—			(625	)

Net income (loss)		(11,172	)		1,866			—			(9,306	)
Less: net income attributable to noncontrolling interest		—			(605	)		—			(605	)

Net income (loss) attributable to common shareholders	€	(11,172	)	€	1,261		€	—		€	(9,911	)


	Three Months Ended June 30, 2012
	Restricted			Unrestricted						Consolidated
	Group			Subsidiaries			Eliminations			Group
Revenues
Pulp	€	103,745		€	82,291		€	—		€	186,036
Energy and chemicals		6,460			11,566			—			18,026

		110,205			93,857			—			204,062
Operating costs		94,762			67,855			—			162,617
Operating depreciation and amortization		7,807			6,718			—			14,525
Selling, general and administrative expenses		5,406			3,218			—			8,624

		107,975			77,791			—			185,766

Operating income (loss)		2,230			16,066			—			18,296

Other income (expense)
Interest expense		(5,934	)		(9,312	)		1,383			(13,863	)
Gain (loss) on derivative instruments		1,619			(276	)		—			1,343
Other income (expense)		915			100			(1,383	)		(368	)

Total other income (expense)		(3,400	)		(9,488	)		—			(12,888	)

Income (loss) before income taxes		(1,170	)		6,578			—			5,408
Income tax benefit (provision)		(1,398	)		(867	)		—			(2,265	)

Net income (loss)		(2,568	)		5,711			—			3,143
Less: net income attributable to noncontrolling interest		—			(1,628	)		—			(1,628	)

Net income (loss) attributable to common shareholders	€	(2,568	)	€	4,083		€	—		€	1,515

FORM 10-Q

QUARTERLY REPORT - PAGE 21

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Operations


	Six Months Ended June 30, 2013
	Restricted Group			Unrestricted Subsidiaries			Eliminations			Consolidated Group
Revenues
Pulp	€	205,781		€	167,998		€	—		€	373,779
Energy and chemicals		13,130			21,509			—			34,639

		218,911			189,507			—			408,418
Operating costs		193,081			158,897			—			351,978
Operating depreciation and amortization		16,449			13,026			—			29,475
Selling, general and administrative expenses		11,360			6,898			—			18,258

		220,890			178,821			—			399,711

Operating income (loss)		(1,979	)		10,686			—			8,707

Other income (expense)
Interest expense		(11,746	)		(17,837	)		3,296			(26,287	)
Gain (loss) on derivative instruments		(767	)		10,880			—			10,113
Other income (expense)		3,155			77			(3,296	)		(64	)

Total other income (expense)		(9,358	)		(6,880	)		—			(16,238	)

Income (loss) before income taxes		(11,337	)		3,806			—			(7,531	)
Income tax benefit (provision)		(1,627	)		135			—			(1,492	)

Net income (loss)		(12,964	)		3,941			—			(9,023	)
Less: net income attributable to noncontrolling interest		—			(1,313	)		—			(1,313	)

Net income (loss) attributable to common shareholders	€	(12,964	)	€	2,628		€	—		€	(10,336	)


	Six Months Ended June 30, 2012
	Restricted Group			Unrestricted Subsidiaries			Eliminations			Consolidated Group
Revenues
Pulp	€	213,634		€	171,841		€	—		€	385,475
Energy and chemicals		14,451			22,494			—			36,945

		228,085			194,335			—			422,420
Operating costs		193,098			147,289			—			340,387
Operating depreciation and amortization		15,447			13,365			—			28,812
Selling, general and administrative expenses		11,927			6,755			—			18,682

		220,472			167,409			—			387,881

Operating income (loss)		7,613			26,926			—			34,539

Other income (expense)
Interest expense		(11,744	)		(18,976	)		2,724			(27,996	)
Gain (loss) on derivative instruments		1,619			600			—			2,219
Other income (expense)		1,740			206			(2,724	)		(778	)

Total other income (expense)		(8,385	)		(18,170	)		—			(26,555	)

Income (loss) before income taxes		(772	)		8,756			—			7,984
Income tax benefit (provision)		(2,113	)		(884	)		—			(2,997	)

Net income (loss)		(2,885	)		7,872			—			4,987
Less: net income attributable to noncontrolling interest		—			(2,299	)		—			(2,299	)

Net income (loss) attributable to common shareholders	€	(2,885	)	€	5,573		€	—		€	2,688

FORM 10-Q

QUARTERLY REPORT - PAGE 22

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Cash Flows


	Three Months Ended June 30, 2013
	Restricted			Unrestricted			Consolidated
	Group			Subsidiaries			Group
Cash flows from (used in) operating activities
Net income (loss)	€	(11,172	)	€	1,866		€	(9,306	)
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized loss (gain) on derivative instruments		34			(5,715	)		(5,681	)
Depreciation and amortization		8,324			6,486			14,810
Deferred income taxes		433			—			433
Stock compensation expense		306			—			306
Pension and other post-retirement expense, net of funding		212			—			212
Other		290			680			970
Changes in working capital
Receivables		18,863			2,886			21,749
Inventories		5,303			(3,156	)		2,147
Accounts payable and accrued expenses		(1,879	)		309			(1,570	)
Other⁽¹⁾		(6,926	)		1,218			(5,708	)

Net cash from (used in) operating activities		13,788			4,574			18,362

Cash flows from (used in) investing activities
Purchase of property, plant and equipment		(2,602	)		(8,380	)		(10,982	)
Proceeds on sale of property, plant and equipment		—			2			2

Net cash from (used in) investing activities		(2,602	)		(8,378	)		(10,980	)

Cash flows from (used in) financing activities
Proceeds from borrowings of debt		—			7,000			7,000
Repayment of capital lease obligations		(122	)		(279	)		(401	)
Proceeds from (repayment of) credit facilities, net		6,986			—			6,986
Proceeds from government grants		—			3,417			3,417

Net cash from (used in) financing activities		6,864			10,138			17,002

Effect of exchange rate changes on cash and cash equivalents		(615	)		—			(615	)

Net increase in cash and cash equivalents		17,435			6,334			23,769
Cash and cash equivalents, beginning of period		52,032			58,632			110,664

Cash and cash equivalents, end of period	€	69,467		€	64,966		€	134,433

(1)	Includes intercompany related transactions.

FORM 10-Q

QUARTERLY REPORT - PAGE 23

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Cash Flows


	Three Months Ended June 30, 2012
	Restricted			Unrestricted			Consolidated
	Group			Subsidiaries			Group
Cash flows from (used in) operating activities
Net income (loss)	€	(2,568	)	€	5,711		€	3,143
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized loss (gain) on derivative instruments		(1,619	)		276			(1,343	)
Depreciation and amortization		7,870			6,718			14,588
Deferred income taxes		1,240			(5,256	)		(4,016	)
Stock compensation expense		(6	)		—			(6	)
Pension and other post-retirement expense, net of funding		(41	)		—			(41	)
Other		(535	)		608			73
Changes in working capital
Receivables		7,833			4,505			12,338
Inventories		(1,765	)		(6,531	)		(8,296	)
Accounts payable and accrued expenses		(3,155	)		3,960			805
Other⁽¹⁾		(1,514	)		1,428			(86	)

Net cash from (used in) operating activities		5,740			11,419			17,159

Cash flows from (used in) investing activities
Purchase of property, plant and equipment		(8,815	)		(1,023	)		(9,838	)
Proceeds on sale of property, plant and equipment		51			62			113
Proceeds on maturity of marketable securities		2,008			—			2,008

Net cash from (used in) investing activities		(6,756	)		(961	)		(7,717	)

Cash flows from (used in) financing activities
Repayment of debt		(1,584	)		—			(1,584	)
Repayment of capital lease obligations		(180	)		(268	)		(448	)
Proceeds from (repayment of) credit facilities, net		(3,759	)		—			(3,759	)
Proceeds from government grants		1,692			—			1,692

Net cash from (used in) financing activities		(3,831	)		(268	)		(4,099	)

Effect of exchange rate changes on cash and cash equivalents		1,348			—			1,348

Net increase (decrease) in cash and cash equivalents		(3,499	)		10,190			6,691
Cash and cash equivalents, beginning of period		53,595			70,601			124,196

Cash and cash equivalents, end of period	€	50,096		€	80,791		€	130,887

(1)	Includes intercompany related transactions.

