Company Report Materials

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1 Company Report Materials February 19, 2007 On The Right Track Recommendation: Stella-Jones Inc. Top Pick Yuri Lynk, MSc, CFA Materials Analyst (514)

2 On the Right Track Stella-Jones Inc Investment Thesis... 3 Brief History... 3 Company Profile... 3 Shareholder Structure... 5 Objectives & Strategy... 6 Recent Acquisitions... 6 Management Profiles... 7 Recent Results... 7 Q4/06 Preview... 8 Financial Forecast... 9 Income Statement Balance Sheet Cash Flow Statement Financial Statements Valuation Risks Appendix I North American Rail Tie Market Appendix II North American Wooden Utility Pole Market Appendix III Production Facilities Summary Appendix IV Potential Acquisition Targets Appendix V Manufacturing Process Appendix VI Preservatives Appendix VII Historical Trading Pattern

3 Stella-Jones Inc. (SJ-T) Top Pick / Target Price: $43.50 Company Profile Stella-Jones Inc. (SJ-T) is a leading Canadian producer and marketer of industrial structures, specializing in the production of treated wood utility and telecommunication poles and railway ties. Other principle products include marine and foundation piles, construction timbers, highway guardrail posts, and treated wood for bridges. Source: BigCharts.com Market Data Ticker SJ-T Shares O/S (M) 12.3 Rating Top Pick Market Cap (M) $391.9 Risk High Float O/S (M) 5.4 Price $31.75 Float Value (M) $ Yr Target $43.50 Avg Daily Volume (K) 11.0 Dividend $0.16 Control Blocks: SJ Intl. SA 1-Yr ROR 37.5% Voting 56% 52-Wk High-Low $35.50-$14.20 Equity 56% Next Reporting March 15, 2007 Management: - Valuation 15x 2008e EPS Fully Diluted EPS (December 31 Year End) Q1 Q2 Q3 Q4 Annual F2005 $0.13 A $0.37 A $0.30 A $0.27 A $1.08 F2006 $0.32 A $0.48 A $0.55 A $0.36 $1.72 F2007 $0.47 $2.23 F2008 $2.90 EBITDA (M) Q1 Q2 Q3 Q4 Annual F2005 $3.1 A $7.0 A $6.6 A $6.0 A $22.7 F2006 $6.9 A $9.9 A $11.7 A $9.0 $37.5 F2007 $11.3 $53.2 F2008 $66.0 Source: Company reports; Thomson One; LBS estimates. We are initiating coverage on Stella-Jones with a Top Pick rating, a 1-year share price target of $43.50, and a High risk ranking. Our target price implies a 1-year total return of 37.5% and is based on 15x 2008e EPS. We forecast EPS of $1.72/share (fd) in 2006 (+59%), $2.23/share (fd) in 2007 (+30%), and $2.90/share (fd) in 2008 (+30%). Stella-Jones is a consolidator of the fragmented rail tie and utility pole markets. We have identified over 25 potential acquisition targets, most of which are in the United States as the Canadian market is relatively more concentrated. We estimate the company is able to acquire assets at very favourable terms. The company paid just 2.3x EV/2005 EBITDA, before considering synergies and excluding working capital considerations, for their last acquisition. Given that Stella-Jones currently trades at 6.6x EV/2007e EBITDA, acquisitions such as this are highly accretive. The company should also post healthy organic growth in its core business lines. We believe 2007 rail tie purchases could exceed last year s record level on the back of continued freight rail growth, stretched capacity, record capital spending plans, and tax credit incentives. Utility poles should benefit from pent-up demand as the age of the average pole in Canada is nearing the end of its estimated useful life. Stella-Jones valuation is compelling. On 2007e financials, the company is trading at the lowest PEG ratio (0.49) while offering the second highest ROIC (18%) versus a group of six comparable companies. Additionally, the company has the financial flexibility to complete further acquisitions. At the end of Q3/06, Stella-Jones had a net debt-to-total capitalization ratio of 43.4% and net debt-to-last 12- months EBITDA of 2.2x despite completing a $50M acquisition in June 2006, its largest to date. Finally, while the dividend yield is miniscule, it is worth noting the company has grown the dividend at a CAGR of 26% since Looking longer-term, once management s growth plans run their course the company could look to pay a more substantial dividend considering the low capital intensity of the business model and the company s strong FCF generation ability

4 Stella-Jones Inc. Top Pick With $ Year Target We are initiating coverage on Stella-Jones with a Top Pick rating and 1-year share price target of $43.50 implying a 37.5% total return from current levels. Our target is based on 15x 2008e EPS of $2.90. Investment Thesis Industry Consolidator By consolidating the fragmented utility pole and rail tie markets, we believe Stella-Jones can generate significant shareholder value going forward. Additionally, we expect market fundamentals in the company s core businesses to allow for healthy organic growth over our forecast horizon. We expect demand for rail ties to benefit from increased capital spending by the Class I railroads in their attempt to accommodate increasing levels of freight rail traffic (Appendix I). Utility poles should benefit from pent-up demand as the age of the average pole in Canada is nearing the end of its estimated useful life (Appendix II). Brief History Former Division Of Domtar Stella-Jones was established in October 1992 for the purpose of acquiring the wood preserving division of Domtar Inc., whose operations existed since the early 1900s. The acquisition of the operating assets of the division, except the lands, was completed in June A year later, Stella-Jones became a public company. Company Profile Leading Canadian Producer Of Treated Wood Stella-Jones is Canada s largest producer of pressure treated wood railway ties and utility poles. Other principal products include marine and foundation pilings, construction timbers, highway guardrail posts, and treated wood for bridges. The company also provides treated consumer lumber products and customized services to lumber retailers and wholesalers for outdoor applications. Exhibit 1 shows the company s segmented sales between 2002 and The company does not regularly disclose their sales mix but we believe utility poles will still be the largest sales segment in 2006, followed closely by railway ties. Millions $180 $160 $140 $120 $100 $80 $60 $40 $20 $- Exhibit 1 - Stella-Jones' Segmented Sales Consumer Lumber Industrial Lumber Railway Ties Utility Poles & Pilings Source: Company reports - 3 -

