Company Report - Initiation of Coverage

Transcription

1 ANS-TSX Daryl Swetlishoff CFA David Quezada CFA (Associate) Forest Products Building Materials The Best Defence is a Good Offence Event We are initiating coverage of Ainsworth Lumber Co. ( Ainsworth Engineered or Ainsworth ) with a Strong Buy rating and $5.30/share target price. Recommendation We advocate investors buy Ainsworth shares, highlighting strong leverage to the US housing recovery and a weaker C$ and note we forecast strong EBITDA growth despite a moderating commodity outlook. Strong free cash flow yields and an inexpensive valuation further backstop our Strong Buy rating. Analysis Ainsworth Engineered has undergone a transformation with new management in place, a revitalized balance sheet, and uncompetitive assets now curtailed or divested. Our bullish stance reflects its higher relative margins - a function of a rare combination of low cost structure coupled with a production focus on premium-priced value added products. This advantage is further augmented by attractive productive expansion opportunities and an industry leading presence in offshore markets. We note Ainsworth s OSB mill in High Level, Alberta is expected to come online in mid-2013, adding ~50% capacity from current levels. This, in addition to capital plans at the company s operating mills and a 75% complete additional line at the Grande Prairie, Alberta OSB facility, imply Ainsworth has the potential to nearly double production from the current 1.68 bln msf. Based on our estimates the company trades at a material discount to OSB comps, something we expect to normalize as production levels rise and strong expected near-term cash flows facilitate further deleveraging. Our supply-demand analysis of North American OSB markets leads us to expect near-term strength in pricing (due to improving US housing markets) to give way to pressure from significant amounts of OSB capacity restarts beginning later this year. Nevertheless, we believe relatively strong OSB prices of US$350/msf and US$330/msf in 2013E and 2014E, respectively, to be sufficient for Ainsworth to post strong EBITDA growth as the company s capacity restarts and other expansion projects offset declining commodity prices. We highlight that OSB demand is highly levered to US housing assumptions and even modestly higher activity levels could result in higher than forecast pricing. Valuation Our $5.30/share price target is based on a 5.6x 2014E EV/EBITDA multiple, inline with our target multiple for competitor Norbord at 5.7x. EPS 1Q 2Q 3Q 4Q Full Revenues EBITDA Mar Jun Sep Dec Year (mln) (mln) 2012A C$0.01 C$(0.11) C$0.32 C$0.06 C$0.28 C$409 C$ E 0.15A E NA NA NA NA Source: Raymond James Ltd., Thomson One Canada Research Published by Raymond James Ltd. June 3, 2013 Company Report - Initiation of Coverage Rating & Target Strong Buy 1 Target Price (6-12 mos): C$5.30 Current Price ( May ) C$3.63 Total Return to Target 46% 52-Week Range C$ C$0.74 Suitability High Risk Market Data Market Capitalization (mln) C$882 Current Net Debt (mln) C$227 Enterprise Value (mln) C$1,109 Shares Outstanding (mln, f.d.) Day Avg Daily Volume (000s) 630 Dividend/Yield C$0.00/0.0% Key Financial Metrics 2012A 2013E 2014E P/E 13.1x 6.7x 5.6x EV/EBITDA 10.4x 4.7x 4.1x NC 7/16" OSB (US$/msf) US$270 US$350 US$330 Net Debt (%) 20% Company Description Ainsworth is a leading North American OSB panel producer with three OSB mills in western Canada and one in Ontario. Ainsworth's total current capacity is 2.54 bln msf of OSB and the company sells its products to both North American and offshore markets. Please read domestic and foreign disclosure/risk information beginning on page 36 and Analyst Certification on page 37.

2 Canada Research Page 2 of 47 Table of Contents Investment Overview... 3 Company Overview... 4 Company Strategy... 7 OSB Supply-Demand Outlook Share Ownership Overview Financial Analysis & Outlook Valuation & Recommendation Appendix I: Management & Board of Directors Appendix II: Risks Appendix III: OSB Industry Background Appendix IV: Ainsworth Financial Statements... 32

3 Canada Research Page 3 of 47 Investment Overview High leverage to US housing rebound and C$ weakness Ainsworth Engineered has successfully reorganized; recapitalizing its balance sheet and shedding uncompetitive assets. The company currently operates three oriented strand board (OSB) facilities with a combined capacity of 1.68 bln sf. We believe each of these facilities to be in the first quartile of North American mills in terms of cash costs a function of the company s average mill capacity (including the soon to restart High Level mill) which is ~25% higher than the industry average. These assets provide strong leverage to the US housing rebound and we estimate each additional 100,000 US starts (relative to our 1.15 mln 2014 forecast) translates into $62 mln in additional EBITDA, implying a potential 25% increase to our target (holding all else constant). Earnings are also sensitive to the bilateral exchange rate with each US$/C$ penny decrease (relative to our US$/C$ 0.98 assumption) increasing EBITDA by ~$8 mln, implying a potential 3% increase to our target. The best defence is a good offence While we expect industry capacity restarts to pressure OSB operating rates and pricing, we see Ainsworth s own capacity expansions supporting earnings growth. Ainsworth has announced a ~50% increase in company capacity, outstripping the ~20% in industry-wide capacity restarts. The key restart is an OSB facility in High Level, Alberta which is a large (860 mln msf) and relatively new mill that first began production in 2000 before being idled in December 2007 due to the severe US housing downturn. Following the announced mid-2013 restart, the mill will have a product line complementary to the existing offering and regional footprint. In addition, Ainsworth is currently in the midst of de-bottlenecking its existing three mills leading to a 100 mln msf, or ~6%, increase of capacity. In addition, while not currently in our earnings estimates, we highlight that Ainsworth maintains potential for further expansion at the company s Grande Prairie mill in the form a 600 mln sf second line (which was shelved during the industry downturn). We understand that the project is 75% complete and would require a capital investment of ~$80 mln to finish. This second line features a state of the art continuous press design and would be complementary to the operations of the mill s other line. If completed, the Grande Prairie facility would boast a mammoth 1.33 bln msf of capacity and boost Ainsworth s total potential capacity to 3.24 mln msf nearly double current operating levels. Value-added product mix also supports margins In addition to being a low cost producer, Ainsworth boasts a valued-added product mix and diversified sales channels (higher realized prices on export shipments) which have enabled the company to realize mill nets above reported benchmark pricing and generally outperform competitors in terms of margins. In fact, we highlight Ainsworth maintained positive EBITDA margins in 2009 when competitors were incurring substantial cash losses and the company has a rolling three year average EBITDA margin of 17%, as compared to competitor s average of 11%. The company has also demonstrated that it participates in industry up-swings as well, with margins in-line with or better than peers in more robust markets. Attractive valuation Historically a highly levered company, a 2008 restructuring and 4Q12 refinancing have reduced net debt to very manageable levels of just 20% of total capitalization (8.5x 2013E interest coverage ratio). However, despite the company s strong competitive position, Ainsworth trades at a marked discount to the company s direct comps, Norbord and Louisiana Pacific. In fact, based on our 2014 EBITDA estimate of $270 mln, we highlight Ainsworth is trading at 4.1x 2014 EV/EBITDA while Norbord and Louisiana Pacific trade at 6.1x and 6.4x, respectively. We attribute this mainly to Ainsworth s smaller market capitalization and trading liquidity. We expect the company to benefit from a catch-up in valuation with +50% capacity increases supporting higher EBITDA and free cash flow generation even with lower forecast commodity pricing.

