West Fraser Timber Co. Ltd. Including Annual Information Form dated March 22, 2012

Transcription

1 West Fraser Timber Co. Ltd. Annual Report 2011 Including Annual Information Form dated March 22, 2012

2 Bill Tribute Ketcham to Bill Ketcham Our Co-Founder and Long-Term Director 2 TRIBUTE TO BILL KETCHAM After 57 years of helping to guide the future of West Fraser as a co-founder, a major shareholder and an actively-engaged director, Bill Ketcham has decided not to stand for re-election to our Board of Directors. Bill has been an invaluable source of advice and guidance for both our Board and our management team over the years. Bill has helped establish and foster our culture and, in many ways, represents what we are all about. He is an inspiring example for all of us. In recognition of the significance of Bill s contribution to West Fraser, our Board has designated him Director Emeritus. Thanks Bill.

3 their lives, but more importantly making a living and making a life. Bill Ketcham The story of West Fraser started 57 years ago at the end of a dusty road leading to Quesnel, British Columbia. There, three pioneering and hardworking brothers veered off course from a fishing trip and saw their future in the people and the resources in the area. 3 The brothers Sam, Bill and Pete Ketcham While some would say I have played an important role, I consider my greatest contribution to have been behind the scenes. I ve shared my experience on the sales and business front when asked and supported the company without hesitation as it grew from a small one-mill operation to a major North American business. But mostly, I ve been incredibly proud to see people work side-by-side to make West Fraser the unique success that it is. We are all in this together, making the various wood products that people depend on in TRIBUTE TO BILL KETCHAM

4 West Fraser Timber Co. Ltd. Annual Report 2011 Including Annual Information Form dated March 22, Table of Contents Table of Contents 2. Tribute to Bill Ketcham 5. Map of Operations 6. Financial and Operating Highlights 8. Report to Shareholders 10. Corporate Structure 11. Annual Information Form 11. Business Overview 11. Corporate Strategy 12. History 12. Fibre Supply 14. Capital Expenditures and Acquisitions 14. Human Resources 14. Markets 15. Research and Development 15. Lumber 16. Panels 17. Pulp & Paper 17. External Factors Affecting West Fraser s Business in Risk Factors 18. Capital Structure 19. Experts 20. Directors and Officers 21. Governance 21. Audit Committee 22. Material Contracts 22. Additional Information 23. Schedule 1 Audit Committee Charter 25. Management s Discussion & Analysis 26. Annual Results 27. Annual Earnings Adjustments for Certain Non-Operational Items 28. Lumber Segment 30. Panels Segment 30. Pulp & Paper Segment 31. Discontinued Operations 32. 4th Quarter Results 33. Quarterly Earnings Adjustments for Certain Non-operational Items 33. Discussion & Analysis of Quarterly Non-operational Items 33. Discussion & Analysis by Product Segment 34. Business Outlook 35. Earnings Sensitivity to Key Variables 35. Capital Structure and Liquidity 37. Significant Management Judgments Affecting Financial Results 38. New Accounting Pronouncements 39. Risks and Uncertainties 41. Disclosure Controls and Internal Controls Over Financial Reporting 42. Responsibility of Management 43. Auditors Report 44. Financial Statements 72. Five-year Financial Review 73. Corporate Information 75. Glossary of Industry Terms

5 West Fraser Operations West Fraser is a North American wood products company. Its main product is lumber (spruce/pine/fir ( SPF ) and southern yellow pine ( SYP )), and it also produces panels (plywood, MDF and LVL), pulp (NBSK and BCTMP), newsprint and wood chips. Its linerboard and kraft paper mill in Kitimat was permanently shut down in January The operations located in western Canada manufacture all of the products described above except SYP lumber. The sawmills located in the southern United States produce SYP lumber and wood chips. PULP & PAPER 27. Hinton 28. Quesnel (2) 29. Slave Lake 30. Whitecourt PLYWOOD 31. Edmonton 32. Quesnel 33. Williams Lake MDF 34. Blue Ridge 35. Quesnel VENEER & LVL 36. Rocky Mountain House 37. Slave Lake 5 WEST FRASER OPERATIONS LUMBER Canada 1. Quesnel 2. Williams Lake 3. Smithers 4. Chetwynd 5. Fraser Lake 6. Chasm 7. Houston Mile House 9. Blue Ridge 10. Slave Lake 11. Hinton 12. Sundre U.S. 13. Joyce 14. Huttig 15. Henderson 16. New Boston 17. Leola 18. Maplesville 19. Opelika 20. McDavid 21. Seaboard 22. Armour 23. Newberry 24. Augusta 25. Folkston 26. Whitehouse LEGEND Lumber Pulp & Paper Plywood MDF LVL

