OIL SANDS SECTOR FUND

Transcription

1 No securities regulatory authority has expressed an opinion about these securities and it is an offence to claim otherwise. PROSPECTUS Initial Public Offering February 24, JAN APR OIL SANDS SECTOR FUND Maximum: $500,000,000 (50,000,000 Units) Oil Sands Sector Fund (the Trust ) is an investment trust established under the laws of the Province of Ontario. This prospectus qualifies the issuance of transferable, redeemable units (the Units ) of the Trust. The Trust will be managed by Markland Street Asset Management Inc. (the Manager ), which has engaged AGF Funds Inc. ( AGF or the Investment Advisor ) to provide investment advisory and portfolio management services to the Trust. The Trust s investment objectives are: (i) to provide long term capital appreciation for holders of Units ( Unitholders ); and (ii) to provide Unitholders with a stable stream of quarterly cash distributions targeted to be $0.125 per Unit ($0.50 per Unit per annum or 5.0% per annum on the original issue price of $10.00 per Unit). The Trust will seek to achieve its investment objectives by actively managing a portfolio (the Portfolio ) of equity securities initially comprised of approximately 50 issuers, consisting primarily of issuers participating in the Canadian oil sands sector with the balance of the Portfolio (up to 25% of the total assets) invested in other issuers involved in the energy sector. The Portfolio s composition will vary over time depending on the Investment Advisor s assessment of market conditions and outlook. It is anticipated that holdings in the following 15 securities, presented by order of their initial weighting, will represent approximately 60% of the initial Portfolio: 1. Suncor Energy Inc. 6. Nexen Inc. 11. BlackRock Ventures Inc. 2. Canadian Oil Sands Trust 7. Western Oil Sands Inc. 12. Enerplus Resources Fund 3. Petro-Canada 8. UTS Energy Corp. 13. Connacher Oil and Gas Limited 4. Imperial Oil Ltd. 9. Canadian Natural Resources Ltd. 14. OPTI Canada Inc. 5. Shell Canada Ltd. 10. Husky Energy Inc. 15. Total S.A. Quarterly distributions for the period ending December 31, 2006 will be $0.125 per Unit ($0.50 per annum or 5.0% per annum on the original issue price of $10.00 per Unit). Commencing in 2007, the Trust will annually determine and announce each January the distribution amount for the following 12 months based upon prevailing market conditions and the Manager s estimate of distributable cash flow for the year. The Trust may make additional distributions in any given year. The initial cash distribution of $0.125 is expected to be payable on or before July 17, 2006 to Unitholders of record on June 30, Based on its initial anticipated composition, the Portfolio is expected to generate approximately 3.8% of distribution and dividend income per Unit per annum, which, after deduction of expenses, will be distributed by the Trust to Unitholders. The balance of the quarterly distributions is expected to be funded through sales of securities in the Portfolio or other returns, if any. The Portfolio would be required to appreciate at a rate of approximately 3.26% per annum in order for the Trust to maintain a stable NAV while making quarterly cash distributions. Therefore, it is expected that distributions to Unitholders will be characterized as capital gains, dividends and returns of capital. If the return on the Portfolio is less than the amount necessary to fund the quarterly distributions, the Manager will return a portion of the capital of the Trust to Unitholders to ensure that the distribution is paid and accordingly, NAV per Unit will be reduced. See Distributions. Prospective purchasers may purchase Units either by (i) cash payment, or (ii) an exchange (the Exchange Option ) of freely tradeable securities of those issuers set forth in this prospectus under the heading Exchange Option Exchange Eligible Issuers (collectively, the Exchange Eligible Issuers ). The Exchange Option does not constitute, and is not to be construed as, a take-over bid for any Exchange Eligible Issuer. See Exchange Option. (continued on next page)

2 (continued from cover) Price: $10.00 per Unit Minimum Purchase: 100 Units Price to Net Proceeds the Public (1) Agents Fee to the Trust (2) Per Unit... $10.00 $0.50 $9.50 Total Maximum Offering (3)... $500,000,000 $25,000,000 $475,000,000 Total Minimum Offering (4)... $250,000,000 $12,500,000 $237,500,000 Notes: (1) The offering price was established by negotiation between the Agents (as defined herein) and the Manager. The price per Unit is payable in cash or in securities of Exchange Eligible Issuers deposited pursuant to the Exchange Option. (2) Before deducting the expenses of this offering estimated at $750,000, subject to a maximum of 1.5% of the gross proceeds of this offering, which, together with the Agents fees, will be paid out of the proceeds of this offering. (3) There will be no closing unless a minimum of 25,000,000 Units are sold. (4) The Trust has granted the Agents an option (the Over-Allotment Option ), exercisable for a period of 30 days from the closing of this offering, to purchase at the offering price additional Units in an amount equal to up to 15% of the aggregate number of Units issued at the closing of this offering, which Over-Allotment Option and additional Units are qualified under this prospectus. If the Over-Allotment Option is exercised in full, under the maximum offering, the total price to the public, Agents fees and net proceeds to the Trust will be $575,000,000 $28,750,000 and $546,250,000, respectively. See Plan of Distribution. Commencing in 2007, Units may be surrendered for redemption during the period from July 15 th until 5:00 p.m. (Toronto time) on the 20 th Business Day before the last Business Day in August in each year (the Notice Period ), subject to the Trust s right to suspend redemptions in certain circumstances. Units surrendered for redemption by a Unitholder during the Notice Period will be redeemed on the last Business Day of August of each year (the Annual Redemption Date ) and the Unitholder will receive payment on or before the 15 th Business Day following the Annual Redemption Date. Unitholders will receive a redemption price per Unit equal to the Net Asset Value per Unit determined as of the Annual Redemption Date less (i) the aggregate of all brokerage fees, commissions and other costs relating to the disposition of securities in the Portfolio necessary to fund such redemptions and (ii) if the Manager determines that it is not practicable or necessary for the Trust to effect all or part of such disposition, then the aggregate of all brokerage fees, commissions and other transaction costs that the Manager estimates would have resulted from such disposition. The Trust may be terminated at any time upon not less than 90 days written notice to the Manager with the majority vote at a meeting of Unitholders called for that purpose. Its net assets will thereafter be distributed to Unitholders. See Description of Units and Unitholder Matters Termination of the Trust. There is no guarantee that an investment in the Trust will earn any positive return in the short or long term. No assurance can be given as to the amount of distributions announced in future years of the Trust. An investment in the Trust is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment and can withstand the effects of the targeted return not being met in any period. The Toronto Stock Exchange (the TSX ) has conditionally approved the listing of the Units, subject to the Trust fulfilling all of the requirements of the TSX on or before May 24, 2006, including the distribution of Units to a minimum number of public Unitholders. There is currently no market through which the Units may be sold and purchasers may not be able to resell securities purchased under this prospectus. There is no assurance that the Trust will be able to achieve its investment objectives. See Risk Factors for a discussion of various risk factors that should be considered by prospective investors in Units. In the opinion of counsel to the Trust and to the Agents, provided that the Trust qualifies as a mutual fund trust for purposes of the Income Tax Act (Canada) (the Tax Act ), the Units will be qualified investments under the Tax Act for trusts governed by registered retirement savings plans, deferred profit sharing plans, registered retirement income funds and registered education savings plans. See Canadian Federal Income Tax Considerations and Eligibility for Investment. The Trust is not a trust company and does not carry on business as a trust company and, accordingly, the Trust is not registered under the trust company legislation of any jurisdiction. Units are not deposits within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under provisions of that Act or any other legislation. RBC Dominion Securities Inc., CIBC World Markets Inc., BMO Nesbitt Burns Inc., National Bank Financial Inc., Scotia Capital Inc., TD Securities Inc., Berkshire Securities Inc., Canaccord Capital Corporation, Dundee Securities Corporation, HSBC Securities (Canada) Inc., Desjardins Securities Inc., Raymond James Ltd., Research Capital Corporation, Blackmont Capital Inc. and Wellington West Capital Inc. (collectively, the Agents ) conditionally offer the Units, subject to prior sale, on a best efforts basis, if, as and when issued by the Trust and accepted by the Agents in accordance with the conditions contained in the Agency Agreement referred to under Plan of Distribution and subject to the approval of certain legal matters by Borden Ladner Gervais LLP on behalf of the Trust and Blake, Cassels & Graydon LLP on behalf of the Agents. See Plan of Distribution. Berkshire Securities Inc., one of the Agents, is an affiliate of the Manager. Consequently, the Trust may be considered to be a connected issuer or related issuer of Berkshire Securities Inc. under applicable securities legislation. See Plan of Distribution. In connection with this offering, the Agents may over-allot or effect transactions related to their over-allotted position as described under Plan of Distribution. Subscriptions will be received for the Units offered hereby subject to rejection or allotment in whole or in part and the right is reserved to close the subscription books at any time. Closing of this offering is expected to occur on or about March 15, 2006, or such later date as the Agents and the Trust may agree, but in any event, no later than April 12, Registrations and transfers of Units will be effected only through the book-entry system administered by The Canadian Depository for Securities Limited ( CDS ). Investors will not have the right to receive physical certificates evidencing their ownership of Units. A purchaser of Units will only receive a customer confirmation from the registered dealer which is a participant in CDS and from or through which Units are purchased. See Plan of Distribution and Description of Units and Unitholder Matters Book-Entry Only System.