5 Stella-Jones has 75% of the utility pole market in Canada. Sales in the utility poles and pilings segment are made predominantly to regional telecommunication and electric utility companies. Pilings include marine pilings and foundation pilings. Demand for pilings typically follows the construction cycle and producers compete on price, quality, and service. Rail Tie Demand Should Remain Strong With 14% of the North American rail tie market, we believe Stella-Jones is well positioned to benefit from strong tie demand. We believe rail tie demand should remain robust on the back of continued freight growth, stretched capacity, record capital spending plans, and tax credit incentives. The largest source of incremental rail tie demand over the next three years could come from a major new railroad construction project. The Dakota, Minnesota & Eastern Railroad (DM&E) expansion project into the coal fields of the Powder River Basin (Eastern Wyoming) would be the largest new railroad construction in the US in almost 100 years. The company s industrial lumber segment provides construction materials used mainly in public works projects, such as highway guardrail posts. Products are typically sold directly to municipal and provincial authorities in response to tenders for a certain quantity and specification of preserved timber for a particular project. Stella-Jones consumer lumber segment provides treating services to lumber wholesalers seeking to add value to their finished product. The wholesaler supplies all the raw wood and the company only applies the treatment. The service allows wholesalers to expand their product line by offering treated wood products, without having to operate treatment facilities on their own. With the acquisition of Bell Pole in 2006, the company now provides treated consumer lumber (including the raw wood) for Alberta s rapidly expanding housing market. Looking To US For New Growth Opportunities Of total 2005 sales, 80% were made in Canada and 20% in the US. The company has largely exited the overseas export market as shown in Exhibit 2. Management believes the US market presents opportunities for additional growth, particularly for its west coast operations where the company s access to Douglas fir and Cedar, large pole species, is a competitive advantage when bidding on transmission projects. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Exhibit 2 - Stella-Jones' Sales By Destination Other United States Canada Source: Company reports - 4 -

6 Eight Facilities In Canada And One In The US Control Block Of 56% FTQ Has 9% In terms of asset location, Stella-Jones has one manufacturing facility in Bangor, Wisconsin with the remaining 8 located in Canada (Appendix III). The company has operations spanning from Truro, Nova Scotia to several pole peeling facilities located throughout British Columbia. On November 15, 2006, the company announced management was considering buying a treating plant in Arlington, Washington, as well as a pole peeling facility in Juliaetta, Idaho from JH Baxter & Co. The deal is expected to close at the end of February Shareholder Structure Stella Jones International SA holds 56% of Stella-Jones making the shares highly illiquid. Mr. Tom A. Bruce Jones, Chairman of Stella-Jones, and Mr. Gianni Chiarva, Vice-Chairman, together hold directly or indirectly all of the shares of Stella Jones International SA (Exhibit 3). The company s shares are regular voting. The other significant shareholder is the Fonds de solidarité des travailleurs du Québec (FTQ) with just under 9% of the company. While Stella-Jones President and CEO, Mr. Brian McManus, directly owns just 1,667 shares, he was granted, in 2003, 300,000 options with a strike price of $2.99 that are now worth approximately $8.6 million. Exhibit 3 - Shareholder Structure Stella-Jones Inc. 56% Stella Jones International SA 49% 51% James Jones & Sons Ltd. Stella International 30% 100% Tom A. Bruce Jones Chairman, Stella-Jones Gianni Chiarva Vice-Chairman, Stella-Jones Source: Company reports - 5 -

7 Objectives & Strategy Consolidating A Fragmented Industry Management s objective is to create shareholder value by completing accretive acquisitions and pursuing organic growth in Stella-Jones core markets. Management s strategy is to seek out attractive targets in the rail tie and/or utility pole businesses, particularly in the US. Acquisition targets must be in Stella-Jones core businesses, have a reasonable multiple, and provide synergistic opportunities. We outline some of the major treated wood producers that could make attractive acquisition targets in Appendix IV. Recent Acquisitions Paid 2.3x EBITDA For Last Acquisition SJ Trades At 6.6x EV/2007e EBITDA Excluding synergies, we estimate Stella-Jones paid only 2.3x EV/2005 EBITDA for Bell Pole Company, their latest acquisition. Stella-Jones announced on June 30, 2006 they had acquired the assets and operations of Bell Pole Company for $50.1 million, of which $30.4 million was for working capital implying a total transaction value of $19.7 million. In a regulatory filing on SEDAR, we were able to determine Bell Pole Company generated EBITDA of $8.6 million in 2005 implying a 2.3x EV/2005 EBITDA multiple. Given that Stella-Jones currently trades at 6.6x EV/2007e EBITDA, acquisitions such as this are highly accretive. Of the four acquisitions the company has completed since 2003, Bell Pole was the only one where detailed financial information was available for the target, however, the company usually discloses the annual revenues of its targets. As shown in Exhibit 4, Stella-Jones usually pays between 0.6x and 0.9x sales. We conservatively assume the company is paying 1x sales for JH Baxter & Company. Future Acquisitions Likely To Be In US Going forward, we expect the bulk of the company s acquisitions to be in the US. Given that the company has such a large market share of the utility pole (75%) and rail tie market (65%) in Canada, the fragmented US market offers more opportunities. Target Annual Sales Transaction Value Price/Sales Effective Date Millions Millions JH Baxter & Co. US$30 US$30* 1.0x* 1-Mar-07* Bell Pole Co. $54 $50 0.9x 1-Jul-06 Webster Wood Preserving Co. $32 $18 0.6x 31-Aug-05 Les Industries Legare (1998) Ltee. N.A. $2 N.A. 27-Apr-04 Cambium Group Inc. $20 $17 0.8x 31-Jul-03 * Assumption as closing details have not been released yet. Source: Company reports; LBS estimates Exhibit 4 - Past Acquisitions - 6 -

8 Management Profiles Experienced Management Team Brian McManus, President and Chief Executive Officer. Mr. McManus had over ten years of entrepreneurial experience before joining Stella-Jones in He was President of Access Mini-Storage Inc. from September 1994 to May 2000 and Vice- President of Cafa Financial Corporation from May 2000 to May Mr. McManus holds a Masters of Business Administration from the Richard Ivey School of Business at the University of Western Ontario. George T. Labelle, Senior Vice-President and Chief Financial Officer. Mr. Labelle was appointed Vice-President of Finance in December 1999 and was promoted to his current position in Prior to his appointment as Vice-President, he was a consultant to Prometic Life Sciences Inc. from 1998 to 1999, Vice-President, Finance of Canada Steamship Lines from 1995 to 1997, and Vice-President of Perkins Paper Ltd. from 1992 to Mr. Labelle is a chartered accountant with a degree from Concordia (Loyola) University. Martin Poirier, Vice-President and General Manager, Central Region. Mr. Poirier was named General Manager, Central Region in January of Between 1997 and January 2002, Mr. Poirier held several positions at IPB International Inc., including that of General Manager. Prior to 1997, he worked for Stella-Jones (or its predecessor, Domtar s wood preserving division) for 18 years, where he held several positions at the company s Delson facility. Recent Results Q3/06 EPS Growth Of 83% Y/Y EBITDA Margins Increased 196 bps Y/Y FCF Growth Was 146% Y/Y On October 31, 2006, Stella-Jones reported Q3/06 earnings of $0.55 per share (fd), up 83% y/y and 15% q/q. At $11.7 million, EBITDA was higher by 79% y/y and 19% q/q (Exhibit 5). Sales in Q3/06 reached $68 million, an increase of 59% y/y and 11% q/q. The company generated EBITDA margins of 17.3% during the quarter, up 196 basis points (bps) y/y and 115 bps q/q. The company cited increased prices in their core segments and better product mix in addition to the contribution from recent acquisitions as the main factors explaining the improved results. At $0.79 per share (fd), free cash flow per share (after dividends) improved by 146% y/y and 24% sequentially. The company s leverage was largely unchanged versus the same quarter the prior year despite completing the $18 million Webster Wood Preserving Co. and $50 million Bell Pole Co. acquisitions in August 2005 and July 2006 respectively

