Canfor Corporation

Canfor Corporation

February 08, 2005 21:31 ET

Canfor Corporation Announces Fourth Quarter and 2004 Earnings

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Highlights
- Net income of $43.7 million in the fourth quarter and $420.9 for the
year
- EBITDA of $61.9 million in the fourth quarter and $676.7 million for
the year
- Net Debt to Equity reduced to 11:89
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VANCOUVER, Feb. 8 - Canfor Corporation (TSX: CFP) today reported
net income of $43.7 million for the fourth quarter, or $0.30 per share on a
diluted basis. Record net income of $420.9 million, or $3.22 per share, was
earned in 2004.

The current quarter's results include a $36.1 million after-tax exchange
gain on long-term debt, and $48.7 million for the year. Net income in the
quarter includes a $8.9 million after-tax favourable duty adjustment resulting
from the rate determination for the period from May 22, 2002 to April 30,
2003, restructuring and mill closure costs of $10.2 million after-tax, and
$3.2 million of after-tax asset write downs. Total restructuring costs
recorded in the year, after tax, were $28.8 million, of which $12.7 million
were for mill closure costs and $16.1 million were associated with the
integration of Canfor and Slocan.

Operating income in the quarter declined by $199.3 million from the third
quarter's results, due to lower product prices and a 7% strengthening in the
Canadian dollar value against the US dollar. Average prices in the quarter
declined by 23% for lumber, 19% for plywood, 17% for OSB and 4% for pulp.

"In terms of operating performance and financial results, 2004 was a very
successful year for Canfor," said Jim Shepherd, President and Chief Executive
Officer. "Due to the hard work of our employees, Canfor has been able to take
advantage of better than expected synergies from the completion of the Canfor-
Slocan integration and capital projects have come on line that will help
further reduce our costs and increase efficiencies going forward. I feel very
confident that we have put the foundation in place that will help us weather
the cyclicality of our industry and position Canfor well for long-term growth
and success," he said.

<<
Summary of Selected Results for the Quarter and Year(1)

12 months 12 months
(millions of dollars, 4th 3rd ended 4th ended
except for per share Quarter Quarter December Quarter December
amounts) 2004 2004 31, 2004 2003 31, 2003
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Sales $1,149.9 $1,228.9 $4,341.9 $ 656.4 $2,662.6
Countervailing &
anti-dumping
duties expensed $ (74.6) $ (78.0) $ (290.2) $ (33.3) $ (146.6)
Restructuring costs $ (12.9) $ (0.5) $ (36.5) $ - $ -
EBITDA $ 61.9 $ 258.3 $ 676.7 $ 27.2 $ 107.0
Operating income (loss) $ 17.3 $ 216.6 $ 521.5 $ (0.3) $ (2.8)
Foreign exchange gain
on long-term debt $ 36.1 $ 40.5 $ 48.7 $ 25.4 $ 110.9
Net income from
continuing operations $ 43.7 $ 201.6 $ 420.9 $ 34.6 $ 85.8
Discontinued operation,
net of tax $ - $ - $ - $ (0.5) $ 67.5
Net income $ 43.7 $ 201.6 $ 420.9 $ 34.1 $ 153.3
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Per share (diluted)
Net income from
continuing operations $ 0.30 $ 1.40 $ 3.22 $ 0.37 $ 0.92
Net income $ 0.30 $ 1.40 $ 3.22 $ 0.37 $ 1.65
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Average Canadian/US
exchange rate $ 0.819 $ 0.765 $ 0.768 $ 0.760 $ 0.714
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(1) Figures quoted in this report reflect the results of the former
Slocan operations since April 1, 2004.

Summarized operating results by segment are as follows:

Lumber
12 months 12 months
(millions of dollars 4th 3rd ended 4th ended
unless otherwise Quarter Quarter December Quarter December
noted) 2004 2004 31, 2004 2003 31, 2003
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Sales $ 785.0 $ 858.2 $2,881.1 $ 382.5 $1,566.9
EBITDA $ 44.4 $ 212.4 $ 499.4 $ 15.6 $ 41.4
EBITDA margin 6% 25% 23% 4% 3%
Operating income (loss) $ 18.2 $ 187.8 $ 411.6 $ 1.9 $ (4.7)
Average 2"x4" lumber
price(2) in US$ $ 338 $ 440 $ 395 $ 298 $ 277
Average price in Cdn $ $ 413 $ 575 $ 517 $ 392 $ 388
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(2) No. 2 & Better, per thousand board feet (Source - Random Lengths
publication)

The Lumber segment earned operating income of $18.2 million in the
quarter compared to $187.8 million in the prior quarter and $1.9 million in
the same quarter last year. This reduction in profitability compared to the
prior quarter reflects the seasonal decline in product prices (23%) combined
with the impact of a 7% increase in the value of the Canadian dollar relative
to the US dollar. When comparing the results to the previous quarter, other
factors to consider include restructuring costs for this segment of
$10.7 million recognized in the fourth quarter. These relate primarily to
severance and asset write-down costs resulting from mill closures identified
in the quarter. When comparing the earnings in the current period and year to
date with the same periods in 2003, the main factors are the income generated
by the former Slocan operations, higher lumber prices and the effect of
exchange rate movements. In addition the fourth quarter 2003 results were
favourably impacted by the inclusion of $8.8 million of exchange gains on
forward exchange contracts (none in the current quarter) and adversely
impacted because of the downtime taken as a result of significant capital
installations at the Prince George and Houston sawmill operations.

Operations:

With the exception of downtime taken over the Christmas holiday period,
the lumber segment continued to operate at full capacity during the quarter.

Operational changes are being made to those mills most affected by the
increasing supply of mountain pine beetle infested timber in order to address
the resultant smaller log sizes and reduced timber quality. The Company's
harvesting operations continue their focus on the most heavily infested areas.

Duties expensed for the quarter were $74.6 million compared to
$78.0 million in the prior quarter and $33.3 million in the fourth quarter of
2003. The duty expense for the current quarter was impacted by adjustments
made to both CVD and ADD as a result of US Department of Commerce
announcements and assessments made in the quarter, which are discussed in
detail in Note 7 to the attached financial statements. The net impact on
operating earnings is a positive $11.3 million in the quarter.

Markets:

Following the 5 year highs achieved in the mid-third quarter, lumber
prices weakened into September and declined further into the fourth quarter.
Prices bottomed out in November before picking up for the balance of the
quarter. Western SPF 2"x4" No. 2 & Better prices averaged US $338 per Mfbm for
the fourth quarter which is 23% less than the previous quarter, and ended the
year at US $358 per Mfbm. A number of factors contributed to a rebound in the
lumber market. These included log shortages in Eastern Canada, the rebuilding
of customer inventories in anticipation of a strong spring building season and
concern about supply as a result of the US East Coast hurricanes.

Panels
12 months 12 months
(millions of dollars 4th 3rd ended 4th ended
unless otherwise Quarter Quarter December Quarter December
noted) 2004 2004 31, 2004 2003 31, 2003
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Sales $ 95.0 $ 109.6 $ 373.4 $ 31.7 $ 122.8
EBITDA $ 22.6 $ 38.5 $ 129.5 $ 1.0 $ 7.8
EBITDA margin 24% 35% 35% 3% 6%
Operating income $ 19.9 $ 35.9 $ 121.0 $ 0.5 $ 5.3
Average plywood price
in Cdn $(3) $ 444 $ 548 $ 532 $ 475 $ 458
Average OSB price
in US $(4) $ 293 $ 353 $ 371 $ 386 $ 263
Average OSB price
in Cdn $ $ 358 $ 461 $ 483 $ 533 $ 365
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(3) Per Msf 3/8" basis, delivered to Toronto (Source - C.C. Crowe
Publications, Inc.)
(4) Per Msf 7/16" North Central (Source - Random Lengths publication)

The Panels segment earned operating income of $19.9 million, or
$16.0 million less than in the third quarter and $19.4 million more than the
same quarter in 2003. The decrease from the previous quarter is primarily the
result of lower product prices and the impact of the stronger Canadian dollar
on sales. When comparing the current year's operating income to the same
periods in 2003, the main factor in the increase is the inclusion of the
former Slocan OSB and plywood operations in 2004.

Operations:

The North Central Plywood operation ran at full capacity for the fourth
quarter following an upgrade to its hot press and lay up line in the previous
quarter. The Tackama plywood operation incurred some downtime due to capital
installation to upgrade the press.

Oriented strand board (OSB) operations ran well in the quarter but
production was impacted in December by a 3-day maintenance shutdown and a
critical press hydraulic failure. Profitability was reduced due to lower
prices, which were down by 17% from the previous quarter.

Markets:

The North American demand for panels was strong in the third quarter but
weakened significantly at the end of the quarter and into the fourth quarter.
The average Canadian Softwood Plywood (CSP) price for the quarter of Cdn $444
(per Msf 3/8" basis, delivered to Toronto) was 19% less than the third quarter
and $31 less than the same quarter in 2003. US dollar OSB prices declined on
average 17% from the third quarter level. Canadian plywood markets levelled
off at the end of the quarter and OSB prices strengthened, increasing by US
$52 in the month of December.

Pulp and Paper
12 months 12 months
(millions of dollars 4th 3rd ended 4th ended
unless otherwise Quarter Quarter December Quarter December
noted) 2004 2004 31, 2004 2003 31, 2003
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Sales $ 239.0 $ 248.7 $ 981.7 $ 217.0 $ 853.4
EBITDA $ 1.8 $ 17.5 $ 89.6 $ 19.6 $ 69.8
EBITDA margin 1% 7% 9% 9% 8%
Operating income (loss) $ (10.1) $ 6.3 $ 45.1 $ 9.2 $ 25.7
Average pulp price(5)
in US $ $ 613 $ 640 $ 624 $ 555 $ 527
Average price in Cdn $ $ 748 $ 837 $ 812 $ 730 $ 739
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(5) delivered to Northern Europe - per tonne (Source - Pulp & Paper
Week)

Operating income decreased by $16.4 million from the previous quarter and
was $19.3 million lower than the same quarter in 2003. Lower pulp prices and
the impact of the strengthened Canadian dollar were the main factors in the
decrease in operating income from the prior quarter. When compared to the
fourth quarter in 2003, the decrease in operating income in the current
quarter is due to a number of one-time favourable adjustments recorded in the
fourth quarter of 2003, including a chip inventory adjustment, forward
contract gains and lower maintenance costs. When comparing the 2004 year with
2003, higher prices for pulp and the inclusion of the former Slocan Taylor
pulp mill's results were the main factors in the higher earnings in 2004.
Strong demand and tight supply of softwood pulp increased the average price
delivered to northern Europe by 10% compared to the same period in 2003.
However, when factoring in the impact of the strengthened Canadian dollar, the
price increase was only 2%.

Operations:

Production at the Northwood mill was above target in the quarter, which
resulted in lower unit costs at that mill. The Intercon mill experienced some
operational issues, including an area shut and some mechanical problems that
caused daily production to be below target for the quarter. The Prince George
Pulp mill's production for the quarter was reduced as a result of their annual
maintenance shutdown in October, which was followed by an extended shutdown to
complete major work on the co-generation project. During the shutdown, the
paper machine at the Prince George mill continued to run at a reduced rate.
The Taylor mill's productivity was slightly below target in the quarter,
mainly due to a fire on the slab press that caused 400 tonnes of lost
production and a BCTMP market-related shutdown over the Christmas period.

Markets:

Market pulp inventories had risen globally through the summer due to a
seasonal slowdown in demand. Customer inventories had correspondingly dropped
to manageable levels and in some cases to fairly low levels. This supply and
demand situation lead to strong shipments during October. At the beginning of
the fourth quarter, pricing had bottomed in northwest Europe at US$590 per
airdry metric tonne (admt). However an increase in orders from the more
speculative Asian markets tipped the supply and demand balance. This allowed
pulp producers to implement modest price increases, and by December the price
in northwest Europe had risen to $630 per admt.

Entering 2005, paper demand has increased in the USA, which has exerted
upward price pressures. Demand is also strong in Europe, with producers
beginning to achieve some price improvement. Paper market fundamentals in Asia
also appear to be good. Looking ahead, paper markets are heading into a
seasonally strong period of the year. Pulp supply will start to be restricted
by maintenance shutdowns later in the first quarter, and possibly by fibre
supply problems in eastern Canada and the southeastern USA. These factors
should lead to a higher pulp prices through the first quarter of 2005.

Coastal Operations
Year 12 months
4th 3rd ended 4th ended
Quarter Quarter December Quarter December
(millions of dollars) 2004 2004 31, 2004 2003 31, 2003
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Sales $ 30.9 $ 12.4 $ 105.7 $ 25.2 $ 119.5
EBITDA $ (2.3) $ (1.7) $ 4.6 $ (2.0) $ 7.2
EBITDA margin (7%) (14%) 4% (8%) 6%
Operating income (loss) $ (4.6) $ (2.8) $ (2.2) $ (3.3) $ 1.4
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Coastal logging operations began its seasonal shutdown early this year,
in mid November, due to heavy rainfall, which caused slides on the rail lines.
As a result, unit costs were higher than normal in the quarter because of the
reduced production and the additional maintenance work on the washed out roads
and rail lines. Weak demand and deteriorating prices for hemlock and cedar
further reduced profitability in the period.

Non-Segmented Items

Year Year
4th 3rd ended 4th ended
Quarter Quarter December Quarter December
(millions of dollars) 2004 2004 31, 2004 2003 31, 2003
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Corporate costs $ (6.1) $ (10.6) $ (54.0) $ (8.6) $ (25.2)
Equity income (loss) $ 2.3 $ 4.9 $ 11.3 $ 0.8 $ (0.4)
Net interest expense $ (10.5) $ (11.9) $ (50.4) $ (11.1) $ (50.5)
Foreign exchange gain
on long-term debt $ 36.1 $ 40.5 $ 48.7 $ 25.4 $ 110.9
Other income (expense) $ (3.7) $ (0.8) $ (3.8) $ 24.2 $ 24.9
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Corporate costs were $4.5 million lower than the previous quarter.
Although $2.2 million of integration-related costs and $1.0 million of other
severance costs were expensed in the fourth quarter, the impact was more than
offset by a reduction in other expenses. On a year-to-date basis, corporate
costs were $28.8 million higher than in 2003, mostly as a result of additional
costs incurred from merging the Canfor and Slocan head offices, including
severance costs of $9.2 million, asset write-downs and lease costs of
$7.2 million and duplicated corporate administration costs of $3.7 million.
Other one-time expenses in 2004 included $4.1 million of special incentive
awards paid in the first half of the year.

Equity income for the quarter and year to date was higher than the
comparative periods last year as Canfor's affiliated companies experienced the
same strong prices and demand as Canfor's lumber segment.

Interest expense was $1.4 million lower than in the previous quarter
because of a $0.7 million increase in interest earned on temporary investments
and the balance being the result of the favourable impact of the strengthening
Canadian dollar on interest payable in US dollars.

Other expense of $3.7 million in the quarter is mainly comprised of a
write-down of deferred costs associated with the Maine sawmill project which
has been discontinued and a $1.0 million write-down of an investment in
Coastal assets.

Changes in Financial Position and Liquidity

Cash flow generated from operations was $153.3 million in the fourth
quarter, compared to $249.8 million in the third quarter and cash used by
operations of $9.6 million in the fourth quarter of 2003. The decrease from
the previous quarter is a reflection of the lower operating income resulting
from the weaker product prices and strengthening of the Canadian dollar. This
impact was partially offset by a reduction in lumber and log inventories of
$50.4 million and $19.6 million respectively in the fourth quarter of 2004.

Cash flow used in financing activities was $2.4 million in the fourth
quarter, compared to $40.9 million in the third quarter and $10.9 million in
the same quarter last year. The third quarter's figure included a
US $31.3 million debt payment. In the current quarter, $1.5 million was
utilized to repurchase 104,800 of the Company's common shares for cancellation
pursuant to a normal course issuer bid initiated in November. A final interest
payment of $2.3 million was paid on the $155.0 million convertible debentures
on November 15th. The debenture holders exercised their conversion right,
which resulted in Canfor issuing 11,742,424 common shares.

Cash flow used for investing activities was $84.7 million in the quarter,
compared to $50.3 million in the third quarter and $19.0 million in the fourth
quarter of 2003. The increase in the current quarter is from higher capital
spending, mainly related to the construction of the OSB mill in Fort St John
and the Prince George Pulp and Paper Co-generation Project.

Outlook

2004's results have been largely driven by strong demand and excellent
pricing for our lumber and panel product lines. After the seasonal decline in
the fourth quarter, lumber prices have rebounded to US $405 (for 2x4 No. 2 &
Better) in early February, and Canfor recently announced a February 1st pulp
price increase of US $30 per tonne in North America and Europe. Although
revenues and profit will continue to be negatively impacted by the strength of
the Canadian dollar, the Company is well positioned to benefit from
anticipated continuing demand for its primary products.

Canfor's cost to complete the BC Hydro Power Smart co-generation project
at its Prince George Pulp and Paper Mill is now expected to be $36 million
higher than originally planned. The increased cost is a result of inflated
steel prices, project design modifications and initial under-estimating of the
cost of certain elements of the project. Despite the higher costs, the project
remains on schedule and will reduce energy consumption and allow the Company
to lower mill emissions and decommission two beehive burners, providing
environmental benefits for the Prince George region. As part of the Power
Smart program, BC Hydro is committing $49 million to the project.

A major capital expansion of the Plateau Division at Vanderhoof, BC was
approved by the Company's Board of Directors on February 8, 2005. The project,
which has an estimated capital cost of $104 million, will increase the mill's
annual production to approximately 620 million board feet. The project will
help meet customer needs while also enhancing the mill's ability to extract
value from beetle infested timber. The project will lower cash conversion
costs and increase lumber recovery. The equipment being installed was chosen
to handle the specific characteristics of beetle wood.

The project will commence in the first quarter, with completion expected
by the end of the year. No significant disruptions to existing operations are
anticipated during the construction phase. The expansion will be funded out of
operating cash flow and is expected to be paid back within thirty months.

Dividend

The Board of Directors has determined not to declare a dividend at this
time.

Conference Call

A conference call to discuss quarterly results will be held Wednesday,
February 9, 2004 at 12:00 pm Pacific Standard Time (3:00 pm Eastern). To
participate in the call, please dial 1-800-387-6216 (Toll-Free North America)
or 604-639-5227 (Vancouver).

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 and specialty kraft
paper for markets around the world and for plywood and oriented strand board
(OSB) markets in North America.

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.

This news release contains references to EBITDA (operating income before
amortization), which Canfor considers to be a key 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.

Consolidated Statements of Income and Retained Earnings

3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2004 2003 2004 2003
-------------------------------------------------------------------------
(unaudited) (audited)
Sales $1,149.9 $ 656.4 $4,341.9 $2,662.6

Costs and expenses
Manufacturing and product costs 775.6 486.5 2,611.0 1,932.7
Freight and other distribution
costs 211.1 93.4 657.5 420.5
Countervailing and anti-dumping
duties (Note 7) 74.6 33.3 290.2 146.6
Amortization 44.6 27.5 155.2 109.8
Selling and administration costs 13.8 16.0 70.0 55.8
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1,119.7 656.7 3,783.9 2,665.4

Restructuring costs (Note 8) 12.9 - 36.5 -
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Operating income (loss) from
continuing operations 17.3 (0.3) 521.5 (2.8)

Equity income (loss) of
affiliated companies 2.3 0.8 11.3 (0.4)
Interest expense (10.5) (11.1) (50.4) (50.5)
Foreign exchange gain on
long-term debt 36.1 25.4 48.7 110.9
Other income (expense) (3.7) 24.2 (3.8) 24.9
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Net income from continuing
operations before income taxes 41.5 39.0 527.3 82.1
Income tax recovery (expense)
(Note 10) 2.2 (4.4) (106.4) 3.7
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Net income from continuing
operations 43.7 34.6 420.9 85.8
Net income (loss) from
discontinued operation - (0.5) - 67.5
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Net income $ 43.7 $ 34.1 $ 420.9 $ 153.3
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Per common share (in dollars)
(Note 12)
Net income from continuing
operations
Basic $ 0.31 $ 0.41 $ 3.45 $ 0.98
Diluted $ 0.30 $ 0.37 $ 3.22 $ 0.92

Net income
Basic $ 0.31 $ 0.40 $ 3.45 $ 1.81
Diluted $ 0.30 $ 0.37 $ 3.22 $ 1.65
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Retained earnings, beginning
of year - as reported $ 273.4 $ 136.7
Cumulative effect of change in
accounting policy (Note 2) 3.6 3.6
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Retained earnings, beginning
of year - as restated 277.0 140.3
Net income for the year to date 420.9 153.3
Common share dividends - (10.6)
Premium paid on common shares
purchased for cancellation
(Note 11) (0.6) -
Interest on equity component
of convertible subordinated
debentures, net of taxes (5.4) (6.0)
-------------------------------------------------------------------------
Retained earnings, end of
current period $ 691.9 $ 277.0
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Consolidated Cash Flow Statements

3 months ended 12 months ended
December 31, December 31,
(millions of dollars) 2004 2003 2004 2003
-------------------------------------------------------------------------
(unaudited) (audited)
Cash generated from (used in)
Operating activities
Net income from continuing
operations $ 43.7 $ 34.6 $ 420.9 $ 85.8
Items not affecting cash:
Amortization 44.6 27.5 155.2 109.8
Income taxes 49.0 0.1 98.9 (8.3)
Unrealized foreign exchange
gain on long-term debt (36.1) (25.4) (46.7) (112.4)
Employee future benefits 8.7 (4.2) 25.1 8.9
Adjustment to accrued duties (10.1) (9.7) 3.6 (25.8)
Long-term portion of deferred
reforestation 17.9 8.2 2.9 (7.9)
Loss (gain) on disposal of
assets - (24.0) 3.2 (23.8)
Equity loss (income) of
affiliated companies,
net of tax (1.3) 0.5 (7.2) 0.7
Other 4.5 2.0 (2.1) 1.7
Changes in non-cash working
capital 32.4 (19.2) 59.6 (30.0)
-------------------------------------------------------------------------
153.3 (9.6) 713.4 (1.3)
-------------------------------------------------------------------------
Financing activities
Proceeds from long-term debt
(Note 5) 1.3 - 311.6 4.8
Repayment of long-term debt
(Note 5) (0.2) (8.4) (269.6) (57.7)
Net proceeds on issuance of
common shares (Note 13) 0.8 0.5 9.5 0.9
Common shares purchased for
cancellation (Note 11) (1.5) - (1.5) -
Dividends paid to common
shareholders - - - (10.6)
Interest on convertible
debentures, net of taxes (2.3) (3.0) (5.4) (6.0)
Other (0.5) - (0.8) (0.4)
-------------------------------------------------------------------------
(2.4) (10.9) 43.8 (69.0)
-------------------------------------------------------------------------
Investing activities
Property, plant, equipment
and timber (82.5) (39.5) (184.5) (123.5)
Business acquisition costs, net
of cash acquired (Note 3) (0.3) - (38.2) (30.6)
Proceeds on disposal of property,
plant and equipment 1.1 25.7 10.6 28.3
Other (3.0) (5.2) (4.0) (5.4)
-------------------------------------------------------------------------
(84.7) (19.0) (216.1) (131.2)
-------------------------------------------------------------------------
Increase (decrease) in net cash
from continuing operations 66.2 (39.5) 541.1 (201.5)
Cash generated (used) by
discontinued operation - (0.3) - 121.2
-------------------------------------------------------------------------
Increase (decrease) in net cash 66.2 (39.8) 541.1 (80.3)
Net cash (short-term indebtedness)
at beginning of period 417.5 (17.6) (57.4) 22.9
-------------------------------------------------------------------------
Net cash (short-term indebtedness)
at end of period $ 483.7 $ (57.4) $ 483.7 $ (57.4)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net cash (short-term indebtedness)
is comprised of:
Cash and temporary investments $ 488.2 $ 24.7 $ 488.2 $ 24.7
Operating bank loans (4.5) (82.1) (4.5) (82.1)
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$ 483.7 $ (57.4) $ 483.7 $ (57.4)
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Changes in non-cash working
capital
Accounts receivable $ 41.2 $ (48.4) $ 56.5 $ (52.3)
Inventories 51.7 (12.4) 51.2 (8.9)
Prepaid expenses (3.2) (1.2) (7.6) (2.3)
Accounts payable, accrued
liabilities and current
portion of deferred
reforestation (49.0) 42.9 (37.6) 37.4
Income taxes (8.3) (0.1) (2.9) (3.9)
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$ 32.4 $ (19.2) $ 59.6 $ (30.0)
-------------------------------------------------------------------------
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Interest paid in the 12 months ended December 31, 2004 was $56.3 million
(2003 - $59.2 million) and taxes paid were $5.8 million
(2003 - $5.6 million).



Consolidated Balance Sheets
as at as at
December December
(audited) (millions of dollars) 31, 2004 31, 2003
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ASSETS
Current assets
Cash $ 40.2 $ 24.7
Temporary investments 448.0 -
Accounts receivable
Trade 240.4 173.2
Other 63.8 86.2
Income taxes recoverable 14.7 1.4
Future income taxes 32.5 21.9
Inventories 635.7 445.0
Prepaid expenses 41.3 24.1
-------------------------------------------------------------------------
Total current assets 1,516.6 776.5
-------------------------------------------------------------------------
Long-term investments and other 197.4 100.5
Property, plant, equipment and timber 2,219.2 1,443.5
Deferred charges 94.9 126.8
-------------------------------------------------------------------------
$4,028.1 $2,447.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
LIABILITIES
Current liabilities
Operating bank loans (Note 5) $ 4.5 $ 82.1
Accounts payable and accrued liabilities (Note 5) 527.8 343.4
Current portion of long-term debt 68.1 57.2
Current portion of deferred reforestation 50.3 39.6
-------------------------------------------------------------------------
Total current liabilities 650.7 522.3
-------------------------------------------------------------------------
Long-term debt (Note 5) 660.5 478.0
Other accruals and provisions (Note 6) 223.7 83.0
Future income taxes, net 499.2 175.7
Deferred credit 27.2 95.7

SHAREHOLDERS' EQUITY
Share capital - 143,416,280 shares outstanding 1,275.7 659.2
Convertible subordinated debentures (Note 5) - 155.0
Retained earnings 691.9 277.0
Foreign exchange translation adjustment (0.8) 1.4
-------------------------------------------------------------------------
Total shareholders' equity 1,966.8 1,092.6
-------------------------------------------------------------------------
$4,028.1 $2,447.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Contingencies (Note 15)
Subsequent event (Note 16)



Statements of Segmented Information

(unaudited)
(millions Lumber Panels Pulp and Coastal Corporate Consol-
of dollars)(Notes a, d) (Note a) Paper Operations and Other idated
-------------------------------------------------------------------------
3 months ended
December 31,
2004

Sales to
external
customers $ 785.0 95.0 239.0 30.9 - $1,149.9
Sales to other
segments
(Note c) $ 35.0 0.9 - 4.6 - $ 40.5
Operating
income
(loss) $ 18.2 19.9 (10.1) (4.6) (6.1) $ 17.3
Amortization $ 26.2 2.7 11.9 2.3 1.5 $ 44.6
Capital
expenditures $ 15.5 32.8 30.9 1.5 1.8 $ 82.5
-------------------------------------------------------------------------

3 months ended
December 31,
2003

Sales to
external
customers $ 382.5 31.7 217.0 25.2 - $ 656.4
Sales to other
segments
(Note c) $ 19.6 0.8 - 2.3 - $ 22.7
Operating
income
(loss) $ 1.9 0.5 9.2 (3.3) (8.6) $ (0.3)
Amortization $ 13.7 0.5 10.4 1.3 1.6 $ 27.5
Capital
expenditures $ 28.8 0.1 9.5 0.8 0.3 $ 39.5
-------------------------------------------------------------------------



Summary of Consolidated Production and Shipments

Production Shipments
3 months ended December 31, ----------------------------------------
(unaudited) 2004 2003 2004 2003
-------------------------------------------------------------------------
Lumber - MMfbm
Canfor produced 1,335.0 691.0 1,365.6 702.4
Purchased from other wholesale
producers 79.0 77.3
--------- ---------
Total Lumber 1,444.6 779.7

Plywood - 000 Msf 3/8" 104.9 43.4 96.3 36.2

Oriented strand board -
000 Msf 3/8" 132.6 - 126.5 -

Pulp - 000 mt
Canfor produced 309.1 234.3 312.8 260.8
Marketed on behalf of HSLP
(Note e) 109.0 83.0
--------- ---------
Total Pulp 421.8 343.8

Kraft paper - 000 mt 31.9 35.0 31.0 30.6

Coastal logs - 000 m(3) 423.5 292.8 359.9 294.8
-------------------------------------------------------------------------
a. In the second quarter of 2004, subsequent to the business combination
discussed in Note 3 of the Consolidated Financial Statements, Canfor
divided its former Wood Products segment into its two major product
categories. The Lumber segment includes all logging and forestry
operations formerly included in Wood Products and the sawmill and
remanufacturing operations. The Panels segment includes the plywood,
OSB and panel and fibre operations.
b. 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.
c. Sales to other segments are accounted for at prices which approximate
market value.
d. Sales for the quarter include sales of Canfor produced lumber of
$715.8 million (2003 - $321.9 million) and $2,584.1 million for the
year-to-date (2003 - $1,346.9 million).
e. Canfor is responsible for marketing, on a commission basis, the pulp
production of Howe Sound Pulp and Paper Limited Partnership (HSLP).
f. Certain previously published figures have been restated to conform
with the current period's presentation.


Statements of Segmented Information

(unaudited)
(millions Lumber Panels Pulp and Coastal Corporate Consol-
of dollars)(Notes a, d) (Note a) Paper Operations and Other idated
-------------------------------------------------------------------------
12 months ended
December 31,
2004

Sales to
external
customers $2,881.1 373.4 981.7 105.7 - $4,341.9
Sales to other
segments
(Note c) $ 121.8 3.5 - 10.8 - $ 136.1
Operating
income
(loss) $ 411.6 121.0 45.1 (2.2) (54.0) $ 521.5
Amortization $ 87.8 8.5 44.5 6.8 7.6 $ 155.2
Capital
expenditures $ 52.5 61.8 61.1 6.7 2.4 $ 184.5
Identifiable
assets $1,781.0 233.5 910.6 94.8 1,008.2 $4,028.1
-------------------------------------------------------------------------

12 months ended
December 31,
2003

Sales to
external
customers $1,566.9 122.8 853.4 119.5 - $2,662.6
Sales to other
segments
(Note c) $ 86.0 3.1 - 8.1 - $ 97.2
Operating
income
(loss) $ (10.0) 5.3 25.7 1.4 (25.2) $ (2.8)
Amortization $ 51.4 2.5 44.1 5.8 6.0 $ 109.8
Capital
expenditures $ 93.1 1.8 23.3 5.0 0.3 $ 123.5
Identifiable
assets $1,077.8 42.0 828.7 65.5 433.3 $2,447.3
-------------------------------------------------------------------------


Summary of Consolidated Production and Shipments

Production Shipments
12 months ended December 31, ----------------------------------------
(unaudited) 2004 2003 2004 2003
-------------------------------------------------------------------------
Lumber - MMfbm
Canfor produced 4,611.9 2,893.3 4,627.8 2,942.0
Purchased from other wholesale
producers 300.2 296.1
--------- ---------
Total Lumber 4,928.0 3,238.1

Plywood - 000 Msf 3/8" 356.6 175.6 343.6 172.3

Oriented strand board -
000 Msf 3/8" 384.8 - 379.6 -

Pulp - 000 mt
Canfor produced 1,142.3 992.1 1,114.2 999.2
Marketed on behalf of HSLP
(Note e) 357.9 361.7
--------- ---------
Total Pulp 1,472.1 1,360.9

Kraft paper - 000 mt 134.1 128.5 139.8 121.4

Coastal logs - 000 m(3) 1,312.2 1,257.5 1,148.3 1,237.0
-------------------------------------------------------------------------



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, 2003. These interim
financial statements follow the same accounting policies and methods of
computation as used in the 2003 consolidated financial statements, except
as described in Note 2.


2. Changes in Accounting Policies and Presentation

Asset Retirement Obligations

Effective January 1, 2004, Canfor retroactively adopted the new
recommendations of the Canadian Institute of Chartered Accountants (CICA)
for asset retirement obligations, which require that such obligations be
measured at fair value. As a result of adopting these new
recommendations, Canfor's deferred reforestation liability decreased by
$5.6 million, the net future income tax liability increased by
$2.0 million and retained earnings increased by $3.6 million at
December 31, 2003. The change in accounting for deferred reforestation
resulted in a $2.2 million increase to the deferred reforestation expense
in 2004 (2003 - nil). The new recommendations were not applied to
retirement obligations for assets with indeterminate useful lives because
sufficient information is not presently available to estimate a range of
potential settlement dates for the obligations.

Shipping and Handling Costs

Prior to January 1, 2004, Canfor, along with other companies in the
forest industry, presented sales net of shipping and handling costs.
Effective January 1, 2004, the CICA introduced new recommendations for
the application of generally accepted accounting principles (GAAP),
which, among other things, prohibit the use of "industry practice" and
provide guidance on alternate sources to consult with when an issue is
not specifically addressed by Canadian GAAP. As a result of applying the
new standard, effective January 1, 2004, Canfor has reclassified shipping
and handling costs and countervailing and anti-dumping duties to cost of
sales. Also, in accordance with CICA Handbook Section 3400, Revenue,
shipping and handling costs recovered from customers have been included
in sales. Prior periods have been reclassified for comparability.


3. Business Combination

On April 1, 2004, Canfor and Slocan Forest Products Ltd. (Slocan)
completed the combination of their businesses after having obtained the
approval of Slocan shareholders on March 25, 2004 and of the Supreme
Court of British Columbia on March 30, 2004. Under the plan of
arrangement, Canfor acquired all of the issued and outstanding shares of
Slocan in exchange for the issuance to Slocan shareholders of
1.3147 Canfor shares for each Slocan share held by them. 49.3 million
Canfor shares were issued and were valued at $9.18 per share, which was
the average market price of the shares shortly before and after the date
that the terms of the combination were agreed to and announced.

Slocan was amalgamated with Canadian Forest Products Ltd., Canfor's
principal operating subsidiary, on April 1, 2004. The acquisition has
been accounted for using the purchase method, in which the purchase
consideration was allocated to the estimated fair values of the assets
and liabilities assumed as of April 1, 2004. The following fair value
allocation is based on Management's best estimates and information known
at the time of preparing these consolidated financial statements.


(millions of dollars)
-------------------------------------------------------------------------
Net assets acquired
Cash $ 20.5
Non-cash working capital 162.7
Property, plant, equipment and timber 761.4
Other assets 20.1
Long-term debt (209.7)
Long-term liabilities (60.7)
Future income tax liabilities (182.7)
-------------------------------------------------------------------------
Fair value of net assets acquired $ 511.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Consideration paid
Common shares issued to Slocan shareholders $ 452.9
Make-whole penalty on Slocan's long-term debt 28.6
Transaction costs 30.1
-------------------------------------------------------------------------
$ 511.6
-------------------------------------------------------------------------
-------------------------------------------------------------------------

In order to address the concerns of the federal Commissioner of
Competition under the Competition Act (Canada) regarding the impact of
the combination on competition, Canfor entered into a Consent Agreement,
as required by the Commissioner, pursuant to which the Company was
directed to divest the sawmill located at Fort St James, British Columbia
and certain associated harvesting rights. A sales agreement was entered
into on December 22, 2004, and the sale is expected to close on March 1,
2005, subject to the approval of the Commissioner and other customary
approvals, filings and conditions. Proceeds of $39 million, plus the
value of inventory on the closing date, are expected to be received and
the transaction is not expected to result in a significant gain or loss
for accounting purposes. Due to the size of the Fort St James operation
in relation to the entire lumber segment, it has not been accounted for
as a discontinued operation.


4. Canfor-LP OSB Limited Partnership

In 2000, Slocan entered into a shareholders 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.
The decision to proceed with the project was made in January 2004. 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 fourth quarter, Canfor made capital contributions of
$21.3 million to the venture (year to date - $38.2 million). 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.

At the end of the year, a limited partnership was formed to own the
assets and carry on the business.

Canfor began proportionately consolidating the joint venture in the
current quarter and has included the following amounts, which represent
its 50% ownership interest, in these consolidated financial statements at
December 31, 2004:

(millions of dollars)
-------------------------------------------------------------------------
Balance Sheet
Cash $ 1.2
Other current assets 1.3
Construction in progress 41.8
Deferred start-up costs 3.0
Accounts payable and accrued liabilities (7.0)
-------------------------------------------------------------------------
$ 40.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Cash flow
Cash used in operating activities (working capital) $ 5.7
Cash used in investing activities (44.8)
-------------------------------------------------------------------------
$ 39.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------


5. Bank Indebtedness and Long-Term Debt

At December 31, 2004 Canfor had $332.0 million of bank operating lines of
credit available, of which $4.5 million was drawn down and an additional
$47.1 million was utilized for several standby letters of credit. In
October 2004, Canfor entered into a new unsecured and committed
$325 million credit facility to replace its existing demand operating
lines of credit. This facility, which is comprised of a $125 million
364-day amount and a three-year $200 million amount, is renewable
annually.

Included in the accounts payable and accrued liabilities balance are
unpresented cheques of $49.7 million (2003 $40.2 million).

New private placement financing of US $50 million was drawn down on
February 2, 2004 and was utilized for general operating purposes and
capital expenditures. On April 1, 2004, the US $160 million of long-term
debt assumed upon the acquisition of Slocan (Note 3) was refinanced with
new private placement debt of US $185 million. The balance was used to
pay a make-whole penalty on Slocan's debt and for general corporate
purposes. The new debt is in the form of unsecured senior notes, which
have the following interest rates and maturities: US $60 million at
5.66% (2009), US $50 million at 6.18% (2011), US $50 million at
6.33% (2012), and US $75 million at 5.42% (2013).

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 $1,214.2 million in additional long-term
debt and pay up to $458.0 million, or $3.20 per share, in dividends to
its common shareholders.

At December 31, 2004, the fair value of Canfor's long-term debt was
$778.4 million.

On November 15, 2004, Canfor redeemed all of its outstanding convertible
subordinated debentures at the principal amount of $155.0 million plus
accrued interest. The holders of the debentures exercised their right of
conversion, which resulted in the Company issuing 11,742,424 Common
Shares to them.


6. Other Accruals and Provisions
December December
(millions of dollars) 31, 2004 31, 2003
-------------------------------------------------------------------------
Deferred reforestation $ 72.4 $ 34.0
Countervailing duty provision (Note 7) 76.7 -
Accrued pension obligations 17.7 5.5
Post employment benefits 54.7 34.0
Other liabilities 2.2 9.5
-------------------------------------------------------------------------
Total other accruals and provisions $ 223.7 $ 83.0
-------------------------------------------------------------------------
-------------------------------------------------------------------------


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% after this date, because of the uncertainty
about whether a company-specific administrative review would be granted.
Canfor's subsidiary in Quebec, which was acquired in May 2003, had been
making CVD deposits and recording the expense at their reduced
company-specific deposit rate of 2.99% since November 2002. 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.
As a result of this determination, in the fourth quarter Canfor reduced
its CVD accrual by $4.6 million, reducing the accrual for Canfor to
record CVD expense at 17.18% for POR1, and increasing the accrual for the
Quebec subsidiary to record CVD expense at 17.18% for the period from
May 27, 2003 to December 20, 2004. The combined additional CVD accrued in
excess of the cash deposits made at December 31, 2004 is $76.7 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 became available. Canfor and Slocan had accrued
ADD expense ranging from 2% to 5% for the periods from May 22, 2002 to
September 30, 2004 and 2% for the fourth quarter of 2004. On December 14,
2004, the DOC determined the ADD assessment rate for Canfor at 2.06% and
for Slocan at 1.37% for POR1. As a result of this determination, in the
fourth quarter Canfor reduced its ADD accrual by $6.0 million to adjust
the ADD expense accrued to the assessment rates for Canfor and Slocan for
POR1. The cumulative ADD cash deposits in excess of the calculated
expense accrued at December 31, 2004 is $116.9 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 a result of the December 14, 2004 DOC determination, the CVD cash
deposit rate was reduced to 17.18% and the company-specific ADD cash
deposit rate was reduced to 1.83% for US lumber shipments after
December 20, 2004.

As at December 31, 2004, Canfor (including legacy Slocan) had paid
combined duty deposits of US $538.2 million (CVD of $383.7 million and
ADD of $154.5 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
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 10th, 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 13th, NAFTA formally issued its affirmation of
the ITC's negative injury ruling. The United States filed a request for
an Extraordinary Challenge, which could extend the case to March 2005 or
beyond. If not reversed by an Extraordinary Challenge Committee review,
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. Restructuring Costs

In the fourth quarter, Canfor expensed $2.7 million of severance, pension
and other costs associated with the integration of Canfor and Slocan's
operations (year to date: $20.4 million).

Also in the fourth quarter, Canfor recognized $7.9 million of severance
and other costs associated with the announced closures of the Hines Creek
sawmill and Quesnel Specialty mill.

The closure of the Taylor sawmill was completed in the second quarter and
resulted in the recognition of further severance, pension and other costs
of $5.9 million in that quarter. Additional pension costs of $0.9 million
were accrued in the fourth quarter. Additional costs of $1.4 million
related to the closure of the Upper Fraser sawmill in 2003 were also
incurred in the fourth quarter.


9. Employee Future Benefits

The total benefit cost of Canfor's defined pension plans was $8.3 million
in the fourth quarter of 2004 and $19.6 million for the year to date. The
total benefit cost of Canfor's other employee future benefit plans was
$3.4 million in the fourth quarter and $14.5 million for the year to
date. The expense for Canfor's defined contribution plans was
$0.4 million in the fourth quarter and $1.2 million for the year to date.


10. Income Tax Recovery (Expense)

3 months 3 months 12 months 12 months
ended ended ended ended
December December December December
(millions of dollars) 31, 2004 31, 2003 31, 2004 31, 2003
-------------------------------------------------------------------------
Current $ 0.3 $ (2.4) $ (8.1) $ 9.5
Future 0.5 (3.6) (163.8) (13.6)
Tax benefit of current
Howe Sound Pulp and Paper
Limited Partnership losses - 4.1 1.1 8.1
Tax on equity earnings (1.0) (1.3) (4.1) (0.3)
-------------------------------------------------------------------------
(0.2) (3.2) (174.9) 3.7

Amortization of deferred
credit on utilization of
acquired tax losses 2.4 (1.2) 68.5 -
-------------------------------------------------------------------------
$ 2.2 $ (4.4) $ (106.4) $ 3.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

3 months 3 months 12 months 12 months
ended ended ended ended
December December December December
(millions of dollars) 31, 2004 31, 2003 31, 2004 31, 2003
-------------------------------------------------------------------------
Income tax expense at
statutory tax rate $ (14.7) $ (14.2) $ (187.2) $ (29.9)
Large corporation tax (1.3) (0.8) (6.2) (4.7)
Tax benefit of current Howe
Sound Pulp and Paper
Limited Partnership losses - 4.1 1.1 8.1
Deferred income tax credit
amortized 2.4 (1.2) 68.5 -
Permanent difference from
capital gains and losses 8.6 - 8.6 -
Benefit of capital losses
not previously recognized 6.3 8.9 8.6 29.9
Other permanent differences
and tax adjustments 0.9 (1.2) 0.2 0.3
-------------------------------------------------------------------------
Tax recovery (expense) $ 2.2 $ (4.4) $ (106.4) $ 3.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------


11. Share Capital

In December 2004, the Company purchased 104,800 common shares for
cancellation, under a Normal Course Issuer Bid. The shares were purchased
on the open market at an average price per share of $14.65, and the
excess of the purchase price over the average book value per share has
been charged to retained earnings. These shares were cancelled in
January 2005. The Normal Course Issuer Bid, which allows for the purchase
for cancellation of up to 6,578,868 Common Shares, or approximately 5% of
the Company's outstanding shares, is expected to continue until
October 14, 2005, unless terminated or completed earlier.


12. Earnings Per Share

(millions of dollars, 3 months 3 months 12 months 12 months
except for number of ended ended ended ended
shares and per December December December December
share amounts) 31, 2004 31, 2003 31, 2004 31, 2003
-------------------------------------------------------------------------
Basic Earnings

Net income from continuing
operations $ 43.7 $ 34.6 $ 420.9 $ 85.8
Less interest on equity
component of convertible
debentures, net of taxes (0.7) (1.5) (5.4) (6.0)
-------------------------------------------------------------------------
Net income from continuing
operations available to
common shareholders 43.0 33.1 415.5 79.8
Net income from discontinued
operations - (0.5) - 67.5
-------------------------------------------------------------------------
Net income available to
common shareholders 43.0 32.6 415.5 147.3
-------------------------------------------------------------------------

Diluted Earnings
Add back interest on equity
component of convertible
debentures, net of taxes 0.7 1.5 5.4 6.0
-------------------------------------------------------------------------
Net income from continuing
operations available to
common shareholders 43.7 34.6 420.9 85.8
-------------------------------------------------------------------------
Net income available to
common shareholders $ 43.7 $ 34.1 $ 420.9 $ 153.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average number
of common shares 137,499,252 81,224,405 120,452,437 81,179,973
Incremental shares from
stock options 185,827 112,561 226,625 88,891
Shares issuable upon
conversion of convertible
debentures 5,871,212 11,742,424 10,234,517 11,742,424
-------------------------------------------------------------------------
Diluted number of common
shares 143,556,291 93,079,390 130,913,579 93,011,288
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Per common share
Net income from continuing
operations
Basic $ 0.31 $ 0.41 $ 3.45 $ 0.98
Diluted $ 0.30 $ 0.37 $ 3.22 $ 0.92
-------------------------------------------------------------------------
Net income
Basic $ 0.31 $ 0.40 $ 3.45 $ 1.81
Diluted $ 0.30 $ 0.37 $ 3.22 $ 1.65
-------------------------------------------------------------------------
-------------------------------------------------------------------------


13. Stock-Based Compensation

During the quarter, proceeds of $0.8 million were received from the
exercise of 88,000 stock options at a weighted-average exercise price of
$9.20. For the year to date, proceeds of $9.5 million were received from
the exercise of 1,073,011 options at an average of $8.85 per share.

No new stock options were granted in the current quarter or in the same
quarter in 2003. The following pro forma disclosures present the effect,
on the current and prior period's reported net income and earnings per
share, of stock options granted in 2002, prior to the adoption of the
fair-value based method of accounting.

3 months 3 months 12 months 12 months
(millions of dollars, ended ended ended ended
except for per December December December December
share amounts) 31, 2004 31, 2003 31, 2004 31, 2003
-------------------------------------------------------------------------
Net income
As reported $ 43.7 $ 34.1 $ 420.9 $ 153.3
Pro forma $ 43.6 $ 33.9 $ 420.6 $ 152.6

Net income per common share
As reported - basic $ 0.31 $ 0.40 $ 3.45 $ 1.81
As reported - diluted $ 0.30 $ 0.37 $ 3.22 $ 1.65
Pro forma - basic $ 0.31 $ 0.40 $ 3.45 $ 1.81
Pro forma - diluted $ 0.30 $ 0.36 $ 3.21 $ 1.64
-------------------------------------------------------------------------
-------------------------------------------------------------------------

The fair value of the stock options granted in 2002 was estimated on each
grant date using a Black-Scholes option-pricing model with the following
weighted-average assumptions: dividend yield of 2.6%; expected volatility
of 44%; risk-free interest rate of 3.75%; and an expected life of
4 years. The weighted average fair value of each option was $3.10.


14. 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. No forward exchange contracts were
outstanding at the end of the current period.

The Company also uses a variety of financial instruments to reduce its
exposure to risks associated with lumber prices and energy costs. At the
end of the current quarter, there were 195 lumber futures contracts
outstanding, which had an unrealized loss of $0.1 million. Commodity
swaps hedging future natural gas purchases of 2.6 million Gigajoules were
outstanding at the end of the current quarter. There was an unrealized
loss of $0.1 million on these swaps at December 31, 2004.


15. Contingencies

Property Transfer Tax Assessment

In 2003, Canfor had appealed the British Columbia Ministry of Provincial
Revenue's assessment of property transfer taxes associated with the
amalgamation of Canadian Forest Products and Howe Sound Pulp and Paper
Limited in 2001. In the third quarter, the appeal was heard by the
BC Supreme Court, and the case was decided in Canfor's favour. In
October, Canfor received notice from the Ministry of Attorney General
that the government would not be seeking to appeal the decision of the
BC Supreme Court. The letter of credit for $11.1 million posted by Canfor
was released by the Ministry in the fourth quarter.

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 will result 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. The allocation of the take-back
among the tenures held by Canfor under this legislation was determined by
Canfor and the government in December 2004 and is to take effect in three
stages: in December 2004, March 2005 and in March 2006. 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.

Prince George Pulp and Paper Co-generation Project

In October 2003, Canfor entered into an agreement with BC Hydro to build
a major electrical co-generation facility (the Project) at the Prince
George Pulp and Paper Mill. Under the agreement, BC Hydro is to
contribute up to $49 million to the project and Canfor is to contribute
the balance of the cost of the project, which is scheduled for completion
during the second quarter of 2005. At December 31, 2004, Canfor had
capitalized $42.2 million of construction costs ($4.9 million at
December 31, 2003) and had further commitments of $9.6 million for 2005.

Should Canfor fail to complete the Project by February 28, 2006, it will
be required to repay BC Hydro for any incentive payments received by
Canfor and BC Hydro will be entitled to enforce any security provided by
Canfor and to terminate the agreement. At December 31, 2004, BC Hydro had
paid a total of $26.0 million in incentive payments and Canfor has posted
a letter of credit in the amount of $18.3 million.


16. Subsequent Event

As discussed in Canfor's 2003 annual financial statements, Canfor
acquired $643 million of tax losses from Howe Sound Pulp and Paper
Limited Partnership in 2001. Canfor made a payment of $7.0 million to
HSLP in 2004 with respect to losses used in the year and made a final
payment of $50.0 million on January 2, 2005.


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

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Contact Information

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

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