CANFOR CORPORATION

University of Victoria Student Research

CFA Institute Research Challenge 2012
Presentation Highlights
$14.41
Overview

Competitive Advantages Financial

Analysis

Rising Lumber Prices Valuation

$11.70
Risks

Increasing Lumber Demand

Company Overview
North American Operations

Overview

Financial
Analysis

Source: Canfor
Valuation
 Headquartered in Vancouver, British Columbia

 Lumber mill operations in British Columbia, Alberta, Quebec, Washington State,

South Carolina, North Carolina
Risks
 Largest Annual Production Capacity in North America (5.2 billion board feet)

 50.2% ownership stake in Canfor Pulp & Paper

Company Overview:
Major Markets

8000
2010 Total Regional Sawnwood Lumber Imports (MM Board Feet)
7000 Overview

6000

5000 Financial
Analysis
4000

3000

Valuation
2000

1000

0
Risks

Source: FAOSTAT
Industry Overview:
US Housing Starts and Lumber Prices
 United States: Expected recovery in the housing market will drive up lumber prices
Annualized Monthly US Housing Starts vs. Monthly Lumber Prices
600 2500
Lunmber Prices ($ per Thousand Board Feet)

Overview

Annual Housing Starts (Thousands)

500
2000

400
Lumber Prices 1500

300
Financial
1000 Analysis
200

500
100
US Housing Starts
Valuation
0 0
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011
Correla on Source: Random Lengths, ForecastChart
600

500
Lumber Prices

400  Potential for Risks

300
 High growth potential in US paired with Supernormal Sales
200
 Continued new growth in China Growth in medium
100
term
0
0 500 1000 1500 2000 2500
US Housing Starts
Industry Overview:
Harvesting Restrictions in China

Overview

Financial
Analysis

Valuation

Risks
Industry Overview:
Growing Supply Gap in China

Sawnwood Lumber Exports to China (MM Board Feet)

Overview

Financial
Analysis

Valuation

Risks
Competitive Positioning: China
North America

Overview

Financial
Analysis

Valuation

Risks
FINANCIAL
ANALYSIS
Financial Analysis:
Return On Equity

ROE
Overview
6.00%

5.00%

4.00% Financial
Analysis

3.00%

2.00%
Valuation
1.00%

0.00%
2010 2011E 2012E 2013E 2014E 2015E
Risks
Financial Analysis:
Lumber Sales

2010
Japan Other
6% 1%

Overview
China
17%
Regional Lumber Sales Growth ($M)
US Housing
United States 2500 Other
Rebound 54%
Canada Japan
22%
2000 Financial
Analysis
Canada
Rising 1500
Lumber China
Price
1000
Valuation
Increasing
2015E 500 United States
Japan, 3.15% Other, 1.95%
Chinese
Supply 0
Gap 2010 2011E 2012E 2013E 2014E 2015E
United
China, States,
Risks
31.68% 47.81%

Canada,
15.41%
Financial Analysis:
Pulp Sales

Weakening Overview
Demand Pulp Sales ($ Millions)
1200

1000

800 Financial
Dropping
600
Analysis
NBSK price
400

200

0
2010 2011E 2012E 2013E 2014E 2015E
Valuation
Excess
Supply
 Canfor Pulp and Paper is not a
sustainable contributor to Canfor’s Risks
Value
 Financial Analysis:
Projected Ratios

EBITDA Margin Debt to Capital Ratio

20% 12%
10%
15% Overview
8%
10% 6%
4%
5%
2%
0% 0%
Financial
2010 2011E 2012E 2013E 2014E 2015E 2010 2011E 2012E 2013E 2014E 2015E Analysis

Current Ratio Solvency Ratio

4.00 40%
3.00 30% Valuation
2.00 20%
1.00 10%
- 0%
2010 2011E 2012E 2013E 2014E 2015E 2010 2011E 2012E 2013E 2014E 2015E Risks