9 Exhibit 5 - Q3/06 Results Summary (Thousands Except Per Share Amounts) Income Statement Summary: Q3/06 y/y Q3/05 q/q Q2/06 Sales $68,072 59% $42,845 11% $61,396 EBITDA $11,747 79% $6,556 19% $9,887 Margin 17.3% 196bp 15.3% 115bp 16.1% Net Income $6, % $3,316 25% $5,415 Margin 10.0% 223bp 7.7% 115bp 8.8% EPS (fd) $ % $ % $0.48 Leverage Analysis: Net Debt/Total Cap. 43.4% 97bp 42.4% -354bp 46.9% Net Debt/LTM EBITDA 2.2x -0.2x 2.4x 0.0x 2.2x LTM EBITDA/LTM Net Int. Exp. 10.7x -1.0x 11.7x -0.3x 11.0x Free Cash Flow Analysis: EBITDA $11,747 79% $6,556 19% $9,887 Less: Net Interest Expense $1, % $509 35% $786 Less: Capex $932-63% $2,510-23% $1,209 FCF Before Dividends $9, % $3,537 24% $7,892 Less: Semi-Annual Dividends $0 $0 $655 FCF After Dividends $9, % $3,537 35% $7,237 FCF/Share After Dividends (fd) $ % $ % $0.64 Source: Company reports; LBS estimates Q4/06 Preview Expect Q4/06 EPS Growth Of 34% Y/Y Latest Acquisition Should Drive Utility Pole Sales EBITDA Margins Expected To Expand By 90 bps Y/Y Our forecast calls for Stella-Jones to post profit growth 34% y/y when they report their Q4/06 results March 15, We expect the company to earn $0.36 per share (fd) versus $0.27 per share (fd) last year and $0.55 per share (fd) the prior quarter (Exhibit 6); the first and fourth quarters are seasonally weak. We expect top line growth to reach 42% y/y, driven largely by their latest acquisition. On July 1, 2006, Stella-Jones closed the acquisition of Bell Pole and therefore utility pole sales should show impressive growth. Rail tie sales growth should moderate given that the Webster Wood acquisition will now be included in the results for a full year. Consumer lumber sales should also benefit from the Bell Pole acquisition and we believe industrial lumber sales should be flat. We will be watching margins closely to see if management has been able realize further synergies from recent acquisitions. The company achieved EBITDA margins of 16% in Q4/05 and we are expecting margins to expand by 90 basis points. Higher stock based compensation could increase SG&A costs as a percentage of revenues and we are modelling 6% versus 4.9% last year. However, we expect a 200 basis point increase in gross profit margins to more than offset the higher SG&A costs

10 Exhibit 6 - Q4/06 Preview (Thousands Except Per Share Amounts) Income Statement Summary: Q4/06e y/y Q4/05 q/q Q3/06 Sales $53,056 42% $37,363-22% $68,072 EBITDA $8,966 50% $5,977-24% $11,747 Margin 16.9% 90bp 16.0% -36bp 17.3% Net Income $4,499 42% $3,171-34% $6,789 Margin 8.5% -1bp 8.5% -149bp 10.0% EPS (fd) $ % $ % $0.55 Leverage Analysis: Net Debt/Total Cap. 39.0% -247bp 41.5% -435bp 43.4% Net Debt/LTM EBITDA 1.7x -0.3x 2.1x -0.4x 2.2x LTM EBITDA/LTM Net Int. Exp. 10.3x -1.4x 11.6x -0.4x 10.7x Free Cash Flow Analysis: EBITDA $8,966 50% $5,977-24% $11,747 Less: Net Interest Expense $1,065 66% $643 0% $1,060 Less: Capex $1,000 73% $578 7% $932 FCF Before Dividends $6,902 45% $4,756-29% $9,754 Less: Semi-Annual Dividends $970 $541 $0 FCF After Dividends $5,932 41% $4,215-39% $9,754 FCF/Share After Dividends (fd) $ % $ % $0.79 Source: Company reports; LBS estimates ROAIC Continues To Grow Financial Forecast We expect organic growth in Stella-Jones core markets combined with the impact of synergistic acquisitions to continue to create significant value for shareholders. The company s return on average invested capital (ROAIC) has increased from 6.1% in 2002 to an anticipated 15% in 2006, 15.8% in 2007, and 16.6% in 2008 (Exhibit 7). We note that this is well in excess of the company s WACC of 10%. Exhibit 7 - Stella-Jones' ROAIC ROAIC 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% e 2007e 2008e Source: Company reports; LBS estimates - 9 -

11 Income Statement Strong Top Line Growth We forecast sales to reach $310 million in 2007 and $360 million in This represents growth of 36% in 2007 and 16% in 2008 (Exhibit 8). Our sales growth forecast is based on the company realizing the full impact of the recent acquisitions of Bell Pole Company and JH Baxter & Company, which is yet to close. Additionally we are modeling organic growth of 5% driven by healthy rail tie and utility pole markets. The slowdown in revenue growth in 2008 is a function of our conservative assumption that the company will not complete another acquisition before the end of our forecast horizon. Exhibit 8 - Sales & Sales Growth Millions $400 $350 $300 $250 $200 $150 $100 $50 50% 40% 30% 20% 10% 0% Sales Growth $ e 2007e 2008e Sales Sales Growth Source: Company reports; LBS estimates -10% EBITDA Expected To Grow 42% In 2007 We forecast EBITDA to increase 42% in 2007 to $53 million and 24% in 2008 to $66 million. The acquisitions noted above should also provide management with various opportunities to take costs out of the system. We forecast that EBITDA margins will increase to 17.1% in 2007 (from 16.5% in 2006) and to 18.3% in Exhibit 9 - EBITDA & EBITDA Margin Millions $70 $60 $50 $40 $30 $20 $10 20% 18% 16% 14% 12% 10% EBITDA Margin $ e 2007e 2008e 8% Source: Company reports; LBS estimates EBITDA EBITDA Margin EPS Growth Expected To Average 30% Between 2006 and 2008 EPS growth is expected to average 30% between 2006 and Our forecast calls for EPS of $1.72 per share (fd) in 2006, $2.23 per share (fd) in 2007, and $2.90 per share in 2008 (fd) (Exhibit 10)

