Action Notes October 17, 2014 Equity Research 1 of 48 RATING/TARGET/ESTIMATE CHANGES Linamar Corp. (LNR-T) C$51.41 BUY (Unchanged);Target: C$65.00 (Prior: C$75.00) Adjusting Valuation on Global Growth Risk ...... 2 Magna International Inc. (MGA-N, MG-T) US$87.69 BUY (Unchanged);Target: US$110.00 (Prior: US$130.00) Adjusting Valuation on Global Growth Risk ...... 6 Norbord Inc. (NBD-T) C$22.37 HOLD (Prior: BUY);Target: C$24.00 (Prior: C$29.00) Downgrading to HOLD from Buy; Dividend Cut Risk in Early-2015 .... 11 INDUSTRY NOTES Energy Producers TD Energy: The Discovery Well .... 16 Paper & Forest Products North American Paper & Forest Products .... 20 Real Estate Canadian Real Estate Q3/14 Earnings Preview .... 29 INTRADAY NOTES (published October 16, 2014) MAG Silver Corp. (MAG-T, MVG-N) C$8.99 SPEC. BUY (Unchanged);Target: C$14.00 (Unchanged) Corporate Update .... 34 Torstar Corp. (TS.B-T) C$7.07 HOLD (Unchanged);Target: C$8.00 (Unchanged) Q3/14 Preview .... 37 Turquoise Hill Resources Ltd. (TRQ-T, TRQ-N) C$3.72 HOLD (Unchanged);Target: C$4.25 (Unchanged) Lower 2014 Production Guidance Offset by Cost Improvements .... 42 Please see the final pages of this document for important disclosure information. Action Notes October 17, 2014 Equity Research Brian Morrison, CA Meaghen Annett (Associate) Auto Parts & Equipment Recommendation: 2 of 48 BUY Unchanged Risk: MEDIUM 12-Month Target Price: C$65.00 C$75.00 Prior: 12-Month Dividend (Est.): C$0.40 12-Month Total Return: 27.2% Linamar Corp. (LNR-T) C$51.41 Adjusting Valuation on Global Growth Risk Event Market Data (C$) Current Price 52-Wk Range Mkt Cap (f.d.)($mm) Current Dividend Dividend Yield Avg. Daily Trading Vol. (3M-All Exch) $51.41 $33.99-$67.67 $3,367.4 $0.40 0.8% 161700 We have adjusted our financial forecast this morning to account for a potential slowing of European/global economic growth. In light of the heightened risk associated with a slower global economic growth outlook, we have adjusted our target multiple resulting in the lowering of our target price to $65.00 from $75.00. Financial Data (C$) Fiscal Y-E Shares O/S (f.d.)(mm) Float Shares (mm) Net Debt ($mm) Net Debt/Tot Cap ROE December 65.5 46.4 $311.0 14.0% 18.9% Impact: NEGATIVE It is our view that the global automotive cycle will continue to grow through 2016 albeit at a modest rate and aided by low interest rates. Despite the potential for slower forecast growth, what we continue to like about Linamar is the industry trends toward both outsourcing of precision components and heightened fuel efficiency standards that should benefit its growth profile through increasing content per vehicle metrics. That stated, we believe that the heightened risk of slowing European/global economic growth dictates a revision to the applied multiple in the auto supplier space. As every multiple turn for Linamar represents $12.00 to the share price, this results in a material lowering of our target price. Estimates (C$) Year Sales ($mm) EBITDA ($mm) EBITDA (old)($mm) EPS (f.d.) EPS (f.d.)(old) 2013A 2014E 2015E 2016E 3,595.5 4,215.1 5,161.0 5,614.9 523.5 653.4 768.9 832.9 --775.9 847.5 3.31 4.43 5.04 5.56 --5.09 5.66 EPS (f.d.) Quarterly Estimates (C$) Year Q1 Q2 Q3 Q4 2013A 0.74 0.93 0.80 0.84 2014E 1.22 1.37 0.95 0.90 2015E ----- 2016E ----- 2015E 10.2x 4.7x 2016E 9.2x 4.0x Supplemental Data Year P/E (f.d.) EV/EBITDA 2013A 13.3x 6.3x 2014E 11.6x 5.5x Notes:EBITDA, EPS pre one-time items. 2015PF Net Debt, ROE. TD Investment Conclusion Despite the recent decline in share price, we maintain that Linamar is well positioned to benefit from positive industry trends and deliver attractive earnings and FCF growth over the next few years. As a function of heightened risk associated with European/global economic growth, it is our view that applied multiples are likely to return to more of a “historical” range for auto suppliers. Based on our positive outlook, we certainly believe that Linamar should trade towards the high end of its average resulting in the lowering of our target price to $65.00 from $75.00. We are maintaining our BUY recommendation and view the current share price as attractive. All figures in C$, unless otherwise specified. Please see the final pages of this document for important disclosure information. Company Profile Linamar is a global supplier of precisionmachined components, modules, and systems for engine, transmission, chassis, and industrial applications, primarily for the North American, European, and Asia Pacific automotive marketplace. LNR-T: Price 70 70 60 60 50 50 40 40 30 30 20 20 10 10 2011 2012 2013 2014 Action Notes October 17, 2014 Equity Research 3 of 48 Details The macro outlook for Europe continues to come under pressure — Germany recently lowering its growth forecast for both 2014 and 2015. In addition, TD Economics cites that other core economies such as Italy and France still need to embark on meaningful structural reform but face limited budgetary space for fiscal support that could result in relatively lacklustre growth in these two countries. Clearly, the macro economic outlook for Europe is not meeting initial expectations and is causing heightened concern that this could spill into other economic regions and result in weakened global economic growth. We estimate that Europe comprises approximately 16% of Linamar’s current revenue base. Assuming the closure of the forging acquisitions of SEI and CFC, we estimate that this should rise to approximately 22% of consolidated revenue. Outlook Our financial adjustments are fairly limited for Linamar, as outlined in Exhibit 1. We attribute the revisions to lowering our inputs to our 2015 European forecast in light of the weakening outlook, while also modestly adjusting our 2015 North American volume forecast. Exhibit 1. Linamar: 2015 Financial Forecast Revisions NEW C$mm (except per share) OLD 2014E 2015E 2016E 2014E 2015E 2016E 3,537.8 3,949.1 4,334.4 3,537.8 3,994.7 4,430.7 677.3 761.9 830.5 677.3 761.9 830.5 n/a 450.0 450.0 n/a n/a n/a 5,711.2 Segment Sales Powertrain/Driveline Industrial Proposed CFC, SEI acquisitions Total Sales 4,215.1 5,161.0 5,614.9 4,215.1 5,206.6 EBITDA 653.4 768.9 832.9 653.4 775.9 847.5 EBITDA margin % 15.5% 14.9% 14.8% 15.5% 14.9% 14.8% EBIT Margin Powertrain/Driveline 9.0% 8.7% 8.6% 9.0% 8.8% 8.6% Industrial 12.9% 12.5% 11.5% 12.9% 12.5% 11.5% Consolidated 9.6% 9.0% 8.9% 9.6% 9.0% 8.9% Net Income 290.3 330.2 364.3 290.3 333.4 370.9 Net margin % 6.9% 6.4% 6.5% 6.9% 6.4% 6.5% EPS $4.43 $5.04 $5.56 $4.43 $5.09 $5.66 Note: 2015 and 2016 segmented EBIT margins exclude the acquisitions of CFC and SEI. Source: TD Securities Inc. estimates The reasoning for such nominal adjustments has to do with several factors, including the following: 1. OEM outsourcing of precision components continues to take hold 2. There is heightened complexity of components in order to meet fuel efficiency standards 3. Linamar has a substantial launch book of over $3.2 billion. As we repeatedly highlight, the industry trends of outsourcing and component complexity position Linamar through heightened content per vehicle to outperform the market rate of growth regardless of the underlying industry volumes. In Exhibit 2, we illustrate Linamar’s recent content per vehicle performance and our forecast. October 17, 2014 Equity Research Action Notes 4 of 48 Exhibit 2. Linamar: Content per Vehicle North America (includes medium/heavy trucks) Y/y growth Europe (excludes medium/heavy trucks, off-road) Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14 2014E 2015E 2016E $126.18 $116.87 $122.60 $118.33 $130.29 $129.91 $131.62 $127.39 $133.65 $141.67 $148.75 -4.3% -5.7% 1.1% -2.4% 3.3% 11.2% 7.4% 7.7% 6.8% 6.0% 5.0% $12.49 $14.78 $11.71 $13.29 $15.58 $17.38 $19.43 $19.13 $20.32 $26.41 $33.01 Y/y growth -4.1% 26.2% 3.8% 24.3% 24.7% 17.6% 65.9% 43.9% 40.6% 30.0% 25.0% Asia Pacific (excludes medium/heavy trucks, off-road) $4.06 $4.65 $4.19 $5.55 $5.74 $6.12 $6.72 $6.76 $6.88 $8.42 $9.69 Y/y growth 4.9% 30.6% 13.9% 31.5% 41.4% 31.6% 60.4% 21.8% 27.3% 22.5% 15.0% Source: Company reports, TD Securities Inc. With an increase in the global macroeconomic risk profile (specifically Europe), shares in the auto supplier sector in general, inclusive of Linamar, have been punished over the past month. With very modest revisions to Linamar’s consensus expectation, it is fair to say that the major contributor to the decline in share price has been a contraction in the applied multiple. According to the global (and European) forecast by our TD Economics team, in addition to the latest forecast by the IMF — a global recovery remains underway. That stated, the recent global revisions have been to the downside with Europe being a focal point. Based on this outlook, we believe that improving global auto volumes will continue through 2016. Q3/14 Preview We are forecasting a 15% increase in consolidated sales, driven by a continuation of growth in volume and content per vehicle in the P/D segment. We forecast a flat EBIT margin in Q3 for P/D as the segment laps a strong Q3/13 performance — admittedly, this may prove conservative. The Industrial segment should continue to benefit from volume growth, while forecast margin improvement is a function of improvement in productivity and economies of scale. We highlight our financial forecasts in Exhibit 3 below. Exhibit 3. Linamar: Q3/14 Financial Forecasts Q3/14E Q3/13A Y/Y Chg Segment Sales Powertrain/Driveline 878.2 765.7 14.7% Industrial 149.3 127.6 17.0% Total Sales 1,027.6 893.3 15.0% EBITDA 148.7 129.0 15.2% EBITDA margin % 14.5% 14.4% 3bps Powertrain/Driveline 8.6% 8.6% -1bps Industrial 7.0% 5.9% 110bps Consolidated 8.4% 8.2% 14bps Net Income 61.9 52.0 19.1% Net margin % 6.0% 5.8% 21bps EPS $0.95 $0.80 18.2% EBIT Margin Source: Company reports, TD Securities Inc. Action Notes October 17, 2014 Equity Research 5 of 48 Valuation Linamar is currently trading at 5.5x/4.7x/4.0x our 2014E/2015E/2016E EBITDA. This compares with its peer group averages of 6.5x, 5.8x, and 5.2x, respectively. On a P/E basis, Linamar is trading at 11.6x/10.2x/9.2x our 2014E/2015E/2016E EPS forecast. Exhibit 4. Historical Valuation LNR Historical Forward P/E LNR Historical Forward EV/EBITDA 18.5x 7.0x 16.5x 6.5x 6.0x 14.5x 11.6x 12.5x Average 10.7x 5.5x 4.5x -1 Std. Dev. 3.9x 4.0x -1 Std. Dev. 8.3x 4.7x Average 4.8x 5.0x 10.2x 10.5x 8.5x +1 Std. Dev. 5.7x 5.5x +1 Std. Dev. 13.1x 3.5x 3.0x 6.5x 2.5x 4.5x 2015E 2014E Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 2015E 2014E Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 2.0x Source: Baseline, Capital IQ, Bloomberg, TD Securities Inc. Justification of Target Price We believe that Linamar is positioned to deliver attractive earnings growth over the next several years. In light of the potential for a slowing of global economic growth, we have seen the rapid removal of premium multiples in the sector. With a return to historical valuations, we are of the view that Linamar should trade towards the high end of its historical average, based on our forecast. Our valuation is derived by applying a target multiple of 5.7x 2015 EBITDA (6.8x previously) or 5.1x our forecast for 2016 (5.9x previously). This results in a reduction to our target price to $65.00 (from $75.00). We believe that the implied target P/E multiples of 12.9x 2015E EPS and 11.7x 2016E EPS are justified by Linamar’s attractive return on capital metrics. Exhibit 5. Derivation of Target Price $mm, except per share 2015E EBITDA $mm, except per share $769 Applied Target Multiple Enterprise Value Net Debt (Cash) Market Capitalization Period Ending Shares Outstanding (mm) 5.7x 2016E EBITDA Applied Target Multiple $4,413 Enterprise Value $221 Net Debt (Cash) $4,192 65 Market Capitalization Period Ending Shares Outstanding (mm) $833 5.1x $4,281 $11 $4,270 65 Target Price $64.50 Target Price $65.39 12-Month Target Price Rounded $65.00 12-Month Target Price Rounded $65.00 Source: TD Securities Inc. Key Risks to Target Price Key risks to target price include: significant deterioration of economic conditions; significant deterioration in the financial health of customers; competition/loss of market share; increased regulation; technological advances and program launches; and capital risk. Action Notes October 17, 2014 Equity Research Brian Morrison, CA Meaghen Annett (Associate) Auto Parts & Equipment Recommendation: 6 of 48 BUY Unchanged Risk: MEDIUM 12-Month Target Price: US$110.00 US$130.00 Prior: 12-Month Dividend (Est.): US$1.52 12-Month Total Return: 27.2% Magna International Inc. (MGA-N, MG-T) US$87.69 Adjusting Valuation on Global Growth Risk Event Market Data (US$) Current Price 52-Wk Range Mkt Cap (f.d.)($mm) EV ($mm) Current Dividend Dividend Yield Avg. Daily Trading Vol. (3M-All Exch) $87.69 $76.15-$114.44 $19,256.7 $18,613.7 $1.52 1.7% 612757 We have adjusted our financial forecast this morning to account for a potential slowing of European/global economic growth. In light of the heightened risk associated with a slower global economic growth outlook, we have adjusted our target multiple resulting in a lowering of our target price to $110.00 from $130.00. Financial Data (US$) Fiscal Y-E Shares O/S (f.d.)(mm) Float Shares (mm) Net Debt ($mm) Net Debt/Tot Cap December 219.6 219.6 ($643.0) (3.4%) Impact: NEGATIVE It is our view that the global automotive cycle will continue to grow through 2016 albeit at a modest rate and be aided by low interest rates. This, combined with cost mitigation initiatives, should result in ongoing financial growth at Magna. That stated, we believe that the heightened risk of slowing European/global economic growth dictates a revision to the applied multiple in the auto supplier space. As every multiple turn for Magna represents $19.00 to the share price, this results in a material lowering of our target price. Estimates (US$) Year Sales ($mm) EBITDA ($mm) EBITDA (old)($mm) EPS (f.d.) EPS (f.d.)(old) 2012A 2013A 2014E 2015E 30,837.0 34,835.0 36,825.0 38,072.0 2,459.0 3,128.0 3,493.0 3,709.0 ---- 3,797.0 5.36 6.98 8.80 10.10 --8.84 10.45 EPS (f.d.) Quarterly Estimates (US$) Year Q1 Q2 Q3 Q4 2012A 1.46 1.48 1.13 1.29 2013A 1.59 1.78 1.53 2.08 2014E 1.99 2.37 1.97 2.48 2015E ----- 2014E 5.0x 10.0x 2015E 4.4x 8.7x Supplemental Data Year EV/EBITDA P/E (f.d.) 2012A 4.3x 9.3x 2013A 5.7x 11.8x TD Investment Conclusion We are of the view that Magna is positioned to continue to deliver strong earnings growth; however, with the heightened risk associated with European/global economic growth, we have seen the removal of premium applied multiples to the sector — in a rapid manner. Despite our positive outlook in terms of earnings, an ongoing low interest rate environment, and the redeployment of its surplus capital, we believe that applied multiples are likely to return to more of a “historical” range. With Magna trading towards the lower end of its historical valuation metrics we are maintaining our BUY recommendation despite lowering our target price to $110.00 from $130.00. Notes:EV/EBITDA calculated using forward balance sheet. All figures in US$, unless otherwise specified. Please see the final pages of this document for important disclosure information. Company Profile Magna is a leading global supplier of technologically advanced automotive systems, components, and complete modules. As one of the most diversified automotive suppliers in the world, Magna designs, develops, and manufactures automotive components and assembles complete vehicle systems. MGA-N: Price 120 120 100 100 80 80 60 60 40 40 20 20 2011 2012 2013 2014 Action Notes October 17, 2014 Equity Research 7 of 48 Details The macro outlook for Europe continues to come under pressure — Germany recently lowered its growth forecast for both 2014 and 2015. In addition, TD Economics cites that other core economies such as Italy and France still need to embark on meaningful structural reforms but face limited budgetary space for fiscal support that could result in relatively lacklustre growth in these two countries. Clearly, the macro economic outlook for Europe is not meeting initial expectations and is causing heightened concern that this could spill into other economic regions and result in weakened global economic growth. Although Europe comprises approximately 40% of Magna’s revenue base, we note that the EBIT contribution is far less — in the range of 17–18%. Despite our benign growth outlook for Europe, it appears prudent to further lower our inputs to our 2015 European forecast in light of the weakening outlook. It is important to note that although we continue to forecast modest growth in North America in 2015, we have slightly reduced our production assumption for 2015 based on the underlying strength of the U.S. light vehicle sales SAAR figures for 2014. We are conscious that favourable leasing terms and incentives may have pulled forward some degree of demand into 2014. Outlook In Exhibit 1, we outline the key changes to our financial forecast for 2015. Exhibit 1. Magna: 2015 Financial Forecast Revisions Metric 2015E Old 2015E New 2015 Growth vs 2014 North America Production Units (mm) European Production Units (mm) 17.10 20.00 16.99 19.85 0.5% 0.0% North America Revenues (US$mm) European Revenues (US$mm) $19,958 $15,280 $19,864 $15,094 2.2% 1.2% Consolidated EBITDA (US$mm) Consolidated EBITDA Margin (US$mm) $3,797 9.9% $3,709 9.7% 6.2% Consolidated EBIT (US$mm) Consolidated EBIT Margin (US$mm) $2,781 7.3% $2,700 7.1% 5.9% EPS (US$) $10.45 $10.10 14.7% Source: TD Securities