FORM 10-Q

QUARTERLY REPORT - PAGE 24

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Cash Flows


	Six Months Ended June 30, 2013
	Restricted Group			Unrestricted Subsidiaries			Consolidated Group
Cash flows from (used in) operating activities
Net income (loss)	€	(12,964	)	€	3,941		€	(9,023	)
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized loss (gain) on derivative instruments		504			(10,880	)		(10,376	)
Depreciation and amortization		16,578			13,026			29,604
Deferred income taxes		1,424			3,147			4,571
Stock compensation expense		573			—			573
Pension and other post-retirement expense, net of funding		333			—			333
Other		703			1,450			2,153
Changes in working capital
Receivables		10,524			1,521			12,045
Inventories		8,370			(477	)		7,893
Accounts payable and accrued expenses		8,626			401			9,027
Other⁽¹⁾		(8,640	)		2,150			(6,490	)

Net cash from (used in) operating activities		26,031			14,279			40,310

Cash flows from (used in) investing activities
Purchase of property, plant and equipment		(5,247	)		(17,130	)		(22,377	)
Proceeds on sale of property, plant and equipment		13			2			15

Net cash from (used in) investing activities		(5,234	)		(17,128	)		(22,362	)

Cash flows from (used in) financing activities
Repayment of debt		(545	)		(20,000	)		(20,545	)
Proceeds from borrowings of debt		—			17,000			17,000
Repayment of capital lease obligations		(244	)		(857	)		(1,101	)
Proceeds from (repayment of) credit facilities, net		12,954			—			12,954
Proceeds from government grants		—			4,147			4,147

Net cash from (used in) financing activities		12,165			290			12,455

Effect of exchange rate changes on cash and cash equivalents		(209	)		—			(209	)

Net increase (decrease) in cash and cash equivalents		32,753			(2,559	)		30,194
Cash and cash equivalents, beginning of period		36,714			67,525			104,239

Cash and cash equivalents, end of period	€	69,467		€	64,966		€	134,433

(1)	Includes intercompany related transactions.

FORM 10-Q

QUARTERLY REPORT - PAGE 25

MERCER INTERNATIONAL INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(In thousands of Euros, except per share data)

Note 12. Restricted Group Supplemental Disclosure (continued)

Combined Condensed Statements of Cash Flows


	Six Months Ended June 30, 2012
	Restricted Group			Unrestricted Subsidiaries			Consolidated Group
Cash flows from (used in) operating activities
Net income (loss)	€	(2,885	)	€	7,872		€	4,987
Adjustments to reconcile net income (loss) to cash flows from operating activities
Unrealized loss (gain) on derivative instruments		(1,619	)		(600	)		(2,219	)
Depreciation and amortization		15,573			13,365			28,938
Deferred income taxes		1,916			(5,256	)		(3,340	)
Stock compensation expense		862			—			862
Pension and other post-retirement expense, net of funding		(55	)		—			(55	)
Other		(477	)		1,343			866
Changes in working capital
Receivables		5,723			9,300			15,023
Inventories		2,253			1,189			3,442
Accounts payable and accrued expenses		2,380			1,074			3,454
Other⁽¹⁾		(7,988	)		9,326			1,338

Net cash from (used in) operating activities		15,683			37,613			53,296

Cash flows from (used in) investing activities
Purchase of property, plant and equipment		(13,033	)		(5,270	)		(18,303	)
Proceeds on sale of property, plant and equipment		237			102			339
Proceeds on maturity of marketable securities		2,008			—			2,008

Net cash from (used in) investing activities		(10,788	)		(5,168	)		(15,956	)

Cash flows from (used in) financing activities
Repayment of debt		(2,127	)		(9,583	)		(11,710	)
Repayment of capital lease obligations		(366	)		(693	)		(1,059	)
Payment of note issuance costs		—			(1,621	)		(1,621	)
Proceeds from government grants		2,322			—			2,322

Net cash from (used in) financing activities		(171	)		(11,897	)		(12,068	)

Effect of exchange rate changes on cash and cash equivalents		543			—			543

Net increase in cash and cash equivalents		5,267			20,548			25,815
Cash and cash equivalents, beginning of period		44,829			60,243			105,072

Cash and cash equivalents, end of period	€	50,096		€	80,791		€	130,887

(1)	Includes intercompany related transactions.

FORM 10-Q

QUARTERLY REPORT - PAGE 26

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this document: (i) unless the context otherwise requires, references to “we”, “our”, “us”, the “Company” or “Mercer” mean Mercer International Inc. and its subsidiaries; (ii) references to “Mercer Inc.” mean the Company excluding its subsidiaries; (iii) information is provided as of June 30, 2013, unless otherwise stated; (iv) all references to monetary amounts are to “Euros”, the lawful currency adopted by most members of the European Union, unless otherwise stated; (v) “€” refers to Euros, “$” refers to U.S. dollars and “C$” refers to Canadian dollars; (vi) “ADMTs” refers to air-dried metric tonnes; (vii) “MW” refers to megawatts; and (viii) “MWh” refers to megawatt hours.

Results of Operations

General

We operate three northern bleached softwood kraft, referred to as “NBSK”, pulp mills through our wholly owned subsidiaries, Rosenthal and Celgar, and our 74.9% owned subsidiary, Stendal, which have a consolidated annual production capacity of approximately 1.5 million ADMTs.

The following discussion and analysis of our results of operations and financial condition for the three and six months ended June 30, 2013 should be read in conjunction with our interim consolidated financial statements and related notes included in this quarterly report, as well as our most recent annual report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission, referred to as the “SEC”.

On July 9, 2013, we announced that, after conducting a comprehensive assessment, our Celgar mill intends to reduce its workforce by approximately 85 employees, with the majority of employees leaving the mill over the next 12 months, in order to improve its competitiveness with other pulp producers. This action is being taken to reduce the mill’s fixed costs. We currently estimate incurring pre-tax charges of approximately $6.0 million to $8.0 million for severance and other personnel related expenses in connection with such reduction. Over 85% of these charges are expected to be recognized by the end of 2013. We currently estimate that our Celgar mill will realize approximately $8.0 million to $10.0 million in annual pre-tax cost savings once the workforce restructuring has been fully implemented. Based upon our planned workforce reduction schedule, we currently expect to realize approximately 80% of such annual cost savings in 2014.

Current Market Environment

Pulp list prices were up marginally in the second quarter of 2013. At the end of the second quarter of 2013, list prices in Europe were approximately $860 per ADMT and in North America and China were approximately $950 and $690 per ADMT, respectively.

We currently expect demand and pricing to trend upwards in the latter part of 2013. Annual maintenance shuts by producers should cause NBSK pulp prices to continue to gradually increase in the medium term. We believe supply and demand levels through the summer should benefit from significant producer maintenance downtime during the summer months. In addition, the announced closure of a Norwegian mill (Tofte) and new tissue capacity coming online in China should keep supply and demand in balance.

FORM 10-Q

QUARTERLY REPORT - PAGE 27

Summary Financial Highlights


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands, other than per share amounts)
Pulp revenues	€	193,659		€	186,036		€	373,779		€	385,475
Energy and chemical revenues		16,487			18,026			34,639			36,945
Operating income (loss)		(841	)		18,296			8,707			34,539
Gain on derivative instruments		5,293			1,343			10,113			2,219
Income tax benefit (provision)		(625	)		(2,265	)		(1,492	)		(2,997	)
Net income (loss)⁽¹⁾		(9,911	)		1,515			(10,336	)		2,688
Net income (loss) per share⁽¹⁾⁽²⁾	€	(0.18	)	€	0.03		€	(0.19	)	€	0.05

(1)	Attributable to common shareholders.

(2)	Per share amounts are on a basic and diluted basis.

Selected Production, Sales and Other Data


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Consolidated
Pulp production (‘000 ADMTs)		349.5		365.0		710.7		745.4
Scheduled production downtime (‘000 ADMTs)		16.0		22.6		16.0		22.6
Scheduled production downtime (days)		11		23		11		23
Pulp sales (‘000 ADMTs)		368.3		349.2		724.9		734.0
Average NBSK pulp list prices in Europe ($/ADMT)⁽¹⁾		857		837		844		837
Average NBSK pulp list prices in Europe (€/ADMT)		656		652		643		645
Average pulp sales realizations (€/ADMT)⁽²⁾		520		526		509		519
Energy production (‘000 MWh)		405.8		425.4		830.2		861.7
Energy sales (‘000 MWh)		167.5		182.7		341.1		365.1
Average energy sales realizations (€/MWh)		83		81		86		85
Average Spot Currency Exchange Rates
€ / $⁽³⁾		0.7655		0.7795		0.7619		0.7710
C$ / $⁽³⁾		1.0230		1.0102		1.0160		1.0056
C$ / €⁽⁴⁾		1.3374		1.2959		1.3346		1.3044

(1)	Source: RISI pricing report.

(2)	Sales realizations after discounts. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3)	Average Federal Reserve Bank of New York noon spot rate over the reporting period.

(4)	Average Bank of Canada noon spot rate over the reporting period.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Total revenues for the three months ended June 30, 2013 increased by approximately 3% to €210.1 million from €204.1 million in the same period in 2012, due to higher pulp revenues.

