Paper & Forest Products
March 2, 2016
Inside:
•
Company-Specific Exposure to
U.S.-Canada Lumber Trade p.3
•
History: Previous Softwood Lumber
Dispute Iterations p.7
•
Lumber Market Dynamics Over the
Recent History of Managed Trade
p.10
•
Recent Lumber Equity Performance
vs. Precedent Cycles p.11
•
Assessing Company Exposure to Potential Trade
Restrictions
Current Softwood Lumber Market
Conditions p.6
•
Canada-U.S. Softwood Lumber Trade
North American Wood Cost Trends
p.12
Interfor Well Positioned if U.S. Takes Hard Line
We expect an increase in media and investment community attention on the
U.S.-Canada softwood lumber trade file in the coming months. The previous
nine-year bilateral agreement expired on October 12, 2015. The countries are in the
middle of a subsequent one-year standstill period of free trade, during which the
U.S. cannot launch unilateral trade action on Canadian lumber imports. To the best
of our knowledge, there has been preliminary dialogue, but formal negotiations
toward a new bilateral agreement are not underway. Several Canadian producers
have met with trade representatives to discuss the topic before Prime Minister
Trudeau's official visit with President Obama on March 10. If there is no
negotiation progress by the early summer, we believe that the odds of the U.S.
pursuing duties or quotas on Canadian imports will increase. At that point, the
U.S. election cycle would likely push negotiations to the back burner.
The analysis in this bulletin provides historical context on previous iterations of
this long-running dispute and company-specific exposure to potential lumber trade
action from the U.S.
YOUR ATTENTION
IS DIRECTED TO
THE IMPORTANT
DISCLOSURES IN
APPENDIX A.
All figures in C$ unless otherwise
specified
•
Large-cap lumber-focused companies: Canfor has slightly higher earnings
leverage than West Fraser to the potential imposition of duties, taxes, or
quotas. The issue is material for both companies in the mid-term, but
mitigated by U.S. sawmill production bases and integrated pulp and paper
operations, which diversify risk.
•
Mid-to small-cap lumber-focused equities: Interfor has relatively low
earnings exposure to potential trade restrictions. This is primarily a function
of the company's capacity concentration in the U.S. South. Conifex has
relatively high earnings leverage to potential duties, taxes, or quotas.
•
Eastern Canadian lumber producers: These companies are sheltered as
lumber is a relatively small portion of these integrated producers' business
mix. Tembec has higher earnings leverage to the issue than Resolute Forest
Products.
•
We are not changing our earnings estimates, target prices, or
recommendations for lumber producers in our coverage universe. At this
stage, we are not attempting to handicap potential outcomes heading into the
standstill expiry (always difficult to determine given a lack of transparency in
negotiations). Our earnings estimates post-standstill period include a 5%
export tax on Canadian shipments to the U.S.
Sean Steuart, CFA
416 308 3399
Kasia Trzaski, CA, CFA (Assoc.)
416 983 4058
[email protected]
[email protected]
Exhibit 1. Target Price and Recommendation Summary for Lumber Producers
Share
Company
Market
12-Mth
Current
TR to
Dividend Target
Risk
Ticker
Price Cap ($mm) Target
Rec.
Rating
Canfor Corp.
CFP-T
$14.70
$1,952
$23.00
-
56%
BUY
HIGH
West Fraser Timber Co. Ltd.
WFT-T
$42.65
$3,563
$58.00
$0.28
37%
BUY
HIGH
Resolute Forest Products Inc. RFP-N,T $4.74
Tembec Inc.
Integrated
$424
$4.50
-
-5%
HOLD
HIGH
TMB-T
$0.88
$88
$1.00
-
14%
HOLD
SPEC
IFP-T
Lumber-Focused
Interfor Corp.
$11.34
$794
$14.50
-
28%
Western Forest Products Inc. WEF-T
$2.13
$849
$2.50
$0.08
21%
Conifex Timber Inc.
$2.32
$49
$1.75
-
CFF-T
AL BUY HIGH
BUY
HIGH
-25% REDUCE SPEC
Note: Resolute share price, market cap, and 12-month target are U.S. dollar-denominated.
Source: TD Securities Inc., Company reports, Thomson One
•
On a relative basis, recent share price declines for lumber-weighted equities
are more severe than during the relevant precedent cycle. The current period is
most analogous to April–October 2001. This was the time between SLA I expiry
and the U.S. enacting final countervailing duties (CVDs). Subsequent CVDs and
anti-dumping duties (ADDs) were imposed at varying rates until the most recent
bilateral agreement (now expired) was signed in October 2006. This cycle,
Canadian lumber equities have declined 30% over the past 10 weeks versus a
6% decline for the S&P/TSX Composite over that period. In 2001, the average
lumber-weighted share price decline over a five-month period following an initial
surge was 29% versus a 14% decline for the S&P/TSX Composite. It is difficult to
isolate specific factors contributing to sector share price swings, especially in
today's volatile markets, but we believe that the recent relative weak performance
in lumber-weighted equities has been partly driven by investor uncertainty around
the trade file.
TD Investment Conclusion
We reiterate our positive investment bias for most lumber-weighted equities in
our coverage universe. Rhetoric around the trade file could weigh on investor
sentiment in the coming months, and speculation around this issue has arguably
contributed to steep share price declines so far this year. But our mid- to long-term
forecasts for the sector are based on rising industry operating rates in tandem with an
ongoing, gradual U.S. housing recovery, and fibre availability restrictions, which will
limit the Canadian industry's ability to add supply. Lumber-weighted equities trade
at a robust average expected 2017 free cash flow yield of 11.4% and an average
EV/EBITDA multiple of 5.5x (versus the long-term average of 6.5x).
We reiterate our Action List BUY recommendation on Interfor and BUY
recommendations on Canfor, West Fraser, and Western Forest Products. Interfor and
Canfor remain our top picks in the lumber sector.
2
Company-Specific Exposure to the U.S.-Canada Lumber
Trade File
There are seven companies in our coverage universe with direct exposure to U.S.Canada lumber trade. These companies cover the spectrum from integrated forest
product producers with lumber, pulp and paper operations (West Fraser, Canfor,
Resolute Forest Products, and Tembec) to lumber-concentrated companies (Interfor,
Western Forest Products, and Conifex). We note that lumber producers also have
affiliated third-party log and by-product sales, which, for most companies, are
embedded in segmented lumber sales and earnings figures. Export taxes and duties are
only applied to lumber exports, not to any by-products or affiliated product lines.
Exhibit 2 shows each company's regional softwood lumber capacity mix and
overall revenue breakdown.