Inc. estimates Within our revisions, we have tweaked our North American EBIT margin assumption for 2015 by 10bps while lowering our European assumption by 25bps. We remain confident that Magna, through its World Class Manufacturing initiatives, remains well positioned to execute upon improving its European margins; however, we believe that the rate of such improvement that we had forecast may be affected by the increasingly challenging environment. Overall, we ascribe approximately 65% of the decline in our EBIT to the revisions to our European outlook. Recall that the stated intention of Magna is to rid its inefficient capital structure and lever its balance sheet to a 1.0x–1.5x debt to adjusted EBITDAR figure by the end of 2015. This is to be accomplished through a potential combination of capital expenditure, acquisitions, and its NCIB. Despite the recent Action Notes October 17, 2014 Equity Research 8 of 48 volatility in the share price, in Exhibit 2 we illustrate that Magna continues to be active in repurchasing its shares and progressing towards its capital structure target. At the end of Q2/14, we estimate that Magna had $643mm of net cash and approximately $4.6 billion of surplus capital to be deployed. Exhibit 2. Magna: Remaining Active with its NCIB Shares Repurchased Cost US$ Average Cost US$ Q4/13 (November 13th - December 31st) Q1 2014 Q2 2014 Q3 2014 Q4/14 (October 1st -14th) 2,509,723 2,710,000 5,718,181 5,704,422 116,800 $198,545,168 $240,000,000 $574,677,191 $624,976,474 $11,065,428 $79.11 $88.56 $100.50 $109.56 $94.74 Total 16,759,126 $1,649,264,262 $98.41 Remaining Room Under NCIB Expiring November 12, 2014 3,240,874 Period Source: SEDI, TMX With an increase in the global macroeconomic risk profile (specifically Europe), shares in the auto supplier sector in general, inclusive of Magna, have been punished over the past month. With modest revisions to Magna’s consensus expectation, it is fair to say that the major contributor to the decline in share price has been a contraction in the applied multiple. According to the global (and European) forecast by our TD Economics team, in addition to the latest forecast by the IMF — a global recovery remains underway. That stated, the recent global revisions have been to the downside with Europe being a focal point. Based on this outlook, we believe that improving global auto volumes will continue through 2016. Our call for EBIT growth in 2015 is largely driven by the North America and Asia (China) segments. Q3/14 Preview We have not made any revisions to our near-term forecasts for Magna. We anticipate the continuation of strong EPS growth in Q3/14, driven by North American volumes, operational improvements in Europe, lower D&A, and a reduction in the share count. Offsetting the operational improvement to an extent should be ongoing launch costs and plant inefficiencies in North America and the U.K. that should persist, albeit at a declining rate, through 2H/14. We expect ongoing revenue and margin improvement in Asia, and continued weakness in South America (ROW). Please see Exhibit 3. October 17, 2014 Equity Research Action Notes 9 of 48 Exhibit 3. Magna: Q3/14 Financial Preview $mm, except per share amounts External Production Sales North America Europe Asia Rest of World Complete Vehicle Assembly Tooling, Engineering and Other Total Sales EBITDA EBITDA Margin % Adjusted EBIT Margin % Q3/14E Q3/13A Y/Y Chg 4,332 2,382 442 194 697 730 8,775 799 9.1% 4,025 2,364 359 215 680 695 8,338 708 8.5% 7.6% 0.8% 23.0% -10.0% 2.5% 5.0% 5.2% 12.9% 62bps 1 9.4% 2.5% 7.0% -5.0% 6.3% $1.97 9.2% 2.1% 6.7% -12.4% 5.3% $1.53 22bps 39bps 35bps 744bps 98bps 28.5% North America Europe Asia Rest of World Consolidated EPS 1 Q3/13 excluding $39mm amortization of E-Car. Source: TD Securities Inc. estimates Valuation Magna is currently trading at 5.0x our 2014E EBITDA and 4.4x our 2015E EBITDA. This compares with its peer group average of 6.5x and 5.8x. On a P/E basis, Magna is trading at 10.0x our 2014E EPS and 8.7x our 2015E EPS. We note that the forward valuation is towards the low end of Magna’s five-year historical range on both metrics. Exhibit 4. Historical Forward Valuation MGA Historical Forward P/E MGA Historical Forward EV/EBITDA 18.0x 7.0x 16.0x +1 Std. Dev. 5.6x 6.0x 5.0x 2015E 2014E Jul-14 Apr-14 Jan-14 Jul-13 Oct-13 Apr-13 Jan-13 Jul-12 Apr-12 Jan-12 Jul-11 Oct-11 2015E 2014E Jul-14 Apr-14 Jan-14 Jul-13 Oct-13 Apr-13 Jan-13 Jul-12 Oct-12 Apr-12 Jan-12 Jul-11 Oct-11 Apr-11 1.0x Jan-11 4.0x Jul-10 2.0x Oct-10 6.0x Apr-10 3.0x Apr-11 8.7x -1 Std. Dev. 8.3x 8.0x -1 Std. Dev. 3.5x Jan-11 10.0x 4.4x 4.0x Jul-10 10.0x Oct-10 Average 10.5x Jan-10 Average 4.6x Apr-10 12.0x 5.0x Oct-12 +1 Std. Dev.12.7x Jan-10 14.0x Source: Baseline, Capital IQ, Bloomberg, TD Securities Inc. Justification of Target Price Our revised valuation is based on a 5.5x multiple (previously 6.5x) of 2015E EBITDA, as shown in Exhibit 5. This results in our target price declining to $110.00 (from $130.00). This represents an approximate 0.25x EBITDA multiple point discount to the peer group and a 10.9x P/E target multiple. Action Notes October 17, 2014 Equity Research 10 of 48 Exhibit 5. Target Valuation (US$) 2015E EBITDA Applied Target Multiple Enterprise Value Net Debt (Cash) Market Capitalization Period Ending Shares Outstanding $3,709 5.5x $20,398 -$469 $20,868 193 Target Price $108.07 12-month Target Price Rounded $110.00 Source: TD Securities Inc. Key Risks to Target Price Key risks to target price include the following: Severe fluctuation in the price of key commodities; significant deterioration of economic conditions; significant deterioration of the financial health of customers; acquisitions that fail to add value; labour disruptions; competition/loss of market share; increased regulation; foreign currency risk; pricing and pressure to absorb costs from customers; and program launch difficulties. Paper & Forest Products Recommendation: Risk: HIGH 12-Month Target Price: C$24.00 C$29.00 Prior: 12-Month Dividend (Est.): C$1.65 12-Month Total Return: 14.7% Market Data (C$) Current Price 52-Wk Range Mkt Cap (f.d.)($mm) EV ($mm) Current Dividend Dividend Yield Avg. Daily Trading Vol. (3M-All Exch) $22.37 $20.14-$34.24 $1,208.0 $1,602.9 $2.40 10.7% 229920 Financial Data (C$) Fiscal Y-E Shares O/S (f.d.)(mm) Float Shares (mm) Net Debt ($mm) Net Debt/Tot Cap BVPS (f.d.) December 54.0 26.2 $351.0 44.5% $8.11 Estimates (US$) 2013A 287.0 -2.75 -3.07 2014E 102.0 120.4 0.26 0.50 0.15 2015E 188.9 228.3 1.27 1.78 0.98 2016E 235.5 -1.86 -1.57 EBITDA ($mm) Quarterly Estimates (US$) Year Q1 Q2 Q3 Q4 2013A 111.0 102.0 45.0 29.0 2014E 27.0 33.0 16.5 25.5 2015E ----- 2016E ----- 2014E 14.0x 76.4x 2015E 7.5x 15.7x 2016E 6.0x 10.7x Valuations Year EV/EBITDA P/E (f.d.) 2013A 5.0x 7.2x Supplemental Data (US$) Year NC OSB ($/Msf) SE OSB ($/Msf) E. OSB (e/m3) NA Vol (MMsf) Eur Vol (MMsf) 2013A $315 $277 273 3,339 1,585 October 17, 2014 Equity Research Sean Steuart, CFA Kasia Trzaski, CA, CFA (Assoc.) 11 of 48 HOLD BUY Prior: Year EBITDA ($mm) EBITDA (old)($mm) EPS (f.d.) EPS (f.d.)(old) FCF/Shr Action Notes 2014E $221 $190 278 3,483 1,614 2015E $248 $225 278 3,525 1,640 2016E $270 $250 278 3,600 1,640 Notes:Financial data is US$ All figures in US$, unless otherwise specified. Please see the final pages of this document for important disclosure information. Norbord Inc. (NBD-T) C$22.37 Downgrading to HOLD from Buy; Dividend Cut Risk in Early2015 Event We are lowering our earnings estimates for Norbord in 2014 and 2015 (reflecting more conservative North American OSB price forecasts) and introducing our estimates for 2016. As a result of reductions to our mid-term free cash flow outlook, and factoring in more conservative cost assumptions over the long run, we are lowering our 12-month target price to C$24.00 from C$29.00. We are also downgrading our recommendation to HOLD from Buy. Impact: NEGATIVE Our recommendation upgrade for Norbord in early-May (obviously a little early) was based on an assumption that OSB prices were near a cyclical floor and that the company would be able to sustain the current dividend for a longer period of time than most investors expected. The slump in North American OSB markets has extended beyond our expectations; we are comfortable that prices are at a floor, but with the potential for accelerating discretionary capex initiatives in Europe consuming a portion of the company’s liquidity reserves, we expect that the Board will lower the dividend in early-2015. From a cyclical perspective, we favour buying OSBweighted equities when prices are at a cyclical floor and sentiment is negative (i.e., current time), but the expectation of a dividend cut in the next six months — while arguably anticipated by some investors — is too large a risk and overhang for us to maintain a Buy recommendation. TD Investment Conclusion We believe that Norbord’s 2014 earnings will represent a cyclical floor for the company. As OSB industry capacity restarts are absorbed by an improving U.S. demand base, we forecast higher prices and improving earnings through mid-2016, at which point, we expect that the next wave of capacity restarts will affect the market. We believe that the industry will have a compelling 18-month earnings window beginning early-2015, but the starting price point is lower than we had anticipated and we now expect that Norbord will lower its variable dividend by ~40% early next year (to C$1.40/share from the current rate of C$2.40/share). A revised payout at this level would equate to an average payout ratio of 97% of expected free cash flow in 2015 and 2016. This would provide Norbord with some added flexibility to pursue discretionary OSB expansion initiatives in Europe. Company Profile Norbord is the world's second-largest producer of oriented strand board (OSB), with an annual capacity of more than 5.1 billion square feet in North America and Europe. Norbord also produces particleboard, medium density fibreboard (MDF), and other engineered wood products. NBD-T: Price 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 2011 2012 2013 2014 October 17, 2014 Equity Research Action Notes 12 of 48 Details We are lowering our North American OSB price forecasts for 2014 and 2015. Our forecast is shown in Exhibit 1, which also provides long- and short-term price histories for key OSB grades. For South East OSB prices — more applicable for Norbord, based on its operating platform — our average price estimate for 2014 falls 2% (to $190/Msf from $194/Msf) and our average price estimate for 2015 declines 3% (to $225/Msf from $233/Msf). The revisions mostly reflect a longer-than-expected price trough this cycle. Exhibit 1. North American OSB Price History and TD Forecasts Long-Term $550 US$/Msf (7/16" basis) $450 Current South East OSB = US$177/Msf - up 5% m/m - down 2% q/q - down 12% y/y Current NC OSB = US$222/Msf - flat m/m - up 4% q/q - down 16% y/y $400 US$/Msf (7/16" basis) $500 Short-Term $450 $400 $350 $300 $250 South East OSB prices have underperformed in recent months, retesting lows from December 2011. $350 $300 $250 $200 $200 $150 $100 Aug-96 Aug-99 Aug-02 Aug-05 North Central OSB Aug-08 Aug-11 South East OSB OSB Price History and Forecast (US$/Msf, 7/16" basis) Region 2010A 2011A 2012A $199 $169 $241 South East % Δ y/y 35% -15% 43% $220 $187 $271 North Central % Δ y/y 35% -15% 45% Aug-14 $150 Dec-11 Average 2013A $277 15% $315 17% Q1/14A $193 -51% $219 -47% Jun-12 Dec-12 North Central OSB Q2/14A $199 -37% $219 -37% Q3/14A $177 -14% $216 -14% Q4/14E $190 -1% $230 -6% 2014E $190 -32% $221 -30% Jun-13 Dec-13 Jun-14 South East OSB 2015E $225 19% $248 12% 2016E $250 11% $270 9% Trend $215 -14% $245 -9% Source: Random Lengths, TD Securities Inc. North American OSB markets have been in an extended slump for the past year. Industry operating rates have been pressured by ongoing capacity restarts (seven mills restarted between Q4/12 and Q1/14) and protracted ramp-up periods. Recent weakness has been compounded by a slowdown in U.S. new home construction activity — the largest end-market for North American OSB. We now believe that ~70% of the 4.4 billion square feet of annual capacity restarted is up and running at this stage. We expect a reduction in dividend in early-2015. On the Q2 conference call in late July, management committed to sustaining the current annual dividend (C$2.40/share; 10.7% yield) through the rest of 2014; we expect a cut early in the new year. Norbord’s objective is to align the payout with the company’s free cash flows over a cycle. We never considered the current dividend sustainable on an indefinite basis, but previously expected that Norbord would be able to support the dividend well into 2015 in anticipation of a commodity price recovery in H2/14 which would continue into 2015. That recovery has not materialized and the implication of a lower starting price in 2015 suggests to us that at least a 40% cut in dividend would be prudent. A C$1.40/share dividend implies an annual payout ratio of 97% based on our estimate of average free cash flow in 2015 and 2016. Management is expected to clarify its growth plans for Europe in the coming months. We believe that management’s bias is towards a modernization of the Inverness, Scotland mill. The scope of the potential investment is significant; we estimate capex of $100 million–$125 million over two-and-a-half years. Management could fund that potential initiative via robust liquidity reserves ($425 million at the end of Q2/14) and rising operating cash flows, augmented by a potential reduction in dividend. October 17, 2014 Equity Research Action Notes 13 of 48 Outlook Norbord is scheduled to report Q3/14 results on October 28. Our EBITDA forecast of $16.5 million for Q3/14 is below the consensus forecast of $22.6 million and is well below Q2/14 EBITDA of $33.0 million. We expect lower sequential EBITDA as weaker North American OSB markets more than offset steady margins for the company’s European operations. Our forecast for Q3 factors in modest pressure on overall North American OSB price realizations, primarily reflecting pronounced weakness in the U.S. South (where the majority of Norbord’s production base is located). Average Q3/14 OSB prices declined 1% in the North Central region, but were 11% weaker in the South East. Unit cost inflation tied to 20 mill days of scheduled maintenance downtime in July is also expected to undermine results in this quarter. Valuation Based on our trend estimates, Norbord trades at 6.3x TEV/EBITDA — close to its peer-group average of 5.4x. If we adjust for modest free cash flow forecasts, Norbord’s multiple drops to 5.7x. Exhibit 2. Norbord Inc. Relative Valuation Lumber & Panel Focused Ticker Share Currency Current Price Market Cap (mm) 2013A TEV/EBITDA 2014E 2015E 2016E Trend P/B Debt/ Cap Ainsworth Lumber Co. Ltd. Boise Cascade Company (2) Canfor Corp. Conifex Timber Inc. (3) Interfor Corp. Louisiana-Pacific Corp. Western Forest Products Inc. West Fraser Timber Co. Ltd. ANS-T BCC-N CFP-T CFF-T IFP-T LPX-N WEF-T WFT-T C$ US$ C$ C$ C$ US$ C$ C$ $2.40 $28.45 $22.82 $7.37 $14.99 $13.56 $2.07 $49.89 $578 $1,121 $3,089 $154 $1,000 $1,942 $841 $4,301 5.5x 9.3x 6.5x 10.0x 9.2x 5.3x 7.0x 8.1x 20.9x 6.7x 5.9x 10.4x 7.1x 19.0x 7.2x 7.3x 6.7x 5.6x 4.8x 6.1x 5.1x 8.9x 5.2x 5.8x 4.1x 4.6x 4.5x 5.0x 4.6x 6.3x 5.0x 5.5x 4.9x n/a 4.9x 5.0x 5.7x 7.3x 5.3x 6.3x 1.4x 2.3x 2.3x 1.3x 1.6x 1.6x 2.0x 2.2x 36% 26% 12% 42% 28% nmf 14% 18% 7.6x 10.6x 6.0x 4.9x 5.6x 1.8x 25% Lumber & Panel Peer Group Average Share Currency Current Price Market Cap (mm) 2013A 2014E 2015E 2016E Trend P/B Debt/ Cap US$ C$ US$ $17.14 $3.03 $32.39 $1,621 $303 $19,003 5.2x 6.6x 12.8x 6.0x 8.5x 13.6x 5.7x 5.9x 12.4x 5.2x 4.6x 11.3x 5.4x 5.0x n/a 0.6x 1.3x 2.7x 11% 68% 39% North American Integrated Peer Group Average 8.2x 9.4x 8.0x 7.0x 5.2x 1.5x 39% Peer Group Average (ex. High/Low) 7.5x 9.5x 6.1x 5.0x 5.4x 1.8x 27% 5.0x 14.0x 7.5x 6.0x 6.3x 2.5x 44% North American Integrated Ticker Resolute Forest Products Inc. Tembec Inc. (1)(3) Weyerhaeuser Co. (2) RFP-N, T TMB-T WY-N Norbord Inc. NBD-T C$ $22.37 $1,208 Notes: (1) Tembec has a September 30 fiscal year end. (2) Multiples are based on Bloomberg consensus estimates. (3) Given heavy capex spending, multiples shown for Conifex and Tembec are based on EV/EBITDA. Source: TD Securities Inc., company reports, Thomson One, Bloomberg. Justification of Target Price Our 12-month target price of C$24.00 is based on a 6.5x target EV/EBITDA multiple using our trend EBITDA estimate. We adjust our enterprise value calculation with expected free cash flows through 2016 to capture mid-term deleveraging expectations. The target multiple compares with an average of 6.1x applied across our coverage universe. Key Risks to Target Price The key risks to our target price for Norbord include the following: 1) earnings sensitivity to changing OSB prices; 2) an extended slowdown in the U.S. housing recovery; 3) North American OSB capacity overhang; 4) appreciating pound versus the euro; 5) rising input costs; 6) a slowdown in demand for panels in the U.K. and/or continental Europe; and 7) control by Brookfield (owns 55% of the total number of diluted shares outstanding). October 17, 2014 Equity Research Action Notes 14 of 48 Exhibit 3. North American Panel Markets Dashboard 1. a) Oriented Strand Board (OSB) Prices b) Announced OSB Capacity Changes North American OSB Price History $550 $450 US$/Msf (7/16" basis) Current South East OSB = US$177/Msf - up 