December 1, 2006

Although Norbord continued to decline after our initial purchase, the stock found a bottom in early October at $7.71 and has since rebounded toward $9.00 per share. The attractive dividend yield, currently 4.5%, and several external factors provided support at the lows.

Despite persistent weakness in US housing statistics, we think that the worst case scenario has already been priced into housing related commodities. We noticed that OSB bottomed in the late-September/early-October time period at $155 per thousand square feet and has since recovered to $175 per thousand square feet. On Norbord’s third quarter conference call, management indicated that all of the company’s mills were generating cash throughout this period. This implies a cash cost well below $155 per thousand square feet, although exact figures were not provided due to competitive reasons. As a comparison, it is generally believed that the industry requires an OSB price of $160 per thousand square feet to break even on a cash basis.

We also observed that most of the US housing-related stocks bottomed at a similar time, which provided evidence that the sector-wide capitulation selling was complete. US home builders, such as Lennar and Toll Brothers, which had been under severe pressure for almost twelve months, began to recover in July. US wood stocks, such as Louisiana-Pacific and Weyerhaeuser started to lift through August and September. Similarly, Home Depot and Lowe’s have bounced from their early September troughs. This pattern gave us comfort that we were on the right track with our position in Norbord, a stock that is also highly sensitive to the US housing market.

Finally, trading in Louisiana-Pacific (NYSE:LPX) on November 28th piqued our interest. The stock rallied as much as 11% on the day, to close 5.8% higher on almost five times the average daily volume. Rumours that LPX was close to making a decision on the allocation of the Company’s $1.2 billion cash balance invigorated the stock. Earlier in November, Highland Capital Management, an activist fund manager, disclosed a 6% stake in LPX. The market suddenly decided that Highland Capital was pressing LPX to pay out a large special dividend, sell the Company to Weyerhaeuser or acquire low-cost, well-run, complementary OSB assets in order to improve returns. Although nothing has come of the excitement, Norbord shareholders could potentially benefit from at least one of these options.

March 2, 2007

The US Department of Commerce released some sobering statistics this week. New home sales fell 16.6% in January from the previous month, the largest decline since January 1994. Shares of the US-based home builders responded negatively to the news and aborted their recovery trend. Home Depot warned that 2007 earnings would be lower than expected and the stock took a hit. Correspondingly, Norbord declined approximately 10% after reaching a high of $9.87 on January 30, 2007.

Despite the dour backward-looking news and the weak outlook for the first half of 2007, our investment thesis is unchanged. Norbord’s solid management and low cost assets should allow the Company to remain cash flow positive through the bottom of the cycle. Although the Company lost US$1 million or $0.01 per share in the fourth quarter of 2006, Norbord generated US$22 million in EBITDA. In fiscal 2006, Norbord earned US$0.67 per share and generated US$247 million in EBITDA. We continue to believe that the Company’s net asset value, based on precedent transactions, is well above the current trading price.

Our positive long-term outlook for the stock depends on the simple economic law of supply and demand. During this period of slowing demand for OSB, it is crucial that producers remain disciplined in order to prevent a collapse in prices. Importantly, we are already seeing the expected supply response. Several high cost facilities have been closed and several proposed expansion or green-field projects have been postponed or cancelled. Norbord even announced that it plans to take scheduled downtime for regular maintenance at four facilities in March and April, while OSB prices are weak. The combined 19 days of total downtime implies the curtailment of approximately 25 million square feet of OSB production.

Similar to the steel sector, consolidation allows tighter control over production, which is positive for pricing and therefore profits. As the housing cycle bottoms, further rationalization in the industry is inevitable. As we have discussed previously, Norbord is likely a “non-core” asset to Brookfield Asset Management and would be attractive to several of the forestry giants. In the meantime, we are content holding a high quality stock that currently yields 4.5%.

August 3, 2007

The US housing crisis and the related sub-prime lending woes have now become front page news. Understandably, the markets have reacted swiftly to re-price risk, removing the speculative fervor fueled by cheap money. Unfortunately, shares of Norbord have declined almost 15% during the ongoing correction. During times of such volatility, investors should take the time to reacquaint themselves with the rationale behind their original investment.

Simply, Norbord is one of the highest quality and lowest cost OSB producers in North America. The Company’s second quarter results, released July 25, are indicative of both the difficult market conditions and the quality of the Company’s diversified asset base. In the second quarter of 2007, Norbord reported EBITDA (earnings before interest, taxes, depreciation and amortization) of US$17 million, compared to US$79 million in the second quarter of 2006 and US$4 million in the first quarter of 2007. In the current quarter, the Company’s European operations generated US$26 million in EBITDA, while the North American operations lost US$2 million at the EBITDA level. Unallocated or corporate expenses of US$7 million result in the US$17 million EBITDA figure. The Company’s newest plant in Cordele, Georgia should reach full capacity by the end of 2007. It is expected to be one of the lowest cost mills in the industry and will improve Norbord’s North American profitability. At current price levels, we believe that the Company trades well below the replacement value of its mills, which is in the $12 to $13 per share range.

The OSB pricing tells the whole story, with an average price of only US$156 per Msf in the second quarter of 2007, compared to US$238 per Msf a year ago and US$145 per Msf in the first quarter of 2007. Interestingly, European pricing was much stronger (reaching €249 per m³ compared to €204 per m³ in 2006). Although the weakness in US housing starts is having a severe detrimental impact on building material prices, the Company noted that North American OSB had rebounded to US$197 per Msf by the end of the second quarter. Management took the time to highlight the fact that a US$10 per Msf change in the North American OSB price would add US$35 million in annualized EBITDA.

