Amid difficult market conditions, Canfor announced a net loss of $0.16 per common share in the third quarter of 2002 compared to net income of $0.23 in the comparable period of 2001. The net loss of $11.8 million included lumber export duty charges of $35.8 million after tax. Net sales declined $27.8 million from the second quarter to $549.3 million due to falling lumber prices and lower pulp shipments. Despite the harsh impact of the punitive duties, the Board of Directors declared a quarterly dividend of $0.065 per common share, which yields over 3.5% at current price levels.

In response to protectionist US policy, Canfor implemented a program designed to reduce costs, improve margins and generate $150 million in tangible benefits by the fourth quarter of 2003. In addition to several projects that will "reduce energy consumption, increase value from raw material and improve productivity", Canfor was forced to announce a 5% reduction in its workforce. Hopefully, this will be accomplished through voluntary early retirement and attrition as opposed to outright layoffs.

Overall, we believe that management has taken the appropriate course of action by focusing on areas of the business that they can control. They have shown a commitment to continue to "meet the needs of the customer" and protect their market position. Although the softwood lumber dispute has dragged on much longer than we had anticipated, we believe that Canfor will become a more efficient and profitable producer because of it.

June 13, 2003

Despite a weak global economy and $107.6 million in duties paid on shipments to the United States, Canfor remained profitable in 2002. The Company generated net sales of $2.1 billion, an increase of almost $127 million from the previous year. However, earnings per share declined to $0.07 in 2002 from $0.27 in 2001, as higher volumes were unable to offset lower commodity prices. Canfor remains committed to its $0.26 annualized dividend, which currently yields approximately 3.3%.

The anti-dumping and countervailing duties have forced the Company to implement an aggressive cost reduction and margin improvement program, as we described in our last comment. Management is targeting various projects with a high return on capital, creating permanent benefits to the bottom line. For example, the Company plans to close the Upper Fraser and Taylor sawmills in 2003 and complete $40 million of capital upgrades at the Fort St. John and Prince George sawmills. By adding a third shift at each of these two mills, the Company expects to realize $30 million in annualized benefits. Another initiative identified 12 projects that will cut the usage of natural gas, which is especially important given rising energy costs. Capital expenditures of $8 million are expected to deliver annualized benefits of $8 million. All told, Canfor is targeting a total of $150 million in cost savings by the end of fiscal 2003.

Negotiations regarding the softwood lumber agreement continue to drag on. In late May, the World Trade Organization's interim decision supported Canada's position in the dispute. The WTO panel is expected to issue its final report in July 2003. The outcome of Canada's challenge under NAFTA is also highly anticipated. It is believed that NAFTA could rule that previously paid duties be returned to Canadian companies. Obviously, the situation is complex and highly politicized. However, we are optimistic that eventually the two sides will come to some sort of reasonable agreement.

November 28, 2003

On November 25, 2003 Canfor announced an agreement to purchase all of the shares of Slocan Forest Products. Canfor offered 1.3147 shares in exchange for each Slocan share in a transaction valued at approximately $630 million. Although the offer represented a 41% premium based on the previous day's closing prices, the deal was transacted at an attractive price relative to Canfor's market valuation.

The strategic benefits of the purchase are quite clear; the combined Company will be the second largest lumber producer in North America, next to Weyerhaeuser. It is expected that annual sales will be in excess of $3 billion and total assets will be greater than $3 billion. Management expects to benefit not only from economies of scale, but also annual synergies in the order of $60 million. We believe that this transaction could just be the start of a round of consolidation in the forestry industry in Canada.

The takeout offer highlights our investment thesis on the sector. It is an out of favour and significantly undervalued industry in need of a catalyst. In this case, an astute acquisition surfaced value for shareholders. If and when a resolution of the softwood lumber dispute with the U.S. is reached, a significant negative overhang would be removed and valuations should improve further. Because the industry is still cheap, we are optimistic that patient investors will be rewarded.

