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Canoe Forest Products Ltd. November 2012

In November 2012, an audit team from KPMG Performance Registrar Inc. (KPMG PRI) carried out an SFI re-certification audit of the Canoe Forest Products (Canoe) woodland operation against the requirements of the 2010-2014 edition of the Sustainable Forestry Initiative (SFI) standard. To provide for a more efficient audit, an ISO 14001 re-certification audit was conducted at the same time. This Certification Summary Report provides an overview of the audit process and KPMGs findings.

Description of Canoe Forest Products Ltd. Woodlands Operations

The Canoe woodland operations encompass a total area of 226,117 hectares of forest land in south central British Columbia. Canoe operates under three forest tenures Tree Farm Licence 33 (TFL 33), Forest Licence FL A18670 and Timber Licence T0635. All three tenures are located geographically within the Okanagan Shuswap Forest District. Canoe has no certified private forest land. The allowable annual cut (AAC) for these operations is approximately 350,755 m3/yr. Operations are carried out within several Biogeoclimatic Zones including the Interior Cedar Hemlock (ICH), Interior Douglas-fir (IDF), Montane Spruce (MS) and Engelmann Subalpine Fir (ESSF). Operations range in elevation from approximately 350 metres to over 1700 metres. Species harvested include Douglas-fir, Spruce, Western Red Cedar, Western Hemlock, Balsam, Larch, and Lodge-pole Pine. Harvesting is carried out by contractors with conventional ground skidding systems using feller bunchers and skidders and also by using overhead cable systems and some helicopter logging.

Audit Scope
The audit was conducted against all of the requirements of the 2010-2014 edition of the SFI standard except objectives 11-13, and incorporated a full scope assessment against all of the SFI program objectives.

Scope of Certification
The scope of the 2012 SFI re-certification audit included the forestry and harvesting operations under British Columbia Crown land tenures (Tree Farm Licence #33, Forest Licence A18670 and Timber Licence 635) and log purchases by Canoe Forest Products Ltd.

The Audit

Audit Team The certification audit was conducted by a two person team, one of whom is an RPF. Both team members were KPMG PRI staff and are EMS Lead Auditors and have conducted numerous forest management audits under a variety of standards including SFI, ISO 14001, CSA Z809 and FSC. The lead auditor on the engagement was Gregor Macintosh. Adrienne Hegedus was the auditor. Audit Approach - Re-certification audits are conducted to evaluate the Companys continuing conformance with all SFI requirements while annual surveillance audits are conducted to ensure that action plans are implemented and selected SFI requirements continue to be met. The 2012 audit involved an on-site assessment of

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all elements of the Companys environmental management system (EMS) and SFI program, and included visits to several field sites to evaluate conformance with the requirements of the current ISO 14001 and SFI standards.

Canoe Forest Products Ltd. 2012 SFI 2010-2014 Audit Findings New major nonconformities New minor nonconformities

SFI Program Representative Mr. Jeff Lipsett, RPF served as the Canoe SFI program representative during the audit. Audit Focus Areas The audit focused on assessing actions taken with respect to opportunities for improvement identified during previous KPMG PRI audits and actions to maintain SFI conformance against all SFI objectives assessed during the 2012 audit. Audit Sample The audit involved document review, interviews and field inspection of roads, harvesting practices and regeneration strategies on 12 sites.

Use of Substitute SFI Indicators

No substitute indicators were used during the audit.

New opportunities for improvement

Audit Objectives
The objectives of the 2012 SFI and ISO 14001 re-certification audit were to:

Assess the extent to which the Canoe environmental management systems, forest management plans and practices conform to the requirements of 2010-2014 version of the SFI standard and the ISO 14001:2004 standard, and Evaluate the progress of Canoe operations towards implementing actions developed for opportunities for improvement from previous audits.

Types of audit findings Major non-conformities: Are pervasive or critical to the achievement of the SFM Objectives.