Exhibit 2. North American Lumber-weighted Equities Capacity and Revenue Breakdown
Company
Canfor Corp.
Conifex Inc. (2)
Interfor Ltd.
Resolute Forest Products Inc. (3)
Tembec Inc.
West Fraser Timber Co. Ltd.
Western Forest Products Inc.
Lumber Capacity (MMfbm)
Total
Canada
U.S.
Canada
U.S.
4,200
745
1,065
2,000
855
4,000
1,120
1,600
1,960
2,300
-
5,800
745
3,025
2,000
855
6,300
1,120
72%
100%
35%
100%
100%
63%
100%
28%
65%
37%
-
Total
100%
100%
100%
100%
100%
100%
100%
2015 Revenue Breakdown
Lumber (1)
Pulp
Paper
Other
70%
95%
99%
15%
26%
65%
100%
26%
24%
43%
20%
-
4%
61%
24%
2%
-
5%
1%
7%
13%
-
Total
100%
100%
100%
100%
100%
100%
100%
Notes: (1) Includes third party log and by-product sales.
(2) Conifex's lumber capacity excludes the El Dorado, Arkansas sawmill, which is currently idled.
(3) Resolute's lumber capacity is 2,800 MMfbm, but the current supply of fiber limits production to a maximum of 2,000 MMfbm per year.
Source: Company reports
Shipments to the U.S. comprised 50% of aggregate 2015 Canadian lumber
volume. Canadian companies are able to mitigate exposure to trade restrictions via
a few strategies: 1) investing in U.S. lumber operations (not exposed to trade
restrictions); 2) shifting Canadian lumber sales away from the U.S. (i.e., growing
domestic or offshore shipments); or 3) investing in non-Canadian lumber
businesses (typically pulp, paper, panels, and bioenergy).
Some important company-specific points with respect to business mix:
•
Many Canadian lumber
producers have established
U.S. operating platforms over
the past several years. This is a
natural hedge against U.S.
trade restrictions on Canadian
lumber imports.
Canadian companies have expanded aggressively into the U.S. over the
past decade. This trend has been motivated by several factors (e.g., proximity
to the primary demand base, access to a growing inventory of high-quality
timber, and a currency hedge), but mitigating risks against potential trade
restrictions also contributed to this shift. West Fraser, Canfor, Interfor, and
Conifex have all acquired U.S. sawmill assets in recent years (predominantly
in the South). For these companies, the U.S. represents anywhere from 28% of
total capacity at the low end (Canfor) to 65% at the high end (Interfor). Last
year, Conifex acquired an idled sawmill in Arkansas, but we have excluded the
asset from this analysis pending a financing plan to rebuild and restart the
asset.
3
•
Relative lumber exposure for Eastern Canadian producers is mitigated by
integrated operating platforms. Tembec's and Resolute's sawmill portfolios
are entirely based in Canada, but these companies have relatively low exposure
to the end market as pulp and paper operations are a much larger component of
their business mix. In fiscal 2015, lumber (including by-product sales)
comprised 15% and 26% of Resolute's and Tembec's respective sales.
Exhibit 3 shows three sets of sensitivities to gauge company-specific exposure
to lumber trade restrictions: 1) the estimated percentage of each company's
lumber shipment volume and aggregate sales exposed to potential duties; 2)
cumulative export taxes collected during SLA II (from 2006 to 2015); and 3)
estimated annual duties collected at notional levels should the U.S. impose a new
round of countervailing and anti-dumping duties (sensitivities at duties ranging
from 10% to 30%).
Exhibit 3. North American Lumber-weighted Equities Duty Exposure & Sensitivity
Company
Canfor Corp.
Conifex Inc. (1)
Interfor Ltd.
Resolute Forest Products Inc. (2)
Tembec Inc.
West Fraser Timber Co. Ltd.
Western Forest Products Inc.
% of Lumber
Volume
Subject to
Duties
% of Total
Sales Base
Subject to
Duties
36%
45%
15%
50%
50%
37%
30%
19%
40%
12%
6%
10%
18%
21%
Cumulative Export Taxes
Paid (2006-2015)
% of Total
Total ($mm)
EBITDA
$392
$12
$51
$83
$68
$406
$55
18%
71%
8%
3%
13%
14%
12%
$mm
$199
$15
$43
$43
$29
$227
$24
2017E CVD/ADD Collection at Varying Aggregate Rates
30%
20%
10%
% of
% of
% of
% of
% of
Sales EBITDA
$mm
Sales EBITDA
$mm
Sales
5%
4%
2%
1%
2%
5%
2%
35%
47%
19%
19%
21%
32%
16%
$132
$10
$28
$29
$19
$152
$16
3%
3%
2%
1%
1%
3%
1%
23%
32%
12%
13%
14%
21%
10%
$66
$5
$14
$14
$10
$76
$8
2%
1%
1%
<1%
1%
2%
1%
% of
EBITDA
12%
16%
6%
6%
7%
11%
5%
Notes: (1) Conifex export taxes collected reflect the 2009-2015 period. The company's shares began trading publicly on June 8, 2010.
(2) Resolute Forest Product figures are U.S. dollar-denominated
Source: Company reports, TD Securities Inc.
Some conclusions on exposure to potential duties:
4
•
Interfor has limited earnings leverage to potential duties. Because of its
proportionately large U.S. operating base, only 15% of the company's overall
lumber volume is exposed to potential trade restrictions (i.e., less than 45% of
the company's Canadian-based capacity). Even in the conservative scenario
that potential aggregate CVD/ADD rates are 30%, estimated duties collected
would be 2% of total sales and 19% of our current 2017 EBITDA estimate.
•
Among large-cap lumber producers, Canfor has slightly higher exposure
than West Fraser to potential Canadian lumber export restrictions. We
believe that there is a general misperception that Canfor's exposure to
protective U.S. trade action is materially higher than that of West Fraser; based
on our analysis this is not the case. West Fraser has a higher percentage of its
lumber capacity based in the U.S. than Canfor (37% versus 28%), but owing to
lumber-specific sales mix differences, relative exposure within each company's
sawmill segment is similar. We note that Canfor consolidates its 51.9% stake
in Canfor Pulp, and backs out the minority interest. Adjusting for minority
interest, Canfor's exposure to potential duties is slightly higher than West
Fraser's.