6 Financial and Operating Highlights Earnings ($ millions) Sales 2,762 2,886 EBITDA Operating earnings Earnings from continuing operations Earnings after discontinued operations Cash flow from operating activities Common Share Data (in dollars per share, except shares outstanding) Shares outstanding (thousands) Weighted average (basic) 42,840 42,823 Year-end 42,846 42,835 Earnings per share Basic from continuing operations Diluted from continuing operations Basic after discontinued operations Diluted after discontinued operations Cash dividends declared Common shareholders equity Price range High (2011 Apr 4; 2010 Dec 9) Low (2011 Oct 4; 2010 Feb 8) Close FINAnCIAL AND Operating Highlights Financial Position ($ millions) Working capital Total assets 2,537 2,610 Long-term debt (excluding current portion) Shareholders equity 1,483 1,534 Analytical Data Current ratio Capital expenditures ($ millions) Net debt to capitalization (%) 14 9 Return on common shareholders equity (%)

7 Lumber Sales ($ millions) 1,670 1,715 Operating earnings ($ millions) (20) 138 SPF (MMfbm) production 3,408 3,318 Shipments 3,389 3,341 SYP (MMfbm) Production 1,503 1,365 Shipments 1,471 1,352 Panels Sales ($ millions) Operating earnings ($ millions) (8) 40 Plywood ( 3 /8 MMsf) Production Shipments MDF ( 3 /4 MMsf) Production Shipments LVL (Mcf) production 1,634 1,918 Shipments 1,596 1,894 Pulp & Paper Sales ($ millions) Operating earnings ($ millions) NBSK (Mtonnes) Production Shipments BCTMP (Mtonnes) production Shipments Newsprint (Mtonnes) production Shipments FINAnCIAL AND Operating Highlights