4 Canada Research Page 4 of 47 Specifically, we are forecasting 2013/14 EBITDA of $236 mln and $270 mln, with FCF yields of 15% and 20%, respectively, despite a $20/msf drop in OSB pricing. We peg Ainsworth s cumulative FCF in 2013E/2014E of ~$310 mln or $1.28/share, which we believe justifies our 5.6x 2014E EV/EBITDA multiple (in-line with bigger cap player Norbord) implying a $5.30 per share target price. RJL supply-demand model forecasts flat to lower average OSB pricing Our analysis of OSB supply and demand involves applying a one-factor power relationship to convert our US housing start forecasts to OSB demand. We then estimate effective North American OSB industry capacity by factoring in what we believe to be a conservative ramp-up of the roughly 20% increase in announced industry mill restarts. Based on these inputs, we arrive at effective North American operating rates of 91%, 90%, and 91% in 2013E-2015E, respectively. We then use a one-factor exponential relationship to convert operating rates to OSB pricing forecasts of US$350/msf, US$330/msf and US$345/msf in We highlight that our forecast for lower pricing next year is sensitive to our US housing start assumption. Operating rates and OSB pricing would be flat next year should US starts average 1.25 mln, less than 10% higher than currently forecast. Leader in offshore markets, looking to develop opportunities abroad While OSB is typically produced and shipped within North America, Ainsworth is more diversified in terms of geographical distribution of shipments, maintaining a market leading position in Japan and actively advancing opportunities in the Chinese market. As it currently stands, roughly 12% of Ainsworth s sales go to export markets. With several mills located in western Canada, we regard the company as uniquely positioned in terms of shipping distance to Asia relative to other concentrated pockets of OSB supply in the US south and eastern Canada. We highlight Japan represents a unique opportunity in the sense that OSB only has a ~5% share of the structural panel market (the remainder being plywood and particle board) which compares to 60% in North America. Clearly, increased Asian market penetration represents a significant opportunity for the company, in our view. Ainsworth a potential takeout candidate Given the company s low cost asset base, attractive product offering, expansion opportunities in Asian markets, and accumulated US tax loss carry forwards (the company no longer operates in the US) we regard Ainsworth as an attractive takeout candidate. Due to the Brookfield ownership link in both companies we see Norbord as the most likely acquirer but also see potential for US panel producers such as Louisiana Pacific or Georgia Pacific as potentially being interested parties. Company Overview Ainsworth Engineered is the 5 th largest producer of OSB in North America with four facilities and a total capacity of 2.54 bln msf annually (including the idled High Level, Alberta mill which is scheduled to restart mid-2013). The company s facilities are located in Canada with three in western Canada and one in eastern Canada, strategically placed according to wood supply and access to markets (see Exhibit 1 - RHS). In 2012 these facilities employed some 600 people. By geography, Ainsworth s primary end market is western North America which represents 58% of the company s total shipments, followed by the mid-western portion of the continent (the mid-western US plus Manitoba and Ontario) at 21% while also sending 12% of production offshore (see Exhibit 1 - LHS). Of Ainsworth s overall sales, roughly 45% are commodity performance

5 Canada Research Page 5 of 47 rated sheathing used primarily in roofs and walls in North American residential construction while the remaining 55% is value-added OSB products. The valued added product line is a strategic focus for Ainsworth and includes engineered wood products, export grade products, residential value-add, and industrial (see Exhibit 2). These value added products typically command a premium price while exhibiting reduced price volatility. On a consolidated basis, Ainsworth has long-term fibre supply arrangements covering 95% of its requirements. Exhibit 1: Ainsworth 2012 Shipments by Geography (LHS) and Mill Locations (RHS) Source: Exhibit 2: Ainsworth Sales Volume by Product Line 1 Value represents mill return Source:

6 Canada Research Page 6 of 47 Company Assets 100 Mile House, British Columbia Opened in 1994, Ainsworth s mill in 100 Mile House, British Columbia has an annual capacity of 440 mln msf/yr. The mill s key products include JAS certified OSB (which meets Japan s stricter structural standards), webstock, rimboard, and commodity sheathing OSB. Based on 2012 shipments the mill sends 63% of its product to North America while the remaining 37% is exported. The mill produces 28% commodity OSB and 72% value added product. In 2010, the company completed a major dryer improvement project at the mill which enhanced its capabilities in processing logs killed by the mountain pine beetle. The 100 Mile House mill has long-term fibre supply agreements in place which cover 100% of its requirements. Grande Prairie, Alberta At 730 mln msf, Ainsworth s Grande Prairie, Alberta mill is the company s largest currently operating facility. The mill opened in 1996 and features a 12 wide multi-opening press. The Grande Prairie compound also includes a potential second 600 mln msf line which features state of the art continuous press design and would be complementary to the mill s first line. This second line was 75% complete when construction was halted due to industry conditions and requires an $80 mln capital investment to bring it online. The existing line at Grande Prairie currently produces commodity sheathing, flooring, JAS certified, and Chinese core stock OSB products with 94% of shipments being sent to North American markets. The mill s commodity to value added product split is 59%-41%. The Grande Prairie mill has longterm fibre supply agreements in place which cover 100% of its requirements. Barwick, Ontario Ainsworth s only mill in eastern Canada is located in Barwick, Ontario and maintains an annual capacity of 510 mln msf. The mill was opened in 1997 and Ainsworth purchased it from Boise. The mill produces commodity sheathing (41% of output) as well as value added products (59%) including flooring, webstock, and RV (Jumbo) OSB products. The mill s output is exclusively shipped within North America. The Barwick mill has long-term fibre supply agreements in place which cover 73% of its requirements with the remainder being purchased in the open market. High Level, Alberta Currently idled, Ainsworth s mill in High Level, Alberta first opened in 2000 before shutting in December The company purchased the remaining 50% it didn t own from prior joint-venture (JV) partner Grant Forest Products in 2011 and plans to restart the mill by mid Once running, the mill s 860 mln msf capacity would represent a ~50% increase to the company s total capacity and would produce commodity sheathing, flooring, JAS, Chinese core stock, and webstock and it would also complement Ainsworth s existing markets and product lines. The High Level mill has long-term fibre supply agreements in place which cover 100% of its requirements. Company History Ainsworth Lumber was first formed in 1952 by David Ainsworth and his brother Tom who settled in British Columbia s Caribou country and set up a small sawmill that had been towed in by truck. By 1955 the company had moved to 100 Mile House, BC and established a planer and larger sawmill facility. Throughout the 60 s the Ainsworth family pioneered the use of smaller diameter (as opposed to old growth large diameter logs) as a renewable source of fibre. During the 70 s and 80 s the company established and acquired several solid wood processing facilities but did not move into structural panels until the establishment of a specialty plywood facility in Savona, BC. In 1990 Ainsworth began its move into the OSB business, being awarded the timber supply for a proposed OSB plant in 100 Mile House which was eventually opened in 1994, two years

