Canfor reports net loss of C$9.6M in Q3, compared with net income of C$37.2M a year ago; results include costs for restart of Vavenby sawmill, part of C$300M three-year investment in lumber operations

VANCOUVER, British Columbia , October 27, 2011 (press release) – Canfor Corporation (TSX: CFP) today reported a net loss of $9.6 million for the third quarter of 2011, compared to net income of $26.2 million for the second quarter of 2011 and net income of $37.2 million for the third quarter of 2010. For the nine months ended September 30, 2011, the Company’s net income was $48.9 million, compared to $116.4 million for the comparable period in 2010.

The Company’s net loss attributable to shareholders (“shareholder net loss”) for the third quarter of 2011 was $21.6 million, or $0.15 per share, compared to shareholder net income of $2.1 million, or $0.01 per share, for the second quarter of 2011, and shareholder net income of $9.1 million, or $0.06 per share, for the third quarter of 2010. For the first nine months of 2011, the shareholder net loss was $12.5 million, or $0.09 per share, compared to shareholder net income of $48.5 million, or $0.34 per share, for the first nine months of 2010.

The shareholder net loss for the third quarter of 2011 included several items affecting comparability with prior periods, which had an overall net negative impact of $19.8 million, or $0.14 per share. After adjusting for such items, the Company’s adjusted shareholder net loss for the third quarter of 2011 was $1.8 million, or $0.01 per share, compared to adjusted shareholder net income of $2.6 million, or $0.02 per share, for the second quarter of 2011, and adjusted shareholder net income of $14.7 million, or $0.10 per share, for the third quarter of 2010.

The Company reported operating income of $14.5 million for the third quarter of 2011, down $12.0 million from $26.5 million for the second quarter. The decrease principally reflected a decline in the pulp and paper segment’s earnings of $10.8 million to $37.3 million, primarily resulting from capital upgrade related downtime and lower pulp market prices. The Lumber segment recorded an operating loss of $11.7 million, which was in line with the previous quarter. The following table summarizes selected financial information for the Company for the comparative periods:

(millions of dollars, except for per    Q3      Q2      YTD      Q3      YTD
 share amounts)                       2011    2011     2011    2010     2010
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Sales                               $602.1  $619.1 $1,845.2  $588.7 $1,801.3
EBITDA                              $ 54.4  $ 66.8 $  194.1  $ 74.2 $  270.9
Operating income                    $ 14.5  $ 26.5 $   72.4  $ 32.0 $  145.0
Net income (loss)                   $ (9.6) $ 26.2 $   48.9  $ 37.2 $  116.4
Net income (loss) attributable to
 equity shareholders of Company     $(21.6) $  2.1 $  (12.5) $  9.1 $   48.5
Net income (loss) per share
 attributable to equity shareholders
 of Company,
basic and diluted                   $(0.15) $ 0.01 $  (0.09) $ 0.06 $   0.34
Adjusted shareholder net income
 (loss)                             $ (1.8) $  2.6 $    0.8  $ 14.7 $   59.0
Adjusted shareholder net income
 (loss) per share                   $(0.01) $ 0.02 $   0.01  $ 0.10 $   0.41

North American lumber markets remained weak in the third quarter of 2011 reflecting the struggling U.S. economy and housing market. U.S. housing starts for the quarter averaged 615,000 units (seasonally adjusted annual rate), up 8% from of the previous quarter, though the increase substantially reflected higher starts for multifamily units, which use a lower proportion of lumber than single family units. The benchmark Western SPF 2x4 #2&Btr price moved up 3% to US$246 per Mfbm, though most wider SPF products showed moderately higher increases. Prices for SYP products were more mixed, with the 2x4 #2 benchmark price up 3% to US$259 per Mfbm, but wider dimensions saw flat or lower prices. Lumber sales realizations from offshore markets, where prices are negotiated monthly or quarterly in advance, showed a modest decrease from the previous quarter. Northern Bleached Softwood Kraft (“NBSK”) pulp markets softened during the quarter, with the average North American price falling US$32 to US$993 per tonne. While the value of the Canadian dollar declined significantly against the US dollar late in the quarter, on average it was down by only 1% compared to the previous quarter.

Shipments and earnings levels for the lumber operations showed little change from the previous quarter, though production was up 3%, principally due to improved productivity. For pulp products, production levels were down 13% reflecting downtime at Canfor Pulp’s Northwood pulp mill for its recovery boiler and precipitator upgrade.

Lumber unit manufacturing costs were up slightly from the previous quarter, with the positive impact of higher productivity offset by higher unit log costs, the latter primarily reflecting challenging wet weather conditions. Results for the third quarter of 2011 also included costs associated with the restart of the Vavenby sawmill on one shift in September. Pulp unit manufacturing costs were up 4% from the previous quarter, mostly attributed to the Northwood pulp mill downtime.

Commenting on the quarter, Canfor’s President and CEO, Don Kayne, said, “The U.S. market remains challenging as the economy struggles to emerge from its slump, and there remains little prospect of a meaningful recovery in the short term. On a more positive note, we continued to see strong shipment levels and increased demand for highervalue products in our offshore markets during the third quarter.”

Further progress was made during the third quarter on the Company’s $300 million, three-year strategic capital investment program at its lumber operations. Significant projects during the quarter included capital upgrades at the recently restarted Vavenby sawmill, and a major planer upgrade at the Polar sawmill. Other high return projects are ongoing, including energy systems at the Plateau and Chetwynd sawmills which are on target for start-up in the fourth quarter. “We are seeing very encouraging results from our various upgrades, and are working hard to ensure that success is carried through to all our other capital projects,” added Kayne.

Looking forward, U.S. lumber consumption is projected to slow in the fourth quarter of 2011 with lower seasonal activity and the continued high volume of home inventories. The Canadian housing market is forecast to follow a similar trend, with demand projected to level off towards the end of the year. Lumber shipments to China are projected to ease somewhat in the fourth quarter, in part reflecting the Chinese New Year early in 2012. Japanese and Korean markets are anticipated to remain stable for the remainder of 2011. In pulp markets, reduced bleached softwood pulp demand has resulted in increased producer inventories and downward pressure on prices.

Additional Information and Conference Call

A conference call to discuss the third quarter’s financial and operating results will be held on Friday, October 28, 2011 at 8:00 AM Pacific time. To participate in the call, please dial 416-340-2216 or Toll-Free 866-226-1792. For instant replay access until October 28, 2012, please dial 905-694-9451 or 800-408-3053 and enter participant pass code 2476745#. The conference call will be webcast live and will be available at www.canfor.com. This news release, the attached financial statements and a presentation used during the conference call can be accessed via the Company’s website at http://www.canfor.ca/investors/webcasts.asp.

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