Fiscal year 2007 was very challenging for Birch Mountain. The overall
financial results and ongoing losses incurred throughout the year were
disappointing. As a result, we have made significant changes to our business
and we are dedicated and focused on improved performance in 2008.
Throughout the year, and particularly in the second half, the Company had
two major challenges - anticipated sales to customers did not materialize and
the cost structure was too high.
With respect to lack of sales, the root causes are directly tied to both
internal and external factors. Externally, the Company identified four areas
that negatively impacted our business in 2007: (i) oil sand project cost
over-runs, (ii) labour shortages and disruptions in the oil sands industry -
especially on the construction side, (iii) the Alberta Royalty Review process
and, (iv) developers using gravel deposits found in the overburden on their
existing oil sand leases.
Internally, Birch Mountain identified four areas that did not allow us to
take full advantage of the opportunities in the market: (i) exposure - our
name and brand were not well known, (ii) lack of long-term relationships with
key clients, (iii) underestimation of the competition and their established
relationships and of the customer's willingness to change from traditional
gravel aggregates to limestone aggregates and (iv) a lack of understanding
from many customers regarding the quality advantages of limestone and
misperceptions in the market specifically with the quality of Birch Mountain
limestone.
The other major challenge during 2007 was that the Company's cost
structure was too high. In June, Birch Mountain had the best month ever in our
very short operations history. We proved the capability and operating
performance of the Muskeg Valley Quarry ('MVQ') with the operations at the
quarry working 24 hours per day, seven days per week, and shipping up to
20,000 tonnes per day. At that time, quarry operations including workforce and
equipment rentals were scaled to meet the June order requirement based on
enquiry levels and anticipated orders.
In the summer months, expected order levels began to fall-off. In response
to these changing market conditions, the Company initiated drastic measures
beginning mid-third quarter to address the cost side of the business. The
Company was restructured resulting in a reduction of more than 50% of the
workforce and equipment rentals. Discretionary spending was minimized and a
new quarry manager and operations manager were put in place to identify
additional cost-saving opportunities and implement changes.
Birch Mountain continued to maintain a very small core crew at the MVQ
during the slower cold weather months. This has allowed the Company to satisfy
small volumes of customer orders and continue developing new higher margin
products such as concrete rock and reagent limestone for in flue gas
desulphurization use.
To continue to satisfy customer order requirements, the existing core
quarry staff will be maintained throughout the spring of 2008 and will ramp up
production fully aligned with orders received. In order to better meet the
needs of the Company from the cost-containment side, Birch Mountain will not
respond to the peak demand by increasing staff and equipment; but will instead
use contracted equipment and workforce to provide the flexibility to
efficiently manage quarry operations.
LOOKING FORWARD
Based on the strategic lessons learned in 2007, the Company will put more
emphasis on becoming a customer-focused organization and be more flexible and
able to adjust its quarry production and costs in response to received orders.
To advance our focus on the customer, Birch Mountain has created new
Business Development and Sales and Marketing groups. These two groups are
working very closely together and are focused on these issues and meeting the
sales targets that were put in place as part of our 2008 Company objectives.
We have established sales targets by customer, sales performance monitoring
and a sales account management process, all of which are designed to move
towards a customer focused culture.
In 2008, the Company expects to successfully produce concrete rock to meet
specifications and then to market high margin concrete rock and reagent
limestone where market opportunities have been identified. The sale of limited
quantities of reagent limestone will continue, validating the market demand
and confirming the quality of Birch Mountain's limestone. Sales will also
target sub-base materials where the performance advantages, particularly in
wet conditions, are becoming known and appreciated by our customers.
Looking ahead, Birch Mountain is well positioned operationally and
believes that the steps we have taken to reduce G&A and quarry operations
costs will improve our financial performance.
The strategic review process announced in September is continuing. Short
term financing was completed in December. The focus has now shifted to
exploring strategic business alternatives that may provide incremental
shareholder value. The process is ongoing and additional details will be
communicated at the appropriate time.
Birch Mountain's priorities for 2008 are clear and simple; (i) to increase
sales and enhance customer relations, (ii) to contain costs and operate the
quarry efficiently, and (iii) to achieve regulatory approval for the
Hammerstone Project.
The price of oil is at unprecedented levels and Canada's estimated oil
reserves rank second only to Saudi Arabia. The Alberta oil sands industry will
continue to expand and prosper and attract global attention for the next
several decades. Major oil sands developers will continue to invest billions
of dollars into the Athabasca oil sands creating a long-term stable market for
our business. The quality of the product and the location of the quarry with
respect to the various oil sands projects are second to none, our aggregate
and environmental limestone products are well positioned to contribute to the
long term sustainability of the oil sands and the real value of the asset
remains as high as ever.
Birch Mountain kept the quarry open and operating during the first quarter
of the year to demonstrate that it could produce product during the winter
season. However, the market conditions Birch Mountain experienced in the fall
continued through the first quarter.