5% m/m - down 2% q/q - down 12% y/y Current NC OSB = US$222/Msf - flat m/m - up 4% q/q - down 16% y/y $500 $400 North American OSB Supply Changes (Q4/12-Q1/14) Start Company Mill Location Date Arbec FP Miramichi, N.B. Georgia-Pacific Clarendon, S.C. Louisiana-Pacific Clarke County, Ala. Louisiana-Pacific Dawson Creek, B.C. Norbord Jefferson, Texas Ainsworth High Level, Alberta Tolko Slave Lake, Alberta Additions = +26% from 2012 Production $350 $300 $250 $200 Capacity (MMsf, 3/8" basis) Q4/12 Q1/13 Q2/13 Q2/13 Q3/13 Q3/13 Q1/14 400 800 750 380 415 860 800 4,405 $150 $100 Jan-95 Jan-98 Jan-01 Jan-04 North Central OSB Jan-07 Jan-10 Jan-13 South East OSB W. Canadian OSB Source: Random Lengths, company reports, TD Securities Inc. 2. a) North American OSB Supply & Demand b) OSB Annual Operating Rates vs. Real Prices $550 95% $500 90% 25 85% 80% 75% 20 Underlying US Housing Starts Assumptions: 2012A = 774,000 units 2013A = 927,000 units 2014E = 980,000 units 2015E = 1.24 million units 2016E = 1.37 million units 15 70% 65% Operating Rate (%) OSB Volume (Billion Square Feet, 3/8" basis) 100% 60% 55% 50% 10 1994 1998 2002 Domestic Shipments "Effective" Surplus Capacity 2006 North Central OSB Price (US$/Msf) North American OSB Supply & Demand 30 N.A. OSB: Annual Op. Rates vs. Real Prices (1994-2016E) $450 $400 2013A $350 $300 2016E 2015E $250 2014E $200 $150 $100 2010 2014E Offshore Shipments "Effective" Operating Rate 60% 65% 70% 75% 80% 85% 90% 95% 100% Effective Operating Rate Source: RISI, Forest Economic Advisors, Random Lengths, TD Securities Inc. 3. a) Structural Panel EBITDA Margins b) OSB Equity Seasonality North American OSB-Weighted Equities Seasonality Structural Panel EBITDA Margins (LTM) 100% 30% 20% ANS NBD LPX 10% 0% 4% 60% 40% 2% 20% 0% 0% -20% -2% -40% -60% -4% -80% -10% -100% Q4/04 Q4/06 Source: Company reports, Bloomberg. Q4/08 Q4/10 Q4/12 -6% J F % Up M A M % Down J J A S O N D Average % Monthly Return Average Monthly Return (%) 40% -20% Q4/02 6% 80% 50% Up Months vs. Down Months EBITDA Margins (Trailing 4-Quarter) 60% October 17, 2014 Equity Research Action Notes 15 of 48 Exhibit 4. Norbord Inc. Summary Financial Data 2013A 2014E 2015E 2016E Trend Segmented Operating Metrics 2013A 2014E 2015E 2016E Trend EBITDA (ex. items, $mm) EPS (ex. items) FCF ($mm) FCF/share BVPS 287.0 2.75 165.0 3.07 8.78 102.0 0.26 8.2 0.15 6.97 188.9 1.27 53.1 0.98 7.01 235.5 1.86 84.6 1.57 7.64 226.2 1.60 103.6 1.92 n/a Exchange rate (US$/C$) $0.97 $0.91 $0.90 $0.90 $0.95 Valuation Metrics EV/EBITDA Trailing EV/EBITDA P/B P/E FCF Yield 6.3x 5.0x 3.5x 7.2x 10.0% 12.8x 14.0x 2.9x nmf 0.8% 6.6x 7.5x 2.8x 15.7x 4.9% 5.5x 6.0x 2.6x 10.7x 7.9% 5.7x 6.3x nmf 12.5x 9.7% North American Panels Panel shipments (3/8" basis, MMsf) Reference price (NC-OSB, 7/16", $/Msf) Avg. price realization ($/Msf, 3/8") Sales ($mm) EBITDA ($mm) EBITDA margin 3,339 $315 $263 879.0 254.8 29% 3,483 $221 $200 697.5 62.7 9% 3,525 $248 $225 793.6 148.8 19% 3,600 $270 $241 869.1 194.4 22% 4,200 $245 $227 953.4 183.4 19% Statement of Operations ($mm) 2013A 2014E 2015E 2016E Trend European Panels Panel shipments (3/8" basis, MMsf) Reference price (Europe OSB, €/m3) Avg. price realization ($/Msf, 3/8") Sales ($mm) EBITDA ($mm) EBITDA margin 1,585 273 $293 464.0 46.2 10% 1,614 278 $313 505.8 51.3 10% 1,640 278 $308 505.8 52.1 10% 1,640 278 $308 505.8 53.1 11% 1,650 275 $299 493.5 54.8 11% Consolidated 2013A 2014E 2015E 2016E Trend 1,343.0 301.0 (14.0) 287.0 21% 1,203.3 114.0 (12.0) 102.0 8% 1,299.4 200.9 (12.0) 188.9 15% 1,374.9 247.5 (12.0) 235.5 17% 1,446.9 238.2 (12.0) 226.2 16% Sales 1,343.0 1,203.3 1,299.4 1,374.9 1,446.9 Manufacturing costs Depreciation and amortization Net interest expense (income) Taxe expense (recovery) 1,076.0 56.0 37.0 25.0 1,101.3 59.0 31.4 (2.6) 1,110.5 58.5 32.5 29.4 1,139.5 59.4 32.4 43.1 1,220.6 66.3 31.4 42.4 Net income (loss) 149.0 14.2 68.6 100.5 86.1 EPS EPS (ex. items) 2.79 2.75 0.26 0.26 1.27 1.27 1.86 1.86 1.60 1.60 Statement of Cash Flows ($mm) 2013A 2014E 2015E 2016E Net income (loss) Depreciation and amortization Deferred income taxes Other operating cash flows Changes in non-cash working capital CF from operating activities 149.0 56.0 26.0 19.0 (6.0) 244.0 14.2 59.0 (6.4) 5.0 1.4 73.2 68.6 58.5 20.6 0.0 (9.6) 138.1 100.5 59.4 30.2 0.0 (5.5) 184.6 Capital expenditures Other investing cash flows CF from investing activities (79.0) 0.0 (79.0) (65.0) 0.0 (65.0) (85.0) 0.0 (85.0) (100.0) 0.0 (100.0) CF from financing activities (100.0) (116.9) (66.4) (66.4) 65.0 (108.8) (13.4) 18.1 2013A 2014E 2015E 2016E Sales ($mm) Segmented EBITDA ($mm) Corporate EBITDA ($mm) Consolidated EBITDA ($mm) EBITDA margin 2014E Segmented Breakdown (inner circle = sales; outer circle = EBITDA) Total cash flow Balance Sheet ($mm) Cash Other current assets Property, plant and equipment Other assets Bank advances Current liabilities Long-term debt Other liabilities Shareholders' equity Net debt Net D/D+E Net debt-to-EBITDA 193.0 261.0 794.0 14.0 1,262.0 84.2 259.9 798.0 15.0 1,157.1 70.9 275.2 824.5 15.0 1,185.5 89.0 286.2 865.1 15.0 1,255.3 0.0 206.0 433.0 147.0 476.0 1,262.0 0.0 205.3 434.0 141.6 376.3 1,157.1 0.0 211.0 434.0 162.1 378.4 1,185.5 0.0 416.5 234.0 192.3 412.5 1,255.3 240.0 33.5% 0.8x Source: Company reports, TD Securities estimates. 349.8 48.2% 3.4x 363.1 49.0% 1.9x 345.0 45.5% 1.5x Sales North Americ58% Europe 42% Europe 45% EBITDA 55% 45% Europe 42% North America 58% North America 55% 2014 Quarterly Estimates EBITDA (ex. items, $mm) EPS (ex. items) FCF/share Q1A 27.0 0.13 (0.85) Q2A 33.0 0.20 (0.09) Q3E 16.5 (0.09) 0.79 Q4E 25.5 0.02 0.30 EBITDA ($mm) 36.0 7.0 EPS 0.49 0.10 2014 Earnings Sensitivities Commodity North American OSB (7/16") European OSB Change $10/Msf €10/m3 Notes: (1) NC-OSB = North Central Oriented Strand Board. October 17, 2014 Equity Research Action Notes Energy Producers TD Energy: The Discovery Well Scott Treadwell, P. Eng. Weekly Analysis and Insight U.S. vs. Canadian Rig Activity: Efficiencies Driven by Scale Menno Hulshof, CFA Aaron Bilkoski Travis Wood Juan Jarrah, CFA, P. Eng. Aaron Sherlock (Associate) 16 of 48 TD Investment Conclusion In this edition of the weekly, we looked at the ability of E&P companies to drive efficiencies in resource plays, contrasting the scale of operations in key U.S. and Canadian developments. What stands out strongly is the sheer size of operations in the U.S. overall as well as in constituent plays. In addition, drillers in the U.S. are able to deliver improved operational efficiency as they tend to operate more rigs in key regions, whereas in Canada they are forced to operate for a larger number of very small projects that drive less continuity between wells. We believe that this fundamental difference between markets is reflected in the rapid improvement in U.S. rig productivity, something that we believe is unlikely to be replicated in Canada in the short term; affecting both E&P capital efficiency as well as OFS demand growth. Top U.S. and Canadian Operators and Contractors Before we get into the differences between the Canadian and U.S. OFS markets, we would like to preface the analysis with a look at the difference in scale between the regions (see Exhibit 1 & 2). It becomes readily apparent that the U.S. is much larger in terms of the aggregate active rigs. The tables below provide the foundation for the play-specific analysis we look at on the following pages. Exhibit 1: Top 10 Operators in the U.S. & Canada by Rig Count All figures in C$, unless otherwise specified. Top U.S. Rig Count by Operator Apache Chesapeake Occidental Continental EOG ExxonMobil Pioneer SandRidge Devon Anadarko Average Bi-Weekly Rig Count Week ending Oct 03 69 55 53 48 47 45 42 37 33 33 Total 462 Top Canadian Rig Count by Operator CrescentPoint Cnrl Husky Tourmaline ConocoPhillips Cenovus SevenGen EnCana Peyto Apache Average Daily Rig Count Week ending Oct 03 24 23 18 16 13 12 12 11 9 8 144 Source: Nickle's, TD Securities Inc. Exhibit 2: Top 10 Contractors Operating in the U.S. & Canada by Rig Count Top U.S. Rig Count by Contractor H&P Patterson Nabors Precision Nomac Unit Ensign Trinidad Pioneer Sidewinder Total Average Bi-Weekly Rig Count Week ending Oct 03 277 199 199 84 80 75 69 52 49 34 1118 Source: RigData, TD Securities Inc. Please see the final pages of this document for important disclosure information. Top Canadian Rig Count by Contractor Precision Ensign Savanna Trinidad Nabors Western Akita CanElson Total Patterson Average Daily Rig Count Week ending Oct 03 87 52 43 39 36 31 20 19 13 8 350 October 17, 2014 Equity Research Action Notes 17 of 48 Size and Scale In recent years, it has become increasingly difficult to replace both reserves and production with low-cost barrels from well understood plays in both the Canadian and U.S. market places. However, the recent advent of horizontal drilling in resource plays has backfilled, in our view, the declining legacy production, but at a much higher breakeven price per barrel. This, in our view, has been one of the underlying drivers for increased pad drilling, expanding the scale of operations within a smaller region. We believe that in order for an operator to achieve the benefits of larger scale operations, the company would, in our view, likely need to run >6 rigs in one area. By the same token, a driller with more than 5–6 rigs with a single customer in a specific play would likely benefit from productivity gains that would likely be transferable across its operation. The table below (Exhibit 3) shows just how significant the operations are in the Bakken, Eagle Ford, Permian, and to a lesser extent the Marcellus. When looking at the WCSB as a whole, it rivals some of the more significant U.S. plays but is spread across a much larger region. Even when looking at resource-based plays like the Montney, we believe that there are very few operators that can justify the capital required to develop the infrastructure necessary to realize meaningful reductions in cost or gains in productivity. Exhibit 3: Most Active Operators by U.S. Play 12 14% 12% 5 2% 40 12% 35 15 6% 10 4% 2014 BHP Billiton Chesapeake EOG Marathon National fuel Chesapeake Cabot Cabot 9% 8% 7% 30 6% 25 5% 20 4% 15 3% 10 2% 2012 2013 2014 OXY Concho Apache Pioneer OXY 0% Devon 0 Pioneer 1% 0% Apache 5 Pioneer 2% Devon BHP Billiton Chesapeake EOG Marathon Marathon Chesapeake EOG BHP Billiton EOG Marathon BHP Billiton 0 2014 Permian Concho 5 2013 % of Market Share 8% % of Market Share 10% Chesapeake 0% Range Res. Hess Exxon Continental Hess Oasis 14% 20 Source: RigData, TD Securities Inc. 2% 2012 25 2013 4% 2 2014 Eagle Ford 2012 6% 4 Apache 30 # of Active Rigs by Operator ExxonMobil Whiting Continental Continental Hess Whiting Statoil 2013 8% 0 0% 2012 6 EQT 0 10% Chevron 4% # of Active Rigs by Operator # of Active Rigs by Operator 6% 10 8 % of Market Share 8% 12% % of Market Share 15 14% 10 20 10% 16% Marcellus Chesapeake Bakken # of Active Rigs by Operator 25 Nabors 2012 Source: RigData, TD Securities Inc. 2013 2014 2012 45% 70 40 80 40% 35 60 70 35% 60 30% 50 25% Eagle Ford 40 20% 30 15% 20 10% 10 5% 0 0% 2012 2012 2013 2013 2013 2014 2014 OXY Cactus 2014 H&P Falcon 0% Precision Encana Patterson Progress Union Talisman Precision Shell Nomac Progress 2014 2014 Marcellus 14 10 8 4 0 Permian 30 50 25 40 15 30 10 20 H&P Paramount Falcon Encana Precision Seven Gen. Patterson Progress H&P Shell Nomac Seven Gen. 2013 2013 Concho Nabors 0 Precision 5% Pioneer Patterson 10 Patterson 10% Apache H&P 15% H&P 30 OXY Cactus 20 2012 2012 Nomac 20% 18 16 16 14 14 12 12 10 10 Devon Nabors 40 25% Precision 30% Patterson 50 18 Pioneer H&P 35% Apache Patterson 2014 Union Bakken 00 Pioneer Nabors 0% Precision 1% Concho Precision 2% Patterson Encana 10 Nomac 0 Patterson 3% Devon H&P 4% # of Active by Operator # of Active Rigs Rigs by Contractor 5% # of Active Rigs by Contractor Husky Tourmaline 20 # of#Active RigsRigs by Contractor of Active by Operator Cyclone Patterson Crescent Pt. CNRL Encana Progress CNRL Husky Encana Lightstream 6% Apache Patterson Pioneer Nabors 2013 H&P Nabors Pioneer Patterson 2013 Patterson H&P Namac Nabors 2012 H&P Nabors 60 Patterson 90 H&P Precision Patterson CNRL Husky 15 20 18 7% 10% 6% 20 8% 5% 4% 6% 3% 4% 10 5 2% 2% 1% 00 0% 0% of Market Share % of%Market Share Trinidad H&P 2012 7% 12 15% 6 10% % of Market Share Nabors 5 % of Market Share H&P 25 % of Market Share Patterson # of Active Rigs by Operator Western Canadian Sedimentary Basin October 17, 2014 Equity Research Montney Marcellus 15% 20% 8 8 15% 66 10% 10% 44 22 5% 5% 0% 0% Source: Nickle's, TD Securities Inc. Exhibit 5: Most Active Contractors by U.S. Play 25% 16 20% 2 5% 0% 2014 14% 9% 8% 12% %% ofofMarket Share Market Share # of Active Rigs by Contractor 30 % of Market Share # of Active Rigs by Contractor Action Notes 18 of 48 Exhibit 4: Most Active Operators in the WCSB & Montney Play 30% 25% 25% 20% October 17, 2014 Equity Research Action Notes 19 of 48 Concentration of Cliental After looking at the number of producers active within just a few plays within the U.S., we turned our attention to drillers’ market share in these dominant plays. One theme that we saw immediately was that a small number of larger drillers had the majority of the market share within localized plays. This differs significantly from the WCSB where drillers must service a greater number of clients in order to gain the scale of operations needed to optimize margins. In the U.S., this enables drillers to drive efficiencies in terms of employing rigs hands, having local shops and maintenance facilities and allows rapid communication of best practices in the operation. Exhibit 6: Most Active Contractors in the WCSB & Montney Play 14 18 6% 20% 16 12 Source: Nickle's, TD Securities Inc. 5% 5% 2 2 00 2012 2012 2013 2013 2014 2014 Ensign Falcon Trinidad H&P Precision Precision Nabors Patterson 0% 0% Horizon H&P 0% 0% 4 Trinidad Nomac Trinidad Tourmaline 2014 Savanna Husky Precision CNRL Trinidad Encana Ensign Progress Nabors CNRL 2013 Ensign Crescent Pt. 2012 Precision Husky Savanna Encana Trinidad Lightstream Ensign CNRL 1% Husky Precision 0 5% 10% 10% 6 4 Ensign Precision 2% 20 5 10 86 Patterson Precision 3% 10% 40 10 30 15% 15% 8 10 Union Nabors 50 15 12 Precision Horizon 15% 4% 20% 20% 14 10 % of % of Market Market Share Share 70 20 60 25% 25% Montney Marcellus Nomac Precision 5% % of of Market Market Share Share % # of Active by Operator # of Active Rigs Rigs by Contractor 25 80 25% 7% Patterson Trinidad WesternCanadian CanadianSedimentary SedimentaryBasin Basin Western 90 # of Active Rigs byby Contractor # of Active Rigs Contractor 100 30 Action Notes Paper & Forest Products Sean Steuart, CFA Kasia Trzaski, CA, CFA (Assoc.) Notes: This industry note reviews our investment thesis for the North American paper and forest products (P&FP) sector and provides expectations for Q3/14 results. We are also taking the opportunity to adjust our commodity price and earnings outlook for 2014 and 2015, and to introduce our forecasts for 2016. All figures in C$, unless otherwise specified. October 17, 2014 Equity Research 20 of 48 North American Paper & Forest Products Q3/14 Earnings Preview: Expect Muted Results Despite Lumber Price Rally Stars Aligning for Several Wood-weighted Equities This industry note reviews our investment thesis for the North American Paper & Forest Products (P&FP) sector, highlights adjustments to our commodity price and earnings outlook, and provides expectations for Q3/14 results. We refer readers to our detailed industry bulletin, also published today, for more details. North American Paper & Forest Products (P&FP) equities have corrected over the past eight months. Since peaking in early-March, share price declines across our coverage universe have averaged 16%, outpacing declines in broader equity markets, but mirroring the correction in basic materials equities. Apart from general equity market weakness, we attribute the recent sector pullback to: 1) inconsistent P&FP commodity price momentum; 2) the stalled U.S. housing start recovery; and 3) downward revision momentum to consensus estimates. Q3/14 preview: We expect a muted earnings recovery for most companies; our forecasts are generally below consensus estimates. We forecast quarter-overquarter earnings growth for eight of the 15 companies in our coverage universe, but our estimates are below consensus forecasts for 13 of the 15 companies under coverage. Expected drivers of higher sequential earnings include rising lumber price realizations and general shipment growth. In many cases, we believe that consensus estimates do not fully reflect fibre cost inflation and unit cost pressure tied to downtime (scheduled maintenance and some unplanned closures). We believe that the most likely downside earnings surprise will come from Resolute Forest Products (RFP-N, T). Commodity deck, target price, and recommendation changes. With the exception of North American and European softwood pulp list prices, we are lowering our 2015 forecasts for major P&FP commodities. Most notable changes to our 2015 outlook: Benchmark lumber and OSB prices forecasts down 3–4% and printing & writing paper price forecasts down 2–5%. We are also introducing our forecasts for 2016. Target price changes: Modest reductions for OSB producers Ainsworth, Norbord, and Louisiana-Pacific, as well as paper producers Cascades, Domtar, KP Tissue, and Resolute. We are making one recommendation change: Downgrading Norbord (NBD-T) to HOLD from