Chemtrade_BC Chemicals Acquisition

When Chemtrade completed its first public offering two years ago, we committed to delivering reliable, sustainable and growing distributions. Since that time we have exceeded the IPO expectations, increasing our distributable cash by more than 20% from $1.47 per unit to our current level of $1.80 per unit.

Our achievements are based upon:

A business model that seeks to maintain reliable distributions by mitigating the effects of changes in commodity prices and volume:
Attention to cost control and incremental growth to ensure sustainability of earnings; and
Acquisitions increasing Chemtrade's scale and diversity of earnings supporting the sustainability and reliability of existing distributions and the ability to increase distributions.

Today, I want to start with a brief description of our business model.

I then want to focus on our operations with particular emphasis on our most recent acquisition and the relation of each business to our business model.

Vic will take you through the financials and distribution information, including some pro formas for the recent Pulp Chemicals acquisition, and I will finish with some concluding comments.

Chemtrade provides industrial chemicals and services to customers in North America and around the world. Through marketing services agreements and our own production facilities we are one of the world's largest suppliers of sulphuric acid, liquid sulphur dioxide and sodium hydrosulphite, or SHS. We are also a leading regional supplier of sulphur, and now, with the Pulp Chemicals acquisition, sodium chlorate.

Our business model is intended to mitigate the effect that changes in commodity prices and volumes could have on our earnings. As a general statement we seek to mitigate commodity risks through

contractual provisions;
competitive position; or
product or service differentiation in the
market place

Outside of our Pulp Chemicals business, we have primarily focused on sulphur-based chemicals. We obtain sulphuric acid, SO2 and sulphur generally from base metal smelters and oil refineries. These products are produced as a result of environmental laws requiring industries to capture sulphur emissions resulting from the production of their core products.

Removal of these products is critical to producers, as they could not operate without Chemtrade's removal services. Chemtrade guarantees its removal services and in its 70 year history has never caused unscheduled downtime for a producer. Chemtrade provides removal services for approximately 40 key producers. The products we remove are valued core ingredients for other industries. So Chemtrade markets and distributes the products it removes to a number of different industries and over 400 customers.

Most of these products are largely commoditized. Therefore, it is important to minimize our exposure to commodity price and volume fluctuations. Our business model follows the general premise that the less you can differentiate your product in the market place the more commodity risk you should push back to the producer of the product. Accordingly, through long-term contracts with our producers, the majority of price and volume risk is borne by the producers and not by Chemtrade. These contractual provisions are a significant stabilizing influence on our earnings.

Following our December 2002 acquisition of the SHS operations from Clariant, Chemtrade became the largest North American producer of SHS and one of the largest producers in the world. This is a great fit with our original business since one of the key raw materials is liquid SO2. The SHS operations are the largest purchaser of SO2 in North America and Chemtrade is North America's largest supplier. Our SHS operations allow us to use the SO2 we obtain from our producers to produce SHS, a higher valued sulphur product.

The majority of our SHS sales are to the pulp and paper industry, where it is used primarily for bleaching mechanical and recycled pulps used in newsprint production. Most of the remainder is sold to the textile industry for bleaching indigo and vat dyes. We are the sole supplier to most of our customers and have excellent long-term customer relationships.

We are the clear market leader in North America, with a market share more than double that of our nearest competitor. The top three producers in the industry maintain an 85% share, creating a disciplined North American SHS market. Finally, Chemtrade is the only North American producer of powder SHS and, accordingly, is the only producer able to offer product in either powder or liquid form.

From a business model perspective,

SHS is a product that can be differentiated in the market based on form (powder or liquid), formulations and performance;
As the market leader, the SHS operations have a strong competitive position; and
Due to the SO2 linkage and steps we are taking to restructure other raw material contracts, we believe that we can add further stability to the cost of the commodity inputs.

Finally, let me describe our newest business.

We recently acquired the operations and assets of BC Chemicals, a wholly owned division of Canfor for $117.3 million. We are calling it our Pulp Chemicals business.