Pulp revenues for the three months ended June 30, 2013 increased to €193.7 million from €186.0 million in the comparative quarter of 2012, primarily due to higher pulp sales volumes, partially offset by a weaker U.S. dollar relative to the Euro. The U.S. dollar decreased versus the Euro in the current quarter, compared to the same quarter of last year.

Energy and chemical revenues decreased by approximately 8% to €16.5 million in the second quarter from €18.0 million in the same quarter last year, primarily as a result of lower pulp production.

FORM 10-Q

QUARTERLY REPORT - PAGE 28

Average list prices for NBSK pulp in Europe were approximately $857 (€656) per ADMT in the current quarter, compared to approximately $837 (€652) per ADMT in the same quarter last year. In the second quarter of 2013, average pulp sales realizations marginally decreased by approximately 1% to €520 per ADMT from approximately €526 per ADMT in the same quarter last year, primarily due to a weaker U.S. dollar relative to the Euro, partially offset by higher pulp prices.

Pulp production decreased by approximately 4% to 349,502 ADMTs in the current quarter from 365,047 ADMTs in the same quarter of 2012, primarily due to decreased pulp production at our Celgar mill. During the second quarter of 2013, our Celgar mill took its annual scheduled major maintenance shutdown. As a result of a combination of a lightning strike at the mill and equipment and execution issues, the shutdown which was planned for 11 days took 15 days instead. Further, the start-up of the mill was slower than budgeted. The shutdown and slower start-up resulted in a loss of approximately 30,300 ADMTs of NBSK pulp production (of which approximately 14,300 ADMTs was unplanned) and a consequential loss of energy production. The shutdown had a negative impact of approximately €11.0 million on our operating results for the second quarter of 2013.

We believe the issues with the Celgar maintenance shutdown were isolated and the mill is performing well and operating at pre-shutdown levels. We believe our inventory levels are adequate and anticipate no material customer issues from this event.

Pulp sales volumes increased by approximately 5% to 368,285 ADMTs in the current quarter from 349,177 ADMTs in the comparative quarter, primarily due to higher sales to Europe and China.

Costs and expenses in the second quarter of 2013 increased by approximately 14% to €211.0 million from €185.8 million in the comparative period of 2012, primarily due to higher sales volumes, fiber costs and costs associated with the Celgar mill maintenance shutdown.

In the second quarter of 2013, operating depreciation and amortization marginally increased to €14.7 million from €14.5 million in the same quarter last year. Selling, general and administrative expenses were €9.4 million in the second quarter of 2013, compared to €8.6 million in the second quarter of 2012.

Transportation costs marginally increased to €17.6 million in the second quarter of 2013 from €17.4 million in the second quarter of 2012, primarily due to flood conditions in Germany as trucks and trains were forced to re-route over longer distances.

On average, our per unit fiber costs in the current quarter increased by approximately 6% from the same period in 2012. During the second quarter of 2013, fiber costs at our German mills were higher than the comparative period in 2012. Increased demand from the European pellet and board producers and sawmills and an under supply of sawlogs kept fiber prices at relatively high levels in the current quarter. Fiber costs at our Celgar mill decreased as a result of increased sawmill activity in the region. Going forward this year, we currently expect fiber costs at our German mills to marginally increase and then stabilize, whereas we expect fiber costs at our Celgar mill to decrease moderately.

FORM 10-Q

QUARTERLY REPORT - PAGE 29

For the second quarter of 2013, we reported an operating loss of €0.8 million, compared to operating income of €18.3 million in the comparative quarter of 2012, primarily due to the negative impact of the Celgar mill shutdown, higher fiber costs and the weaker U.S. dollar relative to the Euro.

Interest expense in the second quarter of 2013 decreased to €13.1 million from €13.9 million in the comparative quarter of 2012, primarily due to lower debt levels associated with the Stendal mill in the second quarter of 2013.

We recorded a net derivative gain of €5.3 million, which includes a €0.4 million loss related to fixed price pulp swap contracts entered into in the fourth quarter of 2012 and an unrealized gain of approximately €5.7 million on the mark to market adjustment of our Stendal mill’s interest rate derivative, compared to a net derivative gain of €1.3 million in the same quarter of last year.

During the current quarter, we recorded a net income tax expense of €0.6 million, compared to €2.3 million in the same quarter of 2012.

The noncontrolling shareholder’s interest in the Stendal mill’s net income in the second quarter of 2013 was €0.6 million, compared to €1.6 million in the same quarter last year.

We reported a net loss attributable to common shareholders of €9.9 million, or €0.18 per basic and diluted share, for the second quarter of 2013, which included a total net non-cash unrealized gain of €5.7 million on the fixed price pulp swaps and Stendal interest rate derivative, and the negative impact of approximately €11.0 million related to the Celgar mill’s maintenance shutdown. In the second quarter of 2012, net income attributable to common shareholders was €1.5 million, or €0.03 per basic and diluted share, which included a net non-cash unrealized gain of €1.3 million on the Stendal interest rate derivative and fixed price pulp swaps.

Operating EBITDA in the second quarter of 2013 was €14.0 million, compared to €32.9 million in the second quarter of 2012. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Management uses Operating EBITDA as a benchmark measurement of its own operating results, and as a benchmark relative to its competitors. Management considers it to be a meaningful supplement to operating income (loss) as a performance measure primarily because depreciation expense and non-recurring capital asset impairment charges are not an actual cash cost, and depreciation expense varies widely from company to company in a manner that management considers largely independent of the underlying cost efficiency of their operating facilities. In addition, we believe Operating EBITDA is commonly used by securities analysts, investors and other interested parties to evaluate our financial performance.

Operating EBITDA does not reflect the impact of a number of items that affect our net income (loss) attributable to common shareholders, including financing costs and the effect of derivative instruments. Operating EBITDA is not a measure of financial performance under the accounting principles generally accepted in the United States of America, referred to as “GAAP”, and should not be considered as an alternative to net income (loss) or income (loss) from operations as a measure of performance, nor as an alternative to net cash from operating activities as a measure of liquidity.

FORM 10-Q

QUARTERLY REPORT - PAGE 30

Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are that Operating EBITDA does not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt; (iv) noncontrolling interests on our Stendal mill operations; (v) the impact of realized or marked to market changes in our derivative positions, which can be substantial; and (vi) the impact of impairment charges against our investments or assets. Because of these limitations, Operating EBITDA should only be considered as a supplemental operational performance measure and should not be considered as a measure of liquidity or cash available to us to invest in the growth of our business. See the Statement of Cash Flows set out in our interim consolidated financial statements included herein. Because all companies do not calculate Operating EBITDA in the same manner, Operating EBITDA as calculated by us may differ from Operating EBITDA or EBITDA as calculated by other companies. We compensate for these limitations by using Operating EBITDA as a supplemental measure of our operational performance and relying primarily on our GAAP financial statements.

The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income (loss) and Operating EBITDA for the periods indicated:


	Three Months Ended June 30,
	2013			2012
	(in thousands)
Net income (loss) attributable to common shareholders	€	(9,911	)	€	1,515
Net income attributable to noncontrolling interest		605			1,628
Income tax provision		625			2,265
Interest expense		13,139			13,863
Gain on derivative instruments		(5,293	)		(1,343	)
Other expense (income)		(6	)		368

Operating income (loss)		(841	)		18,296
Add: Depreciation and amortization		14,810			14,588

Operating EBITDA	€	13,969		€	32,884

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Total revenues for the six months ended June 30, 2013 decreased by approximately 3% to €408.4 million from €422.4 million in the same period in 2012, due to lower pulp and energy and chemical revenues.

Pulp revenues for the six months ended June 30, 2013 decreased to €373.8 million from €385.5 million in the comparative period of 2012, primarily due to lower pulp sales volumes and a weaker U.S. dollar relative to the Euro. The U.S. dollar was approximately 1% weaker versus the Euro in the first half of 2013, compared to the same period of last year.

Energy and chemical revenues decreased by approximately 6% to €34.6 million in the first half of 2013 from €36.9 million in the same period last year, primarily as a result of lower pulp production.

Average list prices for NBSK pulp in Europe were approximately $844 (€643) per ADMT in the first half of 2013, compared to approximately $837 (€645) per ADMT in the same period last year. In the first half of 2013, average pulp sales realizations decreased by approximately 2% to €509 per ADMT from approximately €519 per ADMT in the same period last year, primarily due to the impact of a weaker U.S. dollar versus the Euro.

FORM 10-Q

QUARTERLY REPORT - PAGE 31

Pulp production decreased by approximately 5% to 710,666 ADMTs in the first half of 2013 from 745,389 ADMTs in the same period of 2012, primarily due to decreased pulp production at our Celgar mill. We had 15 days of maintenance downtime at our Celgar mill in the first half of 2013, which, together with a slower startup, resulted in a loss of approximately 30,300 ADMTs of NBSK pulp production.

Pulp sales volumes decreased by approximately 1% to 724,945 ADMTs in the first half of 2013 from 734,003 ADMTs in the comparative period of 2012, primarily due to lower sales to the United States.