8 8 REPORT TO SHAREHOLDERS Report to Shareholders For five consecutive years the North American wood products business has operated in a depression-like environment. This has been the longest and deepest trough in U.S. homebuilding since World War II. Since 2006, North American lumber production has declined by approximately 30%. To match supply with demand, the equivalent of 110 large sawmills have had to close down. A similar scenario has played out in the structural and non-structural panel business. Not only has the wood products industry significantly downsized but many of the remaining players have not had strong enough cash flows or balance sheets to continually modernize their operations. Fortunately, at West Fraser our Canadian sawmilling assets were industry leaders in cost and efficiency going into this downturn and, due to our relatively strong cash flow and very strong balance sheet, we have been able to continue to invest in new equipment and technology to further enhance our operating advantage. Twenty-nine percent of our revenues are derived from our pulp and paper business and during this prolonged downturn we have benefited from strong pulp prices which have helped to offset the historically low lumber prices. As a fully integrated company in Canada we process 100% of our timber resource into products ranging from lumber and plywood to MDF and LVL to pulp, paper and energy. This strategy has paid off handsomely for us as lumber and pulp prices are generally countercyclical and, therefore, our overall results are less exposed to depressed prices in each of the commodities. Nonetheless, 2011 was another very difficult year in the forest products business. Lumber prices declined from moderately profitable levels earlier in the year to unsustainably low levels by year end. Prices for Southern Yellow Pine (SYP) lumber produced at our U.S. operations also declined significantly to the point that the traditional premium enjoyed by SYP over Canadian SPF lumber narrowed dramatically during the year. Plywood prices in Canada also sank to unprofitable levels as the strong Canadian dollar encouraged U.S. plywood producers to export more volume to Canada thereby destroying the tenuous balance of supply and demand in our home market. Finally, the historically high pulp prices we enjoyed early in 2011 encouraged higher cost producers to start up idled capacity which, combined with weak economic conditions in the western world, caused prices to decline by 14% by the end of the year. Fortunately our Asian markets have stayed relatively strong and are helping to offset the lack of demand for our products in North America. Since 2004 Canadian SPF shipments to China have grown from virtually nothing to approximately 3 billion board feet. This is a result of a concerted effort by our industry, with the help of our federal and provincial governments, to develop new markets for our lumber in order to reduce our exposure to our traditional U.S. market. In 2011 West Fraser shipped directly and through wholesalers roughly 30% of our SPF lumber to Japan, China and other Asian countries versus 6% five years ago. We anticipate further growth in these markets in the future. Our pulp business has also benefited from the growth in our Asian markets as more than 60% of our pulp is shipped there. With the emergence of China as the second largest economy in the world, West Fraser is well positioned to benefit from its growing demand for our lumber and pulp. While markets for our wood products were depressed during the year, our Canadian lumber and plywood operations continued to perform well on an operating basis. Our Canadian mills are generally large, efficient and technologically advanced versus most of our Canadian peers. As a result, we have a good cost structure that allows us to withstand difficult market conditions. Our U.S. mills, most of which were acquired in 2007, are generally not yet up to the same standards of efficiency, costs and technology as our Canadian mills. We embarked on an aggressive capital improvement program at our U.S. division in 2011 and will begin to see the results of this program in the second half of We will continue to apply significant capital to these mills in the future in order to position each of them at the lower end of the cost curve. In Canada we have embarked on an ambitious capital program at both our sawmill and pulp divisions. During the year we expanded and modernized our three sawmills in Alberta. When these projects are complete, we will have increased our production capacity in Alberta by almost 20% while significantly lowering our unit costs. In 2009 West Fraser was awarded $88 million of Green Transformation Funds from the federal government. These funds are provided by the government to promote energy efficiency and green energy production in the Canadian pulp and paper industry. We have fully utilized these funds on high payback projects at our four pulp mills. When these projects are completed in the second half of 2012, we will have increased energy efficiency at all of our pulp mills, expanded production at our Hinton, Alberta pulp mill and increased our production of green electricity at our Cariboo pulp mill. These projects will help position our pulp division as a very competitive North American producer. In addition to the green energy projects mentioned above, our Company continues to investigate profitable opportunities in the energy and bioproducts sector. In the latter half of 2011 we were awarded two projects through the B.C. Hydro Biomass Call for Power. We will spend $90 million on these projects which, when complete, will produce over 20 megawatts of wood-fired electricity at two of our B.C. sawmills. These are strong payback projects which will improve wood supply to the mills while allowing us to sell the green electricity on a long-term fixed contract basis. These projects, combined with the projects funded under the Green Transformation Program, will result in almost 45 megawatts of new power production, a 5% improvement in purchased energy efficiency and an 8% reduction in greenhouse gas emissions. When these projects are complete, we will have reduced our overall GHG emissions by 35% over the last ten years. We have many more opportunities to improve our energy efficiency and we will continue to pursue them vigorously.