Buy on the back of reductions to our mid-term free cash flow forecast and in anticipation of a cut in dividend in early-2015. Our overall P&FP sector stance: Upgrading to OVERWEIGHT. We advise investors to buy most lumber-weighted equities on seasonal weakness. We reiterate our positive investment bias for Interfor (IFP-T), Canfor (CFP-T), Western Forest Products (WEF-T), and West Fraser (WFT-T), and believe that the recent share price weakness offers a compelling entry point. Among pulp & paper-weighted equities, our top pick is Canfor Pulp (CFX-T). Please see the final pages of this document for important disclosure information. October 17, 2014 Equity Research Action Notes 21 of 48 Exhibit 1. Changes to Target Prices and Recommendations Ticker Company Name Curr. Current 12-Month Target Total Return Recommendation Share Previous to Revised Previous (if diff.) (if diff.) Price Revised Target Revised Overall Risk Target Price Rating Multiple (2) Pulp, Paper and Packaging Companies Canfor Pulp Products Inc. CFX-T C$ $10.76 Cascades Inc. CAS-T C$ $5.78 $7.00 $34.04 $46.00 $40.00 22% HOLD HIGH 5.0x $15.10 $18.00 $17.50 21% HOLD HIGH 6.2x $9.50 -6% REDUCE HIGH 5.6x $18.00 $17.00 2% HOLD HIGH 5.8x $3.25 8% HOLD HIGH 5.7x Domtar Corp. UFS-N, T US$ KP Tissue Inc. Mercer International Inc. KPT-T C$ MERC-Q US$ $10.11 Resolute Forest Products Inc. RFP-N, T US$ $16.64 Tembec Inc. (1) $3.01 TMB-T C$ $15.00 42% BUY HIGH 5.3x $6.50 15% HOLD HIGH 5.7x Wood Products Companies Ainsworth Lumber Co. Ltd. ANS-T C$ $2.36 $3.50 48% BUY HIGH 6.5x Canfor Corp. CFP-T C$ $22.91 $32.00 40% BUY HIGH 6.7x Conifex Timber Inc. CFF-T C$ $7.36 $9.00 22% HOLD HIGH 5.8x $3.75 Interfor Corp. IFP-T C$ $15.06 $22.00 46% BUY HIGH 6.5x Louisiana-Pacific Corp. LPX-N US$ $13.42 $14.00 $13.50 1% HOLD HIGH 6.5x Norbord Inc. NBD-T C$ $22.14 $29.00 $24.00 15% HOLD HIGH 6.5x Western Forest Products Inc. WEF-T C$ $2.05 $3.00 50% BUY HIGH 6.5x West Fraser Timber Co. Ltd. WFT-T C$ $50.97 $63.00 24% BUY HIGH 6.8x BUY Notes: (1) Tembec has a September 30 fiscal year-end. (2) Target Price Multiple is EV/EBITDA applied to trend EBITDA with numerator adjusted for expected free cash flow through 2016. Source: TD Securities Inc., Thomson One Exhibit 2. Changes to Our Annual Commodity Price and Exchange Rate Forecasts 2014E Previous 2012A 2013A (if diff.) Revised Pulp, Paper & Packaging Pulp (North America NBSK, list) Pulp (China NBSK, transaction) Newsprint (North America, East) Uncoated Freesheet (20-lb. copy) US$/tonne US$/tonne US$/tonne US$/ton $872 $662 $640 $940 $689 $608 $1,030 $990 $997 $724 ∆ $1,019 2% $728 1% $605 $998 - 2015E Previous (if diff.) Revised ∆ 2016E Trend 10-Year Range 2% -6% -2% $1,000 $740 $615 $915 $715 $615 $460-$1,035 $480-$925 $435-$775 $1,020 $1,000 -2% $1,020 $953 $738 $615 $975 $695 $605 $1,000 $710-$1,100 Uncoated Groundwood (35-lb. rolls) US$/ton $820 $799 $788 $776 -2% $820 $780 -5% $780 $775 $655-$890 Coated Groundwood (34-lb. rolls) US$/ton $984 $990 $933 $913 -2% $970 $920 -5% $920 $925 $800-$1,110 Linerboard (42-lb. unbleached kraft) US$/ton $652 $723 $735 - $750 $749 <1% $760 $725 $350-$735 $300 $271 $356 $315 $350 $221 -1% - $390 $255 $374 $248 -4% -3% $400 $270 $345 $245 $131-$466 $125-$520 Wood Products (1) Lumber (WSPF, 2x4, #2 & Better) OSB (North Central, 7/16") US$/Mfbm US$/Msf $354 Foreign Exchange Rates US$/C$ $1.001 $0.971 $0.907 $0.911 <1% $0.892 $0.897 1% $0.900 $0.950 $0.62-$1.09 US$/euro $1.286 $1.328 $1.358 $1.343 -1% $1.309 $1.286 -2% $1.277 $1.350 $1.04-$1.60 Notes: (1) OSB = Oriented Strand Board; WSPF = Western Spruce Pine Fir lumber. Source: TD Securities Inc., Pulp and Paper Week, Random Lengths, Bloomberg October 17, 2014 Equity Research Action Notes 22 of 48 Exhibit 3. Q3/14 Earnings Forecast versus Consensus Expectations and Prior-period Figures EBITDA (1) Q2/14 Earnings Estimates EPS (1) Q3/14E Reporting TD vs. Currency Consensus Q3/14E TD Cons. Q3/13A Q2/14A TD Cons. Q3/13A Q2/14A $0.26 Pulp, Paper & Packaging Companies Canfor Pulp Products Inc. C$ Negative $47.4 $49.6 $27.8 $44.8 $0.29 $0.32 $0.08 Cascades Inc. C$ Negative $89.8 $92.1 $94.0 $91.0 $0.06 $0.14 $0.07 $0.08 Domtar Corp. US$ Negative $191.3 $195.9 $163.0 $175.0 $0.77 $0.84 $0.63 $0.61 KP Tissue Inc. (3) C$ Negative $30.0 $31.8 $31.1 $29.0 $0.15 $0.16 $0.20 $0.11 Mercer International Inc. US$ Negative $49.5 $52.3 $36.7 $41.9 $0.12 $0.17 ($0.04) ($0.02) Resolute Forest Products Inc. US$ Negative $98.9 $107.3 $104.0 $108.0 $0.18 $0.25 $0.31 $0.20 C$ Positive $30.3 $26.2 $25.0 $30.0 $0.07 $0.03 $0.01 $0.13 Ainsworth Lumber Co. Ltd. C$ Negative $6.4 $10.8 $24.4 $13.1 ($0.02) ($0.00) $0.02 $0.02 $0.41 Tembec Inc. (2) Wood Products Companies Canfor Corp. C$ Flat $160.9 $161.4 $94.6 $143.0 $0.48 $0.51 $0.18 Conifex Timber Inc. C$ Flat $6.6 $7.2 $2.5 $5.9 $0.09 $0.13 ($0.01) $0.10 Interfor Corp. C$ Negative $41.7 $47.4 $24.6 $47.3 $0.21 $0.28 $0.11 $0.32 Louisiana-Pacific Corp. US$ Negative $15.2 $25.4 $64.8 $26.3 ($0.07) ($0.04) $0.13 ($0.03) Norbord Inc. US$ $0.20 Negative $16.5 $22.6 $45.0 $33.0 ($0.09) $0.10 $0.33 Western Forest Products Inc. C$ Flat $19.5 $20.7 $27.6 $40.9 $0.02 $0.03 $0.04 $0.07 West Fraser Timber Co. Ltd. C$ Flat $171.5 $169.0 $132.0 $148.0 $0.97 $0.96 $0.79 $0.77 Q3/14 Reporting Dates & Conference Call Details Date Call Report Call Oct 29 Oct 31 Time (ET) Dial-in Replay and Pass Code 800-952-6845 800-408-3053 code: 8780382# Pulp, Paper & Packaging Companies Canfor Pulp Products Inc. 10:30 AM Cascades Inc. Nov 6 Nov 6 10:00 AM 866-229-4144 888-843-7419 code: 9501952# Domtar Corp. Oct 23 Oct 23 10:00 AM 866-321-8231 www.domtar.com KP Tissue Inc. Nov 12 Nov 12 8:30 AM 888-231-8191 855-859-2056 code: 2719340 Mercer International Inc. Oct 30 Oct 31 10:00 AM 888-241-0326 855-859-2056 code: 17193738 Resolute Forest Products Inc. Oct 30 Oct 30 9:00 AM 877-223-4471 www.resolutefp.com Tembec Inc. Nov 20 Nov 20 3:00 PM 866-226-1792 800-408-3053 code: 8432225# Ainsworth Lumber Co. Ltd. Nov 7 Nov 10 1:00 PM 800-319-4610 800-319-6413 code: 4176# Canfor Corp. Oct 30 Oct 31 10:30 AM 800-952-6845 800-408-3053 code: 8780382# Conifex Timber Inc. Nov 4 Nov 5 11:00 AM 866-225-0198 800-408-3053 code: 4728524# Interfor Corp. Nov 6 Nov 7 11:00 AM 866-233-4585 866-245-6755 code: 911243 Wood Products Companies Louisiana-Pacific Corp. (4) Nov 5 Nov 5 11:00 AM n/a n/a Norbord Inc. Oct 28 Oct 28 11:00 AM 800-499-4035 888-203-1112 code: 2306232 Western Forest Products Inc. (4) Nov 13 Nov 14 West Fraser Timber Co. Ltd. Oct 27 Oct 28 n/a 11:30 AM n/a n/a 800-769-8320 www.westfraser.com Notes: (1) Figures exclude non-recurring items. (2) Tembec estimates are for fiscal Q4/14 results and respective comparative periods. (3) Figures shown are for Kruger Products LP. (4) Company has not released conference call details. Source: Company reports, Bloomberg, TD Securities Inc. October 17, 2014 Equity Research Action Notes 23 of 48 Exhibit 4. Changes to EPS and EBITDA Estimates 2014E 2015E Report Previous Curr. (if diff.) Revised Canfor Pulp Products Inc. C$ $1.24 Cascades Inc. C$ $0.29 Domtar Corp. US$ EPS Changes Previous ∆ (if diff.) Revised ∆ 2016E $1.30 5% $1.59 $1.43 -10% $1.55 $0.20 -29% $0.65 $0.38 -41% $0.49 $3.15 $2.94 -7% $3.25 $2.71 -17% $3.17 C$ $0.50 $0.44 -12% $1.02 $0.94 -8% $1.17 Mercer International Inc. US$ $0.47 $0.54 14% $0.51 - $0.76 Resolute Forest Products Inc. US$ $0.19 $0.16 -16% $0.64 $0.36 -44% $0.61 C$ $0.05 $0.08 64% $0.47 $0.37 -21% $0.57 Ainsworth Lumber Co. Ltd. C$ ($0.04) ($0.06) -39% $0.23 $0.19 -19% $0.42 Canfor Corp. C$ $1.99 $1.69 -15% $2.76 $2.30 -16% $2.51 Conifex Timber Inc. C$ $0.63 $0.33 -47% $1.24 $0.96 -23% $1.23 Interfor Corp. C$ $1.42 $1.07 -25% $2.68 $1.71 -36% $1.99 Louisiana-Pacific Corp. US$ ($0.10) ($0.16) -58% $0.55 $0.36 -35% $0.75 Norbord Inc. US$ $0.50 $0.26 -47% $1.78 $1.27 -29% $1.86 Western Forest Products Inc. C$ $0.22 $0.21 -5% $0.33 $0.30 -11% $0.32 West Fraser Timber Co. Ltd. C$ $3.83 $3.78 -1% $5.37 $5.00 -7% $5.47 Report Previous Curr. (if diff.) Revised Revised ∆ 2016E Pulp, Paper and Packaging Companies KP Tissue Inc. (2) Tembec Inc. (1) Wood Products Companies 2014E EBITDA Changes (mm) 2015E Previous ∆ (if diff.) Pulp, Paper and Packaging Companies Canfor Pulp Products Inc. C$ $195.1 $201.2 3% $229.8 $214.1 -7% $224.7 Cascades Inc. C$ $340.7 $336.4 -1% $352.9 $326.4 -8% $345.8 Domtar Corp. US$ $777.7 $754.6 -3% $791.4 $741.7 -6% $775.8 C$ $117.5 $113.0 -4% $151.7 $145.6 -4% $161.1 Mercer International Inc. US$ $189.3 $196.1 4% $194.4 $190.5 -2% $210.5 Resolute Forest Products Inc. US$ $331.5 $328.5 -1% $380.1 $344.5 -9% $378.6 C$ $87.3 $91.3 5% $149.4 $136.3 -9% $163.7 KP Tissue Inc. (2) Tembec Inc. (1) Wood Products Companies Ainsworth Lumber Co. Ltd. C$ $44.1 $38.9 -12% $139.5 $120.8 -13% $200.5 Canfor Corp. C$ $647.6 $592.6 -8% $828.3 $733.3 -11% $778.1 Conifex Timber Inc. C$ $31.6 $25.2 -20% $58.5 $50.7 -13% $59.1 Interfor Corp. C$ $186.8 $173.6 -7% $270.9 $243.5 -10% $266.8 Louisiana-Pacific Corp. US$ $104.4 $91.9 -12% $235.9 $195.9 -17% $275.8 Norbord Inc. US$ $120.4 $102.0 -15% $228.3 $188.9 -17% $235.5 Western Forest Products Inc. C$ $131.2 $126.8 -3% $185.3 $173.8 -6% $181.8 West Fraser Timber Co. Ltd. C$ $656.5 $650.7 -1% $860.2 $814.1 -5% $870.0 Notes: (1) Tembec has a September 30 fiscal year-end. (2) Figures shown are for Kruger Products LP. Source: TD Securities Inc. Current (US$/Msf) 7/16" North Central (US$/Mfbm) Western SPF, #2 & Btr. (US$/short ton) 42-lb Unbleached Kraft (US$/short ton) LWC 34-lb rolls (US$/short ton) SC-A 35-lb (US$/short ton) 20-lb Copy (US$/metric tonne) North America, East (US$/metric tonne) North America BEK $0.92 -3% $1.33 -3% $0.89 $1.28 % ∆ vs. 3% $216 -1% $356 0% $735 0% $900 0% $760 0% $1,000 0% $605 -1% $817 0% $1,030 Q3/14 -3% $1.33 -8% $0.96 -12% $252 7% $328 0% $735 -10% $997 -7% $820 2% $980 0% $605 -7% $873 9% $943 Q3/13 -6% $1.37 -3% $0.92 1% $219 5% $335 0% $735 -2% $920 -3% $780 0% $1,000 0% $605 -4% $847 0% $1,030 Q2/14 Quarterly Average Price % ∆ vs. % ∆ vs. $222 % ∆ vs. $352 % ∆ vs. $735 % ∆ vs. $900 % ∆ vs. $760 % ∆ vs. $1,000 % ∆ vs. $605 % ∆ vs. $810 $1,030 % ∆ vs. Current (US$/metric tonne) Momentum North America NBSK Grade(s) Reference Source: Pulp & Paper Week, Random Lengths, Bloomberg, TD Securities Inc. U.S. dollar/euro U.S. dollar/Canadian dollar Exchange Rates Oriented Strand Board Softwood Lumber Wood Products Linerboard Coated Groundwood Uncoated Groundwood Uncoated Freesheet Newsprint Hardwood Market Pulp Softwood Market Pulp Pulp, Paper & Packaging Commodity Segment $1.33 3% % ∆ y/y -3% $0.97 17% $315 19% $356 11% $723 1% $990 -3% $799 -4% $990 -5% $608 7% $863 8% $940 1% $1.34 -6% $0.91 -30% $221 -2% $350 2% $735 -8% $913 -3% $776 1% $998 0% $605 -3% $834 8% $1,019 2% $615 6% $840 3% $1,000 2016E -4% $1.29 -2% $0.90 12% $248 7% $374 2% $749 1% $920 1% $780 0% -1% $1.28 0% $0.90 9% $270 7% $400 2% $760 0% $920 0% $780 2% $1,000 $1,020 0% $605 -5% $795 -4% $975 2015E Annual Average Price 2013A 2014E $1.29 % ∆ y/y $1.00 % ∆ y/y $271 % ∆ y/y $300 % ∆ y/y $652 % ∆ y/y $984 % ∆ y/y $820 % ∆ y/y $1,030 % ∆ y/y $640 % ∆ y/y $804 % ∆ y/y $872 2012A Exhibit 5. North American Paper & Forest Products Commodity Summary general commodity price pressure. The CAD has depreciated 6% since early July in tandem with other regions have lifted off the bottom over the past week. NC prices have been unchanged since late-August, but prices in region; overall prices remain healthy versus historical levels. Price momentum is flat-to-slightly positive depending on the growth; box demand trends remain muted. Markets are balanced ahead of significant mid-term capacity hikes have been proposed for November (US$20-US$60/ton). On the back of recent capacity closure announcements, price since June 2010; limited November hikes have been proposed. Current supercalendered paper prices are at the lowest levels erode rapidly; import growth remains a concern. Prices have been unchanged since April; demand continues to balanced ahead of expected capacity closures in Q4. Prices in the East have been flat since May 2013; markets are prices have declined US$50/tonne since April. October price increases have been proposed (US$20-$30/tonne); unchanged since March. Markets have been resilient; N.A. list prices have been Comments Action Notes October 17, 2014 Equity Research 24 of 48 October 17, 2014 Equity Research Action Notes 25 of 48 Exhibit 6. TD Securities Paper and Forest Products Universe Estimates Pulp, Paper & Packaging Canfor Pulp Products Inc. Cascades Inc. Domtar Corp. KP Tissue Inc. (3) Mercer International Inc. Resolute Forest Products Inc. Tembec Inc. (1) Ticker CFX-T CAS-T UFS-N, T KPT-T MERC-Q RFP-N,T TMB-T Current Price Reporting Price Currency Currency $10.76 $5.78 $34.04 $15.10 $10.11 $16.64 $3.01 C$ C$ US$ C$ US$ US$ C$ C$ C$ US$ C$ US$ US$ C$ Rec. BUY HOLD HOLD HOLD REDUCE HOLD HOLD Target Risk Total Price Rating Return (%) $15.00 $6.50 $40.00 $17.50 $9.50 $17.00 $3.25 HIGH HIGH HIGH HIGH HIGH HIGH HIGH 42% 15% 22% 21% -6% 2% 8% EPS (excl. extraordinary items) EBITDA (mm) 13A 14E 15E 16E Trend 13A 14E 15E 16E Trend $0.69 $0.31 $2.38 $0.65 ($0.63) $1.14 $0.04 $1.30 $0.20 $2.94 $0.44 $0.54 $0.16 $0.08 $1.43 $0.38 $2.71 $0.94 $0.51 $0.36 $0.37 $1.55 $0.49 $3.17 $1.17 $0.76 $0.61 $0.57 $0.91 $0.28 $2.16 $1.47 $0.84 $0.50 $0.50 $143 $342 $658 $116 $117 $377 $98 $201 $336 $755 $113 $196 $328 $91 $214 $326 $742 $146 $190 $345 $136 $225 $346 $776 $161 $211 $379 $164 $166 $327 $684 $184 $206 $362 $150 15% Average Wood Products Ticker Current Price Reporting Price Currency Currency Ainsworth Lumber Co. Ltd. Canfor Corp. Conifex Timber Inc. Interfor Corp. Louisiana-Pacific Corp. Norbord Inc. Western Forest Products Inc. West Fraser Timber Co. Ltd. ANS-T CFP-T CFF-T IFP-T LPX-N NBD-T WEF-T WFT-T $2.36 $22.91 $7.36 $15.06 $13.42 $22.14 $2.05 $50.97 C$ C$ C$ C$ US$ C$ C$ C$ C$ C$ C$ C$ US$ US$ C$ C$ Rec. BUY BUY HOLD BUY HOLD HOLD BUY BUY Target Risk Total Price Rating Return (%) $3.50 $32.00 $9.00 $22.00 $13.50 $24.00 $3.00 $63.00 HIGH HIGH HIGH HIGH HIGH HIGH HIGH HIGH 48% 40% 22% 46% 1% 15% 50% 24% EPS (excl. extraordinary items) EBITDA (mm) 13A 14E 15E 16E Trend 13A 14E 15E 16E Trend $0.21 $1.63 $0.45 $1.00 $0.90 $2.75 $0.21 $3.82 ($0.06) $1.69 $0.33 $1.07 ($0.16) $0.26 $0.21 $3.78 $0.19 $2.30 $0.96 $1.71 $0.36 $1.27 $0.30 $5.00 $0.42 $2.51 $1.23 $1.99 $0.75 $1.86 $0.32 $5.47 $0.30 $2.34 $1.08 $1.33 $0.59 $1.60 $0.26 $4.46 $149 $541 $21 $134 $331 $287 $129 $583 $39 $593 $25 $174 $92 $102 $127 $651 $121 $733 $51 $244 $196 $189 $174 $814 $200 $778 $59 $267 $276 $235 $182 $870 $167 $715 $58 $218 $239 $226 $171 $750 31% Average Multiples Pulp, Paper & Packaging Canfor Pulp Products Inc. Cascades Inc. Domtar Corp. KP Tissue Inc. (3) Mercer International Inc. Resolute Forest Products Inc. Tembec Inc. (1)(4) Price Reporting Target (2) Currency Currency EV/EBITDA C$ C$ US$ C$ US$ US$ C$ C$ C$ US$ C$ US$ US$ C$ Average Wood Products Ainsworth Lumber Co. Ltd. Canfor Corp. Conifex Timber Inc. (4) Interfor Corp. Louisiana-Pacific Corp. Norbord Inc. Western Forest Products Inc. West Fraser Timber Co. Ltd. Average C$ C$ C$ C$ US$ US$ C$ C$ TEV/EBITDA Trailing BVPS Trailing P/BV 13A 14E 15E 16E Trend 13A 14E 15E 16E Trend 5.3x 5.7x 5.0x 6.2x 5.6x 5.8x 5.7x 2% 63% 32% 42% 62% 11% 68% $6.56 $10.19 $43.41 $8.15 $6.72 $29.89 $2.39 1.6x 0.6x 0.8x 1.9x 1.5x 0.6x 1.3x 14.5x 17.2x 16.2x 27.3x nmf 12.6x nmf 8.3x nmf 11.6x nmf 18.9x nmf nmf 7.5x 15.1x 12.6x 16.0x 20.0x nmf 8.2x 6.9x 11.7x 10.7x 12.9x 13.3x 27.2x 5.2x 11.9x 20.5x 15.7x 10.3x 12.1x nmf 6.0x 5.4x 5.8x 5.4x 9.7x 11.5x 5.1x 6.6x 3.9x 5.9x 4.7x 9.9x 6.9x 5.9x 8.5x 3.6x 6.1x 4.8x 7.7x 7.1x 5.6x 5.9x 3.5x 5.8x 4.6x 7.0x 6.4x 5.1x 4.6x 4.7x 6.1x 5.2x 6.1x 6.5x 5.3x 5.0x 5.6x 40% 1.2x 17.6x 12.9x 13.2x 12.6x 12.7x 7.1x 6.5x 5.8x 5.3x 5.6x Price Reporting Target (2) Currency Currency EV/EBITDA C$ C$ C$ C$ US$ C$ C$ C$ P/E Multiple Trailing D/D+E P/E Multiple TEV/EBITDA Trailing D/D+E Trailing BVPS Trailing P/BV 13A 14E 15E 16E Trend 13A 14E 15E 16E Trend 6.5x 6.7x 5.8x 6.5x 6.5x 6.5x 6.5x 6.8x 36% 12% 42% 28% nmf 44% 14% 18% $1.77 $9.75 $5.77 $9.11 $8.50 $8.11 $1.02 $23.08 1.3x 2.4x 1.3x 1.7x 1.6x 2.4x 2.0x 2.2x 17.0x 12.7x 17.5x 10.7x 20.1x 11.2x 6.8x 11.4x nmf 13.6x 22.1x 14.1x nmf nmf 9.6x 13.5x 12.4x 9.9x 7.7x 8.8x nmf 15.4x 6.9x 10.2x 5.6x 9.1x 6.0x 7.6x 17.9x 10.5x 6.5x 9.3x 7.9x 9.8x 6.8x 11.3x 22.8x 12.2x 7.9x 11.4x 5.4x 6.5x 10.0x 9.3x 5.2x 4.9x 7.0x 8.3x 20.7x 6.0x 10.4x 7.2x 18.8x 13.8x 7.1x 7.4x 6.7x 4.8x 6.1x 5.1x 8.8x 7.4x 5.2x 5.9x 4.0x 4.5x 4.9x 4.7x 6.3x 6.0x 4.9x 5.6x 4.8x 4.9x 5.0x 5.7x 7.2x 6.2x 5.2x 6.5x 6.5x 28% 1.9x 13.4x 14.6x 10.2x 9.1x 11.3x 7.1x 11.4x 6.3x 5.1x 5.7x Notes: (1) Tembec has a September 30 fiscal year-end. (2) Target EV/EBITDA multiple is based on trend EBITDA, adjusted for free cash flows expected through 2016. (3) Figures shown are for Kruger Products LP. (4) Given heavy capex spending, multiples shown for Conifex and Tembec are based on EV/EBITDA. Source: TD Securities Inc., company reports, Thomson One Action Notes October 17, 2014 Equity Research 26 of 48 Exhibit 7. Justification of Target Prices and Key Risks to Target Prices Company Name and Ticker Ainsworth Lumber Co. Ltd. (ANS-T) Canfor Corp. (CFP-T) Canfor Pulp Products Inc. (CFX-T) Cascades Inc. (CAS-T) Conifex Timber Inc. (CFF-T) Domtar Corp. (UFS-N, T) Target Price $3.50 $32.00 $15.00 $6.50 $9.00 US$40.00 Source: TD Securities Inc. Risk Justification of Target Price Rating Key Risks to Target Price BUY Our 12-month target price of $3.50 is based on a 6.5x