7 Canada Research Page 7 of 47 after the company s IPO in The company s next OSB facility, located in Grande Prairie, Alberta, was opened in 1995, and as part of a joint-venture with Grant Forest Products the High Level Alberta mill was opened in In 2004, Ainsworth expanded significantly, acquiring three OSB mills in Minnesota and the Barwick, Ontario mill. At the time the company s OSB capacity was 3.3 bln msf, making Ainsworth the 4 th largest producer in North America. By 2008, driven by the precipitous drop in the US housing market, the company was forced to recapitalize (details follow) in order to survive the industry downturn. In late 2007 the High Level mill was idled, and during 2008 and 2009 the Minnesota mills were permanently closed. In 2011, Ainsworth sold its Chasm sawmill, marking the company s exit from the lumber business. In September 2011 previous CEO Rick Huff retired as President and CEO, and Jim Lake was appointed President and COO before assuming the role of President and CEO in March Recapitalization In July 2008 Ainsworth was forced to recapitalize as the company was burning cash (losing $44 mln in EBITDA over the previous 12 months), had roughly $1.0 bln in debt incurred financing some of the above noted acquisitions, had limited liquidity, and was faced with the prospect of being unable to meet obligations to creditors. The recapitalization featured a US$200 mln cash injection through the issuance of new senior unsecured notes and the cancellation of all the former senior unsecured notes in exchange for the issuance of an additional US$150 mln of new senior unsecured notes. The recapitalization enabled Ainsworth to bring debt back to more manageable levels while providing necessary liquidity to weather the remainder of the industry downturn. As part of the debt exchange in the recapitalization, bondholders received 96% of the equity in the new entity while long-term debt was reduced by ~$440 mln. The Ainsworth family lost the majority of their ownership stake at this time. While industry conditions certainly contributed to the need for a recapitalization, the company s 2004 acquisition of three higher cost OSB mills in Minnesota for US$458 mln was also a significant factor, in our view. After the recapitalization the Ainsworth family exited management and the company focused on divesting or closing all uncompetitive/high cost assets. At the time the company had seven operational facilities (five OSB mills and two plywood/veneer facilities) this was eventually reduced to three operating OSB facilities. Company Strategy Diversified sales channels, geographical distribution, focus on value added products With 55% of Ainsworth s shipments being value added products, the company has consistently seen price realizations surpass prevailing benchmark prices (see Exhibit 3). In fact, over the past 4 years we estimate the company s realized prices exceeded 7/16 OSB (del West) prices by an average of 7%. Importantly, these favourable mill nets have not come at an increased production cost and we therefore believe this, in addition to the company s high quality mills, has contributed to margins outperforming comps. In fact, we note among major panel producers Ainsworth was the only one to avoid material cash losses in the first half of 2009 and has seen EBITDA margins exceed competitors such as Norbord and Louisiana Pacific by approximately 6% over the past 3 years while maintaining an average EBITDA/msf produced of $47/msf as compared to Norbord at $32/msf and Louisiana Pacific (OSB segment) at $28/msf. In addition to the higher, more stable prices realized for Ainsworth s value added products we attribute a

8 Canada Research Page 8 of 47 portion of these strong price realizations to the company s presence in the Japanese market, where product is also sold at a premium and enjoys reduced volatility. Exhibit 3: Ainsworth Average Price Realizations vs. OSB (del. West) Prices US$/msf (del US West) Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 7/16-Inch South (West) ANS Average Sales Realizations Source: Forest Economic Advisors (FEA), Raymond James Ltd., Large, low cost mills contribute to margins outpacing comps We regard Ainsworth s OSB mills as large and modern relative to competitors, with each of the company s three operating mills in the top quartile in terms of cash costs. As a result of this, we highlight the company s EBITDA margins have outpaced the OSB segments of competitors including Norbord and Louisiana Pacific in recent years (see Exhibits 4 and 5). While Norbord is likely the North American industry s low cost producer, we attribute this to the company s focus on commodity sheathing products whereas Ainsworth produces a more value added product offering. Furthermore, Ainsworth s mills are sufficiently flexible that each is able to produce the company s whole product line, lending a further advantage. Historically, Ainsworth s strong competitive position has sheltered margins during industry downturns with the company s mills maintaining higher average operating rates as was seen in when the company s three operating mills essentially ran at full capacity while other producers were forced to take downtime. Ainsworth s large 860 mln msf/year OSB mill in High Level, Alberta is currently progressing well towards resuming operations in the second half of 2013 and we note the facility was operated on care and maintenance since its curtailment, which the company expects to facilitate a smooth restart. The addition of High Level alone would increase Ainsworth s production capacity by 50%. Beyond the High Level restart, Ainsworth would also be able to expand production by a further 600 mln msf annually by completing the second line at the company s Grande Prairie mill. This second line, which is ~75% complete, features a continuous press design and will boast a cost structure comparable to the company s existing asset base, in our view. Ainsworth estimates a capital cost of roughly $80 mln to complete the line. In addition to these mill restarts Ainsworth is currently in the process of adding 100 mln msf to the company s operating facilities at a capex spend of $10 mln distributed evenly between 2013 and 2014.

9 Canada Research Page 9 of 47 Exhibit 4: Ainsworth Rolling 4 Quarter EBITDA/msf Shipped vs. Competitors ` EBITDA/msf Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Company Reports, Raymond James Ltd. Ainsworth Norbord Louisiana Pacific Exhibit 5: Ainsworth Rolling 4 Quarter EBITDA Margins vs. Competitors 40% 30% EBITDA Margin (%) 20% 10% 0% -10% -20% 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Ainsworth Norbord Louisiana Pacific Source: Company Reports, Raymond James Ltd. Increased capacity and shipments to offset moderating commodity prices Consistent with our view of increased industry-wide capacity putting pressure on OSB prices, we assume average pricing falling to US$330/msf in 2014 from US$350/msf in While this will negatively impact margins for all OSB producers, we highlight Ainsworth is in a position to increase shipments by a greater proportion (see Exhibit 6) by bringing on additional capacity. In other words, we expect Ainsworth to show revenues increasing from $566 mln in 2013 to $716 mln in 2014, and EBITDA growing from $236 mln to $270 mln. Importantly, we highlight the mills Ainsworth can bring online are competitive in terms of cash costs meaning, once the respective ramp ups are complete, the company will still demonstrate low average cash costs and benefit from improved absorption of fixed costs, in our view.

10 Canada Research Page 10 of 47 Exhibit 6: Capacity by Mill (LHS) and OSB Price Estimates (RHS) 3, ,000 Grande Prairie II RJL Forecast mln msf 2,500 2,000 1,500 1, E 2014E 2015E 2016E High Level Grande Prairie I Barwick 100 Mile House US$/msf Jan-12 Mar-12 NC 7/16" OSB Prices 2013 RJL OSB Price Forecast 2014 RJL OSB Price Forecast 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 Nov-14 Source:, Raymond James Ltd. Leverage to US Housing Market Ainsworth is highly leveraged to the US Housing market. We regard this as a key element of our investment thesis as, while challenges certainly remain, we have conviction the US housing market is currently in the early stages of a legitimate recovery (see Appendix III for additional details). Moreover, referring to Exhibit 7 (top right), we note OSB demand maintains a high correlation with US housing starts at approximately 99.2% since 2005 while the commodity price, which is clearly also impacted by changes in capacity, maintains a still material 52% correlation with US housing starts (Exhibit 7, top left). Taking this argument a step further, we also highlight the strong relationship between Ainsworth s share price and OSB prices (55% correlation) (Exhibit 7, bottom left) while also noting the commodity price is a primary driver of the company s margins (Exhibit 7, bottom right). Putting this together, we estimate each incremental 100,000 US starts translates into $62 mln in additional EBITDA, implying a potential 25% increase to our target (holding all else constant).