Audit Conclusions
Minor non-conformities:

The audit found that:

The 2012 re-certification audit identified one major non-conformity with respect to
requirements of the SFI and ISO 14001 standards (the Standards). Following the audit Canoe developed an action plan for review by the audit team and then implemented this plan. After review and acceptance of the implementation of the action plan by the audit team, the Canoe EMS, forest management plans and practices were assessed as continuing to meet the requirements of the Standards in all material respects. Consequently, a decision has been made to recommend Canoe for continued certification to the SFI 2010-2014 and ISO 14001:2004 standards. The Canoe Forest Products Ltd. SFI certification is valid until January 10, 2016.

Are isolated incidents that are non-critical to the achievement of SFM Objectives. All non-conformities require the development of a corrective action plan within 30 days of the audit, which must be fully implemented by the operation within 3 months. Major non-conformities must be addressed immediately or certification cannot be achieved / maintained.

Canoes woodlands operations have made adequate progress towards addressing the findings of previous SFI and ISO 14001 audits.

Opportunities for Improvement: Are not non-conformities but are comments on specific areas of the SFM System where improvements can be made.

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Evidence of Conformity with SFI 2010-2014

Primary sources of evidence assessed to determine conformity with the SFI 2010-2014 standard are presented in the following table: SFI Objective # 1. Forest Management Planning 2. Forest Productivity Sources of Key Evidence of Conformity Forest Stewardship Plan (FSP), site plans, field inspections, Phoenix database. Site plans, silviculture reports, field inspections. Canoe Forest Products ensures prompt reforestation by planting within 1 or 2 seasons of harvest using genetically improved stock. An example of a free-growing stand of Douglasfir.

3. Protection and Maintenance of Water Resources 4. Conservation of Biological Diversity

Field inspections of riparian areas, review of site plans & harvest plans.

FSP, site plans, species at risk management handbook, operational field inspections.

5. Management of Visual Quality and Recreational Benefits

FSP, harvest plans, operational field inspections, visual modeling output.

6. Protection of Special Sites FSP, harvest & site plans, special site inspections.

7. Efficient Use of Forest Resources 8. Landowner Outreach

Inspection records, field inspections.

Wood Procurement information package.

9. Use of Qualified Resource and Logging Professionals 10. Adherence to Best Management Practices

Wood Procurement information package, interviews.

Wood Procurement information package, operational field inspections, working with WCSIC.

11. Promote Conservation of N/A Canoe does not procure fibre from outside of Biological Diversity, North America. Biodiversity Hotspots and Major Tropical Wilderness Areas

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Sources of Key Evidence of Conformity N/A - Canoe does not procure fibre from outside of North America.

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SFI Objective # 12. Avoidance of Controversial Sources including Illegal Logging 13. Avoidance of Controversial Sources including Sources without Effective Social Laws 14. Legal and Regulatory Compliance 15. Forestry Research & Technology 16. Training and Education 17. Community Involvement in the Practice of Sustainable Forestry 18. Public Land Management Responsibilities 19. Communications and Public Reporting 20. Management Review and Continual Improvement

N/A - Canoe does not procure fibre from outside of North America.

Sustainability policy, incident tracking system and operational inspections. Research tracking sheet. Training needs matrix, training records, interviews. Community involvement tracking sheet, Western Canada SFI Implementation Committee meeting minutes. FSP and associated referral process, site plans, referral of site plans to First Nations, responses to First Nations questionnaire. Annual SFI Progress Report, Certification Public Summary Report. Management review, internal audit. Canoe Forest Products has several areas where armilleria root rot requires that infected stumps be pulled to kill the fungus. An example of a harvest unit showing the results of stumping and stand level retention for wildlife and recruitment of coarse woody debris.

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Good Practices
A number of good practices were identified during the course of the audit. Examples included: SFI Objective 3: Construction practices for roads observed in the field have been closely supervised by Canoe woodlands staff in accordance with the terrain stability field assessment and the road design, ensuring that terrain stability and water management concerns are addressed as construction progresses. SFI Objective 20: Review of Canoes tracking of incidents and related action plans showed thorough examination of the incidents, including root cause analyses and evaluation of effectiveness. They also included additional documentation such as annotated maps and photographs.