•
Western Forest Products has limited exposure due to the diversity of its
regional sales program and value-added mix. All of Western's sawmills are
located on the B.C. Coast (i.e., no natural hedge through U.S. capacity), but we
estimate that only 21% of sales are exposed to potential duties. This reflects
the company's diverse sales program, which is more focused on offshore
customers. The company also benefits from relatively inelastic demand for
some of its higher-value lumber grades. During previous instances of duties or
export taxes applied against exports to the U.S., Western has been able to pass
on the duties to U.S. customers (especially for Western Red Cedar).
•
The ranges shown for potential CVD/ADD collection rates are strictly
illustrative to show relative exposure. For context, during the 2001–2006
iteration of the lumber trade dispute, CVDs, and ADDs levied by the U.S.
peaked at 27%. The most recently expired Softwood Lumber Agreement (SLA
II) stipulated an export tax rate that maxed out at 15% for Western and 5% for
Eastern Canadian producers. Over the 2006–2015 duration of SLA II, Western
Canadian producers were subjected to export taxes 77% of the time (84 of the
109 months), at a weighted average rate of 11%.
•
If duties are imposed, we expect that Canadian producers would recover
most of their deposits. In the two most recent instances of U.S. collecting
CVDs and ADDs on Canadian lumber imports, Canada eventually recovered
all of the duties paid, plus interest (1994), and 80% of collections (2006). In
previous cycles, initial headline duty collection rates overstated the ultimate
impact on Canadian exporters.
Most management teams have been reluctant to share thoughts regarding potential
outcomes for the lumber trade file. One outlier has been Resolute Forest Product's
CEO, Richard Garneau. Mr. Garneau has suggested his company does not support
a negotiated bilateral agreement, arguing that Eastern Canadian provinces have
adopted stumpage reforms that reflect market-based pricing dynamics and that the
U.S. has no basis for claims of subsidization. We believe that most other
management teams support a negotiated resolution.
5
Current Softwood Lumber Market Conditions
North American softwood lumber prices have generally sustained Q4/15
gains, though prices for some wider-width grades have underperformed.
After pulling back in January, the benchmark Western SPF 2x4 lumber price has
increased 11% over the past month and the current price of US$271/Mfbm is 13%
above levels in September 2015. Positive price momentum for Southern Yellow
Pine lumber has waned over the past two weeks. Prices in the U.S. South had
outperformed since September (the current 2x4 price in the East of US$398/Mfbm
is up 28% over that time), partly owing to regional market-related sawmill
curtailments.
Exhibit 4. North American Softwood Lumber Price Trends & Forecasts
Short-Term
Long-Term
$500
$600
Current Western SPF =
US$271/Mfbm
- up 11% m/m
- up 5% q/q
- down 10% y/y
$550
$500
$450
$400
$350
$400
US$/Mfbm
US$/Mfbm
$450
Current SYP =
US$398/Mfbm
- flat m/m
- down 1% q/q
- down 3% y/y
$350
$300
$250
$300
$250
$200
$200
$150
$150
$100
Jan-95
Jan-98
Jan-01
Jan-04
Jan-07
Jan-10
Southern Yellow Pine #2 2x4
Average
Western SPF #2 2x4
Lumber Price History and Forecast (US$/Mfbm)
Grade
2011A
2012A
Western SPF
$256
$300
% ∆ y/y
1%
17%
Eastern SPF
$344
$396
% ∆ y/y
1%
15%
Southern Yellow Pine
$268
$335
% ∆ y/y
-11%
25%
2013A
$356
19%
$451
14%
$413
23%
Jan-13
2014A
$350
-2%
$443
-2%
$418
1%
Jan-16
2015A
$278
-20%
$378
-15%
$383
-8%
Key reference lumber prices
have improved 10-54%
since September 2015.
$100
Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
WSPF 2x4 #2&Btr.
SYP 2x4 #2&Btr.
SYP 2x6 #2&Btr.
WSPF 2x4 #3/Utility
SYP 2x10 #2&Btr.
Hem-Fir 9' 2x4 Studs
Q1/16E
$270
-13%
$370
-10%
$400
-3%
Q2/16E
$290
8%
$390
7%
$380
-1%
Q3/16E
$310
14%
$410
11%
$385
16%
Q4/16E
$290
10%
$390
7%
$365
-8%
2016E
$290
4%
$390
3%
$383
0%
2017E
$325
12%
$415
6%
$390
2%
Trend
$335
$425
$370
Source: Random Lengths, TD Securities Inc.
Key reference North American lumber prices remain 10–54% above their
September 2015 trough levels. Canadian lumber export growth to the U.S.
picked up once the standstill (free trade) started in mid-October (up 18.5% yearover-year during Q4/15 versus full-year growth of 9.2%), but, in our view, the
speculated "wall of wood" that some expected following the expiry of the SLA has
not materialized. Mild weather, the strong U.S. dollar, and softer Chinese demand
were all contributory factors to the pick-up in Q4/15 Canadian lumber exports to
the U.S., in our view.
6
A History Lesson: Supply & Demand Dynamics during
Previous Softwood Lumber Dispute Iterations
Managed softwood lumber trade between Canada and the U.S. has existed for
decades. For the purposes of equity investors, the current generation of complaints
from the U.S. and managed trade between the two countries has endured since
1982. Ongoing disputes are motivated by fundamental differences in timber
ownership. In the U.S., the vast majority of commercial timber is privately owned
with pricing and timber supply distribution determined via open markets. In
Canada, ~91% of merchantable timber is owned by the provincial and federal
governments (mostly the provinces), which allocate harvest volumes to processors
(e.g., sawmills) and collect royalty (stumpage) payments. Stumpage costs are
determined by various factors, including market-based bidding for a portion of the
volume allocation.
The U.S. has consistently argued that provincial stumpage rates are too low and
constitute a subsidy for Canadian lumber producers. The U.S. has also
intermittently argued that Canadian producers sell lumber below cost (i.e., dump
lumber into the U.S.).
Exhibit 5. Canadian Share of U.S. Lumber Consumption during Previous
Iterations of the Softwood Lumber Dispute
U.S. Lumber Demand (billion board feet)
1.
2.
3.
4.
5.
6.
7.
60
36%
34%
32%
50
30%
28%
40
26%
Canadian Import Share of U.S. Demand
38%
70
24%
30
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
U.S. Consumption
Canadian Share of U.S. Consumption
Source: Random Lengths, Forest Economic Advisors, Statistics Canada
Exhibit 5 shows annual U.S. softwood lumber consumption and Canadian import
share of U.S. consumption since 1980. Shaded areas represent periods of managed
lumber trade; green areas represent periods of bilateral negotiated trade
agreements; and red areas are periods of U.S. unilaterally imposing duties on
Canadian imports.
7
Key phases of the softwood lumber dispute over the past 35 years:
1. Lumber I: January 1982–May 1983: U.S. Unsuccessfully Petitions for
CVDs
A group of U.S. softwood lumber producers petitioned for a countervailing duty
(CVD) on Canadian lumber imports, arguing that Canadian producers were
subsidized via provincial stumpage prices which were below market value for the
timber. The U.S. International Trade Council (USITC) made an initial
determination that Canadian lumber imports injured the U.S. industry, but the
International Trade Administration (a subsidiary of the Department of Commerce,
DOC) subsequently ruled that they did not. Duties were never imposed.
2. Lumber II: May 1986–December 1986: U.S. Revisits CVDs; Leads Way
for Future Managed Trade
The U.S. Coalition for Fair Lumber Imports (CFLI) filed a revised CVD claim
against the Canadian industry. The DOC reached a preliminary determination that
Canadian lumber imports were subsidized and set a 15% interim CVD deposit
rate.
3. Memorandum of Understanding (MOU): January 1987–October 1991:
Canada Agrees to Pay Export Taxes
On December 30, 1986, both countries signed an MOU with Canadian companies
paying an export tax at the border for lumber exports to the U.S. The tax was
initially set at 15%, but was eventually lowered, or eliminated, for some provinces
that adjusted stumpage prices (e.g., the B.C. export tax was rescinded as of
December 1987). Canada opted out of the MOU in October 1991.
4. Lumber III: March 1992–December 1994: U.S. Collects CVDs;
Eventually Repays all Duties to Canadian Companies
The U.S. immediately imposed a new round of CVDs following Canada's
withdrawal from the MOU. CVDs were collected at rates varying from 6.5% to
11.5%. By the end of 1994, U.S.-Canada Free Trade Agreement (FTA) panels had
ruled that the U.S. did not prove injury related to Canadian imports. All collected
duties, plus interest, were repaid to Canadian companies in December 1994.
5. Softwood Lumber Agreement I (SLA I): April 1996–March 2001: Quotabased System Replaces Duties
A five-year agreement was signed, during which B.C., Alberta, Ontario, and
Quebec were administered volume-based quotas on allowable softwood lumber
exports to the U.S. Any volume in excess of the quota was assessed with taxes
collected at the border. If reference lumber prices exceeded certain hurdles, quota
levels were increased.
8
6. Lumber IV: August 2001–October 2006: U.S. Imposes CVDs and ADDs;
Eventually Repays Majority of Collected Duties to Canadian Companies
Following the expiry of SLA I, the U.S. administered and collected CVDs and
ADDs. CVDs varied across provinces and ADDs varied from company to
company. At the peak, aggregate duties collected for most Canadian exporters
were 27%. Canada appealed the determination through various NAFTA and WTO
panels, and, in most cases, received favourable rulings. When the subsequent
Softwood Lumber Agreement II was signed, approximately 80% of collected
CVDs and ADDs were repaid to the Canadian industry.
7. Softwood Lumber Agreement II (SLA II): October 2006–October 2015:
Export Tax System Implemented
Both countries agreed to SLA II, a seven-year binding agreement, with a two-year
extension option (the latter was exercised). The provinces had two options: a
straight export tax which maxed out at 15%; or a hybrid export tax/volume
restriction framework where taxes maxed out at 5%. The latter was chosen by
Eastern Canadian provinces and included volume restrictions intended to limit
Canadian imports' share of U.S. lumber demand between 30% and 34%. Export
taxes increased as reference lumber prices fell (i.e., the mechanism was intended
to discourage dumping by Canadian exporters at low prices).
Exhibit 6. Canadian Share of U.S. Lumber Consumption vs. Lumber
Prices during Previous Iterations of the Softwood Lumber Dispute
Western SPF Price (US$/Mfbm)
1.
2.
3.
4.
5.
6.
7.
36%
$350
34%
$300
32%
$250
30%
$200
28%
$150
26%
Canadian Import Share of U.S. Demand
38%
$400
24%
$100
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013
Western SPF Lumber Price
Canadian Share of U.S. Consumption
Source: Random Lengths, Forest Economic Advisors, Statistics Canada
For Western Canadian producers opting for the straight export tax option,
taxes averaged 11% over the duration of the agreement. The agreement
expired on October 12, 2015, and, under a deal provision, there is currently a oneyear standstill period during which the U.S. is not permitted to launch a new
CVD/ADD case. The current standstill is meant to provide time to re-assess
changing industry dynamics and contemplate a potential new agreement.
9
Lumber Market Dynamics over the Recent History of Managed
Trade between Canada and the U.S.
10
•
Canadian import share of U.S. lumber demand generally moves in
tandem with underlying lumber consumption. The implication is that
Canada is the marginal supply contributor to the U.S. mix when demand
swings. To put a finer point on it, Canadian import share of U.S. demand
topped out at 36% as the U.S. housing cycle approached a cyclical peak and
bottomed out at 25% in 2009 after the housing cycle in the U.S. crashed and
China emerged as an important new end market for Canadian exporters.
Canada is a vital component of the U.S. lumber supply mix.
•
Lumber prices have a positive correlation with Canadian share of the
U.S. market. As shown in Exhibit 6, over the long run, benchmark Western
SPF lumber prices move in tandem with Canadian share of U.S. demand. This
correlation has weakened in recent years as China has emerged as an
important growth market for Western Canadian exporters.
•
Canadian share of the U.S. market has declined during periods of bilateral
trade agreements. Canadian import share of U.S. demand has generally fallen
during periods of managed trade agreements (e.g., the MOU, SLA I, and SLA
II) and increased during periods of unilateral imposition of CVDs, and/or
ADDs. In our view, the U.S. has more successfully achieved market share
management objectives during periods in which both countries agreed on
acceptable trade terms.
Share Price Trends: Recent Relative Lumber Equity Declines Have
Outpaced Declines in Precedent Cycles
During the current one-year standstill (October 2015–October 2016) there are no
trade restrictions on Canadian lumber exports to the U.S. The current period is
most analogous to April–October 2001. This was the time between SLA I expiry
and the U.S. enacting final CVDs. Subsequent CVDs and ADDs were imposed at
varying rates until the most recent bilateral agreement (now expired) was signed in
October 2006. As underlying equity markets are extremely volatile right now, we
believe that it is more informative to consider lumber-weighted equity
performance relative to broader equity indices. The S&P/TSX Composite is our
reference point.
Exhibit 7. Relative Lumber Equity Share Price Performance
1.20
1.15
Canadian lumber equities have
underperformed broader
equity markets over the past
three months. The sell-off for
the sector has outpaced relative
precedent period declines.
1.10
1.05
1.00
0.95
Relative performance
of lumber equities
following expiry of
SLA II (current
2015/16 standstill
period)
0.90
0.85
Relative performance of
lumber equities following
expiry of SLA I
Note: declines indicate
lumber equity
underperformance relative
to the TSX/Composite
index
0.80
Day 1
Lumber Index vs. S&P/TSX Composite (indexed to 1.0 on October 13, 2015)
Day
145
Lumber Index vs. TSX Composite Index (indexed to 1.0 on March 31, 2001)
Source: Bloomberg.
Key takeaways from the share price performance comparison:
•
Initial share price trends, this iteration, were similar to the precedent
period. Following the expiry of SLA I, lumber-weighted equities initially
rallied. In the first six weeks with free trade (April to mid-May 2001), lumberweighted companies' share prices climbed 24% — outpacing gains of 5% for
the S&P/TSX Composite over that duration. During this period, benchmark
Western SPF lumber prices improved 68% in tandem with seasonal housing
activity strength and the absence of a surge in Canadian imports. Over the first
six weeks of the current standstill timeframe, Canadian lumber share prices
improved 11%, while the S&P/TSX Composite declined 2%. During this
period, Western SPF lumber prices have declined 1% amid stagnating U.S.
housing activity and softer Chinese demand.
11
The subsequent sell-off in lumber equities this cycle has outpaced the
precedent period decline. In 2001, the average lumber-weighted share price
decline over the five months following the initial surge was 29% versus a 14%
decline for the S&P/TSX Composite. Lumber equities came under pressure as
the probability of the U.S. taking unilateral action against Canadian imports
increased. This cycle, Canadian lumber equities have declined 30% over
the 10 weeks since the initial surge versus a 6% decline for the S&P/TSX
Composite over that timeframe. It is difficult to isolate factors contributing
to relative share price performance; the recent lumber sector decline has
coincided with a broad rout for resource equities. Still, we attribute a portion
of the lumber equity sell-off to uncertainty around the trade file. We reiterate
that recent relative declines are significantly steeper than relative declines
during the 2001 iteration of this issue.
•
North American Wood Cost Trends: Isolating a Key
Factor of the U.S. Argument
The foundation of the U.S. argument is that Canadian lumber producers are
subsidized via artificially low stumpage costs paid to the provinces for timber
access. Historically, this argument has been consistently denied by various
arbitration panels. Exhibit 8 compares delivered U.S. dollar-denominated wood
cost trends for sawmills in Eastern Canada, the B.C. Interior, and the U.S. South
East. These costs are based on estimates from Forest Economic Advisors and
include stumpage (the cost of logs at the stump) plus costs to harvest and deliver
the wood to the sawmill.
Exhibit 8. Delivered North American Sawmill Wood Costs
$325
2000-2015 CAGR:
$285
B.C. Interior = 0%
U.S. South = -2%
Eastern Canada = +2%
$265
US$/Mfbm
Eastern Canadian log costs are
the highest in North America.
U.S. South fibre costs have
generally trended lower over
the past 15 years.
$305
$245
$225
Recent reversal in
Canadian costs
reflects strong
USD
$205
$185
$165
$145
$125
2000
2002
2004
B.C. Interior
Source: Forest Economic Advisors
12
2006
2008
U.S. South
2010
2012
Eastern Canada
2014
A few points to consider:
•
Eastern Canada has the highest-cost fibre in North America and that gap
has generally increased over the past decade. This is a function of smallerdiameter logs (and associated lower lumber recovery factors) and declines in
the annual allowable cut for Ontario and Quebec.
•
Estimated B.C. Interior wood costs have generally trended higher since
2009. This trend has been driven by a shifting fibre resource as log diets
gradually transition away from less expensive surplus beetle-killed wood, and,
more recently, by the stronger U.S. dollar. We expect further upward pressure
in tandem with ongoing reductions to the annual allowable harvest levels
owing to declines in beetle-killed timber.
•
Many provinces have changed stumpage pricing calculations to capture
market-based pricing dynamics. Over the long run, key provinces have
changed stumpage price calculations to reflect auction bidding for a portion of
timber allocation. These market pricing systems (MPS) were partly meant to
appease U.S. subsidization concerns, but the U.S. continues to pursue
restrictive trade policies in our view.
•
Delivered wood costs in the U.S. South have declined over the past 15
years. Since 2000, estimated U.S. South delivered saw log costs have declined
30% and are now only at a modest premium to costs in the B.C. Interior. The
decline is a function of the collapse in U.S. housing-related demand and the
resultant build-up in timber inventory (Southern Yellow Pine timber has a
relatively rapid growth cycle).
•
Cyclical foreign exchange trends have changed the competitive landscape
over the last five years. The current Canadian/U.S. dollar exchange rate is
27% above the average exchange rate over the 2006–2015 duration of the SLA
II. The stronger U.S. dollar likely bolsters U.S. resolve as, all else equal,
Canadian sawmills have gained a competitive advantage (lumber is primarily
sold in U.S. dollars and the majority of Canadian sawmill operating costs are
denominated in the local currency).
Conclusions
•
The longer Canadian and U.S. trade officials wait to start negotiations,
the greater the odds are that the issue will be overwhelmed by the U.S.
election cycle. If there is no substantial progress toward a bilateral agreement
by the early summer, we expect that the odds of the U.S. pursuing duties or
quotas will increase substantially. In the event that the U.S. takes a hard line on
this issue and imposes punitive CVDs and ADDs, based on historical
precedent, we expect that Canada would eventually recover most, if not all, of
the collected duties.
13
•
Among lumber-focused companies in our coverage universe, Interfor is
best positioned to cope with restrictive U.S. lumber trade action. Only
15% of the company's lumber volume is exposed to potential duties.
•
We believe that Canfor has slightly higher earnings leverage than West
Fraser to potential trade restrictions. A higher percentage of West Fraser's
lumber capacity is based in the U.S., but owing to lumber-specific sales mix
differences, we believe that overall consolidated exposure to this issue is
similar for the two large-cap lumber producers in our coverage universe.
•
On a relative basis, the recent collapse in share prices of lumber-weighted
equities is more severe than sector performance in the relevant precedent
cycle. The current period is most analogous to April–October 2001. This was
the time between SLA I expiry and the U.S. enacting final CVDs. Subsequent
CVDs and ADDs were imposed at varying rates until the most recent bilateral
agreement (now expired) was signed in October 2006. This cycle, Canadian
lumber equities have declined 31% over the past 10 weeks versus a 6%
decline in the S&P/TSX Composite. In 2001, the average lumber-weighted
share price decline over a relevant five-month period was 29% versus a 14%
decline for the S&P/TSX Composite. It is difficult to isolate specific factors
contributing to sector share price trends, especially in volatile markets, but we
believe that the recent relative weak performance for lumber-weighted equities
is partly driven by investor concerns around the trade file.
We reiterate our positive investment bias for most lumber-weighted equities
in our coverage universe. Rhetoric around the trade file could weigh on investor
sentiment in the coming months and speculation around this issue has arguably
contributed to steep share price declines so far this year. But our mid- to long-term
forecasts for the sector are based on rising industry operating rates in tandem with
an ongoing, gradual U.S. housing recovery, and fibre availability restrictions,
which will limit the Canadian industry's ability to add supply. Assuming a
negotiated resolution with an export tax regime, lumber-weighted equities
trade at a robust average expected 2017 free cash flow yield of 11.4% and an
average EV/EBITDA multiple of 5.5x (versus the long-term average of 6.5x).
We reiterate our Action List BUY recommendation on Interfor and BUY
recommendations on Canfor, West Fraser, and Western Forest Products. Interfor
and Canfor remain our top picks in the lumber sector.
14
Exhibit 9. North American Wood Products Comparables
Engineered Wood Product Focused Ticker
Boise Cascade Company (2)
Louisiana-Pacific Corp.
Norbord Inc.
BCC-N
LPX-N
OSB-N,T
Share
Currency
Current
Price
Market
Cap $mm
2014A
TEV/EBITDA
2015E 2016E 2017E
Trend
P/B
Debt/
Cap
US$
US$
C$
$17.37
$16.52
$23.43
$675
$2,357
$1,437
8.2x
nmf
17.4x
7.1x
nmf
18.2x
5.3x
10.9x
6.9x
4.2x
7.2x
4.8x
n/a
6.9x
5.7x
1.3x
2.3x
2.8x
23%
nmf
59%
12.8x
12.6x
7.7x
5.4x
6.3x
2.1x
41%
TEV/EBITDA
2015E 2016E 2017E
Trend
P/B
Debt/
Cap
Engineered Wood Product Peer Group Average
Lumber Focused
Ticker
Share
Currency
Current
Price
Market
Cap $mm
2014A
Canfor Corp.
Conifex Timber Inc.
Interfor Corp.
Western Forest Products Inc.
West Fraser Timber Co. Ltd.
CFP-T
CFF-T
IFP-T
WEF-T
WFT-T
C$
C$
C$
C$
C$
$14.70
$2.32
$11.34
$2.13
$42.65
$1,952
$49
$794
$849
$3,563
5.5x
8.3x
7.4x
8.3x
6.7x
7.4x
23.0x
13.6x
7.7x
10.0x
5.8x
5.8x
6.6x
6.6x
6.8x
4.9x
5.5x
5.4x
5.8x
5.8x
4.4x
4.4x
5.8x
5.6x
5.2x
1.5x
0.4x
1.1x
1.9x
1.7x
29%
49%
38%
11%
22%
7.2x
12.4x
6.3x
5.5x
5.1x
1.3x
30%
Lumber Peer Group Average
North American Integrated
Ticker
Resolute Forest Products Inc.
Tembec Inc. (1)
Weyerhaeuser Co. (2)
RFP-N, T
TMB-T
WY-N
Share
Currency
Current
Price
Market
Cap $mm
2014A
TEV/EBITDA
2015E 2016E 2017E
Trend
P/B
Debt/
Cap
US$
C$
US$
$4.74
$0.88
$26.65
$424
$88
$13,602
5.4x
9.3x
14.3x
3.5x
12.0x
13.8x
4.2x
5.5x
n/a
0.2x
1.6x
3.2x
22%
93%
47%
5.5x
6.6x
13.1x
6.0x
6.3x
11.5x
N.A. Integrated Peer Group Average
9.7x
9.8x
8.4x
7.9x
4.9x
1.7x
54%
Aggregate Peer Group Average (ex. high/low)
8.5x
11.2x
6.8x
5.7x
5.2x
1.6x
36%
Notes:
(1) Tembec has a September 30 fiscal year end.
(2) Valuation is based on Bloomberg consensus estimates.
Source: TD Securities Inc., company reports, Thomson One, Bloomberg
15
Exhibit 10. Lumber Industry Dashboard
1. Lumber Prices and Regional Fibre Cost Trends
North American Lumber Prices
$500
WSPF current =
US$271/Mfbm
- up 11% m/m
- up 5% q/q
- down 10% y/y
$450
$400
$305
2000-2015 CAGR:
B.C. Interior = 0%
U.S. South = -2%
Eastern Canada = +2%
$285
$265
$350
$245
US$/Mfbm
US$/Mfbm
Regional Delivered Wood Costs for Sawmills
$325
$300
$250
$225
$205
$185
$200
$165
$150
$145
$100
Jan-02
$125
Jan-04
Jan-06
Jan-08
Western SPF
Jan-10
Jan-12
Jan-14
Jan-16
2000
2002
Southern Yellow Pine
2004
2006
B.C. Interior
2008
2010
U.S. South
2012
2014
Eastern Canada
Source: Random Lengths, Forest Economic Advisors, LLC, TD Securities Inc.
2. Lumber EBITDA Margins and Canadian Softwood Lumber Export Trends
Canadian Softwood Lumber Exports
60
Aggregate Canadian
lumber exports
increased 13% y/y in
December - U.S.
+13%; China +15%;
Japan +9%.
25%
50
Last 12 Months (million m3)
20%
15%
10%
5%
0%
-5%
-10%
140%
120%
100%
80%
40
60%
30
40%
20%
20
0%
10
-20%
-15%
-20%
Q4/02
Q4/04
Q4/06
Canfor
Western Forest
Conifex
Q4/08
Q4/10
Interfor
Tembec
Q4/12
0
Dec-05
Q4/14
West Fraser
Resolute
Dec-07
Dec-09
China
China y/y
Dec-11
-40%
Dec-15
Dec-13
Japan
Japan y/y
Y/Y % Change (last 12 Months)
North American Lumber Segmented EBITDA Margins (LTM)
30%
U.S.
U.S. y/y
Source: Company reports, Statistics Canada.
3. North American Softwood Lumber Supply & Demand with Correlation to Prices
80
90%
70
85%
60
80%
50
75%
40
70%
30
65%
20
60%
10
55%
2000
2002 2004 2006 2008
Canada
Surplus Capacity
US Operating Rate
2010
2012 2014 2016E
U.S.
Canada Operating Rate
Western SPF Lumber Price (US$/Mfbm, 2x4,
#2&Btr.)
95%
Operating Rate
Aggregate Volume (billion board feet)
North American Lumber Supply & Demand Balance
90
$600
N.A. Lumber: Annual Op. Rate vs. Real Prices (1994-2017E)
$550
$500
$450
$400
2014
$350
2016E
$300
2015
$250
$200
$150
60%
Source: International Wood Market Group Inc., Forest Economic Advisors LLC, Random Lengths, TD Securities Inc.
16
2017E
65%
70%
75%
Operating Rate
80%
85%
90%
95%
Exhibit 11. Justification of Target Prices and Key Risks to Target Prices
Company Name and
Ticker
Canfor Corp.
(CFP-T)
Conifex Timber Inc.
(CFF-T)
Interfor Corp.
(IFP-T)
Louisiana-Pacific
Corp.
(LPX-N)
Norbord Inc.
(OSB-N,T)
Resolute Forest
Products Inc.
(RFP-N,T)
Target
Price
$23.00
$1.75
$14.50
US$16.00
$31.00
US$4.50
Rec.
BUY
REDUCE
AL BUY
HOLD
BUY
HOLD
Risk
Justification of Target Price
Rating
HIGH
In deriving our $23.00 target price for Canfor, we separate the
company’s 51.9% equity stake in Canfor Pulp from the core
wood products business. We value Canfor’s stake in CFX
using our 12-month target price for that investment of $13.50.
We then apply a 5.8x EV/EBITDA multiple to our estimate of
trend EBITDA for the remaining wood products and BCTMP
business units. To capture the impact of changing net debt
over the next two years, we adjust for expected free cash
flows through 2017. We also adjust Canfor’s net debt to back
out its stake in CFX.
Our 12-month target price of $1.75 is based on a 4.1x
EV/EBITDA multiple (down from 5.3x earlier) using our
estimate of trend EBITDA. We adjust our enterprise value
calculation with expected free cash flow through 2017. The
SPEC
target multiple compares with an average of 5.5x applied
across our coverage universe. Our lower target multiple
reflects Conifex’s relatively small scale, tight liquidity position,
and, in our view, limited flexibility to pursue growth.
Key Risks to Target Price
Key risks to our target price for Canfor include 1) a slowerthan-expected recovery in the U.S. housing market; 2) a
stronger Canadian dollar; 3) cost inflation; 4) long-term
shortage of fibre in Western Canada; 5) potential slowdown in
lumber export markets; 6) potential First Nations land
entitlement issues in Western Canada; 7) a potential trade
dispute with the U.S. regarding softwood lumber; and 8)
highly competitive markets. Key risks to our target price for
Canfor Pulp include 1) weaker-than-expected pulp demand
and pricing; 2) a stronger Canadian dollar; 3) fibre cost
inflation in B.C.; 4) higher interest rates; 5) inconsistent
implementation of the dividend policy; 6) unplanned
production disruptions; 7) control by Canfor Corp. (owns
51.9% of the common shares); and 8) highly competitive
markets.
Key risks to our target price for Conifex include: 1) access to
capital; 2) inconsistent lumber margins; 3) capital upgrades
and performance improvement programs that may not yield
the intended returns; 4) changes in lumber demand/price in
North America and offshore; 5) changing exchange rates; 6)
higher input/fibre costs and/or restrictions on supply; 7)
limited trading liquidity; 8) equipment failure/production
disruptions; 9) potential First Nations’ claims to timber; 10)
potential softwood lumber trade dispute with the U.S.; 11)
highly competitive markets; and 12) risks associated with a
concentrated asset base.
HIGH
Our 12-month $14.50 target price is based on a 6.0x
EV/EBITDA multiple, using our trend EBITDA estimate. We
adjust our EV calculation for expected free cash flow through
2017. The target multiple compares with an average of 5.5x
across our coverage universe.
The primary risks to our target price include 1) a slower-thananticipated U.S. housing recovery; 2) an erosion in offshore
lumber demand; 3) a faster-than-expected response in North
American lumber production; 4) a strengthening Canadian
dollar; 5) rising fibre costs; 6) acquisition integration risk; 7)
potential First Nations timber claims; 8) potential trade dispute
with the U.S. regarding softwood lumber; and 9) highly
competitive markets.
HIGH
Our 12-month target price of US$16.00 is based on a 6.0x
target EV/EBITDA multiple using our trend EBITDA estimate.
We adjust our enterprise value calculation for expected free
cash flows through end-2017. The target multiple compares
with an average of 5.5x applied across our coverage universe.
Key risks to our target price for Louisiana-Pacific include 1)
the earnings sensitivity to weaker OSB, siding, and
engineered wood prices; 2) a slower-than-expected recovery
of the U.S. housing market; 3) potential appreciation of the
Canadian dollar; 4) restarts of idled North American OSB
capacity; 5) equipment failures and production disruptions; 6)
rising input costs; and 7) highly competitive markets.
Our 12-month $31.00 target price is based on a 5.7x target
EV/EBITDA multiple using our trend EBITDA estimate. We
adjust our enterprise value calculation with expected free
cash flows through 2017 plus the present value of expected
capex beyond 2017 tied to discretionary growth initiatives.
The target multiple compares with an average of 5.5x applied
across our coverage universe.
The key risks to our target price for Norbord include: 1)
earnings sensitivity to changing OSB prices and currency
fluctuations; 2) a potential slowdown in the U.S. housing
recovery and offshore demand; 3) North American OSB
competition; 4) input cost volatility; 5) control by Brookfield
(owns 53% of the total number of diluted shares outstanding);
6) equipment failures, production disruptions, environmental
liabilities, labour disruptions, and natural disasters; 7) targeted
Ainsworth synergies fail to materialize; and 8) returns
associated with discretionary capex initiatives could fall short
of expectations.
Our 12-month US$4.50 target price is based on a 4.5x
EV/EBITDA multiple (5.0x earlier) using our trend EBITDA
estimate. To capture the impact of changing net debt
expectations, we adjust our enterprise value calculation with
expected free cash flows through the end of 2017 (including
Calhoun capex). The target multiple compares with an
average of 5.5x applied across our coverage universe.
Key risks to our target price include: 1) ongoing structural
decline in North American newsprint/groundwood paper
consumption; 2) potential for deteriorating offshore newsprint
demand; 3) risk of inconsistent capacity discipline from North
American paper producers; 4) fluctuations in foreign
exchange rates; 5) liabilities associated with the company’s
pension plans and benefit obligations; 6) potential for input
cost pressure; 7) highly competitive markets; 8) project
execution risk associated with discretionary capex plans; and
9) potential trade dispute with the U.S. regarding softwood
lumber.
HIGH
HIGH
Source: TD Securities Inc.
17
Exhibit 12. Justification of Target Prices and Key Risks to Target Prices
Company Name and
Ticker
Tembec Inc.
(TMB-T)
Western Forest
Products Inc.
(WEF-T)
West Fraser Timber
Co. Ltd.
(WFT-T)
Target
Price
$1.00
$2.50
$58.00
Source: TD Securities Inc.
18
Rec.
HOLD
BUY
BUY
Risk
Justification of Target Price
Rating
Key Risks to Target Price
Our 12-month $1.00 target price is based on a 5.3x target
EV/EBITDA multiple using our trend EBITDA estimate. We
SPEC adjust our enterprise value calculation for expected free cash
flow through 2017. The target multiple compares with an
average of 5.5x applied across our coverage universe.
Our risk rating remains SPECULATIVE. Quarter-ending
liquidity of $78 million compares with management’s target
minimum of $30 million and a long-term objective of $135
million. Key risks to our target price for Tembec include: 1)
potential negative pulp, paper, and lumber price momentum;
2) potential strengthening of the Canadian dollar and/or euro;
3) higher fibre, chemicals, energy, and transportation costs;
4) equipment failure, production disruptions, and environment
liabilities; 5) execution and liquidity risks associated with the
Témiscaming cogeneration project; 6) high financial leverage;
and 7) highly competitive markets.
HIGH
HIGH
Our 12-month target price of $2.50 is based on 5.5x
EV/EBITDA multiple using our trend EBITDA estimate. We
adjust the enterprise value with expected free cash flows
through the end of 2017. The target multiple compares with
an average of 5.5x applied across our coverage universe.
The primary risks to our target price include 1) changes in
lumber/log demand and pricing; 2) stronger Canadian dollar;
3) higher input costs and potential supply restrictions; 4)
production disruptions at sawmills; 5) potential First Nations
land entitlement issues; 6) proposed margin improvement
initiatives may not yield expected returns; 7) concentration of
byproduct sales; 8) potential softwood lumber trade dispute
with U.S.; and 9) highly competitive markets.
Our 12-month target price of $58.00 is based on a 6.0x target
EV/EBITDA multiple using our trend EBITDA estimate. We
adjust our EV calculation for expected free cash flows through
2017. The target multiple compares with an average of 5.5x
applied across our coverage universe.
The primary risks to our target price for West Fraser include
1) a slower-than-anticipated recovery in the U.S. housing
market; 2) a strengthening Canadian dollar; 3) weaker global
pulp markets; 4) a long-term shortage of fibre in Western
Canada; 5) rising fibre costs and general cost inflation; 6) a
slowdown in lumber export markets; 7) potential First Nations
claims to timber; 8) a faster-than-expected response in North
American lumber production; 9) a potential trade dispute with
the U.S. regarding softwood lumber; and 10) highly
competitive markets.
APPENDIX A. IMPORTANT DISCLOSURES
Company
Ticker
Disclosures
Canfor Corp.
Canfor Pulp Products Inc.
Conifex Timber Inc.
Interfor Corp.
Resolute Forest Products Inc.
Tembec Inc.
West Fraser Timber Co. Ltd.
Western Forest Products Inc.
CFP-T
CFX-T
CFF-T
IFP-T
RFP-N, RFP-T
TMB-T
WFT-T
WEF-T
2, 9
n/a
n/a
2, 4
n/a
n/a
2
n/a
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
TD Securities Inc., TD Securities (USA) LLC or an affiliated company has
managed or co-managed a public offering of securities within the last 12 months
with respect to the subject company.
TD Securities Inc., TD Securities (USA) LLC or an affiliated company has
received compensation for investment banking services within the last 12 months
with respect to the subject company.
TD Securities Inc., TD Securities (USA) LLC or an affiliated company expects to
receive compensation for investment banking services within the next three
months with respect to the subject company.
TD Securities Inc. or TD Securities (USA) LLC has provided investment banking
services within the last 12 months with respect to the subject company.
A long position in the securities of the subject company is held by the research
analyst, by a member of the research analyst’s household, or in an account over
which the research analyst has discretion or control.
A short position in the securities of the subject company is held by the research
analyst, by a member of the research analyst’s household, or in an account over
which the research analyst has discretion or control.
A long position in the derivative securities of the subject company is held by the
research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
A short position in the derivative securities of the subject company is held by the
research analyst, by a member of the research analyst’s household, or in an
account over which the research analyst has discretion or control.
TD Securities Inc. and/or an affiliated company is a market maker, or is
associated with the specialist that makes a market, in the securities of the subject
company.
TD Securities Inc. and/or affiliated companies own 1% or more of the equity
securities of the subject company.
A partner, director or officer of TD Securities Inc. or TD Securities (USA) LLC, or
a research analyst involved in the preparation of this report has, during the
preceding 12 months, provided services to the subject company for remuneration.
This security has Subordinate voting shares.
This security has Restricted voting shares.
This security has Non-voting shares.
This security has Variable voting shares.
This security has Limited voting shares.
Additional Important Disclosures
The Research Analyst responsible for coverage of this stock is related to David J.
Steuart, a member of the Board of Directors of Tembec Inc.
Price Graphs
Full disclosures for all companies covered by TD Securities can be viewed at
https://www.tdsresearch.com/equities/welcome.important.disclosure.action by TD Securities'
institutional equity clients.
19
Research Ratings
Action List BUY:
BUY:
SPECULATIVE BUY:
HOLD:
TENDER:
REDUCE:
The stock’s total return is expected to exceed a minimum of
15%, on a risk-adjusted basis, over the next 12 months and it is
a top pick in the Analyst’s sector.
The stock’s total return is expected to exceed a minimum of
15%, on a risk-adjusted basis, over the next 12 months.
The stock's total return is expected to exceed 30% over the next
12 months; however, there is material event risk associated with
the investment that could result in significant loss.
The stock’s total return is expected to be between 0% and 15%,
on a risk-adjusted basis, over the next 12 months.
Investors are advised to tender their shares to a specific offer
for the company's securities or to support a proposed
combination reflecting our view that a superior offer is not
forthcoming.
The stock’s total return is expected to be negative over the next
12 months.
Overall Risk Rating in order of increasing risk: Low (7.1% of coverage universe), Medium
(34.2%), High (45.5%), Speculative (13.1%)
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