West Fraser Timber Co Ltd T.WFG

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Have a US$125.00 target. GLTA

West Fraser Timber Co. Ltd.

(WFG-N, WFG-T) US$76.92 | C$96.10

WFG Shrinks Capacity and Repositions Product Mix at Hinton Pulp

Event

Last night, West Fraser announced plans to permanently shut one of two production lines at the company's Hinton, Alberta pulp mill by the end of 2022. The remaining pulp line at Hinton will transition to producing Unbleached Kraft Pulp (UKP) instead of the current focus on Northern Bleached Softwood Kraft (NBSK) pulp. Management indicated that the closure was intended to simplify operations, reduce capital requirements and greenhouse gas emissions, and better position pulp production with end-market trends.

Impact: NEUTRAL

• Hinton has delivered inconsistent productivity and margins over a long duration and is a small contributor to West Fraser's overall results. With that context, shrinking this asset's footprint and shifting into new end markets is not a surprise. For scale context, we estimate that Hinton accounted for ~2% of West Fraser's aggregate 2021 sales and contributed negligible earnings. The company will record a modest $13 million non-recurring charge in Q1/22 results to write- down asset value.

• Hinton's current annual capacity is 380,000 tonnes of NBSK pulp. UBK pulp is sold into different end markets than NBSK (e.g., packaging, grocery bags, and fiber-cement board) that provide substitutes for single-use plastics. UKP is a 3.3 million tonne global market (~4.0% of aggregate global market pulp). Hinton has experimented with UKP production since late 2021 and initial customer feedback is positive. The line closure will also yield environmental benefits including lower GHG emissions, lower water usage/waste generation, and elimination of chlorine dioxide emissions (bleaching chemical).

• West Fraser has been active on its NCIB in 2022. In Q1/22, the company repurchased 2.57 million shares (~2.4% of shares outstanding at year-end) for $233 million versus $527 million in 2021 (excluding the $792 million SIB). The company ended 2021 with net cash of $1.07 billion and available liquidity was $2.59 billion.

• Lumber and panel prices are in the initial stages of an anticipated correction. The mid-week Random Lengths Framing Lumber Composite price published Tuesday evening is $1,062/Mfbm, down 20% over the past month and the lowest level since late-December. The current reference North Central OSB price is $1,150/Msf, down 10% over the past two weeks.