Stability Level
VALUATION
Valuation

Final Value, Overview

December
2012

EBITDA Financial
Regression Analysis
Multiple
Analysis

Corrects for potential

Valuation
inaccurate cyclical foresight
Discounted of DCF
Cash Flow

Captures the effect of short- Risks

term cash flows on Canfor’s
value
Discounted Cash Flow:
Asset Proportions

Ownership: Lumber Ownership: Pulp and Paper

Overview

Other, 49.8%
Canfor , 50.2%

Canfor , 100%
Assets by Business Unit Financial
Analysis

Canfor Pulp Limited

Valuation
Partnership, 24%

Canfor's Lumber
Opera ons and
Other, 76%
Risks
Discounted Cash Flow:
Post-Analytical FCFE Projection (2016 Onwards)

FCFE Growth Cycle Illustration

Overview

Financial
Analysis

Valuation

Risks
5 Year Positive Growth 3 Year Negative Growth
Min: 0%, Max: 2.5% Min: 0%, Max: 2.5%
 Discounted Cash Flow:
Analytical Phase (2012-2015)

Change In Non-
Overview
Cash Working
Capital

Non-Cash Charges
Inflows
Financial
Analysis

Net Income

Valuation
Capital Expenditures
Outflows

Net Borrowing
2012 2013 2014 2015 Risks
FCFE, NET: $102.94 $104.03 $120.23 $108.40

 Continued deleveraging
 Notable fixed capital investments December 2012 DCF Value: $15.40
 Multiple Analysis:
Similarity Assessment

Basis for Peer Company Similarity Assessment

WACC
Overview
Total
Assets
Other Factors
Ranking Company
Timber Tenures
1 West Fraser Timber Financial
Efficiency CAGR Sales
2 Weyerhaeuser Analysis
3 Tembec
4 Western Forest Products
Exposure
5 Abitibibowater
Valuation
Assets - ST
Company WACC Investments CAGR Sales Timber Tenures ($M) Regional Operations
($M)
Canfor 6.34% 2594 10.16% 563.7 Canada, US
West Fraser Timber 4.51% 2651.9 7.77% 544.1 Canada, US
Risks
Tembec 7.67% 1004 2.60% Canada, US, France
Western Forest Products 7.08% 582 3.42% 249.9 Canada
Weyerhauser 7.05% 11962 7.29% 124.96 Canada, US, China, Uruguay
Abitibibowater 5.08% 6846 2.19% Canada, US, S.Korea
Multiple Analysis:
Weighted Average Multiple

Company Similarity Score Weight Weighted EV/EBITDA

Similarity Ranking EV/EBITDA (5)
(2) (3) (4) (4)*(5)
1 West Fraser Timber 5.61 32.52% 7.9 2.57
2 Weyerhaeuser 3.23 18.72% 15.8 2.96 Overview
3 Tembec 3.04 17.62% 6.2 1.09
4 Western Forest Products 2.72 15.77% 9.7 1.53
5 Abitibibowater 2.65 15.36% 4.2 0.65
Weighted average EV/EBITDA to apply to Canfor: 8.80
Financial
Projected 2012 Statement of Income ($M) Analysis
SALES 2400.24
COST OF GOODS SOLD
Manufacturing costs
Weighted
1500.29
Freight & Other Distribution Costs 557.59 2012 Average
Export Tax 69.46 EBITDA: EV/EBITDA: Enterprise Value:
COST OF GOODS SOLD (2127.34) 8.80x $2,051,192,000
GROSS MARGIN 272.90
$233.09M Valuation
Selling General and Administrative Costs (39.80)
EBITDA 233.09
Depreciation and Amortization (135.49) # Shares FY End 2012
Restructuring Costs (28.23) Outstanding: Share Price:
EBIT 69.37
142,710,000
Interest Income (Expense)
EBT
(10.10)
59.28
$14.37 Risks
Income Tax Recovery (Expense) (22.82)
NET West
INCOME Fraser Timber and Weyerhaeuser
36.46 are the most comparable to Canfor
EBITDA Regression: Variables

 Method: Regress regional EBITDA over the following macroeconomic

variables in each region.
Geographic Segment Normalized Variables Overview
GDP
Eurozone GDP
China
Japan
Europe
Canada Eurozone
Housing Domestic
Housing Starts
CNY/USD Demand
& Prices
Exchange
Starts Rate
United States
USD/JPY
EUR/USD Exchange
Exchange
Unemployment
Unemployment Rate
Rate
RateRate
Financial
USD/CAD Exchange Rate Analysis
EBITDA Mean: $171 Million