As the US housing market and the related OSB market work their way through a downturn that could last “well into 2008”, we should examine Norbord’s balance sheet closely. As of the end of the second quarter, Norbord had US$640 million of long-term debt on the balance sheet and US$83 million of cash and cash equivalents. The Company also has $196 million of available capacity on its $200 million unsecured revolving bank lines to support “short-term liquidity requirements”. This amount of liquidity would be able to fund the Company’s dividend for almost 4 years. Therefore, we believe that cash flow and credit lines will be able to fund the Company’s operations and meet dividend requirements throughout the bottom of the cycle. Investors need to be patient but the dividend, which currently yields 4.95%, should support the shares in the interim.

December 28, 2007

Since our last update, Norbord has traded in a range between $7.00 and $8.50 per share, buffeted by fears related to the US housing slowdown. According to the US Census Bureau and the US Department of Housing and Urban Development, privately-owned housing starts in November came in at a seasonally adjusted rate of 1,187,000 units. This was 3.7% below the October figure of 1,232,000 units and 24.2% below the November 2006 rate of 1,565,000 units. Historically, seasonally adjusted US housing starts have bottomed around 1,000,000 units. Although a rapid recovery is unlikely, we believe that we are approaching the trough of the cycle.

Weak demand from the US housing sector has pushed OSB prices down to approximately US$150 per thousand square feet. In response, several companies have announced production curtailments, have mothballed older facilities and have cancelled new capacity additions. Even Norbord, one of the lowest cost producers in the industry, has taken downtime at mills in Quebec, Alabama and Genk, Belgium. This industry-wide production discipline should stabilize prices, albeit at relatively low levels in the near-term. OSB prices will recover once inventories of unsold homes are worked off. Longer-term, rising home ownership rates, increasing panel intensity and switching from higher cost plywood will boost prices.

Norbord’s third quarter financial results demonstrated the low cost and high quality nature of the Company’s geographically diversified asset base. Although Norbord reported a net loss of $1 million or $0.00 per share in the third quarter, it compares favourably to the loss of $15 million or $0.11 per share in the second quarter of this year. In the most recently completed quarter, EBITDA improved to $30 million from $17 million in the second quarter. Importantly, the Company’s European operations were strong, offsetting weakness in the North American side of the business. In fact, European panel prices have increased more than 15% year-to-date, driven by strong demand in Eastern Europe.

We believe that the shares have found support around current levels for five key reasons. First, as we discussed above, we are close to the traditional bottom of the housing cycle. Second, Norbord’s financial results seem to have stabilized and are generating positive EBITDA. Third, the Company has continued to pay its dividend of $0.10 per quarter, which yields 5.2% at current price levels. Fourth, the shares are trading at a large discount to the replacement value of the Company’s mills, which we believe to be in the $12 to $13 per share range. Finally, on September 19th, Brookfield Asset Management, Norbord’s largest shareholder, announced that they had purchased 3,250,000 common shares at a price of $7.05. This purchase brings the total number of shares beneficially owned by Brookfield to 58,703,575, representing 40% of the outstanding common shares and puts a floor on the stock. Patience is required, but investors should eventually reap the rewards of owning a high quality company in a beaten down sector with positive long-term fundamentals.

January 25, 2008

The US housing crisis is now front page news. Yesterday, the National Association of Realtors said that the median price for all homes sold in 2007 fell 1.3%, the first decline since the organization began tracking this statistic in 1968. On January 17, the US Census Bureau and the Department of Housing and Urban Development announced that privately-owned housing starts in December came in at a seasonally adjusted rate of 1,006,000 units. This was 14.2% below the revised November estimate of 1,173,000 and an amazing 38.2% below the revised December 2006 estimate. Traditionally, new housing starts bottom around the 1 million units per year level, so sentiment in the sector shouldn’t get much worse.

Recent aggressive actions from both the US Federal Reserve and the Bush administration should provide some support for the housing sector, the economy and the stock markets in the short-run. The Fed surprised the markets with an inter-meeting 75 basis point rate cut on Tuesday and is expected to cut rates again, perhaps as much as 50 basis points, when they meet next week. In concert, Freddie Mac reported that 30-year and 15-year fixed rate mortgages have fallen to the most attractive levels since 2004. Additionally, US taxpayers have just received a stimulus package that will essentially provide a $600 rebate per person. This cash infusion is designed to juice the economy and avoid a deepening slowdown or recession.

Because sentiment is so negative today, we believe that Norbord’s shares, yielding 6.5%, have limited downside. Let’s examine why we believe that the dividend is safe. At the end of the third quarter, Norbord had $48 million of cash on the balance sheet and $231 million of unused credit facilities. Subsequent to the quarter end the Company securitized $50 million of its accounts receivable. Although $200 million of debt is due in March 2008, repayment has already been pre-funded through the issuance of senior notes due in 2017. Assuming the Company breaks even on a cash basis and spends $35 million per year on capex, the dividend can be paid from current liquidity for almost two full years. By then we expect that the housing market will have rebounded enough to allow the lowest-cost operator to generate sufficient cash from operations to fund the dividend.

Finally, it is worth noting that today’s trading price implies a 25% to 50% discount to the replacement value of the Company’s assets. Remember that Brookfield Asset Management has shown to be a buyer of the stock at $7.05. At $6.15 the possibility of BAM privatizing the entire Company becomes more and more likely. As patient, long-term, deep-value investors, we intend to collect our dividends and wait for either a housing recovery or some form of corporate action to realize shareholder value.