We believe that the forestry sector is fundamentally very undervalued. Within this industry Fletcher Challenge Canada continues to be our favourite holding. While Fletcher Challenge Canada has appreciated to $17.00 from $15.50 since our original write-up, the shares remain cheap and primed for a catalyst.

The company recently reported its fiscal 2000 year-end results as of June 30. Not only did Fletcher Challenge Canada report exceptional earnings of $0.80 per share for the year versus $0.29 per share in 1999 but also the company bolstered an already strong balance sheet. Its book value rose to $17.07 and its huge cash position increased $55 million to $855 million or $6.90 per share. By year-end 2000, this cash pool could reach over $950 million.

This extraordinary cash accumulation should prove to be the ultimate catalyst to bring this stock back to the level it deserves. With a fresh and very motivated management team, along with the new controlling shareholder, Norske Skog, we believe that the decision for the utilization of this excessive cash hoard may be announced as early as October 2000. The company has a number options: the company could go private and buy out the minority public shareholders; pay a large special cash dividend of $5-10; or utilize its substantial cash to purchase attractive acquisitions. Norske Skog could also opt to sell Fletcher Challenge Canada to the highest bidder or implement a combination of any of the above.

Presently, Fletcher is in an optimal position with the uncertain former controlling shareholder Fletcher Challenge New Zealand out of the way, improving future earnings and a pristine balance sheet. We believe patience is now key. In the meantime, the stock provides a dividend yield of 3.5% and its two main commodities of newspaper and pulp are increasing in price. We expect that controlling shareholder Norske Skog will make a corporate decision on Fletcher’s future direction by the end of the year.

On October 26, at Fletcher Challenge Canada's annual general meeting it was announced that the company would adopt its new parent's name as well as its December year-end hence becoming Norske Skog Canada. Many investors were also waiting in anticipation for an additional announcement with regards to Norske Skog's substantial cash position of $909.2 million or $7.32 per share. While the company acknowledged that a more efficient use of its under-leveraged balance sheet is top priority, a final decision has yet to be made.

In our August 17, 2000 update we outlined the following possible options for Norske Skog's excessive cash position: the company could go private and buy out the minority public shareholders; pay a large special cash dividend of $5-10; or utilize its substantial cash to purchase attractive acquisitions. Norske Skog could also opt to sell Fletcher Challenge Canada to the highest bidder or implement a combination of any of the above. We expect a decision to be made in early 2001.

Meanwhile, Norske Skog continues to make progress in a volatile industry with quarter over quarter improvements while ameliorating its already strong balance sheet. Net earnings of $0.31 per share in the first quarter of fiscal 2001 were notably better than $0.08 per share in the comparable quarter of 2000. Strong newsprint demand was key to Norske's improved earnings although this benefit was partially offset by higher fibre and energy costs.

Most recently Norske Skog announced that it is exploring options for the sale of its Mackenzie pulp mill. This potential divestment is in line with Norske's strategic decision to focus on becoming a "leading supplier of lightweight uncoated groundwood printing paper".

We feel that Norske Skog continues to display considerable upside potential. It is fundamentally under-valued, currently trading below its book value of $17.23 and yielding 3.6%. The ultimate catalyst for this thinly traded, debt-free company could prove to be an announcement of the company's intention regarding the use of its large cash position.

We have sold our entire position in Norske Skog at $19. We feel that this is a prudent action in a weakening environment.

Numerous aspects of the paper and forest sector concern us at this time. One of the most prevalent issues is the expiration of the Softwood Lumber Agreement with the United States on March 31. While negotiations are in process, there is still a possibility that industry-threatening tariffs on exports could be implemented which would have a foreboding psychological effect on the whole sector. In addition to this, pulp and newsprint prices, primary products of Norske Skog have been softening.

While Norske’s stock price could go even higher we feel that the expectation of a dividend is widely accepted in the market place and built into the stock price. This, in conjunction with our cautious stance on the sector as a whole, has prompted us to take the opportunity to profit on this position.