In 2005, we monetized part of our chemicals business through an initial public offering of the Canexus Income Fund. We have retained a 61.4% interest in our chemicals business, and we continue to fully consolidate chemicals in our Consolidated Financial Statements .

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Description of Chemicals Business
Our chemicals business manufactures sodium chlorate and chlor-alkali products (chlorine, caustic soda and muriatic acid) in Canada and Brazil. This production is sold in North and South America, with some sodium chlorate distributed in Asia. Our manufacturing facilities are modern, reliable and strategically located to capitalize on competitive power costs or transportation infrastructure to minimize production and delivery costs. This enables us to have reliable supplies and low costs—key factors for marketing bleaching chemicals.

Electricity is the most significant operating cost in producing sodium chlorate and chlor-alkali products, making up over half our cash costs. Therefore, our current facilities are strategically located to take advantage of economic power sources. Our second highest cost is transportation. The proximity of our manufacturing plants to major customers and competitive freight rates minimize our transportation costs. Labour is also a significant manufacturing cost. Approximately 50% of our workforce is unionized with collective agreements in place at all of our unionized plants.

To grow value in our chemicals business, we focus on reducing our costs while maintaining market share, building a sustainable North American customer base and capturing new offshore opportunities.

North America
The North American pulp and paper industry consumes approximately 95% of the continent’s sodium chlorate production. We market our sodium chlorate production to numerous pulp and paper mills under multi-year contracts that contain price and volume adjustment provisions. Approximately 32% of this production is sold in Canada, 61% in the US, and the rest is marketed offshore.

We are the third-largest manufacturer of sodium chlorate in North America with four Canadian facilities: Nanaimo, British Columbia; Bruderheim, Alberta; Brandon, Manitoba; and Beauharnois, Quebec.

In October 2004, we completed an expansion of our Brandon plant, increasing capacity to 260,000 tonnes per year. Brandon is the world’s largest sodium chlorate facility and has one of the lowest cost structures in the industry, significantly enhancing our competitive position in North America. In late 2006, we began another expansion at Brandon which is expected to increase capacity by 33,000 tonnes per year, by mid 2008.

Our chlor-alkali facility at North Vancouver, British Columbia, manufactures caustic soda, chlorine and muriatic acid. Almost all of our caustic soda is consumed by local pulp and paper mills, while our chlorine is sold to various customers in the polyvinyl chloride, water purification and petrochemicals industries, primarily in the United States. In early 2008, a technology conversion project for the North Vancouver facility was sanctioned. The conversion project will replace existing diaphragm technology and assets with newer, proven membrane technology that is expected to be more cost effective and will expand productive capacity by 35%. The project is expected to be completed early 2010.

Brazil
We entered Brazil in 1999 by acquiring a sodium chlorate plant and a chlor-alkali plant from Aracruz Cellulose S.A. (Aracruz), the leading manufacturer of pulp in Brazil. The majority of the sodium chlorate production is sold to Aracruz under a long-term sales agreement that expires in 2024. Most of the chlorine and about 15% of the sodium chlorate production is sold in the merchant market under shorter-term contracts. In 2002, we completed an expansion at both facilities to meet Aracruz’s growing needs. The majority of our electricity needs are supplied by a long-term supply contract in Brazil.