12 Exhibit 10 - EPS & Net Profit Margin EPS $3.00 $2.50 $2.00 $1.50 $1.00 $ % 10% 9% 8% 7% 6% 5% 4% Net Profit Margin $ e 2007e 2008e 3% Source: Company reports; LBS estimates EPS (f.d.) Net Margin Balance Sheet Quality Balance Sheet Net Debt-To-Total Cap. Of 43.4% At Q3/06 Net Debt-To-LTM EBITDA Of 2.2x At Q3/06 Overall, the company has a quality balance sheet and is not heavily indebted, especially when considering their free cash flow generation ability. Of note, the company carries no intangible assets on the balance sheet. In terms of off balance sheet liabilities, there are no outstanding legal disputes and the pension plan has a slight surplus. Stella-Jones net debt-to-total capitalization ratio stood at 43.4% at the end of September Buoyed by an expected strong Q4/06, we expect this ratio to decline to 39% by the end of the December quarter. Our assumption that the company will finance the JH Baxter acquisition entirely with debt is the main reason our 2007 net debt-to-total capitalization ratio is forecasted to increase to 43.1% before declining in 2008 to 35%. The company s indebtedness in relation to its cash flow generation is very healthy. With the exception of 2003, when the company was still in the early stages of its recovery plan and had just completed its first significant acquisition, Stella-Jones net debt-to-ebitda ratio has consistently been between 2.2x and 1.7x (Exhibit 11). We forecast this ratio to be 1.8x in 2007 and 1.3x in By way of comparison, at the end of September 2006, the company s net debt-to-last twelve months EBITDA was 2.2x. Exhibit 11 - Net Debt/Total Capitalization & Net Debt/EBITDA Net Debt/Total Capitalization 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% e 2007e 2008e Net Debt/Total Capitalization Net Debt/EBITDA Source: Company reports; LBS estimates 3.5x 3.0x 2.5x 2.0x 1.5x 1.0x Net Debt/EBITDA

13 Cash Flow Statement FCF CAGR Of 37% Between 2006 and 2008 Stella-Jones currently yields 10.5% on our 2007 free cash flow estimate (FCF). We forecast FCF per share (EBITDA Net Interest Expense Capex Dividends) to reach $2.36 (fd) in 2006 (+90% y/y), $3.38 (fd) in 2007, and $4.42 (fd) in 2008 (Exhibit 12). We assume capex of approximately $2.7 million in 2007 and 2008 versus the expected $4.5 million to be spent in Our capex estimate is for maintenance only and we do not assume any expansion projects or other major capital outlays. In 2005, the company spent $3.8 million on environmental investment required to complete the Technical Recommendations Documents (TRD) baseline assessments undertaken by Environment Canada in the year We believe all of the company s Canadian treating plants are now TRD compliant and thus the absence of any environmental related spending could result in lower capex going forward. FCF/Share Exhibit 12 - Free Cash Flow Per Share $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $ e 2007e 2008e Source: Company reports; LBS estimates Dividend Growth Of 26% CAGR Since 2003 Since reinstating the dividend in 2003, the Board of Directors has increased it at a CAGR of 26%. The current dividend stands at $0.16 per share after the board increased the semi-annual dividend to $0.08 per share from $0.06 per share in Q4/06. Given the board s history of dividend increases and the current, low, 8% payout ratio, we assume the annual dividend level will reach $0.18 per share in 2007 and $0.20 per share in In terms of acquisitions, we assume the company pays $35 million for JH Baxter in 2007 and we do not assume any further acquisitions. Thirty-five million dollars would represent a 1x price-to-sales ratio; the company has never paid more than 0.9x for any of their recent acquisitions

14 Financial Statements Exhibit 13 - Stella-Jones Inc. Consolidated Income Statement (Thousands Except Per Share Amounts) 31 December Year-End 2002a 2003a 2004a 2005a Q1/06a Q2/06a Q3/06a Q4/06e 2006e 2007e 2008e Gross Sales $ 96,652 $ 92,033 $ 128,972 $ 157,129 $ 44,873 $ 61,396 $ 68,072 $ 53,056 $ 227,396 $ 310,101 $ 359,697 COGS (Incl. SG&A) $ 87,032 $ 82,083 $ 113,065 $ 134,472 $ 38,022 $ 51,509 $ 56,325 $ 44,089 $ 189,946 $ 256,930 $ 293,701 EBITDA $ 9,620 $ 9,950 $ 15,907 $ 22,657 $ 6,850 $ 9,887 $ 11,747 $ 8,966 $ 37,451 $ 53,171 $ 65,996 Depreciation & Amortization $ 2,473 $ 2,635 $ 3,077 $ 3,277 $ 783 $ 803 $ 872 $ 872 $ 3,330 $ 3,650 $ 3,680 EBIT $ 7,148 $ 7,315 $ 12,831 $ 19,379 $ 6,067 $ 9,083 $ 10,875 $ 8,095 $ 34,121 $ 49,521 $ 62,316 Net Interest Expense $ 1,332 $ 1,330 $ 1,669 $ 1,946 $ 730 $ 786 $ 1,060 $ 1,065 $ 3,641 $ 6,518 $ 6,298 Non-Recurring Gains (Losses) $ - $ (385) $ (114) $ 165 $ 65 $ (63) $ 455 $ - $ 458 $ - $ - EBT $ 5,816 $ 5,600 $ 11,048 $ 17,599 $ 5,402 $ 8,235 $ 10,270 $ 7,030 $ 30,938 $ 43,004 $ 56,018 Non-Controlling Interests $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Taxes - Current $ 2,381 $ 1,487 $ 3,064 $ 5,944 $ 2,001 $ 3,084 $ 3,661 $ 2,818 $ 11,563 $ 16,698 $ 21,383 - Deferred $ (286) $ 359 $ 693 $ (87) $ (117) $ (263) $ (180) $ (287) $ (847) $ (1,206) $ (1,217) Net Income $ 3,721 $ 3,754 $ 7,291 $ 11,742 $ 3,518 $ 5,415 $ 6,789 $ 4,499 $ 20,221 $ 27,511 $ 35,852 After-tax Charges $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - "Cash" Earnings fr. Continuing Ops. $ 3,721 $ 3,754 $ 7,291 $ 11,742 $ 3,518 $ 5,415 $ 6,789 $ 4,499 $ 20,221 $ 27,511 $ 35,852 "Cash" EPS - Basic $ 0.41 $ 0.40 $ 0.72 $ 1.12 $ 0.32 $ 0.50 $ 0.56 $ 0.37 $ 1.75 $ 2.27 $ Fully Diluted $ 0.41 $ 0.39 $ 0.70 $ 1.08 $ 0.32 $ 0.48 $ 0.55 $ 0.36 $ 1.72 $ 2.23 $ 2.90 Shares O/S - Basic 9,075 9,384 10,127 10,449 10,923 10,923 12,124 12,124 11,523 12,124 12,124 - Fully Diluted 9,075 9,625 10,416 10,883 10,923 11,335 12,344 12,344 11,737 12,344 12,344 As a Percentage of Sales COGS (Incl. SG&A) 90.0% 89.2% 87.7% 85.6% 84.7% 83.9% 82.7% 83.1% 83.5% 82.9% 81.7% EBITDA 10.0% 10.8% 12.3% 14.4% 15.3% 16.1% 17.3% 16.9% 16.5% 17.1% 18.3% y/y Basis Point (bp) Change 86bp 152bp 209bp 529bp 80bp 196bp 90bp 205bp 68bp 120bp EBIT 7.4% 7.9% 9.9% 12.3% 13.5% 14.8% 16.0% 15.3% 15.0% 16.0% 17.3% "Cash" Earnings 3.8% 4.1% 5.7% 7.5% 7.8% 8.8% 10.0% 8.5% 8.9% 8.9% 10.0% Source: Company reports; LBS estimates