3 TABLE OF CONTENTS Page PROSPECTUS SUMMARY... 4 Amendments to the Declaration of Trust.. 39 GLOSSARY OF TERMS Reporting to Unitholders THE TRUST Termination of the Trust Status of the Trust Non-Resident Unitholders INVESTMENTS OF THE TRUST Book-Entry Only System Investment Objectives PLAN OF DISTRIBUTION Investment Rationale USE OF PROCEEDS Investment Strategy FEES AND EXPENSES The Oil Sands Industry Initial Expenses Indicative Portfolio Fees and Other Expenses Investment Criteria CANADIAN FEDERAL INCOME TAX Investment Restrictions CONSIDERATIONS Use of Derivative Instruments Taxation of the Trust Securities Lending Taxation of Unitholders MANAGEMENT OF THE TRUST ELIGIBILITY FOR INVESTMENT The Manager EXCHANGE OPTION Directors and Officers of the Manager Method to Purchase Units Advisory Board Procedure The Investment Advisor Determination of Exchange Ratio Similar Funds Managed by the Investment Delivery of Final Prospectus Advisor Withdrawal of Exchange Option Elections. 50 The Investment Advisory Agreement Maximum Offering Proxy Voting Policies and Procedures Exchange Eligible Issuers The Trustee RISK FACTORS CONFLICTS OF INTEREST INTEREST OF MANAGEMENT AND LOAN FACILITY OTHERS IN MATERIAL DISTRIBUTIONS TRANSACTIONS Distribution Reinvestment Plan MATERIAL CONTRACTS REDEMPTION OF UNITS LEGAL OPINIONS Annual Redemption PROMOTER Exercise of Redemption Rights AUDITORS Resale of Units Surrendered for CUSTODIAN Redemption REGISTRAR AND TRANSFER AGENT.. 59 Suspension of Redemptions PURCHASERS STATUTORY RIGHTS CALCULATION OF NET ASSET VALUE. 36 AUDITORS CONSENT... F-1 DESCRIPTION OF UNITS AND AUDITORS REPORT... F-1 UNITHOLDER MATTERS STATEMENT OF FINANCIAL POSITION. F-2 Trust Units NOTES TO STATEMENT OF FINANCIAL Issuances of Additional Units POSITION... F-3 Mandatory Market Purchase Program CERTIFICATE OF THE TRUST AND Meetings of Unitholders and Extraordinary THE PROMOTER... C-1 Resolutions CERTIFICATE OF THE AGENTS... C-2 Page 3

4 PROSPECTUS SUMMARY The following is a summary only of the principal features of this offering and is qualified in its entirety by, and should be read in conjunction with, the more detailed information appearing elsewhere in this prospectus. All references in this prospectus to dollars or $ are to Canadian dollars unless otherwise indicated. Oil Sands Sector Fund Oil Sands Sector Fund (the Trust ) is an investment trust established under the laws of the Province of Ontario pursuant to a declaration of trust dated as of February 24, 2006 (the Declaration of Trust ). The manager of the Trust is Markland Street Asset Management Inc. (the Manager ). AGF Funds Inc. ( AGF or the Investment Advisor ) will provide investment advisory and portfolio management services to the Trust. Offering: The offering consists of transferable, redeemable units (the Units ) of the Trust. Amount: Maximum: $500,000,000 (50,000,000 Units) Minimum: $250,000,000 (25,000,000 Units) Price: $10.00 per Unit Minimum Purchase: 100 Units ($1,000) Exchange Option: At the election of a prospective purchaser of Units, the price for each Unit purchased may be paid either by (i) cash or (ii) an exchange (the Exchange Option ) of freely tradeable securities of those issuers set forth in this prospectus under the heading Exchange Option Exchange Eligible Issuers (collectively, the Exchange Eligible Issuers ). A prospective purchaser of Units who elects to pay for such Units by using the Exchange Option must have done so by depositing (in the form of a book-entry deposit) securities of Exchange Eligible Issuers with Computershare Investor Services Inc., the Trust s agent for the Exchange Option, through The Canadian Depository for Securities Limited ( CDS ) prior to 5:00 p.m. (Toronto time) on February 23, Such book-entry deposits must have been made by a participant in CDS, which may have had an earlier deadline for receiving instructions from their clients to deposit securities of Exchange Eligible Issuers under the Exchange Option. Each prospective purchaser who has authorized the deposit of securities of an Exchange Eligible Issuer through CDS has the right to withdraw such deposit of securities at any time on or before midnight on the second business day after receipt or deemed receipt of the final prospectus for this Offering and any amendment. See Exchange Option. The purchase of Units by the exchange of securities of an Exchange Eligible Issuer pursuant to the Exchange Option will be a taxable event for the purchaser. See Canadian Federal Income Tax Considerations. Investment Objectives: The Trust s investment objectives are: (a) to provide long term capital appreciation for holders of Units ( Unitholders ); and (b) to provide Unitholders with a stable stream of quarterly cash distributions targeted to be $0.125 per Unit ($0.50 per Unit per annum or 5.0% per annum on the original issue price of $10.00 per Unit). Investment Rationale: The Trust has been created to provide investors with exposure to the returns of a portfolio of equity securities of issuers participating in the Canadian oil sands sector. The Manager and Investment Advisor believe that oil sands participants are very attractively positioned for future growth for several reasons: 4