Follow-up on Findings from Previous Audits

There were no open nonconformities from the 2011 surveillance audit. However, the 2012 re-certification audit did assess actions taken to address the opportunities for improvement identified during the 2011 audit and found that these actions were effective.

An example of road construction on steep terrain. Canoe Forest Products uses engineered road designs for full -bench roads intended for several years use. Road construction in the Onyx Creek drainage through an incised gully.

New Areas of Nonconformance

Performance Measure 20.1: The SFI standard requires that Program Participants establish a management review system to annually examine findings and progress in implementing the SFI Standard, to make appropriate improvements in programs, and to inform their employees of changes. Canoe Forest Products Ltd. EMS Manual requires annual management reviews. The audit observed that as of the date of the re -certification audit, a period of more than 12 months had elapsed since the last management review. Note: A management review meeting was held subsequent to the re-certification audit. The lead auditor has determined that correction and corrective action for the non-conformity has been effectively implemented and the nonconformity has been closed.

New Opportunities for Improvement

A total of 6 new opportunities for improvement were also identified during the audit. The key opportunities noted during the audit included: Performance Measure 4.1: The audit observed that an internal Species at Risk Guidelines binder contained the 2005-2009 version of the SFI Standard. Performance Measure 10.1: Canoes wood procurement risk assessment process involves records from the Ministry of Forests Compliance and Enforcement (C&E) branch. The latest C&E information reviewed by Canoe was the 2009 annual report.

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Performance Measure 16.1: The audit observed an opportunity for improvement regarding tracking of contractor training records. The audit noted that Canoe staff has abandoned the practice of collating contractor training records in a central database. Performance Measure 3.1: While annual road inspections are being conducted as per the requirement for a road risk assessment program there does not appear to be a definitive summary of which roads have / have not been assessed. Performance Measure 20.1: The audit observed an opportunity for improvement regarding documentation of the management review meeting minutes. Review of the 2012 meeting minutes observed that for each discussion topic there is a section where conclusions are to be documented. However, it was noted that this section was not completed for all of the 2012 discussion topics. SFI Performance Measure 20.1: The audit found that the Company had completed a comprehensive internal audit of its performance against the requirements of the SFI 2010-2014 Standard objectives and performance measures, and that this was sufficient to satisfy the requirements of the Standard. However, The Companys EMS manual does not include a specific requirement that the annual management review include a review of the Companys progress in achieving SFI 2010-2014 Standard objectives and performance measures.

Review of the record of the December 4, 2012 management review found that although it mentioned the findings of the internal audit, the level of detail included in the minutes is insufficient to clearly demonstrate that the requirements of the standard have been met.

Corrective Action Plans

Corrective action plans designed to address the root cause(s) of the non-conformities identified during the audit have been developed by Canoe Forest Products Ltd. and reviewed and approved by KPMG PRI. The next surveillance audit will include a follow-up assessment of these issues to confirm that the corrective action plans developed to address them have been implemented as required.

Focus Areas for the Next Audit Visit

The following have been identified as focus areas for the next audit visit: 1) Follow-up on 2012 external audit findings. 2) Completed road construction in the Onyx Creek drainage. 3) Company participation in WCSIC meetings and initiatives.

Contacts:
Chris Ridley-Thomas RPBio, EP(EMSLA) (604) 691-3088 Dave Bebb RPF, EP(EMSLA) (604) 691-3451

This report may only be reproduced by the intended client, Canoe Forest Products Ltd., with the express consent of KPMG. Information in this issue is of a general nature with respect to audit findings and is not intended to be acted upon without appropriate professional advice. 2012 KPMG. All rights reserved.

Through KPMG PRI, KPMGs Vancouver based forestry group is accredited to register forest companies to ISO 14001, CSA-SFM, SFI and PEFC certification standards. The group is led by Chris Ridley-Thomas and consists of a highly qualified team of resource management professionals.