Pulp & Paper. Initiating on SUZB5 and FIBR3 Deleverage: nothing else matters. Research BRAZIL PULP & PAPER

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1 BRAZIL PULP & PAPER Initiation of Coverage Pulp & Paper Initiating on SUZB5 and FIBR3 Deleverage: nothing else matters We initiate coverage on two Brazilian pulp and paper companies: Suzano Papel e Celulose (NEUTRAL, FV R$9.5) and Fibria (SELL, FV R$13.9). We expect a continued recovery in the eucalyptus pulp price in 2012 after it bottomed at US$649/ton (BHKP Europe CIF) in Dec/11 its lowest level since October The BHKP price has increased rapidly to US$746/ton (+15% from 20/Dec/11 to 20/Mar/12), and global pulp producers stockpiles improved to 34 days in Jan/12 (from the 2011 high of 41 days in Aug), signaling that buoyant demand from China may partially compensate for likely lackluster sales to Europe in We forecast BHKP prices to average US$759/ton in 2012E (-6.3% YoY), US$760/ton in 2013E (+0.1% YoY) and US$725/ton in 2014E (- 4.6% YoY), when 4.3mt of new pulp capacity is due to come online, potentially driving down prices. Our estimated long-term price for BHKP is US$740/ton. However, for now, we expect deleveraging, cash cost reduction and organic growth to be the key catalysts for Fibria s and Suzano s stock performance in 2012, rather than leading pulp indicators (eg. price, demand and inventories). We have just initiated on Klabin (BUY, FV R$10.8/sh), and make it our top pick in the Pulp & Paper sector (see Initiating on KLBN4 with a BUY More to come on restructuring process, dated March 19 th 2012). Suzano Papel e Celulose (SUZB5, NEUTRAL, FV R$9.5/sh): Challenging times to continue We think Suzano faces a serious dilemma as it attempts to reduce leverage while funding large capacity expansion. Suzano launched an aggressive pulp organic expansion plan in 2008 and, as a consequence, has a massive 2012 CAPEX budget (est. R$3.1bn). At the same time, Suzano must reduce its leverage as soon and by as much as possible in order to comply with its debt covenants and bring its debt to a manageable level. We think Suzano could kill two birds with one stone by selling noncore assets but we also see a risk that Suzano could raise funds by issuing shares, which would likely cause an overhang in its stock price. We highlight Suzano s higher flexibility in raising funds through non-core assets sales in comparison to Fibria, given the latter does not have many options to divest without trimming its Ebitda. SUZB5 trades at 10.2x EV/Ebitda12E. Fibria (FIBR3, SELL, FV R$13.9/sh US$7.6/ADR): Shares issue will reduce leverage, but not enough FIBR3 is our least preferred stock in our P&P coverage universe, mainly owing to: (i) its unattractive valuation; (ii) high leverage and few non-core assets to sell; (iii) the higher exposure to pulp prices and f/x rate vs. Suzano and Klabin; and (iv) the potential overhang in the stocks to be caused by the equity issuance announced on March, 7 th We note, however, that Fibria has been managing to reduce CAPEX and we expect it to delay the development of its Três Lagoas II unit, which would bring some relief to its cash flow in Management s decision on the project should be made in 2H12, according to Fibria. FIBR3 trades at 8.1x EV/Ebitda12E, at a discount of 22% to its Latin American peers (Bloomberg consensus). NEUTRAL - SUZB5 16% upside Fair Value R$ 9.5 Bovespa, Bloomberg Code SUZB5, SUZB5 BZ Share Price (19/Mar/12) R$ 8.2 Market Capitalisation (m) R$ 3,820 Free Float 53% Source: Reuters, Bloomberg, Espírito Santo Investment Bank for estimates. SELL - FIBR3 SELL - FBR -8% downside -11% downside Fair Value - FIBR3 R$ 13.9 Fair Value - FBR $7.6 Bovespa, Bloomberg Code FIBR3, FIBR3 BZ Share Price (19/Mar/12) - FIBR3 R$ 15.1 Share Price (19/Mar/12) FBR (ADR) $8.5 Market Capitalisation (m) R$ 7,047 Free Float 40% Source: Reuters, Bloomberg, Espírito Santo Investment Bank for estimates. Analysts Juliano Navarro jnavarro@bessecurities.com.br [BES Securities do Brasil, S.A CCVM] Felipe Machado fmachado@bessecurities.com.br [BES Securities do Brasil, S.A CCVM] FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT. Please refer to page 90 of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/ qualified as research analysts with FINRA. EXHIBIT 1: RECOMMENDATIONS SUMMARY AND 2012E MULTIPLES Ticker Rating FV EV/Ebitda (x) P/E (x) P/BV (x) ND/Ebitda (x) EPS (R$) KLBN4 BUY R$ SUZB5 NEUTRAL R$ FIBR3 SELL R$ FBR SELL US$ Source: Espirito Santo Investment Bank for estimates.(priced as at 19/03/2012). 1

2 Pulp & Paper Table of contents INVESTMENT SUMMARY.... COMPANIES COMPARISON... SECTOR OVERVIEW... SUZANO PAPEL E CELULOSE... SWOT ANALYSIS.. VALUATION... SENSITIVITY ANALYSIS. ASSUMPTIONS.. INDEBTEDNESS. RISK FACTORS.. REPLACEMENT VALUE.. MARANHÃO PROJECT.. PIAUÍ PROJECT..... SUZANO ENERGIA RENOVÁVEL.. COMPANY OVERVIEW... FIBRIA... SWOT ANALYSIS. VALUATION... SENSITIVITY ANALYSIS.... ASSUMPTIONS.. INDEBTEDNESS. RISK FACTORS.. REPLACEMENT VALUE.. TRÊS LAGOAS II PROJECT... VERACEL II PROJECT... COMPANY OVERVIEW... APPENDIX Unless otherwise stated, the pricing date in this report is 19/03/2012 MACRO ASSUMPTIONS e 2013e 2014e 2015e 2016e GDP (real grow th) -0.3% 7.5% 2.7% 3.5% 4.0% 4.0% 4.0% 4.0% Inflation - IPCA 4.3% 5.9% 6.5% 5.3% 5.8% 5.2% 5.0% 5.0% Inflation - IGPM -1.4% 11.3% 5.0% 4.5% 5.1% 4.8% 4.5% 4.5% Interest rate - Selic 9.9% 9.8% 11.6% 9.0% 9.8% 8.7% 8.5% 8.5% F/X (final) - US$/R$ F/X (average) - US$/R$ Source: Central Bank, IBGE and BESI Brazil Macroeconomic department estimates. 2

3 Pulp & Paper INVESTMENT SUMMARY Uncertain scenario for pulp demand + increasing global supply Based on a top-down analytical approach, we do not think that the coming years should be bright for pulp and paper producers, taking into account market consensus expectations for continuing low growth rates in the global economy especially in Europe coupled with the pulp expansion projects expected to come online from 2013 onwards. At first glance, the dynamics in the sector appear counterintuitive, with pulp producers planning to increase capacity at a time when demand growth is more uncertain than ever. Nevertheless, a search for more scale in production has been driving many players to transform their operations into pulp giants. We think some projects may be postponed, but three of them (Eldorado J&F, Maranhão Suzano and Montes del Plata Arauco+Stora Enso) are already at advanced stages and unlikely be canceled or even delayed, in our view, as their required rate of return could be seriously affected. We estimate hardwood pulp prices (BHKP CIF Europe) to peak in 2H12/1H13 at US$790/ton. There are no significant capacity additions in the market scheduled for 2012E, but inflation costs coupled with a poorer sales mix given the redirection of pulp sales to China from Europe mean we are concerned about the Brazilian pulp producers ability to recover operating margins and to reduce their leverage this year. NEUTRAL on Suzano and SELL on Fibria. Lack of momentum for both Besides our cautious view on the sector in the medium term, Suzano s stock presents a high risk/reward profile, in our view, and Fibria s stocks present downside potential based on our valuation. We value Suzano and Fibria via a blend of 50% EV/EBITDA methodology and 50% DCF, which we think best captures the companies operating dynamics and short-term capital structures. Suzano currently trades at 10.2x EV/Ebitda12E and Fibria at 8.1x. We forecast an Ebitda CAGR 2012E-2015E of 18% for Suzano (influenced by the Maranhão unit) and -1% for Fibria. The companies substantially high net debts are another point of concern that leads us to conclude that a bright scenario for the pulp and paper markets in 2012 would unlikely be enough to turn the companies around (i.e., we see it as nothing more than a pre-condition for a successful deleveraging process, which depends on other measures). Hence, Suzano and Fibria have said that they plan to take further action to reduce their leverage, including possible sales of non-core assets and/or stakes in projects during 1H12. Fibria has already announced an equity issuance (R$1.25bn) and Suzano said this would be its last option, although we think there is an increasing risk that it could be unavoidable. Meanwhile, Fibria s and Suzano s ability to manage debt levels amidst an uncertain credit market and given the high volatility in the f/x rate is also a risk factor in light of the companies (recently renegotiated) covenants. Deleveraging process ongoing: Healthy balance sheets are the numberone priority for Suzano and Fibria, with organic expansion as a distant second Suzano and Fibria are focusing on debt reduction, a condition for the companies to continue their pulp expansion projects. In addition to their strong cash generation, both companies have raised funds by divesting non-core businesses, selling forestry assets and pulp projects and issuing bonds. We think the strategy for both companies is to keep selling non-core assets. Suzano s Net debt/ebitda ratio of 4.2x (3Q11) is still far from its target level of 3.5x during the expansion cycle and Fibria s leverage, at 4.8x (4Q11), is also above its x target. However, to achieve lower indebtedness levels, we think Suzano may have to issue new shares and Fibria may have to sell non-core assets. They will need a blue-sky scenario for pulp prices and demand and (equally important) a controlled f/x rate given the high exposure of both companies debt to foreign currencies just in order to deleverage. In light of these concerns, we expect Fibria to announce the delay of its main pulp expansion project (Três Lagoas II) in 2H12 unless the company succeeds in selling Losango, land/forestry assets or even core assets in 1H12, given we calculate the proceeds from the equity issuance will not be enough to reduce leverage to the targeted level ( x net debt/ebitda). We think Suzano, however, is unlikely to suspend the construction of its Maranhão unit since the civil 3

4 Pulp & Paper construction works are underway and 70% of the equipment/machines for the industrial plant have already been ordered. In other words, Maranhão is already at such an advanced stage that shutting it down would likely be more expensive than continuing. We would expect Suzano s Piaui project (not yet approved by the Board) to be delayed until Aside from their debt leverage levels, we think the large amount of new pulp capacities scheduled to come online in the next three years and the current global economic scenario are the most important variables to monitor before the companies reaccelerate capital expenditures in pulp expansion. Scale is a key element, but discipline is crucial in the current environment We have seen a rush in the sector to increase global pulp supply, with most projects concentrated in Latin America, although we think players may be making plans to increase production capacity without considering the future aggregate supply vis-à-vis demand. The main problem is that the new capacities are scheduled to come online practically at the same time ( ). In other words, we see a lack of discipline in the sector, primarily caused by the large number of players. In addition to the permanent shutdowns of inefficient pulp plants around the world, we would like to see a deep consolidation process in the industry led by those players that are currently increasing capacity through greenfield expansion projects rather than further increases in existing capacity. Fibria s overstretched balance sheet has, at least to some extent, kept it from participating in this quest for scale. We think this may ultimately be positive for the company given the negative global macroeconomic scenario and concerns over its indebtedness. Consolidation in Latam could be a fast way to gain scale, but unlikely Given that the quest for more scale in the pulp sector appears to be far from at an end, we think the best move for Latin American pulp players would be to shift their strategy to invest in new pulp lines, starting a consolidation process through M&A activity. However, we see this as unlikely, at least in the short term. The Brazilian players are on the one hand currently highly leveraged, but on the other hand are unlikely to give up their expansion strategy pipeline, and therefore should resume expansion projects after reducing leverage. Moreover, the pulp companies family controllers have been focused on the paper and pulp business for years and would likely be potential consolidators rather than pulp assets sellers in a consolidation process, from our standpoint. Therefore, we see consolidation and a decrease in the number of players as unlikely to occur in Latin America in the coming years. Thus, we remain cautious on the increasing supply and believe that an (unlikely) consolidation process in the sector would be strategically better for the pulp leaders to increase capacity rather than everyone expanding organically, which is a clear lack of supply discipline. Paper: Defensive but in decline China has historically been a net importer of paper and board products, but Chinese paper production is quickly catching up with consumption. In 2000, the domestic deficit of paper products was 6.1mt, while this deficit decreased to only 0.1mt in Considering the significant new paper capacities widely estimated to come on line in China over the coming years, the key question is whether China s domestic demand will grow enough to absorb the new supply. We see the risk of oversupply of paper products in China, which could flood other markets and put pressure on paper prices globally particularly in printing & writing (P&W) and tissues (H&S). These dynamics will likely be more intense in the first years after the start up of these paper machines, as the supply increases more quickly when new capacities come on line, on a discrete basis, and demand grows gradually yet constantly. Although paper is primarily a local market, we have been witnessing an increase in imported P&W paper in Brazil in recent years, whose apparent consumption in Brazil has risen from 10% in 2002 to 30% in Chinese paper consumption is highly concentrated in packaging paper products, although the new capacities scheduled to come online in the next few years primarily target the P&W and H&S segments. Between 2011 and 2013, more than 5mt of P&W paper capacity is estimated to start up in China alone, according to Hawkins Wright and RISI. Suzano is Brazil s largest paper producer (first in coated paper and second in cardboard and non-coated paper), having sold 1.15m tons of paper in 2010 (1.27m tons in 2011E), which accounted for 55% of 4