5 (a) Industry Supply and Demand Dynamics Positive for Oil Sands Producers The Investment Advisor believes that the global supply of crude oil is at or near its peak. At the same time, global demand for crude oil is increasing with much of the expected demand being driven by economic growth in the developing world countries such as China and India. Non-conventional resources, such as oil sands, are expected to represent an increasing share of total supply. (b) Canadian Oil Sands: A World Class Asset According to the Canadian Association of Petroleum Producers, the large Alberta oil sands are second only to the oil fields of Saudi Arabia in terms of the size of the resource base. Furthermore, the Investment Advisor believes that the Canadian oil sands represent one of the world s largest oil reserves accessible to the investing public since a significant amount of the world s conventional oil reserves (including virtually all of OPEC s massive production) are not open to investment from the general public. (c) Canadian Oil Sands: Strong Competitive Advantages Non-Declining Asset Base. The Investment Advisor believes that oil sands producers generally do not incur the traditional exploration risk or declining resource profile of a conventional oil and gas producer. Advantages of oil sands resources include the relatively low exploration cost to establish the location, extent and the quality of resources, when compared to conventional oil development. Combined, these benefits offer a known, proven resource base having the potential to support a project for many years of stable production. Political Stability and Secure Source of Supply. As a G7 country with a developed legal system, stable economic and political environment and highly developed infrastructure, Canada represents a relatively low risk supply source when compared with many other countries with large hydrocarbon resources (e.g. Middle East, Russia, South America). Proximity to United States. Alberta s oil sands are located strategically close to the United States, the world s largest energy consumer accounting for approximately 25% of the world s oil consumption. Access to this market is available to oil sands participants through the significant transportation and other infrastructure that exists between Canada and the United States. Favourable Tax and Royalty Regime. The Province of Alberta has enacted a favourable tax and royalty regime for oil sands producers. Expansion Capabilities. Many oil sands projects have sufficient resources to increase current production levels by magnitudes. The ability to increase production and bring on reserves can add significant value to an oil sands project if these expansions are developed. (d) Further Sector Consolidation The Investment Advisor believes that merger and acquisition activity within the oil sands sector will remain active following a record number of transactions in This is supported by a recent survey of oil industry executives and investment bankers, in which 91% of respondents believed the level of transactions in the Canadian oil and gas sector will increase or remain the same in 2006, compared to 2005, with the largest number of transactions expected to be in the oil sands segment or conventional upstream transactions. Respondents to the survey 5

6 overwhelmingly saw either China or the United States as the primary sources of foreign merger and acquisition interest. Industry Challenges Oil sands exploration and development is competitive and oil sands participants are subject to a number of potential challenges. These factors include, but are not limited to, market fluctuations of commodity prices, specifically crude oil and natural gas, proximity and capacity of pipelines, access to skilled employees, the potential for project delays and cost overruns, the price of synthetic crude oil compared to crude oil and government and environmental regulations. The extent of these factors cannot be accurately predicted and will change from time to time. Investment Strategy: The Trust will seek to achieve its investment objectives by actively managing a portfolio (the Portfolio ) of equity securities initially comprised of approximately 50 issuers, consisting primarily of issuers participating in the Canadian oil sands sector with the balance of the Portfolio (up to 25% of the total assets) consisting primarily of other issuers involved in the energy sector. The Portfolio s composition will vary over time depending on the Investment Advisor s assessment of market conditions and outlook. It is anticipated that holdings in the following 15 Oil Sands Securities, presented by order of their initial weighting, will represent approximately 60% of the initial Portfolio: Security Ticker (1) Market Capitalization (2) (in millions) Suncor Energy Inc.... SU $ 38,305.4 Canadian Oil Sands Trust... COS.UN $ 13,766.1 Petro-Canada... PCA $ 26,687.0 Imperial Oil Ltd.... IMO $ 40,108.1 Shell Canada Ltd.... SHC $ 37,005.9 Nexen Inc.... NXY $ 16,166.8 Western Oil Sands Inc.... WTO $ 5,467.3 UTS Energy Corp.... UTS $ 2,427.2 Canadian Natural Resources Ltd.... CNQ $ 35,400.5 Husky Energy Inc.... HSE $ 28,174.6 BlackRock Ventures Inc.... BVI $ 1,156.9 Enerplus Resources Fund... ERF.UN $ 6,823.6 Connacher Oil and Gas Limited... CLL $ OPTI Canada Inc.... OPC $ 3,591.0 Total S.A.... TOT $164,253.4 (3) Notes: (1) Ticker symbol used on the Toronto Stock Exchange, other than for Total S.A., which is listed on the New York Stock Exchange. (2) Source: Reuters. Based on closing prices on January 20, (3) In U.S. dollars. The information in the table above is based on publicly available information, is historical and is not intended to be, and should not be construed as, an indication of future levels of market capitalization or value. 6

7 Oil Sands Industry: Potential investments in Oil Sands Securities for the Trust will include securities, other than debt securities, issued by issuers with direct investments in oil sands projects and those whose underlying business is directly or indirectly related to the oil sands sector, including service companies such as pipelines and heavy equipment manufacturers or distributors ( Oil Sands Securities ). In selecting investments for the Trust, the Investment Advisor will employ a bottom-up approach. Oil Sands Securities will be selected based on fundamental research, including each issuer s potential to generate above-average production growth and finance future growth. AGF will meet with management, competitors and investment analysts. Securities will be sold where the Investment Advisor identifies opportunities which it believes are more attractive relative to the securities in question. Canada s oil sands resources are contained in three areas: the Athabasca area, the Cold Lake area and the Peace River area. The Athabasca area is the largest, and, to date, has been the most intensely developed. This area is also the only area that is amenable to surface mining. The other two regions are the Cold Lake area, and the Peace River area. The map below outlines the location of selected projects within the three oil sands regions for the Trust s initial top 15 holdings. 30JAN Investment Advisor: AGF Funds Inc. has been retained by the Manager to provide investment advisory and portfolio management services for the Trust. A team of AGF s experienced professionals will be responsible for managing the investments within the Portfolio. This team will initially be headed by Charles Oliver. Mr. Oliver is a Senior Vice-President and Portfolio Manager for AGF and has over 17 years of industry expertise. Founded in 1957, AGF manages approximately $35 billion for institutional and retail investors, with investment management expertise located in Toronto, Dublin, and Singapore. AGF acts as a manager for institutional clients and provides 7