9 In 2011 West Fraser personnel participated in extensive negotiations with our partners in the Canadian Boreal Accord. We are working hard to put specific plans in place to meet the broad principles which have been agreed to by the signatories to the Accord. We also continue to make progress in other aspects of environmental performance including water usage and quality, forest stewardship and reduced reliance on fossil fuels. We remain committed to continually reducing our environmental footprint. The devastating effects of the Mountain Pine Beetle in the B.C. Interior are becoming more obvious as timber quality and availability declines. At some of our B.C. mills lumber quality, lumber recovery and overall productivity has declined. We have invested heavily in these mills to help offset the effects of the pine beetle killed timber. Over the past several years the B.C. Interior industry has been harvesting at increased levels in order to salvage as much beetle killed timber as possible before it loses its saw-log value. In the coming years, the dead pine will reach the end of its economic shelf life and the harvest levels in the Central Interior will be significantly reduced. This will result in reduced milling capacity and lumber production in the Province. On a positive note, reduced production from B.C. in the future will tighten the supply/demand fundamentals in the lumber market which should result in increased prices for our products. In the 1990 s West Fraser embarked on a strategy to expand our Company beyond the borders of British Columbia. In the intervening years we have aggressively grown our manufacturing capabilities in Alberta and the southern United States. Today we are the largest lumber manufacturer in Alberta and one of the largest in the U.S. South. By pursuing this strategy we have significantly reduced our risks associated with the Mountain Pine Beetle, the ongoing softwood lumber dispute between Canada and the U.S. and the impact of U.S./ Canadian dollar currency fluctuations. At the same time we have created new platforms for growth in areas with stable or increasing timber supplies. We believe we will be generously rewarded for this strategy as the lumber market recovers. In early 2011, the U.S. Department of Commerce filed a Request for Arbitration under the Canada/U.S. Softwood Lumber Agreement. The U.S. claims that British Columbia has violated certain aspects of the Agreement relating to timber pricing in the B.C. Interior. We believe we have a very strong defence and the Government of Canada is vigorously defending our position. We expect a decision to be rendered by the Tribunal in the third or fourth quarter of West Fraser strives to be the most efficient, productive and cost conscious company in our industry. We also strive to be the safest. We have worked very hard over the past few years to improve and enhance all aspects of our safety programs. While our Company must provide the best leadership and safest working conditions we can, we must also continually reinforce a safety culture which encourages personal responsibility and accountability for safe work practices and behaviour. We continue to make great strides in reducing risk in the Company but the job is never finished. Our commitment to our employees and our stakeholders is to continuously improve our safety culture and performance so that serious and debilitating injuries become a thing of the past at West Fraser. In July Gerry Miller, our Executive Vice-President of Finance and CFO retired after 25 years of service with the Company and in March 2012 Wayne Clogg, our Senior Vice-President of Woodlands retired after a 32 year career with the Company. Gerry and Wayne were key members of our management team throughout their careers and were instrumental in building West Fraser into the company it is today. Brian MacNeill, who has been a director of the Company since 2000 will not be standing for re-election at this year s annual general meeting. Brian, who has had a distinguished career as a CEO and corporate director, has been an active director and a valued source of solid advice during his term on our Board. Finally Bill Ketcham, one of the original founders of the Company in 1955, has decided not to stand for re-election at this year s annual meeting. Bill has been actively involved in the Company since he and his two brothers bought a small planing mill in Quesnel, British Columbia in the mid 50 s. He has participated in every major decision involving the growth and development of the Company over the years and has encouraged and supported management to constantly strive to build a bigger and stronger company while staying true to our culture of cost control, prudent financial management and truly caring for our employees. Bill has been a source of sound advice for successive management teams throughout our history and a friend to many of the employees he has worked with over the years. While we will miss his regular participation at our Board meetings, Bill will continue as a valued adviser and friend to our Board and our management team and as an active participant in Company affairs. Given the economic environment we were working in, 2011 was another successful year for our Company. We believe that when the housing market begins to recover we will be extremely well positioned to take advantage of the scale and efficiency we have built into our Company. At West Fraser, our employees continue to be our key competitive advantage. They contribute to a strong, competitive cost conscious culture which is what has driven our success over the years. Through their continued support and commitment we will build a stronger and more profitable company in the future. Henry H. Ketcham Chairman, President and Chief Executive Officer 9 REPORT TO SHAREHOLDERS

10 Corporate Structure WEST FRASER MILLS LTD. LUMBER PANELS PULP & PAPER 10 Canada U.S. 3 Plywood Pulp Quesnel Joyce Edmonton Hinton Williams Lake Huttig Quesnel Quesnel Smithers Henderson Williams Lake Quesnel (50%) 4 Chetwynd new Boston Slave Lake Fraser Lake leola MDF Chasm Maplesville Blue Ridge Newsprint Houston opelika Quesnel Whitecourt (50%) Mile House McDavid Blue Ridge 1 Seaboard Veneer & LVL Slave Lake Armour Rocky Mountain House 2 Hinton newberry Slave Lake Sundre 2 Augusta Folkston Whitehouse CORPORATE STRUCTURE 1. Owned through Blue Ridge Lumber Inc., a wholly-owned subsidiary. 2. Owned through Sundre Forest Products Inc., a wholly-owned subsidiary. 3. Owned through West Fraser, Inc., a wholly-owned subsidiary. 4. Joint venture interest in Cariboo Pulp & Paper Company. 5. Joint venture interest in Alberta Newsprint Company owned through West Fraser Newsprint Ltd., a wholly-owned subsidiary.