11 Canada Research Page 11 of 47 Exhibit 7: Ainsworth Leverage to OSB Pricing and the US Housing Market 600 Benchmark OSB Prices vs. US Housing Starts Total North American OSB demand vs. US Housing Starts 31.0 US$/msf ρ = 52% 's SAAR US Housing Starts (mlns SAAR) ρ = 99.2% OSB Demand (bln msf) 0 Jan-04 Jun-04 Nov-04 Apr-05 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar E 6.0 NC 7/16 OSB Total USHS (RHS) Total NA OSB Demand (RHS) Total US Housing Starts C$ ANS Share Price vs. OSB Pricing ρ = 55% US$/msf US$/msf (del US West) OSB Prices vs. ANS EBITDA Margins Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 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 Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q ANS Share Price NC 7/16" OSB Prices (RHS) 7/16-Inch South (West) ANS EBITDA Margin (% - RHS) Source: Company Reports, Raymond James Ltd., Random Lengths, US Census Bureau, APA-The Engineered Wood Association (APA), Capital IQ Expansion in offshore markets While OSB produced in North America is not generally exported in meaningful quantities (4% of North American OSB production was exported in 2012), Ainsworth is unique in that the company has a long standing presence in Japan, sending ~10% of shipments to the country. While returns on North American shipments are typically higher at US housing cycle peaks, Ainsworth s JAS certified product shipped to Japan is the company s highest return product throughout the cycle, while also exhibiting less price volatility than North America. As a result, Ainsworth has a goal of doubling shipments to the Asian region (with shipments as a % of total capacity to the region holding firm at roughly 12% while the company s capacity potentially doubles between /16). The domestic plywood industry in Japan is subsidized, which represents a barrier to OSB substitution; however, Ainsworth is also attempting to introduce OSB as an alternative to certain particleboard products. We believe Ainsworth s competitive strength in the Japanese market is a product of the company s long standing presence (customers feel the company is more reliable than panel producer competitors who pulled out of the market during previous downturns), western Canadian mill locations, and high quality standards. Referring to Exhibit 8 below, Japanese housing starts did not decline as severely as did those in the US and have improved modestly from recessionary lows rising 15% between 2009 and More recently, 2012 housing starts improved 6% y/y while 1Q13 starts are up 5% y/y and March 2013 starts were up 7% y/y. We understand this recent improvement is the result of improved consumer sentiment and economic strength while pending consumption sales tax changes are also encouraging some buyers to enter the market before they are implemented. The consumption tax will rise from 5% currently to 8% in April 2014 and 10% in We believe the current strong demand from Japan for building materials will persist throughout 2013 and 2014 and expect Ainsworth will continue to make inroads into this and other export markets.

12 Canada Research Page 12 of 47 Exhibit 8: Japan Housing Starts Japan Annual Housing Starts (mlns) Japan YTD Housing Starts mln units mln units Q12 1Q13 Source: OSB Supply-Demand Outlook Lower Though Still Decent Future OSB Pricing on Tap We apply a one-factor power relationship (R 2 =0.93%) to convert our US housing forecasts to OSB demand. Taken with our effective capacity assumptions described above, our OSB supply/demand model predicts effective operating rates increasing from 84% in 2012 to 91% this year as 16% shipment growth outstrips a 7% increase in effective capacity. We use a one-factor exponential relationship (R 2 =0.82%) to convert effective operating rates to OSB prices. This results in our US$350/msf 2013 price forecast. In 2014E, a 10% forecast increase in OSB shipments is overwhelmed by a 12% increase in effective capacity resulting in effective operating rates falling to 90% and our OSB price forecast falling to US$330/msf. In 2015E, 8% shipment growth offsets an assumed 6% increase in effective capacity, resulting in a 91% operating rate and a price forecast of US$345/msf (see Exhibit 9). We caution that our OSB pricing forecasts are sensitive to our US housing outlook and note that a < 10% increase in 2014 US housing activity results in flat operating rates (relative to 2013) and a flat resulting commodity price outlook. While there are likely permanent closure candidates among the 3.4 bln sf of remaining idled mills, it is interesting to investigate the supply/demand balance assuming the full 27 bln msf of capacity operates. Trend levels of US housing starts of 1.5 mln, which occur in 2016E in our forecast, would result in an 86% operating rate and trend pricing of US$300/msf. Under this scenario, to keep operating rates at 91% and pricing at the US$350 level would require US housing to average 1.75 mln a low probability event, in our view.

13 Canada Research Page 13 of 47 Exhibit 9: RJL North American OSB Supply-Demand Model OSB Pricing US$/msf $400 $350 $300 $250 $200 $150 97% % % % 161 NC 7/16" OSB Prices vs Effective NA Operating Rates 82% 84% 74% 71% 66% % 90% 91% % % 80% 60% 40% $100 $50 20% $ E 2014E 2015E 2016E N/C OSB Pricing (US$/msf) Operating Rate (%) Right Axis 0% E 2014E 2015E 2016E N.A. OSB Supply/Demand (bln sq ft) U.S. Total Housing Starts (mlns) N.A. Demand Net Exports N.A. Shipments Net Change (1.2) (2.7) (4.8) (4.3) (0.1) N.A. OSB Capacity Total Effective Net Change (0.1) (1.3) (4.5) (1.1) (0.9) (0.7) Operating Rates Total 97% 103% 94% 86% 70% 55% 59% 63% 61% 71% 77% 84% 85% Effective 97% 103% 94% 85% 71% 66% 74% 82% 84% 91% 90% 91% 89% OSB Price ($US/msf) Source: Raymond James Ltd., APA, FEA Potential OSB Capacity Restarts and Impact on the Market Driven by depressed commodity pricing and substantial cash losses over the most recent industry downturn, a large number of OSB facilities were either shut and dismantled or indefinitely idled. In fact, as it currently stands there are 38 mills currently operational and 16 mills indefinitely idled (1 currently in ramp-up mode), while a further 15 have been dismantled. According to FEA, these idled mills represent roughly 6.7 bln msf of capacity or close to 25% of the 26.9 bln msf total existing North American capacity (as at the end of 2012). Of course, while several large panel producers have announced plans for mill restarts, the timing of the ramp-up for these facilities and the ability to staff the mills with qualified workers will add an element of uncertainty. Referring to Exhibit 10 below we note, of the 16 curtailed mills, 8 have either announced an intention to restart during either 2013 or 2014 or have started making preparations for restart that cause us to view it as highly likely. Of these restarts 5 are in the US south and 3 are located in western Canada. Undeniable Supply Response Reflecting high EBITDA margins and cash flow, we peg effective OSB capacity as set to increase by over 5.1 bln msf, or 20% of total capacity, by 2015E. To date, 2013/2014 announced restarts total over 4.7 bln msf and while we assume this new capacity takes time to ramp and eventually only operates at ~90%, assumed 1.5% capacity creep adds to the total. We assume a conservative ramp schedule with less than 50% (1.3 bln) of the over 3.0 bln msf in announced 2013 restarts hitting the market this year. This is followed by 2.5 bln in 2014 and 1.4 bln in 2015,