Costs and expenses in the first half of 2013 increased by 3% to €399.7 million from €387.9 million in the comparative period of 2012, primarily due to higher fiber costs at our German mills and costs associated with the Celgar maintenance shutdown.

In the first half of 2013, operating depreciation and amortization marginally increased to €29.5 million from €28.8 million in the same period last year. Selling, general and administrative expenses were €18.3 million in the first half of 2013, compared to €18.7 million in the same period of 2012.

Transportation costs decreased to €34.4 million in the first half of 2013 from €35.4 million in the same period of 2012, primarily due to lower pulp sales volumes, partially offset by increased logistics costs related to flooding in Germany in the second quarter of 2013.

On average, our per unit fiber costs in the first six months of 2013 increased by approximately 2% from the same period in 2012. During the first half of 2013, fiber costs at our German mills were higher than the comparative period in 2012. Increased demand from the European pellet and board producers and sawmills, reduced wood supply because of extreme winter weather conditions and lower availability of trucking transportation kept fiber prices at relatively high levels in the current period. Fiber costs at our Celgar mill decreased as a result of increased sawmill activity in the region. Going forward this year, we currently expect fiber costs at our German mills to marginally increase and then stabilize, whereas we expect fiber costs at our Celgar mill to continue to decrease moderately.

For the first half of 2013, operating income decreased to €8.7 million from €34.5 million in the comparative period of 2012, primarily due to the combined effect of the Celgar mill’s maintenance shutdown and lower pulp sales volumes and higher fiber costs.

Interest expense in the first half of 2013 decreased to €26.3 million from €28.0 million in the comparative period of 2012, primarily due to lower debt levels associated with the Stendal mill.

We recorded a net derivative gain of €10.1 million, which includes a €0.8 million loss related to fixed price pulp swap contracts entered into in the fourth quarter of 2012 and an unrealized gain of approximately €10.9 million on the mark to market adjustment of our Stendal mill’s interest rate derivative, compared to a derivative gain of €2.2 million in the same period of last year.

During the six months ended June 30, 2013, we recorded a net income tax expense of €1.5 million, compared to €3.0 million in the same period of 2012.

FORM 10-Q

QUARTERLY REPORT - PAGE 32

The noncontrolling shareholder’s interest in the Stendal mill’s income in the first half of 2013 was €1.3 million, compared to €2.3 million in the same period last year.

We reported a net loss attributable to common shareholders of €10.3 million, or €0.19 per basic and diluted share, for the first half of 2013, which included a net non-cash unrealized gain of €10.4 million on the fixed price pulp swaps and Stendal interest rate derivative, more than offset by a negative impact of approximately €11.0 million related to the Celgar maintenance shutdown and a non-cash charge for stock compensation of €0.6 million. In the first half of 2012, net income attributable to common shareholders was €2.7 million, or €0.05 per basic and diluted share, which included a non-cash unrealized gain of €2.2 million on the fixed price pulp swaps and Stendal interest rate derivative, partially offset by a non-cash charge for stock compensation of €0.9 million.

Operating EBITDA in the first half of 2013 was €38.3 million, compared to €63.5 million in the first half of 2012. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our results for the three months ended June 30, 2013 for additional information relating to such limitations of Operating EBITDA.

The following table provides a reconciliation of net income (loss) attributable to common shareholders to operating income and Operating EBITDA for the periods indicated:


	Six Months Ended June 30,
	2013			2012
	(in thousands)
Net income (loss) attributable to common shareholders	€	(10,336	)	€	2,688
Net income attributable to noncontrolling interest		1,313			2,299
Income tax provision		1,492			2,997
Interest expense		26,287			27,996
Gain on derivative instruments		(10,113	)		(2,219	)
Other expense (income)		64			778

Operating income		8,707			34,539
Add: Depreciation and amortization		29,604			28,938

Operating EBITDA	€	38,311		€	63,477

Liquidity and Capital Resources

The following table is a summary of selected financial information at the dates indicated:


	As at June 30,		As at December 31,
	2013		2012
	(in thousands)
Financial Position
Cash and cash equivalents	€	134,433	€	104,239
Working capital		215,165		208,573
Total assets		1,172,499		1,183,603
Long-term liabilities		771,534		768,253
Total equity		259,837		278,925

As at June 30, 2013, we had approximately €17.7 million and C$17.6 million available under our Rosenthal and Celgar revolving facilities, respectively.

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QUARTERLY REPORT - PAGE 33

As at June 30, 2013, our cash and cash equivalents increased to €134.4 million from €104.2 million and working capital had increased to €215.2 million from €208.6 million at the end of 2012.

On July 22, 2013, we completed our registered public offering of $50.0 million aggregate principal amount of additional 9.5% senior notes due 2017, referred to as the “Senior Notes”, at an issue price of 104.5% plus accrued interest from June 1, 2013. We used the proceeds to repay the revolving credit facilities of our Rosenthal and Celgar mills and for general corporate purposes.

Sources and Uses of Funds

Our principal sources of funds are cash flows from operations, cash and cash equivalents on hand and the revolving working capital loan facilities for our Celgar and Rosenthal mills. Our principal uses of funds consist of operating expenditures, payments of principal and interest on the project loan facilities relating to our development of the Stendal mill (the “Stendal Loan Facility”) and for its Project Blue Mill (collectively, the “Stendal Facilities”), capital expenditures and interest payments on our outstanding Senior Notes.

Debt Covenants

Our long-term obligations contain various financial tests and covenants customary to these types of arrangements.

The Stendal Facilities had approximately €449.9 million in total principal outstanding at June 30, 2013. The Stendal Facilities are without recourse to the Restricted Group (comprised of Mercer, the Rosenthal and Celgar mills and certain holding subsidiaries) and 80% of the principal amount thereunder is severally guaranteed by German federal and state governments. The Stendal Facilities require the Stendal mill, among other things, to maintain a stipulated semi-annual leverage ratio and a debt coverage ratio (the “Ratios”) and previously report on compliance with such Ratios on September 30, 2013 for the trailing 12-month period ended June 30, 2013.

We have had ongoing discussions with the agent bank under the Stendal Facilities to obtain a satisfactory amendment and/or waiver of the Ratios to provide greater flexibility for the Stendal mill. On June 26, 2013, Stendal and the agent bank for the lenders agreed upon a non-binding term sheet which will provide the mill with greater covenant flexibility and the mill engaged the agent bank pursuant to a mandate agreement to seek lender approval to implement the same. Pursuant to the term sheet, concurrent with a successful amendment of the Stendal Facilities thereunder, we have agreed to invest $20.0 million into Stendal as additional capital. The term sheet is subject to customary conditions and approvals, including lender approval, German governmental approval, our board approval, Stendal shareholder approval and entering into satisfactory definitive legal agreements.

Subsequent to entering into the term sheet, the agent has advised that the lenders agreed to have: (i) the Ratios cover the trailing 12-month period ending on September 30, 2013, instead of June 30, 2013; and (ii) the Stendal mill report on its compliance with the Ratios revised as aforesaid on November 15, 2013.

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Currently, based upon our discussions with the agent bank to date, the limited nature of the requested amendment, the Stendal mill’s current liquidity (cash on hand, as at June 30, 2013 of approximately €65.0 million, of which €33.0 million is in a debt service reserve account) and the governmental guarantees, we believe we will be able to conclude a satisfactory amendment with Stendal’s lenders in the third quarter of 2013; however, we cannot assure you of a successful outcome.

In the event that the Stendal mill is not in compliance with the revised Ratios when they are reported on November 15, 2013, we have the right to cure any breach by providing additional capital to Stendal within 20 business days of being notified of such breach by the lenders. If the Stendal mill is not in compliance with such revised Ratios as aforesaid, and is unable to secure a satisfactory amendment and/or waiver of the Ratios and we do not cure the breach by providing additional capital to Stendal, the breach would constitute an event of default under the Stendal Facilities. If such event of default occurs and after careful consideration of the reasonable concerns of Stendal or if the stipulated majority of the lenders have reasonably determined that such default has caused Stendal’s ability to perform its obligations thereunder to be materially impaired, the lenders may provide notice cancelling and accelerating the Stendal Facilities and demanding full payment thereof. In the current circumstances, we do not believe Stendal’s lenders would be permitted to accelerate and cancel such loan facilities based upon a failure to satisfy the Ratios; however, we cannot assure you of the same.

If Stendal’s lenders did accelerate and cancel the Stendal Facilities, this would have a material adverse effect on the Stendal mill and our consolidated financial condition, results of operations and liquidity.