11 Annual Information Form Date This Annual Information Form of West Fraser Timber Co. Ltd. ( West Fraser or the Company ) is dated as of March 22, Except as otherwise indicated, the information contained in it is as of December 31, Business Overview West Fraser is a North American integrated wood products company which produces lumber (spruce/pine/fir ( SPF ) and southern yellow pine ( SYP )), panels (plywood, MDF and LVL), pulp (NBSK and BCTMP), newsprint and wood chips. The operations located in western Canada manufacture all of the products described above except SYP lumber. The sawmills located in the southern U.S. produce SYP lumber and wood chips. The annual production capacities of our wholly-owned facilities and our share of the capacities of our joint venture facilities are as follows: Lumber (MMfbm) SPF 3,700 SYP 2,000 Total 5,700 Panels Plywood (MMsf 3 /8 ) 830 MDF (MMsf 3 /4 ) 300 LVL (Mcf) 3,200 Pulp (Mtonnes) BCTMP 640 NBSK 590 Newsprint (Mtonnes) 135 Corporate Strategy Our goal at West Fraser is to generate strong financial results through the business cycle, relying on our committed work force, the quality of our assets, and our well-established corporate culture. This culture emphasizes cost control in all aspects of the business and on competitiveness, both internally and externally. In our approach to employee relations, we emphasize employee involvement and favour internal promotions whenever possible. West Fraser is an integrated and diversified producer of wood products with access to extensive timber resources. Acquisitions and expansions are considered with a view to extending our existing business lines, particularly in lumber operations, and to product and geographic diversification. Our earnings over the business cycle have enabled us to make significant and ongoing capital investments in our facilities to maintain and improve our overall low-cost position. 11 ANNUAL INFORMATION FORM We are committed to operating in a financially conservative and prudent manner. The North American wood products industry is cyclical, and over the last several years has faced very difficult market conditions and serious challenges. During such cyclical downturns, we focus on financial discipline, including reduction or deferral of non-essential capital expenditures. We believe that maintaining a strong balance sheet provides the ability to react to growth opportunities. Corporate Structure The chart on page 10 shows the relationship of West Fraser to the principal direct and indirect subsidiaries and the joint ventures in which we participate and, where less than 100%, the percentage of our direct or indirect ownership. Forward-looking Statements This Annual Information Form, and the Annual Report of which it forms a part, contain historical information, descriptions of current circumstances and statements about potential future developments. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Forward-looking statements are included under the headings Fibre Supply First Nations Issues, Capital Expenditures and Acquisitions and Capital Structure Dividends and in parts of the Management s Discussion & Analysis incorporated herein. Actual outcomes and results will depend on a number of factors that could affect the ability of the Company to execute its business plans, including the matters described in these sections and under Risk Factors, and may differ materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements which reflect management s estimates, projections and views only as of the date hereof. The Company undertakes no obligation to publicly revise these statements to reflect subsequent events or changes in circumstances except as required by applicable securities laws.