14 Canada Research Page 14 of 47 taking effective capacity to 24.6 bln msf (see Exhibit 10). The potential restart of the remaining ~3.4 bln msf of idled capacity is much less certain as many of these mills are permanent closure candidates due to high cash costs, as well as wood supply and labour issues, in our view. Exhibit 10: Estimated OSB Capacity Changes Announced Capacity Increases (all figures in bln msf) Company Location Date Idled Capacity Timing 2013E 2014E 2015E Georgia Pacific Clarendon County, SC n/a Q Louisiana Pacific Peace Valley, BC* n/a Q Louisiana Pacific Thomasville, AL 2Q Q Norbord Jefferson, TX 1Q Q Ainsworth High Level, AB 4Q Q % Capacity Creep Industry wide n/a Total 2013 Capacity Increase Tolko Industries Slave Lake II, AB 2Q Q Louisiana Pacific Dawson Creek, BC 4Q H Norbord Huguley, AL 1Q H % Capacity Creep Industry wide n/a Total 2014E/15E Capacity Increase Total 2013E/15E Capacity Increase Remaining Idled Capacity Company Location Date Idled Capacity Georgia Pacific Grenada, MS 4Q Georgia Pacific Mount Hope, WV 1Q Georgia Pacific Skippers, VA 2Q Huber Spring City, TN 4Q Louisiana Pacific Chambord, QC 4Q Norbord Val D'Or, QC 2Q Tolko High Prairie, AB 1Q Weyerhaeuser Wawa, ON 4Q Total Potential expansions Ainsworth Grand Prairie Expansion 600 * additional shift to operational mill Source: Company Reports, Raymond James Ltd. Share Ownership Overview As of May 2013 Ainsworth had mln shares outstanding, of which Brookfield Asset Management owned mln, or 55% (see Exhibit 11). In addition to the common shares outstanding, Ainsworth also has 2.1 mln options outstanding with exercise prices in the range of $1.03 to $3.73 (most in the money or very close) bringing the company s fully diluted share count to mln. In addition, the company maintains 8.7 mln warrants which, as of July 29, 2013 will either be converted to 1.52 common shares or common shares, depending on whether a trigger price of $7.89/share is met. If the trigger price is met (which we consider unlikely) the warrants would convert at a rate of 1.52 (into 13.2 mln shares). If not, the warrants would convert at (into ~30,400 shares). We do not assume any further dilution at this time related to these warrants as the most likely outcome (the trigger price not being met) will have a minimal impact on the fully diluted share count. According to data from ThomsonOne, after Brookfield, the largest institutional holders of Ainsworth shares outstanding are Blackrock at 2.3%, Pyramis at 1.9%, GWL Investment Management at 0.8%, and O Shaughnessy Asset Management at 0.7%. The largest individual holder is Paul

15 Canada Research Page 15 of 47 Houston, lead independent Board member, with ~464,000 shares, followed by Robert Chadwick, also a Board member. We also note that CEO Jim Lake owns ~95,500 shares, or roughly $350,000 worth of stock. The 3 month average daily volume of Ainsworth shares traded is ~910,000 and the company has a float of 44%. Ainsworth s current capital structure was altered materially by a refinancing in 4Q12 where the company raised $175 mln via a fully backstopped rights offering with a total of 140 mln shares being issued. In conjunction with the rights offering the company issued US$350 mln in senior secured notes and the combined funds were used to repay the company s 11% senior secured notes (par value: US$398.3 mln) and the senior secured term loan (par value: US$102.6 mln). This pushed maturities in 2014 and 2015 out to December 2017, reduced total debt by 30%, and reduced annual borrowing costs by $25 mln. We note Brookfield Asset Management came to own its stake in Ainsworth in March 2010 when a subsidiary, Brookfield Special Situations Partners Ltd., acquired common shares and warrants in the company from HBK Investments who acquired them during the recapitalization. Brookfield obtained common shares and warrants at a price of $2.25/share for a total cost of $56 mln and, upon conversion of the warrants, arrived at a 55% ownership stake. Exhibit 11: Ainsworth Shareholder Summary (as-at May-30-13) Shareholder Summary Largest Institutional Holders # Shares (mlns) % Outstanding Blackrock % Pyramis % GWL Investment Management % O'Shaughnessy Asset Management % Other % Total Institutional % Insiders Largest Insider Holders # Shares (mlns) % Outstanding Brookfield Asset Mgmt % Paul Houston % Robert Chadwick % Jonathan Mishkin % Other Insiders % Total Insider % Source: ThomsonOne, Raymond James Ltd. Brookfield Asset Mgmt, 55% Other Institutional, 7% Insiders, 0% Public & Other, 37% Financial Analysis & Outlook Driven by rising shipments from the restarted High Level mill and higher average forecasted OSB prices, we expect Ainsworth will post substantial growth in each of revenues and EBITDA in 2013 relative to In fact, assuming an average OSB price of US$350/msf (well below current YTD prices of US$403/msf but up considerably from US$270/msf in 2012), a C$ of US$0.98 (in-line with RJL s marked-to-market assumption) and shipments of 1.67 bln msf we arrive at revenues of $566 mln (up 38% y/y) and EBITDA of $236 mln (up over 120% from 2012). We note that our 2013 shipment estimate assumes the High Level mill restarts and operates at an average of 50% in 4Q13. Looking to 2014, we assume OSB capacity restarts begin to pressure prices, particularly in the second half of the year, prompting us to adopt a more conservative forecast of US$330/msf. Offsetting this, however, would be a full year of shipments from the 860 mln msf/yr High Level mill which, based on management guidance of a 12

16 Canada Research Page 16 of 47 month ramp-up period, we assume would run at an average operating rate of 75% in 2014, while the company s other three mills run at close to full capacity for a consolidated operating rate of 87% on capacity of 2.54 bln msf and shipments of 2.18 bln msf. Therefore, the net effect of these higher shipments and lower commodity prices is positive with sales rising to $716 mln and EBITDA improving to $270 mln. For the time being we do not factor the eventual restart of the second line at Grande Prairie into our EBITDA estimates. On the cost side, we expect fibre costs for Ainsworth will be relatively flat over our forecast period while resin prices increase modestly at 3%-4% per year. Sensitivity to OSB pricing and FX Referring to the sensitivity tables in Exhibits 12 and 13 below, we highlight the company s significant sensitivity to OSB pricing and USD/CAD bilateral FX rates. We note a US$10/msf change in OSB prices impacts our 2014 EBITDA estimate by approximately $20-$23 mln while a US$0.01 change in the USD/CAD FX rate impacts EBITDA by an estimated $7-$8 mln. Therefore, as a bear case we can envision a scenario where the company makes as little as ~$150 mln in 2014 EBITDA (assuming US$280/msf OSB and parity FX). Of course, conversely, we also believe it is plausible that under a bull case scenario the company generates as much as ~$385 mln in EBITDA (assuming US$375/msf OSB prices and a USD/CAD of $0.96) should US housing starts materially exceed our expectations. Assuming a 5.6x 2014 EV/EBITDA multiple, this bear case scenario would result in a target share price of ~$2.50/share (53% below our $5.30 target), whereas the bull case would result in a theoretical target price closer to $8.00/share (51% above our target). We believe these 2 scenarios illustrate both the risks involved in an investment in Ainsworth and also the significant potential upside. Our target price of $5.30 assumes a US$330/msf 2014 average OSB price forecast and a USD/CAD of $0.98. Exhibit 12: Ainsworth 2014E EBITDA Sensitivity to OSB Prices and USD/CAD FX Rates Ainsworth 2014E EBITDA Sensitivity to OSB Pricing and US$/C$ FX Rates US$/C$ 7/16' OSB Prices (US$/msf, del. West) $ 21 $ 82 $ 142 $ 214 $ 263 $ 335 $ 359 $ 384 $ 444 $ 504 $ 625 $ $ 16 $ 76 $ 135 $ 207 $ 255 $ 327 $ 350 $ 374 $ 434 $ 494 $ 613 $ $ 11 $ 70 $ 129 $ 200 $ 247 $ 318 $ 342 $ 365 $ 424 $ 483 $ 602 $ $ 6 $ 64 $ 122 $ 193 $ 239 $ 310 $ 333 $ 356 $ 415 $ 473 $ 590 $ $ 1 $ 58 $ 116 $ 186 $ 232 $ 301 $ 325 $ 348 $ 405 $ 463 $ 579 $ $ (4) $ 53 $ 110 $ 179 $ 225 $ 293 $ 316 $ 339 $ 396 $ 454 $ 568 $ $ (9) $ 48 $ 104 $ 172 $ 218 $ 285 $ 308 $ 331 $ 387 $ 444 $ 557 $ $ (14) $ 42 $ 98 $ 166 $ 210 $ 278 $ 300 $ 323 $ 379 $ 435 $ 547 $ $ (18) $ 37 $ 93 $ 159 $ 204 $ 270 $ 292 $ 315 $ 370 $ 426 $ 537 $ $ (23) $ 32 $ 87 $ 153 $ 197 $ 263 $ 285 $ 307 $ 362 $ 417 $ 526 $ $ (27) $ 27 $ 82 $ 147 $ 190 $ 256 $ 277 $ 299 $ 353 $ 408 $ 517 $ $ (31) $ 22 $ 76 $ 141 $ 184 $ 248 $ 270 $ 292 $ 345 $ 399 $ 507 $ $ (36) $ 18 $ 71 $ 135 $ 178 $ 241 $ 263 $ 284 $ 337 $ 391 $ 497 $ $ (40) $ 13 $ 66 $ 129 $ 171 $ 235 $ 256 $ 277 $ 330 $ 382 $ 488 $ $ (44) $ 8 $ 61 $ 123 $ 165 $ 228 $ 249 $ 270 $ 322 $ 374 $ 479 $ $ (48) $ 4 $ 56 $ 118 $ 159 $ 221 $ 242 $ 263 $ 315 $ 366 $ 470 $ 574 RJL Current Estimates Source: Raymond James Ltd.