Celgar Working Capital Facility

On May 2, 2013, our Celgar mill entered into a Second Amended and Restated Credit Agreement (the “Second Amended Credit Agreement”) with the lenders party thereto relating to its C$40.0 million revolving working capital credit facility (the “Celgar Working Capital Facility”). The Second Amended Credit Agreement amended and restated the Amended and Restated Credit Agreement, dated November 27, 2009, by and among our Celgar mill, the lenders party thereto and CIT Business Credit Canada Inc., as agent.

The Second Amended Credit Agreement extends the maturity of the Celgar Working Capital Facility to May 2, 2016. The Celgar Working Capital Facility is available by way of: (i) Canadian and U.S. denominated advances which bear interest at a designated prime rate plus 0.25% for Canadian advances and at a designated base rate plus 0.25% per annum for U.S. advances; (ii) banker’s acceptance equivalent loans which will be subject to a discount rate and an acceptance fee calculated on the face amount of such loans at a rate equal to the applicable Canadian dollar bankers’ acceptance rate plus 1.75% per annum; and/or (iii) LIBOR advances which bear interest at the applicable LIBOR plus 1.75% per annum. The Celgar Working Capital Facility also incorporates a C$3.0 million letter of credit sub-line. Celgar is also required to pay a 0.35% per annum standby fee monthly in arrears on any unutilized portion of the revolving facility. Availability of drawdowns under the facility is subject to a borrowing base limit that is based upon the Celgar mill’s eligible accounts receivable and inventory levels from time to time. The Celgar Working Capital Facility is secured by, among other things, a first fixed charge on the current assets of Celgar.

FORM 10-Q

QUARTERLY REPORT - PAGE 35

As at June 30, 2013, C$17.6 million of funds were available under the Celgar Working Capital Facility.

Rosenthal Revolving Credit Facility

In the second quarter of 2013, our Rosenthal mill amended its revolving credit facility to increase it from €3.5 million to €5.0 million. The revolving credit facility for the Rosenthal mill bears interest at the rate of Euribor plus 3.5% and it matures in December 2015. As at June 30, 2013, approximately €1.0 million of this facility was supporting bank guarantees leaving approximately €4.0 million available.

In addition, our Rosenthal mill has a €25.0 million working capital facility that matures in October 2016.

Cash Flow Analysis

Cash Flows from Operating Activities. We operate in a cyclical industry and our operating cash flows vary accordingly. Our principal operating cash expenditures are for labor, fiber and chemicals.

Working capital levels fluctuate throughout the year and are affected by maintenance downtime, changing sales patterns, seasonality and the timing of receivables and the payment of payables and expenses.

Cash provided by operating activities decreased to €40.3 million in the six months ended June 30, 2013 from €53.3 million in the comparative period of 2012, primarily due to weaker operating performance. An increase in accounts payable and accrued expenses provided cash of €9.0 million, compared to €3.5 million in the same period of 2012. A decrease in inventories provided cash of €7.9 million in the six months ended June 30, 2013, compared to €3.4 million in the same period of 2012. A decrease in receivables provided cash of €12.0 million in the six months ended June 30, 2013, compared to €15.0 million in the same period of 2012.

Cash Flows from Investing Activities. Investing activities in the six months ended June 30, 2013 used cash of €22.4 million, compared to using cash of €16.0 million in the same period of 2012. Capital expenditures in the six months ended June 30, 2013 used cash of €22.4 million, compared to €18.3 million in the same period of 2012. Capital expenditures related to Project Blue Mill used cash of €17.1 million in the first half of 2013.

Cash Flows from Financing Activities. In the six months ended June 30, 2013, financing activities provided cash of €12.5 million, compared to using cash of €12.1 million in the same period of 2012. In the first half of 2013, principal repayments under the Stendal Loan Facility used cash of €20.0 million, compared to €9.6 million in the same period of 2012. During the first half of 2013, borrowing under the loan facility for Project Blue Mill provided cash of €17.0 million. Net borrowing from our revolving credit facilities provided cash of €13.0 million in the first half of 2013, compared to €nil in the same period of 2012. In the six months ended June 30, 2013 and 2012, proceeds of government grants provided cash of €4.1 million and €2.3 million, respectively.

FORM 10-Q

QUARTERLY REPORT - PAGE 36

Capital Commitments and Future Liquidity

Project Blue Mill is designed to increase our Stendal mill’s annual energy production by 109,000 MWh and annual pulp production by 30,000 ADMTs. The project remains on schedule and budget and is currently expected to start to generate power sales in or about the end of September 2013. As at June 30, 2013, we had approximately €6.8 million of capital commitments related to our €40.0 million Project Blue Mill at the Stendal mill and had €6.1 million in a separate investment account to manage Project Blue Mill’s costs and funding. Project Blue Mill has also received an investment decree, determining that it qualifies for up to €12.0 million in governmental grants, comprised of €9.2 million of investment incentives and €2.8 million of tax grants. The actual receipt of such grants is subject to the Stendal mill satisfying all governmental rules including verification. The investment decree is a condition of our accessing the Project Blue Mill loan facility. As at June 30, 2013, the Stendal mill, based on expenditures to date, had applied for and received €4.1 million in grants.

Based upon the current level of operations and our current expectations for future periods in light of the current economic environment, and in particular, current and expected pulp pricing and foreign exchange rates, we believe that cash flow from operations and available cash, together with available borrowings will be adequate to meet our liquidity needs in the next 12 months.

Other than commitments relating to Project Blue Mill, we currently have no material commitments to acquire assets or operating businesses. We anticipate that there may be acquisitions or commitments to capital projects in the future. To achieve the long-term goals of expanding our assets and earnings, additional capital resources may be required. Depending on the size of a transaction or project, the capital resources that will be required can be substantial. The necessary resources will be generated from cash flow from operations, cash on hand, borrowing against our assets or the issuance of securities.

Contractual Obligations and Commitments

Other than with respect to the Second Amended Credit Agreement, there were no material changes outside the ordinary course to any of our material contractual obligations during the first half of 2013.

In July 2013, we renewed the collective agreement for our Rosenthal mill for an additional two year period until May 2015. The agreement provides for, among other things, an initial 1.8% wage increase for employees thereunder, with a subsequent 3% wage increase in May 2014.

Foreign Currency

Our reporting currency is the Euro as the majority of our business transactions are denominated in Euros. However, we hold certain assets and liabilities in U.S. dollars and Canadian dollars. Further, the majority of our sales are in products quoted in U.S. dollars, whereas most of our operating costs and expenses are incurred in Euros and, to a lesser extent, Canadian dollars. Accordingly, our consolidated financial results are subject to foreign currency exchange rate fluctuations.

We translate foreign denominated assets and liabilities into Euros at the rate of exchange on the balance sheet date. Equity accounts are translated using historical exchange rates. Unrealized gains or losses from these translations are recorded in our Consolidated Statement of Comprehensive Income (Loss) and impact shareholders’ equity on the Consolidated Balance Sheet but do not affect our net income.

In the six months ended June 30, 2013, accumulated other comprehensive income decreased by €10.6 million to €14.6 million, primarily due to the foreign currency translation adjustment.

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QUARTERLY REPORT - PAGE 37

Based upon the exchange rate at June 30, 2013, the U.S. dollar has weakened by approximately 3% in value against the Euro since June 30, 2012. See “Quantitative and Qualitative Disclosures about Market Risk”.

Results of Operations of the Restricted Group under our Senior Note Indenture

General

The indenture governing our Senior Notes requires that we also provide a discussion in annual and quarterly reports we file with the SEC under Management’s Discussion and Analysis of Financial Condition and Results of Operations of the results of operations and financial condition of Mercer Inc. and our restricted subsidiaries under the indenture, referred to as the “Restricted Group”. The Restricted Group is comprised of Mercer Inc., our Rosenthal and Celgar mills and certain holding subsidiaries. The Restricted Group excludes our Stendal mill.

The following is a discussion of the results of operations and financial condition of the Restricted Group. For further information regarding the Restricted Group including, without limitation, a reconciliation to our consolidated results of operations, see Note 12 of our Interim Consolidated Financial Statements included herein.

Summary Financial Highlights for the Restricted Group


	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)						(in thousands)
Pulp revenues	€	105,541		€	103,745		€	205,781		€	213,634
Energy and chemical revenues		6,040			6,460			13,130			14,451
Operating income (loss)		(5,879	)		2,230			(1,979	)		7,613
Gain (loss) on derivative instruments		(422	)		1,619			(767	)		1,619
Income tax provision		(611	)		(1,398	)		(1,627	)		(2,113	)
Net loss		(11,172	)		(2,568	)		(12,964	)		(2,885	)

FORM 10-Q

QUARTERLY REPORT - PAGE 38

Selected Production, Sales and Other Data for the Restricted Group


	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Restricted Group
Pulp production (‘000 ADMTs)		192.1		194.1		397.7		412.7
Scheduled production downtime (‘000 ADMTs)		16.0		22.6		16.0		22.6
Scheduled production downtime (days)		11		23		11		23
Pulp sales (‘000 ADMTs)		202.4		196.5		401.8		410.0
Average NBSK pulp list prices in Europe ($/ADMT)⁽¹⁾		857		837		844		837
Average NBSK pulp list prices in Europe (€/ADMT)		656		652		643		645
Average pulp sales realizations (€/ADMT)⁽²⁾		521		528		512		520
Energy production (‘000 MWh)		216.3		222.2		446.6		462.4
Energy sales (‘000 MWh)		78.8		85.3		158.7		174.1
Average energy sales realizations (€/MWh)		77		76		83		83
Average Spot Currency Exchange Rates
€ / $⁽³⁾		0.7655		0.7795		0.7619		0.7710
C$ / $⁽³⁾		1.0230		1.0102		1.0160		1.0056
C$ / €⁽⁴⁾		1.3374		1.2959		1.3346		1.3044

(1)	Source: RISI pricing report.