5 Pulp & Paper its total net revenues (58% in 2011E). Suzano has confirmed it is considering selling some of its paper assets and, in our view, it could become a pure pulp producer soon (like its closest competitor, Fibria). This likely shift in Suzano s strategy is driven by its need to reduce debt through asset sales. Regardless of this fact and Suzano s competitive advantages in the paper local market, we also have a positive view on Suzano s possible strict focus on pulp in the (near) future. This is also based on the fact that we see risks related to potential increasing paper imports going forward, especially when Chinese paper machines start coming onto the market. At the end of the day, paper prices may suffer a deep correction and Suzano s paper margins could be severely affected. Forestry is a wildcard in a game full of uncertainties Land and forest assets do not devalue. On the one hand, controlling CAPEX in pulp capacity expansion may be a smart decision considering the expectations of tough times ahead for pulp producers. On the other hand, increasing the forestry base could give Fibria and Suzano the option of expanding their pulp capacity in the future while investing in a strategic asset with significant flexibility in terms of use and liquidity. We also note the possibility of a potential wood shortage if more pulp line expansions are announced for the next 2-3 years. Although Fibria has said publicly that it may delay its 1.5mt expansion project (Três Lagoas II), investments in forestry will likely continue, although at a slower pace, adding more eucalyptus trees to the surplus of 30,000 ha the company already holds in its forestry base. This gives Fibria a key competitive advantage as the company can use the wood surplus to reduce the consumption of third-party wood (among other alternatives, including the sale of the wood). Suzano can benefit for the same reasons. However, Suzano holds a biomass project (Suzano Energia Renovável SER), planned to produce up to 5.0mtpa of wood pellets, that should broaden the range of uses for the company s forestry. We value SER at R$709m (R$1.5/share), although we do not include this in our base case valuation as the continuation of the project depends on a investor/partner joining Suzano, which has not been announced as yet. Klabin is our top pick in the sector (see Initiating on KLBN4 with a BUY More to come on restructuring process, dated 19/Mar/12) Klabin is Brazil s leading packaging paper producer and its performance is closely correlated to conditions in the domestic market. In our view, Klabin stands to benefit the most from Brazil s buoyant economy, which should continue to decouple from developed economies over the coming years. We rate Klabin a BUY despite the outperformance of its shares in 2011 (+87%, +94% and +59% versus Fibria, Suzano and the Bovespa Index, respectively), and we think Klabin is still a compelling name mainly in terms of its management and its exposure to the Brazilian packaging sector. We note the ongoing deep turnaround process in the company s strategy/management/operations, where we expect additional improvements in 2012 to further enhance the company s operating performance. On the latest reported figures, Klabin also benefits from a more comfortable debt situation than Fibria or Suzano. Finally, the packaging paper market s fundamentals currently look more solid than the pulp and paper market. Moreover, Klabin s sales are mostly concentrated in the domestic market (78% of net revenues in 2011), where increasing income coupled with a strong credit market should drive durable and non-durable goods consumption (both heavy users of Klabin s packaging products) in 2012, where we expect consistent price increases and the expansion of the company s operating margins. Klabin is currently trading at 6.8x EV/Ebitda12E and 10.6x P/E12E. 5

6 Pulp & Paper Companies comparison EXHIBIT 2: COMPARATIVE ANALYSIS Operational Segment Pulp Capacity Paper Capacity OPERATING e 2013e e 2012e 2013e e 2013e mtpy 1.9mtpy Net Revenue - Domestic Market (%) 9% 10% 10% 10% 42% 47% 47% 48% 78% 78% 81% 81% FINANCIAL e 2013e e 2012e 2013e e 2013e Net Revenue - R$ m 7,050 5,854 5,748 5,703 4,514 4,684 4,869 5,009 3,663 3,889 4,224 4,538 EBITDA - R$ m 2,634 1,980 1,995 1,937 1,677 1,180 1,152 1, ,077 1,487 1,631 EBITDA Margin (%) 37% 34% 35% 34% 37% 25% 24% 24% 26% 28% 35% 36% Net Income - R$ m 598 (1,023) 394 (411) 769 (214) 202 (318) Net Debt - R$ m 9,817 9,478 9,146 9,766 3,421 5,230 7,885 9,362 2,128 2,735 2,367 2,080 Net Debt/EBITDA (x) CAPEX - R$ m 1,030 1,242 1,021 1,021 1,009 3,280 3,172 1, DPS - R$ Dividend Yield % 0% 0% 0% 0% 32% 0% 25% 0% 30% 44% 25% 25% ROE % 4% -7% 3% -3% 9% -2% 2% -3% 11% 4% 14% 11% STOCK INDICATORS e 2013e e 2012e 2013e e 2013e Ticker Corporate Governance Tag Along Level of Corp. Governance Traded Volume - 21d average Bovespa R$ '000 ADR US$ '000 Share of IBOV % Current Share Price - R$ Market Cap. - R$ m EV - R$ m Pulp 5.25mtpy FIBR3 100% 'Novo Mercado' ,047 Pulp and Paper 1.92mtpy Packaging Paper and Wood - 16,539 9,111 10,890 EV/EBITDA (x) P/E (x) EPS - R$ SUZB5 - Level ,820 KLBN4 70% Level ,820 Source: Company data, Bloomberg and Espírito Santo Investment Bank for estimates. Priced as at 19/03/2012. EXHIBIT 3: SHARE PRICE PERFORMANCE Company Fibria ON FIBR3 R$ % -9% -10% -42% -61% Fibria ON ADR FBR US$ 8.5-9% -13% -4% -46% -61% Suzano PNA SUZB5 R$ 8.2-6% -4% -17% -46% -57% Klabin PN KLBN4 R$ 8.8-3% 2% 67% 38% 66% Ibovespa IBOV 67,730 0% 2% 21% 0% -3% Source: Bloomberg. Priced as at 19/03/2012. Ticker Current 15d 30d 180d 360d 720d EXHIBIT 4: MARKET RELATIVE PERFORMANCE Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 IBOV FIBR3 SUZB5 KLBN4 Source: Economatica. 6

7 Pulp & Paper EXHIBIT 5: INTERNATIONAL PEER COMPARISON (PRICED AS OF 19/03/2012) Company Curr Rating Price ESIBR FV Potential Return Market Cap (US$ mn) Source: Bloomberg consensus for not rated stocks and Espírito Santo Investment Bank estimates for covered stocks. EV / EBITDA PE FCF Yield 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E Latin America FIBRIA BRL SELL (8%) 3, x 8.1x 8.7x -6.9x 17.9x -17.1x 18.2% 14.6% 12.8% SUZANO BRL NEUTRAL % 2, x 10.2x 11.0x -17.9x 18.9x -12.0x (55.0%) (59.9%) (12.5%) KLABIN BRL BUY % 4, x 6.8x 6.1x 42.8x 10.6x 12.6x 1.6% 7.5% 11.6% CMPC CLP N.R. 2,078.7 N.R. N.R x 10.7x 9.8x 19.0x 19.0x 17.1x (0.0%) (0.0%) (0.0%) COPEC CLP N.R. 8,110.8 N.R. N.R. 2, x 13.5x 12.4x 22.2x 23.8x 22.9x (0.0%) 0.0% 0.0% North America IP USD N.R N.R. N.R. 15, x 5.7x 5.0x 11.5x 13.1x 10.0x 11.4% 7.6% 13.7% WEYERHAEUSER USD N.R N.R. N.R. 11, x 15.7x 12.5x 88.4x 56.4x 29.2x 2.7% 3.2% 5.2% ABITIBIBOWATER USD N.R N.R. N.R. 1, x 4.1x 3.0x 9.8x 12.8x 6.3x 7.1% 12.1% 20.8% BUCKEYE USD N.R N.R. N.R. 1, x 6.2x 5.8x 15.6x 12.3x 11.3x 8.3% 5.2% 5.7% MERCER USD N.R. 7.9 N.R. N.R x 6.4x 4.8x 6.1x 9.5x 4.9x n.a. 5.0% 9.7% Europe ENCE EUR BUY % x 5.1x 3.9x 12.4x 9.6x 7.4x 6.0% (1.5%) 14.8% PORTUCEL EUR BUY % 1, x 5,2x 4.8x 7,9x 8.7x 8.8x 14.9% 12.8% 14.2% ALTRI EUR NEUTRAL % x 7.8x 6.4x 10.1x 8.8x 6.3x 19.5% 11.5% 21.9% SEMAPA EUR BUY % x 4,9x 4,3x 5.1x 5.6x 5.2x 21.7% (49.7%) 30.6% STORA ENSO EUR N.R. 5.8 N.R. N.R. 6, x 6.7x 6.2x 8.9x 11.0x 9.7x 11.2% 5.9% 9.9% AHLSTROM EUR N.R N.R. N.R x 6.5x 5.9x 54.9x 28.7x 19.9x 0.2% 3.8% 5.2% UPM-KYMMENE EUR N.R N.R. N.R. 7, x 6.8x 6.1x 11.2x 14.0x 10.8x 15.7% 14.4% 15.1% M-REAL EUR N.R. 2.2 N.R. N.R x 7.8x 6.5x 0.0x 25.3x 11.2x (0.9%) 7.7% 11.7% Asia OJI JPY N.R N.R. N.R. 5, x 8.6x 7.8x 14.5x 15.0x 9.8x 6.4% 8.1% 8.2% CHENMING PAPERHKD N.R. 4.1 N.R. N.R. 1, x 7.2x 6.1x 6.4x 4.7x 4.9x n.a. n.a. n.a. NINE DRAGONS HKD N.R. 6.6 N.R. N.R. 3, x 11.2x 9.4x 11.3x 13.6x 10.5x (19.4%) (6.9%) 2.6% Africa SAPPI ZAr N.R. 2,712.0 N.R. N.R. 1, x 5.2x 4.7x 24.9x 11.4x 9.4x 1.1% 0.3% 1.4% MONDI ZAr N.R. 7,225.0 N.R. N.R. 4, x 5.5x 5.3x 10.6x 12.1x 11.2x 1.5% 1.1% 1.1% AVERAGE 8.2x 8.0x 7.2x 17.5x 17.4x 9.6x 3.4% 0.1% 9.3% EXHIBIT 6: 12M PERFORMANCE - LATIN AMERICAN COMPANIES EXHIBIT 7: YTD PERFORMANCE - LATIN AMERICAN COMPANIES (B) KLABIN (N) SUZANO (-) COPEC (-) COPEC (-) CMPC (B) KLABIN (S) FIBRIA (-) CMPC (N) SUZANO (S) FIBRIA -60% -40% -20% 0% 20% 40% 60% 0% 5% 10% 15% 20% 25% Source: Bloomberg and Espírito Santo Investment Bank. Source: Bloomberg and Espírito Santo Investment Bank. 7

8 Pulp & Paper EXHIBIT 8: KLBN4 EV/EBITDA 12-MONTH FORWARD 8 EXHIBIT 9: SUZB5 EV/EBITDA 12-MONTH FORWARD Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 5 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 12M Fwd EV/Ebitda Avg. + 1 Std. dev. Average Avg. - 1 Std. dev. 12M Fwd EV/Ebitda Avg. + 1 Std. dev. Average Avg. - 1 Std. dev. EXHIBIT 10: FIBR3 EV/EBITDA 12-MONTH FORWARD Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 12M Fwd EV/Ebitda Avg. + 1 Std. dev. Average Avg. - 1 Std. dev. Source: Economatica and Espírito Santo Investment Bank for estimates. 8

9 Pulp & Paper SECTOR OVERVIEW The pulp and paper industry is divided into four main segments: forestry, pulp production, papermaking and distribution. Many producers are integrated and operate in two, three or even all four stages, taking advantage of the cost reduction generated by this up/downstream integration. Pulp making is divided into two processes, mechanical and chemical (also known as kraft), with the latter the most common, representing 80% of global pulp consumption in About two thirds of the chemical pulp produced globally was destined for integrated paper mills in 2010, and the other third was sold as market pulp. However, in Brazil the new trend appears to be deverticalization since Fibria has already sold all of its paper operations and Suzano also seems to be focusing on pulp (the company recently confirmed that it is considering selling paper assets as an option to reduce its leverage). EXHIBIT 11: VALUE CHAIN IN THE PULP & PAPER INDUSTRY Source: Espírito Santo Investment Bank. Forestry: The key to profitability In order to generate high operating margins and profitability in the pulp and paper industry, one of the most important areas to monitor is forestry management. This is where Brazil has the greatest advantage among pulp producers, reaching the highest productivity yields in the world. Many different types of trees can be used to produce pulp. Each tree species has fibers of different lengths, resulting in different pulp, and consequently, paper properties with varying utilization. There are two types of pulpwood (timber grown for pulp production): hardwood and softwood. The former comes from non-coniferous species, mainly eucalyptus, and has short fibers ( mm), resulting in paper with higher softness and absorbency ideal for Printing & Writing and Tissue papers. Softwood is taken from coniferous species, mainly pine, which have long fibers ( mm), leading to more resistant paper, primarily used in the packaging industry. The most common trees used in pulp production worldwide are eucalyptus (hardwood) and pine (softwood). Eucalyptus trees are more suitable for geographies where temperatures are higher (eg. Brazil and Chile), while pine trees are able to withstand very low temperatures and shallow soils (which explains why softwood predominates in Russia, Sweden and Finland). Although these two types of trees are the most common in the pulp and paper sector, paper can also be produced from many other wood and non-wood plants as well, such as sugarcane, bamboo, straw, and others. Although papers made from non-wood currently represent a very small share of the market, we think they should be monitored closely, especially when pulp prices rise. 9