8 sub-advisory and managed account services for several Canadian financial institutions. Since March 1960, AGF has been managing a mutual fund devoted to the natural resources sector in Canada. As at December 31, 2005, AGF Canadian Resources Fund Limited (the AGF Resources Fund ), which has been managed since December, 2002 by Charles Oliver, had over $370 million in assets. The AGF Resources Fund differs from the Trust in several ways. The AGF Resources Fund is an open-end fund that has not made distributions, has not employed leverage as part of its investment strategy and has not used derivatives. Additionally, the AGF Resources Fund does not have an investment strategy that requires significant exposure to a particular component of the resource sector or the payment of regular distributions. The AGF Resources Fund invests broadly in the Canadian resource sector, including in the mining, forestry, base metals and precious metals sectors. As of December 31, 2005, six of the AGF Resources Fund s top 10 holdings were Oil Sands Securities. The following table shows the historical annual compound returns achieved by the Investment Advisor with respect to the AGF Resources Fund for the periods shown, as at December 31, This information does not reflect the expected performance of the Trust and is provided only to illustrate the experience and historic investment results obtained by the Investment Advisor in the resources sector. This information is not, and should not be construed as, indicative of the future performance of the Units or amounts which may be distributed by the Trust. This information is provided solely for illustrative purposes, and should not be construed as a forecast or projection. Past performance does not guarantee future investment results. 1 Year 3 Year 5 Year Average Average Average AGF Canadian Resources Fund Limited (1)(2) % 39.3% 28.5% Morningstar/TSX Resource Equity Index (3)(4) % 28.1% 20.8% Notes: (1) Source: AGF Funds Inc. (2) These returns are the historical annual compounded total returns on a gross basis, including reinvestment of all dividends, and do not take into account management fees, operating expenses and other charges that would have reduced returns or performance. (3) Source: Morningstar Research Inc. (4) The Morningstar/TSX Resource Equity Index is a total return index composed of resource related sectors, industries and sub-industries of the S&P/TSX Composite Index. These are the Energy sector, the Paper & Forest Products industry, and the Aluminum, Diversified Metals & Mining, Gold and Precious Metals & Minerals sub-industries. Individual sector and industry weights are represented in the same proportions as they are in the S&P/TSX Composite Index and thus can vary from month to month. Manager: Distributions: The Manager has taken the initiative in founding and organizing the Trust and is a promoter of the Trust within the meaning of applicable securities legislation. The Manager was co-founded by Desana Capital Partners Inc. and Portland Holdings Inc. The Trust intends to pay quarterly distributions. Quarterly distributions for the period ending December 31, 2006 will be $0.125 per Unit ($0.50 per Unit per annum or 5.0% per annum on the original issue price of $10.00 per Unit). 8

9 Loan Facility: Commencing in 2007, the Trust will annually determine and announce each January the distribution amount for the following 12 months based upon prevailing market conditions and the Manager s estimate of distributable cash flow for the year. Distributions will be payable to Unitholders of record on the last Business Day of each March, June, September and December and will be paid on or before the 10 th Business Day of the month following the end of the period for which the distribution is made. The initial cash distribution of $0.125 is expected to be payable on or before July 17, 2006 to Unitholders of record on June 30, Based on its initial anticipated composition, the Portfolio is expected to generate approximately 3.8% of distribution and dividend income per Unit per annum, which, after deduction of expenses, will be distributed by the Trust to Unitholders. Assuming (i) an Offering size of $300 million, (ii) no leverage being employed, and (iii) the fees and expenses as described under Summary of Fees and Expenses Payable by the Trust, this equates to a net yield of 1.94% on the original issue price of $10.00 per Unit. The balance of the quarterly distributions is expected to be funded through sales of securities in the Portfolio or other returns, if any. The Portfolio would be required to appreciate at a rate of approximately 3.26% per annum in order for the Trust to maintain a stable NAV while making quarterly cash distributions. Therefore, it is expected that distributions to Unitholders will be characterized as capital gains, dividends and returns of capital. If the return on the Portfolio is less than the amount necessary to fund the quarterly distributions, the Manager will return a portion of the capital of the Trust to Unitholders to ensure that the distribution is paid and accordingly, NAV per Unit will be reduced. If the Trust s net income and net realized capital gains in a year are insufficient to fund the quarterly cash distributions, the balance of the distributions will constitute a return of capital to Unitholders. A return of capital received by a Unitholder resident in Canada generally will not be subject to tax; it would, generally, however, reduce the adjusted cost base of the Units. The Declaration of Trust provides that if, in any year after quarterly cash distributions have been paid, there would otherwise remain in the Trust additional net income or net realized capital gains, a special distribution of such portion of the remaining net income and net realized capital gains as is necessary to ensure that the Trust will not be liable for ordinary income tax thereon under the Income Tax Act (Canada) (the Tax Act ) will be automatically payable to Unitholders of record on December 31 of that year. See Distributions and Canadian Federal Income Tax Considerations. On or subsequent to the closing of this Offering, the Trust intends to enter into a loan facility (the Loan Facility ) with one or more Canadian chartered banks (collectively, the Lender ). The Loan Facility will permit the Trust to borrow an amount not exceeding 15% of the value of the total assets within the Portfolio, determined at the time of borrowing. which may be used for various purposes, including purchasing additional securities for the Portfolio and for cash flow purposes. In the event that the total amount borrowed by the Trust under the Loan Facility at any time exceeds 20% of the value of the total assets within the Portfolio, the Investment Advisor will take appropriate steps with the Portfolio which may include liquidating a portion the Portfolio securities in an orderly manner and using the proceeds thereof to reduce indebtedness so that the amount borrowed under the Loan Facility does not exceed 15% of the value of the total assets within the Portfolio. The Trust initially does not intend to borrow under the 9