EV/EBITDA multiple using our trend EBITDA estimate. To capture the impact of lower net debt, we have adjusted our enterprise value calculation with expected free cash flows HIGH through 2016, and expected incremental capex to complete GP II beyond our forecast horizon. The target multiple compares with an average of 6.1x applied across our coverage universe. The key risks to our target price for Ainsworth include the following: 1) earnings sensitivity to changing OSB prices and currency fluctuations; 2) a slowdown in the U.S. housing recovery and offshore demand; 3) competition/the North American OSB capacity overhang; 4) rising input costs; 5) equipment failures, production disruptions, environmental liabilities, labour disruptions, and natural disasters; 6) the GP II expansion may not proceed in a timely manner or at all; 7) control by Brookfield Capital Partners (owns 54% of the total number of diluted shares outstanding); 8) First Nations’ land claims; and 9) pension plan funding requirements. BUY In deriving our $32.00 target price for Canfor, we separate the company’s 50.4% 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. We then apply a 6.7x EV/EBITDA multiple to our estimate of HIGH 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 2016. We also adjust Canfor’s net debt to back out the stake in CFX. Key risks to our target price for Canfor include: 1) a slowerthan-expected recovery for 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; and 6) potential First Nations land entitlement issues in Western Canada. Key risks to our target price for Canfor Pulp include: 1) Weaker-thanexpected pulp demand and pricing; 2) a stronger Canadian dollar; 3) availability and costs of fibre in Western Canada; 4) higher interest rates; 5) inconsistent implementation of dividend policy; 6) unplanned production disruptions; and 7) control by Canfor Corp. (owns 50.4% of the common shares). BUY Our 12-month target price of $15.00 is based on a 5.3x target EV/EBITDA multiple using our trend EBITDA estimate. We adjust our enterprise value calculation with HIGH expected free cash flows through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. Key risks to target price include the following: 1) Weakerthan-expected pulp demand and pricing; 2) a stronger Canadian dollar; 3) fibre availability and costs in Western Canada; 4) higher interest rates; 5) inconsistent implementation of dividend policy; 6) unplanned production disruptions; and 7) control by Canfor Corp. (owns 50.4% of the common shares). HOLD Our 12-month target price of $6.50 per share is based on a 5.7x target EV/EBITDA multiple using our trend EBITDA estimate. To capture the impact of lower net debt over the next two years, we adjust our enterprise value calculation HIGH with expected free cash flows through 2016. We also adjust Cascades’ net debt for its equity stakes in Boralex and Greenpac. The target multiple compares with an average of 6.1x applied across our coverage universe. The primary risks to our target price for Cascades include: 1) a potential decline in packaging and tissue prices; 2) rising cost of recycled and virgin fibre; 3) higher cost of natural gas; 4) appreciation of the Canadian dollar; 5) weakness in the North American and European manufacturing sectors; 6) high financial leverage; and 7) a slower-than-expected ramp-up/failure to attain the targeted operating cost structure at the Greenpac Holding LLC containerboard mill. HOLD Our 12-month target price of $9.00 is based on a 5.8x EV/EBITDA multiple, using our estimate of trend EBITDA. To capture the impact of lower mid-term net debt, we adjust HIGH our enterprise value calculation with expected free cash flow through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. Key risks to our target price include: 1) access to capital; 2) inconsistent lumber margins; 3) capital upgrades and performance improvement programs that may not yield the intended effect on margins; 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; and 9) potential First Nations’ claims to timber. HOLD Our 12-month target price of US$40.00 is based on a 5.0x target EV/EBITDA multiple using our trend EBITDA estimate. To capture the impact of expected lower net debt, HIGH we adjust our enterprise value calculation with expected free cash flows through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. Key risks to target price for Domtar include the following: 1) accelerating decline in structural demand for uncoated freesheet; 2) exchange rate fluctuations; 3) input cost pressure; 4) increased U.S. import of uncoated freesheet; 5) weaker pulp prices; and 6) productivity disruptions. Rec. Action Notes October 17, 2014 Equity Research 27 of 48 Exhibit 8. Justification of Target Prices and Key Risks to Target Prices Company Name and Ticker Interfor Corp. (IFP-T) KP Tissue Inc. (KPT-T) LouisianaPacific Corp. (LPX-N) Mercer International Inc. (MERC-Q) Norbord Inc. (NBD-T) Resolute Forest Products Inc. (RFP-N, T) Tembec Inc. (TMB-T) Target Price $22.00 $17.50 US$13.50 US$9.50 $24.00 US$17.00 $3.25 Source: TD Securities Inc. Rec. Risk Justification of Target Price Rating Key Risks to Target Price BUY Our 12-month target price of $22.00 is based on a 6.5x EV/EBITDA multiple, using our trend EBITDA forecast. To capture the impact of lower net debt over the mid-term, we HIGH adjust our EV calculation with expected free cash flow through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. The primary risks to our target price for Interfor are: 1) slower-than-anticipated U.S. housing recovery; 2) a reversal in positive demand trends from offshore markets (primarily Asia); 3) a faster-than-expected response in North American lumber production; 4) a stronger Canadian dollar; 5) rising fibre costs and general cost inflation; 6) acquisition integration risk; and 7) potential First Nations claims to timber. HOLD Our 12-month target price of $17.50 is based on a 6.2x EV/EBITDA multiple, using our trend EBITDA estimate for KPLP. We adjust the trailing enterprise value for free cash HIGH flow expectations through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. The primary risks to our target price for KP Tissue include: 1) poor disclosure; 2) control of KPLP by Kruger Inc. — 83.4% ownership, majority Board and senior management representation; 3) significant commercial contracts between KPLP, KP Tissue, and Kruger; 4) sensitivity of the North American tissue market capacity growth; 5) higher input costs (fibre and energy); 6) sensitivity to fluctuations in the U.S. dollar/Canadian dollar exchange rate; 7) equipment failure, production/labour disruptions, natural disasters, and environmental liabilities; and 8) the Memphis TAD project may not achieve the intended returns. HOLD Our 12-month target price of US$13.50 is based on a 6.5x target EV/EBITDA multiple using our trend EBITDA estimate. To capture the impact of lower mid-term net debt, HIGH we adjust our enterprise value calculation with expected free cash flows through the end of 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. The primary risks to our target price for Louisiana-Pacific include: 1) earnings sensitivity to weaker OSB, siding, and engineered wood prices; 2) a slower-than-expected recovery of the U.S. housing market; 3) appreciation of the Canadian dollar; 4) restarts of idled North American OSB capacity; 5) equipment failures and production disruptions; and 6) rising input costs. REDUCE Our 12-month target price of US$9.50 is based on a 5.6x target EV/EBITDA multiple using our trend EBITDA estimate. We adjust our enterprise value calculation by HIGH expected free cash flows through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. Key risks to our target price include: 1) weaker-thanexpected pulp demand and pricing; 2) a stronger Canadian dollar and Euro; 3) higher input costs and potential fibre supply restrictions; 4) equipment failures, production disruptions, and environmental liabilities; 5) high financial leverage/complex capital structure; and 6) risks associated with executing capital investment projects. HOLD Our 12-month target price of $24.00 is based on a 6.5x target EV/EBITDA multiple using our trend EBITDA estimate. We adjust our enterprise value calculation with HIGH expected free cash flows through 2016 to capture mid-term deleveraging expectations. The target multiple compares with an average of 6.1x applied across our coverage universe. The key risks to our target price for Norbord include the following: 1) earnings sensitivity to changing OSB prices; 2) a slowdown in the U.S. housing recovery; 3) North American OSB capacity overhang; 4) appreciating pound versus the euro; 5) rising input costs; 6) a slowdown in demand for panels in the U.K. and/or continental Europe; and 7) control by Brookfield (owns 51% of the total number of diluted shares outstanding). HOLD Our 12-month target price of US$17.00 per share is based on a 5.8x EV/EBITDA multiple using our trend EBITDA estimate. To capture the impact of changing net debt HIGH expectations, we adjust our enterprise value calculation with expected free cash flows through the end of 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. Key risks to our target price for Resolute 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; and 6) potential for input cost pressure. HOLD Our 12-month target price of $3.25 is based on a 5.7x target EV/EBITDA multiple using our trend EBITDA estimate. We adjust our enterprise value calculation with expected free HIGH cash flow through 2016, including the $23 million remaining capex for the Témiscaming project. The target multiple compares with an average of 6.1x applied across our coverage universe. Key risks to our target price for Tembec include: 1) negative pulp, paper, and lumber price momentum; 2) strengthening of the Canadian dollar; 3) higher fibre, chemicals, energy, and transportation costs; 4) equipment failures, production disruptions, and environment liabilities; 5) execution and liquidity risks associated with the Témiscaming cogeneration project; and 6) high financial leverage. Action Notes October 17, 2014 Equity Research 28 of 48 Exhibit 9. Justification of Target Prices and Key Risks to Target Prices Company Name and Ticker Western Forest Products Inc. (WEF-T) West Fraser Timber Co. Ltd. (WFT-T) Target Price $3.00 $63.00 Source: TD Securities Inc. Rec. Risk Justification of Target Price Rating Key Risks to Target Price BUY Our 12-month target price of $3.00 is based on 6.5x EV/EBITDA multiple using our trend EBITDA estimate. We adjust enterprise value with expected free cash flows HIGH through the end of 2016 (excluding potential sales of noncore assets). The target multiple compares with an average of 6.1x applied across our coverage universe. The primary risks to our Western target price include the following: 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 capital upgrades and margin improvement program may not yield the expected returns; and 7) concentration of wood chip sales to one customer. BUY Our 12-month target price of $63.00 is based on a 6.8x target EV/EBITDA multiple using our trend EBITDA estimate. We adjust our enterprise value calculation for HIGH expected free cash flows through 2016. The target multiple compares with an average of 6.1x applied across our coverage universe. The primary risks to our target price for West Fraser include: 1) a slower-than-anticipated recovery in the U.S. housing market; 2) strengthening Canadian dollar; 3) weaker global pulp markets; 4) a long-term shortage of fibre in Western Canada; 5) cost inflation; 6) potential slowdown in lumber export markets; 7) potential First Nations claims to timber; and 8) trade disputes. Action Notes Real Estate Sam Damiani, CFA Jonathan Kelcher, CFA Peter Angelopoulos, CA (Assoc.) Derrick Lau, CPA, CBV, (Assoc.) All figures in C$, unless otherwise specified. October 17, 2014 Equity Research 29 of 48 Canadian Real Estate Q3/14 Earnings Preview Forecasting 2.6% Overall AFFO/unit Growth Q3/14 earnings season kicks off next week with Brookfield Canada Office Properties reporting on October 20. The bulk of the companies in our coverage universe are scheduled to report between November 3 and November 14. For the group, we are expecting year-over-year average AFFO/unit growth of 2.6% in Q3/14, excluding outliers and calculated on a simple average basis. Our Q3/14 forecast of 2.6% year-over-year AFFO/unit growth compares with ~5% posted by our coverage universe over the first half of the year. The change of pace reflects more modest earnings growth from the diversified/office/industrial group of 0.2% (versus ~7% in H1/14). This is partly on the assumption of flat-to-slightly-lower occupancy levels for those with office exposure. Among all property types, seniors’ housing is expected to remain the outperformer with 10% growth (~8% in H1/14), followed by multifamily at 2.7% (~5% in H1/14), and retail at 1.4% (3% in H1/14). Fundamentals remain healthy for the sector. Our full-year forecasts call for average annual AFFO/unit growth of approximately 5% between 2014 and 2016, on a market cap weighted basis. Despite an expected deceleration in Q3/14, we believe that our coverage universe can hit the 5% mark in F2014 on the back of a stronger Q4/14, where we expect AFFO/unit growth of just under 8%. Over the last two years, Canadian REITs have underperformed both U.S. and global peers. Since January 2012, the S&P Capped REIT Index is up only 3% (price-only) compared with the MSCI US REIT Index at +28% and the FTSE EPRA/NAREIT Global Index at +29%. The relative underperformance increases after factoring in the 8% decline in Canadian dollar relative to the U.S. dollar. In our view, the underperformance has largely been a function of negative funds flow into Canadian REIT/REOC equities as we believe that many international investors are currently underweight the sector. However, given the sector’s small relative size, when funds flow reverts to more favourable levels, we believe that this can cause a revaluation to occur quickly. We are maintaining our Market Weight Sector weighting. The average FFO yield for the sector is 8% with REITs trading at an average ~10% discount to NAV (compared with the long-term historical average of between 0% and 5% NAV premium). The average yield spread at 6.1% is near a decade-high (excluding the Global Financial Crisis). Our top picks are Dream Office REIT (D.un) and H&R REIT (HR.un), both of which are rated ACTION LIST BUY. The average potential total return to our target prices across our coverage universe of 33 companies is 21%. Please see the final pages of this document for important disclosure information. October 17, 2014 Equity Research Action Notes 30 of 48 Exhibit 1. Healthy AFFO/unit Growth Forecasted to Continue 2008 2009 2010 2011 2012 2013 2014F 2015F 2016F Forecast Average Q1 Q2 Q3 Q4 Simple average (1) 3% 2% 3% 3% 14% 5% 6% 9% 7% 7% 2012 10% 8% 7% 4% Weighted average (1) 5% -2% -1% 3% 8% 7% 5% 6% 5% 5% 2013 3% 3% 7% 8% 2014 5% 5% 3% AFFO/unit growth for coverage universe: Quarterly growth (2) Notes: 1. Averages exclude hotels, DRM, and TCN. 2. Quarterly figures are calculated on a simple average basis and exclude outliers, in addition to hotels, DRM, and TCN. Source: TD Securities Inc. Exhibit 2. FFO and AFFO Estimates vs. Consensus and Prior Year; and Earnings Release Details Company Name Apartment REITs/REOCs Boardwalk REIT CAP REIT InterRent REIT Killam Properties Inc. Mainstreet Equity Corp. (2) Market Current Cap Price FFO (1) Q3/14E TD Cons. Q3/13A AFFO (1) % Release Q3/14E Q3/13A Change Date Upcoming Earnings Release and Conference Call Details Conference Call Telephone No. Date Time (ET) $3,560 $2,591 $317 $564 $399 $467 $871 $68.07 $23.75 $5.51 $10.34 $38.03 $10.04 $27.29 $0.91 $0.43 $0.09 $0.22 $0.63 $0.24 $0.67 $0.90 $0.44 $0.09 $0.22 $0.65 $0.24 $0.68 $0.86 $0.43 $0.10 $0.21 $0.55 $0.22 $0.65 $0.81 $0.38 $0.07 $0.18 $0.54 $0.21 $0.60 $0.77 $0.39 $0.08 $0.18 $0.47 $0.19 $0.56 6.0% -0.8% -8.1% 2.1% 14.7% 10.0% 6.9% 4.4% 2.7% 13-Nov-14 14-Nov-14 11-Nov-14 12-Nov-14 10-Nov-14 * 4-Nov-14 5-Nov-14 10-Dec-14 * 5-Nov-14 6-Nov-14 5-Nov-14 6-Nov-14 12:00 PM 1:00 PM 647-427-7450 or 1-888-231-8191 416-340-2216 or 1-866-225-0198 No conference call. 647-427-7450 or 1-888-231-8191 No conference call. TBA 647-427-7450 or 1-888-231-8191 $3,547 $3,967 $1,666 $1,994 $3,794 $7,795 $356 $26.20 $10.34 $12.77 $10.99 $17.62 $25.35 $4.19 $0.48 $0.23 $0.27 $0.24 $0.26 $0.42 $0.10 $0.48 $0.23 $0.27 $0.24 $0.26 $0.43 $0.11 $0.47 $0.21 $0.28 n/a $0.26 $0.40 $0.13 $0.43 $0.18 $0.22 $0.19 $0.23 $0.37 $0.08 $0.43 $0.18 $0.23 n/a $0.22 $0.35 $0.08 2.0% 3.8% -2.2% n/a 3.8% 4.2% -3.1% 1.4% 5-Nov-14 10-Nov-14 13-Nov-14 3-Nov-14 4-Nov-14 5-Nov-14 6-Nov-14 6-Nov-14 10-Nov-14 13-Nov-14 4-Nov-14 4-Nov-14 5-Nov-14 7-Nov-14 9:00 AM 2:00 PM 12:30 PM 9:00 AM 2:00 PM 9:30 AM 12:00 PM 1-866-530-1553 647-427-7450 TBA 416-340-2216 or 1-866-223-7781 416-340-2217 or 1-866-696-5910 416-340-2218 or 1-866-225-0198 416-204-9702 or 1-800-524-8850 Diversified/Office/Industrial REITs/REOCs Allied Properties REIT $2,571 Brookfield Canada Office Properties $2,463 Canadian REIT $3,285 Cominar REIT $2,973 $2,961 Dream Office REIT Dream Global REIT $984 Dream Industrial REIT $689 Granite REIT $1,762 H&R REIT $6,190 FAM REIT $114 Overall Average $34.51 $26.40 $47.47 $18.90 $27.39 $8.90 $9.00 $37.48 $21.38 $21.38 $0.51 $0.52 $0.41 $0.41 $0.74 $0.74 $0.47 $0.47 $0.71 $0.71 $0.20 $0.21 $0.23 $0.24 $0.77 $0.80 $0.46 $0.46 --- Restr. --- $0.50 $0.36 $0.72 $0.45 $0.73 $0.21 $0.24 $0.78 $0.45 $0.24 $0.45 $0.44 1.2% $0.33 $0.34 -2.0% $0.68 $0.65 3.3% $0.40 $0.41 -0.3% $0.59 $0.58 0.8% $0.19 $0.19 1.0% $0.19 $0.20 -4.2% $0.71 $0.73 -2.8% $0.41 $0.39 4.8% --- Restricted --0.2% 11-Nov-14 12-Nov-14 20-Oct-14 21-Oct-14 6-Nov-14 6-Nov-14 * 6-Nov-14 13-Nov-14 14-Nov-14 12-Nov-14 13-Nov-14 11-Nov-14 12-Nov-14 5-Nov-14 6-Nov-14 13-Nov-14 6-Nov-14 * 12:00 PM 9:00 AM 416-847-6330 or 1-866-530-1553 1-888-438-5491 No conference call. 1-888-390-0549 416-216-4169 or 1-866-229-4144 416-216-4169 or 1-866-229-4144 416-216-4169 or 1-866-229-4144 416-981-9011 or 1-800-747-0365 No conference call. No conference call. $214 $1,921 $679 $483 $249 $6.94 $10.86 $7.75 $13.34 $7.98 $0.14 $0.21 $0.21 $0.21 $0.20 $0.31 $0.31 $0.19 $0.20 $0.12 $0.21 $0.20 $0.22 $0.13 $0.12 $0.19 $0.16 $0.33 $0.18 $0.11 $0.18 $0.14 $0.24 $0.15 14-Oct-14 6-Nov-14 6-Nov-14 12-Nov-14 6-Nov-14 $458 $4.84 $0.27 $0.26 $0.27 $0.21 $0.21 $1,414 $671 $250 $12.45 $7.41 $12.46 $0.17 $0.09 $0.24 $0.20 $0.09 $0.24 $0.18 $0.15 $0.25 Morguard N.A. Residential REIT Northern Property REIT Overall Average Excluding Outliers Retail REITs/REOCs Calloway REIT Choice Properties REIT Crombie REIT CT REIT First Capital Realty Inc. RioCan REIT Retrocom REIT Overall Average Seniors REITs/REOCs Amica Mature Lifestyles Inc. (2) Chartwell Retirement Residences Extendicare Inc. Leisureworld Senior Care Corp. Regal Lifestyle Communities Inc. Overall Average Excluding Outliers Hotels InnVest REIT Other Real Estate Companies Dream Unlimited Corp. (3) Tricon Capital Group Inc. (3) Firm Capital Mortgage Investment Corp. (4) Overall average (simple average) (5) Average excluding outliers (simple average) (5) $0.24 $0.25 6.0% 5.1% 12.7% 38.7% 19.4% 16.4% 10.8% 0.0% 6-Nov-14 11:00 AM 10:00 AM 11:00 AM 2:00 PM 10:00 AM 2:00 PM 8:30 AM 7-Nov-14 7-Nov-14 13-Nov-14 7-Nov-14 Q1/15 results reported on October 14 10:00 AM 416-340-2217 or 1-866-696-5910 11:00 AM 416-340-2217 or 1-866-696-5910 9:00 AM 416-340-8527 or 1-800-565-0813 TBA 6-Nov-14 12:00 PM 416-340-2216 or 1-866-225-0198 8:30 AM 416-216-4169 or 1-866-229-4144 TBA No conference call. 4-Nov-14 5-Nov-14 11-Nov-14 12-Nov-14 -2.0% 6-Nov-14 * Passcode 10381077 15178839 5409743 5810088 7678875# 8694191# 9411711# 8898044 5060236# 6281674# 4.2% 2.6% Notes: * Tentative earnings release date. 1. Figures are stated in per unit or per share, and not rounded. 