17 Canada Research Page 17 of 47 Exhibit 13: Ainsworth 2013E EBITDA Sensitivity to OSB Prices and USD/CAD FX Rates Ainsworth 2013E EBITDA Sensitivity to OSB Pricing and US$/C$ FX Rates US$/C$ 7/16' OSB Prices (US$/msf, del. West) $ 159 $ 196 $ 224 $ 252 $ 270 $ 289 $ 307 $ 326 $ 345 $ 363 $ 382 $ $ 153 $ 190 $ 217 $ 245 $ 263 $ 282 $ 300 $ 318 $ 337 $ 355 $ 374 $ $ 147 $ 184 $ 211 $ 238 $ 256 $ 275 $ 293 $ 311 $ 329 $ 347 $ 366 $ $ 142 $ 178 $ 205 $ 232 $ 250 $ 268 $ 286 $ 304 $ 322 $ 340 $ 358 $ $ 136 $ 172 $ 199 $ 225 $ 243 $ 261 $ 279 $ 297 $ 314 $ 332 $ 350 $ $ 131 $ 166 $ 193 $ 219 $ 237 $ 254 $ 272 $ 290 $ 307 $ 325 $ 343 $ $ 126 $ 161 $ 187 $ 213 $ 231 $ 248 $ 265 $ 283 $ 300 $ 318 $ 335 $ $ 121 $ 155 $ 181 $ 207 $ 225 $ 242 $ 259 $ 276 $ 294 $ 311 $ 328 $ $ 116 $ 150 $ 176 $ 201 $ 219 $ 236 $ 253 $ 270 $ 287 $ 304 $ 321 $ $ 111 $ 145 $ 170 $ 196 $ 213 $ 230 $ 246 $ 263 $ 280 $ 297 $ 314 $ $ 106 $ 140 $ 165 $ 190 $ 207 $ 224 $ 240 $ 257 $ 274 $ 291 $ 307 $ $ 102 $ 135 $ 160 $ 185 $ 201 $ 218 $ 234 $ 251 $ 268 $ 284 $ 301 $ $ 97 $ 130 $ 155 $ 179 $ 196 $ 212 $ 229 $ 245 $ 261 $ 278 $ 294 $ $ 93 $ 125 $ 150 $ 174 $ 190 $ 207 $ 223 $ 239 $ 255 $ 272 $ 288 $ $ 88 $ 121 $ 145 $ 169 $ 185 $ 201 $ 217 $ 233 $ 249 $ 265 $ 282 $ $ 84 $ 116 $ 140 $ 164 $ 180 $ 196 $ 212 $ 228 $ 244 $ 260 $ 275 $ 355 RJL Current Estimates Source: Raymond James Ltd. Exhibit 14: Ainsworth Shipment, Revenue, EBITDA and FCF Forecasts mln msf 2,500 2,000 1,500 1, ,175 1,633 1,620 1,674 1,547 1,547 1, E 2014E Shipments (mln msf) Sales (C$ mlns, RT Axis) $800 $700 $600 $500 $400 $300 $200 $100 $0 C$ mlns C$ mlns $300 $250 $200 $150 $100 $50 $0 -$50 -$100 -$ EBITDA 236 Free Cash Flow (EBITDA-Interest-Capex-Taxes) E 2014E Source:, Raymond James Ltd. Debt Analysis While Ainsworth was highly levered at one time, the company s 2008 restructuring and 2012 refinancing have each combined to materially reduce the debt levels and leave the company with a solid balance sheet (see Exhibit 15). With net debt currently at roughly 20% of total cap and an EBITDA to interest ratio of 8.5x in 2013E and 10.8x in 2014E, we regard the company s debt levels as manageable. After factoring in robust free cash flows over the next two years of approximately $310 mln, we see the company s net debt levels falling further, even if more of this cash is spent on capital projects than we currently expect. Referring to the left hand side of Exhibit 15 we note the vast majority of Ainsworth s debt (US$350 mln in senior secured notes) is due in 2017, while the company s two equipment financing facilities are due in We do not foresee any issue with Ainsworth either repaying or refinancing these two facilities when they come due. The $350 mln senior secured notes include a 10% annual repayment option ($35 mln/year). We note, our estimates assume $20 mln in capex goes towards the High Level mill restart this year (consistent with management guidance) but do not assume any cash is used towards the completion of the second line at Grande Prairie. While we

18 Canada Research Page 18 of 47 believe Ainsworth s net debt will fall materially by the end of 2014, we see decisions on returning cash to shareholders (either via dividends or share buybacks) are likely 18 to 24 months out as the company has an attractive pipeline of expansion projects and will likely wait for some clarity on the pace of the US housing recovery before committing to distributing cash. Exhibit 15: Ainsworth Debt Summary $US mlns $500 $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 Matures: Dec-17 Rate: 7.5% US$350.0 Ainsworth Debt Summary Matures: Sep-14 Rate: LIBOR + 3.5% Matures: Jun-14 Rate: EURIBOR % US$ Senior Secured notes Equipment Loan (a) Equipment Loan (b)* C$ mlns $1,200 $1,000 $800 $600 $400 $200 $0 Ainsworth Net Debt 2008 restructuring 2012 refinancing & rights offering 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 The Senior Secured Notes and Equipment Loan (a) are denominated in USD Equipment Loan (b) is denominated in Euros Source:, Capital IQ, Raymond James Ltd. Valuation & Recommendation Initiating coverage with an Strong Buy rating and $5.30/share target price Based on our $270 mln 2014 EV/EBITDA estimate and a 5.6x 2014 EV/EBITDA multiple (in-line with comp Norbord) we arrive at a target price for Ainsworth of $5.30/share, which represents ~46% upside from current levels consistent with a Strong Buy rating, in our view. We note OSB comps Norbord and Louisiana Pacific are currently trading at 6.1x and 6.4x, respectively (note: the Norbord multiple is based on RJL estimates while Louisiana Pacific s multiple is based on consensus estimates see Exhibit 17). Therefore, as Ainsworth, trading at just 4.1x 2014E EV/EBITDA, is currently valued at a material discount to these comps we see a catch-up as the market comes to recognize the company s increasing capacity, strong relative margins, and quality asset base. We also highlight Ainsworth s significant leverage to OSB prices and note a US$10/msf change in OSB pricing impacts our 2014 EBITDA estimate by $20-$23 mln and, holding the assumed multiple constant, the corresponding impact to our target share price is approximately $0.50/share, or 9%. Viewed another way, if we were to assign Ainsworth an EV/EBITDA multiple in-line with the comps, we arrive at a theoretical target price closer to $6.00/share (see Exhibit 16).