(2)	Sales realizations after discounts. Incorporates the effect of pulp price variations occurring between the order and shipment dates.

(3)	Average Federal Reserve Bank of New York noon spot rate over the reporting period.

(4)	Average Bank of Canada noon spot rate over the reporting period.

Restricted Group Results — Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Total revenues for the Restricted Group increased by approximately 1% to €111.6 million in the second quarter of 2013, compared to €110.2 million in the second quarter of 2012, primarily due to higher pulp revenues.

Pulp revenues for the Restricted Group for the three months ended June 30, 2013 increased to €105.5 million from €103.7 million in the comparative period of 2012, primarily due to higher pulp sales volumes, partially offset by a weaker U.S. dollar relative to the Euro. The U.S. dollar was approximately 2% weaker versus the Euro in the second quarter of 2013, compared to the second quarter of 2012.

Energy revenues decreased by approximately 8% in the current quarter to €6.0 million from €6.5 million in the same period last year, primarily as a result of lower pulp production at our Celgar mill.

Average list prices for NBSK pulp in Europe were approximately $857 (€656) per ADMT in the current quarter, compared to $837 (€652) per ADMT in the same quarter last year. In the second quarter of 2013, average pulp sales realizations for the Restricted Group decreased by approximately 1% to €521 per ADMT from €528 per ADMT in the same period last year, primarily due to a weaker U.S. dollar relative to the Euro, partially offset by higher pulp prices.

Pulp production for the Restricted Group decreased by approximately 1% to 192,142 ADMTs in the second quarter of 2013 from 194,093 ADMTs in the same period of 2012, primarily due to decreased pulp production at our Celgar mill. We had 15 days of maintenance downtime at our Celgar mill in the first half of 2013, which, together with a slower startup, resulted in a loss of approximately 30,300 ADMTs of NBSK pulp production. See “Results of Operations” for further information regarding the Celgar mill shutdown.

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QUARTERLY REPORT - PAGE 39

Pulp sales volumes of the Restricted Group increased by approximately 3% to 202,446 ADMTs in the second quarter of 2013 from 196,520 ADMTs in the comparative period of 2012, primarily due to higher sales to Europe and China.

Costs and expenses for the Restricted Group in the second quarter of 2013 increased by approximately 9% to €117.5 million from €108.0 million in the comparative period of 2012, primarily due to higher sales volumes, fiber costs and costs associated with the Celgar mill maintenance shutdown.

In the second quarter of 2013, operating depreciation and amortization for the Restricted Group was €8.3 million, compared to €7.8 million in the same quarter last year. Selling, general and administrative expenses for the Restricted Group were €5.6 million, compared to €5.4 million in the same period of 2012.

Transportation costs for the Restricted Group decreased to €12.3 million in the second quarter of 2013 from €12.8 million in the same quarter last year.

Overall, per unit fiber costs of the Restricted Group in the second quarter of 2013 increased by approximately 5%, compared to the same period in 2012. During the second quarter of 2013, fiber costs at our Rosenthal mill were higher than the comparative period in 2012. Increased demand from the European pellet and board producers and sawmills and an under supply of sawlogs kept fiber prices at relatively high levels in the current quarter. Fiber costs at our Celgar mill decreased as a result of increased sawmill activity in the region. Going forward this year, we currently expect fiber costs at our Rosenthal mill to marginally increase and then stabilize, whereas we expect fiber costs at our Celgar mill to decrease moderately.

In the second quarter of 2013, the Restricted Group reported an operating loss of €5.9 million, compared to operating income of €2.2 million in the second quarter of 2012, primarily due to the combined effect of the Celgar mill’s maintenance shutdown, higher fiber costs and a weaker U.S. dollar relative to the Euro.

Interest expense for the Restricted Group remained stable at €5.9 million in the second quarter of 2013 and 2012, respectively.

In the second quarter of 2013, the Restricted Group also recorded a loss on derivative instruments of approximately €0.4 million related to two fixed price pulp swap contracts entered into in the fourth quarter of 2012, compared to a derivative gain of €1.6 million in the same quarter of last year.

During the second quarter of 2013, the Restricted Group recorded €0.6 million of income tax expense, compared to income tax expense of €1.4 million in the same period last year.

The Restricted Group reported a net loss for the second quarter of 2013 of €11.2 million, compared to a net loss of €2.6 million in the same period last year, primarily due to the negative impact of the Celgar mill shutdown, higher fiber costs and the weaker U.S. dollar relative to the Euro.

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QUARTERLY REPORT - PAGE 40

In the second quarter of 2013, the Restricted Group reported Operating EBITDA of €2.4 million, compared to Operating EBITDA of €10.1 million in the same quarter of 2012. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our consolidated results for the three months ended June 30, 2013 for additional information relating to such limitations of Operating EBITDA.

The following table provides a reconciliation of net loss to operating income (loss) and Operating EBITDA for the Restricted Group for the periods indicated:


	Three Months Ended June 30,
	2013			2012
	(in thousands)
Restricted Group⁽¹⁾
Net loss	€	(11,172	)	€	(2,568	)
Income tax provision (benefit)		611			1,398
Interest expense		5,880			5,934
Loss (gain) on derivative instruments		422			(1,619	)
Other expense (income)		(1,620	)		(915	)

Operating income (loss)		(5,879	)		2,230
Add: Depreciation and amortization		8,324			7,870

Operating EBITDA	€	2,445		€	10,100

(1)	See Note 12 of the interim consolidated financial statements included elsewhere herein for a reconciliation to our consolidated results.

Restricted Group Results — Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Total revenues for the Restricted Group decreased by approximately 4% to €218.9 million in the first half of 2013, compared to €228.1 million in the first half of 2012, primarily due to lower pulp and energy revenues at our Celgar mill.

Pulp revenues for the Restricted Group for the six months ended June 30, 2013 decreased to €205.8 million from €213.6 million in the comparative period of 2012, primarily due to lower pulp sales volumes and a weaker U.S. dollar relative to the Euro. The U.S. dollar was approximately 1% weaker versus the Euro in the first half of 2013, compared to the same period of 2012.

Energy revenues decreased by approximately 10% in the first half of 2013 to €13.1 million from €14.5 million in the same period last year, primarily as a result of lower pulp production at our Celgar mill.

Average list prices for NBSK pulp in Europe were approximately $844 (€643) per ADMT in the first half of 2013, compared to $837 (€645) per ADMT in the same period last year. In the first half of 2013, average pulp sales realizations for the Restricted Group decreased by approximately 2% to €512 per ADMT from €520 per ADMT in the same period last year due to the impact of a weaker U.S. dollar compared to the Euro.

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QUARTERLY REPORT - PAGE 41

Pulp production for the Restricted Group decreased by approximately 4% to 397,692 ADMTs in the first half of 2013 from 412,713 ADMTs in the same period of 2012, primarily due to decreased pulp production at our Celgar mill. We had 15 days of maintenance downtime at our Celgar mill in the first half of 2013, which, together with a slower startup, resulted in a loss of approximately 30,300 ADMTs of NBSK pulp production.

Pulp sales volumes of the Restricted Group decreased by approximately 2% to 401,771 ADMTs in the first half of 2013 from 409,992 ADMTs in the comparative period of 2012, primarily due to lower sales to the United States.

Costs and expenses for the Restricted Group in the first half of 2013 marginally increased to €220.9 million from €220.5 million in the comparative period of 2012.

In the first half of 2013, operating depreciation and amortization for the Restricted Group was €16.4 million, compared to €15.4 million in the same period last year. Selling, general and administrative expenses for the Restricted Group were €11.4 million, compared to €11.9 million in the same period of 2012.

Transportation costs for the Restricted Group decreased to €23.9 million in the first half of 2013 from €25.6 million in the same period last year primarily due to lower pulp sales volumes.

