B.C. forestry's stock shock highlights industry troubles

Look at any stock chart of any publicly traded forest company in B.C. over a three-year period, and you may be struck by what you see: mountains.

Whether it is a major player like West Fraser Timber Co. (TSX:WFT) or a medium-sized company like Conifex Timber Inc. (TSX:CFF), the stock charts for these B.C. companies over three years all have a similar shape - a mountain slope that starts rising in early 2017, peaks in the summer of 2018 and then slides down to three-year lows.

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Whereas some B.C. forestry companies were posting record profits one year ago, they have lately been posting losses.

Canfor Corp. (TSX:CFP) posted $126 million in operating income from lumber sales in the first quarter of 2018 and a $78 million loss in lumber sales for the first quarter of 2019.

Its stock price has plunged 65 per cent in one year - from $31.20 per share on May 14, 2018, to $10.93 per share on May 14, 2019.

Interfor Corp. (TSX:IFP) reported net income of $32.7 million in Q1 2018 and a net loss of $15.3 million in Q1 2019. Its share price has fallen 47 per cent, from $24.81 per share on May 14, 2018, to $13.16 on May 14, 2019.

In first-quarter financials, B.C. companies cite lower lumber prices in the U.S. and higher log costs in B.C. for the poor first-quarter showings. And in management and discussion analysis, they also note new layers of regulations in B.C. as introducing new risks and uncertainty that could deter any further investments in B.C.

John Rustad, the BC Liberal critic for forestry, said it's not just about lumber prices, U.S. softwood lumber tariffs and market access. He points to West Fraser Timber's most recent financials as an example.

"It showed them making solid profits in Alberta; they're making solid profits in their operations in the States and they're losing money on their operations in B.C.," Rustad said.

"Alberta and B.C., you've got the same market conditions. You're struggling getting wood into the United States. The difference is, British Columbia has become the highest-cost producer in North America."

Some B.C.-headquartered companies warn that it is simply becoming too costly to operate in B.C. Since last year, they have been taking temporary curtailments and eliminating shifts. More could be coming.

"We expect the July 1 market-based stumpage adjustment to put severe additional pressure on British Columbia production levels, which could result in additional curtailments across the industry, given the increasingly challenging competitive environment," Canfor CEO Don Kayne said in a recent analyst call.

"Between supply and demand today and with the cutbacks on AAC [annual allowable cut]," Kayne said, roughly two billion board feet of lumber will need to be taken out of production in B.C.

Tolko Industries has already announced that it will take 250 million board feet out with the permanent closure of its Quest Wood sawmill in Quesnel and the elimination of one shift in Kelowna - curtailments that will result in 240 job losses.

That represents one-eighth of the curtailment that Kayne estimated may be coming in B.C., in response to high operating costs and a shrinking AAC.

Companies operating in B.C. not only face a shrinking timber supply and high log costs, but also now face a host of new regulations being added to the B.C. landscape.

They include:

adoption of the United Nations Declaration on the Rights of Indigenous People;

new restrictions on log exports and wood waste in the Coast Forest Sector Revitalization plan;

a new caribou protection plan that could take 300,000 cubic metres of timber from the AAC in the northeast; and

Bill 22, which could result in tenure take-backs.

Some of these new regulations are intended to address a long-term decline in the AAC - very likely the result of climate change.

A mountain pine beetle infestation and the increasing frequency and scale of forest fires have taken a huge chunk out of the annual allowable cut in the province. The AAC jumped to 84 million cubic metres in 2008 as a result of the huge amount of salvageable beetle-killed timber. It dropped to 64 million cubic metres, and will decline to 57 million cubic metres for the next decade. Parks and protected areas have also restricted the available timber supply.

B.C. companies are now having to compete for logs in an ever-shrinking fibre basket, and all of them are now paying higher prices for logs. On top of that, they are having to pay U.S. softwood lumber duties.

Some of those challenges were offset somewhat by high lumber demand in the U.S. and China and the availability of salvage wood from the pine beetle kill.

But that bonanza of beetle-killed timber is gone, U.S. lumber prices began to fall in the latter half of 2018, and a diplomatic spat with China puts that market for Canadian wood in question.

A number of B.C. sawmills have taken temporary curtailments, and now companies are beginning to make some of those curtailments permanent.

In an effort to keep B.C. logs from being exported, and used in local mills instead, the NDP government introduced the Coast Forest Sector Revitalization plan, and it is now looking to bring in a plan for the Interior forest industry.

Rustad said the aspirations of the plan are good ones - reducing log exports to free up more timber for B.C. mills, and making more wood waste available to pulp mills and wood pellet producers. But so far, it appears to be having the opposite effect.

"What we have seen is a 40 per cent reduction in the monthly average number of permits that are being applied for - i.e., there is going to be less wood being logged," Rustad said.

But while there appears to be less logging going on, the percentage of exports from those logs that are still being harvested has actually gone up, Rustad said, "because they have to recover their costs."

"So the end result of this is likely going to be fewer logs available for processing," he said. "For example, Western [Forest Products (TSX:WEF)] has taken downtime on three of their mills because they can't get logs. They can't afford to log.

"So you've driven up costs, created uncertainty, and you're having the opposite effect of what you're trying to do."

Meanwhile, the Green party is lobbying to have more coastal forests made off limits to logging. It is calling for a moratorium on logging in old-growth forests on Vancouver Island, which, if implemented, would cut into an already diminished coastal AAC.

For the Interior industry, one of the biggest new concerns is a proposed caribou recovery plan for the northeast. The industry estimates the plan could result in 300,000 cubic metres coming out of the AAC for that area.

As for high stumpage costs, they are tied to lumber prices, which explains why they have been so high, said B.C. Forests Minister Doug Donaldson.

"As they've dropped, then stumpage prices will react to the lower prices as well," he said.

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