May 28, 2004

On March 25, shareholders of Slocan Forest Products voted in favour of the plan of arrangement providing for the Company’s acquisition by Canfor. The combination became effective April 1, 2004 and the financial results will be consolidated in the second quarter report. We believe that despite the recent run in the stock, the market has yet to fully appreciate the potential of this combined entity. Besides the usual economies of scale and rising commodity prices, the $60 million in projected synergies appears to be quite conservative.

On April 23, Canfor reported results for the first quarter of fiscal 2004 that were above most analysts’ expectations. The Company generated $92.4 million of EBITDA, almost triple the $33.5 million of EBITDA last year. Operating income improved to $62.4 million in the quarter compared to only $3.1 million in the first quarter of 2003. On an earnings per share basis, Canfor earned $0.34 compared to $0.43 the previous year, which doesn’t really tell the full story. In the current quarter Canfor had a $6.0 million unrealized foreign exchange loss on long-term debt compared to a $36.2 million gain a year ago. Looking past this non-operating item, we saw a real turn in the profitability in the quarter.

What drove this improvement? US dollar denominated lumber prices were 51% higher than in the same period in 2003 due to strong housing demand. Pulp prices were 23% higher as a recovering economy powered demand. Canfor’s CRMI program (cost reduction/margin improvement) is now targeting annual savings of $230 million compared to $150 million at inception. As an example, productivity at the wood products division was 20% higher and conversion costs were 23% lower than the fourth quarter of 2003. Given the magnitude of improvement, we are optimistic that the forecast of $60 million in synergies from Slocan will be revised upward.

Looking forward to the second quarter, Canfor should be “firing on all cylinders”. Lumber prices (Western SPF 2x4) have increased to $462 per thousand board feet compared to $233 last year and pulp prices have increased to $640 per tonne from $558 a year ago. Combine better commodity prices, with continued cost cutting and the Slocan synergies, and Canfor’s earnings for the second quarter could surprise many people. How good could they be? Earnings of $1.00 per share would not be an unrealistic estimate. Finally, as the softwood lumber dispute swings in favour of Canada, the refund of duties paid will eventually become reflected in Canfor’s share price.

November 5, 2004

On October 28, Canfor reported record results for the third quarter; driven by higher lumber prices and a $38.3 million gain on US denominated debt. The Company generated net income of $201.6 million or $1.40 per fully diluted share compared to $143.6 million or $1.00 per fully diluted share in the comparable quarter a year ago. Results were down slightly from the second quarter of fiscal 2004, as lumber prices declined late in the quarter and the Canadian dollar strengthened. Management suggested that the integration of Slocan is proceeding as planned and they expect to exceed $85 million in synergies. The acquisition should be fully integrated by the second quarter of 2005.

We don’t believe that Canfor’s record earnings are sustainable in the long run since lumber prices have started to decline to more normal levels. However, the Company is taking advantage of the exceptional results to reduce debt and spend some cash on maintenance and equipment upgrades. Of note, Canfor announced the redemption of $155 million of convertible subordinated debentures effective November 15, 2004. Approximately 11.7 million common shares will have to be issued if all holders convert to common stock. Although this may act as an overhang on the share price in the short run, Canfor intends to use a normal course issuer bid to purchase for cancellation up to 6.6 million shares. The share buyback will partially offset some of the dilution from the convertible redemption.

On the softwood lumber dispute, the United States has initiated an extraordinary challenge to the favourable (for Canadian producers) NAFTA ruling. Based on history, this challenge should be resolved by perhaps by mid-December. We then expect Canfor’s shares to factor in the return of a large portion of the US $467 million of duties paid to date. Analyst’s estimates for 2005 would also have to be revised upwards to reflect the removal of the countervailing and anti-dumping duties.

June 10, 2005

Strength in the housing sector has generated excellent results for Canfor Corporation in fiscal 2004. The Company earned $421 million on sales of $4.3 billion in 2004 compared to $86 million on sales of $2.7 billion in 2003. On a per share basis, Canfor earned $3.22 in 2004 compared to $0.92 in 2003. The vast improvement could be attributed to the Company’s lumber operations, where sales increased 84% to $2.9 billion and operating earnings swung to a profit of $412 million from a loss of $5 million. Unfortunately, with several capital projects on the go, the Board of Directors decided not to declare a dividend at this time.

Looking forward, existing home sales continue to set record highs despite constant fears of a slowdown, which has supported lumber and panel prices. The National Association of Realtors reported on May 24 that existing home sales rose 4.5% in April to a record seasonally adjusted annual rate of 6.28 million homes, up from 6.01 million in March. On a year over year basis, sales activity was 5% above the 5.98 million mark in April 2004. With the US 10 year T-Bill below 4% and 30-year fixed-rate mortgages available for roughly 6% in the United States, the Association is forecasting another record year. They are calling for existing home sales to rise 1.6% in 2005 to 6.89 million from 6.78 million in 2004. Obviously, these levels are very supportive for the lumber and panel industry.

We are heading into a period of seasonal strength for lumber and panel prices for three key reasons. First homebuilders are increasing their inventories in advance of the summer building season. Second, dry weather in British Columbia and the threat of forest fires raises concerns regarding availability. Finally, we are just about to enter hurricane season and any damage will bolster demand for lumber and panel products. For these reasons we look for the shares of Canfor to strengthen along with the commodities over the coming months.

December 9, 2005

The legal wrangling continues as the softwood lumber dispute drags on. However, two recent developments have positive implications for the long-suffering industry.

First, the Canadian government announced an aid package worth almost $1.5 billion. Approximately $580 million was designated to support forest-dependent communities, market diversification and innovation. Tax breaks will save the industry more than $100 million. Further, $800 million in loan insurance and $100 million in repayable cash contributions will backstop companies most affected by the punitive softwood lumber duties.

Second, the U.S. Department of Commerce announced that, after a second administrative review, the countervailing and anti-dumping duties would be effectively cut in half. The new combined rate falls to 10.8% and the changes are retroactive from April 1, 2003 to March 31, 2004 for the countervailing duty and from May 1, 2003 to April 30, 2004 for the anti-dumping duty. Despite the partial capitulation, it is unlikely that the Canadian industry would accept anything less than a full refund of the more than $5 billion of duties that have been illegally collected.

Shares of lumber producers, such as Canfor, have rallied approximately 20% from their lows reached in late October. We expect the shares to remain buoyant through the spring, as the building season ramps up. Inventory buying by home builders could be particularly strong this year due to reconstruction efforts across hurricane damaged regions of the United States.

April 28, 2006

After four years, billions in anti-dumping and countervailing duties, arduous legal wrangling and several periods of false hope Canada and the United States have finally agreed in principle to a softwood lumber deal. The details of the complex settlement have been reported extensively in the press. Essentially Canada’s market share will be capped at an average rate of 34%. Companies can choose between export charges or export charges combined with volume constraints. More importantly, 80% of the $5 billion in duties paid by Canadian producers will be returned to these companies. The remaining $1 billion that the US has collected will be shared 50-50 by the US government and the US Softwood Lumber Coalition. The fact that the US Softwood Lumber Coalition will be receiving $500 million is upsetting to most Canadians and remains a dangling nerve to the Canadian side.

Canfor has paid almost $6 per share of duties over the course of this dispute. Assuming they receive 80% of this amount at a 35% tax rate, CFP would receive almost $3 per share. Canfor’s stock price has already responded positively to this news and has appreciated approximately 30% from lows reached in October 2005. However, the timing of the cash repatriation is uncertain. Moreover, the meteoric rise of the Canadian dollar is damaging the profitability of the forestry sector. The housing industry could be at or close to the peak of the cycle. In consequence, we believe that much of the good news has been priced in while macro risks remain. Therefore, we have taken advantage of the buying interest after the settlement announcement and have sold our entire position in Canfor.