10 Termination: Redemptions: Market Purchases: Loan Facility. The interest rates, fees and expenses under the Loan Facility will be typical of credit facilities of this nature and the Trust expects that the Lender will require the Trust to provide a security interest in favour of the Lender over the assets of the Trust to secure such borrowings. See Loan Facility. The Trust may be terminated at any time upon not less than 90 days written notice to the Manager with the approval of Unitholders by a majority vote at a meeting called for such purpose. On termination, the net assets of the Trust will be distributed to Unitholders. See Description of Units and Unitholder Matters Termination of the Trust. Commencing in 2007, Units may be surrendered for redemption during the period from July 15 th until 5:00 p.m. (Toronto time) on the 20 th Business Day before the last Business Day in August in each year (the Notice Period ), subject to the Trust s right to suspend redemptions in certain circumstances. Units surrendered for redemption by a Unitholder during the Notice Period will be redeemed on the last Business Day of August of each year (the Annual Redemption Date ) and the Unitholder will receive payment on or before the 15 th Business Day following the Annual Redemption Date. Unitholders whose Units are redeemed will be entitled to receive a redemption price per Unit equal to the Redemption Amount (as hereinafter defined). Redemption Amount means the NAV per Unit determined as of the Annual Redemption Date less (i) the aggregate of all brokerage fees, commissions and other costs relating to the disposition of securities in the Portfolio necessary to fund such redemptions and (ii) if the Manager determines that it is not practicable or necessary for the Trust to effect all or part of such disposition, then the aggregate of all brokerage fees, commissions and other transaction costs that the Manager estimates would have resulted from such disposition. The redemption proceeds will be paid net of any amount required to be withheld therefrom under applicable law. See Redemption of Units Annual Redemption. To enhance liquidity and to provide market support for the Units, the Trust will have a mandatory market purchase program under which the Trust will, subject to certain exceptions contained in the Declaration of Trust (as described below) and in compliance with any applicable regulatory requirements, be obligated to purchase Units for cancellation on and subject to the terms below. If, on any Business Day following the Closing, the closing price of the Units on the TSX (or such other exchange or market on which the Units are then listed if the Units are no longer listed on the TSX) is less than 95% of the NAV per Unit on such Business Day, on the following Business Day the Trust will offer to purchase for cancellation certain of the Units listed on the TSX (or such other exchange or market on which the Units are then listed if the Units are no longer listed on the TSX) at prices that are less than 95% of the latest NAV per Unit in one or more trades in order to seek to increase the last trade price so that it is equal to or greater than 95% of the latest NAV per Unit. Commencing with the first full calendar quarter following the Closing, the maximum number of Units to be purchased in any three month calendar quarter will be 1.25% of the number of Units outstanding at the beginning of such period; provided that a pro rata number of Units may be purchased during the period from the Closing until the day prior to beginning of the first full calendar quarter following the Closing. The Declaration of Trust provides that the Trust will not be obligated to make such purchases if, among other things: (i) in the opinion of the Manager, the Trust lacks the cash, debt capacity or other resources to make such purchases; (ii) in the opinion of the Manager, such market purchases would adversely affect the ongoing 10

11 Custodian: activities of the Trust or the remaining Unitholders; or (iii) the Manager reasonably believes that the Trust would be required to make an additional distribution in respect of the year to Unitholders of record on the last Valuation Date in December of a year in order that the Trust will generally not be liable to pay income tax after making such purchase. In addition, the Declaration of Trust provides that the Trust has the right (but not the obligation), exercisable in its sole discretion, at any time, to purchase Units for cancellation in the market at a price not exceeding the NAV per Unit at that time, subject to any applicable regulatory requirements and limitations. It is expected that such purchases, if made, will be made as normal course issuer bids through the facilities and under the rules of the exchange or market on which the Units are listed, if applicable, as provided for in the Declaration of Trust or as otherwise permitted by applicable securities laws. See Description of Units and Unitholder Matters Mandatory Market Purchase Program. State Street Trust Company Canada will be appointed custodian of the assets of the Trust. 11

12 Risk Factors An investment in Units is subject to various risk factors, including: (i) the Trust may not able to achieve its investment objectives (including its targeted quarterly distributions); (ii) the NAV of the Trust will vary depending on a number of factors, including the value of the securities in the Portfolio; (iii) Units may trade in the market at a premium or a discount to the NAV per Unit; (iv) commodity price fluctuations and, in particular, volatility of oil and natural gas prices; (v) risks associated with performance of the securities in the Portfolio, including risks specific to investments in the oil sands sector, such as, exploration and development risks, shortages of skilled labour, construction delays and cost overruns, adverse royalty regime changes and environmental regulations and declines in reserve estimates; (vi) risks associated with the composition and concentration of the Portfolio; (vii) reliance on the Investment Advisor for portfolio management and investment advisory services, including there being no certainty that the employees of the Investment Advisor who will be primarily responsible for the management of the Portfolio will continue to be employees of the Investment Advisor throughout the term of the Trust; (viii) the lack of operating history of the Trust and the current absence of a public trading market for the Units; (ix) the possibility of the Trust being unable to acquire or dispose of illiquid securities; (x) the risk of the Trust being required to pay subsequent instalments on a security that has declined in value where the security was purchased on an instalment basis; (xi) the possibility that if, contrary to the advice of counsel to the Trust and to the Agents, a view expressed by the Canada Revenue Agency relating to the deductibility of certain interest on money borrowed to invest in income trusts were to apply to the Trust, the after-tax returns to Unitholders could be reduced; (xii) the NAV of the Trust and the market price of Units may be highly sensitive to interest rate fluctuations; (xiii) risks associated with the use of leverage by the Trust; (xiv) the Trust not being subject to regulation as a mutual fund; (xv) the risks associated with the use of options and other derivative instruments; (xvi) the risks associated with securities lending; (xvii) the potential for conflicts of interest; (xviii) Units being different from equity securities and debt instruments; (xix) potential changes in legislation, including tax legislation; and (xx) the risk of a registered plan receiving a non-qualified investment on a payment in kind on termination. See Risk Factors. 12