19 Canada Research Page 19 of 47 Exhibit 16: Target Price Sensitivity to EBITDA and Assumed EV/EBITDA Multiple Ainsworth Target Price Sensivity to EBITDA and EV/EBITDA Multiple 2014E EBITDA (C$ mlns) $ 1.84 $ 2.31 $ 2.77 $ 3.23 $ 3.70 $ 4.07 $ 4.25 $ 4.62 $ 5.09 $ 5.55 $ 6.20 $ $ 1.91 $ 2.38 $ 2.85 $ 3.33 $ 3.80 $ 4.19 $ 4.37 $ 4.75 $ 5.22 $ 5.69 $ 6.36 $ $ 1.97 $ 2.45 $ 2.94 $ 3.42 $ 3.90 $ 4.30 $ 4.48 $ 4.87 $ 5.35 $ 5.84 $ 6.51 $ $ 2.03 $ 2.52 $ 3.02 $ 3.51 $ 4.01 $ 4.41 $ 4.60 $ 4.99 $ 5.49 $ 5.98 $ 6.67 $ $ 2.09 $ 2.60 $ 3.10 $ 3.60 $ 4.11 $ 4.52 $ 4.71 $ 5.12 $ 5.62 $ 6.13 $ 6.83 $ $ 2.16 $ 2.67 $ 3.19 $ 3.71 $ 4.22 $ 4.64 $ 4.84 $ 5.25 $ 5.77 $ 6.28 $ 7.01 $ $ 2.21 $ 2.74 $ 3.26 $ 3.79 $ 4.31 $ 4.74 $ 4.94 $ 5.36 $ 5.89 $ 6.41 $ 7.15 $ $ 2.28 $ 2.81 $ 3.35 $ 3.88 $ 4.42 $ 4.85 $ 5.06 $ 5.49 $ 6.02 $ 6.56 $ 7.31 $ $ 2.34 $ 2.88 $ 3.43 $ 3.97 $ 4.52 $ 4.97 $ 5.17 $ 5.61 $ 6.16 $ 6.70 $ 7.47 $ $ 2.40 $ 2.96 $ 3.51 $ 4.07 $ 4.62 $ 5.08 $ 5.29 $ 5.73 $ 6.29 $ 6.85 $ 7.62 $ $ 2.46 $ 3.03 $ 3.59 $ 4.16 $ 4.73 $ 5.19 $ 5.41 $ 5.86 $ 6.42 $ 6.99 $ 7.78 $ $ 2.52 $ 3.10 $ 3.68 $ 4.25 $ 4.83 $ 5.30 $ 5.52 $ 5.98 $ 6.56 $ 7.13 $ 7.94 $ $ 2.59 $ 3.17 $ 3.76 $ 4.35 $ 4.93 $ 5.41 $ 5.64 $ 6.10 $ 6.69 $ 7.28 $ 8.10 $ $ 2.65 $ 3.24 $ 3.84 $ 4.44 $ 5.03 $ 5.52 $ 5.75 $ 6.23 $ 6.83 $ 7.42 $ 8.26 $ $ 2.89 $ 3.53 $ 4.17 $ 4.81 $ 5.45 $ 5.97 $ 6.21 $ 6.72 $ 7.36 $ 8.00 $ 8.89 $ $ 3.02 $ 3.68 $ 4.33 $ 4.99 $ 5.65 $ 6.19 $ 6.44 $ 6.97 $ 7.63 $ 8.29 $ 9.21 $ 9.60 RJL Current Target Source: Raymond James Ltd. Exhibit 17: Building Materials and OSB Comps Recent Market Net Total Net EBITDA EV/EBITDA Multiples EPS P/E Ratio Ticker Price Target Upside Cap Debt EV Debt 2012A 2013E 2014E Annual 2013E 2014E 2013E 2014E Company Symbol Rating May Price 4 (%) ($ mlns) (%) $ mlns 2012A 2013E 2014E BUILDING MATERIALS Lumber Canfor 1 TSX:CFP OP2 $ $ % 2, ,779 10% x 5.4x 4.1x x 6.9x Interfor TSX:IFP.A OP2 $ 9.47 $ % % x 5.1x 4.1x x 6.2x West Fraser Timber TSX:WFT OP2 $ $ % 3, ,728 12% x 5.4x 4.3x x 6.8x Conifex 2 TSXV:CFF SB1 $ 7.62 $ % % (3) n.m. 7.0x 3.5x x 3.5x Western Forest Prod. 2 TSX:WEF MP3 $ 1.30 $ % 616 (100) % n.m. 4.9x 4.1x x 6.9x OSB Ainsworth TSX:ANS SB1 $ 3.63 $ % ,109 20% x 4.7x 4.1x x 5.6x Norbord 4 TSX:NBD MP3 $ $ % 1, ,110 37% x 5.8x 6.1x x 9.3x Louisiana Pacific 3 NYSE:LPX n.m. $ $ % 2, ,874 11% x 6.7x 6.4x x 11.6x Notes: 1 Canfor EBITDA estimates and net debt exlcude 50% of Canfor Pulp's EBITDA and net debt for comparability purposes reflecting the company's ownership stake 2 Net debt for Conifex is pro-forma for bio-energy project financing, Western Forest Products' net debt is pro-forma for non-core asset sales 3 Louisiana Pacific is not covered by Raymond James Ltd., price target and estimates are consensus figures 4 Norbord financial estimates and net debt are reported in USD, share price shown in CAD Source: Raymond James Ltd., Capital IQ, Company Reports

20 Canada Research Page 20 of 47 Appendix I: Management & Board of Directors Jim Lake, CEO: After joining Ainsworth as VP of Operations in June 2010, Jim Lake was promoted to President and COO in September 2011 before being appointed President and CEO and joining the Board of Directors in March Prior to joining Ainsworth, Mr. Lake spent time at Grant Forest Products as VP of Operations for three years, and prior to that held the position of VP of Manufacturing at Louisiana Pacific Corp. where he worked for 23 years. Mr. Lake holds a Bachelor of Science in Management and Leadership from Kennedy Western University and served as a non-commissioned officer (NCO) in the United States Marine Corps. Rick Eng, CFO: Rick Eng has held the position of VP, Finance and CFO since September Prior to this, Mr. Eng was a SVP at Brookfield Asset Management where he spent six years focusing on private equity investing and capital markets activities in western Canada. Before Brookfield, Mr. Eng was a VP in investment banking at National Bank Financial and an Associate in private equity at TD Capital. Mr. Eng earned his CA designation at KPMG after obtaining a B.A. (Economics) from Queen s University. Barton Bender, VP Sales and Marketing: Mr. Bender has been the VP, Sales and Marketing of Ainsworth since March 2012 and was previously General Manager, Sales and Logistics of the company. Chad Eisner, General Manager, Operations: Mr. Eisner has been the General Manager, Operations of Ainsworth since November Previously, he was the site manager at the company s Barwick mill and prior to that, site manager at Grant Forest Products. Robert Fouquet, VP Business Development: Mr. Fouquet has been the VP, Business Development of Ainsworth since March 2012; previously, he was VP, Sales and Marketing of the company.