2. MEQ has a September 30 fiscal year-end and figures shown are for Q4; ACC has a May 31 fiscal year-end and amounts shown are actual results for Q1/15. 3. FFO column represents diluted EPS for DRM and Adjusted f.d. EPS for TCN. 4. Values represent Basic EPS. 5. Q3/14 outliers are MEQ, LW, and INN. In addition, we exclude DRM and TCN owing to quarter-over-quarter earnings volatility, which in our view is reflective of the land and homebuilding industry. Source: Company reports, TD Securities Inc. Action Notes October 17, 2014 Equity Research 31 of 48 A Closer Look at Industry Fundamentals Office sector rebounds. According to CBRE, the national downtown office vacancy rate declined 20 bps quarter-over-quarter to 8%. After two years of weak demand, absorption has recovered in both Q2/14 and Q3/14. Canada’s office vacancy rates remain ~500 bps below those in the U.S. The national office construction pipeline represents 5.8% of the total inventory. In our view, the new supply is manageable, though we believe that office vacancy will creep upwards as new developments come on line. Industrial remains strong. The national industrial vacancy rate decreased by 10 bps quarter-overquarter to 5.3% and is near a decade-low, driven by steady demand. Q3/14 marks the 19th consecutive quarter of positive absorption with rents at all-time high. Industrial vacancy rates in Canada were ~600 bps lower than those in the U.S. The total industrial construction pipeline represents just 1.2% of the total inventory, which we believe can be adequately absorbed. Retail continues to benefit from U.S. retailers expanding into Canada: According to the ICSC, Canadian shopping centres experience 32% higher sales productivity and have nearly 40% less retail square feet per capita compared with the U.S. In our view, this lower penetration should result in better stability of occupancy and rents. According to CBRE, current developments underway represent 4% of the total retail space and annualized deliveries represent ~2%. We believe that most of the retail development supply will be absorbed by new foreign retailers as they establish their Canadian presence. Q3/14 earnings expectations by asset class: Apartment REITs/REOCs are expected to post overall average AFFO/unit growth of 2.7% (excluding outliers). We expect property fundamentals to remain favourable, with elevated occupancies in the +97% range and a steady uplift in rents. The group average is largely weighed down by InterRent REIT, whose expected 8% decline in earnings can be entirely attributed to dilution from its large-scale Bell Street development. We expect average AFFO/unit growth of 1.4% for the Retail sector. Excluding Crombie REIT and Retrocom REIT, whose third-quarter results reflect temporary earnings dilution from recently completed equity offerings, the average expected earnings growth for the group is 3.4% and in line with growth of ~3% over H1/14. For the Diversified/Office/Industrial sector, we expect overall average AFFO/unit growth of 0.2%. On balance, earnings growth for companies with office portfolio exposure is expected to be modest over the second half of the year in comparison with H1/14 as the overall sector absorbs new supply coming on stream. The Seniors’ Housing group is expected to report 10.8% AFFO/unit growth (excluding Leisureworld because of the impact of subscription receipts in Q3/13). Action Notes October 17, 2014 Equity Research 32 of 48 Exhibit 3. Conference Call Details, Ordered by Earnings Release Dates Upcoming Earnings Release and Conference Call Details Release Date Ticker Amica Mature Lifestyles Inc. ACC 14-Oct-14 Brookfield Canada Office Properties BOX.UN 20-Oct-14 21-Oct-14 9:00 AM 1-888-438-5491 CT REIT First Capital Realty Inc. Dream Unlimited Corp. Killam Properties Inc. CRT.UN FCR DRM KMP REI.UN GRT.UN CWT.UN NPR.UN MRG.UN CUF.UN INN.UN CSH.UN EXE RMM.UN RLC REF.UN FC F.UN CHP.UN IIP.UN TCN CAR.UN AP.UN DIR.UN LW DRG.UN CRR.UN BEI.UN D.UN HR.UN MEQ 3-Nov-14 4-Nov-14 4-Nov-14 4-Nov-14 5-Nov-14 5-Nov-14 5-Nov-14 5-Nov-14 5-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 10-Nov-14 10-Nov-14 11-Nov-14 11-Nov-14 11-Nov-14 11-Nov-14 12-Nov-14 12-Nov-14 13-Nov-14 13-Nov-14 13-Nov-14 13-Nov-14 10-Dec-14 4-Nov-14 4-Nov-14 5-Nov-14 5-Nov-14 5-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 6-Nov-14 7-Nov-14 7-Nov-14 7-Nov-14 7-Nov-14 9:00 AM 2:00 PM 8:30 AM 12:00 PM 9:30 AM 8:30 AM 9:00 AM 1:00 PM 416-340-2216 or 1-866-223-7781 416-340-2217 or 1-866-696-5910 416-216-4169 or 1-866-229-4144 647-427-7450 or 1-888-231-8191 416-340-2218 or 1-866-225-0198 416-981-9011 or 1-800-747-0365 1-866-530-1553 647-427-7450 or 1-888-231-8191 TBA 1-888-390-0549 416-340-2216 or 1-866-225-0198 416-340-2217 or 1-866-696-5910 416-340-2217 or 1-866-696-5910 416-204-9702 or 1-800-524-8850 TBA RioCan REIT Granite REIT Calloway REIT Northern Property REIT Morguard N.A. Residential REIT Cominar REIT InnVest REIT Chartwell Retirement Residences Extendicare Inc. Retrocom REIT Regal Lifestyle Communities Inc. Canadian REIT Firm Capital Mortgage Investment Corp. FAM REIT Choice Properties REIT InterRent REIT Tricon Capital Group Inc. CAP REIT Allied Properties REIT DREAM Industrial REIT Leisureworld Senior Care Corp. DREAM Global REIT Crombie REIT Boardwalk REIT DREAM Office REIT H&R REIT Mainstreet Equity Corp. Notes: * Tentative earnings release date Source: Company reports Date Conference Call Time (ET) Company Name Telephone No. Passcode Q1/15 results reported on October 14 * * * 10-Nov-14 * 12-Nov-14 12-Nov-14 12-Nov-14 12-Nov-14 13-Nov-14 13-Nov-14 13-Nov-14 14-Nov-14 14-Nov-14 * 11:00 AM 12:00 PM 10:00 AM 11:00 AM 12:00 PM No conference call. No conference call. No conference call. 2:00 PM No conference call. 12:00 AM 10:00 AM 12:00 PM 2:00 PM 9:00 AM 10:00 AM 12:30 PM 11:00 AM 2:00 PM No conference call. No conference call. 5409743 6281674# 15178839 8898044 5060236# 647-427-7450 TBA 416-340-2216 or 1-866-225-0198 416-847-6330 or 1-866-530-1553 416-216-4169 or 1-866-229-4144 416-340-8527 or 1-800-565-0813 416-216-4169 or 1-866-229-4144 TBA 647-427-7450 or 1-888-231-8191 416-216-4169 or 1-866-229-4144 9411711# 8694191# 10381077 7678875# October 17, 2014 Equity Research Action Notes 33 of 48 Exhibit 4. Trading Comparables — Coverage Universe TD Securities Real Estate Coverage Name of REIT or REOC Current Price Mkt Cap ($mm) EV ($mm) Current Dist. / Div 12-mon. Project. Dist. / Div Yield Payout on '14E AFFO P/ AFFO '14E P/ AFFO '15E P/ AFFO '16E NAV NAV Cap Rate Implied P/ Cap NAV Rate Net Debt / Gross Asset Value Excl. Incl. conv. conv. Rating Risk Rating Target Price Target Return Analyst Commercial Property (Retail, Office, Industrial) RioCan REIT $25.35 $7,795 $13,964 $1.41 $1.43 5.6% 98% 17.6x 16.7x 16.0x $26.00 6.0% 98% 6.1% 44% 44% BUY MEDIUM $30.00 24% SD H&R REIT $21.38 $6,190 $12,927 $1.35 $1.37 6.3% 82% 13.0x 12.7x 12.4x $26.00 6.0% 82% 6.6% 46% 47% AL BUY MEDIUM $28.00 37% SD SD 6.5% 46% 46% HOLD MEDIUM $11.50 18% First Capital Realty Inc. $17.62 $3,794 $7,428 $0.86 $0.86 4.9% 96% 19.6x 18.4x 17.4x $20.30 5.4% 87% 5.8% 43% 45% BUY MEDIUM $21.00 24% Calloway REIT $26.20 $3,547 $6,515 $1.55 $1.59 5.9% 89% 15.1x 14.2x 13.7x $28.70 6.1% 91% 6.4% 43% 43% BUY MEDIUM $30.00 21% SD Canadian REIT $47.47 $3,285 $5,188 $1.75 $1.77 3.7% 65% 17.6x 17.0x 16.4x $45.20 6.0% 105% 5.8% 38% 38% BUY MEDIUM $50.00 9% SD Choice Properties REIT $10.34 $3,967 $7,654 $0.65 $0.65 6.3% 89% 14.2x 13.8x 13.4x $11.20 6.2% 92% SD Dream Office REIT $27.39 $2,961 $6,551 $2.24 $2.24 8.2% 95% 11.6x 11.6x 11.6x $34.20 6.5% 80% 7.2% 49% 49% AL BUY MEDIUM $35.00 36% SD Brookfield Canada Office Properties $26.40 $2,463 $4,711 $1.24 $1.26 4.7% 93% 19.8x 19.3x 18.9x $32.70 5.1% 81% 5.7% 42% 42% BUY MEDIUM $31.00 22% SD Cominar REIT $18.90 $2,973 $7,370 $1.47 $1.47 7.8% 90% 11.6x 11.0x 10.6x $21.00 6.7% 90% 7.1% 57% 57% BUY MEDIUM $23.00 29% Allied Properties REIT $34.51 $2,571 $3,720 $1.41 $1.44 4.1% 79% 19.3x 16.7x 15.0x $32.25 6.1% 107% 5.8% 32% 32% HOLD MEDIUM $37.00 11% JK CT REIT $10.99 $1,994 $3,831 $0.65 $0.65 5.9% 89% 15.1x 14.5x 13.9x $11.30 6.3% 97% 6.4% 47% 47% HOLD MEDIUM $12.00 15% SD Granite REIT $37.48 $1,762 $2,127 $2.20 $2.30 5.9% 72% 12.3x 11.4x 10.7x $40.00 8.6% 94% 9.0% 16% 16% HOLD MEDIUM $42.00 18% SD Crombie REIT $12.77 $1,666 $3,673 $0.89 $0.89 7.0% 99% 14.2x 14.0x 13.7x $14.10 6.4% 91% 6.7% 50% 52% HOLD MEDIUM $15.00 24% SD Dream Global REIT $8.90 $984 $2,406 $0.80 $0.80 9.0% 99% 11.0x 10.9x 10.1x $9.80 6.8% 91% 7.1% 54% 57% BUY MEDIUM $10.50 27% Dream Industrial REIT $9.00 $689 $1,612 $0.70 $0.70 7.8% 91% 11.7x 11.0x 10.6x $10.50 6.7% 86% 7.2% 50% 53% BUY MEDIUM $11.00 30% SD Retrocom REIT $4.19 $356 $1,067 $0.45 $0.45 10.7% 129% 12.0x 11.0x 10.7x $5.00 6.8% 84% 7.2% 59% 63% HOLD MEDIUM $5.00 30% SD FAM REIT $7.65 Total / Average $114 JK SD ------------------------------------------------------------------------------------------------- Restricted ---------------------------------------------------------------------------------------------------------- $47,111 $90,744 6.5% 91% 14.7x 14.0x 13.5x 6.3% 91% 6.7% 45% 46% 24% Apartments Boardwalk REIT $68.07 $3,560 $5,558 $2.04 $2.06 3.0% 68% 22.6x 20.7x 19.7x $68.25 5.5% 100% 5.5% 36% 36% BUY MEDIUM $75.00 13% CAP REIT $23.75 $2,591 $5,399 $1.18 $1.20 5.0% 84% 17.0x 16.4x 15.7x $25.00 5.3% 95% 5.4% 51% 51% BUY MEDIUM $26.00 15% JK JK Northern Property REIT $27.29 $871 $1,609 $1.58 $1.61 5.8% 75% 13.0x 11.9x 11.2x $29.25 7.3% 93% 7.6% 44% 44% BUY MEDIUM $33.00 27% JK Killam Properties Inc. $10.34 $564 $1,449 $0.60 $0.60 5.8% 105% 18.1x 16.4x 15.0x $11.50 6.0% 90% 6.3% 54% 59% HOLD MEDIUM $11.50 17% JK Morguard NA Residential REIT $10.04 $467 $1,414 $0.60 $0.62 6.0% 74% 12.4x 11.5x 10.9x $13.25 5.8% 76% 6.3% 59% 61% BUY MEDIUM $12.50 31% JK Mainstreet Equity Corp. $38.03 $399 $998 $0.00 $0.00 0.0% 0% 20.4x 18.1x 16.0x $43.00 5.7% 88% 6.0% 57% 57% HOLD MEDIUM $43.00 13% JK $317 $716 $0.20 $0.23 3.6% 77% 21.2x 16.7x 14.5x $6.00 5.6% 92% 5.8% 54% 54% HOLD MEDIUM $6.00 13% JK $8,768 $17,142 4.2% 69% 17.8x 16.0x 14.7x 5.9% 91% 6.1% 51% 52% 12.6x 11.4x 89% InterRent REIT $5.51 Total / Average 18% Seniors Housing 7.2% 47% 48% BUY 20% JK $7.75 $679 $1,727 $0.48 $0.48 6.2% 87% 14.1x 10.3x 9.2x 91% 11.4% 55% 58% HOLD HIGH $8.00 9% JK $13.34 $483 $1,092 $0.90 $0.90 6.7% 73% 10.8x 10.1x 9.5x $13.00 8.2% 103% 7.9% 56% 56% BUY MEDIUM $14.50 15% JK Amica Mature Lifestyles Inc. $6.94 $214 $713 $0.42 $0.42 6.1% 98% 16.1x 13.6x 10.4x $11.00 6.5% 63% 7.7% 60% 60% BUY MEDIUM $9.50 43% JK Regal Lifestyle Communities Inc. $7.98 $0.70 $0.70 8.8% 103% 11.7x 10.2x 9.3x $9.75 6.7% 82% 7.2% 54% 56% BUY MEDIUM $10.00 34% JK 6.5% 87% 13.5x 11.4x 10.0x 7.8% 85% 8.3% 54% 56% 110% 7.4% 61% 69% Chartwell Retirement Residences Extendicare Inc. Leisureworld Senior Care Corp. $10.86 $1,921 $3,957 $0.54 $0.56 5.0% 73% 14.7x $12.25 6.8% $8.50 10.9% $249 $630 $3,545 $8,119 $4.84 $458 $1,393 $0.40 $0.40 8.3% 118% 14.2x 11.0x 11.0x $4.40 7.6% Other Real Estate Companies 1 Dream Unlimited Corp. Tricon Capital Group Inc. $12.45 $7.41 $1,414 $671 $1,741 $837 $0.00 $0.24 $0.00 $0.24 0.0% 3.2% 0% 63% P/E '14E 19.2x 19.5x P/E '15E 16.0x 16.8x P/E '16E 8.8x 15.8x $17.40 $9.90 nmf nmf 72% 75% nmf nmf 14% 3% Firm Capital Mortgage Inv. Corp. $12.46 $250 $387 $0.97 $0.97 7.8% 101% 13.0x 12.8x 12.7x $10.45 nmf 119% nmf 16% Total / Average MEDIUM $12.50 24% Hotels InnVest REIT Note: 1) EPS represents Basic EPS for FC, f.d. EPS for DRM and Adjusted f.d. EPS for TCN Source: Company reports, Thomson One, TD Securities Inc. HOLD HIGH $5.00 12% SD 14% 16% BUY BUY MEDIUM MEDIUM $17.50 $9.50 41% 31% SD JK 39% HOLD LOW $13.00 12% SD Gold and Precious Minerals - Mid-and Small-Cap Golds Recommendation: Risk: SPEC. BUY Unchanged SPECULATIVE 12-Month Target Price: C$14.00 Unchanged 12-Month Dividend (Est.): 12-Month Total Return: C$0.00 55.7% Market Data (C$) Current Price 52-Wk Range Mkt Cap (f.d.)($mm) Current Dividend Dividend Yield Avg. Daily Trading Vol. (3M-All Exch) $8.99 $5.15-$11.42 $628.4 --199886 Financial Data (C$) Fiscal Y-E Shares O/S (f.d.)(mm) Float Shares (mm) Net Debt/Tot Cap Cash ($mm) NAVPS (current)(f.d.) Resources (mm oz) December 69.9 56.1 -$90.0 $11.86 226.0 Notes:Cash in $US All figures in C$, unless otherwise specified. Action Notes October 17, 2014 Equity Research Daniel Earle Arun Lamba (Associate) 34 of 48 MAG Silver Corp. (MAG-T, MVG-N) C$8.99 Corporate Update Event In this brief note, we are providing a summary of and our reaction to recent events relating to the company. Impact: NEUTRAL TD Investment Conclusion We view MAG's (44%) Juanicipio project as one of the finest undeveloped silver assets in the world. It possesses the rare combination of being large in size and having high grades which should yield very robust economics. We maintain our 12-month target price of $14.00/share and SPEC. BUY recommendation, based on a long-term silver price of US$20/oz and a 1.2x target NAV5% multiple. Details Juancipio Outlook MAG's portion of the 2014 initial development budget is US$5mm (44% of the 2014 budget of US$11.4mm), and is designated primarily for detailed engineering and ramp advancement. As of August 13, approximately US$16.2mm of the US$25.4mm initial development budget has been funded by the joint venture partners (MAG’s share funded is US$7.1mm), with the balance to be funded in late 2014 and early 2015 (MAG’s share remaining to be funded is approximately US$4.1mm). The project is operated by the company’s joint venture partner, Fresnillo plc (56%), which is constructing and operating similar mines in the Fresnillo silver district in Zacatecas State. Construction commenced with portal preparation and ramp excavation in October 2013 and production is anticipated in mid-2017, according to the company. Cinco de Mayo Outlook Negotiations with the local Ejido are ongoing, however, the overall timeline to successful resolution is not determinable at this time. Currently no exploration is being undertaken on the Cinco de Mayo property as further exploration and drilling can only resume upon obtaining: 1) The Soil Use Change Permit; 2) Drill Permits; 3) A Surface Access Agreement with the Local Ejido. Please see the final pages of this document for important disclosure information. Company Profile MAG Silver is a Vancouver-based silver development company with a portfolio of assets in Mexico. Its most advanced interest is in the Juanicipio project (44% MAG/56% Fresnillo) located in the Fresnillo silver district in Zacatecas State. MAG also holds 100% interest in the Cinco de Mayo project and a 70% option on the Salamandra project. MAG-T: Price 14 14 12 12 10 10 8 8 6 6 4 4 2011 2012 2013 2014 October 17, 2014 Equity Research Action Notes 35 of 48 Salamandra Outlook Phase I and II drilling are now complete and the system remains open in all directions. The company has indicated that prior to further drilling it will review all the drill holes and build a 3 dimensional model of the system as known. MAG believes that a number of new drill targets will emerge from the review of the drilling to date. US$90mm in Available Funds We estimate that the company now has approximately US$90mm in available funds (as of August 18) and the company has suggested that its total capital obligations for Juanicipio amount to US$132 million. In an effort to be conservative, we model the company raising an additional $100mm of equity in 2016, at an assumed equity issuance price of $8.50/share. Outlook We have made no changes to our estimates at this time. We anticipate the following timeline of developments: Underground ramp development at Juanicipio — ongoing Exploration drilling at Juanicipio, Salmandra — ongoing Cinco de Mayo negotiation with the Ejido — ongoing Q3/14 Financial results — November 2014 Additional $100mm equity issuance — 2016E Valuation MAG Silver is currently trading at 0.76x our corporate NAV5%. This is slightly above the development-stage companies in our precious metals coverage universe, which trade at an average of 0.63x NAV5%. However, we believe that MAG Silver deserves a premium multiple given what we see as the quality of its Juanicipio asset, its status as a near-term producer, and its appeal as a takeover candidate to companies like Fresnillo, Tahoe Resources, and others. 