15 Financial Statements (Continued) Exhibit 14 - Stella-Jones Inc. Consolidated Balance Sheet (Thousands Except Per Share Amounts) 31 December Year-End 2002a 2003a 2004a 2005a Q1/06a Q2/06a Q3/06a Q4/06e 2006e 2007e 2008e Cash & Marketable Secuities $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Accounts Receivable $ 11,865 $ 11,974 $ 13,206 $ 21,060 $ 27,229 $ 35,036 $ 41,714 $ 29,987 $ 29,987 $ 35,581 $ 42,177 Inventories $ 35,000 $ 48,579 $ 52,770 $ 77,316 $ 81,903 $ 74,315 $ 100,092 $ 107,309 $ 107,309 $ 127,162 $ 148,778 Prepaid Expenses & Other $ 1,215 $ 1,143 $ 1,380 $ 2,162 $ 2,401 $ 13,107 $ 2,617 $ 2,617 $ 2,617 $ 2,617 $ 2,617 Total Current Assets $ 48,080 $ 61,696 $ 67,355 $ 100,538 $ 111,532 $ 122,458 $ 144,423 $ 139,913 $ 139,913 $ 165,359 $ 193,571 Property, Plant, Equipment & Other $ 21,151 $ 31,384 $ 30,543 $ 37,003 $ 37,604 $ 37,824 $ 59,412 $ 59,540 $ 59,540 $ 93,922 $ 93,002 Goodwill & Intangible Assets $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Other $ 205 $ 271 $ 301 $ 350 $ 654 $ 641 $ 952 $ 952 $ 952 $ 952 $ 952 Total Assets $ 69,436 $ 93,351 $ 98,200 $ 137,891 $ 149,790 $ 160,923 $ 204,787 $ 200,405 $ 200,405 $ 260,233 $ 287,525 Bank Loans $ 11,184 $ 19,528 $ 11,421 $ 21,312 $ 31,946 $ 38,304 $ 38,801 $ 28,740 $ 28,740 $ 28,332 $ 18,535 Accounts Payable $ 9,852 $ 13,683 $ 13,878 $ 17,452 $ 17,735 $ 17,906 $ 21,786 $ 24,223 $ 24,223 $ 28,704 $ 33,583 Current Portion of L.T. Debt $ 3,894 $ 2,475 $ 3,699 $ 4,061 $ 3,820 $ 3,739 $ 3,693 $ 3,693 $ 3,693 $ - $ - Other $ 1,732 $ 136 $ 1,775 $ 2,228 $ - $ 549 $ 3,374 $ 3,374 $ 3,374 $ 3,374 $ 3,374 Total Current Liabilities $ 26,662 $ 35,822 $ 30,773 $ 45,053 $ 53,501 $ 60,497 $ 67,653 $ 60,029 $ 60,029 $ 60,409 $ 55,491 Long-Term Debt $ 3,134 $ 10,308 $ 12,485 $ 21,140 $ 22,229 $ 22,261 $ 32,459 $ 32,459 $ 32,459 $ 67,753 $ 67,753 Other $ 4,285 $ 4,935 $ 5,656 $ 6,068 $ 5,569 $ 5,354 $ 6,740 $ 6,453 $ 6,453 $ 5,247 $ 4,030 Total Current & L.T. Debt $ 34,081 $ 51,065 $ 48,915 $ 72,261 $ 81,299 $ 88,112 $ 106,852 $ 98,941 $ 98,941 $ 133,410 $ 127,275 Capital Stock $ 16,500 $ 20,439 $ 20,955 $ 26,228 $ 26,330 $ 26,387 $ 44,709 $ 44,709 $ 44,709 $ 44,709 $ 44,709 Contributed Surplus $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Retained Earnings (Deficit) $ 18,855 $ 21,847 $ 28,330 $ 39,603 $ 42,300 $ 47,059 $ 53,849 $ 57,378 $ 57,378 $ 82,737 $ 116,164 FX Translation Adjustment $ - $ - $ - $ (202) $ (139) $ (636) $ (623) $ (623) $ (623) $ (623) $ (623) Total Shareholders' Equity $ 35,355 $ 42,286 $ 49,285 $ 65,630 $ 68,491 $ 72,810 $ 97,935 $ 101,464 $ 101,464 $ 126,823 $ 160,250 Total Liabilities & Equity $ 69,436 $ 93,351 $ 98,200 $ 137,891 $ 149,790 $ 160,923 $ 204,787 $ 200,405 $ 200,405 $ 260,233 $ 287,525 Leverage Ratios Net Debt/(Net Debt + Equity) 34.0% 43.3% 35.9% 41.5% 45.9% 46.9% 43.4% 39.0% 39.0% 43.1% 35.0% Debt/Equity 51.5% 76.4% 56.0% 70.9% 84.7% 88.3% 76.5% 64.0% 64.0% 75.8% 53.8% Interest Coverage* 7.2x 7.5x 9.5x 11.6x 11.5x 11.0x 10.7x 10.3x 10.3x 8.2x 10.5x Net Debt/EBITDA* 1.9x 3.2x 1.7x 2.1x 2.2x 2.2x 2.2x 1.7x 1.7x 1.8x 1.3x * Last twelve months Source: Company reports; LBS estimates