Based in Prince George, British Columbia, Pulp Chemicals produces sodium chlorate and crude tall oil, both of which are chemicals used by the pulp and paper industry. Sodium chlorate is used to bleach pulp, and crude tall oil is used as a less expensive alternative energy source to natural gas. Crude tall oil is also referred to as CTO. The bulk of Pulp Chemical's earnings are generated from sales of sodium chlorate.

The sodium chlorate facility consists of two cell lines having total capacity of about 78,000 tonnes per year. In basic terms, the cell lines undertake a very simple process of combining salt and water, and then passing electricity through the solution to produce sodium chlorate.

This morning I will quickly review Chemtrade's 2002 performance, its first full year of operations, and measure that against the expectations at the time of the IPO. I will then review the results for the first half of this year, which reflect the acquisition of the SHS business. Finally, we'll have a look at some pro formas that reflect the Pulp Chemicals acquisition.

In the IPO marketing materials, we indicated expected annual EBITDA of $25.6 million and distributable cash of $19.2 million.

Our actual results for 2002 were well ahead of the IPO estimates. EBITDA was $26.3 million and, more importantly, distributable cash was $21.9 million.

The SHS acquisition in December of last year substantially changed Chemtrade's financial picture.

For the first half of this year, cash available for distribution was $14.1 million, generated from revenue of $135.4 million and EBITDA of $18.9 million. In the first half of last year, distributable cash was $11.7 million, revenue was $101.4 million, and EBITDA was $13.7 million. The principal reason for the increase of greater than 20% in each of these metrics over last year is the year-end acquisition of the SHS assets.

In total, consolidated financial results for the first half of 2003 met expectations. Results were affected by planned maintenance shutdowns at our SHS plant in South Carolina, and at the Inco smelter in Sudbury, Ontario, which reduced available product at both of these facilities. Financial results were also affected by the stronger Canadian dollar.

An unplanned labour disruption at the Inco operation in Sudbury, our major supplier of sulphuric acid, affected operations but not financial results in the second quarter. We were able to supply the majority of our customer base from inventory and alternative sources in June, and indeed, since then.

We're pleased that Inco and the union reached a settlement and that the operations have resumed.

Since the beginning of July, Inco has been contractually required to mitigate the financial impact resulting from Chemtrade purchasing sulphuric acid from alternative sources in order to supply its customer base. We were able to minimize the impact on both Inco and Chemtrade during the stoppage, and the mitigation will be reflected in Chemtrade's third quarter results.

The Pulp Chemicals acquisition has again changed the financial picture for Chemtrade. On a pro forma basis, the combined businesses, that is, Chemtrade and the Pulp Chemicals business would have produced EBITDA of $28 million, and distributable cash of $21.3 million, or 97 cents per unit on a basic basis, for the 6 months ended June 30, 2003. This compares with EBITDA of $18.9 million and distributable cash of $14.1 million, or 87 cents per unit, that Chemtrade actually generated.

Obviously the acquisition is very accretive for Chemtrade unitholders. Taking just one measure, albeit the most important, pro forma basic distributable cash per unit for this
6-month period is 10 cents higher than Chemtrade standalone, or an increase of approximately 11%. As Mark explained, we also believe that the Canfor agreements will ensure that this earnings stream should be relatively stable over the long term.

Our key financial objective is to provide reliable and sustainable distributions. We pay regular monthly distributions to our unitholders and, after each quarter is completed, we pay a supplemental distribution to complete that quarter's cash distribution.

We have established a conservative distribution policy, holding back some distributable cash so that we would be able to continue to pay consistent distributions even in the event of unforeseen interruptions to the normal course of business. Because of this, and because the business has performed quite well this year even under difficult conditions, we have been able to maintain the distribution rate we established at the end of last year.

The results we have delivered since our inception have led to cash distributions to our unitholders that have exceeded our initial expectations.

