Canfor Corporation

Canfor Corporation

April 29, 2005 13:48 ET

Canfor Corporation announces first quarter earnings

VANCOUVER, April 29 - Canfor Corporation (TSX: CFP) today reported
net income of $65.6 million for the first quarter of 2005, or $0.46 per share
on a diluted basis. This compares to net income of $30.4 million, or $0.34 per
share in the same quarter of 2004 and net income of $43.0 million, or $0.30
per share in the fourth quarter of 2004.

The current quarter's results include a $3.6 million after-tax exchange
loss on long-term debt and a $5.2 million after-tax favourable adjustment to
the prior period's duty expense. The previous quarter's results included an
exchange gain on long-term debt of $36.1 million, an $8.9 million favourable
duty expense adjustment and $13.4 million of restructuring accruals and asset
write-downs (all after-tax). The first quarter 2004 results included a
$6.0 million after-tax exchange loss on long-term debt.

Operating income in the first quarter was $95.6 million, which is
$79.9 million higher than the previous quarter, mainly as a result of higher
product prices. First quarter 2004 operating income, before the merger with
Slocan on April 1, 2004, was $62.1 million.

Railcar shortages throughout the quarter limited shipments of all
products, reducing sales volumes and increasing finished inventories,
impacting net earnings by approximately $10 million or $0.07 per share. With
renewed commitment for improved service from the rail carriers and scheduling
of a marine shipment to transport product to the company's major US market,
combined with the normal seasonal increase in building activity, the impact of
lower first quarter shipments is expected to be recovered in the second
quarter.

During the quarter, activities on major capital projects progressed as
planned, with the near completion of the Prince George Co-Generation facility,
and completion of the capacity upgrades at the OSB mill in Fort Nelson with
successful start-up achieved in the second week of April. Construction of the
OSB joint venture mill in Fort St John is on target for start-up in September,
and contracts have been let for $51 million on the $104 million Plateau mill
re-build to be completed by the end of the year.

"We continue to focus on operating efficiencies and strategic investments
that enhance performance and add value for our shareholders and customers, and
are encouraged by the progress achieved to date," said Jim Shepherd, President
and Chief Executive Officer.

Annual General Meeting
The Company's annual general meeting will be held Friday April 29th at
11:30 am (PST) at the Four Seasons Hotel in Vancouver, BC. The meeting will be
webcast live and will be available for replay at Canfor's website at
www.canfor.com.

Conference Call
A conference call to discuss the first quarter financial and operating
results will be held Friday, April 29, 2005 at 1:00 pm Pacific (4:00 pm
Eastern). To participate in the call, please dial 604-639-5227 (Vancouver) or
1-800-387-6216 (Toll-Free North America).

Canfor Corporation is a leading Canadian integrated forest products
company based in Vancouver, British Columbia. The Company has extensive
woodlands operations and manufacturing facilities in British Columbia, Alberta
and Quebec and a lumber remanufacturing plant in Washington State. Canfor is a
major producer and supplier of lumber, bleached kraft pulp, specialty kraft
paper, plywood and oriented strand board (OSB) for markets around the world.

Forward Looking Statements
This news release contains statements that are forward-looking in nature.
Some of these forward-looking statements can be identified by the use of
terminology such as "estimates", "plans", "expects", "anticipates",
"approximately" and "projections". The accuracy of such statements is subject
to a number of risks, uncertainties and assumptions that may cause actual
results to differ materially from those expressed or implied.


Canfor Corporation
First Quarter 2005 - Report to Shareholders

Management's Discussion and Analysis

The Management's Discussion and Analysis provides a review of the
significant developments that have impacted Canfor's performance during the
first quarter of 2005 relative to the previous quarter and the last published
annual results as at December 31, 2004 and relative to the comparative quarter
in 2004. The following unaudited financial results along with Management's
Discussion and Analysis should be read in conjunction with the consolidated
financial statements and notes thereto included in Canfor's Annual Report for
the year ended December 31, 2004.

Factors that could impact future operations are also discussed. These
factors may be influenced by known and unknown risks and uncertainties that
could cause the actual results to be materially different from those stated in
this discussion. Factors that could have a material impact on any future
oriented statements made herein include, but are not limited to: general
economic, market and business conditions; product selling prices; raw material
and operating costs; foreign exchange rates; changes in law and public policy;
rulings on countervailing and anti-dumping duties; and opportunities available
to or pursued by Canfor.

Throughout this discussion, reference is made to EBITDA (operating income
before amortization), which Canfor considers to be an important indicator for
identifying trends in the performance of each operating segment and of the
Company's ability to generate funds to meet its debt repayment and capital
expenditure requirements. EBITDA is not a generally accepted earnings measure
and should not be considered as an alternative to net income or cash flows as
determined in accordance with Canadian GAAP. As there is no standardized
method of calculating EBITDA, the Company's use of the term may not be
directly comparable with similarly titled measures used by other companies.

The information in this report is as at April 29, 2005.
All financial references are in millions of Canadian dollars unless
otherwise noted.

<<
Summarized Results for the Quarter(1,2)

(millions of dollars, 1st Quarter 4th Quarter 1st Quarter
except for per share amounts) 2005 2004 2004
-------------------------------------------------------------------------
Sales $ 965.9 $ 1,072.7 $ 645.1
Countervailing & anti-dumping
duties expensed $ 58.9 $ 71.2 $ 35.3
EBITDA $ 137.2 $ 58.3 $ 90.8
Operating income $ 95.6 $ 15.7 $ 62.1
Foreign exchange gain (loss) on
long-term debt $ (3.6) $ 36.1 $ (6.0)
Income from continuing operations,
after tax $ 62.7 $ 42.0 $ 30.2
Income from discontinued operations,
net of tax $ 2.9 $ 1.0 $ 0.2
Net income $ 65.6 $ 43.0 $ 30.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Per share (diluted)
Income from continuing operations $ 0.44 $ 0.30 $ 0.34
Net income $ 0.46 $ 0.30 $ 0.34
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Average Canadian/US exchange rate(3) $ 0.815 $ 0.819 $ 0.759
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(1) Figures quoted in this report reflect the results of the former
Slocan operations since April 1, 2004.
(2) Prior period figures have been restated throughout this report to
reflect the discontinued operations treatment of the Fort St James,
Slocan and Valemount operations, as discussed later in this report.
(3) Source - Bank of Canada (average noon rate for the period)

Operating results in the first quarter were impacted by a number of
significant items. Market prices for all of the major product lines, except
for plywood, were significantly higher than in the previous quarter. Prices
for OSB increased by 40% in the quarter, lumber by 18%, and pulp by 8%, while
plywood prices decreased by 1%.

These positive elements were offset by a shortage of railcar supply to
the mills, which resulted in reduced shipment volumes during the period. In
addition, severe cold weather in early January created operational
difficulties, resulting in lower production rates and increased unit costs in
the sawmills and pulp mills. Lumber production costs trended downward to
targeted levels through the quarter as the sawmills returned to more normal
operating levels.

OPERATING RESULTS
-----------------

The following discussion relates to the operating segments, as presented
in Note 14 in the Financial Statements.

Lumber

(millions of dollars, 1st Quarter 4th Quarter 1st Quarter
unless otherwise noted) 2005 2004 2004
-------------------------------------------------------------------------
Sales $ 641.2 $ 708.1 $ 377.5
EBITDA $ 101.3 $ 40.8 $ 66.3
EBITDA margin 16% 6% 18%
Operating income $ 76.0 $ 16.6 $ 51.6
-------------------------------------------------------------------------
Average 2"x4" No. 2 & Better
lumber price - US $(4) $ 398 $ 338 $ 370
Average price in Cdn$ $ 488 $ 413 $ 488
-------------------------------------------------------------------------
Production - lumber (MMfbm) 1,205.4 1,229.4 748.5
Shipments - Canfor-produced lumber
(MMfbm) 1,088.2 1,265.0 662.4
Shipments - wholesale lumber (MMfbm) 76.6 79.0 61.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(4) Per thousand board feet (Source - Random Lengths Publications, Inc.)