16 Financial Statements (Continued) 31 December Year-End 2002a 2003a 2004a 2005a Q1/06a Q2/06a Q3/06a Q4/06e 2006e 2007e 2008e Operating Activities: Net Income $ 3,721 $ 3,754 $ 7,291 $ 11,742 $ 3,518 $ 5,415 $ 6,789 $ 4,499 $ 20,221 $ 27,541 $ 35,852 Depreciation & Amortization $ 2,473 $ 2,619 $ 2,713 $ 2,929 $ 783 $ 803 $ 1,057 $ 872 $ 3,515 $ 3,650 $ 3,680 Translation FX Loss (Gain) on LT Debt $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Future Income Taxes $ (286) $ 359 $ 693 $ (87) $ (117) $ (263) $ (180) $ (287) $ (847) $ (1,206) $ (1,217) Other $ (90) $ 93 $ 222 $ 1,391 $ 626 $ 969 $ 764 $ - $ 2,360 $ - $ - Cash Flow from Operations $ 5,818 $ 6,825 $ 10,919 $ 15,975 $ 4,810 $ 6,924 $ 8,430 $ 5,084 $ 25,249 $ 29,985 $ 38,315 Changes in Non-Cash Working Cap. $ 5,299 $ (1,941) $ (2,021) $ (13,870) $ (13,226) $ (1,056) $ 6,465 $ 6,947 $ (870) $ (20,965) $ (23,333) Cash provided by (used in) continu'g ops' $ 11,116 $ 4,884 $ 8,897 $ 2,104 $ (8,416) $ 5,868 $ 14,895 $ 12,031 $ 24,379 $ 9,020 $ 14,982 Investment Activities: Sale of Business $ 164 $ 22 $ 915 $ 231 $ 49 $ - $ 10,000 $ - $ 10,049 $ - $ - Capital Expenditures $ (1,437) $ (3,789) $ (2,915) $ (6,108) $ (1,380) $ (1,209) $ (932) $ (1,000) $ (4,522) $ (2,738) $ (2,760) Acquisitions & Other Investments $ - $ (15,306) $ (1,884) $ (17,954) $ - $ (10,000) $ (44,483) $ - $ (54,483) $ (35,294) $ - $ (1,273) $ (19,073) $ (3,883) $ (23,830) $ (1,331) $ (11,209) $ (35,415) $ (1,000) $ (48,956) $ (38,032) $ (2,760) Financing Activities: Equity, net $ 19 $ 3,922 $ 498 $ 5,254 $ 89 $ 43 $ 18,308 $ - $ 18,440 $ - $ - LT Debt, net $ (4,815) $ 2,686 $ 3,402 $ 7,552 $ (1,039) $ (814) $ 9,441 $ - $ 7,588 $ 31,601 $ - Dividends $ - $ (763) $ (808) $ (1,054) $ - $ (655) $ - $ (970) $ (1,625) $ (2,182) $ (2,425) Other $ - $ - $ - $ - $ - $ 405 $ (7,729) $ - $ (7,324) $ - $ - $ (4,796) $ 5,846 $ 3,093 $ 11,753 $ (950) $ (1,021) $ 20,020 $ (970) $ 17,079 $ 29,419 $ (2,425) Cash Increase (decrease) Dur. Year $ 5,047 $ (8,344) $ 8,107 $ (9,972) $ (10,697) $ (6,362) $ (500) $ 10,061 $ (7,498) $ 408 $ 9,797 FX Translation Adjustment on Cash $ - $ - $ - $ 81 $ 63 $ 4 $ 3 $ - $ 70 $ - $ - Cash (Indebtedness) at Beg. of Year $ (16,231) $ (11,184) $ (19,528) $ (11,421) $ (21,312) $ (31,946) $ (38,304) $ (38,801) $ (21,312) $ (28,740) $ (28,332) Cash (Indebtedness) at End of Year $ (11,184) $ (19,528) $ (11,421) $ (21,312) $ (31,946) $ (38,304) $ (38,801) $ (28,740) $ (28,740) $ (28,332) $ (18,535) EBITDA $ 9,620 $ 9,950 $ 15,907 $ 22,657 $ 6,850 $ 9,887 $ 11,747 $ 8,966 $ 37,451 $ 53,171 $ 65,996 Net Interest Expense $ (1,332) $ (1,330) $ (1,669) $ (1,946) $ (730) $ (786) $ (1,060) $ (1,065) $ (3,641) $ (6,518) $ (6,298) Capex $ (1,437) $ (3,789) $ (2,915) $ (6,108) $ (1,380) $ (1,209) $ (932) $ (1,000) $ (4,522) $ (2,738) $ (2,760) Free Cash Flow Before Dividends $ 6,851 $ 4,831 $ 11,324 $ 14,603 $ 4,740 $ 7,892 $ 9,754 $ 6,902 $ 29,288 $ 43,916 $ 56,938 Dividends $ - $ (763) $ (808) $ (1,054) $ - $ (655) $ - $ (970) $ (1,625) $ (2,182) $ (2,425) Free Cash Flow After Dividends $ 6,851 $ 4,069 $ 10,517 $ 13,549 $ 4,740 $ 7,237 $ 9,754 $ 5,932 $ 27,663 $ 41,734 $ 54,513 FCF/Share After Dividends - Basic $ 0.76 $ 0.43 $ 1.04 $ 1.30 $ 0.43 $ 0.66 $ 0.80 $ 0.49 $ 2.40 $ 3.44 $ Fully Diluted $ 0.76 $ 0.42 $ 1.01 $ 1.24 $ 0.43 $ 0.64 $ 0.79 $ 0.48 $ 2.36 $ 3.38 $ 4.42 Shares O/S - Basic 9,075 9,384 10,127 10,449 10,923 10,923 12,124 12,124 11,523 12,124 12,124 - Fully Diluted 9,075 9,625 10,416 10,883 10,923 11,335 12,344 12,344 11,737 12,344 12,344 Source: Company reports; LBS estimates Exhibit 15 - Stella-Jones Inc. Consolidated Cash Flow Statement (Thousands Except Per Share Amounts) Free Cash Flow

17 Valuation Top Pick Rating With 37.5% Expected Total Return Valuation Multiples Have Expanded We are initiating coverage on Stella-Jones with a Top Pick rating and 1-year share price target of $43.50 implying a 37.5% total return from current levels. Our target is based on 15x 2008e EPS of $2.90 and equates to 7.6 EV/2008e EBITDA and 3.4x 2008e book value. Our projected trading multiples seem aggressive compared to the past (Exhibit 16). However, since Mr. McManus and his management team took the helm in 2003 and embarked on their transformation plan for the company, valuation metrics have been increasing (1) Avg. Fwd. P/E - High n.m. 10.5x 5.8x 8.2x 7.4x n.m. 6.1x 8.3x 5.3x 6.0x 8.3x x Fwd. P/E - Low n.m. 6.3x 3.3x 4.8x 4.9x n.m. 4.4x 4.5x 3.7x 3.3x 3.3x x Fwd. P/E - Avg. n.m. 8.8x 4.3x 6.4x 6.5x n.m. 5.4x 6.1x 4.6x 4.3x 5.3x x Fwd. EV/EBITDA - High 7.7x 1.5x 1.0x 1.4x 0.9x 3.0x 0.9x 1.1x 1.3x 2.0x 3.2x 6.7x 2.6x Fwd. EV/EBITDA - Low 1.5x 0.1x n.m. 0.0x n.m. 1.0x 0.3x n.m. 0.6x 0.6x 0.7x 2.1x 0.8x Fwd. EV/EBITDA - Avg. 2.9x 0.9x 0.3x 0.7x 0.6x 1.6x 0.7x 0.3x 1.0x 1.1x 1.8x 3.7x 1.3x P/BV - High 1.8x 0.9x 0.9x 1.0x 0.8x 0.9x 0.7x 0.8x 0.8x 1.4x 2.4x 4.0x 1.4x P/BV - Low 0.8x 0.5x 0.5x 0.6x 0.5x 0.6x 0.5x 0.4x 0.6x 0.8x 0.9x 1.6x 0.7x P/BV - Avg. 1.0x 0.8x 0.7x 0.8x 0.7x 0.7x 0.6x 0.6x 0.7x 1.0x 1.5x 2.4x 1.0x (1) Using LBS 2007e EPS & EBITDA Source: Company reports; LBS estimates Exhibit 16 - Historical Trading Multiples Lowest PEG; Second Highest ROIC We believe 15x earnings is an appropriate multiple given the company s superior growth profile, ROIC generation, and healthy balance sheet. Despite the lack of liquidity of the shares, we believe 15x is justified given the following factors: At 29%, the company exhibits the highest expected EPS growth of the group. Trading at 14.2x 2007e earnings, Stella-Jones PEG ratio is the lowest of the group at Stella-Jones is expected to generate ROIC of 18% in 2007, which is exceeded by only American Railcar Industries Inc. at 22% but is 443bps higher than the group average. Stella-Jones net debt-to-total capitalization ratio was 43.4% at the end of Q3/06, despite completing a $50 million acquisition June 30, 2006, and is in line with the group. Versus its closest comparable, Koppers Holdings Inc., Stella-Jones PEG ratio is much lower (0.49 versus 0.77), and its ROIC is 100bps higher as shown in Exhibit