13 Canadian Federal Income Tax Considerations A Unitholder who acquires Units pursuant to the Exchange Option will be disposing of securities of one or more Exchange Eligible Issuers. Provided that the Unitholder held such securities as capital property, he or she will realize a capital gain (or loss) to the extent that the proceeds of disposition, net of reasonable costs of disposition, exceed (or are less than) the adjusted cost base of such securities. A Unitholder who is resident in Canada will generally be required to include in computing income for a year the amount of income of the Trust for tax purposes, including net realized taxable capital gains, if any, paid or payable to the Unitholder by the Trust in that taxation year. To the extent that amounts payable to a Unitholder are designated by the Trust as taxable dividends on shares of taxable Canadian corporations, net taxable capital gains and foreign source income, those amounts will effectively retain their character and be treated as such in the hands of the Unitholder. Distributions by the Trust to a Unitholder in excess of the Unitholder s share of the Trust s net income and net realized taxable capital gains will not be taxable, however, will, except with respect to the non-taxable portion of capital gains designated in respect of the Unitholder, reduce the adjusted cost base of Units held by the Unitholder. A Unitholder who holds Units as capital property will realize a capital gain to the extent that the adjusted cost base of the Unitholder s Units would otherwise be a negative amount. A Unitholder who disposes of Units held as capital property (on redemption or otherwise) will realize a capital gain to the extent that the proceeds of disposition exceed the adjusted cost base of the Units and any reasonable costs of disposition. For a detailed explanation of the Canadian federal income tax considerations, see Canadian Federal Income Tax Considerations. Eligibility for Investment Provided that the Trust qualifies as a mutual fund trust for purposes of the Tax Act, the Units will be qualified investments under the Tax Act for trusts governed by registered retirement savings plans, registered retirement income funds, deferred profit sharing plans and registered education savings plans. See Canadian Federal Income Tax Considerations and Eligibility for Investment. Forward-Looking Statements Certain statements included in this prospectus constitute forward looking statements, including those identified by the expressions anticipate, believe, plan, estimate, expect, intend and similar expressions to the extent they relate to the Trust or the Manager. The forward-looking statements are not historical facts but reflect the Trust s current expectations regarding future results or events. These forward looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations, including the matters discussed under Risk Factors and in other sections of this prospectus. Information Regarding Public Issuers Certain information contained in this prospectus relating to publicly-traded securities and the issuers of those securities is taken from and based solely upon information published by those issuers. Neither the Manager, the Trustee, the Investment Advisor, the Trust nor the Agents have independently verified the accuracy or completeness of any such information or assume any responsibility for the completeness or accuracy of such information. 13

14 Summary of Fees and Expenses Payable by the Trust The following table contains a summary of the fees and expenses payable by the Trust. For further particulars see Fees and Expenses. Type of Charge Fees payable to the Agents for selling Units: Expenses of Issue: Fee payable to the Manager for acting as manager of the Trust: Operating expenses of the Trust: Service Fee: Description $0.50 per Unit (5% of the Unit price). The Trust will pay the expenses incurred in connection with this offering, which are estimated to be $750,000, subject to a maximum of 1.5% of the gross proceeds of this offering. Annual management fee of 1.10% of the Trust s NAV calculated daily and payable monthly plus an amount equal to the service fee payable by the Manager to registered dealers of 0.40% of NAV, per annum, plus applicable taxes. The Manager will be responsible for paying an advisory fee to the Investment Advisor pursuant to an investment advisory agreement. See Fees and Expenses Fees and Other Expenses. The Trust will pay all ordinary expenses incurred in connection with its operation and administration, estimated to be $350,000 per annum, assuming an Offering size of $300 million. The Trust will also be responsible for commissions and other costs of portfolio transactions, debt service and costs relating to the Loan Facility and any extraordinary expenses which it may incur from time to time. The Manager will pay to registered dealers a service fee calculated and payable quarterly in arrears at an annual rate equal to 0.40% of the NAV of Units held by clients of the sales representatives of such dealers at the end of the relevant calendar quarter, plus applicable taxes. 14

15 GLOSSARY OF TERMS In this prospectus, the following terms shall have the meanings set forth below, unless otherwise indicated. Agency Agreement means the agency agreement dated February 24, 2006 among the Trust, the Manager, the Investment Advisor and the Agents. Agents means RBC Dominion Securities Inc., CIBC World Markets Inc., BMO Nesbitt Burns Inc., National Bank Financial Inc., Scotia Capital Inc., TD Securities Inc., Berkshire Securities Inc., Canaccord Capital Corporation, Dundee Securities Corporation, HSBC Securities (Canada) Inc., Desjardins Securities Inc., Raymond James Ltd., Research Capital Corporation, Blackmont Capital Inc. and Wellington West Capital Inc. AGF means AGF Funds Inc. AGF Resources Fund means AGF Canadian Resources Fund Limited, an open-end mutual fund corporation. Alberta Energy means Alberta Energy, a department of the Government of Alberta. Annual Redemption Date means the last Business Day in August of each year. Annual Redemption Payment Date means the 15 th Business Day following an Annual Redemption Date. Business Day means any day on which the TSX is open for business. CAPP means the Canadian Association of Petroleum Producers. Cash Equivalents has the meaning ascribed thereto in NI CDS means The Canadian Depository for Securities Limited. CDS Participant means a participant in the CDS. Closing means the closing of the Offering on the Closing Date. Closing Date means the date of the Closing, which is expected to be on or about March 15, 2006, or such later date as the Trust and the Agents may agree, but in any event not later than April 12, CRA means the Canada Revenue Agency. Declaration of Trust means the declaration of trust dated as of February 24, 2006, as it may be amended from time to time. Energy Securities means securities, other than debt securities, issued by issuers whose underlying business is related to the energy sector, other than Oil Sands Securities. Exchange Option has the meaning ascribed thereto in this prospectus under the heading Exchange Option. Extraordinary Resolution means a resolution passed by the holders of not less than % of the Units voting thereon at a meeting duly convened for the consideration of such matter. Investment Advisor means AGF Funds Inc. or, if applicable, its successor. Investment Advisory Agreement means the investment advisory agreement dated as of February 24, 2006 between the Trust, the Manager and the Investment Advisor, as it may be amended from time to time. Lender means one or more Canadian chartered banks who may provide a loan facility to the Trust. Loan Facility means the loan facility to be entered into by the Trust and the Lender, as described under Loan Facility. Manager means Markland Street Asset Management Inc. or, if applicable, its successor. NAV or Net Asset Value means the net asset value of the Trust, as determined by subtracting the aggregate amount of the liabilities of the Trust from the total assets and as more particularly set forth in the Declaration of Trust. NAV per Unit means the quotient obtained by dividing the NAV on such day by the number of Units then outstanding prior to any redemptions on such date. NEB means Canada s National Energy Board. 15