Operating income of $76.0 million was generated by the Lumber segment in
the first quarter, which is a $59.4 million increase over the previous quarter
and $24.4 million higher than the same quarter in 2004. The fourth quarter
2004 results were adversely impacted by lower lumber prices and $10.7 million
of restructuring costs. The first quarter 2004 results, which exclude the
Slocan mills acquired on April 1, 2004, reflect strong prices and a favourable
exchange rate. Shipment volumes in the current period were 13% lower than in
the previous quarter, mainly as a result of shortages in railcar supply.

Operations

Extremely cold temperatures in the first two weeks of January affected
production volumes and recoveries at most of the sawmills. However, by early
February productivity had improved significantly, with production records
being set at Houston, Quesnel and Fort St John. The sawmills ran near full
capacity in February and March, except for one-day production curtailments at
each of the Plateau, Isle Pierre and Polar sawmills that were caused by
picketing action during the log haulers' dispute, and one week of capital
installation-related downtime at the Prince George mill.

Lumber inventories increased significantly during the quarter. Railcar
supply was a major issue impacting shipment volumes. With rail service
improving in April and a vessel scheduled to ship 15 million board feet to the
US, inventories are anticipated to be back on target in the second quarter.

Log inventories increased by over 2.2 million cubic metres since the
beginning of the year, as part of the normal seasonal build up. As a result of
extreme weather fluctuations in January and disruptions from the truckers'
dispute in February, log inventories are approximately 1.2 million cubic
metres below target for the period. Although log inventories are tight, it is
expected that they will be sufficient to last through the spring break-up with
no disruption in lumber production.

Markets and Outlook - see below, following Panels section

Panels

(millions of dollars 1st Quarter 4th Quarter 1st Quarter
unless otherwise noted) 2005 2004 2004
-------------------------------------------------------------------------
Sales $ 94.4 $ 94.7 $ 32.0
EBITDA $ 20.6 $ 22.6 $ 6.2
EBITDA margin 22% 24% 19%
Operating income $ 17.8 $ 19.9 $ 5.7
-------------------------------------------------------------------------
Average plywood price in Cdn $(5) $ 439 $ 444 $ 528
Average OSB price in US $(6) $ 364 $ 260 n/a
Average OSB price in Cdn $ $ 447 $ 317 n/a
-------------------------------------------------------------------------
Production - plywood (MMsf 3/8") 108.3 104.9 44.0
Production - OSB (MMsf 3/8") 120.6 132.6 n/a
Shipments - plywood (MMsf 3/8") 106.0 96.3 45.4
Shipments - OSB (MMsf 3/8") 102.5 126.5 n/a
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(5) Per Msf 3/8" basis, delivered to Toronto (Source - C.C. Crowe
Publications, Inc.)
(6) Per Msf 7/16" North Central (Source - Random Lengths Publications,
Inc.)

Operating income of $17.8 million in the quarter was $2.1 million lower
than in the previous quarter and $12.1 million higher than in the same period
last year (before the acquisition of Slocan's panel operations). Plywood
prices were slightly lower when compared to the fourth quarter of 2004, while
OSB prices increased by 40%. OSB shipment volumes were 19% lower than the
previous quarter, mainly as a result of bad weather in the Eastern US in
February and railcar supply issues throughout the quarter.

Operations

Panel operations were also adversely affected by the extreme weather
conditions in early January.

After a slow start in January related to the cold weather, North Central
Plywood set new records for production in February and March. Tackama Plywood
also reached production milestones in the quarter, but experienced over
80 hours of downtime in March due to mechanical issues on the carousel and
lathe.

The PolarBoard mill had some downtime in the period arising due to lack
of dry flake, maintenance and reliability issues and power outages. A fire in
March caused 12 hours of downtime and an additional 12 hours later in the
month when the fire suppression system malfunctioned. The mill was shut down
in the last week of the quarter for the installation of two new dryer drums
and completion of the planned capital project to increase capacity.

Markets - Lumber and Panels

Both lumber and panel markets remained quite strong in the first quarter
of 2005. Western SPF 2"x4" No. 2 & Better prices averaged US $398 per thousand
board feet during the quarter, or 18% higher than in the previous quarter and
8% higher than in the first quarter of 2004, although with the weaker Canadian
dollar in the first quarter of 2004, prices achieved in Canadian dollars were
essentially unchanged. US dollar prices started to decline during March, as
wet weather throughout key regions of the US hampered lumber delivery to
building sites. Although interest rates have started to increase, they remain
low enough to support the continued expansion of new housing construction. As
a result, US housing starts reached 2.09 million units on a seasonally
adjusted basis in the quarter, or 7% higher than the same period last year.

All sales of wood products were considerably higher when compared to the
same period in 2004, largely because the Slocan mills' sales were not included
in Canfor's results until April 1, 2004. Although offshore markets experienced
a relatively slow start to the year, sales volumes picked up considerably
through the quarter, particularly in Japan, and have resulted in a 23%
increase over the first quarter of 2004.

North American demand for panels during the first quarter has been
relatively flat compared with the same period a year ago. The average Canadian
softwood plywood price for the quarter of Cdn $439 per thousand square feet
3/8" basis, delivered to Toronto, was 17% below the average price in the first
quarter of 2004. The average oriented strand board price of US $364 per Msf
7/16", North Central, was 16% lower than the same time last year, although
Canfor only added the product line in April, with the acquisition of Slocan.

Outlook - Lumber and Panel Markets

The outlook for lumber and panel markets in the second quarter of 2005 is
positive. The weather in the US has started to improve and products are now
being transported to the job sites, which, in turn, has resulted in increased
orders. In general, it is anticipated that stronger markets in the first half
of 2005 will give way to slightly weaker demand in the second half of the year
as higher interest rates result in reduced new housing construction. The
Japanese market is expected to gather strength as 2"x4" housing starts
continue to increase, as they did during 2004.

Pulp and Paper

(millions of dollars 1st Quarter 4th Quarter 1st Quarter
unless otherwise noted) 2005 2004 2004
-------------------------------------------------------------------------
Sales $ 223.9 $ 239.0 $ 218.4
EBITDA $ 21.3 $ 1.8 $ 23.3
EBITDA margin 10% 1% 11%
Operating income (loss) $ 10.0 $ (10.1) $ 12.5
-------------------------------------------------------------------------
Average pulp price - US$(7) $ 660 $ 613 $ 590
Average price in Cdn $ $ 810 $ 748 $ 778
-------------------------------------------------------------------------
Production - pulp (000 mt) 299.6 309.1 249.0
Production - paper (000 mt) 33.4 31.9 34.0
Shipments - Canfor-produced pulp
(000 mt) 268.1 312.8 241.7
Marketed on behalf of HSLP (000 mt) 82.1 109.0 73.6
Shipments - paper (000 mt) 32.5 31.0 35.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(7) Per tonne, delivered to Northern Europe (Source - Pulp & Paper Week)

Operating income improved by $20.1 million over the previous quarter, but
was $2.5 million lower than in the same quarter of 2004. Strong prices in the
quarter were partially offset by lower shipment volumes, mainly as a result of
railcar shortages, which caused delays in meeting some North American and
overseas shipment scheduling. The supply of railcars has improved in April,
which is expected to allow for inventories to be reduced to target levels by
the end of the second quarter.