12 Annual Information Form (continued) West Fraser assumed its present form in 1966 by the amalgamation of a group of companies under the laws of B.C. The principal operating subsidiary, West Fraser Mills Ltd., assumed its present form on January 1, 2005 by amalgamation under those laws. West Fraser, Inc. is a Delaware corporation, while Blue Ridge Lumber Inc. and Sundre Forest Products Inc. are Alberta corporations. West Fraser Newsprint Ltd. subsists under the laws of Canada. Alberta Newsprint Company ( ANC ) and Cariboo Pulp & Paper Company are unincorporated joint ventures governed, respectively, by the laws of Alberta and B.C. Our executive office is located at 858 Beatty Street, Suite 501, Vancouver, B.C., Canada, V6B 1C1 and our registered office is located at West Georgia Street, Vancouver, B.C., Canada, V6E 4N7. History West Fraser originated in 1955 when three brothers, Pete, Bill and Sam Ketcham, acquired a lumber planing mill located in Quesnel, B.C. ( Quesnel ). From 1955 through 2005 the business expanded in western Canada through the acquisition of a number of sawmills and related timber harvesting rights and the acquisition or development of lumber, panel and pulp & paper businesses. Expansion into the southern U.S. began in 2000, with the acquisition of two sawmills. 12 ANNUAL INFORMATION FORM Major developments for West Fraser during the last five years include the following: 2007 Acquisition of 13 sawmills in the southern U.S. (the U.S. Acquisition ) for $391 million Closure of linerboard and kraft paper mill at Kitimat, B.C. in January Sale of Kitimat industrial site, deep-sea wharf and Terrace sawmill. Sales Revenue 1 ($ millions) Year ended December Lumber 1,579 1,622 1,285 1,645 1,802 Panels Pulp & Paper Total 2,762 2,886 2,353 2,862 3, From continuing operations Fibre Supply Our operations are dependent on the consistent supply of substantial quantities of wood fibre in various forms. The primary manufacturing facilities, which produce lumber, plywood and LVL, consume whole logs while the pulp & paper and MDF facilities mostly consume wood by-products in the form of wood chips, shavings and sawdust resulting from the production of lumber, plywood or LVL. Many facilities also consume hog fuel and wood waste in energy systems. Log Supply Our U.S. operations, which produce SYP lumber, consume approximately 8 million tons of logs per year operating at capacity. These operations obtain approximately 25% of their log requirements under certain long-term supply contracts, with the balance being purchased on the open market. In B.C. and Alberta substantially all timberlands are publicly owned and the right to harvest timber is acquired through provinciallygranted licences. Licences grant the holder the right to harvest up to a specified quantity of timber annually and either have a term of 15 to 25 years and are replaceable or renewable or have a shorter term but are not replaceable or renewable. The following table summarizes the timber tenures, as at December 31, 2011, which supply the Canadian mills that we own or in which we have an interest, as well as our Annual Allowable Cut ( AAC ) for such tenures. Timber Tenures (thousand m 3 ) Location Tenure 1 Expiry AAC B.C. Coniferous Long-term ,694 Coniferous Short-term Alberta Coniferous Long-term ,314 Deciduous Long-term , Long-term tenures include TFLs, FMAs, timber quotas and forest licences, which are renewable timber tenures. Short-term tenures include non-replaceable forest licences.