16 NI means National Instrument of the Canadian Securities Administrators, as it may be amended from time to time. Notice Period means the period from July 15 th until 5:00 p.m. (Toronto time) on the 20 th Business Day before the last Business Day in August each year (starting in 2007). October 31 Proposals has the meaning ascribed to it under Canadian Federal Income Tax Considerations. Offering means the offering of a minimum of 25,000,000 Units and a maximum of 50,000,000 Units at the Offering Price, as contemplated in this prospectus. Offering Price means a price of $10.00 per Unit. Oil Sands Securities means securities, other than debt securities, issued by issuers with direct investments in oil sands projects and those whose underlying business is directly or indirectly related to the oil sands sector, including, without limitation, service companies such as pipelines and heavy equipment manufacturers or distributors. Over-Allotment Option means the option granted by the Trust to the Agents, exercisable for a period of 30 days following the Closing, to purchase additional Units in an amount of up to 15% of the aggregate number of Units issued at Closing at the Offering Price, on the same terms set forth in this prospectus. Permitted Merger means a merger of the Trust with another investment fund or funds in the circumstances described under Description of Units and Unitholder Matters Amendments to the Declaration of Trust. Portfolio means the total assets held by the Trust from time to time. Redemption Amount means the NAV per Unit determined as of the Annual Redemption Date less (i) the aggregate of all brokerage fees, commissions and other costs relating to the disposition of securities in the Portfolio necessary to fund such redemptions and (ii) if the Manager determines that it is not practicable or necessary for the Trust to effect all or part of such disposition, then the aggregate of all brokerage fees, commissions and other transaction costs that the Manager estimates would have resulted from such disposition. The redemption proceeds will be paid net of any amount required to be withheld therefrom under applicable law. Redemption Notice means the redemption notice that is given to CDS. SCO means synthetic crude oil. Securities Lending Agreement means an agreement between the Trust and a borrower setting out terms for lending securities. Tax Act means the Income Tax Act (Canada) and the regulations thereunder. Trust means the Oil Sands Sector Fund, a closed-end investment trust established under the laws of Ontario pursuant to the Declaration of Trust. Trustee means Markland Street Asset Management Inc., in its capacity as trustee under the Declaration of Trust or, if applicable, its successor. TSX means the Toronto Stock Exchange. Unit means a transferable, redeemable unit of the Trust. Unitholders means holders of Units. Valuation Date means each of the following days: (i) each Thursday during the year (or, if a Thursday is not a Business Day, then on the Business Day following such Thursday); (ii) the last Business Days of March, June, September and December; (iii) each Annual Redemption Date; and (iv) any other date on which the Manager elects, in its discretion, to calculate the NAV per Unit. Valuation Time means 4:00 p.m. (Toronto time) or such other time as the Manager or its agent deems appropriate on a Valuation Date. VGO means vacuum gas oil. 16

17 THE TRUST Oil Sands Sector Fund (the Trust ) is a closed-end investment trust established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated as of February 24, 2006 (the Declaration of Trust ). Markland Street Asset Management Inc. is the manager of the Trust (the Manager ) and the trustee of the Trust (the Trustee ). The Trust s investment advisor is AGF Funds Inc. ( AGF or the Investment Advisor ). The Trustee and the Manager (or any replacement thereof) will at all times be residents of Canada for the purposes of the Income Tax Act (Canada) (the Tax Act ). The head office of the Trust is located at 200 Bay Street, Suite 2200, South Tower, Royal Bank Plaza, Toronto, Ontario, M5J 2J1. The fiscal year-end of the Trust is December 31. Status of the Trust The Trust is not considered to be a mutual fund under the securities legislation of the provinces of Canada. Consequently, the Trust is not subject to the various policies and regulations that apply to mutual funds, including National Instrument of the Canadian Securities Administrators ( NI ). The Trust differs from a mutual fund in a number of respects, most notably as follows: (a) the units of the Trust (the Units ) may be surrendered for redemption only annually, commencing in 2007, whereas the securities of most mutual funds are redeemable daily from inception of such funds; (b) the Units are to have a stock exchange listing whereas the securities of most mutual funds do not; (c) unlike most mutual funds, the Units will not be offered on a continuous basis; and (d) the Trust is permitted to borrow whereas mutual funds are generally not permitted to do so. The Trust is not a trust company and does not carry on business as a trust company and, accordingly, the Trust is not registered under the trust company legislation of any jurisdiction. Units are not deposits within the meaning of the Canada Deposit Insurance Corporation Act (Canada) and are not insured under provisions of that Act or any other legislation. INVESTMENTS OF THE TRUST Investment Objectives The Trust s investment objectives are: (a) to provide long term capital appreciation for holders of Units ( Unitholders ); and (b) to provide Unitholders with a stable stream of quarterly cash distributions targeted to be $0.125 per Unit ($0.50 per Unit per annum or 5.0% per annum on the original issue price of $10.00 per Unit). Quarterly distributions for the period ending December 31, 2006 will be $0.125 per Unit ($0.50 per annum or 5.0% per annum on the original issue price of $10.00 per Unit). Commencing in 2007, the Trust will annually determine and announce each January the distribution amount for the following 12 months based upon prevailing market conditions and the Manager s estimate of distributable cash flow for the year. Investment Rationale The Trust has been created to provide investors with exposure to the returns of a portfolio of equity securities of issuers participating in the Canadian oil sands sector. The Manager and Investment Advisor believe that oil sands participants are very attractively positioned for future growth for several reasons: (a) Industry Supply and Demand Dynamics Positive for Oil Sands Producers The Investment Advisor believes that the global supply of crude oil is at or near its peak. At the same time, global demand for crude oil is increasing with much of the expected demand being driven by economic growth in developing world countries such as China and India. Non-conventional resources, such as oil sands, are expected to represent an increasing share of total supply. 17

18 (b) Canadian Oil Sands: A World Class Asset According to the Canadian Association of Petroleum Producers ( CAAP ), the large Alberta oil sands are second only to the oil fields of Saudi Arabia in terms of the size of the resource base. Furthermore, the Investment Advisor believes that the Canadian oil sands represent one of the world s largest oil reserves accessible to the investing public since a significant amount of the world s conventional oil reserves (including virtually all of OPEC s massive production) are not open to investment from the general public. (c) Canadian Oil Sands: Strong Competitive Advantages Non-Declining Asset Base. The Investment Advisor believes that oil sands producers generally do not incur the traditional exploration risk or declining resource profile of a conventional oil and gas producer. Advantages of oil sands resources include the relatively low exploration cost to establish the location, extent and the quality of resources, when compared to conventional oil development. Combined, these benefits offer a known, proven resource base having the potential to support a project for many years of stable production. Political Stability and Secure Source of Supply. As a G7 country with a developed legal system, stable economic and political environment and highly developed infrastructure, Canada represents a relatively low risk supply source when compared with many other countries with large hydrocarbon resources (e.g. Middle East, Russia, South America). Proximity to United States. Alberta s oil sands are located strategically close to the United States, the world s largest energy consumer accounting for approximately 25% of the world s oil consumption. Access to this market is available to oil sands participants through the significant transportation and other infrastructure that exists between Canada and the United States. The United States is capable of producing only 45% of its demand from domestic sources, and therefore is becoming increasingly focused on securing sources of energy from politically stable and friendly countries. According to the U.S. Department of Energy, demand from the United States for crude oil will increase nearly 50% by At that time, the U.S. Department of Energy estimates that the United States will be importing approximately 70% of its total consumption of crude oil and liquids. This forecasted increase in demand suggests that, absent material changes, the U.S. will grow increasingly dependent on foreign supplies. Favourable Tax and Royalty Regime. The Province of Alberta has enacted a favourable tax and royalty regime for oil sands producers. Currently royalties are 1% of gross revenues until capital costs, including a return on capital, have been fully recovered. Expansion Capabilities. Many oil sands projects have sufficient resources to increase current production levels by magnitudes. The ability to increase production and bring on reserves can add significant value to an oil sands project if these expansions are developed. (d) Further Sector Consolidation The Investment Advisor believes that merger and acquisition activity within the oil sands sector will remain active following a record number of transactions in This is supported by a recent survey of oil industry executives and investment bankers conducted by The MergerMarket Group entitled Canadian Oil and Gas Insight, in which 91% of respondents believed the level of transactions in the Canadian oil and gas sector will increase or remain the same in 2006, compared to 2005, with the largest number of transactions expected to be in the oil sands segment or conventional upstream transactions. Respondents to the survey overwhelmingly saw either China or the United States as the primary sources of foreign merger and acquisition interest. Industry Challenges Oil sands exploration and development is competitive and oil sands participants are subject to a number of potential challenges. These factors include, but are not limited to, market fluctuations of commodity prices, specifically crude oil and natural gas, proximity and capacity of pipelines, access to skilled employees, the potential for project delays and cost overruns, the price of synthetic crude oil compared to crude oil and 18

