paper & fp 110118

INDUSTRY | COMMENTJANUARY 18, 2011

Growth & Yield Report

Prospects for the paper & forest products sector

Special Feature: Q410 Earnings Preview

• Three rating changes (LPX, FTP and ADN) and six targetprice changes (ADN, MERC, CFX, WFT, CFP and IFP.A)

• Commodity price forecasts: Pulp nudged up, with mostother commodity flat to down in 2011; introducing 2012forecasts.

• Q410 commodity performance: Pulp slipped, buildingproducts generally strengthened.

Company & Industry News (page 12)

• Longview packaging reportedly up for sale.

• Catalyst Paper to redeem notes – another encouragingsign.

• Sino’s Greenheart acquires New Zealand plantation asexpected & agrees to sell timber in China.

Commodity & Economic News (page 13)

• 2010 showed growth in printing and writing papershipments.

Priced as of prior trading day's market close, EST (unless otherwise noted).All values in CAD unless otherwise noted.

RBC Dominion Securities Inc.

Paul C. Quinn, B.Sc.F. (Analyst)(604) 257-7048; [email protected]

Claire Huxtable, CFA (Associate)(604) 257-7610; [email protected]

Paper & Forest Products Universe Performance

Implied 1 mo

Rating/ Price 12-mo total shr

Risk 1/15/11 Target return perf.

LARGE CAPS

ABH O/AA $25.35 $29.00 14% 14%

CFP SP/AA $11.54 $9.50 -18% 7%

CAS SP/AA $6.38 $7.00 12% 5%

IP O/AA US$28.67 US$32.00 14% 11%

LPX SP/AA US$9.93 US$10.00 1% 5%

MWV O/AA US$27.19 US$32.00 21% 8%

TRE O/AA $22.68 $27.00 19% -4%

UFS TP/AA US$79.11 US$105.00 34% 4%

WFT SP/Avg $49.32 $45.00 -8% 4%

WY SP/AA US$21.63 US$18.00 -16% 19%

SMALL CAPS

ADN O/Avg $7.48 $10.00 36% 1%

CTL U/AA $0.39 $0.10 -74% 114%

FTP SP/AA $50.00 $50.00 0% 11%

IFP.A SP/AA $6.03 $5.50 -9% 21%

MERC O/Spec US$8.50 US$10.00 18% 28%

NBD O/AA $15.50 $17.00 10% 11%

INCOME TRUSTS

CFX.UN SP/AA $14.60 $13.50 -3% 0%

TWF.UN U/AA $4.86 $3.50 -28% 12%

INDICES

TSX PFP Index 713 -2%

S&P PFP Index 124 10%

Source: Thomson, RBC Capital Markets analysis

For Required Non-U.S. Analyst and Conflicts Disclosures, see page 15.

2

Special Feature

Q410 earnings preview: Weaker results expected for most We expect earnings to decrease for the majority of our coverage universe, primarily as a result of the drop in shipment volumes at year-end. We have raised our Q4 estimates for all the building material companies under our coverage (Weyerhaeuser, West Fraser, Canfor, Norbord and Louisiana Pacific) as a result of very strong demand for both lumber and OSB. Pulp prices have weakened somewhat from the record levels attained in late Q2, so we anticipate only slightly weaker q/q results and better than we had previously predicted. Besides the building material companies, we have raised our Q4 estimates for Mercer, Canfor Pulp, Acadian, Catalyst and TimberWest. Paper and packaging companies should see earnings drop q/q as shipment volumes seasonally weaken at the end of the year.

We are materially above consensus estimates for Norbord, Canfor Pulp, Canfor, Mercer, West Fraser and TimberWest, but we expect that analyst revisions will raise the consensus over the next week. We are essentially in line on International Paper, MeadWestvaco, Weyerhaeuser, Interfor, Louisiana-Pacific, Catalyst Paper and Cascades. Companies that we expect to report lower Q4 results than consensus include Domtar, Fortress Paper and Sino-Forest, but we remain quite positive on these companies.

We have made a few changes to our 2011 commodity price forecasts and introduce our 2012 pricing deck. For 2011, we are trimming our panels forecasts – lowering OSB by $10/msf, plywood by $30/msf and MDF by $15/msf. On the pulp front, we have raised our NBSK (softwood) price forecast by $15/mt while lowering our NBHK (hardwood) price by $20, reflecting the supply-demand divergence between the two grades. In paper, we have left unchanged our groundwood paper prices, but have reduced our light-weight coated, uncoated freesheet and packaging prices. We had previously anticipated spring price increases in LWC and UFS on stronger economic and employment growth and expect that the widely anticipated linerboard price hike to be only partially implemented. We continue to believe that the Canadian dollar will trade at par to its US counterpart in 2011 and again in 2012. For 2012, we have significantly raised our lumber forecast, due to growth in Chinese demand and our belief that 2012 will be the start of a more normalized US housing market. Also in 2012, our price forecast for OSB and plywood are up, in keeping with the recovery in the US housing market. On the pulp & paper front, we don’t anticipate any major changes between 2011 and 2012 with small decline for most of these commodities.

North American equity markets have been on a tear since the late summer with the effects of the US Federal Reserve’s QE2 program greasing investor returns. Despite the great run, we are becoming increasingly nervous on the future performance of the markets. We believe that US home foreclosures will increase in H111, hitting new highs, and that the resulting home price weakness could reverse the recent improvement in consumer confidence. We suspect that employment gains will accelerate in 2011 and 2012, but continue to disappoint expectations. In the near term, we continue to favour companies with strong financials or competitive position – Domtar, Sino-Forest, AbitibiBowater, International Paper and MeadWestvaco are our favorites, with significant longer-term value found in Norbord and Acadian Timber.

Exhibit 1: Q410 and 2010 saw good returns with few exceptions

Q410 Total Return

58%40%

36%33%32%

28%26%25%24%

22%20%

18%14%14%

6%5%5%

9%8%

0% 20% 40% 60% 80% 100%

CatalystMercerInterfor

Sino-ForestP&FP Index

CanforNorbord

IPLouisiana Pacific

West FraserAcadian

WeyerhaeuserDomtar

Materials IndexFortress PaperS&P/TSX Index

MWVCascades

TimberWestCanfor Pulp

114%

2010 Total Return

42%38%37%36%36%

26%21%20%19%18%

17%6%

3%

0%-3%

-5%-23%

150%

94%

-50% -25% 0% 25% 50% 75% 100% 125% 150%

Fortress PaperMercer

Canfor PulpWest Fraser

DomtarCanfor

Materials IndexLouisiana

P&FP IndexAcadian

Sino-ForestInterfor

CatalystS&P/TSX

WeyerhaeuserIP

NorbordTimberWest

MWVCascades

371%

Note: ABH trading began Dec 10, 2010.

Source: Thomson Reuters, RBC Capital Markets analysis

Growth & Yield ReportJanuary 18, 2011

3

Three rating changes and six target price changes on revised pricing and operational assumptions

We have made a number of recommendation and target price changes following the revisions to our pricing forecasts and to the individual company models. These changes are as follows:

Louisiana Pacific (SP, Above Average Risk; $10 target) – We have lowered our recommendation to Sector Perform, from Outperform, but maintain our $10 target. Our target is based on the blended 4.6x EV/EBITDA multiple of our trend EBITDA estimate of $353 million (85%) and our revised 2011 EBITDA estimate of $98 million (15%). We believe the shares should trade at a multiple well below the typical US Paper & Forest Products trading range (6.0x-7.5x), reflecting the challenging home construction market and the industry’s overcapacity.