Overall, per unit fiber costs of the Restricted Group in the first half of 2013 were flat, compared to the same period in 2012. During the first half of 2013, fiber costs at our Rosenthal mill were higher than the comparative period in 2012. Increased demand from the European pellet and board producers and sawmills, reduced wood supply because of extreme winter weather conditions and lower availability of trucking transportation kept fiber prices at relatively high levels in the current period. Fiber costs at our Celgar mill decreased as a result of increased sawmill activity in the region. Going forward this year, we currently expect fiber costs at our Rosenthal mill to marginally increase before stabilizing, whereas we expect fiber costs at our Celgar mill to continue to decrease moderately.

In the first half of 2013, the Restricted Group reported an operating loss of €2.0 million, compared to operating income of €7.6 million in the first half of 2012, primarily due to the combined effect of the Celgar mill’s maintenance shutdown, lower pulp sales volumes and the weaker U.S. dollar relative to the Euro.

Interest expense for the Restricted Group remained stable at €11.7 million in the first half of 2013 and 2012, respectively.

In the first half of 2013, the Restricted Group also recorded a loss on derivative instruments of approximately €0.8 million related to two fixed price pulp swap contracts entered into in the fourth quarter of 2012, compared to a derivative gain of €1.6 million in the same period of last year.

During the first half of 2013, the Restricted Group recorded €1.6 million of income tax expense, compared to €2.1 million in the same period last year.

The Restricted Group reported a net loss for the first half of 2013 of €13.0 million, compared to a net loss of €2.9 million in the same period last year.

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QUARTERLY REPORT - PAGE 42

In the first half of 2013, the Restricted Group reported Operating EBITDA of €14.6 million, compared to Operating EBITDA of €23.2 million in the comparative period of 2012. Operating EBITDA is defined as operating income (loss) plus depreciation and amortization and non-recurring capital asset impairment charges. Operating EBITDA has significant limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. See the discussion of our consolidated results for the three months ended June 30, 2013 for additional information relating to such limitations of Operating EBITDA.

The following table provides a reconciliation of net loss to operating income (loss) and Operating EBITDA for the Restricted Group for the periods indicated:


	Six Months Ended June 30,
	2013			2012
	(in thousands)
Restricted Group⁽¹⁾
Net loss	€	(12,964	)	€	(2,885	)
Income tax provision (benefit)		1,627			2,113
Interest expense		11,746			11,744
Loss (gain) on derivative instruments		767			(1,619	)
Other expense (income)		(3,155	)		(1,740	)

Operating income (loss)		(1,979	)		7,613
Add: Depreciation and amortization		16,578			15,573

Operating EBITDA	€	14,599		€	23,186

(1)	See Note 12 of the interim consolidated financial statements included elsewhere herein for a reconciliation to our consolidated results.

Liquidity and Capital Resources of the Restricted Group

The following table is a summary of selected financial information for the Restricted Group at the dates indicated:


	As at June 30,		As at December 31,
	2013		2012
	(in thousands)
Restricted Group Financial Position⁽¹⁾
Cash and cash equivalents	€	69,467	€	36,714
Working capital		142,029		132,130
Total assets		643,324		644,119
Long-term liabilities		279,788		260,185
Total equity		312,164		335,353

(1)	See Note 12 of the interim consolidated financial statements included elsewhere herein for a reconciliation to our consolidated results.

At June 30, 2013, cash and cash equivalents for the Restricted Group increased to €69.5 million from €36.7 million at the end of 2012.

On July 22, 2013, we completed our registered public offering of $50.0 million aggregate principal amount of additional Senior Notes at an issue price of 104.5% plus accrued interest from June 1, 2013. We used the proceeds to repay the revolving credit facilities of our Rosenthal and Celgar mills and for general corporate purposes.

We currently expect the Restricted Group to meet its interest and debt service obligations and meet the working and maintenance capital requirements for its operations for the next 12 months with cash flow from operations, cash on hand and available borrowings.

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Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect both the amount and the timing of the recording of assets, liabilities, revenues, and expenses in the consolidated financial statements and accompanying note disclosures. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. As the number of variables and assumptions affecting the probable future resolution of the uncertainties increase, these judgments become even more subjective and complex.

Our significant accounting policies are disclosed in Note 1 to our annual report on Form 10-K for the fiscal year ended December 31, 2012. While all of the significant accounting policies are important to the consolidated financial statements, some of these policies may be viewed as having a high degree of judgment. On an ongoing basis, using currently available information, management reviews its estimates, including those related to the accounting for, among other things doubtful accounts and reserves, depreciation and amortization, future cash flows associated with impairment testing for long-lived assets, derivative financial instruments, environmental conservation and legal liabilities, asset retirement obligations, pensions and post-retirement benefit obligations, income taxes, contingencies, and inventory obsolescence and provisions. Actual results could differ materially from these estimates, and changes in these estimates are recorded when known.

We have identified certain accounting policies that are the most important to the portrayal of our current financial condition and results of operations.

For information about both our significant and critical accounting policies, see our annual report on Form 10-K for the fiscal year ended December 31, 2012.

Cautionary Statement Regarding Forward-Looking Information

The statements in this report that are not reported financial results or other historical information are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.

Generally, forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, or words of similar meaning, or future or conditional verbs, such as “will”, “should”, “could”, or “may”, although not all forward-looking statements contain these identifying words. Forward-looking statements are based on expectations, forecasts and assumptions by our management and involve a number of risks, uncertainties and other factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. These factors include, but are not limited to, the following:

•

the highly cyclical nature of our business;

•

our level of indebtedness could negatively impact our financial condition and results of operations;

•

any noncompliance with the financial ratios in our credit facilities and the outcome of negotiations with lenders in respect thereof;

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•

we may not be able to obtain a waiver of the Ratios or a satisfactory amendment to the Stendal Facilities;

•

a weakening of the global economy could adversely affect our business and financial results and have a material adverse effect on our liquidity and capital resources;

•

cyclical fluctuations in the price and supply of our raw materials could adversely affect our business;

•

we operate in highly competitive markets;

•

we are exposed to currency exchange rate and interest rate fluctuations;

•

we use derivatives to manage certain risks which has caused significant fluctuations in our operating results;

•

we are subject to extensive environmental regulation and we could have environmental liabilities at our facilities;

•

our business is subject to risks associated with climate change and social government responses thereto;

•

our operations require substantial capital and we may be unable to maintain adequate capital resources to provide for such requirements;

•

future acquisitions may result in additional risks and uncertainties in our business;

•

changes in credit ratings issued by nationally recognized statistical rating organizations could adversely affect our cost of financing and have an adverse effect on the market price of our securities;

•

Project Blue Mill might not generate the results we expect;

•

the actual timing, costs and benefits of the Celgar workforce reduction may differ from those currently expected;

•

we are subject to risks related to our employees;

•

we rely on German federal and state government grants and guarantees and participate in European statutory programs;

•

we are dependent on key personnel;

•

we may experience material disruptions to our production (including as a result of, among other things, planned and unplanned maintenance shutdowns);

•

if our long-lived assets become impaired, we may be required to record non-cash impairment that could have a material impact on our results of operations;

•

we may incur losses as a result of unforeseen or catastrophic events, including the emergence of a pandemic, terrorist attacks or natural disasters;

•

our insurance coverage may not be adequate;

•

we rely on third parties for transportation services; and

•

the price of our common stock may be volatile.

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Given these uncertainties, you should not place undue reliance on our forward-looking statements. The forgoing review of important factors is not exhaustive or necessarily in order of importance and should be read in conjunction with the risks and assumptions including those set forth in reports and other documents we have filed with or furnished to the SEC, including in our annual report on Form 10-K for the fiscal year ended December 31, 2012. We advise you that these cautionary remarks expressly qualify in their entirety all forward-looking statements attributable to us or persons acting on our behalf. Unless required by law, we do not assume any obligation to update forward-looking statements based on unanticipated events or changed expectations. However, you should carefully review the reports and other documents we file from time to time with the SEC.

Cyclical Nature of Business

Revenues

The pulp business is highly cyclical in nature and markets are characterized by periods of supply and demand imbalance, which in turn affects prices. Pulp markets are highly competitive and are sensitive to cyclical changes in the global economy, industry capacity and foreign exchange rates, all of which can have a significant influence on selling prices and our operating results. The length and magnitude of industry cycles have varied over time but generally reflect changes in macro-economic conditions and levels of industry capacity. Pulp is a commodity that is generally available from other producers. Because commodity products have few distinguishing qualities from producer to producer, competition is generally based upon price, which is generally determined by supply relative to demand.

Industry capacity can fluctuate as changing industry conditions can influence producers to idle production capacity or permanently close mills. In addition, to avoid substantial cash costs in idling or closing a mill, some producers will choose to operate at a loss, sometimes even a cash loss, which can prolong weak pricing environments due to oversupply. Oversupply of our products can also result from producers introducing new capacity in response to favorable pricing trends.