Valuation

Risks
Final Value

Final Value, Overview

December
$14.41 2012
$14.37
Multiple Financial
Analysis Analysis
$15.40
Discounted • 50% Weighting

Cash Flow
• 40% Weighting

$10.58 Valuation
Statistical
Approach
• 10% Weighting

Risks
RISKS
Investment Risks

Investment Risks
Overview
Highest Impact Disappointing US housing start growth

Lower than expected Chinese lumber demand growth

Financial
Sustained lull in lumber prices Analysis

Exchange rate risk

Dangers to natural environment Valuation

Government regulation changes

Failure to successfully renegotiate labour union terms Risks

Lowest Impact Termination of Softwood Lumber Agreement (SLA)

 Rising Strong Growing
Lumber Competitive Lumber
Demand Positioning Prices
Appendix A: Financials
Appendix B: Financials
Appendix C: Financials
Appendix D: Financials
Appendix E: FCFE Sensitivity
Analysis
Appendix F: DCF Inputs
 ) #+% ' " #&( ' " #( ' ' " #- & ' " #+, ' ( #" & ' ( #$' ' ( #+* ' *#' - ' *#$& ' *#+* ' $#' +

.
) #( % ' ' #** ' ' #- + ' ' #, ( ' " #' , ' " #*- ' " #) ( ' ( #&' ' ( #" , ' ( #$) ' ( #+- ' *#' $
, #, % ' &#, & ' ' #' ' ' ' #( * ' ' #$- ' ' #+& ' " #&( ' " #" ) ' " #$" ' " #) - ' ( #&' ' ( #" $
+#' % ' &#*& ' &#- & ' &#) , ' &#, , ' ' #" & ' ' #*' ' ' #- ' ' ' #+( ' " #&* ' " #" $ ' " #*-

Appendix G: Comparables
Source: Team C estimates

Appendix B: Comparable Analysis

This chart illustrates the similarities of observed companies to Canfor. We evaluate similarities based on demand and supply factors and
company fundamentals. Companies closer to Canfor are more more similar based on these factors.

Fundamentals

Market
Factors:
Exposure &
Supply

Source: Team C analysis

Appendix H: Company Similarity
Appendix I: Comparable Fundamentals
After Tax
Cost of
Company WACC Cost of Equity Cost of
Debt
Debt
Canfor 6.34% 6.68% 3.60% 5.00%
West Fraser 4.51% 4.61% 3.74% 5.20%
Weyerhaeuser 7.05% 8.11% 5.29% 7.35%
AbitibiBowater 5.08% 4.99% 5.76% 8.00%
Tembec 7.67% 7.52% 8.10% 11.25%
Western Forest Porducts 7.08% 7.69% 4.32% 6.00%
Lousiana Pacific 9.70% 9.84% 9.36% 13.00%
Plum Creek Timber 4.48% 5.49% 3.89% 5.40%
Norbord 6.15% 6.46% 5.72% 7.95%

Required
Company % Equity % Debt Beta RFR Return,
Market
Canfor 89% 11% 1.071 2.16% 6.38%
West Fraser 89% 11.00% 0.58 2.158% 6.38%
Weyerhaeuser 62% 37.70% 1.41 2.158% 6.38%
AbitibiBowater 87% 12.60% 0.67 2.158% 6.38%
Tembec 73% 26.60% 1.27 2.158% 6.38%
Western Forest Porducts 82% 17.90% 1.31 2.158% 6.38%
Lousiana Pacific 70% 29.60% 1.82 2.158% 6.38%
Plum Creek Timber 37% 63.20% 0.79 2.158% 6.38%
Norbord 58% 41.70% 1.02 2.158% 6.38%
Appendix J: Applied Ratios
Appendix K:
Regression Variables
Appendix L: Exchange Rates
Appendix M:
Management Change
Appendix N: Mountain Pine Beetle

Entire Province
Timber Harvesting Land Base
Pine Volume Killed (millions of cubic meters