Action Notes RATING/TARGET/ESTIMATE CHANGES

Transcription

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

Action Notes RATING/TARGET/ESTIMATE CHANGES

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