10 Pulp & Paper The pulpwood (wood for pulp production) market In 2010, the world s total pulpwood production amounted to 533million m³, according to the Food and Agriculture Organization of the United Nations (FAO) estimates, of which the US represented 26%, followed by Brazil (13%) and Russia (8%). However, US pulpwood production has been slowing in recent years, while Brazil and Chile have been reporting particularly high production growth. In , the US reported a pulpwood production CAGR of -1.9% while production in Brazil and Chile grew 6.1% and 5.1% pa, respectively, in the same period. EXHIBIT 12: PULPWOOD PRODUCTION: USA SLOWING DOWN; LATAM SPEEDING UP CAGR million m³ USA % Brazil % Russia % Sweden % Finland % Canada % Chile % World % Source: FAOSTAT. In non-coniferous (hardwood) production, Brazil holds the leadership position, with 23% of 2010 global production, followed by USA and Indonesia, with 22% and 9% shares, respectively. In coniferous (softwood), the US leads by far, with a 28% share of production, followed by Russia 10% and Sweden (10% each). EXHIBIT 13: PULPWOOD PRODUCTION: USA DOMINATES 140 EXHIBIT 14: PULPWOOD PRODUCTION: NON CONIFEROUS (HARDWOOD) MUCH MORE VOLATILE (2001=100) Nonconiferous(Hardwood) Coniferous (Softwood) 90 Coniferous - Softwood (mt) Non Coniferous - Hardwood (mt) Source: FAOSTAT and Espirito Santo Investment Bank. Source: FAOSTAT and Espirito Santo Investment Bank. On a global basis, over the last few years (particularly in 2008 and 2009) production of coniferous pulpwood for softwood pulp has decreased, while non coniferous, for hardwood pulp production, has been fairly stable. This is partially explained by the decrease in softwood demand from packaging paper producers and the increasing demand for hardwood pulp (demand of market hardwood pulp to supply China and substitution of fibers, due to the lower price of the latter). In the 2008 crisis, demand for goods slowed sharply, consequently decreasing demand for packaging. Furthermore, China has recently been investing heavily in non-integrated paper production mainly in printing and writing papers which are hardwood based. 10

11 Pulp & Paper Pulping process summary After harvesting, wood is transported to the mills (transporting the wood to the mill represents roughly a third of the wood costs and thus forestry should always be as close to the mills as possible) and debarked into chips (some of the wood may be debarked at the forestry base to reduce transporting costs). The wood chips then go through either mechanical or chemical processing, the latter being much more common. This process separates the cellulose fibers from lignin (also referred to as black liquor ), cooking the wood chips with chemicals in the socalled digester. The pulp then goes through several processes to remove the lignin and the water and may receive bleaching or not, depending on its final use. In integrated mills, the pulp goes directly to the paper machine. Otherwise it is dried, cut, baled and stored or sold as market pulp. Integrated mills gain a great cost advantage from eliminating the processes of pulp drying, cutting, baling, storage and transport. In 2010, 63% of the chemical pulp produced worldwide was used in integrated mills. EXHIBIT 15: GLOBAL FIBERS MARKET (2010) EXHIBIT 16: GLOBAL MARKET PULP CAPACITY RANKING 2010 Global fiber consumption 392mt Recycled 224mt Pulp 167mt Mechanical 33mt Chemical 134mt Integrated Pulp 85mt Softwood/Other 22mt Hardwood 25mt Acacia/Others 9mt BEKP 16mt Others 9mt Suzano 2mt Fibria 5mt Source: Companies data and Espirito Santo Investment Bank. Source: Company data and Espirito Santo Investment Bank. Of total global fiber consumption, 57% is recycled and 43% is virgin pulp. Chemical pulp fiber accounts for 80% of total virgin pulp production and is divided between market pulp and integrated pulp. Global demand for chemical market pulp in 2010 (excluding sulphite pulp) amounted to 47mt, of which 47% was softwood (BSKP) and 53% was hardwood (BHKP). Fibria is the leader in market pulp production, with an 11% global market share (22% in hardwood). Until 2005 (inclusive), softwood had higher demand than hardwood; however, the situation has changed in recent years. Over , demand for hardwood grew 4.0% per year in average, while the softwood demand CAGR was 0.9%. This is mostly a result of new paper machines starting up around the world, mainly in China, essentially using market hardwood pulp. Moreover, such new capacities have more advanced technologies capable of using different mixes of pulp and maintaining a similar quality. 11

12 Pulp & Paper EXHIBIT 17: MARKET PULP DEMAND (M TONS) - HARDWOOD DEMAND INCREASING MORE THAN SOFTWOOD CAGR = 3.2% E 2012E 2013E Hardwood Softwood Total Market Pulp ESIBRe Source: Company data and Espirito Santo Investment Bank for estimates. Emerging markets pulp demand looks poised to grow A key driver for the sector is that pulp and paper demand from emerging markets, specifically China, should start to grow faster than in developed countries given the ongoing urbanization process and the expected increase in the low consumption per capita. The paper and board consumption per capita in emerging countries is substantially below that seen in mature economies. While the largest economies have consumption of over 100kg per capita, in the BRICs the average is 42kg per capita. India is well below this average, with consumption per capita of only 7kg, on our estimates. EXHIBIT 18: ESTIMATED CONSUMPTION PER CAPITA (KG) AS OF 2010: EMERGING MARKETS ARE VERY FAR FROM DEVELOPED ECONOMIES P&B Cons/Capita World Average BRICs Average Source: FAOSTAT, IMF and Espirito Santo Investment Bank for estimates. The low consumption per capita in India, China and other Asian countries reflects the large percentage of the population still living in rural areas coupled with low income. Migrating from rural areas to urban areas in these economies has been taking much longer than in DMs and in some countries it has only just begun. If we consider the world ex-china and India (as their massive populations can distort the analysis), about 64% of the world s population was living in urban areas during the 1960 s, growing to c.70% currently with the potential to reach 78% by 2050, according to FAOSTAT s projections. In some emerging markets, the exodus to cities and urban areas is much more evident and recent. In China, 53% of the population is still living in rural areas, while in India this proportion reaches 70%. By 2050, this picture is likely to reverse, with China and India s rural populations falling to 27% and 46%, respectively, according to FAO estimates. 12

13 Pulp & Paper The urbanization process, mainly in China and India, coupled with the rising per capita incomes expected for those countries, are the main drivers for pulp demand growth. The global population is expected to grow 0.7% per year on average until 2050 according to FAOSTAT. Nevertheless, the urban population s CAGR estimate is 1.5% while the rural population should shrink 0.4% per year by The net impact of this scenario is an annual increase of 73m people living in urban areas. If we assume BRICs average paper consumption per capita is 42Kg per year, the urbanization process could potentially add 2.5m tons of pulp demand every year. EXHIBIT 19: CHINESE POPULATION - SHARP URBANIZATION SINCE THE 70 S EXHIBIT 20: INDIAN POPULATION - STILL MOSTLY RURAL 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Rural population (1000) Urban population (1000) Source: FAOSTAT and Espirito Santo Investment Bank. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Rural population (1000) Urban population (1000) Source: FAOSTAT and Espirito Santo Investment Bank. Pulp supply vs demand: Pressure on prices in 2013/2014 Pulp market fundamentals should remain solid going forward. The global market pulp demand growth will likely be supported by China. China represents nearly a quarter of global market pulp demand, importing nearly all of its demand. The Chinese economy (GDP) should continue growing at high rates (7.5% in 2012, according to the Chinese government s forecast), and we expect the Chinese population s paper consumption to increase along these lines, mainly due to higher income, and in tandem with the ongoing urbanization process in the country. In order to meet this demand, Chinese paper producers are investing in new capacities scheduled to start up in the coming years. Most of the new paper supply in China will not be pulp integrated so China will likely have to boost its market pulp imports in order to feed the new paper machines. For the new paper capacities to come online, hardwood should be the most used pulp fiber, and the Latin America pulp producers look the best positioned to meet this demand given their competitiveness (low cost production) and the planned new hardwood pulp lines to start up by 2014 (3 projects = 4.3m tons). China s mentioned large-scale investments have been in all paper grades capacity (China is the world s second-largest tissue producer and consumer). In 2012, we estimate China should add 2.5m tons of printing & writing paper (23.1mt produced in 2010) and 400,000 tons of tissue (6.4mt produced in 2010) to its current capacity, potentially leading to demand for 2.3m tons of market pulp (hardwood should be the most sought after). In the short term (2012), we have a slightly positive stance on the outlook for the pulp market, when the global supply and demand balance will likely remain somewhat tight and the normalization of pulp inventories should support the pulp price until the end of the year. However, in the medium term (2013/14), our view on the sector is less positive. This is owing to the risk of pulp oversupply and consequently lower utilization rates and price corrections as pulp producers have been investing (announcing) in giant mills aimed at meeting the potential demand from China. 13

14 Pulp & Paper We expect the global pulp supply to increase considerably between late 2013 and 2014, when large BHKP pulp projects are set to start up in Latin America: Eldorado (J&F - 1.5mtpy), Montes del Plata (Arauco+Stora Enso - 1.3mtpy) and Maranhão (Suzano - 1.5mtpy). We estimate a market pulp supply 2012E-2016E CAGR of 3.2%. Regarding pulp demand, we forecast a recovery in the coming years, with a CAGR of 3.5% in 2012E-2016E. The growth in the pulp supply should push the utilization rate down, mainly in 2013E to 89.0%, from 91.6% in 2012E, bearing in mind Eldorado and Montes del Plata operations should be at full capacity in 2014 after ramping up during EXHIBIT 21: ESIBR PULP SUPPLY / DEMAND MODEL FORECAST Million tons E 2012E 2013E 2014E 2015E 2016E Market pulp demand % growth 4.2% 3.0% 3.3% 3.5% 3.6% 3.6% Market pulp supply % growth 4.6% 1.2% 6.4% 3.3% 2.3% 2.6% Oversupply - mt Utilization rate 90.3% 90.0% 91.6% 89.0% 89.1% 90.3% 91.2% Source: Company data, IMF and Espirito Santo Investment Bank for estimates. From 2014 on, market pulp demand can start offsetting the capacity increases planned to come online. The lower utilization rate we forecast for 2013E will likely put downwards pressure on international pulp prices in Nevertheless, we do not rule out delays in one or more of the planned pulp mills if market conditions worsen, as we expect pulp producers to become more disciplined in expanding supply than they have been in the past. EXHIBIT 22: SUPPLY VS DEMAND BALANCE EXPECTED % 90.3% 90.3% 91.2% 90.0% 89.1% 89.0% E 2012E 2013E 2014E 2015E 2016E Market pulp demand Oversupply - mt Utilization rate - RHS 100% 98% 96% 94% 92% 90% 88% 86% 84% 82% 80% Source: Company data and Espirito Santo Investment Bank for estimates. 14

15 Pulp & Paper Brazilian pulp sector: Preparing to meet China s needs Pulp production in Brazil has been growing far more rapidly than domestic consumption, based on the expectation for demand growth in China. In , the Brazilian pulp production CAGR was 6.5%, while domestic apparent consumption rose only 2.2% in the same period. With Brazil s cost advantage in pulp production, the main domestic participants in the pulp sector have been investing in pulp capacity. At least 1.5mt per year of pulp capacity is scheduled to come online in Brazil from 2012 to 2014, without any new relevant paper capacity planned for the period. We estimate that, in 2010, Brazil exported about 8mt of market pulp, 17% of the global demand. EXHIBIT 23: BRAZILIAN S PULP PRODUCTION AND CONSUMPTION Pulp Consumption (mt) Pulp Production (mt) Source: ABRAF and Espirito Santo Investment Bank. China accounted for 24% of Brazilian pulp exports (US$ FOB) in 2010, following a sharp increase over the preceding ten years. We also expect increases in global pulp demand in the coming years to come primarily from China (mainly in hardwood). Brazilian and LatAm pulp producers new capacities are likely to meet much of this demand given that no significant hardwood capacities are scheduled to start outside of LatAm. EXHIBIT 24: BRAZIL S PULP EXPORTS TO CHINA EXHIBIT 25: BRAZIL S PULP EXPORTS BREAKDOWN 2010 (US$) US$m FOB 1,400 1,200 1, CAGR = 35.4% 200% 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% -20% Japan South Korea 3% Others 4% 7% US 18% Germany/France/ Netherlands/Italy /Belgium/UK 44% Exports to China (US$m) % YoY China 24% Source: Bracelpa, SECEX and Espirito Santo Investment Bank. 15

16 Pulp & Paper Brazilian forestry: A natural advantage (enhanced with R&D) The Brazilian Association of Planted Forest Producers (ABRAF) estimated that there were 6.5m ha of round wood (Eucalyptus + Pine) plantations in the country as of 2010, of which approximately 37.5% (2.4mha of planted area) were for the production of pulp, the so-called, pulpwood. In 2010 total pulpwood production in the country amounted to 69.8 million m³, while pulp production reached 14.1mt. EXHIBIT 26: BRAZILIAN ROUND WOOD FORESTS (6.5MN HA): MAIN USES (AS AT 2010) Plywood; 3.5% Sawn wood; 15.8% Panels; 7.8% Pulp; 37.5% Logs, charcoal and others; 35.4% Source: ABRAF and Espirito Santo Investment Bank. Focusing only on pulpwood, Brazil produces both coniferous and non-coniferous wood. Of Brazil s total pulpwood production in 2010, 86% were non-coniferous, for hardwood. Coniferous production has also been growing in Brazil, although at a much slower pace than nonconiferous. This is explained by the competitive advantage Brazil has in the latter, coupled with the increasing demand for BHKP and the hardwood pulp projects scheduled to start up in the next few years. EXHIBIT 27: BRAZILIAN PULP WOOD PRODUCTION: NON-CONIFEROUS DOMINATES AND KEEP GROWING CAGR = 6.4% CAGR = 4.5% Coniferous Non-Coniferous Source: FAOSTAT and Espirito Santo Investment Bank. 16

17 Pulp & Paper Productivity = Lower cash cost = Higher profitability Brazilian forestry is the most competitive in the world, mainly in eucalyptus, which grows well in the country s soil and climate conditions. This permits eucalyptus to have a shorter harvesting cycle and higher productivity yield than any other major pulp producing country. EXHIBIT 28: BRAZILIAN PRODUCTIVITY - LOWER CYCLES AND HIGHER YIELD EXHIBIT 29: MAIN TREES USED FOR PULP PRODUCTION ,5 Brazil Indonesia South Africa , Chile Iberia North America 5 35 Finland / Sweden Country / Region Brazil Indonesia South Africa Chile Iberia North America Finland / Sweden Main tree used Eucalyptus Acacia Eucalyptus Eucalyptus Eucalyptus Aspen Betula Cycle (avg. years) - LHS Yield (m³/ha/year) - RHS Source: Company data and Espirito Santo Investment Bank. Source: Company data and Espirito Santo Investment Bank. Brazil appears to have a particular advantage in eucalyptus, with a harvest cycle of approximately 6 years and an average yield of 45m³/ha/year, currently (vs. 25m³/ha/year in Chile, 15m³ in Iberia, 8m³ in North America and 5m³ in Finland/Sweden). However, companies have been consistently working and investing in new technologies and clones from species crossing, aiming to further increase their productivity yields and protect against disease, thereby reducing cash costs. Through the 1970 s, the average yield in Brazil was 20m³/ha/year, and it has since increased to 45m³/ha/year, and companies estimate that in the next 10 years it could exceed 50m³/ha/year. Some regions in Brazil (such as São Paulo state) already have yields above 50m³/ha/year. We understand that this cash cost reduction is crucial for Brazilian pulp producers to at least partially offset the increasing freight cost to the Asian market, which we expect to account for most of the global demand growth over the next several years as well as the high energy and labor costs in Brazil. Productivity yield is also important to reduce the area needed for forestry, freeing up land to be sold or to increase production. We estimate that to produce 1,000tpy of pulp with the Brazilian average yield of 45m³/ha/year, 84ha are needed. An increase to 50m³/ha/year, for example, would reduce this need by about 8ha, which could be sold for R$84m, based on R$5,000/ha of land and another R$5,000/ha of forestry. Depending on the region, this amount could potentially be much higher. Cash cost: BZ pulp producers greatest advantage The aforementioned Brazilian forestry competitiveness is the main reason why local pulp producers have the lowest cash cost worldwide (US$310/ton). Moreover, local producers have more modern and efficient pulp mills than average and also make large investments in biotechnology to enhance their productivity yield further. Excluding Brazil, Chile has the most competitive cash cost (US$ 316/ton) followed by Indonesia (US$359/ton). Its benefits, besides its low production cost, are the low freight costs mainly to China and Europe. It is worth noting that in Asia a high level of native forests are still used to make pulp, which are one of the reasons for their low cash cost. However, some countries will not accept this pulp since it is not certified by the FSC (Forestry Stewardship Council). 17

18 Pulp & Paper EXHIBIT 30: CASH COSTS AROUND THE WORLD¹ - US$/TON Cash Cost (BHKP) average Source: Company data and Espirito Santo Investment Bank for estimates. * ESIBRe; (1) As of April/11 for the countries, 2011 average for Altri and Ence, 3Q11 for Suzano and 4Q11 for Fibria. Fibria s and Suzano s latest (ex. maintenance stoppages) pulp cash cost were US$246/t for Fibria (4Q11) and US$339/t for Suzano (3Q11), significantly lower (37%) than North Hemisphere players cash cost (including China). Both companies work with yields of around 44-45m³/ha/year and are BHKP-only (Bleached Hardwood Kraft Pulp) producers. European pulp producers cash costs are 80% higher than Brazilian players, on average, which consists an important 'hedge for the Brazilian pulp producers operating margins, given that a pulp price of US$ /ton can be considered a bottom before Northern producers start to post negative margins and inefficient pulp lines shutdowns take place. During the last two months of 2011, when pulp prices were below US$700/t, at least 5 important pulp players announced downtimes. Wood is the main raw material used in pulp production, representing roughly a third of the total cash cost for Brazilian producers. As a consequence, the companies results are very sensitive to any increase/decrease in the forest productivity yield. Working with high productivity forestry yields and low harvesting cycles can determine a large share of companies cash costs and, therefore, their profitability. On the other hand, wood market prices have a more limited impact on Brazilian pulp producers costs, as Brazilian players are almost fully self sufficient in wood. Therefore, most of the impact comes from inflation in labor, energy and chemicals costs. EXHIBIT 31: BRAZILIAN COMPANIES CASH COST BREAKDOWN (SUZANO = 3Q11; FIBRIA = 4Q11) 2% 3% 25% 25% 10% 14% 20% 20% 43% 38% Fibria Suzano Wood Chemicals Oil and Gas Fixed Cost Others Source: Company data and Espirito Santo Investment Bank. 18

19 Pulp & Paper Chemicals also represent a significant part of the companies cash costs (20-25%). Caustic soda accounts for the largest share of this cost, but many other chemicals are used in the production process e.g. chloride dioxide, sulfuric acid, hydrogen peroxide and oxygen. Chemicals are used to separate the lignin from the cellulose (ensuring a higher purity grade) and also play an important role in the bleaching process. Most chemicals used by Brazilian producers are imported and therefore linked to f/x rate fluctuations. Freight is another key element of the pulp industry s COGS. Given that the main pulp consuming markets globally are Asia, Europe and North America, proximity and scale can reduce freight costs and increase operating margins. According to Hawkins Wright, in July/11, the estimated freight cost to export BHKP from Brazil to Europe (CIF) was US$51/t. Moreover, as freight costs are dollar denominated, the f/x rate also affect the companies costs. EXHIBIT 32: BHKP EXPORTING FREIGHT (CIF EUROPE) AS OF JULY Source: Company data and Espirito Santo Investment Bank. We expect lower average pulp price in 2012; US$740/t in the LT Hardwood pulp prices started 2012 on an upward trend, likely to be maintained in the short term on the back of the demand recovery mostly seen in Europe and China. We expect the global pulp utilization rate to rise this year to 91.6% (vs. 90.0% in 2011E) given there are no material pulp capacities scheduled to come online and also based on the increasing pulp demand (we estimate a 3% increase YoY in the global market pulp demand). On top of this improvement in the pulp market scenario, we expect pulp prices to continue recovering in 1H12 after having bottomed at US$648 (BHKP - Europe CIF) at the end of December, 2011 (BHKP spot price is currently at US$746/ton). Besides the rebound in global pulp demand, world pulp inventories have been declining after peaking at 41 days in Aug/11, and stood at 34 days of shipments in Jan/12. In spite of increasing prices witnessed in the beginning of the year, we forecast the 2012E average pulp price to be 6.3% lower than the 2011 average, given the price in 1H11 of US$860/ton pulled up the year average, and will unlikely be hit this in 2012, in our view, unless the European pulp demand rises substantially. For 2013E, we forecast flat pulp price and for 2014E, when most of the new pulp supply reaches the full capacity, we forecast a correction in the pulp price (-4.6% YoY). On the one hand postponements may happen, andon the other hand new pulp projects may also start up by 2014 (like Klabin s hybrid pulp project and/or Fibria s Três Lagoas II), although none of these is part of our base case. In the long term, we forecast the pulp (BHKP Europe CIF) price at US$740/ton, c.15% higher than the last ten years average and c.us$100/ton above European pulp producers cash cost (with freight), a level we think is conservative. 19

20 Pulp & Paper EXHIBIT 33: ESIBR PULP PRICE FORECAST EXHIBIT 34: ESIBR PULP PRICE FORECAST US$/ton E 2013E 2014E 2015E LT Europe - BHKP (avg. CIF) % Chg -4.3% -6.3% 0.1% -4.6% 2.1% 0.0% China - BHKP (avg. CIF) % Chg -10.3% -8.1% -0.5% -5.5% 2.5% 0.0% US$/tom E 2013E 2014E 2015E LT Source: FOEX and Espirito Santo Investment Bank for estimates. Pulp inventories at normal levels support price increases in 2012 Global pulp stockpiles stood at 34 days of shipments in Jan/12, bringing some relief after have peaked at 41 days of sales as of Aug/11 (32 days is considered the normal level). The more buoyant demand since 3Q11 has been the main reason for the normalization of pulp inventories in number of shipment days, and this improvement has been reflected in the pulp price upwards trend year-to-date (+13%). Fibria and Suzano have announced a US$30/ton increase in the hardwood list price in Europe to US$760/ton for Mar/12 (vs. US$746/ton of the spot market FOEX), which we think is still being implemented to clients. EXHIBIT 35: PULP GLOBAL INVENTORIES VS. BHKP AND BSKP PRICES Source: FOEX and Espirito Santo Investment Bank for estimates. 1, Feb-02 Sep-02 Apr-03 Nov-03 Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Producer Inv. (days) - RHS BSKP CIF Europe (US$/t) -LHS BHKP CIF Europe (US$/t) - LHS Source: Bloomberg, FOEX and Espirito Santo Investment Bank. 20

21 Pulp & Paper Chinese paper production focus on P&W and Tissue = more hardwood demand In the medium term, the new paper capacities planned to start up, especially in China (almost 8.0mt of P&W/Tissue capacity, of which only about 1.0mt is integrated), are poised to be the main driver of global pulp demand. As a large part of the expected China s paper new capacities to come online in the coming years are focused on P&W and Tissue paper production, the paper machines will likely use a larger portion of hardwood market pulp than the old equipment, which should generate increasing marginal demand for eucalyptus pulp fiber. As previously stated, China accounts for a quarter of world s market pulp consumption. On top of the Chinese paper mill projects that will likely boost market pulp demand, major global pulp producers have been making large investments in new pulp mill lines, most of which are scheduled to come online from 2013 to 2016 as already mentioned. We are even seeing some new entrants, such as J&F (not listed), the holding that controls the beef producer JBS (JBSS3, not rated), which plans to start up a 1.5mt pulp mill in Nov/2012 in Brazil (the so-called Eldorado project ). EXHIBIT 36: HARDWOOD PULP CAPACITIES: 10.4MT MORE IN THE COMING YEARS, MAINLY TO SUPPLY CHINA Start Up Country Company Mill Capacity mtpy 4Q12 Brazil Eldorado (JBS) Três Lagoas 1.5 1Q13 Uruguay Montes del Plata Punta Pereira 1.3 1Q13 China Oji Paper Nantong 0.5 4Q13 Brazil Suzano Maranhão Brazil Fibria Três Lagoas II Australia Southern Star Bell Bay Brazil CMPC Guaiba II Brazil Suzano Piauí 1.5 Total 10.4 Source: Company data and Espirito Santo Investment Bank. 21

22 Pulp & Paper The papermaking process The papermaking process starts with the input of the raw material, which can be taken from different sources of pulp and recycled/waste paper or a mixture of them. In 2010, global fiber consumption for papermaking was approximately 57% from recovered/waste paper and 43% from pulp. Normally recovered paper results in lower-quality paper and, therefore, is mostly used for packaging and newsprint papers. When using pulp, it is first hydrated (if using market pulp) to form a slurry and then fed into paper machines, where it is strained onto a rolling screen, creating a sheet. The next stage of the process is drying, accomplished with the use of pressure, absorbent materials, heat and air. Next, the paper is reeled and cut to the desired size. Special treatments during the production process can give the paper specific characteristics. EXHIBIT 37: RAW MATERIAL FOR PAPER PRODUCTION Recovered/Waste paper; 57% Virgin fiber; 43% Source: Company data and Espirito Santo Investment Bank. Depending on the mixture of fibers used and the treatment given during the papermaking process, different types of paper are produced, with packaging representing more than half of total paper production on a global basis, according to FAO. EXHIBIT 38: MAIN TYPES OF PAPER Source: Company data and Espirito Santo Investment Bank. 22

23 Pulp & Paper China: Paper oversupply poses a risk to global prices China has been the principal growth driver for the pulp and paper sector over the past decade. Chinese paper and board production and apparent consumption jumped from 11% and 13% of the world s total in 2000, respectively, to about 24% and 25% in 2010, respectively. This indicates a P&B production CAGR of 10.8% in this period and a CAGR of 9.0% in consumption. Growth has been seen all across paper grades, including newsprint. EXHIBIT 39: P&B PRODUCTION AND CONSUMPTION SHARE (2010) Production mt % Consumption mt % China 96 24% China 97 25% USA 76 19% USA 74 19% Japan 24 6% Japan 25 7% Germany 22 6% Germany 18 5% Canada 13 3% Italy 11 3% Finland 12 3% UK 11 3% Korea 12 3% France 10 3% Indonesia 12 3% Korea 10 2% Sweden 11 3% Mexico 9 2% Brazil 10 2% Brazil 9 2% Total % Total % Source: FAOSTAT and Espirito Santo Investment Bank. EXHIBIT 40: CHINA S P&B CONSUMPTION SHARE 30% EXHIBIT 41: CHINA S P&B PRODUCTION SHARE 30% 25% 20% 15% 24% 25% 21% 20% 19% 18% 17% 16% 15% 13% 13% 25% 20% 15% 24% 24% 20% 21% 18% 17% 15% 14% 13% 11% 11% 10% % China's Consumption (% of World) China's Production (% of World) Source: FAOSTAT and Espirito Santo Investment Bank. Source: FAOSTAT and Espirito Santo Investment Bank. China has always been a net importer of paper and board products. However, currently its production is almost in line with its consumption. In 2000, the deficit of these products was about 6.1mt while in 2010 this deficit had decreased to only 0.1mt. Considering all the paper new capacities announced to come on line in the coming years in China, the key question is whether its domestic demand will increase enough to absorb all these new production capacities, at least in the beginning. Therefore, we see a risk of a paper oversupply in China until their demand meets this new supply. Therefore, even though paper is known for not being easily exported/imported, such oversupply coupled with the industry s need to operate at high utilization rates, make us believe that Chinese paper producers could flood the market, potentially with really low margins, and consequently put downward pressure on paper prices globally, mainly P&W and H&S papers. 23

24 Pulp & Paper EXHIBIT 42: P&B PRODUCTS: CHINA S PRODUCTION AND CONSUMPTION IN 2010 EXHIBIT 43: P&B PRODUCTS: CHINA S PRODUCTION AND CONSUMPTION AS A % OF THE WORLD S TOTAL % % % Newsprint Printing + Writing Packaging Household + Sanitary Other 14% 10% Production Consumption Consumption Production Source: FAOSTAT and Espirito Santo Investment Bank. Source: FAOSTAT and Espirito Santo Investment Bank. China s paper consumption is currently highly concentrated in packaging, although the new capacities scheduled for the coming years primarily target the P&W and H&S segments, as a reflection of the urbanization process. Between 2011 and 2013, more than 5mt of P&W paper capacity is estimated to start up in China alone, according to Hawkins Wright and RISI. EXHIBIT 44: CHINESE EXPORTS P&W = 54% IN 2010 EXHIBIT 45: CHINESE IMPORTS - PACKAGING = 56% IN 2010 Household + Sanitary 3% Other 1% Newsprint 4% Household + Sanitary 1% Newsprint 11% Other 3% Packaging 38% Printing + Writing 54% Packaging 56% Printing + Writing 29% Source: FAOSTAT and Espirito Santo Investment Bank. Source: FAOSTAT and Espirito Santo Investment Bank. EXHIBIT 46: CHINESE APPARENT CONSUMPTION PACKAGING = 64% IN 2010 Household + Sanitary 6% Other 2% Newsprint 5% Printing + Writing 23% Packaging 64% Source: FAOSTAT and Espirito Santo Investment Bank. 24

25 Pulp & Paper Paper: Defensive, but we prefer pulp going forward Looking forward, we see more opportunity for pulp players than paper producers in spite of the upside potential for paper demand with the urbanization process in China and the potential increase of paper consumption per capita in emerging countries as a whole. Our preference for the pulp business is mainly owing to: (i) the higher margins in comparison to paper; (ii) most of the paper capacity to come online in the coming years is not pulp integrated and should, therefore, boost market pulp consumption; and (iii) paper oversupply from China could hit prices globally in the coming years. However, it is important to highlight that market pulp is more exposed to global macroeconomic conditions and to the f/x rate than paper, which is primarily a domestic-market driven product. Therefore, pulp producers tend to see higher volatility in their cash flow. Total paper and board production in 2010 amounted to 394mt, while apparent consumption reached 388mt. In , demand for paper and board products has grown (+1.8% on average per year) in all of the paper types but newsprint. While total paper apparent consumption has been growing by 2.0% per year on average, newsprint paper demand has shrunk 2.0% per year since 2000, mainly driven by North American demand, which slowed to 9.6% per year in the past 10 years. The higher growth in the same period, on the other hand, came from household and sanitary papers, whose demand has shown a CAGR of 3.4%, where Asia represented the greatest growth (CAGR of 7.7%). However, tissues consumption in Asia, largely India and China, is still far from that seen in developed markets. According to Suzano, recent studies show that up to 400m people in China and 600m people in India currently have no access to toilet paper, which suggests substantial upside for tissues consumption and, as a consequence, for hardwood demand. EXHIBIT 47: PAPER - GLOBAL PRODUCTION AND CONSUMPTION IN 2010 EXHIBIT 48: PAPER: GLOBAL CONSUMPTION NEWSPRINT DECREASING (2000=100) Newsprint Printing + Writing Production - mt Packaging Household + Sanitary Consumption - mt 16 Other Newsprint Printing + Writing Packaging Household + Sanitary Total 2010 Source: FAOSTAT and Espirito Santo Investment Bank. Source: FAOSTAT and Espirito Santo Investment Bank. EXHIBIT 49: PAPER - GLOBAL APPARENT CONSUMPTION BREAKDOWN (2010) Household + Sanitary 7% Other 5% Newsprint 8% Printing + Writing 27% Packaging 53% Source: FAOSTAT and Espirito Santo Investment Bank. 25

26 Pulp & Paper Brazilian paper imports: A government supervisory and f/x issue As we already mentioned, importing paper is not easy owing to the high costs involved and the possible loss of quality. However, there has been a flood of imported paper in Brazil over recent years. P&W imports represented 30% of Brazilian apparent consumption in 2011 vs. 10% in The majority of the imported papers are coated products and have mostly been imported from Europe. This is a reflex of the oversupply of this paper grade in Europe, caused mostly by the recession, coupled with the strong BRL. Moreover, currently in Brazil there is a law stating that when a paper is to be used for educational purposes, it is completely free of tax and duties. Many foreign paper producers take advantage of this law to sell their products in the country at competitive prices. To make matters worse, the paper s final use is hard to control or regulate. However, since 2010 the Brazilian government has been taking some measures to make sure imports are taxed correctly according to their intended use and to protect the domestic industry against dumping. The government has implemented RECOPI, a program to recognize and control operations with tax-free paper. In mid 2011, the government also cancelled the automatic licenses for importers and started applying fines of up to R$100m for violations, according to reports in the press. We expect these measures, coupled with the BRL depreciation (ESIB macroeconomic team estimates), to be reflected in a drop in the market share of imports in the Brazilian coated paper market, where Suzano is the only large-scale domestic player and should therefore benefit. EXHIBIT 50: PAPER IMPORTS AS % OF APPARENT CONSUMPTION Imports/App. Cons. P&W Total % 12% % 9% % 8% % 9% % 10% % 11% % 13% % 14% % 15% % 13% % 16% % 16% jan-12 26% 15% EXHIBIT 51: COATED PAPER IMPORTS IN THE DOMESTIC MARKET 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 40% 44% 47% 57% 70% Imports 69% 72% 66% 56% Domestic Products 60% 55% 56% 53% Source: Bracelpa and Espirito Santo Investment Bank. Source: Companies data and Espirito Santo Investment Bank. 26

27 BRAZIL PULP & PAPER Initiation of Coverage Suzano Papel e Celulose Initiating on SUZB5 with a NEUTRAL - Challenging times to continue We initiate coverage of Suzano (SUZB5) with a NEUTRAL rating and a Fair Value of R$9.5/sh. While we have a slightly positive short-term view on the pulp market and Suzano s exposure to the Brazilian paper market, we have a negative view on the company s organic expansion plan (in light of its elevated leverage: we estimate 6.8x Net Debt/Ebitda12E). Suzano has launched an ambitious plan to increase its market pulp capacity from 1.9mtpa to 4.9mtpa by 2016, with the first project (Maranhão 1.5mtpa) scheduled to come online in 2013/14. Suzano s leverage appears to be at a critical level and the Maranhão project has reached an irreversible investment stage. We think Suzano now faces a serious problem. It has a significant CAPEX budget in 2012 and, at the same time, it must reduce its debt as soon (and by as much) as possible. A combination of supportive pulp prices, asset sales and low f/x rate volatility is merely a pre-requisite for leverage reduction, in our view. Nevertheless, we think Suzano has flexibility in reducing debt through non-core asset sales, paving the way to maintain its pulp expansion on track. The company also plans to sell a stake in the Maranhão project to a strategic partner, sharing capital expenditure and the execution risk. We expect these sales to take place in 2012 and we see them as key catalysts for Suzano s share price. SUZB5 trades at an EV/Ebitda 12E of 10.2x, on our estimates, at premiums of 25% and 3% to FIBR3 and its Latin American peers (BBG consensus), respectively. Pulp expansion: Too early to begin too late to delay Companies that manage to bring new pulp capacity to the market first should gain a competitive advantage. Non-integrated paper capacity set to start up in China over the coming years is the main incentive for pulp players to finish their projects quickly. Suzano has decided to join this race by launching its Maranhão project amidst two other large BHKP projects coming online soon (1.3mtpa + 1.5mtpa) plus Fibria s expansion (1.5mtpa), that will likely be postponed (in our view). We think Maranhão is unlikely to be delayed because industrial investments have already begun and equipment orders have already been made. In our view, the project has reached an irreversible stage at which shutting it down would be more expensive than continuing. We estimate Suzano could raise up to R$2.8bn by selling assets (see pages 38 and 39), which would reduce its leverage to 4.4x in 2012E. Besides the sale of assets, we see a risk that Suzano may have to raise funds by issuing equity (like Fibria), potentially causing an overhang in its share price. In the long run, we prefer pulp-only producers... When the difficult situation Brazilian pulp producers are facing comes to an end, we expect to see a new round of organic expansion - if market conditions permit. Besides Maranhão, Suzano has another pulp project in its pipeline (Piauí). We think divesting its paper assets, which is one of Suzano s strategies, and concentrating strictly on the pulp business would be the best move, despite our positive outlook for paper in The paper machines set to start up in China in the coming years will likely boost supply, potentially pushing down paper prices globally. We think Suzano would be right to focus only on pulp production, although its leverage may prevent faster pulp capacity growth....and investment in biomass is also a +ve (and accretive) diversification Forestry is, and should continue to be, a key asset globally, given the large range of uses for wood alongside the production of paper and board. Suzano s biomass project, set to produce up to 5.0mtpa of wood pellets, should broaden the range of uses for the company s forestry. We value Suzano Energia Renovável at R$709m (R$1.52/share; 16% of incremental upside to our fair value), although we do not include this in our base case valuation as the progress of the project depends on a investor/partner joining Suzano, which has not been announced yet. NEUTRAL - SUZB5 16% upside Fair Value R$ 9.5 Bovespa, Bloomberg Code SUZB5, SUZB5 BZ Share Price (19/Mar/12) R$ 8.2 Market Capitalisation (m) R$ 3,820 Free Float 53% Source: Reuters, Bloomberg, Espírito Santo Investment Bank for estimates. Year to Dec. R$ 2010A 2011E 2012E 2013E Revenues (m) 4,514 4,684 4,869 5,009 EBITDA (m) 1,677 1,180 1,152 1,202 EPS DPS FCF ps EV (m) 7,241 9,050 11,704 13,181 Net Debt (m) 3,421 5,230 7,885 9,362 Net Debt/Ebitda (x) Source: Company data, Espírito Santo Investment Bank for estimates. At Current Price: 2010A 2011E 2012E 2013E P/E (x) EV/Ebitda (x) Dividend Yield (%) 6.5% 0.0% 1.3% 0.0% FCF Yield (%) 12.1% -55.0% -59.9% -12.5% At Fair Value: 2010A 2011E 2012E 2013E PE (x) EV/Ebitda (x) Dividend Yield (%) 2.9% 0.0% 1.1% 0.0% *FCF after total CAPEX Source: Company data, Espírito Santo Investment Bank for estimates Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 Source: Bloomberg. Market Relative Performance IBOV SUZB5 Analysts Juliano Navarro jnavarro@bessecurities.com.br [BES Securities do Brasil, S.A CCVM] Felipe Machado fmachado@bessecurities.com.br [BES Securities do Brasil, S.A CCVM] FOR IMPORTANT DISCLOSURE INFORMATION, INCLUDING DISCLOSURES RELATED TO THE U.S. DISTRIBUTOR OF THIS REPORT, PLEASE REFER TO THE FINAL PAGES OF THIS REPORT. Please refer to page 90 of this report for important disclosures, analyst certifications and additional information. Espirito Santo Investment Bank does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by research analysts based outside the US who are not registered/ qualified as research analysts with FINRA. 27

28 Suzano Papel e Celulose Summary financial information Valuation Metrics (Year end Dec) E 2012E 2013E 2014E SUZANO Rating SUZB5 (PNA) NEUTRAL Recurrent P/E (x) Fair Value (R$/sh): 9.5 Reported P/E (x) Share Price (19/Mar/12 - R$/sh) 8.2 EV / Sales (x) Upside / Downside potential % 16.1% EV / EBITDA (x) EV / EBIT (x) Previous Fair Value (R$/pref): 0.0 FCF Yield (%) 12.1% -55.0% -59.9% -12.5% 5.6% % change to Fair Value: #DIV/0! Dividend yield (%) 6.5% 0.0% 1.3% 0.0% 0.0% Key Ratios E 2012E 2013E 2014E EBITDA margin 37.2% 25.2% 23.7% 24.0% 25.1% Bloomberg SUZB5 BZ EBIT margin 25.5% 11.3% 9.4% 9.1% 11.8% Bovespa SUZB5 Capex / Revenue Capex / Depreciation (x) Shares in Issue adj. by debentures (No treasury)(m) 467 Net Debt / EBITDA (x) Market Cap (R$ m) 3,820 EBITDA / Net Interest (x) Net Debt 3Q11 (R$ m) 5,291 ROE 8.9% -2.2% 2.1% -3.4% -2.2% Adjustments for Associates & Minorities (R$ m) 0 Enterprise Value (R$ m) 9,111 P & L Summary (R$ m) E 2012E 2013E 2014E Forthcoming Catalysts Revenue 4,514 4,684 4,869 5,009 6,114 4Q11 Earnings release - 26/Mar/12 % change 14% 4% 4% 3% 22% EBITDA 1,677 1,180 1,152 1,202 1,533 % change 44% -30% -2% 4% 28% BES Securities Analyst % margin 37% 25% 24% 24% 25% Juliano Navarro Depreciation, Amort. and Exhaustion EBIT 1, jnavarro@bessecurities.com.br % change 80% -54% -13% -1% 58% % margin 26% 11% 9% 9% 12% Felipe Machado Associates Operation Profit 1, fmachado@bessecurities.com.br Net Financials Other Pre-tax Income Revenue breakdown (2012E) Pre-Tax Profit Income Tax Expense Coated 8% Others 4% Minority Interests Net Income Recurrent Net Income Paperboard 13% Pulp 43% Reported EPS (R$) Recurrent EPS (R$) DPS (R$) Payout Ratio 32.4% 0.0% 25.0% 0.0% 0.0% Shares in Issue (Less Treasury) (m) Non Coated Cash Flow Summary (R$ m) E 2012E 2013E 2014E 32% EBITDA (net of provisions) 1,677 1,180 1,152 1,202 1,533 Net Revenues (R$m) and YoY variation (%) Taxes Paid Interest Paid / Received % Change in Working Capital % Associate & Minority Dividends Other Operating Cash Flow 157-3, % 3.9% 2.9% Operating Cash Flow 1,373-2, , Capital Expenditure -1,009-3,280-3,172-1, Free Cash Flow 365-5,940-2, ,114 Acquisitions & Disposals ,514 4,684 4,869 5,009 Dividends Paid to Shareholders Equity Raised / Bought Back Other Financing Cash Flow 1,044 5,339 3, Net Cash Flow 1, Ebitda (R$ m) e Ebitda mg. (%) Balance Sheet Summary (R$ m) E 2012E 2013E 2014E Source: Company Data, Bloomberg, Espirito Santo Investment Bank for estimates e 2012e 2013e 2014e 37% 1,677 25% 24% 24% 1,180 1,152 1,202 25% 1, e 2012e 2013e 2014e Cash & Equivalents 3,735 3,135 3,416 3,500 3,500 Tangible Fixed Assets 10,938 12,823 15,024 15,489 15,151 Goodwill & Intangibles Associates & Financial Investments -1,009-3,280-3,172-1, Other Assets 5,078 8,318 8,944 8,184 8,770 Total Assets 18,914 21,176 24,393 25,721 26,718 Interes Bearing Debt 7,156 8,365 11,301 12,862 13,798 Other Liabilities 3,116 3,258 3,387 3,473 3,739 Total Liabilities 10,273 11,623 14,688 16,335 17,536 Shareholder's Equity 8,641 9,553 9,704 9,386 9,182 Minority Interests Total Equity 18,914 21,176 24,393 25,721 26,718 Net Debt 3,421 5,230 7,885 9,362 10,298 28

29 Suzano Papel e Celulose SWOT analysis Strengths Second largest BEKP producer (1.9m tons of production capacity); One of the most important players in the Brazilian paper segment; Fully integrated (forestry/pulp/paper); Better products mix than local competitors; Low pulp cash cost; Wood production yield (44m3/ha/year) and harvesting cycle (6 years); Opportunities Consolidation process, disposing of a number of non-efficient pulp mills, making room for higher pulp supply discipline; New state-of-the-art paper machines to come online in China, to demand more hardw ood fiber rather than softw ood; Selling of unused forestry to help reduce leverage; Higher w ood production yields and productivity gains w ith cloning biotechnology improvements; Scale gains w ith new pulp capacity (Maranhão project); Sale of energy surplus and project to produce and sell biomass; Possible entry in the Ibovespa Index in the short to mid term; Weaknesses Low shares liquidity: ADVT of R$21m in the Brazilian stock exchange and is not part of the Ibovespa Index; Low er corporate governance and disclosure than competitors; Current high debt leverage (4.2x Net Debt/Ebitda as at 3Q11); High revenues exposure to US dollar w hile great part of the costs are in Brazilian Real; Cash burning; No dividends payment expected; Recent dow ngrade of the debt rating and loss of the Investment Grade status; Threats New paper machines to start up in China could generate paper oversupply; Macro scenario that could curb pulp demand, especially in Europe and China; BRL strengthening, impacting pulp export revenues (despite helping to decrease US dollar-denominated debt); New pulp supply entries (before Maranhão) should pressure pulp prices; Freight costs increase may reduce competitiveness; Internet and e-media penetration may curb P&W paper usage; Government measures to control paper imports may not be successful; Source: Espirito Santo Investment Bank for estimates. Valuation We value Suzano via a 50/50 blend of DCF (rolling ten-year cash flow forecasts) and EV/Ebitda (7.3x, based on the last ten years average EV/Ebitda). In our DCF, we assume a discount rate of 10.8%, calculated by nominal WACC, arrived at through a weighting of 40% debt (Kd of 4.9%, after tax) and 60% equity (Ke of 14.7% - Beta of 1.1). We also assume a nominal perpetuity rate of 4% and the last discounted flow (year 2021) has an EBITDA margin of 30.0%, versus the last adjusted Ebitda margin of 21.2% in 3Q11. As a result, we estimate Suzano s fair value to be R$9.5/share, implying 16% upside potential to the closing price on 19/Mar/12 (R$8.2/sh) and we rate Suzano s shares NEUTRAL. Our estimates vs. consensus Our earnings forecast for 2012E/2013E/2014E are below BBG consensus. Our NEUTRAL rating and fair value for Suzano s shares are in line with consensus (30% BUY, 35% are NEUTRAL, and 35% are SELL) out of a total of 17 ratings for SUZB5. We forecast net revenues in line with consensus for 2012E and 3.3% below for 2013E; however, our EBITDA estimates are -3.1% and -13.7% vs. consensus for 2012E and 2013E, respectively. We are more cautions on the company s cost structure and expect pressure on cash costs in 2012 through more use of third parties wood and the impact of Mucuri s non-programmed stoppage in Jan/12. Our net income forecasts are very dependent on f/x estimates given Suzano s USDdenominated debt, which may explain the difference between our figures and consensus. EXHIBIT 52: ESIBR FORECASTS VS. BLOOMBERG CONSENSUS 2012E 2013E 2014E R$ million ESIBR Consensus % ESIBR Consensus % ESIBR Consensus % Net Revenues 4,869 4, % 5,009 5, % 6,114 6, % EBITDA 1,152 1, % 1,202 1, % 1,533 1, % EBITDA margin 23.7% 24.2% -0.6 p.p. 24.0% 26.9% -2.9 p.p. 25.1% 28.3% -3.2 p.p. Net Income % % % Source: Bloomberg for consensus and Espirito Santo Investment Bank for estimates. 29

30 Suzano Papel e Celulose EXHIBIT 53: CASH FLOW AND VALUATION ASSUMPTIONS Free Cash Flow R$ million 4Q11e 2012e 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e EBIT ,034 1,120 1,200 1,283 1,370 1,459 1,552 Tax and contribution NOPLAT ,024 1,095 1,158 1,223 1,289 1,357 1,426 (+) Depreciation (+) Working Capital (-) CAPEX ,172-1, Free Cash Flow 93-2, ,049 1,143 1,345 1,425 1,505 1,588 1,673 WACC 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Discount period Discount factor Free Cash Flow - PV 90-2, DCF Valuation (50%) NPV - Free cash flow R$ m 2,437,116 DCF (WACC=10.8% / g=4%) NPV - Perpetuity R$ m 8,658,893 "g" in perpetuity (nominal) 4% Firm value R$ m 11,096,009 Net debt 3Q11 R$ m 5,291,425 Participation in P/BV R$ m 0 Equity value R$ m 5,804,584 # shares (adj. by debentures) m 467 Equity value per share R$/share 12.4 EV/Ebitda multiple Valuation (50%) SUZB5 avg. EV/Ebitda x 7.3 Ebitda12 R$ m 1,152 Implied EV R$ m 8,363 Net debt 3Q11 R$ m 5,291 Equity value R$ m 3,072 # shares (adj. by debentures) m 467 Equity value per share R$/sh 6.6 WACC assumptions Risk premium 5.5% Beta 1.1 Risk free 3.8% Country risk 200bp Cost of Equity (US$) 11.9% US inflation 2.5% Ke(US$) 9.2% BZ inflation 5.0% Ke (R$) 14.7% Average cost of debt 7.5% Tax shield 34% Kd 4.9% % Debt 40.0% % Equity 60.0% WACC (nominal in R$) 10.8% SUZB5 - Fair Value R$/share DCF Valuation - 50% w eight 12.4 EV/Ebitda multiple Valuation - 50% w eight 6.6 Fair Value 9.5 Current price R$/share 8.2 Upside potential 16.1% Source: Company data, Economática and Espirito Santo Investment Bank for estimates. Priced as at 19/03/

31 Suzano Papel e Celulose Sensitivity analysis We have carried out a sensitivity analysis where we show the impact on our Fair Value by changing our WACC by 50bps and perpetuity growth rate g (%) by 100bps. EXHIBIT 54: DCF SENSITIVITY ANALYSIS WACC % 9.8% 10.3% 10.8% 11.3% 11.8% 12.3% 1% % Perpetuity 3% growth (g%) 4% % % % Source: Espirito Santo Investment Bank for estimates. USD-leveraged: Lower f/x rate impact on Suzano s indebtedness than Fibria s In the table below, we analyze the impact of the f/x rate variation on Suzano s debt leverage and its operating cash generation (Ebitda). The BRL appreciation vs the US dollar has opposite effects on Suzano s debt and Ebitda vs. Fibria. While the impact on the company s debt is positive, the strengthening of the BRL is detrimental for cash generation, since 51% of net revenues are US dollar-denominated. Unlike Fibria, a strong BRL has only a slight effect on Suzano s Net Debt/Ebitda, as shown in the table below. The positive impact on the net debt is more than offset by a lower Ebitda, and therefore the company s leverage increases. That said, we prefer a weaker BRL, as Suzano s leverage would benefit under this scenario. In the medium term, the exposure of Suzano s Ebitda to the US dollar should increase with the start-up of Maranhão, given the company will rise its pulp exports and, as a consequence, the correlation of the Ebitda with the US dollar. EXHIBIT 55: NET DEBT/EBITDA 12E SENSITIVITY ANALYSIS BRL/USD 12E Net Debt 12E Chg % Ebitda 12E Chg % Net Debt/Ebitda 12E ,347-7% 1,008-12% ,526-5% 1,056-8% ,705-2% 1,104-4% ,885 0% 1,152 0% ,064 2% 1,200 4% ,269 5% 1,248 8% ,487 8% 1,296 13% 6.5 Source: Espirito Santo Investment Bank for estimates. EXHIBIT 56: NET DEBT/EBITDA 13E SENSITIVITY ANALYSIS BRL/USD 13E Net Debt 13E Chg % Ebitda 13E Chg % Net Debt/Ebitda 13E ,746-7% 1,062-12% ,933-5% 1,109-8% ,133-2% 1,155-4% ,362 0% 1,202 0% ,590 2% 1,249 4% ,818 5% 1,295 8% ,047 7% 1,342 12% 7.5 Source: Espirito Santo Investment Bank for estimates. 31

32 Suzano Papel e Celulose Assumptions We forecast sales volumes, prices and (consequently) revenues for each of Suzano s products. We also assume in our DCF that the company will operate at full capacity in pulp and a 97% utilization rate for the paper business. Our expectation for higher sales volumes in 2012E and 2013E versus 2011E is explained by operational problems at Suzano s Mucuri unit in However, the company has recently announced that a non-programmed stoppage in Mucuri in Jan/12 will reduce pulp sales by 50,000 tons in 1Q12 and affect COGS as well. The volume corresponds to c.3% of 2011 pulp sales (c.11% of quarterly sales). The acquisition of Conpacel in 1Q11 also contributes to reducing the 2011 comparison base. International pulp prices are above Suzano s realized prices Our forecast for Suzano s pulp sales volumes jumps by 49% YoY in 2014E on the back of the start-up of the Maranhão project, which we forecast to begin operations in 1Q14 (vs. company guidance of 4Q13). Given the limited demand for BEKP in the domestic market, we assume that 100% of the company s new capacity will be exported. We forecast a change in the mix for paper sales, with an increase in domestic sales as the company searches for higher margins and also as a result of the benefit we expect from the increasing supervision and control of illegally imported paper by the Brazilian government. EXHIBIT 57: VOLUME ( 000T) - PRODUCTS BREAKDOWN EXHIBIT 58: DOMESTIC MARKET SALES AS % OF TOTAL SALES Volume '000t E 2012E 2013E 2014E 2015E Pulp 1,607 1,749 1,874 1,920 2,858 3,420 %chg 9% 7% 2% 49% 20% DM %chg 22% 3% 2% 4% 2% Exports 1,310 1,386 1,502 1,541 2,463 3,018 %chg 6% 8% 3% 60% 23% Paper 1,156 1,274 1,303 1,309 1,310 1,308 %chg 10% 2% 0% 0% 0% Uncoated Paper %chg 8% 0% 1% 0% 0% Paperboard %chg -1% -1% -1% 0% 0% Coated Paper %chg 15% 18% 0% 0% 0% Distribution %chg 252% 14% 0% 0% 0% Total 2,763 3,023 3,177 3,229 4,168 4,728 %chg 9% 5% 2% 29% 13% 22% 20% 18% 16% 14% 12% 10% 21% 20% 20% 65% 66% 18% 63% 63% 61% 14% 56% 12% E 2012E 2013E 2014E 2015E Pulp (LHS) Paper (RHS) 68% 66% 64% 62% 60% 58% 56% 54% Source: Company for historical data and Espirito Santo Investment Bank for estimates. Source: Company for historical data and Espirito Santo Investment Bank for estimates. Applying the same methodology as we do for Fibria, we estimate Suzano s realized pulp price based on our international pulp price forecast (see pages 19 and 20 for details), adjusted by the historical c.13% discount of Suzano s pulp price to the hardwood pulp spot price (FOEX). It is important to highlight that Suzano is able to sell pulp at higher prices than Fibria. This is chiefly owing to Fibria s higher pulp production capacity and, therefore, higher scale contracts, which gives some pricing power to its clients. For the paper business estimates, we link prices to the Brazilian CPI estimated by the BESI Macroeconomic department, recognizing that paper sales are closely correlated to the domestic market. However, paper imports are also a conspicuous driver as they directly determine the premium of the domestic price and, therefore, can influence Brazilian paper producers pricing strategy. Hence, we also base our paper price forecasts on the last international spot price (FOEX). 32