18 Company Ticker Last Mkt. Cap. Net Debt/ ROIC (2) EPS (3) Growth P/E PEG 19-Feb-07 Millions Total Cap. (1) 2007e 2006e 2007e 2006e 2007e 2007e American Railcar Industries Inc. (US$) ARII-Q $28.86 $615 No Debt 22% $2.12 $ % 13.6x 11.2x 0.52 Global Railway Industries Ltd. (C$) GBI-T $3.20 $48 No Debt 17% $0.25 $ % 12.8x 11.4x 0.95 Koppers Holdings Inc. (US$) KOP-N $26.50 $ % 16% $1.50 $ % 17.7x 14.8x 0.77 Portec Rail Products Inc. (US$) PRPX-Q $10.27 $99 17% 8% $0.46 $ % 22.3x 17.4x 0.62 The Greenbrier Companies (US$) GBX-N $29.52 $473 61% 8% $1.88 $ % 15.7x 12.6x 0.52 Trinity Industries Inc. (US$) TRN-N $42.80 $3,390 38% 12% $2.53 $ % 16.9x 13.7x 0.58 Avg. (Excl. High & Low) 39% 13% n.m. n.m. 22% 16.0x 13.1x 0.62 Stella-Jones Inc. (C$) SJ-T $31.75 $392 43% 18% $1.72 $ % 18.4x 14.2x 0.49 Premium/Discount 474bp 443bp n.m. n.m. 708bp 2.5x 1.2x (1) Balance sheet data as of most recent quarter (2) EBIT(1-T)/Total Assets - Non-Interest Bearing Current Liabilities (3) SJ-T: LBS estimates. Others: I/B/E/S earnings estimates Source: Bloomberg; Company reports; LBS estimates Exhibit 17 - Comparable Company Analysis Compares Favourably To Closest Comp., KOP-N ROIC 2007e Exhibit 18 - ROIC VS PEG Ratio 24% 22% 20% ARII-Q 18% 16% SJ-T GBI-T 14% KOP-N 12% 10% TRN-N 8% 6% GBX-N PRPX-Q 4% PEG 2007e Source: Company reports; First Call; LBS estimates Description of Comparable Companies American Railcar Industries Inc. (ARII-Q) manufactures new railcars, provides after market support through its parts group, Special Products, and offers railcar repairs, engineering, consulting and fleet management services to shippers, lessors and railroads. Global Railway Industries Ltd. (GBI-T) is a consolidator of North American railway equipment manufacturers. The company is pursuing an acquisition strategy of industry suppliers of the equipment railways need to run and maintain their operations efficiently. Koppers Holdings Inc. (KOP-N) is the largest wooden rail tie producer in North America in addition to being a major supplier of wooden utility poles in the United States and Australia. The company is fully integrated in that it is a producer of carbon compounds used to treat wood

19 Portec Rail Products Inc. (PRPX-Q) manufactures, supplies and distributes a broad range of railroad products, including rail joints, rail anchors and spikes, railway friction management products, railway wayside data collection and data management systems and load securement systems. The Greenbrier Companies (GBX-N) is an international supplier of transportation equipment and services to the railroad industry. The company builds, leases, repairs and refurbishes freight railcars for a variety of customers in North America. It also manufactures and refurbishes freight wagons in the European market. Trinity Industries Inc. (TRN-N) is a diversified industrial company operating through five principal business groups: railcar leasing and management services, inland barge construction products, and energy equipment groups. Risks Indemnities Help But Environmental Risks Remain Integration Risks A Concern Given Acquisition Strategy Economic Slowdown Could Reduce End Market Demand Currency Risk Is Low But Should Be Noted Lack Of Wood Supply Could Increase Costs Shares Are Illiquid Stella-Jones is subject to a variety of environmental laws and regulations. The company must comply with many laws and regulations relating to emissions to the air, discharges into water, releases of hazardous and toxic substances, and remediation of contaminated sites. Under various laws and regulations, the company could be liable for the costs of removal or remediation of contamination at its sites. However, it should be noted that the company benefits from indemnities from the former owners of sites it acquires. Given Stella-Jones strategy of growth through acquisitions, the company faces various integration risks. There is no guarantee the company will be able to keep key employees, customer relationships, or realize the anticipated benefits of the acquisition. Other key risks associated with an acquisition strategy include the inability to quickly and efficiently integrate the acquired facilities, the potential for unexpected liabilities, and the potential diversion of management s attention from the core business. A general economic slowdown or recession could have a detrimental impact on the business of Stella-Jones. For example, rail tie replacement needs would likely slow in the event of an economic slowdown as would demand for consumer and industrial lumber. Laurentian Bank Economics forecasts US Real GDP growth of 2.6% in 2007 and 3.0% in The company is exposed to currency risks, as it does ship goods manufactured in Canada to other markets. These risks are partially offset by purchases of goods and services denominated in US dollars. The company uses very little in the way of foreign exchange forward contracts to hedge contracted net cash inflows and outflows of US dollars. Versus the other companies in our coverage universe, Stella-Jones has much lower exposure to the US$/C$ exchange rate. The company may be affected by industry-wide concerns over the availability of competitively priced wood. The company has numerous long-standing relationships with private woodland owners and other suppliers in addition to its own cutting rights in Quebec and British Columbia. The shares of Stella-Jones are highly illiquid. Given the 56% control block held by Stella Jones International SA, the float outstanding is less than five million shares and thus large positions could be difficult to trade in and out of without materially impacting the share price. The average daily trading volume on the Toronto Stock Exchange is approximately 11,000 shares

20 Appendix I North American Rail Tie Market Strong Demand Outlook Tie Purchases Could Set Another Record In 2007 We estimate 2007 rail tie purchases could exceed last year s record level of 21 million (Exhibit 19). The Railway Tie Association (RTA) is predicting 2007 will be another strong year with tie purchases forecast to come in at 21 million versus the 17 million purchased, on average, over the last ten years. Their forecast is based on an econometric model that has proven to be very accurate in the past although it did underestimate purchases last year by 1 million ties. Additionally, the RTA also conducts an annual survey of both the Class I and regional and short line railroads estimated rail tie requirements for the next three years. According to their latest survey, Class I and regional and short line railroads, together, plan on purchasing over 21 million wooden rail ties per year between 2007 and Exhibit 19 - North American Rail Tie Purchases 20 Millions e Source: LBS estimates; Rail Tie Association Freight Rail Traffic Continues To Grow We believe tie purchases could reach 22 million driven by record levels of capital spending and tax credit incentives. Freight growth on the US Class I railroads has been capacity constrained due to increasing levels of freight rail traffic (Exhibit 20) and shrinking rail capacity (Exhibit 21). This has resulted in newfound pricing power for the railroads allowing them to generate the free cash flow necessary to fund their aggressive capital programs. Exhibit 20 - Freight Rail Carloads Originated Millions Source: Association of American Railroads