21 Canada Research Page 21 of 47 Exhibit 18: Ainsworth Board of Directors Name Role/Principal Occupation(s) Peter Gordon; Chairman; Director since May Mr. Gordon is a Managing Partner at Brookfield Asset Management Inc., where he is a senior manager in Corporate Governance Brookfield Capital Partners Ltd. He has over 25 years of industrial experience, principally in the mining and forest products industries, Committee having held a number of senior management positions including President and CEO of Fraser Papers Inc. from 2007 to He also currently serves as a Director of Western Forest Products Inc. and of MAAX Bath Inc. Directors Paul Houston; Lead Independent Director, Audit Committee Director since July A retired executive, Mr. Houston was President and CEO of The Alderwoods Group Inc., a provider of funeral and cemetery services, from 2001 to He also served as Director of Vicwest Income Fund, a steel fabricator, in 2006 and of CFM Corporation, a home products company, in 2004 and Robert Chadwick; Compensation Committee Paul Gagné; Audit Committee Director since July Mr. Chadwick is a partner and a member of the Executive Committee at Goodmans LLP. He practices corporate and commercial law. Director since May Mr. Gagné, a retired executive, has extensive experience in the natural resource sector and is a Chartered Accountant. He currently serves as Chairman of the Board of Wajax Corporation, and is a Director of CAE Inc. and Textron Inc. He was formerly a Director of Inmet Mining and also served as a Director of Fraser Papers Inc. from 2004 to February John Lacey; Corporate Governance Committee Gordon Lancaster; Audit Committee Pierre McNeil; Compensation Committee Jim Lake; CEO Director since July Mr. Lacey, a retired executive, currently serves as the Chairman of the Advisory Board for Brookfield Capital Partners Ltd. He also currently serves as a Director of Telus Corporation and of Loblaw Companies Limited. In the previous five years, Mr. Lacey has also served as Director of CIBC and Stelco Inc. Director since May Mr. Lancaster, a Chartered Accountant, retired from the position of Chief Financial Officer of Ivanhoe Energy Inc. in He also currently serves as a Director of SouthGobi Resources Limited and of Sonde Resources Corp, an oil and gas exploration company. Director since July Since 2006, Mr. McNeil has been Senior Vice President of Brookfield Asset Management Inc., with responsibilities in Brookfield Capital Partners Ltd. He has a diverse operational and human resources management background in the forest products and manufacturing industries. Mr. McNeil was formerly the CEO of Concert Industries, Inc. and currently serves as a Director of Western Forest Products Inc. and MAAX Bath Inc. Director since March After joining Ainsworth as VP of Operations in June 2010, Jim Lake was promoted to President & COO in September 2011 before being appointed President and CEO and joining the Board of Directors in March Prior to joining Ainsworth, Mr. Lake spent time at Grant Forest Products as VP of Operations for three years, and prior to that held the position of VP of Manufacturing at Louisiana Pacific Corp. where he worked for 23 years. Source:, Raymond James Ltd.

22 Canada Research Page 22 of 47 Appendix II: Risks Currency Risk As OSB prices are denominated in US dollars whereas Ainsworth s costs are primarily incurred in Canadian dollars, the company is exposed to the risk of the C$ appreciating relative to the US$, resulting in reduced margins in Canadian dollar terms (Ainsworth s reporting currency). Commodity Price Risk The global forest products industry is highly cyclical and prices for Ainsworth s key product, OSB panels, may vary materially from our estimates and negatively impact the company s results. Environmental Issues/Government Regulation Ainsworth is subject to regulation in terms of both government regulations relating to forest management practices, as well as health and safety requirements. Should any of these regulations change it could result in increased costs to Ainsworth to maintain compliance or restrict access to wood fibre. In addition, the company is also subject to general and industry specific environmental laws which could adversely affect the business. Fibre Costs Availability and Other Input Costs Wood fibre is one of Ainsworth s key inputs and the cost of it is materially impacted by costs including logging/hauling, stumpage rates, fuel, road building, and reforestation obligations. Each of these costs could vary materially from our estimates and negatively impact Ainsworth s results. In Canada, wood fibre is sourced primarily by agreements with provincial governments which are granted for various terms from five to twenty-five years and are generally subject to regular renewals every five years. Difficulties renewing these agreements could negatively impact the company s business. Another key input in OSB is resin, which can also fluctuate materially and could also negatively impact Ainsworth s results. Resin costs are influenced by changes in the prices of petroleum products, as well as demand for and availability of resin products. Rising petroleum prices could also reduce the company s profitability. Maintenance Costs/Facility Disruptions From time to time Ainsworth must carry out maintenance at its facilities which could potentially last longer or cost more than we currently estimate. In addition, the company s equipment could malfunction and/or require unexpected repairs which could negatively impact the company s operations and result in higher than expected maintenance costs. Inclement Weather/Forest Fires There exists the potential for inclement weather in the areas where Ainsworth operates to hinder the company s ability to harvest and/or transport logs during key harvesting seasons, potentially resulting in reduced operating rates. In addition, forest fires are common during the summer in certain areas of Canada and could impact the company s timber assets and/or logging operations. High Level Mill and other Expansion Initiatives Implementation Risk As Ainsworth proceeds with the ramp up of the High Level mill there are issues such as cost overruns, delays, and other unexpected implementation issues which could negatively impact the project s expected returns. The company will face similar risks when and if the second line Grande Prairie is completed and restarted. Labour Agreements Ainsworth s Barwick and 100 Mile House mills are unionized. During 2010, new union contracts were negotiated for 100 Mile House, due to expire on June 30, 2013, and Barwick, due to expire on July 31, The company could experience strikes or work interruptions if it is unable to negotiate acceptable contracts with its various trade unions upon expiry.

23 Canada Research Page 23 of 47 Appendix III: OSB Industry Background What is OSB? OSB is a wood-based panel manufactured from waterproof heat-cured adhesives and rectangular-shaped wood strands that are arranged in cross-oriented layers forming wide mats that are placed in a thermal press and eventually cut into individual panels. The resulting product is a structurally engineered wood panel with strength and performance characteristics similar to plywood but produced at a lower cost. OSB is used primarily in new home construction, repair/remodeling, furniture production and industrial/light commercial applications. Specific uses for OSB panels within a wood frame home include wall sheathing, roofing, flooring, and door and window headers, among others (see Exhibit 19). By end market, new home construction, which includes single family, multi-family and mobile homes, represents ~46% of total OSB demand, followed by repair and remodeling at 25%, industrial uses at 16%, and other nonresidential construction applications at 13% (see Exhibit 20, left side). North American produced OSB is primarily consumed in the US and Canadian residential construction markets with a relatively small proportion (~4%) being shipped overseas. The bulk of exported OSB is sent to Japan and Korea. Historically, industry-wide oversupply has been an issue for the industry, resulting in significant commodity price volatility and periods where producers have incurred substantial losses. On the positive side, as OSB is a lower cost product than plywood it has taken market share from plywood over time and continues to do so (details follow). In addition, the industry is relatively consolidated with the top 5 producers controlling 77% of North American capacity (see Exhibit 20, right side); however, unfortunately this has not traditionally resulted in rational production decisions. As it currently stands, the OSB industry is fresh off an extremely painful five year downturn where large amounts of capacity were idled or dismantled. Thus, as the US housing market recovery gains momentum and as OSB prices (already up 92% YTD vs as of May 24) remain strong we now believe the key question is to what extent will idled capacity be restarted and whether or not producers take this opportunity to exercise production discipline. We note that mill restarts totaling ~20% of total capacity have already been announced. While we expect this will serve to cause moderation in panel prices over our forecast horizon, there is some uncertainty, in our view, as to when this capacity will eventually come online. Exhibit 19: OSB Residential Construction End Uses Source: