Montreal, Quebec, Canada, 16 March 2012 – Tembec announced today a CAD 190 million capital investment to upgrade its specialty cellulose manufacturing facility at Temiscaming, Québec. This investment will increase annual production of green electricity by up to 40 megawatts, reduce sulfur dioxide emissions by 70%, increase Temiscaming’s annual production capacity of specialty cellulose by 5000 metric tons, and make Temiscaming one of the world’s lowest-cost specialty cellulose manufacturing facilities.

This project is the first phase of a two-phase investment plan for the facility. It will involve the replacement of three old boilers with a new high-pressure boiler designed to burn waste sulfite liquor, a co-product of the specialty cellulose manufacturing process, producing green steam for use at the facility. The project also calls for the installation of a new electricity turbine that will be driven by this steam. The turbine will increase the Temiscaming facility's green electricity production capacity from its current 10 megawatts to 60 megawatts. The boiler is scheduled to start up in December 2013, followed by the turbine, in May 2014.

Hydro-Québec will offtake the additional green electricity produced by this turbine under a 25-year contract at CAD 106 MW/hour, indexed with the consumer price index, which will strengthen and stabilize Tembec’s revenues through the economic cycle.

The CAD 190 million investment in Phase 1 will be financed with CAD 105 million of new debt, which includes a CAD 75 million loan from Investissement Québec; the balance of CAD 85 million will come from free cash flow from Tembec operations.

“This game-changing project for Tembec will make Temiscaming one of the most competitive mills in the global pulp and paper market. I want to acknowledge the critical support of the Québec government, through Investissement Québec, and the continuing commitment of our employees to remaining competitive,” said James Lopez, Tembec’s president and chief executive officer.

“This exciting project shows Québec’s commitment to supporting its regional resource-based industries, and helping them compete on the world stage. By working together proactively with local governments and Investissement Québec, we are pleased to reinforce Tembec’s leadership position in specialty cellulose, a growing and sustainable industry,” said Québec Premier Jean Charest.

Once the new equipment is in operation, Tembec expects a four-year return on investment, through new revenues from green electricity, the additional production of 5000 metric tons of specialty cellulose, and lower costs. Tembec’s management expects the project will reach an annual run-rate EBITDA (earnings before interest, taxes, depreciation, and amortization) contribution of approximately CAD 40-45 million by fiscal year 2015, assuming implementation as scheduled and planned.

Refined from wood pulp, specialty cellulose is a component of products in the pharmaceuticals, food, cosmetics, personal care, construction, and electronics industries, among others. It is a high margin business, growing in the range of 4% to 5% per year, and enjoys more stable demand than forest product commodities.

The overall project will increase Tembec’s annual production capacity of specialty cellulose from the current 310,000 metric tons to 345,000 metric tons. The Temiscaming facility’s production capacity will increase from the current 160,000 metric tons to 195,000 metric tons. Tembec’s Tartas, France, specialty cellulose facility has a current production capacity of 150,000 metric tons.

Tembec’s limited partnership, Tembec Energy L.P., has entered into a long-term power purchase contract with Hydro-Québec acting through its Hydro-Québec Distribution division. The agreement will allow Tembec to sell to Hydro-Québec, for a 25-year term, up to 50 megawatts of the electricity generated by a new turbine to be installed at its Temiscaming mill, at green energy rates of CAD 106 MW/hour, indexed with the consumer price index.

In connection with the project, Tembec has entered into a CAD 75 million loan with Investissement Québec, a governmental agency, which will be used to finance a portion of the total cost of the project, which currently is estimated at CAD 190 million. The loan bears interest at a rate of 5.5% compounded yearly and is secured by a second priority charge over the project’s assets. The loan shall be reimbursed in equal monthly payments over a period of 12 years starting 36 months after the initial loan disbursement and is subject to compliance with certain covenants and undertakings customary with such types of loans. Under this loan, Tembec also has agreed to grant to Investissement Québec a five-year option to purchase 3 million common shares of Tembec at a price of CAD 7.00 per share.

Tembec is a manufacturer of forest products – lumber, pulp, paper, and specialty cellulose – and a global leader in sustainable forest management practices. The company's principal operations are in Canada and France. With annual sales of approximately CAD 2 billion, Tembec has 4000 employees and is listed on the TSX (TMB).