21 Exhibit 21 - North American Railroad System Length Total Track (Km) 450, , , , , , , ,000 50, e United States Canada Source: North American Transportation Statistics Database Record Capex Plans For 2007 All of the Class 1 railroads have announced record capital spending programs for We believe rail tie demand will directly benefit from these aggressive capital programs (Exhibit 22), as Class 1 railroads purchase between 75% and 80% of all rail ties. In particular, tie demand should benefit from the addition of new sidings and double tracking, increased maintenance work (replacements), and even investment in new lines. Millions (US$) Exhibit 22 - Capex At Class I Railroads & Tie Purchases $9, $8, $7, $6, $5,000 ` 18 $4, $3, $2, e Capex (Left) Ties Purchased (Right) Source: Company reports; Railway Tie Association Ties Purchased (Millions) Last Year Of Tax Credit Production 7% Above Purchases Demand from the regional and shortline railroads should benefit from the final year of a tax credit worth 50 cents for every dollar spent on track maintenance and upgrading. In a 2004 bill, the US congress enacted a tax credit that is scheduled to expire at the end of Currently, the American Shortline and Regional Railroad Association has hired a lobbyist to try to convince Congress to extend the annual tax break. The industry has been more than able to keep up with last year s record level of tie demand (Exhibit 23). The preliminary 2006 production figure is 22.5 million ties or 7% more than what were purchased. The record level of production could mean there is some excess inventory in the system but increased purchases as we head into the seasonally stronger part of the year could tighten the market

22 Exhibit 23 - Rail Tie Production and Purchases 24, Month Rolling Total (000) 22,000 20,000 18,000 16,000 14,000 12, Source: Railway Tie Association Production Purchases Largest Railroad Construction Project In Last 100 Years Could Drive Demand Largest Railroad Construction In 100 Years Should Know By May 2007 If Project Gets Green Light The biggest source of incremental rail tie demand over the next three years could come from a major new railroad construction project. The Dakota, Minnesota & Eastern Railroad (DM&E) expansion project into the coal fields of the Powder River Basin in eastern Wyoming (and pictured in Exhibit 24) would be the largest new railroad construction in the US in almost 100 years. The project would require the construction of 452 km (280 miles) of new track and upgrading 968 km (600 miles) of existing track (including all of the railroad's track in Minnesota). The project received regulatory approval last year and received final environmental approval on January 31, Following last year s regulatory approval from the Surface Transportation Board, the DM&E has been awaiting US$2.3 billion of public funding under the Federal Railroad Administration s Railroad Rehabilitation Infrastructure Financing loan program. A prerequisite for the loan was the completion of a federal environmental review process. Following the January 31, 2007 ruling in favour of the DM&E, the Federal Railroad Administration now has up to 90 days to approve the loan. Should the loan be approved, we estimate approximately 2 million ties over three years would be required to complete the new line and upgrading of existing track. We expect between 1 and 1.3 million of the 2 million ties to be made of wood, which could increase industry purchases by 1%-2% per year over the next three years

23 Exhibit 24 - Powder River Basin Expansion Project Source: Company reports; Wall Street Journal Low Substitution Risk Wood Should Continue To Have 93% Market Share We believe the threat of substitution for the wood rail tie is low due to the higher cost of alternative materials. Of the total rail tie market, wooden ties have historically had in excess of 93% market share and, based on the RTA s annual survey of the purchasing intentions of the railroads, wood should continue to command a similar market share going forward (Exhibit 25). Exhibit 25 - North American Railway Tie Market Share 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% e 2008e 2009e Source: Railway Tie Association Wood Concrete Steel Wood Is Lowest Cost Versus concrete, steel, and plastic, wood rail ties offer railroads the best performance for price proposition (Exhibit 26). Besides their cost advantage, wooden ties offer significant advantages over concrete, steel, and plastic crossties. Their relatively lighter weight allows for ease in handling, they absorb vibration thus reducing noise and equipment wear, and wood provides electrical insulation, an important factor for track signalling

24 Exhibit 26 - Life Cycle Cost Comparison Material Price Per Tie Est. Life Life Cycle US$ Cost Wood $42 35 $1.2 Concrete $73 50 $1.5 Plastic $90 50 $1.8 Steel $ $2.0 Source: Company reports; Industry Contacts Concrete ties should continue to garner approximately 5% of the rail tie market. Concrete ties have been identified by the railroads as a feasible alternative to wood in limited circumstances. However, besides their higher life-cycle cost versus wood ties, the other major obstacle to further adoption is that concrete and wood ties can not coexist on the same track. Therefore, to use CN Railway as an example, that company has 97% of its network sitting on wood ties and therefore is unlikely to switch

25 Appendix II North American Wooden Utility Pole Market A Fragmented Industry In The US There are approximately 150 million wooden utility poles in service in North America. There are approximately 2.4 million replacement poles purchased annually. The North American market is highly competitive, characterized by a large number of small producers selling into a price-sensitive industry. The customers are also very fragmented with over 200 investor-owned electric and telephone utilities and 2,800 smaller municipal utilities and rural electric associations. The Canadian utility poles market is more consolidated than in the US and Stella- Jones is the leader with 75% of the Canadian market. The majority of the company s sales of utility poles are made in response to public tenders issued by customers, particularly Crown corporations. The key criteria in successfully obtaining orders are competitive prices, high quality, consistent on-time delivery, and customer satisfaction. Pent-Up Demand In Canada We believe the Canadian utility pole market should exhibit above trend growth over our forecast horizon. The average age of Canada s 12 to 14 million treated wood utility poles is 40, approaching the end of their estimated useful life of 45 years and implying pent-up demand. Furthermore, demand for transmission poles from the growing wind farm business is providing incremental demand. Most utilities and telecommunication companies continue to use wood because it is less expensive versus alternative materials (Exhibit 27). Furthermore, the track record of treated wood poles is far superior to that of alternative materials. While alternative material claim a product service life of years, such claims remain unsubstantiated. Exhibit 27 - Life Cycle Cost Comparison Material Price Per Pole Est. Life Life Cycle US$ Cost Wood $ $18 Steel $1, $27 Fiberglass $1, $33 Concrete $1, $35 Source: Creosote Council; LBS estimates Alternative Materials Do Not Perform Well In Cold Climates Despite being more expensive, alternative materials, such as concrete, have not proven to be as durable in colder climates. Also, due to higher costs and characteristics such as conductivity, potential for corrosion, poor serviceability, flexibility and workability (drilling, machining, climbing), steel poles have not found wide acceptance by the utilities