In the IPO marketing materials we indicated an expected annual distribution rate of $1.47 per unit. Distributions per unit attributable to 2002 were $1.58, a substantial increase over the expected rate of $1.47. For 2002, these numbers exclude the units issued on December 30th as part of the SHS acquisition.

Effective with the January 2003 distribution, we announced further increases to our monthly and supplemental distributions, taking the annual rate to $1.76 per unit. And as
a result of the Pulp Chemicals acquisition, we have announced plans to increase the quarterly supplemental distribution to 12 cents per unit effective with the third quarter distribution. This takes the annual rate to $1.80 per unit. Over the 2 years since the IPO, cash distributions have increased by about 22%.

The Pulp Chemicals acquisition was financed by proceeds from a new issue of units and increased bank debt. The total cost of the purchase, including costs, is estimated at $126 million.

The equity was issued on a bought deal basis in the amount of $86.4 million Subscription Receipts through a syndicate of underwriters including, of course, Scotia Capital. The Subscription Receipts were exchanged for 5,860,000 units of the Fund upon completion of the acquisition. There are now approximately 22 million units outstanding.

As mentioned earlier, we have adopted a conservative distribution policy and are confident we will maintain the rate we have set. We will continue closely monitoring distributable cash and consider whether a further increase in distributions is sustainable, and therefore, warranted.

I'll now hand the presentation back to Mark

Mark Davis

Thanks, Vic.

We are pleased with the increased scale provided by our two acquisitions. Furthermore, just viewing the effects of the Pulp Chemicals transaction on its own, we have significantly diversified our stream of earnings.

On a pro forma basis the Pulp Chemicals Business should account for approximately 33% of Chemtrade's aggregate EBITDA and 34% of distributable cash. We believe that this diversity is important to long term reliability and sustainability of our distributions.

We continue to believe that we can realize synergies and productivity improvements from our recent acquisitions, and that there are further opportunities to expand our business. We will continue looking for acquisitions that strengthen our ability to sustain and increase distributions. However, our guidelines for appropriate transactions are clear - they must be in areas of our core competence, fit our business model and be immediately accretive to unitholders.

Our results and actions have led to a very positive return in the market. In the two years since the IPO our total return has significantly outpaced the income trust and TSX indexes. We believe that we are even better positioned today to deliver on our commitments of reliable, sustainable and growing distributions in the years to come.

The cell lines have been well maintained and are currently in the final stages of a five year $4 million anode recoating program. This program will not only improve electricity utilization, which represents approximately 50% of sodium chlorate manufacturing costs, but will also boost production capacity by reducing the required number of down days.

The program is expected to be completed in May 2004 and the remaining costs for the recoating program were pre-funded as part of the financing for the acquisition. Anode recoatings are only needed every 12-15 years, so the timing was excellent for us in this regard.

Both the sodium chlorate and CTO plants are efficient state-of-the-art facilities that have been well maintained and upgraded. Excluding the major anode project (which will not be required again for at least 10 years) annual maintenance capital expenditures have averaged about $500,000 over the last 5 years.

The acquisition was structured to include 10-year exclusive contracts with Canfor, expanding Chemtrade's existing long term contract base by providing new long-term, stable, contractual earnings streams. We expect to earn approximately 65% of the pro forma Pulp Chemicals EBITDA from the Canfor long-term contracts.
Canfor will continue to purchase about 70% of the sodium chlorate capacity at a price that will be adjusted to reflect changes in approximately 95% of the variable manufacturing costs; further, another 15% of the sodium chlorate capacity is sold to other customers under long-term contracts.
Chemtrade will toll process Canfor's soap skimmings into CTO and Canfor will pay a fee to Chemtrade to compensate for a complete recovery of the processing costs plus a fixed dollar profit margin.

Clearly, from our unitholders perspective, these contracts substantially mitigate a significant portion of price and volume risk on the Pulp Chemicals products.

After Vic reviews Chemtrade's financial performance and pro-formas to give you a better sense of the expanded business I will add some final comments concerning our diversity of earnings.