1.24x Exhibit 1. Developers – P/NAV 1.40x 1.20x 0.42x 0.40x 0.24x 0.60x 0.42x XRC CNL 0.76x 0.80x 0.61x 1.00x 0.71x Average: 0.63x 0.20x 0.00x BSX Source: TD Securities Inc. estimates RMX GUY MAG TXG Action Notes October 17, 2014 Equity Research 36 of 48 Justification of Target Price We have calculated our $14.00 target price by applying a 1.2x target multiple to our corporate NAV. Our calculation of MAG Silver’s NAV is calculated based on a 5% discount rate and a long-term silver price of US$20.00/oz. We use what we consider to be a reasonable multiple for a junior with a world class silver project in development, but one that requires additional funding. Our model assumes production in 2018 and we apply a resource credit of C$2.48/share for the Cinco de Mayo project and an exploration credit of C$0.61/share. Key Risks to Target Price The key risks to our target price include: silver, gold, zinc, lead, fuel, power and water price risks; financial risks, including risks to the cost and availability of financing; foreign exchange rate risks; forecast risks, including capital and operating cost risks, risks related to deposit size, grade and mineability, and risks to production levels, metallurgical recoveries and smelter terms; market risks; technical risks, including risks associated with underground mining and risks to the process flow sheet that we envision; infrastructure risks, including the availability of power and its reliability; transportation risk; political risks, including resource nationalization risk, and changes to the legal and fiscal regimes; permitting risk; community social relations risks, including indigenous people risk; security risks, including potential for violence and access disruptions; labour relations risk; illegal mining risk; risks related to the cost and availability of equipment and consumables; environmental risk; title risk; litigation risk; surface rights risk; access risk; non-operating risks, including non-controlling interest of a primary asset; and key personnel retention risk. Action Notes October 17, 2014 Equity Research Bentley Cross, CFA Vince Valentini, CFA Media Recommendation: HOLD Unchanged Risk: MEDIUM 12-Month Target Price: C$8.00 Unchanged 12-Month Dividend (Est.): C$0.53 12-Month Total Return: 20.7% Market Data (C$) Current Price 52-Wk Range Mkt Cap (f.d.)($mm) Current Dividend Dividend Yield Avg. Daily Trading Vol. (3M-All Exch) $7.07 $4.96-$8.47 $566.3 $0.53 7.5% 73,707 Financial Data (C$) Fiscal Y-E Shares O/S (f.d.)(mm) Float Shares (mm) Net Debt ($mm) Net Debt/Tot Cap December 80.1 62.7 $158.6 16.9% Estimates (C$) Year EBITDA ($mm) EBITDA (old)($mm) EPS (f.d.) EPS (f.d.)(old) 2013A 161.9 -1.01 -- 2014E 102.0 102.0 0.66 0.78 2015E 101.8 103.4 0.69 0.70 2016E 106.8 113.2 0.70 0.74 EPS (f.d.) Quarterly Estimates (C$) Year Q1 Q2 Q3 Q4 2013A 0.14 0.25 0.21 0.48 2014E 0.02 0.20 0.11 0.34 2015E ----- 2016E ----- 2014E 2.5x 2015E 3.6x 2016E 4.0x Valuations Year Est. EV/EBITDA 2013A 4.3x 37 of 48 Notes:2014E estimates exclude Harlequin All figures in C$, unless otherwise specified. Torstar Corp. (TS.B-T) C$7.07 Q3/14 Preview Event Torstar to report Q3/14 results. Impact NEUTRAL. We maintain our HOLD rating with our $8.00 target price intact. Our estimates for the core business are unchanged, but given the recent Sun Media/Postmedia deal we have elected to shift the mix of our forecast acquisitions in 2015 and 2016. Management had previously implied to us that the acquisition of the Sun Media assets was not a high priority use of excess capital, but due to the potential synergies we had thought there remained a possibility. With Sun's English-language assets now off the market (pending approvals) we have elected to shift our mix of forecast acquisitions to 25% newspapers, 50% digital, and 25% other minority investments (previously 40%/40%/20%). Our EBITDA estimates move down marginally, as we expect digital assets to come at a higher multiple. TD Investment Conclusion Although the return to our target may look compelling, we are hesitant to recommend TS.B shares at this time. We see an absence of near-term catalysts and we do not expect near-term results alone to propel the shares upward. The re-deployment of Harlequin proceeds could serve as a catalyst for the shares, but our sense from recent management commentary is that the conclusion to this process is not likely to surface anytime soon. Moreover, there are too many unknowns at this time to determine how the market would react to an announced deal. We see almost as much near-term downside risk from announced deals as we do upside. Details Torstar will report Q3/14 results on the morning of November 5, with a conference call at 8:15 am (416-340-2216 or 1-866-223-7781). Due to the sale of Harlequin, y/y comparisons are challenging, and investors looking to identify trends should focus on divisional metrics. We note the following forecasts for Q3/14; please refer to Exhibit 1 for additional details Please see the final pages of this document for important disclosure information. Commentary from other players in the media industry and the recent ROP data (see Exhibits 2-4) suggest it remained a difficult ad market in Q3. Total ROP agate lines were down 6.4%, 2.4% and 6.5% in July, August and September, respectively. Linage for papers with circulation of 150k+ was even less encouraging, with y/y declines of 14.2%, 14.3%, Company Profile Torstar is a diversified Canadian publisher with interests in daily newspapers, community newspapers, and online properties. Its flagship asset is the Toronto Star newspaper, which boasts of the largest daily circulation in Canada. TS.B-T: Price 12 12 10 10 8 8 6 6 4 4 2011 2012 2013 2014 October 17, 2014 Equity Research Action Notes 38 of 48 and 5.5% in July, August and September. The correlation between industry agate lines and Torstar revenue is far from perfect, so we are not changing our estimates in light of recent data, but we believe these figures suggest Torstar faced an uphill battle again in Q3. Our estimates reflect a slight improvement in revenue trends for the Media division as a whole, with revenue expected to be down 7.0% in Q3 (-6.1% at MMG and -8.1% at SMG), versus declines of 7.1% and 8.1% in Q2 and Q1. We forecast Media division EBITDA to be down just 1%, owing to recent cost restructuring. Our forecasts imply division margins of 11.0%, which represents a ~70bps improvement from Q3/13. We are forecasting consolidated EBTIDA of $18.0 million, which is generally in line with a very thin consensus. We forecast adjusted EPS of $0.11; consensus is in the same general range (Bloomberg shows $0.12, while Capital IQ shows $0.09 and Thomson is at $0.10). As an aside, we are changing our presented EPS estimate for 2014 in this note to better alight to management's definition of adjusted EPS; this is simply a presentation change and our forecasts are unchanged. Exhibit 1. Torstar Financial Forecasts for Q3/14 ($000) Q3/14E Q3/13A2 % chg. y/y Q2/14A1 % chg. q/q $237,260 -10.9% Media Division Revenue $211,357 $227,383 -7.0% Total Revenue $199,838 $310,413 -35.6% $225,591 -11.4% Media Division EBITDA $23,249 $23,477 -1.0% $35,759 -35.0% 11.0% 10.3% 0.7% 15.1% -4.1% Margin (%) $18,050 $33,307 -45.8% $30,019 -39.9% Margin (%) 9.0% 10.7% -1.7% 13.3% -4.3% Adjusted EPS (f.d.) $0.11 $0.21 -49.6% $0.20 -47.1% CFO (pre-WC) $9,854 $13,650 -27.8% $21,526 -54.2% Total EBITDA 1 Does not include Harlequin; reflects Halequin as discontinued ops. 2 Totals include Halrequin; has not been re-stated. Source: Company reports, TD Securities Inc. Exhibit 2. Industry Monthly Agate Lines (All regions; Canada) Total Monthly Agate Lines - % change 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 Source: Newspapers Canada, TD Securities Inc. Agate lines - Circulation 150,000+ - % change 10.0% September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 Agate lines - Ontario Dailies - % change 5.0% 39 of 48 October 17, 2014 Equity Research Action Notes Exhibit 3. Industry Monthly Agate Lines (Circulation >150,000; Canada) 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% Note: Papers included in this sample include: The Globe and Mail, The Toronto Sun, The Vancouver Sun and The Toronto Star. Source: Newspapers Canada, TD Securities Inc. Exhibit 4. Industry Monthly Agate Lines (Ontario; Canada) 0.0% -5.0% -10.0% -15.0% -20.0% September 2014 August 2014 July 2014 June 2014 May 2014 April 2014 March 2014 February 2014 January 2014 December 2013 November 2013 October 2013 September 2013 August 2013 July 2013 June 2013 May 2013 April 2013 March 2013 February 2013 January 2013 December 2012 November 2012 October 2012 September 2012 August 2012 July 2012 June 2012 May 2012 April 2012 March 2012 February 2012 January 2012 December 2011 November 2011 October 2011 September 2011 August 2011 July 2011 June 2011 May 2011 April 2011 March 2011 February 2011 January 2011 Source: Newspapers Canada, TD Securities Inc. Valuation Torstar shares trade at 3.6x EV/EBITDA, based on our 2015 estimates, which appears low compared to U.S. peers at 5x-10x, but consistent with the recent Sun Media/Postmedia transaction (done at 3.5x trailing). In our opinion, there is clearly a lot of execution risk and Torstar does not have the brand value of many of these U.S. comps, which will likely continue to impact its ability to deliver on its digital strategy. Action Notes October 17, 2014 Equity Research 40 of 48 Justification of Target Price We use a modified P/FCF multiple to arrive at our one-year target price of $8.00. Given the expectation for continued restructuring and pension contributions, we believe that free cash flow is a better measure of comparability than EBITDA or EPS. We apply an 11x free cash flow multiple to our 2016E free cash flow (to better capture forecast acquisitions) and add $1.81/share in minority investments to arrive at our 2016E target price. We discount this value by approximately 10% to arrive at our 2015E target price of $8.00. This value equates to 4.3x EBITDA and 11.6x EPS in 2015. Exhibit 5. Torstar Corporation: Derivation of Target Price 2016E FCFPS Applied Multiple $0.62 11.0x Free Cash Flow Ascribed Value $6.83 Plus Minority Investments $1.81 2016E Target Price $8.64 Less Time Value Discount 10% 2015E Target Price (rounded) $8.00 Source: TD Securities Inc. Key Risks to Target Price 1) Secular Industry Declines; 2) Ad Market Exposure; 3) Exposure to Newsprint Costs; 4) Labour Relations Risk; 5) Sensitivity to Interest Rates; 6) Acquisition Risk; 7) Forecasting Risk; 8) Subordinate Voting Share Structure Exhibit 6. Torstar Corporation: Summary of Key Forecasts — Base Case 2013A 2014E 2015E 2016E $984 $0 $398 -$73 $1,309 $912 $0 n/a -$49 $863 $839 $53 n/a -$45 $846 $768 $158 n/a -$41 $884 EBITDA Media EBITDA Acquired EBITDA Book Publishing EBITDA Corporate EBITDA Drag Adjustments & Eliminations Total EBITDA $131 $0 $56 -$14 -$12 $162 $126 $0 n/a -$12 -$12 $102.0 $119 $6 n/a -$12 -$11 $101.8 $108 $20 n/a -$12 -$10 $106.8 EBITDA Margin (%) 12.4% 11.8% 12.0% 12.1% EPS from Operations - f.d. $1.01 $0.66 $0.69 $0.70 Free Cash Flow FCFPS $56 $0.70 $37 $0.46 $42 $0.52 $50 $0.62 Revenue Media revenue Acquired revenue Book Publishing revenue Adjustments Total Revenue Notes: 2014E excludes Harlequin contributions Source: TD Securities Inc. October 17, 2014 Equity Research Action Notes 41 of 48 Exhibit 7. Newspaper Comps Name Ticker Price Yield Market Cap P/E F2013A F2014E F2015E EV/EBITDA F2013A F2014E F2015E P/FCF F2013A F2014E F2015E TS.B $7.07 7.4% $566 7.0x 10.8x 10.2x 4.3x 2.5x 3.6x 10.1x 15.4x 13.5x Canadian Newspaper Publishers Glacier Media PostMedia Network FP Newspapers Transcontinental GVC PNC.B FP TCL.A $1.45 $2.25 $3.80 $13.91 5.5% 0.0% 15.8% 4.6% $129 $90 $26 $1,088 6.3x n/a 5.4x 6.9x 9.7x n/a n/a 6.8x 9.3x n/a n/a 6.6x 5.2x 4.1x 3.3x 4.0x 5.3x 4.5x n/a 4.0x 5.1x 3.9x n/a 3.8x 5.9x 2.9x 1.9x 3.2x 9.8x 14.4x n/a 4.6x 5.7x 2.6x n/a 5.4x US Newspaper Publishers Gannett Co., Inc. (USD) The New York Times Company (USD) The McClatchy Company (USD) New Media Investment Group Inc. (USD) Tribune Publishing (USD) GCI NYT MNI NEWM TPUB $27.09 $12.38 $3.00 $16.85 $17.73 3.0% 1.3% 0.0% 0.0% 0.0% $6,288 $2,004 $266 $506 $450 13.4x 28.1x 5.5x n/a 6.6x 10.2x 33.2x n/a 240.7x n/a 11.0x 28.0x n/a 14.3x n/a 9.1x 7.2x 6.6x 7.2x 3.2x 8.0x 10.6x n/a 8.6x 1.9x 7.5x 9.6x n/a 5.7x n/a 13.4x 111.9x n/a 7.8x n/a 8.5x 21.1x n/a 8.5x n/a 9.3x 13.3x n/a 5.5x n/a Torstar Corporation Source: Capital IQ, TD Securities Inc. Exhibit 8. Torstar Corporation: Valuations ($mm, except per-share amounts) TS.B Capitalization Fully Diluted Shares O/S TS'B Share Price - Current Share Price - 12-Month Target Equity Capitalization - Current Equity Capitalization - Target 2013A 2014E 2015E 2016E 79.9 $7.07 80.1 $7.07 $8.00 567 641 80.1 $7.07 $8.00 567 641 80.1 $7.07 $8.00 567 641 565 Total Net Debt Hidden assets/Adjustments1 164 (40) (268) (40) (128) (75) 4 (145) Total F.D Net Debt (adjusted for hidden assets) 124 (308) (203) (141) Enterprise Value - Current Enterprise Value - Target 689 259 333 364 438 426 500 2 162 102 102 107 4.3x 2.5x 3.3x 3.6x 4.3x 4.0x 4.7x TS Consolidated EBITDA Enterprise Value/EBITDA Valuation Adjusted EV/EBITDA multiple $7.07 - Current $8.00 - 12-Month Target $0.70 TS Free Cash Flow per Share Price to FCF Per-share Valuation Price to FCF per-share multiple $7.07 - Current $8.00 - 12-Month Target $1.01 TS EPS from Operations (f.d.) P/E Valuation P/E Multiple $7.07 - Current $8.00 - 12-Month Target 1 Includes estimate for current and expected minority investments 2 2014E estimates exclude Harlequin contributions Source: Company reports, TD Securities Inc. 10.1x 7.0x $0.46 15.4x 17.4x $0.66 10.8x 12.2x $0.52 13.5x 15.3x $0.69 10.2x 11.6x $0.62 11.4x 12.9x $0.70 10.0x 11.4x Action Notes Metals & Minerals HOLD Unchanged Risk: SPECULATIVE 12-Month Target Price: C$4.25 Unchanged 12-Month Dividend (Est.): 14.2% Event On October 14th, Turquoise Hill reported its Q3/14 operating results and lowered its full year production guidance. $3.72 $3.17-$4.82 $7,484.6 $7,484.6 $0.00 0.0% 1,323,353 Financial Data (C$) Fiscal Y-E Shares O/S (f.d.)(mm) Shares O/S (basic)(mm) Float Shares (mm) Net Debt/Tot Cap Cash ($mm) NAVPS (current)(f.d.) December 2,012.0 2,012.0 905.0 -$201.2 $3.75 Estimates (US$) 2013A (0.17) -(0.30) -- 2014E 0.06 0.08 0.23 0.24 2015E 0.01 0.01 0.19 0.19 2014E 314 554 2015E 355 565 Supplemental Data Year Cu Prod mmlb Au Prod koz 2012A --- 2013A 169 157 (TRQ-T, TRQ-N) C$3.72 Lower 2014 Production Guidance Offset by Cost Improvements Market Data (C$) Current Price 52-Wk Range Mkt Cap (f.d.)($mm) Mkt Cap (basic)($mm) Current Dividend Dividend Yield Avg. Daily Trading Vol. (3M-All Exch) Turquoise Hill Resources Ltd. C$0.00 12-Month Total Return: 2012A (0.33) -(0.51) -- 42 of 48 Craig Hutchison, P. Eng. Recommendation: Year EPS (basic) EPS (basic)(old) CFPS (basic) CFPS (basic)(old) October 17, 2014 Equity Research Notes:Cash in US$ All figures in US$, unless otherwise specified. Impact- NEUTRAL Q3/14 production at Oyu Tolgoi totaled 36.6ktonnes copper and 132koz gold below our estimate of 39.4kt (-7%) and 183.4koz (-28%) respectively, from a combination of lower throughputs and grades. Sales outpaced production for the second straight quarter resulting in a decline in inventories and what we expect will translate into a buildup in cash for the quarter. The company lowered its 2014 production guidance to 135-150kt copper (previously 135-160kt) and 550-600koz gold (previously 600-700koz). In addition, the company expects 2014 onsite costs and capital expenditures to be approximately $180mm lower than previously forecast, as it focuses on cost reductions and productivity initiatives. We had expected the company to cut its 2014 production guidance on the basis of the lower than expected grades year-to-date along with equipment availabilities issues. We now expect some of the higher grade material expected in H2/14 to be pushed out to H1/15. We are forecasting 2014 production of 142.5kt copper (previously 149.8kt) and 554koz gold (previously 574koz). In addition, we have trimmed our operating and capex assumptions to reflect the company's guidance, which offset the impact of the lower production. On balance the Q3/14 operating results and revised guidance were neutral to our estimates. TD Investment Conclusion Our C$4.25 target price and HOLD rating are both unchanged. On October 2nd Turquoise Hill announced that it had not yet requested an extension for the estimated US$4billion underground financing commitments, although the company maintains ongoing engagement with the various financial institutions. Our investment thesis and the majority of our valuation for the company is contingent on the development of the high-grade underground mine. We continue to be of the view that the various shareholder issues will be resolved and that the debt financing package will be available allowing construction of the underground mine to resume in late 2014 or early 2015. Please see the final pages of this document for important disclosure information. Company Profile Turquoise Hill Resources is a resource company focused on the Asia Pacific region. It is an emerging copper producer through its core asset, the large Oyu Tolgoi (66%) Cu-Au deposit in Mongolia. The company has formed a strategic partnership with its majority shareholder, Rio Tinto, to manage its development. TRQ-T: Price 25 25 20 20 15 15 10 10 5 5 0 0 2011 2012 2013 2014 October 17, 2014 Equity Research Action Notes 43 of 48 Details (Exhibit 1) Q3/14 copper production at Oyu Tolgoi totaled 36.6ktonnes, flat q/q and below our expectation of 39.4kt (-7%) driven by lower than expected throughputs. Total tonnes milled of 7.03mmt (76,400tpd) declined 10% q/q as a result of the previously announced tailings rake damage, which reduced mill throughputs by approximately 40% over 25-days. Assuming there was no tailings rake related impacts in the quarter, we estimate throughput would have averaged approximately 85,700tpd in Q3, which is consistent with Q2. Gold production was 132koz in Q3, up 17% q/q, but well below our estimate of 183.4koz (-28%) on lower gold grades. Mining of the high-grade gold zone began in September and grades are expected to increase through the fourth quarter. Copper and gold sales totaled 53.6kt and 144koz respectively, below our estimate of 51.2kt and 238.4koz on lower production. Sales outpaced production for the second straight quarter, and this trend is expected to continue into Q4/14 and Q1/15. Recall that as at the end of Q2/14, we estimate that the company had 258,000 tonnes of copper concentrate in inventory valued at $476mm. Exhibit 1. Q3/14 Operating Results Q1/14 Q2/14 Q3/13 8,052 89,467 Q4/13 7,835 87,056 Q1/14A 5,560 61,778 Q2/14A 7,778 85,473 Actual 7,029 76,402 TDS 7,544 82,000 Var. % -7% -7% Average mill head grades: Copper (%) Gold (g/t) Silver (g/t) Cu concentrates produced ('000 tonnes) Average concentrate grade (% Cu) 0.47 0.36 1.39 110.5 27.7 0.49 0.41 1.44 129.5 25.4 0.52 0.49 1.52 101.6 24.9 0.53 0.60 1.57 140.3 25.8 0.59 0.80 1.64 134.1 27.3 0.60 1.00 1.45 151.5 26.0 -2% -20% 13% -11% 5% Production of metals in concentrates: Copper in concentrates ('000 tonnes) Gold in concentrates ('000 ounces) Silver in concentrates ('000 ounces) 30.6 62.0 196.0 32.9 74.0 208.0 25.3 66.0 163.0 36.2 113.0 229.0 36.6 132.0 216.0 39.4 183.4 249.2 -7% -28% -13% Sales of metals in concentrates: Copper in concentrates ('000 tonnes) Gold in concentrates ('000 ounces) Silver in concentrates ('000 ounces) 0.0 0.0 0.0 6.1 10.0 36.0 13.1 28.0 78.0 51.6 126.0 309.0 53.6 144.0 323.0 51.2 238.4 324.0 5% -40% 0% Metal recovery (%) Copper Gold Silver 80.9 66.4 54.4 86.4 71.2 57.2 87.9 75.5 59.3 87.6 74.8 58.6 89.3 74.8 58.6 87.0 75.5 71.0 3% -1% -17% Ore Treated ('000 tonnes) Throughput (tpd) Q3/14 Source: Company reports, TD Securities Inc. Outlook The company has lowered its 2014 production guidance to 135,000-150,000 tonnes copper (previously 135,000-160,000t) and 550,000-600,000 ounces gold (previously 600,000-700,000oz). In order to achieve the lower range of its 2014 gold guidance, we estimate grades in Q4 will need to increase by approximately 50% to ~1.20 g/t. The company expects some of the higher grade ore anticipated for in Q4/14 to shift to Q1/15. The company also expects to reduce its 2014 on-site operating costs by $130mm from the previously announced $1.0 billion, as management focuses on cost reductions and productivity improvements. In addition the company expects to reduce 2014 capital expenditures from US$160mm to US$110mm. We suspect that a portion of the cost savings in 2014 is related to slower development of the open pit and lower overall tonnes mined. October 17, 2014 Equity Research Action Notes 44 of 48 Changes to our estimates: We have updated our estimates to reflect the company's Q3/14 results and made some minor changes to our production, cash cost and capex assumptions. We have lowered our production estimates for 2014 to 142,500 tonnes copper (previously 149,800 tonnes) and 554,200oz gold (previously 574,000oz). Exhibit 2. 2014 Operating Estimates and Guidance Q1/14 Q2/14 Q3/14 Q4/14 2014 TRQ Q1/14A 5,560 61,778 Q2/14A 7,778 85,473 Q3/14A 7,029 76,402 Q4/14E 8,280 90,000 2014E 28,647 78,485 Guidance Average mill head grades: Copper (%) Gold (g/t) Silver (g/t) Cu concentrates produced ('000 tonnes) Average concentrate grade (% Cu) 0.52 0.49 1.52 101.6 24.9 0.53 0.60 1.57 140.3 25.8 0.59 0.80 1.64 134.1 27.3 0.61 1.20 0.60 171.0 26.0 0.57 0.80 1.30 547.0 26.1 Production of metals in concentrates: Copper in concentrates ('000 tonnes) Gold in concentrates ('000 ounces) Silver in concentrates ('000 ounces) 25.3 66.0 163.0 36.2 113.0 229.0 36.6 132.0 216.0 44.4 243.2 115.2 142.5 554.2 723.2 Sales of metals in concentrates: Copper in concentrates ('000 tonnes) Gold in concentrates ('000 ounces) Silver in concentrates ('000 ounces) 13.1 28.0 78.0 51.6 126.0 309.0 53.6 144.0 323.0 57.8 316.1 149.7 176.1 614.1 859.7 Metal recovery (%) Copper Gold Silver 87.9 75.5 59.3 87.6 74.8 58.6 89.3 74.8 58.6 88.0 76.0 72.0 88.2 75.3 62.6 Ore Treated ('000 tonnes) Throughput (tpd) 135 - 150 550 - 600 Source: Company reports, TD Securities Inc. Valuation Turquoise Hill is trading at 1.0x our 10%NAPVS estimate of C$3.75 (previously C$3.73) versus the mid-cap base metal producers of 0.7x. Justification of Target Price Our target price of C$4.25 is based on 1.1x our 10%NAVPS estimate weighted 100% using a Canadian dollar/U.S. dollar exchange rate of 0.90. Key Risks to Target Price Relative to other companies within our equity universe, we believe that an investment in Turquoise Hill is subject to a SPECULATIVE level of risk. Our recommendation is subject to forecast, financial, technical, political, and deposit-size risks. These include risks related to copper, gold and fuel prices; the governing fiscal and legislative regimes in Mongolia; the timing of key developments; market conditions; capital and operating costs; foreign exchange rates; resource estimates; operating parameters; permitting and environmental issues; and staffing and personnel retention. Risks specific to the company include technical risk with the block caving mining method and access to financing to build the Phase 2 underground. October 17, 2014 Equity Research Action Notes 45 of 48 Exhibit 3. Company Snapshot Turquoise Hill Resources Ltd. Target Price Calculator Price 10% NAV 3.45 Target Multiple 1.10x Weighting 100% Forex CAD/USD Calculated Target Price Canadian Rounded Target Price Revenues By Metal (US$mm) Copper Gold Silver 2012A 0 0 0 2013A 42 12 1 2014E 1149 726 16 Realized Metal Prices & Costs Copper (US$/lb) Gold (US$/oz) ContributionSilver (US$/oz) 3.80 Forex CAD to USD 0.90 Cash cost Net (US$/lb Cu) C$4.22 Attributable Cu Prod., mmlb C$4.25 Stage 1 Open Pit (66% to 100%) 2015E Stage 2 Underground (66% to 100%) 1102 Total Copper (mm lb) 706 Total Copper (k tonnes) 23 Gold (000 'oz) Silver (000' oz) Copper Production Hedged % 2012 2013A Q1/14A Q2/14A Q3/14E Q4/14E 2014E 2015E 3.62 3.34 3.18 3.08 3.16 3.10 3.13 3.10 1,655 1,413 1,293 1,290 1,282 1,205 1,268 1,250 31.29 23.88 20.48 19.65 19.76 20.00 19.97 20.00 1.00 0.97 0.91 0.92 0.92 0.91 0.92 0.90 0.00 3.48 2.87 2.06 1.85 0.48 1.54 1.86 2012A 2013A Q1/14A Q2/14A Q3/14E Q4/14E 2014E 2015E 169 56 80 81 98 314 355 169 56 80 81 98 314 355 0.0 76.7 25.3 36.2 36.6 44.4 142.5 161.2 0 157 66 113 132 243 554 565 0 489 163 229 216 115 723 1,157 0% 0% 0% 0% 0% 0% 0% 0% Production Profile 2010600 2011 2012 2013 400 2014 2015 2016 2017200 2018 2019 2020 - 2010A 2011A 2012A 2013A 2014E Copper Production, mmlb NAV Analysis Mining Assets Stage 1 Open Pit (66% to 100%) Stage 2 Underground (66% to 100%) Sub Total Mining Assets Shares Used in DCF Model, mm 8% 8% 10% US$mm US$/sh US$mm 1,837 5,570 7,406 0.91 2.77 3.68 1,667 4,157 5,825 630 54 5 6 694 0.31 0.03 0.00 0.00 0.34 630 54 5 6 694 Net Debt Working Capital Long Term Debt Working Capital Additions/Financings Options & Warrants In the Money Total Adjustments Total Net Asset Value, US$ Total Net Asset Value, C$ 427 427 8,527 9,269 0.21 0.21 4.24 4.61 427 427 6,946 7,550 Balance Sheet (US$mm) Cash Current assets Total assets Current liabilities Long term debt Total liabilities Non Controlling Interest Shareholders' equity 2012A 1,163 1,611 9,085 2,772 3,001 12 6,072 Other Tangible Assets Expansion Scenario at OT (66%) SouthGobi Resources (SGQ-T) Entrée Gold (ETG-T) Ivanhoe Mines (IVN-T) Total Other Assets Source: company, TDS 2013A 78 973 8,596 3,057 (170) 4,018 (387) 4,965 2014E 4,806 5,333 12,558 569 4,000 4,768 (519) 8,309 $4.00 Cash Costs, $/lb Cu (net) Total Copper Production Total Gold Production Copper Production, mmlb Gold Production, koz 2010A 2011A 2012A 2013A 169 157 2014E 314 554 2015E 355 565 2016E 415 583 2017E 290 233 2018E 324 583 2019E 424 441 2020E 719 312 2015E 0.00 0.00 0.00 3.48 1.54 1.86 1.78 3.51 1.77 1.50 1.28 $3.00 $2.00 $/lb Cu 800 $1.00 $0.00 2016E Gold Production, koz 2017E 2018E 2019E 2020E Cash Costs, $/lb Cu (net) 2,012 2012A 2013A Q1/14A Q2/14A Q3/14E Q4/14E 2014E 2015E 10% Key Financial Information US$/sh Adjusted EPS (f.d.) (US$/sh) (0.33) (0.17) (0.01) 0.00 (0.00) 0.07 0.06 0.01 CFPS bf WC (US$/sh) (0.51) (0.30) (0.01) 0.03 0.06 0.14 0.23 0.19 0.83 Adjusted EBITDA (US$mm) (458) (40) 34 140 118 291 583 389 2.07 2.89 Income Statement ($USmm) Mining Revenues 134 110 113 443 466 636 1,659 1,575 147 178 90 349 331 322 1,091 1,135 Production & Delivery 0.31 Exploration 169 27 3 3 3 3 12 10 0.03 G & A (incl stock based comp) 314 61 6 9 10 15 40 40 (458) (40) 34 140 118 291 583 389 0.00 Adjusted EBITDA 0.00 Reclamation 5 6 2 2 4 0.34 Depreciation 20 31 116 124 129 400 357 Other expenses (gains) (161) 155 99 63 (0) 162 EBIT (322) (202) (99) (41) (6) 162 17 32 0.21 - Interest Expense 12 62 12 0 0 12 - Taxes (recovery) 34.3 99.9 6.8 13.1 0.0 16.2 36.1 3.2 - Share of Loss of Influenced Investees (33) (3) (0) (0) (0) 0.21 Net Income (Loss) Continuing Operations (581) (367) (117) (54) (6) 145 (31) 29 3.45 3.75 Income (loss) from discontinued operation 147 (81) Net Gain/Loss (435) (448) (117) (54) (6) 145 (31) 29 Gain (loss) Attributable to Minority Interest (336) (66) (63) (130) 2015E Reported net earnings (435) (112) (51) 10 (6) 145 98 29 (285) (219) (19) 7 (6) 145 128 29 4,174 Adjusted net earnings 4,701 Weighted Average Share Count, mm 854 1,298 1,867 2,012 2,012 2,012 1,976 2,012 12,587 569 Cash Flow Statement (US$mm) 2012A 2013A Q1/14A Q2/14A Q3/14E Q4/14E 2014E 2015E 4,000 Operating CF bf. ch. in WC (434) (392) (10) 69 117 275 452 386 4,768 CF from operating activities (507) (631) (148) 147 253 454 707 386 (519) CF from financing activities 3,179 337 273 (30) 3,952 4,195 8,337 CF from investing activities (2,524) (787) (62) (57) (10) (45) (174) (1,018) Action Notes October 17, 2014 Equity Research 46 of 48 TD Securities Equity Research Disclosures Company Ticker Disclosures Ainsworth Lumber Co. Ltd. Allied Properties REIT Amica Mature Lifestyles Inc. Boardwalk REIT Brookfield Canada Office Properties CT REIT Calloway REIT Canadian Apartment Properties REIT Canadian REIT Canfor Corp. Canfor Pulp Products Inc. Cascades Inc. Chartwell Retirement Residences Choice Properties REIT Cominar REIT Conifex Timber Inc. Crombie REIT Domtar Corp. Dream Industrial REIT Dream Global REIT Dream Office REIT Dream Unlimited Corp. Extendicare Inc. Firm Capital Mortgage Investment Corp. First Capital Realty Inc. Granite REIT H&R REIT InnVest REIT InterRent REIT Interfor Corp. KP Tissue Inc. Killam Properties Inc. Leisureworld Senior Care Corp. Linamar Corp. Louisiana-Pacific Corp. MAG Silver Corp. Magna International Inc. Mainstreet Equity Corp. Mercer International Inc. Morguard North American Residential REIT Norbord Inc. Northern Property REIT Regal Lifestyle Communities Inc. Resolute Forest Products Inc. Retrocom REIT RioCan REIT Tembec Inc. Torstar Corp. Tricon Capital Group Inc. Turquoise Hill Resources Ltd. West Fraser Timber Co. Ltd. Western Forest Products Inc. ANS-T AP.UN-T ACC-T BEI.UN-T BOX.UN-T CRT.UN-T CWT.UN-T CAR.UN-T REF.UN-T CFP-T CFX-T CAS-T CSH.UN-T CHP.UN-T CUF.UN-T CFF-T CRR.UN-T UFS-N DIR.UN-T DRG.UN-T D.UN-T DRM-T EXE-T FC-T FCR-T GRT.UN-T HR.UN-T INN.UN-T IIP.UN-T IFP-T KPT-T KMP-T LW-T LNR-T LPX-N MAG-T MGA-N MEQ-T MERC-Q MRG.UN-T NBD-T NPR.UN-T RLC-T RFP-N RMM.UN-T REI.UN-T TMB-T TS.B-T TCN-T TRQ-T WFT-T WEF-T n/a 1, 2, 4 n/a n/a n/a 1, 2, 4 1, 2, 4, 9 n/a 2,4 9 n/a 1, 2, 4 2, 4, 9 1, 2, 4 1, 2, 4 n/a 1, 2, 4 9 n/a n/a 1, 2, 4 1, 2, 4, 10, 12 2, 4, 9 n/a 1,2, 4, 9 9 1, 2, 4, 9 n/a n/a 2, 5, 12 n/a n/a 1, 2, 4 9 n/a 1, 2, 4, 9 2, 4, 9 n/a n/a n/a 2, 4 n/a 1, 2, 4 n/a 1, 2, 4,14 1, 2, 4, 9 5 5, 14 n/a 9 1, 2, 4 1, 2, 4 1. 2. 3. 4. 5. 6. 7. UFS-T GRP.U-N MVG-N MG-T RFP-T TRQ-N 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. Action Notes 8. 9. 10. 11. 12. 13. 14. 15. 16. October 17, 2014 Equity Research 47 of 48 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 Domtar Corp.: Brian Levitt, Director of Domtar Corp., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank. 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. Henry H. Ketcham, Executive Chairman of West Fraser Timber Co. Ltd., is a member of the board of directors of The Toronto-Dominion Bank. TD Securities Inc. is a wholly owned subsidiary of The Toronto-Dominion Bank 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. Distribution of Research Ratings Investment Banking Services Provided* Distribution of Research Ratings^ REDUCE 3% BUY 58% 80% 70% 60% 67% 50% 40% 30% HOLD 39% 30% 20% 3% 10% 0% BUY HOLD REDUCE Current as of October 2, 2014 ^ Percentage of subject companies under each rating * Percentage of subject companies within each of the three category—BUY (covering Action List BUY, BUY and Spec. categories (BUY, HOLD and REDUCE) for which TD BUY ratings), HOLD and REDUCE (covering TENDER Securities Inc. has provided investment banking services and REDUCE ratings). within the last 12 months. Definition of Research Ratings ACTION LIST BUY: 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. BUY: The stock’s total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months. SPECULATIVE BUY: 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. HOLD: The stock’s total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12 months. TENDER: 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. REDUCE: The stock’s total return is expected to be negative over the next 12 months. Overall Risk Rating in order of increasing risk: Low (6.5% of coverage universe), Medium (33.2%), High (49.2%), Speculative (11.1%) Research Dissemination Policy TD Securities makes its research products available in electronic and/or printed formats and simultaneously distributes them to its institutional clients who are entitled to receive them. The Action Notes are distributed by email, and are available in PDFform on Thomson Reuters, Bloomberg, S&P Capital IQ and FactSet. Research Reports are distributed by email; they are also printed and distributed by courier to our entitled clients. PDFs of Reports are available on Thomson Reuters, Bloomberg, S&P Capital IQ and FactSet. All research is available by password to entitled institutional clients at https://www.tdsresearch.com/equities Action Notes October 17, 2014 Equity Research 48 of 48 Analyst Certification Each analyst of TD Securities Inc. whose name appears on page 1 of this research report hereby certifies that (i) the recommendations and opinions expressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed herein that are within the analyst’s coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the provision of specific recommendations or views expressed by the research analyst in the research report. Disclaimer This report is produced entirely by TD Securities Inc. 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U.S. clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities (USA) LLC. European clients wishing to effect transactions in any security discussed should do so through a qualified salesperson of TD Securities Limited. Insofar as the information on this report is issued in the U.K. and Europe, it has been issued with the prior approval of TD Securities Limited and only to persons falling within Articles 19 and 49 of the Financial Services & Markets Act 2000 (Financial Promotion) Order 2001, namely persons sufficiently expert to understand the risks involved. This report has been distributed in Hong Kong through The TorontoDominion Bank (Hong Kong Branch), which is regulated by the Hong Kong Monetary Authority. TD Securities Limited is providing financial services to wholesale clients in Australia in reliance on Class Order CO 03/1099. 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