33 Suzano Papel e Celulose EXHIBIT 59: SUZANO S PRICES (R$/T) BREAKDOWN EXHIBIT 60: SUZANO S PRICES (R$/T) - PRODUCTS BREAKDOWN Prices - R$/ton E 2012E 2013E 2014E 2015E Pulp 1,256 1,125 1,126 1,108 1,089 1,145 %chg -10% 0% -2% -2% 5% DM 1,194 1,062 1,050 1,033 1,012 1,062 %chg -11% -1% -2% -2% 5% Exports 1,270 1,141 1,145 1,127 1,102 1,156 %chg -10% 0% -2% -2% 5% Paper 2,158 2,133 2,117 2,201 2,290 2,374 %chg -1% -1% 4% 4% 4% Uncoated Paper 2,015 1,965 1,931 2,009 2,090 2,169 %chg -3% -2% 4% 4% 4% Paperboard 2,387 2,493 2,545 2,651 2,764 2,861 %chg 4% 2% 4% 4% 4% Coated Paper 2,425 2,205 2,155 2,243 2,331 2,413 %chg -9% -2% 4% 4% 4% Distribution 3,078 2,774 2,725 2,831 2,938 3,041 %chg -10% -2% 4% 4% 4% Total 1,634 1,550 1,533 1,551 1,467 1,485 %chg -5% -1% 1% -5% 1% 3,000 2,800 2,600 2,400 2,200 2,000 1,800 1,600 1,400 1,200 1, E 2012E 2013E 2014E 2015E Pulp Uncoated Paper Paperboard Coated Paper Source: Company for historical data and Espirito Santo Investment Bank for estimates. Source: Company for historical data and Espirito Santo Investment Bank for estimates. As a result of our sales volumes and prices estimates, we see the company s net revenues reaching R$4.9bn in 2012E and growing in both 2013E and 2014E, driven by pulp price rise and Maranhão s pulp sales debut, respectively. In 2015E, the ongoing ramp-up process for the new pulp line is the main driver for the 15% growth we estimate in Suzano s consolidated net revenues. EXHIBIT 61: NET REVENUES (R$MN) - PRODUCTS BREAKDOWN EXHIBIT 62: NET REVENUES (R$MN) - PRODUCTS BREAKDOWN Net Rev. - R$mn E 2012E 2013E 2014E 2015E Pulp 2,018 1,967 2,110 2,128 3,112 3,915 %chg -3% 7% 1% 46% 26% DM %chg 8% 1% 0% 2% 7% Exports 1,663 1,582 1,720 1,736 2,714 3,488 %chg -5% 9% 1% 56% 29% Paper 2,496 2,717 2,759 2,881 3,001 3,107 %chg 9% 2% 4% 4% 4% Uncoated Paper 1,521 1,600 1,566 1,646 1,716 1,777 %chg 5% -2% 5% 4% 4% Paperboard %chg 3% 1% 3% 4% 4% Coated Paper %chg 5% 15% 4% 4% 4% Distribution %chg 217% 12% 4% 4% 4% Total 4,514 4,684 4,869 5,009 6,114 7,021 %chg 4% 4% 3% 22% 15% Source: Company for historical data and Espirito Santo Investment Bank for estimates. Cash cost should reflect more wood purchases from third parties Suzano s cash cost was negatively affected by operational problems in the ramp-up process of the Mucuri unit in According to the company, the problems have been addressed and should not be repeated. Suzano s guidance for a normalized cash cost is c.r$500/t (considering stable chemical prices, normalized plants operations and 30% of third-party wood); however, we expect some pressure from wood costs in the next few years owing to an increased share of wood supply from third parties. In 2008, the company opted to use only its own forestry base in order to reduce costs during the global financial crisis, resulting in a shortage of own wood that should translate into higher wood purchases from third parties. That said, we think the company is unlikely to reach the normalized cash cost in We forecast approximately 80% of Suzano s pulp cash cost is linked to 60% of the Brazilian CPI (IPCA) until 2015E E 2012E 2013E 2014E 2015E Distribution Coated Paper Paperboard Uncoated Paper Pulp (Exports) Pulp (DM) Source: Company for historical data and Espirito Santo Investment Bank for estimates. 33

34 Suzano Papel e Celulose We also forecast US$78/ton for Suzano s freight cost, which corresponds to 4% of the company s COGS, significantly lower than Fibria s freight (16%) given Suzano s exports account for 53% of its total net revenues (2011E) vs. 90% for Fibria. We have linked Suzano s freight costs to our Macroeconomic department s f/x rate forecasts (USD/BRL see page 2). EXHIBIT 63: CASH COST (R$/T) EXHIBIT 64: CASH COST (R$/T) Cash Cost - R$/t E 2012E 2013E 2014E 2015E Total - R$ %chg 19% -4% 1% 3% 3% Ex-Stoppage - R$ %chg 20% -3% 2% 3% 3% Total - US$ %chg 25% -8% -1% 1% 1% Ex-Stoppage - US$ %chg 26% -6% 0% 1% 1% E 2012E 2013E 2014E 2015E Total - R$ Total - US$ R$/US$ avg. Source: Company for historical data and Espirito Santo Investment Bank for estimates. Source: Company for historical data and Espirito Santo Investment Bank for estimates. Operating margins should rise gradually We estimate Suzano s Ebitda margin at 24% in 2012E and 2013E, 25% in 2014E, increasing faster from 2015E onwards with Maranhão pulp sales. Our forecast LT Ebitda margin is 30%, still 700bps below 2010 s margin. EXHIBIT 65: OPERATIONAL FORECASTS - HIGHLIGHTS 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, % 30% 27% 25% 24% 24% 25% 23% 25% 21% 21% 22% E 2012E 2013E 2014E 2015E 40% 35% 30% 25% 20% 15% 10% Net Revenues (R$mn) Ebitda (R$mn) Ebitda mg. Gross mg. Source: Company for historical data and Espirito Santo Investment Bank for estimates. 34

35 Suzano Papel e Celulose Indebtedness: Worse than Fibria s, but more room to fix it (non-core asset sales) Suzano s present and, mainly, future indebtedness level has been an apparent concern for investors since Suzano announced its investment plan in July This was owing to the large number of upcoming projects and what appear to be inadequate funding sources to maintain the Net Debt/EBITDA ratio below the company s target of 3.5x (during the investment phase). Coupled with the sharp drop in pulp prices in 2011, we see a risk that Suzano may have to raise funds by issuing equity The company s debt leverage, currently at 4.2x Net debt/ebitda (3Q11), should reach 6.8x in the last quarter of 2012E if no funds are raised, on our estimates. From 2014 onwards, although the investment cycle should already be over (unless Suzano goes ahead with the Piauí project), the expected drop in pulp prices should prevent the company from rapidly reducing its debt leverage. Given this challenging situation, we see an increasing likelihood of asset divestments and/or the sale of stakes in the company s projects (e.g: Maranhão). Suzano has R$1.7bn in debt to be amortized in 2012, which corresponds to 20% of its gross debt (R$8.2bn as at 31 September 2011). Since we estimate an Ebitda of R$1.1bn, CAPEX of R$3.1bn and working capital of R$201m in 2012E, the cash outflow is R$4.4bn, including the debt amortization + interest payments + taxes. The funding could come from raising new debt and/or the sale of assets that are already being negotiated, according to Suzano s management, which are: (i) a 17.9% stake in the Capim Branco power plant, which we value at R$307m; and (ii) the land in Sao Paulo state, which we value at R$783m, thus totaling R$1.1bn (see page 38). EXHIBIT 66: DEBT LEVERAGE EXHIBIT 67: DEBT LEVERAGE Leverage E 2012E 2013E 2014E 2015E Net Debt (R$mn) 3,421 5,230 7,885 9,362 10,298 10,506 %chg 53% 51% 19% 10% 2% Ebitda (R$mn) 1,677 1,180 1,152 1,202 1,533 1,894 %chg -30% -2% 4% 28% 24% Net Debt/Ebitda (x) ,200 10,200 8,200 6,200 4,200 2, E 2012E 2013E 2014E 2015E Net Debt (R$mn) Ebitda (R$mn) Net Debt/Ebitda (x) 1.5 Source: Company for historical data and Espirito Santo Investment Bank for estimates. Source: Company for historical data and Espirito Santo Investment Bank for estimates. 35

36 Suzano Papel e Celulose Suzano s management says it has not ruled out the possibility of an equity offering; however, it has stated this option would be considered only as a last resort since financing the company s cash needs with equity is the most expensive option. EXHIBIT 68: DEBT AMORTIZATION SCHEDULE AS OF 3Q11-21% EXPIRING IN 2012 EXHIBIT 69: DEBT 3Q11-53% IN FOREIGN CURRENCIES Foreign Currencies; 53% Local Currency; 47% on Gross Debt Cash Net Debt Source: Company data and Espirito Santo Investment Bank. Source: Company data and Espirito Santo Investment Bank. Debt covenants and rating downgrade to below Investment Grade Part of Suzano s debt (c.15%) is linked to leverage covenants (i.e., Net Debt/Ebitda LTM and interest coverage ratio). According to the company, at the end of 3Q11, R$635m of its debt (corresponding to its 3 rd debentures offer) was subject to covenants of 4.0x Net Debt/Ebitda for any two consecutive quarters. Suzano does not disclose the details of the resting debt linked to covenants, including c.r$300m of export credit loans related to equipment purchases for Mucuri Line 2. We calculate that, given the f/x rate as at 31/Dec/11 of USD/BRL1.87, Suzano s debt leverage at the end of 4Q11E will reach 4.4x, therefore breaching the covenants. The company, aware of the situation, held a meeting with its debenture holders wherein they granted the company a waiver in exchange for a fee payment of c.r$12m. Under the new agreement made with the debenture holders, the covenant will remain the same as the previously agreed (4.0x Net debt/ebitda for two consecutive quarters), however, it will only be valid again from 3Q12 on. Therefore, no penalties will be applicable before 4Q12. Having said that, we estimate that in 3Q12 and 4Q12 the company s debt leverage will be at 6.5x and 6.8x, respectively, and therefore breaching the covenants again. As a result, asset sales, partnerships (see page 38) and/or share issuance are likely to occur in 2012, in our view. EXHIBIT 70: COVENANTS RENEGOTIATED IN DEC/11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Covenants - Net Debt/Ebitda LTM (x) ¹ Our Estimates - Net Debt/Ebitda LTM (x) ¹ Note: Red numbers represent non-applicable covenants. Source: Company data and Espirito Santo Investment Bank for estimates. 36

37 Suzano Papel e Celulose EXHIBIT 71: COVENANTS VS. ESIBR S NET DEBT/EBITDA ESTIMATES (BASE CASE DOES NOT INCLUDE SALE OF ASSETS) Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Non-applicable covenants - Net Debt/Ebitda LTM (x) ¹ Covenants - Net Debt/Ebitda LTM (x) ¹ Our Estimates -Net Debt/Ebitda LTM (x) ¹ Source: Company data and Espirito Santo Investment Bank for estimates. (1) Last net debt reported divided by the last-twelve-month Ebitda. Mainly owing to its high leverage coupled with sequentially lower cash generation in early November 2011, Moody s downgraded Suzano from Baa3 to Ba2 (global scale) and from Aa1.br to Aa3.br (national scale) below Investment grade with a stable outlook. As a consequence, the company s cost of debt should increase going forward. According to Moody s, the rating could be revisited if the company manages to maintain its leverage below 3.0x, a scenario we do not forecast in our 10-year DCF (wherein we assume no asset sales). 37

38 Suzano Papel e Celulose Asset sales may not be enough We think Suzano will have to combine more than one move to bring its debt leverage to the required level. Asset sales may not offer a complete solution and the company may need to take further measures to raise funds. In our base case scenario, we have calculated that in order to maintain an indebtedness level in line with the company s target (limit of 3.5x), Suzano will need to raise over R$3.9bn this year. In the next few paragraphs, we analyze some of these alternatives and our valuations of the assets that could potentially be sold. Option # 1: Sale of Capim Branco and land in São Paulo state A deal for the divestment of these assets could be worked out by as soon as 1H12, according to the company. Suzano publicly declared that it has been in talks with potential buyers. However, the company did not disclose the terms of the ongoing negotiations. Although Suzano has not disclosed information about the value of the assets or the details of their sale, we value these assets at R$1.1bn, which would bring the company s leverage to 5.9x in 2012, still above the desired level. EXHIBIT 72: ESIBR ESTIMATES FOR CAPIM BRANCO ASSETS Multiple Installed Capacity (MW) 450 Assured Capacity (MW) 286 EV/Assured Energy (x) 6 Estimated Debt (R$mn) n.a. Suzano's share (%) 17.9% EV (R$mn) 1,716 Suzano's share (R$mn) 307 Source: Company data and Espirito Santo Investment Bank for estimates. EXHIBIT 73: ESIBR ESTIMATES FOR SÃO PAULO S LAND AND FORESTRY SP land and forestry Pulp capacity in SP (mtpy) Yield (m³/ha/year) 50,0 Ton/ha 13,2 Forestry needed (ha) 87 Land owned in SP (ha) 188 Forestry planted in SP (ha) 118 Conservation area (ha) 22 Land for sale (ha) 79 Forestry for sale (ha) 31 R$/ha land in SP R$/ha of forestry Total land R$mi 630 Total forestry R$mi 153 Total R$mn 783 Source: Company data and Espirito Santo Investment Bank for estimates. Option # 2: Partnership in the Maranhão project Suzano says it will also likely sell part of the Maranhão project to a strategic partner, decreasing its exposure to the asset and, consequently, alleviating its capital expenditures in 2012/13 which is the company s main objective. The total CAPEX of the project is R$5.1bn and in a hypothetical scenario where Suzano sells 40% of Maranhão (thus still retaining control), for the identical budgeted CAPEX, the adjusted Net Debt/Ebitda estimated for the end of 2012E and 2013E would be 4.4x and 4.9x, respectively, also taking the sale of Capim Branco and the land mentioned above into account. Therefore, even in this highest deleveraging scenario, Net Debt/Ebitda ratio would remain above the targeted level of 3.5x and also above the covenant. EXHIBIT 74: DEBT LEVERAGE IN DIFFERENT SCENARIOS Net Debt/Ebitda Base case Lands + Capim Branco sales Lands + Capim Branco + 10% of Maranhão Proj Lands + Capim Branco + 20% of Maranhão Proj Lands + Capim Branco + 30% of Maranhão Proj Lands + Capim Branco + 40% of Maranhão Proj Source: Espirito Santo Investment Bank for estimates. 38

39 Suzano Papel e Celulose EXHIBIT 75: DEBT LEVERAGE AFTER POSSIBLE ASSETS SALE LEVERAGE STILL HIGH x 7x 6x Net Debt R$bn x 4x 3x Net Debt/Ebitda 6 2x 1x Net Debt after asset sales Sale of a 40% stake in Maranhão Proj. Sale of Land/Forestry in SP Sale of stake in Capim Branco Net Debt/Ebitda (Base case) - RHS Net Debt/Ebitda (Best case) - RHS 0x Source: Company data and Espirito Santo Investment Bank for estimates. Option # 3: Sale of paper assets Suzano s paper assets are a source of revenue diversification and offer important exposure to the Brazilian market. Suzano is the market leader in coated paper and holds the second place in cardboard and uncoated paper sales in Brazil, a strength that also reduces the volatility of the company s cash flows. On the other hand, as previously highlighted in this report, we think divesting its paper assets (one of its stated strategies) and consolidating its position as a pure pulp producer would be the best move. Although Suzano s diversification in paper would be reduced, it would help the company to achieve its main goal i.e., debt reduction, even though it would jeopardize some Ebitda as well. We estimate Suzano s paper assets to have a replacement value of c.r$1.5bn (see page 41), 39