Fortress Papers (SP, Above Average Risk; $50 target) – We have lowered our recommendation to Sector Perform, from

Outperform, but maintain our $50 target. Our target reflects an EV/EBITDA multiple of 5.0x applied to our revised 2011 EBITDA forecast of $75 million (15%) and our trend EBITDA estimate of $141 million (85%). We believe Fortress should trade at a multiple below the midpoint of the typical Canadian Paper & Forest Products trading range (4.5x to 6.5x), reflecting the company's niche market orientation partially offset by the strong growth platform.

Acadian Timber (OP, Average Risk; $10 target) – We have upgraded Acadian to Outperform, from Sector Perform, and raised our

target raised to $10 (from $8). Our target is based on a blended 10.6x EV/EBITDA multiple of our trend EBITDA estimate of $23 million (85%) and our unchanged 2011 EBITDA estimate of $17 million (15%). We have increased our valuation multiple from 9.6x previously to account to our expectation of a dividend increase. We believe the shares should trade through the cycle well above their Canadian peers’ average trading range of 4.5x-6.5x, reflecting the company's 8-year tax-free structure and our expectation of the future dividend yield.

Mercer (OP, Speculative Risk; $10 target) – We have raised our target to $10, from $7.75, while maintaining Outperform rating. Our new target is based on a blend of a 5.5x EV/EBITDA multiple on our trend EBITDA estimate of €196 million (85%) and our revised 2011 EBITDA estimate of €226 million (15%). We have raised our valuation multiple from 5.4x to account for the company’s improved profitability and debt reduction efforts. We believe the shares should trade through the cycle near the mid-point of the average trading range of 4.5x to 6.5x of their Canadian peers, reflecting the strong pricing environment offset by Mercer’s relatively high debt level.

On the above companies, we have published separate notes with further detail on our reasons for the changes. In the case on the minor target price adjustments to the lumber companies below, we have simply raised our valuation multiple to account for the robust Chinese lumber demand. We see near-term risk in this sub-sector, given the high likelihood that the US Coalition for Fair Lumber Imports brings forward its complaint against BC stumpage. We continue to believe that this risk is material.

• Canfor Pulp – We have raised our target to $13.50, from $12.50, while maintaining a Sector Perform rating. Our new target is based on a blend of a 6.2x EV/EBITDA multiple on our trend EBITDA estimate of $165 million (85%) and our revised 2011 EBITDA estimate of $162 million.

• West Fraser – We have raised our target to $45, from $41, while maintaining a Sector Perform rating. Our new target is based on a blend of a 4.2x EV/EBITDA multiple on our trend EBITDA estimate of $510 million (85%) and our revised 2011 EBITDA estimate of $394 million.

• Canfor – We have raised our target to $9.50, from $8.50, while maintaining a Sector Perform rating. Our new target is based on a blend of a 5.4x EV/EBITDA multiple on our trend EBITDA estimate of $197 million (85%) and our revised 2011 EBITDA estimate of $92 million for Canfor only plus our valuation for its 50.2% interest in Canfor Pulp.

• Interfor – We have raised our target to $5.50, from $4.50, while maintaining a Sector Perform rating. Our new target is based on a blend of a 4.0x EV/EBITDA multiple on our trend EBITDA estimate of $122 million (85%) and our revised 2011 EBITDA estimate of $58 million.


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Exhibit 2: Fourth quarter reporting schedule and estimates RBC EPS Consensus Prev. Prior Yr. Conf. Conf.

RBC CM Universe Release Q4101 Q4102 Q310A Q409A 2010E Date Call Dial in Number Replay Replay

Date Estimate Estimate Quarter Quarter Call Time Code

MeadWestvaco (US$) 26-Jan $0.42 $0.40 $0.63 $0.22 $1.52 26-Jan 10:00 am ET 800 230 1092 800 475 6701 187 118 www.mwv.com

Norbord (US$) 28-Jan ($0.02) ($0.13) ($0.16) ($0.25) $0.51 28-Jan 11:00 am ET 866 322 1159 888 203 1112 653 2094 www.norbord.com

International Paper 03-Feb $0.67 $0.66 $0.91 ($0.24) $2.04 03-Feb 10:00 am ET 877 316 2541 800 642 1687 3489 1863 www.internationalpaper.com

Domtar ($US) 04-Feb $2.71 $2.92 $4.26 $1.39 $11.23 04-Feb 11:00 am ET 866 321 8231 888 203 1112 275 5346 www.domtar.com

Weyerhaeuser 04-Feb $0.04 $0.05 $0.25 ($0.52) $0.24 04-Feb 10:00 am ET 877 296 9413 800 642 1687 2986 8228 www.weyerhaeuser.com

Canfor Pulp3 08-Feb $0.74 $0.58 $0.78 $0.31 $2.96 09-Feb 11:00 am ET 877 440 9795 800 408 3053 135 6351 www.canforpulp.com

Acadian Timber 08-Feb $0.09 $0.07 $0.09 ($0.00) $0.29 09-Feb 10:00 am ET 800 319 4610 800 319 6413 2826 www.acadiantimber.com

Interfor 09-Feb ($0.01) ($0.03) ($0.02) ($0.11) ($0.09) 10-Feb 11:00 am ET 866 323 8540 866 245 6755 424 030

Canfor 11-Feb $0.09 $0.04 $0.08 ($0.13) $0.44 14-Feb 11:00 am ET 877 240 9772 800 408 3053 567 2504 www.canfor.com

Mercer 14-Feb € 0.48 € 0.32 € 0.64 (€ 0.13) € 1.70 15-Feb 10:00 am ET 800 399 3065 800 642 1687 8530 2908 www.mercerint.com

Catalyst Papers 02-Mar ($0.03) ($0.04) ($0.03) ($0.09) ($0.27) 02-Mar 11:00 am ET 888 231 8191 800 642 1687 1382 5640 www.catalystpaper.com

AbitibiBowater TBA ($0.71) n/a ($14.39) ($5.44) ($29.09)

West Fraser Timber TBA $1.02 $0.73 $0.87 ($0.59) $4.31 11:30 am ET 866 226 1792 westfraser.com

Louisiana Pacific (US$) TBA ($0.16) ($0.16) ($0.09) ($0.31) ($0.27) 1:00 pm ET 866 788 0540 888 286 8010 4517 7509 www.lpcorp.com

Cascades TBA $0.14 $0.15 $0.28 $0.27 $0.64 10:00 am ET 866 865 3087 800 642 1687 1873 6085 www.cascades.com

Fortress Paper TBA $0.10 $0.13 $0.29 $0.47 $1.04 11:00 am ET 877 353 9586 877 245 4531 347 381

TimberWest3 TBA $0.09 $0.02 ($0.05) ($0.13) $0.05 10:00 am ET 800 926 4481 800 558 5253 2147 3305 www.timberwest.com

Sino-Forest TBA $0.50 $0.65 $0.56 $0.49 $1.58 8:30 am ET 800 732 6179 877 289 8525 4181685 www.sinoforest.com

1. From continuing operations, before FX gains or losses and non-recurring items

2. Consensus estimates from Thomson One Analytics, Jan 14, 2011.

3. Figures shown are for distributable cash, before non-recurring items.

Source: Company reports, Thomson Reuters, Thomson Analytics, RBC Capital Markets estimates

Commodity price forecasts: Pulp nudged up, with most other commodity flat to down in 2011

We have made several changes to our 2011 price forecasts and are introducing our expectations for 2012 commodity prices. For building products, we have only made two minor adjustments to our lumber forecasts, but have made more meaningful revisions to our panels forecasts. We have taken down panels on expectations for another tough year in US housing, without the same relief from export opportunities that lumber markets are enjoying.

We have taken up our 2011 softwood pulp forecast but reduced our hardwood forecast, reflecting diverging fundamentals for the grades. Softwood pulp markets remain tight and prices increased in major Asian markets in January. Hardwood supply remains abundant and inventories are high, and we expect prices to remain under pressure through 2011. In paper, we are maintaining our forecasts for the lower quality grades, but taking down our expectations for lightweight coated papers and uncoated freesheet. While we expect packaging markets to remain solid through 2011, we have revised down our forecasts to reflect the lower pricing level at the beginning of the year.

We have made no change to our Canadian dollar and euro forecasts. We continue to use parity for the Canadian dollar versus the US dollar through 2011 and 2012. The Canadian dollar has been trading slightly above parity since the beginning of the year. A higher Canadian dollar has historically supported higher prices for those commodities that see a significant proportion of supply from Canadian producers (NBSK and newsprint, primarily); however, the price response typically lags and only partially offsets currency changes. The euro will likely continue to experience a relatively high level of volatility as concerns over sovereign debt ebb and flow.


5

Exhibit 3: Building products adjusted down, pulp mixed, paper & packaging prices flat to down

Current 2011 Forecasts (US$) CDN$ 2012 Forecasts

Commodity Price 2007 2008 2009 2010 2011YTD New Old Change Change (US$)

Lumber Random Lengths Composite 305 283 252 222 283 303 290 290 320

W. SPF 2x4s #2&btr (US$/mfbm) 309 250 221 182 256 315 260 260 300

E.SPF 2x4 G.L. (US$/mfbm) 395 329 305 270 341 395 340 340 380

SPF 2x4s 8' KD Studs (US$/mfbm) 270 264 212 185 246 270 250 260 (10) (3.8%) (10) 290

SYP 2x4 West (US$/mfbm) 317 279 298 242 303 310 320 315 5 1.6% 5 345

Panels OSB (7/16", NC, US$/msf) 218 160 172 163 219 217 215 225 (10) (4.4%) (10) 235

Plywood (3/8", US$/msf) 301 344 316 291 324 296 315 345 (30) (8.7%) (30) 345

MDF (3/4", West, US$/msf) 535 456 513 463 524 535 525 540 (15) (2.8%) (15) 540

Pulp NBSK (US$/tonne) 960 824 857 718 960 960 915 900 15 1.7% 15 950

NBHK (US$/tonne) 820 719 788 608 856 820 780 800 (20) (2.5%) (20) 835

Paper Newsprint (US$/tonne) 640 593 701 564 606 na 665 665 650

22.5 lb Directory (US$/ton) 740 749 748 708 700 na 745 745 730

35 lb SC-A (US$/ton) 840 751 878 818 791 na 850 850 845

No.5 40 lb LWC (US$/ton) 795 773 950 805 767 na 820 835 (15) (1.8%) (15) 870

20lb. Repro bond, 92 cut size 1,070 958 1,053 1,025 1,071 na 1,050 1,125 (75) (6.7%) (75) 1,050

50 lb Offset, Rolls (US$/ton) 920 808 901 836 905 na 920 935 (15) (1.6%) (15) 925

Packaging Linerboard (US$/ton) 635 527 577 542 620 na 665 695 (30) (4.3%) (30) 675

Medium 26 lb (US$/ton) 605 507 556 512 590 na 635 665 (30) (4.5%) (30) 645

US/Cdn Exchange Rate $1.01 $0.93 $0.94 $0.88 $0.97 $1.01 $1.00 $1.00 $1.00

Euro/US Exchange Rate € 0.75 € 0.73 € 0.68 € 0.72 € 0.75 € 0.76 € 0.77 € 0.77 € 0.77

Source: Random Lengths, Pulp & Paper Week, FOEX Indexes Ltd., Pacific Exchange Rate Service and RBC Capital Markets estimates

Q410 commodity performance: Pulp slipped, building products generally strengthened

Pulp prices began their long anticipated decline from peak levels, but declines to date have been modest, with some softwood prices showing strength as availability remains tight and demand good. Building product prices – particularly lumber prices – ended the year on a surprising high note, as offshore exports take pressure of the weak domestic market. Changes in paper prices were muted, with no major moves in either direction. Packaging markets remained flat following the failure of the announced August price increase.

Exhibit 4: Commodity price performance mixed in Q410: pulp coming off, building products up

Current Average Change ($) Change (%)

Price Q4 10 Q3 10 Q4 09 Q-o-Q Y-o-Y Q-o-Q Y-o-Y

Lumber Random Lengths Composite 305 270 249 243 21 27 9% 11%

W. SPF 2x4 309 269 222 205 46 63 21% 31%

E.SPF 2x4 G.L. 395 350 316 294 34 56 11% 19%

SPF 2x4s KD Studs, 8' 270 228 199 203 29 25 15% 12%

SYP 2x4 West 317 270 248 246 22 24 9% 10%

Panels OSB (7/16" NC) 218 191 178 172 12 19 7% 11%

Plywood 301 297 312 305 (16) (8) -5% -3%

MDF 535 535 547 435 (12) 100 -2% 23%

Pulp NBSK, del US 960 967 1000 820 (33) 147 -3% 18%

FOEX US NBSK 962 972 1005 810 (34) 161 -3% 20%

BCTMP 810 792 827 642 (35) 150 -4% 23%

NBHK 820 840 900 706 (60) 134 -7% 19%

Paper Newsprint (30 lb) 640 640 637 503 3 137 1% 27%

FOEX US Newsprint (30 lb) 626 623 604 490 19 133 3% 27%

Directory (22.5 lb) 740 740 740 667 0 73 0% 11%

SC-A (35 lb) 840 840 820 777 20 63 2% 8%

LWC 40 lb 795 795 795 753 0 42 0% 6%

20lb. Repro bond, 92 cut size 1,070 1,080 1,100 1,010 (20) 70 -2% 7%

50 lb Offset, Rolls 920 923 928 845 (5) 78 -1% 9%

Packaging Linerboard 635 635 635 525 - 110 0% 21%

Medium 26 lb 605 605 605 495 - 110 0% 22%

US/Cdn Exchange Rate 0.99 1.01 1.04 1.06 (0.03) (0.04) -2% -4%

Euro/US Exchange Rate € 0.75 € 0.74 € 0.77 € 0.68 (0.04) 0.06 -5% 9%

Source: Random Lengths, Pulp & Paper Week, FOEX Indexes Ltd., Pacific Exchange Rate Service and RBC Capital Markets estimates


6

Building materials: Lumber prices are unseasonably strong and we expect them to fall

• Lumber prices are strong despite weak underlying demand: The benchmark Western SPF price ended last week at US$309/mfbm, showing unusual strength during what is typically a slow time of year. Bad weather typically reduces new home building activity at the end of the year. Deep structural problems continue to undermine progress in the housing market. The recent strength in lumber prices has been driven by two forces: a steep increase in demand for Canadian lumber in China and some concern that a complaint will be launched under the Softwood Lumber Agreement. We note that Western SPF prices jumped 23% from the beginning of December to January. We believe lumber prices are now clear of fundamentals, and will fall in the near term as we suspect Chinese buyers will be less enthusiastic about the current pricing level.

• The China factor: Exports to China from British Columbia alone are expect to reach 2.5 billion board feet in 2010 (up 56% from 1.6 billion bfm in 2009), representing about 25% of total estimated Canadian softwood lumber exports to the US. For 2011, we understand that a couple of Canadian companies are anticipating continued 60% growth. We are not as bullish, believing gains of 30% will be achieved.

• No news but plenty of nervousness regarding softwood lumber dispute: On the Softwood Lumber Agreement front, on October 8th, the US Trade Representation filed a formal request for consultations under the agreement. After 40 days, if the dispute was not resolved through consultation, the issue could then be taken to the LCIA (London Court of International Arbitration, the agreement’s dispute resolution body). Forty days came and went on November 17th. We anticipate the US could claim damages of between US$300 million and US$400 million, although some estimates are as high as US$600 million. Trade action of this type adds uncertainty and increases the cost of lumber, as producers attempt to prepare for potentially higher duties on their shipments to the US.

• We expect prices to show little improvement in 2011, some in 2012: We forecast benchmark W SPF lumber will average US$260/mfbm in 2011, basically in line with its 2010 average, rising to US$300/mfbm in 2012 as the US housing market continues its slow recovery. We expect prices to decline from their current levels as Chinese customers balk at renewing supply contracts at prevailing prices and the potential supply of wood to North American customers increases. We expect domestic demand to remain extremely low through 2011.

Exhibit 5: Lumber prices reflect better demand offshore and increased uncertainty at home

Lumber is at surprisingly high levels in early 2011

$-

$100

$200

$300

$400

$500

$600

Jan-91

Jan-92

Jan-93

Jan-94

Jan-95

Jan-96

Jan-97

Jan-98

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

WSPF 2 x 4, USD WSPF 2 x 10, USD

Lumber near-future contract is also high

$100

$150

$200

$250

$300

$350

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

$/mfbm

Source: Random Lengths, Thomson ONE, RBC Capital Markets analysis

Building materials: OSB prices have firmed on reduced supply

• OSB prices have also recovered from trough levels, but on lower supply rather than export demand: Benchmark North Central OSB prices hit their recent low of US$160/msf in mid-September after peaking at US$395/msf in early June. They have since recovered to US$218/msf at the end of last week. The APA – The Engineered Wood Association – reported Q310 North American OSB production fell 7% to 3.8B sf from 4.2B sf in the prior quarter, with cutbacks of about the same magnitude both north and south of the border. Through the first three quarters of 2010, production of 11.6 Bsf remained 9% above last year’s level reflecting the 16% increase through the first half of the year. Consumption in Q310 fell 8% to 3.7B sf, but through the first nine months is up 8%. While fourth quarter stats are not yet available, we believe Q410 production fell again as producers adjusted output to lower demand. We forecast total production of 15.5 Bsf this year, up 9% from last year but down 42% from its peak of 26.4Bsf in 2006.


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• All-in average industry operating rates are low, but downtime includes fully idled mills: APA stats indicated the overall industry operating rate fell to 55% of capacity in Q310, down from 55-60% in the prior quarter. We believe about 20% (or about 5 billion sf) of total North American capacity of ~25 billion sf is indefinitely idled, allowing the remaining capacity to run at a higher rate. We believe producers will be very reluctant to start up mills in advance of a clearly sustainable recovery in US housing, which should help keep a floor under prices through the recovery.

• Q410 OSB prices strengthened through the quarter, and we expect then to remain near current levels – Benchmark North Central OSB averaged US$191/msf in Q410, up 7% from Q310 and an 11% improvement from Q409. OSB production is much more consolidated than lumber, with the top 5 producers representing almost 80% of total industry capacity (versus lumber’s top 10 producers representing only 44% of production). We expect greater consolidation will support better supply management, keeping prices relatively firm through continuing US housing market weakness in 2011.

• We forecast 2011 prices of US$215/msf (prices averaged US$219/msf in 2010) in 2010, rising only slightly to US$235/msf in 2012.

Exhibit 6: OSB prices have stabilized after producers cut production in H210

OSB markets should improve slightly in 2010

-

5,000

10,000

15,000

20,000

25,000

30,000

97 98 99 00 01 02 03 04 05 06 07 08 09

YTD

annualized

2010

forecast

North America OSB production (msf)

10%

20%

30%

40%

50%

60%

70%

OSB % of panel consumption

US OSB production Canadian OSB production

OSB % of panel consumption

Prices have shown gradual improvement

0

100

200

300

400

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

US$/msf

OSB - North Central

OSB - Southeast

Source: Random Lengths, RBC Capital Markets estimates

Pulp: Prices are declining, but at a modest pace

• Prices have come off peak levels, but more slowly than initially anticipated: Benchmark US NBSK pulp prices are $960/mt in January, down just $60/mt from their $1,020/mt peak in mid-2010. As prices began to roll over in the late summer, some had expected 2008’s rapid decline to repeat. Despite a significant pullback in Chinese demand in July and August that had been designed to accelerate price declines, prices stepped down in only modest increments and remained at very profitable levels.

• Softwood prices have been increasing in Asia – Arauco, the world’s second largest producer of market pulp, last week announced a US$10/mt February increase on its softwood (Radiata Pine) pulp sales to China, the third consecutive such increase. Domtar and Canfor Pulp also both announced a US$10/mt price increase on sales to China in January.

• Slower-than-expected start-up of incremental capacity, season downtime has kept markets tight: Over the past 18 months, about 2 million mt of capacity has either restarted (Catalyst Paper’s Crofton, a second line at Harmac, the Mackenzie, BC mill and Terrace Bay to name a few) or new capacity has started up (most notably the Rizhao mill in China, ~1.1 million mt). The re-starts, however, have come on-line more slowly than anticipated and have been offset by autumn maintenance work on Northern Hemisphere mills and some conversions to other grades.

• Inventories move in opposite directions – Combined days of supply declined 1 day to 33 days in November, with softwood stocks down one day to 25 days and hardwood down one day to 42 days. Softwood inventories remain below balanced market levels of about 30 days, while hardwood inventories are well above the ~38 days we would expect to see in a balanced market. Given the low inventory position, softwood stocks could increase several times over coming months and remain near balanced levels.

• We forecast US NBSK of US$915/mt in 2011 and US$950/mt in 2012, based on expectations for steady to improving demand and capacity conversions offsetting additions. We anticipate greater near-term weakness for hardwood grades, as ample supply and higher stocks put greater pressure on prices, and have reduced our 2011 NBHK forecast US$20/mt to US$780/mt.


8

Exhibit 7: Pulp prices have come off…slowly

US NBSK list prices have shown remarkably little

weakness

400

600

800

1,000

1,200

Jan-00

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

NBSK Price ($/tonne)

Increases in hardwood stocks are driving the rise in

total inventories

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

00 01 02 03 04 05 06 07 08 09 10

000's mt

400

500

600

700

800

900

1000

1100

1200

US $/mt

World Inventory NBSK Price US del.

Source: Random Lengths, RBC Capital Markets analysis

Newsprint & groundwood papers: Prices have improved and demand is stabilizing

• Newsprint prices are strong and stable: Newsprint prices have remained stable at US$640/mt since August. Prior to that, they rose each month for 12 months, increasing a total of US$205/mt from their nadir of US$435/mt in August 2009. In 2010, prices averaged US$605/mt, 7% above their 2009 average.