Operations

Severe cold weather, followed by heavy rain and mild temperatures early
in the year resulted in several production challenges at the pulp mills. The
Northwood mill experienced water quality issues and melting ice hazards, while
Intercon lost production as a result of chip feed issues that were caused by
the cold weather. Mechanical problems at the Northwood mill in February and at
the Taylor and Prince George Paper mills throughout the quarter had a negative
impact on the results, but overall productivity and costs were on target in
the period.

The Intercontinental pulp mill took a four-day maintenance shutdown in
March and the Northwood mill will complete their 15-day maintenance shutdown
in April. The duration of the shutdown is expected to be 3.5 days longer than
was planned as a result of additional work being performed on the No. 1
recovery boiler. Prince George Pulp has slowed production rates due to the
environmental limits of the No. 1 precipitator, while the No. 2 recovery
boiler is taken off-line for approximately six weeks to convert it to a power
boiler as part of the co-generation project.

Markets

At the start of the year, demand was good into most shipping regions,
particularly China where buyers were continuing to restock their inventories
after heavy buying in the fourth quarter of 2004. Through February, demand for
chemical market pulp has equalled that for the same period in 2004, and
inventories stood at 32 days of supply, which is considered a balanced to
slightly oversupplied level by industry analysts. However, there was a
pronounced drop off in pulp demand from China in March, as buyers tested
suppliers' resolve to raise prices. This standoff came after news that global
printing and writing paper demand had registered a slight drop in February,
falling 0.5% year over year, although year-to-date demand is up by a modest
0.4%. The falloff in Chinese demand, coupled with railcar service issues at
Canfor's mills in northern British Columbia, caused sales of woodpulp to fall
below forecasted levels in March.

Outlook

Looking ahead, despite strong order volumes in the US and decent volumes
in Europe, there is an oversupply of softwood kraft pulp on the market. It is
anticipated that upcoming pulp mill maintenance downtime will help to reduce
excess capacity. The strong hardwood pulp market is causing pulp mills that
can produce both softwood and hardwood market pulp to swing full production
over to hardwood when practical, which could also have a stabilizing effect on
the softwood pulp market.

Coastal Operations


(millions of dollars unless 1st Quarter 4th Quarter 1st Quarter
otherwise noted) 2005 2004 2004
-------------------------------------------------------------------------
Sales $ 6.4 $ 30.9 $ 17.2
EBITDA $ (0.3) $ (2.3) $ 1.7
EBITDA margin (5%) (7%) 10%
Operating income (loss) $ (1.3) $ (4.6) $ 0.6
-------------------------------------------------------------------------
Production - 000 m(3) 113.8 423.5 230.2
Shipments - 000 m(3) 91.9 359.9 187.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Coastal logging operations' seasonal shutdown, which began in mid-
November, was extended to mid-March because of poor market conditions. As a
result, there were only limited sales of existing inventory in the current
period. Log prices bottomed out in February, mainly due to market-driven
logging curtailments, but some strengthening in price and demand is beginning,
particularly for hemlock and other low grades of sawlogs. Demand for cedar is
also strengthening, with prices increasing slightly in the latter part of the
quarter. Demand for cypress continues to be very soft, although there are
signs that this market may improve in the second quarter.


Non-Segmented Items

1st Quarter 4th Quarter 1st Quarter
(millions of dollars) 2005 2004 2004
-------------------------------------------------------------------------
Corporate costs $ (6.9) $ (6.1) $ (8.3)
Equity income of affiliated
companies $ 1.6 $ 2.3 $ 0.6
Net interest expense $ (11.8) $ (11.6) $ (14.8)
Foreign exchange gain (loss) on
long-term debt $ (3.6) $ 36.1 $ (6.0)
Other income (expense) $ (0.2) $ (3.7) $ 0.3
-------------------------------------------------------------------------

Corporate costs were $0.8 million higher than the previous quarter and
$1.4 million lower than in the first quarter of 2004. The first quarter 2004
expense was higher than normal due to the expensing of special incentive
awards.

Equity income for the quarter was $0.7 million lower than in the previous
quarter and $1.0 million higher than in the first quarter of 2004. Canfor's
equity investees were affected by similar market factors and transportation
constraints as Canfor's lumber segment.

Net interest expense was $0.2 million higher than in the previous quarter
and $3.0 million lower than in the same quarter of 2004. Interest expense for
the prior periods has been restated to include interest on the convertible
debentures ($2.4 million and $1.1 million in the first and fourth quarters of
2004 respectively), which was previously charged to equity (see "Changes in
Accounting Policies", below). The debentures were converted in November 2004.
Interest income earned on temporary investments was $0.5 million lower than in
the previous quarter and $2.2 million higher than in the same quarter in 2004.

Other expense in the previous quarter was comprised of a write-down of
deferred costs associated with the discontinued Maine sawmill project and a
write-down of an investment in Coastal assets.

Discontinued Operations

In December 2004, Canfor announced that it had entered into an agreement
to sell its Fort St James sawmill and associated tenures for proceeds of
$39.0 million plus the value of inventory at closing. In the first quarter of
2005, Canfor announced that it had entered into an agreement to sell its
Slocan sawmill and related tenures for $6.2 million plus the value of
inventory at closing. The Slocan sale closed on April 18th and the
Fort St James sale closed on April 25th. The sale of the Valemount sawmill is
expected to occur in the second quarter. There is no significant gain or loss
expected from the disposition of these operations.

Net income from discontinued operations, after tax, amounted to
$2.9 million in the first quarter, compared to $1.0 million in the previous
quarter and $0.2 million in the same quarter of 2004. Lumber shipments from
discontinued operations totaled 90.7 million board feet in the current
quarter, 100.6 million board feet in the previous quarter and 64.8 million
board feet in the first quarter of 2004.


SUMMARY OF FINANCIAL POSITION
-----------------------------

The following table summarizes Canfor's financial position as at the end
of the following periods:

1st Quarter 4th Quarter 1st Quarter
(millions of dollars) 2005 2004 2004
-------------------------------------------------------------------------
Ratio of current assets to current
liabilities(8) 2.6:1 2.4:1 0.5:1
Ratio of net debt to common
shareholders' equity(9) 18:82 13:87 45:55
Increase (decrease) in net
short-term cash(8) $ (145.3) $ 58.5 $ 59.8
- comprised of cash flow from
(used in):
Operating activities $ (22.7) $ 166.2 $ (1.7)
Financing activities $ 1.9 $ (0.1) $ 71.8
Investing activities $ (119.3) $ (83.7) $ (14.4)
Discontinued operations $ (5.2) $ (23.9) $ 4.1
-------------------------------------------------------------------------

(8) Prior periods have been restated to present cash net of unpresented
cheques.
(9) Q1 2004 has been restated to present the convertible subordinated
debentures as liabilities.

Changes in Financial Position

Cash flow used in operating activities was $22.7 million in the quarter,
compared to $1.7 million in the same quarter in 2004 and cash generated by
operations of $166.2 million in the previous quarter. The main reason for the
decrease over the previous quarter is the rise in inventories. Inventories
increased by $169.2 million from the end of 2004, of which $128.6 million is
attributable to the seasonal build-up of log inventories. Lumber and pulp
inventories increased by $22.4 million and $19.5 million respectively, mainly
as a result of railcar shortages, as discussed previously in this report.

Cash generated by financing activities of $1.9 million in the current
quarter is mainly comprised of proceeds from stock options exercised. In the
same quarter in 2004, financing activities generated $71.8 million of cash, as
a result of drawing down new long-term financing of US $50 million and
receiving proceeds of $5.8 million from stock options exercised. In the
previous quarter, financing activities consumed $0.1 million of cash.

$119.3 million was used for investing activities in the current quarter.
Capital expenditures of $68.1 million in the quarter included $28.8 million
contributed to the construction of the OSB mill in Fort St John and
$17.3 million for the Prince George Pulp and Paper Co-generation Project. A
payment of $50 million was made to Howe Sound Limited Partnership at the
beginning of the year for income tax losses, as discussed further below. The
majority of the $83.7 million of cash used in investing activities in the
previous quarter and the $14.4 million used in the first quarter of 2004 was
for capital expenditures.

Liquidity and Financial Requirements

At the end of the quarter, Canfor was in a net cash position of
$288.7 million and had $272.4 million of unused operating bank lines of credit
available, as compared to the December 31, 2004 net cash position of
$434.0 million and $280.4 million of unused operating lines of credit.

Provisions contained in Canfor's long-term borrowing agreements limit
both the amount of indebtedness the Company can incur and the amount of
dividends it may pay on its common shares. The amount of dividends the Company
is permitted to pay under its long-term borrowing agreements is approximately
$500 million or $3.50 per share. The Company can incur approximately
$1,270.0 million in additional long-term debt under these borrowing
arrangements.

Howe Sound Pulp and Paper Limited Partnership (HSLP)

Although Canfor wrote off its investment in HSLP in 1998, and therefore
no longer consolidates HSLP into its financial results, the operation reported
a net loss of $15.1 million in the quarter, after a $2.8 million foreign
exchange loss on long-term debt, and EBITDA of $(0.8) million.

Based on a separate prepayment agreement between Canfor and Oji Paper Co.
Ltd., the partners of HSLP, at the end of the first quarter Canfor had prepaid
$50 million to HSLP in advance of the due date of receivables for pulp
marketed and collected on their behalf ($44 million had been prepaid at the
end of the previous quarter). This agreement provides for the partners to
prepay up to a maximum amount of $50 million each, which is used as short-term
operating funds by HSLP. Canfor charges HSLP a market rate of interest for the
period of prepayment and the prepayment is covered by the assignment of
current and future accounts receivable.

Canfor acquired $643 million of tax losses from HSLP in 2001, which gave
rise to a deferred credit of $104.0 million. On January 2, 2005, Canfor made a
final contribution of $50 million to HSLP with respect to these losses. As at
March 31, 2005 Canfor had $14.7 million of deferred credits remaining
available to reduce income tax expense in future periods ($88.9 million was
remaining at March 31, 2004).

Outstanding Shares

At April 29, 2005, there were 143,496,897 common shares outstanding.

CHANGES IN ACCOUNTING POLICIES
------------------------------

Convertible Debentures - Effective January 1, 2005, Canfor retroactively
adopted new recommendations of the Canadian Institute of Chartered Accountants
(CICA) concerning the balance sheet presentation of financial instruments as
liabilities or equity. Canfor had previously accounted for its convertible
subordinated debentures as equity, including the related interest charges, in
accordance with EIC-71 Financial Instruments That May Be Settled at the
Issuer's Option in Cash or its Own Equity Instruments. Prior year figures have
been restated to reflect the debentures as liabilities and the related
interest as an expense on the income statement. This had no impact on
previously reported earnings per share. The debentures had a maturity date of
November 23, 2006 but were converted in November 2004 with the issuance of
11,742,424 Common Shares.

Variable Interest Entities - Effective January 1, 2005, Canfor adopted
the CICA's new accounting guideline for the consolidation of variable interest
entities. The primary objective of the guideline is to identify and report on
entities over which control is achieved through means other than voting
rights. The adoption of this guideline did not have a material impact on
Canfor's financial position or results of operations.

Cash and Temporary Investments - Effective January 1, 2005, Canfor
retroactively amended its presentation of cash and temporary investments to
include unpresented cheques, which were previously included in accounts
payable.

RISKS AND UNCERTAINTIES
-----------------------

A comprehensive discussion of Risks and Uncertainties was included in the
2004 Annual Report. An update of that discussion is included below.

Canada/US Softwood Lumber Dispute

On December 14, 2004, after completing its administrative review for the
period from May 2002 to April 2003 (POR1), the US Department of Commerce (DOC)
determined the countervailing duty (CVD) assessment rate of 17.18% applicable
to all Canadian companies for POR1. At that time, Canfor recorded a favourable
adjustment to reduce its POR1 expense to 17.18%. In February 2005, the DOC
announced a further reduction to the rate, to 16.37%, applicable to POR1 and
to future cash deposits, due to a calculation error on their part. As a
result, in the first quarter, Canfor reduced its CVD accrual by $6.5 million,
to record CVD expense at 16.37% for POR1. Canfor is currently paying deposits
at 16.37% for CVD and 1.83% for antidumping duties (ADD) and is expensing the
duties at the same rates.

In April 2005, the DOC began its administrative review of Canfor's POR2
(May 2003 to April 2004) data. The results of that review are expected later
this year.

The current dispute between Canada and the US over alleged subsidies
provided through provincial forest policies has continued since April 2001.
Currently, there are multiple legal cases underway regarding CVD relative to
subsidy levels, injury to the US industry and anti-dumping accusations. Cases
are being heard by WTO and NAFTA panels and in the US Court of International
Trade.

A NAFTA Panel decision in August 2004 determined that no injury or threat
of injury to the US industry had been established for the period of
investigation, and, accordingly, the NAFTA Panel ruled that the DOC should
revoke CVD and ADD orders. However, the US government has appealed this NAFTA
Injury Panel decision to an Extraordinary Challenge Committee (ECC). Hearings
will take place in early June 2005, with a decision expected 60 to 90 days
later. Notwithstanding the ECC's decision, further actions and appeals could
delay any return of duty deposits to exporting companies. The length of such
delay cannot be determined at this time. At March 31, 2005, Canfor had over
US $595 million on deposit for CVD and ADD.

Both the Canadian and the US industries have an interest in exploring a
negotiated agreement and periodic discussions have been held between the
industries and the governments of Canada, the provinces and the US.
Significant differences still exist between the parties. However, positions
are being considered and further negotiations are expected.

The Forestry Revitalization Plan

In March 2003, the Government of British Columbia (the Crown) introduced
the Forestry Revitalization Plan (the Plan) that provides for significant
changes to Crown forest policy and to the existing allocation of Crown timber
tenures to licensees. The changes prescribed in the Plan include the
elimination of minimum cut control regulations, the elimination of existing
timber processing regulations, and the elimination of restrictions limiting
the transfer and subdivision of existing licenses. As well, through
legislation, licensees, including Canfor, are required to return 20% of their
replaceable tenure to the Crown. The Plan states that approximately half of
this volume will be redistributed to open up opportunities for woodlots,
community forests and First Nations and the other half will be available for
public auction. The Crown has acknowledged that licensees will be fairly
compensated for the return of tenure and related infrastructure costs such as
roads and bridges.

The effect of the timber take-back results in a reduction of
approximately 2.4 million cubic metres to Canfor's existing allowable annual
cut on its replaceable tenures. While the legislation taking back the 20% was
passed in March 2003, the government has effectively loaned back the volume
until the Minister orders that it is needed. Canfor has worked with the
government to identify those licenses and operating areas that are to be
returned to the Crown and this allocation was determined in December 2004. The
second phase of the take-back is a negotiation with the government concerning
the "on-the-ground" sites or operating areas to be taken back. The site
selection process is complete for Canfor on the coast and in the northeastern
portion of the province but continues in the central interior. The third phase
is associated with compensation, concerning which Canfor is engaged in
discussions with the Minister. The completion of negotiations with respect to
site selection and compensation cannot be determined at this time.

As the amount of compensation to be made to Canfor for the take-back has
not yet been determined the effect of the Plan on Canfor's financial position
and results of operations cannot be determined at this time. Canfor will
record the effects of the Plan at the time that the amounts to be recorded are
estimable.

Selected Quarterly Financial Information (10)

1st Qtr 4th Qtr 3rd Qtr 2nd Qtr 1st Qtr
2005 2004 2004 2004 2004
-------------------------------------------------------------------------
Sales and Income
(millions of dollars)
Sales $ 965.9 $ 1,072.7 $ 1,130.7 $ 1,180.7 $ 645.1
Operating income
(loss) $ 95.6 $ 15.7 $ 203.2 $ 211.3 $ 62.1
Net income (loss)
from continuing
operations $ 62.7 $ 42.0 $ 191.3 $ 133.1 $ 30.2
Net income (loss) $ 65.6 $ 43.0 $ 200.0 $ 142.0 $ 30.4

Per common share
(dollars)
Net income (loss)
from continuing
operations
Basic $ 0.44 $ 0.31 $ 1.45 $ 1.01 $ 0.37
Diluted $ 0.44 $ 0.30 $ 1.34 $ 0.94 $ 0.34
Net income (loss)
Basic $ 0.46 $ 0.31 $ 1.52 $ 1.08 $ 0.37
Diluted $ 0.46 $ 0.30 $ 1.40 $ 1.00 $ 0.34
-------------------------------------------------------------------------

Statistics
----------
Lumber shipments
(Mmfbm) 1,165 1,344 1,181 1,298 724
Pulp shipments (000 mt) 268 313 275 285 242
Plywood shipments
(000 Msf 3/8") 106 96 93 109 45
OSB shipments
(000 Msf 3/8") 103 127 121 133 -
Average exchange rate
(Cdn$/US$) $ 0.815 $ 0.819 $ 0.765 $ 0.736 $ 0.759
Average 2x4
No. 2&Btr lumber
price (US$) $ 398 $ 338 $ 440 $ 437 $ 370
Average NBSK pulp
price to Northern
Europe (US$) $ 660 $ 613 $ 640 $ 652 $ 590
Average plywood
price - Toronto
(Cdn$) $ 439 $ 444 $ 548 $ 592 $ 528
Average OSB price -
North Central
(US$) $ 364 $ 260 $ 353 $ 437 n/a
-------------------------------------------------------------------------


4th Qtr 3rd Qtr 2nd Qtr
2003 2003 2003
-------------------------------------------------------------------------
Sales and Income
(millions of dollars)
Sales $ 616.2 $ 641.5 $ 611.6
Operating income
(loss) $ 0.8 $ 47.1 $ (42.8)
Net income (loss)
from continuing
operations $ 33.8 $ 19.7 $ (2.2)
Net income (loss) $ 32.6 $ 78.6 $ (2.6)

Per common share
(dollars)
Net income (loss)
from continuing
operations
Basic $ 0.42 $ 0.24 $ (0.02)
Diluted $ 0.38 $ 0.23 $ (0.02)
Net income (loss)
Basic $ 0.40 $ 0.97 $ (0.03)
Diluted $ 0.37 $ 0.86 $ (0.03)
-------------------------------------------------------------------------

Statistics
----------

Lumber shipments
(Mmfbm) 711 754 778
Pulp shipments (000 mt) 261 244 220
Plywood shipments
(000 Msf 3/8") 36 48 48
OSB shipments
(000 Msf 3/8") - - -
Average exchange rate
(Cdn$/US$) $ 0.760 $ 0.725 $ 0.715
Average 2x4
No. 2&Btr lumber
price (US$) $ 298 $ 316 $ 246
Average NBSK pulp
price to Northern
Europe (US$) $ 555 $ 520 $ 553
Average plywood
price - Toronto
(Cdn$) $ 542 $ 475 $ 361
Average OSB price -
North Central
(US$) n/a n/a n/a
-------------------------------------------------------------------------

The main factors affecting the comparability of the results over the
last eight quarters are the integration of the former Slocan operations as of
April 1, 2004, the strengthening of the Canadian dollar against the US dollar
beginning early in 2003, and changes in lumber, pulp, plywood and OSB prices.
One-time items that had a significant impact on quarterly results include a
$62.3 million gain on the sale of the BC Chemicals operation in the third
quarter of 2003, a $19.5 million gain from the sale of property in the fourth
quarter of 2003, and restructuring and mill closure provisions of $18.3
million, $0.3 million and $10.2 million in the second, third and fourth
quarters of 2004 respectively.

The quarterly results are also impacted by seasonal factors such as
weather and building activity. Adverse weather conditions can cause logging
curtailments, which can affect the supply of raw materials to sawmills,
plywood and OSB plants, and pulp mills. Market demand also varies seasonally
to some degree. For example, building activity and repair and renovation work,
which affects demand for lumber and panel products, is generally stronger in
the spring and summer months. Shipment volumes are affected by these factors
as well as by global supply and demand conditions. Shortages in railcar supply
had an adverse impact on shipment volumes in the current quarter and also in
the first three quarters of 2004.


-----------------------------------
(10) Certain prior year figures have been restated for comparability.



Consolidated Statements of Income and Retained Earnings

3 months ended
March 31,
(millions of dollars, unaudited) 2005 2004
-------------------------------------------------------------------------

Sales $ 965.9 $ 645.1

Costs and expenses
Manufacturing and product costs 598.4 399.1
Freight and other distribution costs 154.9 104.7
Countervailing and anti-dumping duties (Note 7) 58.9 35.3
Amortization 41.6 28.7
Selling and administration costs 16.5 15.2
-------------------------------------------------------------------------
870.3 583.0

Operating income from continuing operations 95.6 62.1

Equity income of affiliated companies 1.6 0.6
Interest expense (Note 2) (11.8) (14.8)
Foreign exchange loss on long-term debt (3.6) (6.0)
Other income (expense) (0.2) 0.3
-------------------------------------------------------------------------
Net income from continuing operations before
income taxes 81.6 42.2
Income tax expense (Note 9) (18.9) (12.0)
-------------------------------------------------------------------------
Net income from continuing operations 62.7 30.2
Net income from discontinued operations (Note 3) 2.9 0.2
-------------------------------------------------------------------------
Net income $ 65.6 $ 30.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Per common share (in dollars) (Note 10)
Net income from continuing operations
Basic $ 0.44 $ 0.37
Diluted $ 0.44 $ 0.34

Net income
Basic $ 0.46 $ 0.37
Diluted $ 0.46 $ 0.34

-------------------------------------------------------------------------
-------------------------------------------------------------------------

Retained earnings, beginning of year 691.9 277.0
Net income for the year to date 65.6 30.4
-------------------------------------------------------------------------
Retained earnings, end of current period $ 757.5 $ 307.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------



Consolidated Cash Flow Statements

3 months ended
March 31,
(millions of dollars, unaudited) 2005 2004
-------------------------------------------------------------------------

Cash generated from (used in)
Operating activities
Net income from continuing operations $ 62.7 $ 30.2
Items not affecting cash:
Amortization 41.6 28.7
Income taxes 18.1 9.7
Long-term portion of deferred reforestation 17.8 18.8
Employee future benefits 5.8 5.2
Unrealized foreign exchange loss on
long-term debt 3.6 6.0
Adjustment to accrued duties (Note 7) (7.0) (5.3)
Other (1.0) (0.6)
Changes in non-cash working capital (164.3) (94.4)
-------------------------------------------------------------------------
(22.7) (1.7)
-------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt 0.6 66.9
Repayment of long-term debt (0.3) (0.8)
Net proceeds on issuance of common shares
(Note 11) 1.8 5.8
Other (0.2) (0.1)
-------------------------------------------------------------------------
1.9 71.8
-------------------------------------------------------------------------
Investing activities
Property, plant, equipment and timber (68.1) (15.3)
Howe Sound Pulp and Paper Limited Partnership
(Note 13) (50.0) -
Proceeds on disposal of property, plant and
equipment 0.7 0.6
Other (1.9) 0.3
-------------------------------------------------------------------------
(119.3) (14.4)
-------------------------------------------------------------------------
Increase (decrease) in net cash from continuing
operations (140.1) 55.7
Cash generated (used) by discontinued operation
(Note 3) (5.2) 4.1
-------------------------------------------------------------------------
Increase (decrease) in net cash (145.3) 59.8

Net cash (short-term indebtedness) at beginning
of period 434.0 (97.6)
-------------------------------------------------------------------------
Net cash (short-term indebtedness) at
end of period $ 288.7 $ (37.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net cash (short-term indebtedness) is
comprised of:
Cash and temporary investments (Note 2) $ 295.6 $ (24.8)
Operating bank loans (6.9) (13.0)
-------------------------------------------------------------------------
$ 288.7 $ (37.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Changes in non-cash working capital
Accounts receivable $ (19.7) $ (15.5)
Inventories (169.2) (132.7)
Prepaid expenses 9.7 6.0
Accounts payable, accrued liabilities and
current portion of deferred reforestation 13.4 46.4
Income taxes 1.5 1.4
-------------------------------------------------------------------------
$ (164.3) $ (94.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------


Interest payments of $23.8 million were made in the 3 months ended
March 31, 2005 (2004 - $18.6 million) and income taxes of $2.0 million
were recovered (2004 - $0.5 million paid).



Consolidated Balance Sheets

as at as at
March 31, December 31,
(millions of dollars) 2005 2004
-------------------------------------------------------------------------
(unaudited) (audited)
ASSETS
Current assets
Cash and temporary investments (Note 2) $ 295.6 $ 438.5
Accounts receivable
Trade 260.1 239.4
Other 61.5 62.2
Income taxes recoverable 13.3 14.7
Future income taxes 30.1 32.5
Inventories 778.4 609.2
Prepaid expenses 30.2 40.0
Current assets of discontinued operations
(Note 3) 37.2 31.6
-------------------------------------------------------------------------
Total current assets 1,506.4 1,468.1
-------------------------------------------------------------------------

Long-term investments and other 200.6 197.4

Property, plant, equipment and timber 2,203.3 2,185.4

Deferred charges 92.7 94.9

Non-current assets of discontinued operations
(Note 3) 33.5 33.8
-------------------------------------------------------------------------
$ 4,036.5 $ 3,979.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------

LIABILITIES
Current liabilities
Operating bank loans (Note 5) $ 6.9 $ 4.5
Accounts payable and accrued liabilities 430.0 463.5
Current portion of long-term debt 68.7 68.1
Current portion of deferred reforestation 47.8 46.6
Current liabilities of discontinued operations
(Note 3) 16.7 19.5
-------------------------------------------------------------------------
Total current liabilities 570.1 602.2
-------------------------------------------------------------------------

Long-term debt (Note 5) 663.6 660.5

Other accruals and provisions (Note 6) 233.7 223.7

Long-term liabilities of discontinued operations
(Note 3) 5.0 -

Future income taxes, net 515.1 499.2

Deferred credit 14.7 27.2

SHAREHOLDERS' EQUITY
Share capital - 143,496,897 shares outstanding 1,277.5 1,275.7
Retained earnings 757.5 691.9
Foreign exchange translation adjustment (0.7) (0.8)
-------------------------------------------------------------------------
Total shareholders' equity 2,034.3 1,966.8
-------------------------------------------------------------------------
$ 4,036.5 $ 3,979.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Contingencies (Note 15)
Subsequent events (Note 3)


Notes to the Consolidated Financial Statements

1. These interim financial statements do not include all of the
disclosures required by Canadian generally accepted accounting
principles for annual financial statements and, accordingly, should
be read in conjunction with the financial statements and notes
included in Canfor's Annual Report for the year ended December 31,
2004. These interim financial statements follow the same accounting
policies and methods of computation as used in the 2004 consolidated
financial statements, except as described in Note 2.

2. Changes in Accounting Policies and Presentation

Convertible Debentures
Effective January 1, 2005, Canfor retroactively adopted the new
recommendations of the Canadian Institute of Chartered Accountants
(CICA) concerning the balance sheet presentation of financial
instruments as liabilities or equity. Canfor had previously
accounted for its convertible subordinated debentures as equity,
including the related interest charges, in accordance with EIC-71
Financial Instruments That May Be Settled at the Issuer's Option
in Cash or its Own Equity Instruments. Prior year figures have been
restated to reflect the debentures as liabilities and the related
interest as an expense on the income statement. This had no impact
on previously reported earnings per share. The debentures had a
maturity date of November 23, 2006 but were converted in November
2004 with the issuance of 11,742,424 Common Shares.

Variable Interest Entities
Effective January 1, 2005, Canfor adopted the CICA's new accounting
guideline for the consolidation of variable interest entities. The
primary objective of the guideline is to identify and report on
entities over which control is achieved through means other than
voting rights. The adoption of this guideline did not have a
material impact on Canfor's financial position or results of
operations.

Cash and Temporary Investments
Effective January 1, 2005, Canfor retroactively amended its
presentation of cash and temporary investments to include
unpresented cheques, which were previously included in accounts
payable.

3. Discontinued Operations

In December 2004, Canfor announced that it had entered into an
agreement to sell its Fort St James sawmill and associated tenures
for proceeds of $39.0 million plus the value of inventory at
closing. In the first quarter of 2005, Canfor announced that it had
entered into an agreement to sell its Slocan sawmill and related
tenures for $6.2 million plus the value of inventory at closing.
The Slocan sale closed on April 18th and the Fort St James sale
closed on April 25th. The sale of the Valemount sawmill is expected
to occur in the second quarter. There is no significant gain or loss
expected from the disposition of these operations.

The following table presents selected financial information for the
Fort St James, Slocan and Valemount operations, which have been
reclassified as discontinued operations:

3 months ended
March 31, March 31,
(millions of dollars) 2005 2004
--------------------------------------------------------------------
Sales to external customers $ 47.9 $ 27.4
--------------------------------------------------------------------
--------------------------------------------------------------------
Operating income before income taxes 4.5 0.3

Income tax expense (1.6) (0.1)
--------------------------------------------------------------------
Net income $ 2.9 $ 0.2
--------------------------------------------------------------------
--------------------------------------------------------------------
Net income per share (basic and diluted) $ 0.02 $ -
--------------------------------------------------------------------
--------------------------------------------------------------------

Cash flows
Cash generated from (used in)
operating activities $ (5.5) $ 3.3

Cash generated from investing activities 0.3 0.8
--------------------------------------------------------------------
$ (5.2) $ 4.1
--------------------------------------------------------------------
--------------------------------------------------------------------


4. Canfor-LP OSB Limited Partnership

Canfor has entered into a limited partnership agreement with
Louisiana-Pacific Canada Ltd. to jointly undertake construction and
operation of an oriented strand board mill with rated annual
capacity of 820 million square feet (3/8" basis), in Fort St. John,
British Columbia. Canfor has agreed to supply 330,000 cubic metres
of timber annually to the joint venture out of its existing timber
tenure in the area. The joint venture is still in the pre-operating
construction phase.

During the first quarter of 2005, Canfor made capital contributions
of $28.8 million to the venture. In order to retain its 50%
interest, Canfor has agreed to contribute 50% of the capital to fund
the project, which is estimated to have a total cost of
$226.4 million.

These consolidated financial statements include the following
amounts, which represent Canfor's 50% ownership interest in the
partnership:

March 31, December 31,
(millions of dollars) 2005 2004
--------------------------------------------------------------------
Balance Sheet
Cash $ 2.5 $ 1.2

Other current assets 2.3 1.3

Construction in progress 69.3 41.8

Deferred start-up costs 3.9 3.0

Accounts payable and accrued liabilities (8.9) (7.0)
--------------------------------------------------------------------
$ 69.1 $ 40.3
--------------------------------------------------------------------
--------------------------------------------------------------------

Cash flow
Cash used in operating activities
(working capital) $ (0.4) $ 5.7

Cash used in investing activities (28.4) (44.8)
--------------------------------------------------------------------
$ (28.8) $ (39.1)
--------------------------------------------------------------------
--------------------------------------------------------------------


5. Bank Indebtedness and Long-Term Debt

At March 31, 2005 Canfor had $332.0 million of bank operating lines
of credit available, of which $6.9 million was drawn down and an
additional $52.7 million was utilized for several standby letters of
credit.

The agreements relative to Canfor's privately placed senior notes
contain provisions limiting the amount of indebtedness that Canfor
and its designated subsidiaries can incur and the amount of
dividends paid to its common shareholders. Under these agreements,
Canfor and its designated subsidiaries can presently incur
approximately $1,270.0 million in additional long-term debt and pay
up to $500.0 million, or approximately $3.50 per share, in dividends
to its common shareholders.

At March 31, 2005, the fair value of Canfor's long-term debt was
$769.4 million.


6. Other Accruals and Provisions
March 31, December 31,
(millions of dollars) 2005 2004
--------------------------------------------------------------------
Deferred reforestation $ 85.3 $ 72.4

Countervailing duty provision (Note 7) 70.2 76.7

Accrued pension obligations 18.4 17.7

Post employment benefits 57.0 54.7

Other liabilities 2.8 2.2
--------------------------------------------------------------------
Total other accruals and provisions $ 233.7 $ 223.7
--------------------------------------------------------------------
--------------------------------------------------------------------


7. Countervailing and Anti-dumping Duties

The US Department of Commerce (DOC) imposed an 18.79% countervailing
duty (CVD) on Canadian lumber shipments to the US effective May 16,
2002. Canfor's company-specific cash deposit rate was subsequently
reduced to 12.24%, effective prospectively from March 10, 2004.
Canfor continued to expense CVD at the 18.79% rate after this date,
because of the uncertainty about whether a company-specific
administrative review would be granted. On December 14, 2004, after
completing its administrative review for the period from May 2002 to
April 2003 (POR1), the DOC determined the CVD assessment rate of
17.18% applicable to all Canadian companies for POR1. At that time,
Canfor recorded a favourable adjustment to reduce its POR1 expense
to 17.18%. In February 2005, the DOC announced a further reduction
to the rate, to 16.37%, applicable to POR1 and to future cash
deposits, due to a calculation error on their part. As a result, in
the first quarter, Canfor reduced its CVD accrual by $6.5 million,
to record CVD expense at 16.37% for POR1. The combined additional
CVD accrued in excess of the cash deposits made at March 31, 2004 is
$70.2 million and is included in "other accruals and provisions"
(Note 6).

The DOC also imposed anti-dumping duties (ADD) on Canadian lumber
shipments to the US effective May 16, 2002. Canfor's
company-specific rate was determined at 5.96% and Slocan's
company-specific rate was determined at 7.71%. While the cash
payments up to December 20, 2004 were made at the required deposit
rates, Canfor regularly reviews its estimate of the ADD expense rate
by applying the DOC's methodology to updated sales and cost data as
it becomes available. On December 14, 2004, the DOC determined the
ADD assessment rate for Canfor at 2.06% and for Slocan at 1.37% for
POR1 and the cash deposit rate was reduced to 1.83% for US lumber
shipments after December 20, 2004. The cumulative ADD cash deposits
in excess of the calculated expense accrued at March 31, 2005 is
$118.1 million and is being carried as a receivable under
"long-term investments and other".

The DOC officially announced in the Federal Register that it would
be assessing duties in accordance with the rates that it determined
in the reviews, which legal counsel advise would result in the
excess ADD deposits being recoverable. Notwithstanding the rates
established in the investigations and the posting of cash deposits,
the final liability for the assessment of countervailing and
anti-dumping duties will not be determined until the DOC's
administrative review process is complete and all subsequent
challenges or appeals are finalized.

As at March 31, 2005, Canfor (including legacy Slocan) had paid
combined duty deposits of US $595.6 million (CVD of $436.6 million
and ADD of $159.0 million) since inception of CVD and ADD in May
2002.

On August 31, 2004, a NAFTA Panel ruled, for the third time, that
the US International Trade Commission (ITC) had failed to prove that
Canadian lumber imports posed a threat of material injury to the US
industry. The Panel gave the ITC ten days to comply with its ruling,
which would effectively end the case and result in the return of all
duties collected to date. On September 10, 2004, the ITC released a
decision indicating that the Canadian lumber industry did not
threaten the US industry with material injury during the period of
investigation. On October 13, 2004, NAFTA formally issued its
affirmation of the ITC's negative injury ruling. The United States
has filed a request for an Extraordinary Challenge and the
Extraordinary Challenge Committee will hear oral arguments on
June 2-3, 2005. If not reversed by the Extraordinary Challenge
Committee, the ITC's negative threat determination will become
final, requiring revocation of the anti-dumping and countervailing
duty orders on softwood lumber from Canada.

Canadian Interests continue to aggressively defend the Canadian
industry in this US trade dispute and are appealing the decision of
these administrative agencies to the appropriate courts, NAFTA
panels and the WTO.

8. Employee Future Benefits

The total benefit cost of Canfor's defined benefit pension plans was
$4.1 million in the quarter (2004 - $2.5 million) and the total
benefit cost of Canfor's other employee future benefit plans was
$2.1 million (2004 - $3.5 million). The cost of Canfor's defined
contribution plans was $0.5 million in the current quarter
(2004 - nil).

9. Income Tax Expense

3 months ended
March 31, March 31,
(millions of dollars) 2005 2004
--------------------------------------------------------------------
Current $ (2.9) $ (2.3)
Future (27.9) (17.5)
Tax benefit of current Howe Sound Pulp and
Paper Limited Partnership losses - 1.1
Tax on equity earnings (0.6) (0.1)
--------------------------------------------------------------------
(31.4) (18.8)
Amortization of deferred credit on
utilization of acquired tax losses 12.5 6.8
--------------------------------------------------------------------
$ (18.9) $ (12.0)
--------------------------------------------------------------------
--------------------------------------------------------------------

The reconciliation of income taxes calculated at the statutory rate
to the actual income tax provision is as follows:

3 months ended
March 31, March 31,
(millions of dollars) 2005 2004
--------------------------------------------------------------------
Income tax expense at statutory tax rate $ (29.0) $ (15.1)
Large corporation tax (1.3) (1.3)
Tax benefit of current Howe Sound Pulp and
Paper Limited Partnership losses - 1.1
Amortization of deferred credit on
utilization of acquired tax losses 12.5 6.8
Permanent difference from capital gains and
losses (1.3) (2.1)
Other permanent differences and tax
adjustments 0.2 (1.4)
--------------------------------------------------------------------
Tax recovery (expense) $ (18.9) $ (12.0)
--------------------------------------------------------------------
--------------------------------------------------------------------


10. Earnings Per Share


(millions of dollars, 3 months ended
except for number of shares and March 31, March 31,
per share amounts) 2005 2004
--------------------------------------------------------------------

Earnings per share from continuing
operations
Net income from continuing operations $ 62.7 $ 30.2
Basic earnings per share from continuing
operations $ 0.44 $ 0.37
Net income from continuing operations -
diluted earnings per share (a) $ 62.7 $ 31.8
Diluted earnings per share from
continuing operations $ 0.44 $ 0.34

--------------------------------------------------------------------
Earnings per share
Net income $ 65.6 $ 30.4
Basic earnings per share $ 0.46 $ 0.37
Net income - diluted earnings per share (a) $ 65.6 $ 32.0
Diluted earnings per share $ 0.46 $ 0.34

--------------------------------------------------------------------

Weighted average number of common shares 143,400,634 81,156,010
Incremental shares from stock options 247,889 86,881
Shares issuable upon conversion of
convertible debentures - 11,742,424
--------------------------------------------------------------------
Diluted number of common shares 143,648,523 92,985,315
--------------------------------------------------------------------
--------------------------------------------------------------------

(a) 2004 - after adding back interest on liability component of
convertible debentures


11. Stock-Based Compensation

During the quarter, proceeds of $1.8 million were received from the
exercise of 185,418 stock options at a weighted-average exercise
price of $9.61. No new stock options were granted in the current
quarter.

12. Financial Instruments

A significant portion of Canfor's income from operations is
generated from sales denominated in US dollars. In order to manage
some of the risk associated with fluctuating exchange rates, Canfor
enters into forward exchange contracts from time to time. At
March 31, 2005, Canfor had US $29.1 million of forward contracts
outstanding (2004 - US $6 million). These contracts were fixed at an
average rate of 1.2329 and have option periods extending through to
April 2006. There was an unrecognized gain of $0.7 million on these
contracts at March 31, 2005. No contracts were exercised in the
current quarter (2004 - contracts totaling US $15 million were
exercised and a gain of $1.5 million was realized).

Canfor also uses a variety of financial instruments to reduce its
exposure to risks associated with lumber and pulp prices and energy
costs. At the end of the current quarter, there were 590 lumber
futures contracts outstanding, which had an unrealized loss of
$0.5 million. In March 2005, Canfor entered into a pulp swap to
hedge 500 tonnes per month for one year, commencing in April, at
US $675 per tonne. There was an unrealized gain of $0.1 million on
this contract at March 31, 2005. Commodity swaps hedging future
natural gas purchases of 5.0 million Gigajoules were outstanding at
the end of the current quarter (2004 - 1.1 million Gigajoules).
There was an unrealized gain of $7.2 million on these swaps at
March 31, 2005.

13. Howe Sound Pulp & Paper Limited Partnership (HSLP)

Canfor acquired $643 million of tax losses from HSLP in 2001, which
gave rise to a deferred credit of $104.0 million. On January 2,
2005, Canfor made a final contribution of $50 million to HSLP with
respect to these losses. As at March 31, 2005 Canfor had
$14.7 million of deferred credits remaining available to reduce
income tax expense in future periods ($88.9 million was remaining at
March 31, 2004).

14. Segmented Information (a)



(millions of dollars) Lumber(b) Panels Pulp & Paper
--------------------------------------------------------------------
3 months ended March 31, 2005

Sales to external customers $ 641.2 94.4 223.9
Sales to other segments (c) $ 34.6 - -
Operating income (loss) $ 76.0 17.8 10.0
Amortization $ 25.3 2.8 11.3
Capital expenditures $ 8.9 35.7 20.7
Identifiable assets $ 1,853.8 292.2 909.1

--------------------------------------------------------------------
--------------------------------------------------------------------
3 months ended March 31, 2004 (d)

Sales to external customers $ 377.5 32.0 218.4
Sales to other segments (c) $ 22.7 0.8 -
Operating income (loss) $ 51.6 5.7 12.5
Amortization $ 14.7 0.5 10.8
Capital expenditures $ 7.3 - 7.0
Identifiable assets $ 1,172.4 43.3 823.4

--------------------------------------------------------------------


Coastal Corporate Consoli-
(millions of dollars) Operations & Other dated
--------------------------------------------------------------------
3 months ended March 31, 2005

Sales to external customers $ 6.4 - $ 965.9
Sales to other segments (c) $ 0.3 - $ 34.9
Operating income (loss) $ (1.3) (6.9) $ 95.6
Amortization $ 1.0 1.2 $ 41.6
Capital expenditures $ 1.3 1.5 $ 68.1
Identifiable assets $ 81.5 899.9 $ 4,036.5

--------------------------------------------------------------------
--------------------------------------------------------------------
3 months ended March 31, 2004 (d)

Sales to external customers $ 17.2 - $ 645.1
Sales to other segments (c) $ 0.9 - $ 24.4
Operating income (loss) $ 0.6 (8.3) $ 62.1
Amortization $ 1.1 1.6 $ 28.7
Capital expenditures $ 1.0 - $ 15.3
Identifiable assets $ 74.9 446.2 $ 2,560.2

--------------------------------------------------------------------

(a) Operations are presented by product lines. Operations are
considered to be in one geographic area, Canada, since the
subsidiary in the United States is not significant to the
total.

(b) Sales for the quarter include sales of Canfor produced lumber
of $592.0 million (2004 - $340.7 million).
Excludes discontinued operations (Note 3).

(c) Sales to other segments are accounted for at prices which
approximate market value.

(d) These figures do not include the results of the former Slocan
operations, which were acquired on April 1, 2004.

15. Contingencies

The Forestry Revitalization Plan
In March 2003, the Government of British Columbia (the Crown)
introduced the Forestry Revitalization Plan (the Plan) that provides
for significant changes to Crown forest policy and to the existing
allocation of Crown timber tenures to licensees. The changes
prescribed in the Plan include the elimination of minimum cut
control regulations, the elimination of existing timber processing
regulations, and the elimination of restrictions limiting the
transfer and subdivision of existing licenses. As well, through
legislation, licensees, including Canfor, are required to return 20%
of their replaceable tenure to the Crown. The Plan states that
approximately half of this volume will be redistributed to open up
opportunities for woodlots, community forests and First Nations and
the other half will be available for public auction. The Crown has
acknowledged that licensees will be fairly compensated for the
return of tenure and related infrastructure costs such as roads and
bridges.

The effect of the timber take-back results in a reduction of
approximately 2.4 million cubic metres to Canfor's existing
allowable annual cut on its replaceable tenures. While the
legislation taking back the 20% was passed in March 2003, the
government has effectively loaned back the volume until the Minister
orders that it is needed. Canfor has worked with the government to
identify those licenses and operating areas that are to be returned
to the Crown and this allocation was determined in December 2004.
The second phase of the take-back is a negotiation with the
government concerning the "on-the-ground" sites or operating areas
to be taken back. The site selection process is complete for Canfor
on the coast and in the northeastern portion of the province but
continues in the central interior. The third phase is associated
with compensation, concerning which Canfor is engaged in discussions
with the Minister. The completion of negotiations with respect to
site selection and compensation cannot be determined at this time.

As the amount of compensation to be made to Canfor for the take-back
has not yet been determined the effect of the Plan on Canfor's
financial position and results of operations cannot be determined at
this time. Canfor will record the effects of the Plan at the time
that the amounts to be recorded are estimable.

16. Certain comparative information has been reclassified to conform
to the presentation in the current period.
>>

Contact Information

  • Terry D. Hodgins
    Vice President and Treasurer
    (604) 661-5241

    Media Contact:
    R. Lee Coonfer
    Manager, Public Affairs & Corporate Communication
    (604) 209-7097