19 government and environmental regulations. The extent of these factors cannot be accurately predicted and will change from time to time. Investment Strategy The Trust will seek to achieve its investment objectives by actively managing a portfolio (the Portfolio ) of equity securities initially comprised of approximately 50 issuers, consisting primarily of issuers participating in the Canadian oil sands sector with the balance (up to 25% of total assets) consisting primarily of other issuers involved in the energy sector. The Portfolio s composition will vary over time depending on the Investment Advisor s assessment of market conditions and outlook. At least 75% of the total assets by value of the initial Portfolio following the investment in full of the use of proceeds on closing of the Offering will be invested in Oil Sands Securities (as hereinafter defined). Due to changes in market prices and other changes, such as consolidations among issuers, Oil Sands Securities may from time to time represent less than 75% of the total assets of the Portfolio. At least every 90 days, or more often at the discretion of the Investment Advisor, the Investment Advisor will rebalance the Portfolio such that Oil Sands Securities represent, at the time of such rebalancing, at least 75% of the total assets of the Portfolio by value. Potential investments in Oil Sands Securities will include securities, other than debt securities, issued by issuers with direct investments in oil sands projects and those whose underlying business is directly or indirectly related to the oil sands sector, including, without limitation, service companies such as pipelines and heavy equipment manufacturers or distributors. Potential investments by the Trust in Energy Securities include securities, other than debt securities, issued by issuers whose underlying business is related to the energy sector, other than Oil Sands Securities. In selecting investments for the Trust, the Investment Advisor will employ a bottom-up approach. Oil Sands Securities will be selected based on fundamental research, including each issuer s potential to generate aboveaverage production growth and finance future growth. AGF will meet with management, competitors and investment analysts. Securities will be sold where the Investment Advisor identifies opportunities which it believes are more attractive relative to the securities in question. Other Energy Securities, in particular oil and gas trusts, will be assessed based on strict criteria that include anticipated stability of future earnings, reserve life index, sustainable production and payout ratio, quality of management and debt to equity ratios. AGF s investment decisions are based on selecting securities that meet rigorous investment criteria. The team members experience and insight are important factors in the selection process. The team members also consult industry leaders in order to obtain further insights. The Oil Sands Industry Description of the Oil Sands Industry Oil sands are composed primarily of sand, bitumen, mineral rich clays and water. Bitumen, in its raw state, is a heavy, viscous, tar-like form of oil; more solid than liquid. Bitumen is currently sold in two principal forms: either as a bitumen blend, in which the bitumen is mixed with a diluent, either pentanes plus or synthetic crude oil, so that it will flow in pipelines; or, after upgrading, as a synthetic crude oil ( SCO ). Bitumen blend has many characteristics similar to, and is generally priced like, conventional heavy oil. Synthetic crude oil, depending on the level of upgrading it has undergone, has many characteristics similar to, and is generally priced like, conventional medium to light oil. According to the Energy and Utilities Board, the total Alberta in-place bitumen volume is approximately 1.6 trillion barrels, of which approximately 315 billion barrels are potentially recoverable under anticipated technology and economic conditions. While not an exact comparison, according to the National Energy Board ( NEB ), these potentially recoverable bitumen resources are approximately equivalent in size to Saudi Arabia s proved conventional oil reserves. Canada s oil sands resources are contained in three areas: the Athabasca area, the Cold Lake Area and the Peace River Area. The Athabasca area is the largest, and, to date, has been the most intensely developed. This 19

20 area is also the only area that is amenable to surface mining. The other two regions are the Cold Lake area and the Peace River area. The map below outlines the location of selected projects within the three oil sands regions for the Trust s initial top 15 holdings. 30JAN The low viscosity and lack of mobility of the crude oil must be overcome either physically or thermally. The depth and location of the crude oil in Alberta s oil sands influences the production methods used for the recovery of bitumen. The extraction techniques currently commercially employed to produce bitumen are surface mining and in-situ thermal recovery. Generally, physical surface mining is used in the production of Athabasca oil sands where the total overburden is less than 75 metres. The in-situ techniques currently in use employ steam to heat the bitumen, allowing it flow into a well and to be produced to the surface. Of the approximately 315 billion barrels of potentially recoverable bitumen, the NEB estimates that approximately 20% are suitable for mining and 80% will require in-situ recovery techniques. Typically, surface mining operations utilize open pit truck and shovel techniques. Soil and rock overburden and the oil sands are excavated using large shovels and are transported away by trucks. Waste material is either disposed of in previously mined areas or stored for future disposal or reclamation while the oil sands are transported to ore processing facilities. At the processing facility the oil sands are crushed, sized and conveyed to the slurry preparation facility. The oil sands are then mixed with warm water to create a slurry mixture that is then transported to the extraction facility. The two most common methods of in-situ production are cyclic stream simulation and steam assisted gravity drainage (SAGD). The steam used in both processes is normally generated using natural gas, and natural gas is generally the primary input cost of either method. Cyclic steam stimulation involves the cyclic process of steam injection followed by the production from a single well bore. SAGD involves the use of stacked horizontal wells spaced approximately five metres apart. Steam is injected into the upper well where it heats the oil sands reservoir. The heated bitumen becomes mobile and flows with condensed steam to the lower horizontal well and is then pumped to the surface. In-situ recovery processes cause considerably less surface disturbance than surface mining operations. Technology improvements continue to advance the effectiveness of both surface mining and in-situ recoveries. Mine improvements are generally focused on the reduction of the distance and the number of times material is moved while improvements in in-situ operations are generally focused on the reduction of energy requirements. 20