40 Suzano Papel e Celulose Risk Factors The main risks we see for Suzano include: Pulp prices and demand: Suzano s pulp prices are highly dependent on the international pulp market. Therefore, if prices drop going forward, the company s cash flow will be affected, further affecting the ongoing debt reduction process. Pulp demand could also fall on the back of the European debt crisis and Chinese producers may not be able to absorb the surplus, as has been expected by the market and the company. Paper prices and demand: The paper market is much more correlated to domestic supply/demand. A slowdown in the Brazilian economy could negatively affect paper demand and put pressure on prices. There is also the risk of a sudden increase in paper imports (mainly from Europe) competing with Suzano for domestic market share. The new paper capacities planned to come online in China could flood the global paper market and threaten pricing dynamics in Brazil. Leverage control: Suzano may have difficulty selling its non-core assets or take longer than previously expected to do so. Potential divestments may not raise adequate funds to reduce indebtedness and the company could be forced to issue new shares, potentially causing an overhang in its share price. F/X rate: Given that exports represent 50% of Suzano s total net revenues, the company is highly exposed to the USD, while its costs and expenses are mostly BRL denominated. Moreover, 53% of the company s debt is in foreign currencies. As a consequence, the positive effect of the BRL depreciation against the US dollar on Suzano s cash flow prevails in relation to the negative impact on its debt. 40

41 Suzano Papel e Celulose Replacement Value Estimated replacement value of R$6.1bn; shares trading at a 66% discount We calculate Suzano s replacement value at R$23.9/share, which represents a 66% discount to the current market price of its shares (as at March, 19 th ). Based on the company s existing assets, we assume a CAPEX per ton of US$1,400 for the pulp industrial plant and US$1,143 for the paper industrial assets, based on the most recently announced greenfield projects. For the forestry assets, we have assumed the average market value/hectare for Suzano s land and used company guidance for the value of its forests. EXHIBIT 76: SUZANO IS TRADING AT 34% OF ITS REPLACEMENT VALUE Plant & Equipment Capacity (th. tons) US$/ton US$m Pulp 2,890 1,400 4,046 Non-coated paper 850 1, Coated paper 190 1, Paperboard 250 1, Total Plant & Equipment 5,520 Forest Assets Forests (th. ha) US$/ha US$m Land 800 2,800 2,240 Forestry 240 2, Total Forest Assets 2,912 Other Assets and Liabilities US$m Net Working Capital (receivables, inventories and payables) 610 Net debt -2,905 Total Other Assets and Liabilities -2,295 Equity Value (US$m) 6,137 # shares (adj. by debentures) - m 467 Equity Value per share (US$) F/X rate - R$/US$ 1.82 Equity Value per share (R$) 23.9 Current share price (R$) 8.18 Current share price as % of replacement value 34% Premium (discount) -66% Source: Company data and Espirito Santo Investment Bank for estimates. Priced as at 19/03/2012. Suzano s shares are trading at a greater discount to their replacement value (66%) than Fibria (59%) and Klabin (30%), which we attribute to the structural discount SUZB5 has always traded at versus FIBR3, coupled with its worse debt situation in comparison with Fibria. Unless Suzano succeeds in selling Capim Branco, the land in SP and a stake in the Maranhão project (all feature in the company s current divestment plans), we would not expect this discount to narrow in the near future. 41

42 Suzano Papel e Celulose Maranhão project too late to turn back Suzano has already announced 2 different pulp projects planned to come on line in the next 5 years, Maranhão and Piauí both with capacity of 1.5mtpy of BEKP. According to company guidance, Maranhão should start up in Nov/13 while Piauí is scheduled to start only in 1H16. Both projects will be fully self-sufficient in energy and each should have 100MW of spare energy, enough to supply a city with 200,000 inhabitants, according to the company. Combined, these projects should more than double the company s current market pulp capacity (reaching 4.9mtpy), making Suzano one of the largest pulp producers in the world. EXHIBIT 77: CURRENT CAPACITIES AND FUTURE PROJECTS ANOTHER 3MTPY IN THE COMING YEARS 7 million ton ,5 1,5 1,5 1,5 1,5 1,9 1,9 1,9 1,9 1,9 1,9 1,7 1,8 1,8 0,5 0,6 0,6 0,8 0,8 0,9 1,1 1,1 1,1 1,1 1,1 1,3 1,3 1,3 1,3 1,3 1, E 2012E 2013E 2014E 2015E 2016E Paper Pulp Maranhão (Pulp) ¹ Piauí (Pulp) ¹ Source: Company data and Espirito Santo Investment Bank. ¹ Suzano s schedule. We value Maranhão at R$1,001m (R$2.1/share) We value Maranhão at R$1,001m, based on a DCF valuation and not considering any energy surplus sales, due to the limited availability of information on this business unit. Given the advanced stage of the project, scheduled to come online in 4Q13, we have included Maranhão in our base case scenario for Suzano. However, we think Suzano will sell a stake in the project (not more than 40%, in our view), which would be essential to reduce the execution risk of the project, besides Suzano s 2012 CAPEX and, consequently, the company s debt leverage. Too advanced to delay Considering: (i) the current global macroeconomic scenario; (ii) the decreasing pulp prices expected by the market from 2014 onwards; and (iii) the high indebtedness level that Maranhão and Piauí projects represent for Suzano, we think there is a risk that the company will not go ahead with Piauí. Nevertheless, Maranhão has already been approved by the Board and received industrial investments. Suzano has also placed equipment orders, which means that the project has reached an advanced stage and any postponement would imply financial losses and lower returns. 42

43 Suzano Papel e Celulose Given this unfavorable scenario, we assume Maranhão starting with a one-quarter delay in our base-case valuation (1Q14) and we do not consider Piauí in our DCF, although Suzano has been investing in forestry for the project since On the other hand, if Piauí is cancelled outright, Suzano could use the forestry to supply Maranhão, reducing purchases from wood producers. Other alternatives would be to sell the wood in the market or even sell the land and the forestry. EXHIBIT 78: MARANHÃO PROJECT VALUATION Maranhão FCF - R$ thousand 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Sales volume 938 1,500 1,500 1,500 1,500 1,500 1,500 1,500 Suzano's pulp price - US$/ton Suzano's pulp price - R$/ton 1,145 1,127 1,100 1,156 1,186 1,217 1,246 1,277 1,308 1,340 Net revenues 1,032 1,733 1,780 1,825 1,869 1,915 1,962 2,009 Cash cost Freight Depreciation EBITDA Ebitda mg. 42% 43% 43% 43% 43% 43% 43% 43% EBIT Taxes and contribution NOPLAT (+) Depreciation (+) Working Capital (-) CAPEX 2, Free cash flow (2,649) (990) WACC 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Discount period Discount factor FCF present value (2,392) (807) DCF Valuation NPV - Free cash flow R$ m (2,315) NPV - Perpetuity R$ m 3,317 "g" in perpetuity (nominal) 4% Equity value R$ m 1,001 Equity value US$ m 536 # shares (adj. by debentures) m 467 Value per share R$/share 2.14 IRR % 13.4% Source: Company data and Espirito Santo Investment Bank for estimates. 43

44 Suzano Papel e Celulose Piauí project an option for the long term We value Piauí at R$728m (R$1.6/share; 16% of incremental upside) We value Piauí at R$728m, based on a DCF valuation and not considering any energy surplus sales due to the lack of information regarding this business unit. This comes to R$1.5 per share, which offers incremental upside of 16% to our fair value. As discussed above, we do not consider Piauí in our base case valuation owing to Suzano s high leverage and the lack of information on the project besides the fact that it has not been approved by the Board. EXHIBIT 79: PIAUÍ PROJECT VALUATION Piauí FCF - R$ thousand 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Sales volume 281 1,406 1,500 1,500 1,500 1,500 Suzano's pulp price - US$/ton Suzano's pulp price - R$/ton 1,145 1,127 1,100 1,156 1,186 1,217 1,246 1,277 1,308 1,340 Net revenues 334 1,711 1,869 1,915 1,962 2,009 Cash cost Freight Depreciation EBITDA Ebitda mg. 43% 43% 43% 43% 43% 43% EBIT Taxes and contribution NOPLAT (+) Depreciation (+) Working Capital (-) CAPEX ,069 2,389 1, Free cash flow 0 (217) (1,069) (2,389) (1,406) WACC 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Discount period Discount factor FCF present value 0 (177) (786) (1,587) (843) DCF Valuation NPV - Free cash flow R$ m (2,458) NPV - Perpetuity R$ m 3,186 "g" in perpetuity (nominal) 4% Equity value R$ m 728 Equity value US$ m 390 # shares (adj. by debentures) m 467 Value per share R$/share 1.56 Upside potential to our FV % 16.4% IRR % 13.8% Source: Company data and Espirito Santo Investment Bank for estimates. 44

45 Suzano Papel e Celulose Suzano Energia Renovável Business In addition to its pulp projects, Suzano also has a wood pellet project called Suzano Energia Renovável (SER). This project aims to produce one of the main biomass power ingredients, wood pellets pressed and dried pieces of triturated wood from so-called Energetic Forest, which has a higher productivity yield owing to its lower harvesting cycle (2-3 years) compared with the conventional pulp forest (6-7 years), and a higher lignin grade, essential for this business. The project is due to be implemented in 2 phases. Financials The first phase will have three units producing a total of 3mtpy by 2014 and generating US$520m in revenues, according to our estimates. The second phase will add another two units, totaling 5mtpy capacity by 2018/2019 and revenues of US$766m/US$981m, on our figures. The estimated CAPEX for the project is US$800m in the first phase and another US$500m in the second phase. Market Production should be primarily exported to Europe, where the demand is highest, although Suzano stated that will probably depend on fiscal incentives in that region for the business to be profitable. The European Union has a goal of producing 20% of its energy from renewable sources, which makes SER look like an attractive business. Strategy Suzano has stated that it is looking for partners in this project and will not continue with the project by itself. Given that no partnership seems to have been made so far and a lack of information and peer comparisons worldwide we do not consider this project in our valuation. EXHIBIT 80: SUZANO ENERGIA RENOVÁVEL PROJECT (SUZANO RENEWABLE ENERGY) 1st Phase 2nd Phase Units 3 2 Capacity 3mtpy 2mtpy CAPEX US$800mn US$500mn Full Capacity /19 Estimated Revenue US$520m US$ m Source: Company data and estimates and Espirito Santo Investment Bank. 45

46 Suzano Papel e Celulose We value SER at R$709m (DCF valuation) and do not consider the business in our valuation. The value represents R$1.5 per share, which implies incremental upside of 16% to our fair value. EXHIBIT 81: SER PROJECT VALUATION SER FCF - R$ thousand 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Pellets sales (mtpa) Price US$/t Price R$/t Net revenues US$mn ,005 1,031 COGS + SG&A EBIT Taxes and contribution (20%) NOPLAT (+) Depreciation (+) Working Capital (-) CAPEX Free cash flow (869) (301) (474) (62) WACC 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Discount period Discount factor FCF present value (784) (245) (256) (30) DCF Valuation NPV - Free cash flow US$ m (820) NPV - Perpetuity US$ m 1,200 "g" in perpetuity (nominal) 4% Equity value US$ m 380 Equity value R$ m 709 Suzano's stake % 100.0% Suzano's stake R$ 709 Value per share R$/share 1.52 Upside potential to our FV % 16.0% IRR % 14.9% Source: Company data and Espirito Santo Investment Bank for estimates. 46

47 Suzano Papel e Celulose Suzano - Company snapshot Suzano is the second-largest BEKP producer in the world and the third-largest player in BHKP after Fibria and the Indonesian company APRIL (not listed). Suzano has the capacity to produce 2.890mtpy of pulp 0.97mtpy of which is used in the company s integrated paper mills and 1.92mtpy of which is sold as market pulp. Suzano is also an important player in the paper segment, with capacity to produce 1.29mtpy, of which 66% is uncoated paper. The company holds 30% of the domestic market share in uncoated paper, making it the second-largest player in Brazil, after International Paper (IP, not rated). EXHIBIT 82: SUZANO S HISTORY - ALMOST 90 YEARS IN THE MARKET 1924 Leon Feffer starts paper trading 1939 Start up of the first paper mill 1956 Acquisition of Suzano mill 2004 Merger with Bahia Sul 2005 Acquisition of Ripasa/Compacel (50%) 2010 Acquisition of FuturaGene 2011 Acquisition of another 50% of Conpacel + KSR Source: Company data and Espirito Santo Investment Bank. Suzano was founded in 1924 as a paper trading company and started its first paper mill 15 years later. The company entered the pulp sector in the mid 1950s with its own eucalyptus plantation. Suzano currently employs about 12,000 people (including outsourced workforce). The assets As of the end of 3Q11, Suzano s forestry business unit held 800,000ha of land in 7 Brazilian states, of which 343,000ha are planted with eucalyptus trees. Suzano s wood needs are roughly 70% suplied by its own forestry, while the resting wood is bougth from thirdparty suppliers. In 2010 this level was slightly higher, 80% of Suzano s wood needs were met by its own forestry base, which achieved an average productivity yield of 44m³/ha year, in line with the Brazilian eucalyptus forestry productivity yield average of 45m³/ha/year the highest in the world. According to the company, the São Paulo units deliver higher yields than the country average. Suzano does not disclose this figure but we estimate that it could reach above 50m³/ha/year in some areas. EXHIBIT 83: COMPANY ASSETS - FORESTRY, PULP AND PAPER AS AT 3Q11 Source: Company data and Espirito Santo Investment Bank. 47