• Increased exports have been key: North American newsprint production has actually increased 5.7% year-to-date (November), even as North American demand has continued to decline. Year to date, demand is down 6.2% (US demand is down 7.4%) – disappointing, but a huge improvement over the 28% demand decline between 2008 and 2009. Monthly exports of newsprint have represented 32% of total shipments to date in 2010, up from 23% last year. India and Brazil have been the major sources of increased demand so far this year, and are unlikely to reduce their demand anytime soon.

• Groundwood papers prices have also improved: Prices for SC-A were steady at US$840/st in Q410, up 2.4% from the prior quarter and 8.2% from a year ago. In contrast, second quarter average prices remained 9% below prior year levels. Benchmark lightweight coated (LWC) papers have followed a similar pattern, flat quarter-over-quarter at US$795/st, but 5.5% higher than Q409. Spot directory prices also took a large step forward in third quarter, up US$80/st (12%) to US$740/st, where they remained through Q410. This is a 10% improvement over last year’s prices, and we expect to see the increase reflected in directory contract prices, currently being negotiated.

• We expect prices will continue to rise through 2011 as market leader AbitibiBowater maintains market discipline and holds the line on pricing. We forecast US$665/mt in 2011 and US$650/mt in 2012, highlighting some risk that demand declines remain elevated.


9

Exhibit 8: Increased exports have helped firm the domestic newsprint market despite ongoing demand declines

Exports have reduced domestic oversupply

15%

20%

25%

30%

35%

40%Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Exports as a percentage of total North

American shipments

Annual U.S. Dailies Annual

(000s tonnes) NA Demand Change Consumption Change

2000 13,050 -0.4% 9,274 0.5%

2001 11,633 -10.9% 8,265 -10.9%

2002 11,375 -2.2% 8,129 -1.6%

2003 11,220 -1.4% 8,123 -0.1%

2004 10,998 -2.0% 7,998 -1.5%

2005 10,384 -5.6% 7,563 -5.4%

2006 9,747 -6.1% 7,027 -7.1%

2007 8,743 -10.3% 6,265 -10.8%

2008 7,696 -12.0% 5,245 -16.3%

2009 5,766 -25.1% 3,997 -23.8%

2010 YTD 4,929 -6.2% 3,369 -8.2%

Historical North American Newsprint Demand

Source: Random Lengths, RBC Capital Markets analysis

Freesheet paper: Price increases have been implemented; demand seasonally weaker through the winter

• Prices increased twice in 2010: Prices for uncoated freesheet papers (UFS) made gains through 2010, rising US$40/st in March and about another US$45/st in May/June. Of the two types of UFS, cutsize performed better through the economic downturn in part due to its more consolidated production base. Benchmark cutsize prices slipped US$30/st in November reflecting typical seasonal weakness and price concessions by smaller producers, but prices did not decline further in December. Offset prices slipped US$10/st to US$920/st in November, where they have remained.

• Demand up this year: According to PPPC industry statistics, demand for UFS is up 0.8% through the first 11 months of 2011, against long-term expectations for a 2-4% annual structural demand decline due to changing use patterns. Compared to pre-financial crisis levels, demand to November is down 13%.

• Price increases expected to continue next year: Benchmark cut size prices averaged US$1,071/st in 2010, up 4.4% from 2009. We expect modest price erosion in early 2011, bringing the average to $1,050/st in 2011. With greater employment gains, we had expected UFS cut size prices to reach our previous forecast of $1,125/st, but we have erred on the side of caution.


10

Exhibit 9: EPS Forecast Summary

EPS

Q409A 09A Q110A Q210A Q310A Q410E 10E Q111E Q211E Q311E Q411E 11E 12E

Large caps

AbitibiBowater current ($5.44) ($26.91) ($8.77) ($5.22) ($14.39) ($0.71) ($29.09) $0.70 $1.09 $1.34 $0.80 $3.93 $4.06

prior ($8.77) ($5.22) ($14.39) ($0.71) ($29.09) $4.08

Canfor current ($0.13) ($1.06) $0.07 $0.20 $0.08 $0.09 $0.44 $0.11 $0.02 ($0.08) ($0.02) $0.03 $0.86

prior $0.07 $0.20 $0.08 $0.01 $0.36 $0.08

Cascades current $0.27 $1.13 $0.00 $0.22 $0.28 $0.14 $0.64 $0.14 $0.22 $0.27 $0.16 $0.79 $1.07

prior $0.00 $0.22 $0.28 $0.14 $0.64 $0.71

Domtar (US$) current $1.39 $1.06 $1.59 $2.67 $4.26 $2.71 $11.23 $2.58 $2.91 $2.83 $2.45 $10.77 $7.90

prior $1.59 $2.67 $4.26 $2.89 $11.40 $11.60

International Paper (US$) current ($0.24) $0.89 $0.04 $0.42 $0.91 $0.67 $2.04 $0.45 $0.77 $0.83 $0.77 $2.83 $2.69

prior $0.04 $0.42 $0.91 $0.70 $2.06 $3.12

Louisiana Pacific current ($0.31) ($1.06) ($0.18) $0.16 ($0.09) ($0.16) ($0.27) ($0.08) ($0.01) ($0.01) ($0.07) ($0.17) $0.37

prior ($0.18) $0.16 ($0.09) ($0.18) ($0.29) ($0.16)

MeadWestvaco current $0.22 $0.73 $0.11 $0.35 $0.63 $0.42 $1.52 $0.37 $0.57 $0.58 $0.47 $1.98 $2.65

prior $0.11 $0.35 $0.63 $0.42 $1.52 $1.98

Sino Forest (US$) current $0.49 $1.38 $0.18 $0.26 $0.56 $0.50 $1.58 $1.86 $2.24

prior $0.18 $0.26 $0.56 $0.54 $1.54 $2.03

West Fraser current ($0.59) ($3.40) $0.66 $1.73 $0.87 $1.02 $4.31 $0.90 $0.70 $0.57 $0.43 $2.59 $6.43

prior $0.66 $1.73 $0.87 $0.63 $3.89 $2.71

Weyerhaeuser (US$) current ($0.52) ($2.05) ($0.07) $0.20 $0.25 $0.04 $0.24 $0.14 $0.21 $0.17 $0.25 $0.77 $0.97

prior ($0.07) $0.20 $0.25 ($0.02) $0.31 $0.37

Small caps

Acadian Timber current ($0.00) $0.56 $0.20 ($0.09) $0.09 $0.09 $0.29 $0.31 ($0.12) $0.11 $0.14 $0.43 $0.64

prior $0.20 ($0.09) $0.09 ($0.02) $0.18 $0.38

Catalyst current ($0.09) ($0.19) ($0.10) ($0.11) ($0.03) ($0.03) ($0.27) ($0.04) ($0.02) ($0.02) ($0.03) ($0.11) ($0.04)

prior ($0.10) ($0.11) ($0.03) ($0.04) ($0.29) ($0.17)

Fortress Paper current $0.47 $1.37 $0.28 $0.37 $0.29 $0.10 $1.04 $0.04 $0.04 $1.69 $1.73 $3.50 $8.01

prior $0.28 $0.37 $0.29 $0.12 $1.05 $4.14

Interfor current ($0.11) ($0.86) ($0.05) ($0.01) ($0.02) ($0.01) ($0.09) $0.10 $0.08 $0.01 ($0.10) $0.09 $0.55

prior ($0.05) ($0.01) ($0.02) ($0.02) ($0.10) $0.07

Mercer (€) current (€ 0.13) (€ 1.75) € 0.10 € 0.49 € 0.64 € 0.48 € 1.70 € 0.48 € 0.39 € 0.38 € 0.46 € 1.70 € 3.11

prior € 0.10 € 0.49 € 0.64 € 0.38 € 1.60 € 1.02

Norbord (US$) current ($0.25) ($1.28) ($0.12) $0.81 ($0.16) ($0.02) $0.51 $0.05 $0.11 ($0.00) $0.05 $0.20 $1.75

prior ($0.12) $0.81 ($0.16) ($0.01) $0.52 $0.36

Income Trusts

Canfor Pulp1 current $0.31 $0.43 $0.57 $0.88 $0.78 $0.74 $2.96 $0.44 $0.34 $0.25 $0.36 $1.39 $1.84

prior $0.57 $0.88 $0.78 $0.47 $2.69 $1.30

TimberWest current ($0.13) ($0.45) ($0.04) $0.06 ($0.05) $0.09 $0.05 $0.06 $0.08 $0.07 $0.06 $0.28 $0.63

prior ($0.04) $0.06 ($0.05) $0.04 $0.01 $0.45

1 Canfor Pulp forecasts are for distributable cash. The trust converted to a corporation Jan 1, 2011.

Source: Company reports, RBC Capital Markets estimates


11

Exhibit 10: EBITDA Forecast Summary

EBITDA

Q409A 09A Q110A Q210A Q310A Q410E 10E Q111E Q211E Q311E Q411E 11E 12E

Large caps

AbitibiBowater current $314.0 $582 $20.0 $69.0 $117.0 $146.5 $353 $163 $203 $225 $163 $754 $797

prior $20.0 $69.0 $117.0 $146.5 $353 $754

Canfor current $20.6 ($64) $54.8 $108.0 $81.2 $89.0 $333 $88 $65 $42 $59 $253 $490

prior $54.8 $108.0 $81.2 $68.4 $312 $263

Cascades current $110 $465 $78 $107 $115 $97 $397 $96 $109 $115 $99 $419 $448

prior $78 $107 $115 $97 $397 $409

Domtar (US$) current $203 $640 $234 $264 $334 $260 $1,092 $248 $265 $260 $237 $1,009 $985

prior $234 $264 $334 $270 $1,102 $1,054

International Paper (US$) current $705 $2,934 $603 $829 $1,115 $957 $3,504 $816 $1,007 $1,048 $1,008 $3,879 $3,934

prior $603 $829 $1,115 $979 $3,526 $4,068

Louisiana Pacific current ($22.2) ($54) ($1.1) $71.8 $6.0 $3.3 $80.0 $17.2 $30.8 $31.3 $18.7 $98.0 $234.4

prior ($1.1) $71.8 $6.0 ($4.2) $72.5 $102.6

MeadWestvaco current $206 $808 $178 $242 $256 $250 $926 $232 $279 $281 $254 $1,046 $1,032

prior $178 $242 $276 $251 $947 $1,051

Sino Forest (US$) current $356 $898 $146 $174 $455 $412 $1,187 $1,445 $1,849

prior $146 $174 $455 $412 $1,187 $1,445

West Fraser current $64.0 $88.5 $102 $151 $109 $115 $478 $115 $102 $93 $84 $394 $644

prior $102 $151 $109 $92 $454 $408

Weyerhaeuser (US$) current $93.0 $189 $143 $289 $290 $247 $969 $309 $353 $331 $384 $1,377 $1,567

prior $143 $289 $290 $210 $932 $1,125

Small caps

Acadian Timber current $2.0 $11.5 $5.8 $1.0 $4.8 $4.2 $15.8 $8.3 ($0.3) $4.3 $5.0 $17.3 $21.3

prior $5.8 $1.0 $4.8 $2.3 $13.9 $17.3

Catalyst current $7.0 $122 ($2.1) $10.5 $34.5 $28.6 $71.5 $27.6 $35.2 $37.7 $32.5 $133.0 $170.8

prior ($2.1) $10.5 $34.5 $26.4 $69.3 $105.8

Fortress Paper current $7.9 $26 $5.8 $8.1 $8.9 $6.2 $29.1 $6.1 $6.1 $30.9 $31.5 $74.6 $132.6

prior $5.8 $8.1 $8.9 $5.2 $28.0 $89.3

Interfor current $5.7 ($6) $9.7 $13.1 $10.6 $10.5 $44.0 $20.0 $19.3 $13.7 $5.2 $58.2 $94.2

prior $9.7 $13.1 $10.6 $7.8 $41.2 $54.1

Mercer (€) current € 23.3 € 41 € 31.7 € 62.0 € 65.2 € 60.6 € 219.5 € 60.2 € 53.9 € 53.5 € 58.6 € 226.1 € 230.3

prior € 31.7 € 62.0 € 65.2 € 53.4 € 212.4 € 179.6

Norbord (US$) current $6.0 $0.0 $9.0 $71.0 $12.0 $18.6 $110.6 $22.9 $27.3 $18.7 $22.9 $91.7 $230.8

prior $9.0 $71.0 $12.0 $18.6 $110.6 $114.8

Income Trusts

Canfor Pulp1 current $27.0 $61 $44.1 $63.6 $63.9 $60.1 $231.7 $50.0 $39.3 $31.1 $41.7 $162.0 $198.7

prior $44.1 $63.6 $63.9 $40.6 $212.2 $158.3

TimberWest current ($1.7) ($8.6) $3.1 $9.9 $2.6 $6.8 $22.4 $7.0 $7.1 $6.8 $5.4 $26.2 $50.4

prior $3.1 $9.9 $2.6 $5.5 $21.1 $31.1

Source: Company reports, RBC Capital Markets estimates

____________________________________________________________________________________________________________


12

Company & Industry News

Longview packaging reportedly up for sale

Reuters reports that Brookfield Asset Management (BAM) has put its Longview complex of containerboard and kraft paper mills up for sale. The company has declined to comment. Longview is a leading West Coast producer of packaging, with 1.2 million mt of capacity, including 470 k st of kraft paper and 757 k st of containerboard capacity. In addition, Longview operates seven box plants in the region. BAM acquired the business in 2007 in a US$2.15 billion deal which included 600 k acres of timberlands, which are now part of Longview Timber LLC and are not for sale. We believe a sale of the assets to another producer is the most likely outcome, and will benefit the sector by continuing consolidation.

We believe BAM attributed only about US$110 million (or less than 1.0x current EBITDA) to the mill complex in 2007. Despite its size, Longview had been plagued by labour and operational problems for a very long time. After generating about US$200 million in 2009 from Black Liquor Tax Credits and the sale of the Eastern & Midwestern box plants, BAM has more than made back its initial estimate of value. Using a typical 4.5-6.5x sector multiple range on about US$115 million annual EBITDA generated to September 2010, we arrive at a potential value of about US$500-750 million. This value would include the integrated 1.5 million mt pulping capacity and the potential to generate ~75MW of electricity (capex required) which could be sold to the grid or used to power a potential new 500 k st containerboard machine. As consolidation in containerboard continues, we believe the most likely acquirers are International Paper, Temple-Inland and RockTenn. We would be disappointed if International Paper (Outperform, Above Average Risk; US$32.00 target) chose to pursue the asset and take its focus from realizing the potential of prior acquisitions and investments (Weyerhaeuser packaging asset optimization, SCA Chinese assets, Ilim expansion) as well as further progress on debt reduction and returning the dividend to pre-recession levels.

Catalyst Paper to redeem notes – another encouraging sign

Last week Catalyst announced it would redeem all US$26 million of outstanding June 2011 8 5/8% notes at 100% of face value. During Q310, the company bought back US$9.5 million of the notes at a small (6%) discount. In a prior transaction, US$319 million of the notes had been exchanged for US$280 million of 11% 2016 notes. In May of last year, Catalyst sold an additional US$110 million of 2016 notes with an OID of 86%. The next major maturity is US$250 million of 2014 notes.

Catalyst’s liquidity has remained strong, at $184 million at the end of Q310 including $82 million cash. Stronger results from the pulp segment and lower losses in newsprint, along with cost cutting and closing idled facilities, have improved results over the past few quarters. The share price has improved from its low of about $0.10 through August and September last year, and closed last week at $0.41. The improvement reflects improved expectations for pulp and specialty paper markets, increased confidence in newsprint supply management (following market leader AbitibiBowater’s December exit from creditor protection) and increased confidence in management’s ability to deal with the lopsided capital structure.

While we are encouraged by progress to date, we remain cautious on the name given the size of remaining challenges in primary markets and the very heavy debt burden the company continues to carry.

Sino’s Greenheart acquires New Zealand plantation as expected & agrees to sell timber in China

Greenheart announced last week that it has entered into an agreement to supply logs and related products to Sino-Forest subsidiaries at prevailing market prices over a period of three years. Greenheart has the right (but no obligation) to sell up to US$30 million of products in 2011, US$80 million in 2012 and US$100 million in 2013. Greenheart owns 60% of the harvest rights in an 184,000 hectare forest in Suriname and last week confirmed it has agreed to purchase the share capital of MFVL Limited, a Radiata Pine plantation in New Zealand as previously announced. The plantation covers 13,000 hectares, of which 11,000 hectares is harvestable timber. The purchase price was US$77 million, to be paid by the issuance of US$37 million of new Greenheart common shares and a US$40 million term loan that will either be provided by or guaranteed by Sino-Forest. Sino is the controlling shareholder of Greenheart.

Sino continues to execute on its growth plans, both inside and outside of China. It has indicated its intention to acquire 300,000 ha of mature plantations in central and western China, in addition to 650,000 ha of plantations available under the company’s six Master Agreements, representing about 75 million m3. We continue to believe investors have a number of compelling reasons to own Sino, including its exposure to the strong Chinese domestic economy, increasing year-end cash flows, upcoming growth opportunities in the form of a potential state-owned plantation (SOP) agreement, an exceptionally strong balance sheet and a very attractive valuation.

Commodity & Economic News

2010 showed growth in printing and writing paper shipments

According to preliminary AF&PA Printing & Writing paper stats, total US consumption of all grades was up 5.4% from the prior year. Uncoated freesheet shipments of 8.7 million mt were down 2.3% from the prior year, at the low end of our expectations for a 2-4% secular annual demand decline. We note that the full North American statistics published by the Pulp and Paper Products Council have


13

consistently shown a stronger result for the grade, with November year-to-date showing North American demand up 0.8%. We do not expect final PPPC printing and writing paper stats before the last week of January. It should be remembered that demand in 2009 was severely impacted by the financial crisis: compared to 2008, total demand and shipments are off ~15% to November. We do not expect aggregate demand to return to 2008 levels for several years.

Other paper grades suffered more than uncoated freesheet through the worst of the recession in 2009 and have had more ground to recover. Coated freesheet shipments slipped 2% from November but were up 16.4% from year-ago levels, while coated mechanical shipments were up 5.2% from the prior month and up 10.8% for the full year. Uncoated mechanical shipments were down significantly (7.5%) from the prior month, but still ran 14.7% above 2009 levels.

We expect uncoated freesheet demand to return to negative territory next year, but for producers to maintain their focus on managing supply to demand and keep prices near current levels. We forecast US$1,050/st for 2011 and 2012. We continue to rate Domtar Top Pick with a US$105 target. Our target is based on a blended 5.5x EV/EBITDA multiple applied to our trend EBITDA estimate of $945 million (85%) and our 2011 EBITDA estimate of $1.054 billion (15%). Our target multiple is at the midpoint of the typical Paper & Forest Products trading range (5.0x-6.5x), reflecting the company’s strong FCF and balance sheet, offset by the secular decline in paper consumption and negative pricing momentum in pulp.

Commodity Prices

Benchmark W SPF retreated US$12/mfbm to US$309/mfbm last week, still a surprisingly strong level for what is typically a very weak time of the year for lumber. Lumber futures ended the week at US$302/mfbm, down from their early January US$330/mfbm peak. We expect lumber to weaken further early in 2011 before strengthening in the spring. North Central OSB prices rose to US$218/msf, their highest level since June of last year. Production cutbacks have helped bring the market more into balance with demand.

Pulp prices continue to be strong, with January US NBSK hanging in at US$960/mt, down just US$60/mt from the mid-2010 peak. Most pulp prices were stable in the US and Europe, with just a US$10/mt decrease for US de-inked pulp (to US$745/mt). In Asia, softwood prices increased US$10/mt, supporting expectations for continuing price stability in the near term.

The Canadian dollar ended the week at US$1.01. It has traded slightly above parity since the beginning of the year. We expect it will remain near current levels through 2011 and 2012. The euro ended last week at US1.33, up from US$1.29 about a month ago. The euro remains volatile, reflecting on-going concerns about some European national debt levels. We forecast US$1.30 for both 2011 and 2012.

Exhibit 11: Commodity Prices

Current Previous Last YTD Forecasts RBC CM

Commodity Price Week Month Year ago 2006 2007 2008 2009 2010 2011 2011E 2012E Trend Price

Lumber Random Lengths Composite 305 301 282 268 326 283 252 222 283 303 290 320 355

W. SPF 2x4s #2&btr (US$/mfbm) 309 321 285 239 296 250 221 182 256 315 260 300 325

E.SPF 2x4 G.L. (US$/mfbm) 395 395 370 318 368 329 305 270 341 395 340 380 415

SPF 2x4s 8' KD Studs (US$/mfbm) 270 270 242 237 289 264 212 185 246 270 250 290 345

SYP 2x4 West (US$/mfbm) 317 303 275 277 329 279 298 242 303 310 320 345 365

Baby Squares (US$/mfbm) 753 753 753 648 673 763 760 753 780 715

Panels OSB (7/16", NC, US$/msf) 218 215 197 190 218 160 172 163 219 217 215 235 225

Plywood (3/8", US$/msf) 301 300 296 304 311 344 316 291 324 296 315 345 325

MDF (3/4", West, US$/msf) 535 535 535 435 452 456 513 463 524 535 525 540 500

Pulp NBSK (US$/tonne) 960 960 850 824 824 857 718 960 960 915 950 850

FOEX US NBSK (US$/mt) 962 967 969 839 717 819 861 715 955 965

NBHK (US$/tonne) 820 820 743 656 719 788 608 856 820 780 835 585

Paper Newsprint (US$/tonne) 640 640 530 668 593 701 564 606 na 665 650 650

FOEX US Newsprint (US$/mt) 626 626 625 527 634 581 672 574 583 626

22.5 lb Directory (US$/ton) 740 740 660 750 749 748 708 700 na 745 730 730

35 lb SC-A (US$/ton) 840 840 770 798 751 878 818 791 na 850 845 870

No.5 40 lb LWC (US$/ton) 795 795 750 843 773 950 805 767 na 820 870 850

20lb. Repro bond, 92 cut size 1,070 1,070 1,010 893 958 1,053 1,025 1,071 na 1,050 1,050 1,025

50 lb Offset, Rolls (US$/ton) 920 920 845 813 808 901 836 905 na 920 925 900

Packaging Linerboard (US$/ton) 635 635 525 498 527 577 542 620 na 665 675 625

Medium 26 lb (US$/ton) 605 605 495 473 507 556 512 590 na 635 645 595

US/Cdn Exchange Rate $1.01 $1.01 $0.99 $0.96 $0.88 $0.93 $0.94 $0.88 $0.97 $1.01 $1.00 $1.00 $1.00

Euro/US Exchange Rate € 0.75 € 0.77 € 0.76 € 0.70 € 0.80 € 0.73 € 0.68 € 0.72 € 0.75 € 0.76 € 0.77 € 0.77 € 0.73 Source: Random Lengths, Crows, Pulp & Paper Week, FOEX Indexes Ltd., Pacific Exchange Rate Service and RBC Capital Markets estimates


14

Exhibit 12: North American Paper & Forest Products Comparative Valuation Table

Price 12-month Dividend Implied Shares Mkt Cap EV Net EPS EV/EBITDA

1/14/11 Target Yield Return High Low (FD Mln) (Mln) (Mln) D/D+E '09A '10E '11E '12E '09A '10E '11E '12E

LARGE CAPS

AbitibiBowater (US$) ABH'I AA O $25.35 $29.00 0% 14% $29.48 $21.50 101.0 $2,459 $3,349 20% ($26.91) ($29.09) $3.93 $4.06 5.8x 9.5x 4.4x 4.2x

Canfor CFP AA SP $11.46 $9.50 0% -17% $12.02 $7.22 142.6 $1,634 $1,742 7% ($1.06) $0.44 $0.03 $0.86 nmf 5.2x 6.9x 3.6x

Cascades CAS AA SP $6.33 $7.00 2.5% 13% $9.41 $5.71 99.0 $612 $2,128 53% $1.13 $0.64 $0.79 $1.07 4.6x 5.4x 5.1x 4.8x

Domtar (US$) UFS AA TP $79.11 $105.00 1% 34% $84.99 $46.24 43.0 $3,378 $3,850 14% $1.06 $11.23 $10.77 $7.90 6.0x 3.5x 3.8x 3.9x

International Paper (US$) IP AA O $28.67 $32.00 2.6% 14% $29.25 $19.33 433.8 $12,437 $19,748 52% $0.89 $2.04 $2.83 $2.69 6.7x 5.6x 5.1x 5.0x

Louisiana Pacific (US$) LPX AA SP $9.93 $10.00 0% 1% $13.44 $6.25 131.1 $1,302 $1,708 21% ($1.06) ($0.27) ($0.17) $0.37 nmf 21.3x 17.4x 7.3x

MeadWestvaco (US$) MWV AA O $27.19 $32.00 4% 21% $29.18 $20.81 172.5 $4,628 $5,908 28% $0.73 $1.52 $1.98 $2.65 7.3x 6.4x 5.6x 5.7x

Sino-Forest (US$)1 TRE AA O $22.62 $27.00 0% 19% $24.68 $15.10 268.2 $5,551 $5,437 0% $1.38 $1.58 $1.86 $2.24 6.1x 4.6x 3.8x 2.9x

West Fraser WFT Avg SP $49.60 $45.00 0.5% -9% $50.58 $31.52 43.1 $2,124 $2,237 6% ($3.40) $4.31 $2.59 $6.43 25.3x 4.7x 5.7x 3.5x

Weyerhaeuser (US$) WY AA SP $21.63 $18.00 0.9% -16% $53.69 $15.06 536.0 $11,585 $15,342 45% ($2.05) $0.24 $0.77 $0.97 nm 15.8x 11.1x 9.8x

SMALL CAPS

Acadian Timber ADN Avg O $7.47 $10.00 2.7% 37% $7.75 $5.71 16.6 $124 $197 39% $0.56 $0.29 $0.43 $0.64 17.1x 12.5x 11.3x 9.2x

Catalyst CTL AA U $0.41 $0.10 0% -75% $0.44 $0.09 381.8 $155 $908 65% ($0.19) ($0.27) ($0.11) ($0.04) 7.4x 12.7x 6.8x 5.3x

Fortress Paper FTP AA SP $50.25 $50.00 0% 0% $53.96 $10.38 13.5 $677 $754 0% $1.37 $1.04 $3.50 $8.01 29.5x 26.0x 10.1x 5.7x

Interfor IFP.A AA SP $6.18 $5.50 0% -11% $6.25 $3.21 47.1 $291 $442 30% ($0.86) ($0.09) $0.09 $0.55 nm 10.1x 7.6x 4.7x

Mercer (US$/€)2 MERC Spec O $8.50 $10.00 0% 18% $8.75 $2.83 56.9 € 268 € 1,094 79% (€ 1.75) € 1.70 € 1.70 € 3.11 27.0x 5.0x 4.8x 4.8x

Norbord (US$)1 NBD AA O $15.36 $17.00 0% 11% $21.61 $10.51 57.4 $881 $1,258 50% ($1.28) $0.51 $0.20 $1.75 nmf 11.4x 13.7x 5.4x

INCOME TRUSTS

Canfor Pulp CFX.UN AA SP $14.62 $13.50 4.1% -3% $16.70 $7.47 71.3 $1,042 $1,128 13% $0.43 $2.96 $1.39 $1.84 18.4x 4.9x 7.0x 5.7x

TimberWest3 TWF.UN AA U $4.85 $3.50 0% -28% $5.98 $3.60 90.3 $436 $728 30% ($0.45) $0.05 $0.28 $0.63 nm nmf 27.7x 14.4x

Company52-week

RatingRisk

Notes: TP – Top Pick; O - Outperform; SP - Sector Perform; U - Underperform. Avg - Average Risk; AA - Above Average Risk; Spec - Speculative Risk.

1 TRE and NBD share price is in C$, while all other financial data is in US$. 2 MERC share price in US$, all other financial data is in euros. 3 TWF.UN shows distributable cash flow per unit, not EPS, and P/DCF, not P/E. All EPS and distributable cash flows are before unusual items.

Source: Company reports, Thomson One, RBC Capital Markets estimates


15

Required Disclosures

Non-U.S. Analyst Disclosure

Paul C. Quinn (i) is not registered/qualified as a research analyst with the NYSE and/or FINRA and (ii) may not be associated personsof the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions oncommunications with a subject company, public appearances and trading securities held by a research analyst account.

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including totalrevenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated byinvestment banking activities of the member companies of RBC Capital Markets and its affiliates.

Distribution of Ratings

For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy,Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick/Outperform,Sector Perform and Underperform most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the samebecause our ratings are determined on a relative basis (as described above).

Distribution of RatingsRBC Capital Markets, Equity Research

Investment BankingServ./Past 12 Mos.

Rating Count Percent Count Percent

BUY[TP/O] 676 50.10 193 28.55HOLD[SP] 609 45.10 133 21.84SELL[U] 65 4.80 9 13.85

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