West Fraser Timber Co Ltd T.WFG

TD Notes

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Softwood Lumber Trade; Pushing Towards Potential Negotiations

Event

Yesterday evening, a media report suggested that Canadian lumber industry executives are set to meet with Canada's International Trade Minister in an effort to ensure that softwood lumber trade policy is discussed when President Biden visits Prime Minister Trudeau later this month. This note provides context on aggregate duty deposits made since this iteration of countervailing/anti-dumping duties were imposed in 2017 and on potential eventual refunds to Canadian companies.

Impact: POTENTIALLY POSITIVE

As shown in Exhibit 1, total deposits for companies in our coverage universe (34% of Canadian capacity) are almost US$2.1 billion since Q2/17. A few thoughts:

• If there is a negotiated bi-lateral lumber trade deal, we do not expect a full deposit refund. The last negotiated lumber trade deal was 2006. At that point, countervailing/anti-dumping duties were replaced with an export tax system that kept deposits in Canada. With that agreement, 80% of duty deposits were refunded to Canadian companies. That refund percentage was a negotiated result tied to Canada agreeing to a replacement managed trade system. There is no guarantee that any deal this time would have as high a refund percentage. Calculations in Exhibit 1 assume an 80% after-tax refund in three years and discount that refund at a 25% rate. We assume that duty collection rates will be negligible in three years following successful Canadian legal challenges and at that point, the U.S. will be motivated to negotiate.

• In our coverage universe, the companies with the highest leverage to a potential refund are pure-play lumber producers IFP and WEF. Cumulative deposits for each of these companies are above 50% of current share prices and the estimated present value of a potential 80% refund in three years is 16-17% of the current share price for each name. Our target prices do not include potential refunds for any lumber producer.

• Having covered the sector the last time a negotiated trade deal was secured, we advise investors to temper expectations on timing. We expect lots of rhetoric, but precedent suggests any negotiations could materialize slowly.