Demand for pulp has historically been determined primarily by general global macro-economic conditions and has been closely tied to overall business activity. From 2006 to mid-2008, pulp prices steadily improved. However, the global economic crisis in the latter half of 2008 resulted in a sharp decline of pulp prices from a high of $900 per ADMT to $635 per ADMT at the end of 2008. Pulp prices began to increase in the second half of 2009 and continued to increase to record levels through June of 2010, before declining slightly in the fourth quarter of 2010. Pulp prices again rebounded to record levels in the first half of 2011 but declined sharply in the latter part of the year, primarily due to economic uncertainty in Europe and credit tightening in China. Economic uncertainty in Europe and China, respectively, impacted both demand and prices. In 2012, list prices were on average approximately 15% lower than 2011. Pulp prices marginally increased during the first half of 2013, and as at June 30, 2013, list prices for NBSK pulp were approximately $860 per ADMT in Europe, $950 per ADMT in North America and $690 per ADMT in China.

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Accordingly, prices for pulp are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Because market conditions beyond our control determine the price for pulp, prices may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our mills. Therefore, our profitability depends on managing our cost structure, particularly raw materials which represent a significant component of our operating costs and can fluctuate based upon factors beyond our control. If the prices of our products decline, or if prices for our raw materials increase, or both, our results of operations could be materially adversely affected.

Costs

Our production costs are influenced by the availability and cost of raw materials, energy and labor, and our plant efficiencies and productivity. Our main raw material is fiber in the form of wood chips and pulp logs. Wood chip and pulp log costs are primarily affected by the supply of, and demand for, lumber and pulp, which are both cyclical. Higher fiber costs could affect producer profit margins if they are unable to pass along price increases to pulp customers or purchasers of surplus energy. The state of lumber markets affects both the amount of sawmill residuals, such as chips, produced as a by-product of lumber and the level of timber harvesting, which provides us with pulp logs. Production costs also depend on the total volume of production. Lower operating rates during periods of cyclically low demand result in higher average production costs and lower margins.

Currency

The majority of our sales are in products quoted in U.S. dollars while most of our operating costs and expenses, other than those of the Celgar mill, are incurred in Euros. In addition, all of the products sold by the Celgar mill are quoted in U.S. dollars and the Celgar mill costs are primarily incurred in Canadian dollars. Our results of operations and financial condition are reported in Euros. As a result, our revenues are adversely affected by a decrease in the value of the U.S. dollar relative to the Euro and to the Canadian dollar. Such shifts in currencies relative to the Euro and the Canadian dollar reduce our operating margins and the cash flow available to fund our operations and to service our debt. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risks from changes in interest rates and foreign currency exchange rates, particularly the exchange rates between the Euro and the U.S. dollar and the Canadian dollar versus the U.S. dollar and the Euro. Changes in these rates may affect our results of operations and financial condition and, consequently, our fair value. We seek to manage these risks through internal risk management policies as well as the use of derivatives. We use derivatives to reduce or limit our exposure to interest rate and currency risks. We also use derivatives to reduce or limit our exposure to fluctuations in pulp prices. We use derivatives to reduce our potential losses or to augment our potential gains, depending on our management’s perception of future economic events and developments. These types of derivatives are generally highly speculative in nature. They are also very volatile as they are highly leveraged given that margin requirements are relatively low in proportion to notional amounts.

Many of our strategies, including the use of derivatives, and the types of derivatives selected by us, are based on historical trading patterns and correlations and our management’s expectations of future events. However, these strategies may not be effective in all market environments or against all types of risks. Unexpected market developments may affect our risk management strategies during this time, and unanticipated developments could impact our risk management strategies in the future. If any of the variety of instruments and strategies we utilize is not effective, we may incur significant losses.

All of our derivatives are marked to market at the end of each reporting period, and all unrealized gains and losses are recognized in earnings for a reporting period. We determine market valuations based primarily upon observable inputs including applicable yield curves.

During the six months ended June 30, 2013, we recorded an unrealized gain of approximately €10.9 million on our outstanding interest rate derivative, compared to €0.6 million in the same period of 2012.

In May 2012, we entered into a fixed price pulp swap contract with a bank. Under the contract, 5,000 metric tonnes, referred to as “MTs”, of pulp per month is fixed at a price of $915 per MT for each month between May and December 2012. The contract expired in December 2012.

In November 2012, we entered into two fixed price pulp swap contracts with a bank. Under the terms of these contracts, 3,000 MTs of pulp per month is fixed at prices which range from $880 to $890 per MT. These contracts expire in December 2013.

We recorded a loss of approximately €0.8 million related to these swap contracts in the six months ended June 30, 2013 and a gain of €1.6 million in the six months ended June 30, 2012.

We are also subject to some energy price risk, primarily for the natural gas and the electricity that our operations purchase.

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ITEM 4.

CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, referred to as the “Exchange Act”), as of the end of the period covered by this report. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

It should be noted that any system of controls is based in part upon certain assumptions designed to obtain reasonable (and not absolute) assurance as to its effectiveness, and there can be no assurance that any design will succeed in achieving its stated goals.

Changes in Internal Controls

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

We are subject to routine litigation incidental to our business, including those described in our latest annual report on Form 10-K for the fiscal year ended December 31, 2012. We do not believe that the outcome of such litigation will have a material adverse effect on our business or financial condition.

ITEM 1A.

RISK FACTORS

As of June 30, 2013, there have been no material changes to the factors disclosed in Item 1A. Risk Factors in our latest annual report on Form 10-K for the fiscal year ended December 31, 2012 except with respect to the risk factors set forth below.

The agreements governing our indebtedness contain significant restrictions that limit our operating and financial flexibility.

The indenture governing our Senior Notes and our credit facilities contain covenants that, among other things, limit our ability to:

•

incur additional indebtedness and issue preferred stock;

•

pay dividends and make distributions;

•

repurchase stock or repay subordinated indebtedness;

•

make certain investments;

•

transfer, sell or make certain dispositions of assets or engage in sale and leaseback transactions;

•

incur liens;

•

enter into transactions with affiliates;

•

create dividend or other payment restrictions affecting restricted subsidiaries; and

•

merge, consolidate, amalgamate or sell all or substantially all of our assets to another person.

In addition, our credit facilities require us to maintain specified financial ratios, and we may be unable to meet such ratios. All of these restrictions may limit our ability to execute our business strategy. Moreover, if operating results fall below current levels, we may be unable to comply with these covenants. If that occurs, our lenders could accelerate our indebtedness, in which case we may not be able to repay all of our indebtedness.

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The actual timing, costs and benefits of the Celgar mill workforce reduction may differ from those currently expected.

On July 9, 2013, we announced that our Celgar mill intends to undertake a workforce reduction designed to, among other things, reduce the mill’s fixed costs and improve its competitiveness. The Celgar workforce reduction initiative is subject to various risks, which could result in the actual timing, costs and benefits of the initiative differing from those currently anticipated. These risks and uncertainties include, among others that: we may not be able to implement the planned reduction in the timeframe currently planned; our costs related to such reduction may be higher than currently estimated; and unanticipated disruptions to the Celgar mill’s operations may result in additional costs being incurred, anticipated benefits not being realized and may adversely impact the mill’s operations.

ITEM 2.

UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

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ITEM 6.

EXHIBITS


Exhibit No.		Description

10.1		Second Amended and Restated Credit Agreement, dated as of May 2, 2013, by and among Zellstoff Celgar Limited partnership, as Borrower, the Lenders from time to time parties thereto, as Lenders, and Canadian Imperial Bank of Commerce, as agent (included as Exhibit 10.1 of the Current Report on Form 8-K filed May 8, 2013 and incorporated by reference herein)

31.1		Section 302 Certification of Chief Executive Officer

31.2		Section 302 Certification of Chief Financial Officer

32.1*		Section 906 Certification of Chief Executive Officer

32.2*		Section 906 Certification of Chief Financial Officer

101		The following financial statements from the Company’s Form 10-Q for the fiscal quarter ended June 30, 2013, formatted in XBRL: (i) Interim Consolidated Balance Sheets; (ii) Interim Consolidated Statements of Operations; (iii) Interim Consolidated Statements of Retained Earnings; (iv) Interim Consolidated Statements of Comprehensive Income; (v) Interim Consolidated Statements of Cash Flows; and (vi) Notes to Interim Consolidated Financial Statements.

In accordance with Release 33-8212 of the Commission, these Certifications: (i) are “furnished” to the Commission and are not “filed” for the purposes of liability under the Securities Exchange Act of 1934, as amended; and (ii) are not to be subject to automatic incorporation by reference into any of the Company’s registration statements filed under the Securities Act of 1933, as amended, for the purposes of liability thereunder or any offering memorandum, unless the Company specifically incorporates them by reference therein.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


MERCER INTERNATIONAL INC.

By:		/s/ David M. Gandossi
		David M. Gandossi
		Secretary and Chief Financial Officer

Date: August 2, 2013

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