13 Annual log requirements for our Canadian sawmills, plywood facilities and LVL plant, all operating at capacities described in this Annual Information Form, total approximately 14 million m 3. Approximately 75% of these requirements can be obtained from the tenures described in the above table and the balance is acquired from third parties holding short or long-term timber harvesting rights, including independent logging contractors, First Nations, communities and woodlot owners. Timber tenures in B.C. and Alberta require the payment of a fee, commonly known as stumpage, for timber harvested under it. Currently, stumpage in Alberta is product-price specific and varies with the sales price of the product into which the logs will be converted. Stumpage in B.C. is substantially based on the results of certain publicly-auctioned timber harvesting rights. Timber tenures in B.C. and Alberta require the holder to carry out reforestation to ensure re-establishment of the forest after harvesting. Reforestation requirements depend on climate, terrain, species and other factors affecting regeneration. Reforestation projects are planned and supervised by our woodlands staff and are subject to approval by relevant government authorities. Our timber harvesting operations are carried out by independent contractors under the supervision of our woodlands staff. Mountain Pine Beetle The current mountain pine beetle infestation in the B.C. interior reached a peak in terms of the annual timber mortality rate in To date, the Chief Forester of B.C. estimates that 692 million m 3 of pine, representing approximately 51% of the total merchantable pine on the timber harvesting land base, has been attacked and killed and he projected that approximately 61% will be killed by the time the infestation ultimately runs its course over the next decade. Although the ultimate effect of the infestation is less severe than originally forecasted, the damage to the mature pine forests within our operating areas is significant. We continue to focus on the salvage and processing of dead pine in order to utilize as much of the resource as possible and to ensure that affected sites are promptly reforested. The Province of B.C. has also limited the harvest of non-pine species until the salvage of dead pine stands comes to a conclusion. As the stands of dead pine are salvaged or when they are no longer economic to manufacture into lumber, the AAC will be reduced to reflect lower mature inventories. The Province already started decreasing the AACs in the central interior in 2010 and we expect this process to continue over the next several years. To date, B.C. s Chief Forester has announced reductions in the AACs in three of our operating areas in the interior. As the timing of future reductions and the effect on our AACs will depend on a variety of factors, including the amount of non-pine species available for harvest, the full effect on our operations cannot reasonably be determined at this time. Alberta s Minister of Sustainable Resource Development reported that cold weather during the winter of 2010/2011 and summer of 2011 resulted in a significant mountain pine beetle population decrease in most areas of Alberta, including on all of our tenures in that province. However, a significant population of beetles remains stable in certain north central areas bordering our tenures. We, in concert with industry and the Province of Alberta, continue to aggressively reduce the level of susceptible pine stands and conduct spread control activities across our tenures. Certification Our Canadian woodlands operations, in addition to being subject to various environmental protection laws, are third party certified to internationally-recognized, sustainable forest management standards. For more information concerning our sustainable and environmentally sound forest practices see our Sustainability Report and our Environmental Report at 13 ANNUAL INFORMATION FORM First Nations Issues Issues relating to Canada s aboriginal people ( First Nations ) have the potential to have a significant effect on resource industries in Canada, including wood products. The main First Nations issues that are relevant to our operations relate to aboriginal rights and title, and consultation. The potential existence of aboriginal title and rights over substantial portions of B.C., including areas where our timber tenures are located, has created uncertainty with respect to property rights and natural resource development in the province. The Supreme Court of Canada (the SCC ) determined in 1997 that First Nations may possess rights in respect of land used or occupied by their ancestors where treaties have not been concluded to deal with those rights. Very few areas of B.C. are the subject of such treaties, although all of Alberta is covered by treaties. This uncertainty in B.C. may be alleviated by the negotiation of treaties with First Nations and further judgments of the courts. In 2004, the SCC confirmed that the Crown must consult with First Nations before authorizing activity that might infringe on their interests in certain circumstances and, when appropriate to do so, seek to accommodate those interests by minimizing interference with them. In 2005 the SCC determined that this Crown duty of consultation applies to treaty lands as well as non-treaty lands, so the duty of consultation applies to all of the lands in B.C. and Alberta where our timber tenures are located. Authorizations requiring consultation

14 Annual Information Form (continued) may include approval of cutting permits and required ministerial action relating to the transfer or renewal of Crown timber tenures. The process of consultation and, when appropriate, accommodation is currently not clearly defined, creating some uncertainty with respect to Crown timber harvesting rights held by wood products companies, including West Fraser. We participate as requested by the Crown in the consultation process, but rely on provincial governments to adequately discharge obligations to First Nations in order to preserve the validity of actions dealing with public rights, including the granting of Crown timber harvesting rights. We also seek to develop good relationships with the First Nations that may be affected by our business activities. However, as the jurisprudence and government policies respecting aboriginal title and rights and the consultation process continue to evolve, we cannot at this time predict whether First Nations claims will have a material adverse affect on our timber harvesting rights or on our ability to exercise or renew them, or secure other timber harvesting rights. 14 ANNUAL INFORMATION FORM Residual Fibre Supply In Canada substantially all our requirements for wood chips, shavings and sawdust are supplied from our own operations, either directly or indirectly through trades. This reduces our exposure to risks associated with price fluctuations and supply shortages. Our B.C. sawmills and plywood plants fulfill substantially all of the fibre requirements of our B.C. pulp operations and MDF plant. The Alberta MDF plant obtains its fibre from the adjacent Blue Ridge sawmill and other sawmills in the area. The Hinton Pulp mill obtains its fibre from the adjacent Hinton sawmill and other sawmills in the area, including those owned by us. At times we produce whole log chips to supplement the supply of residual chips from our various sawmills. Almost all of the fibre requirements of ANC are obtained from local sawmills, including the Slave Lake sawmill and veneer operation, through log-for-chip trades using logs harvested from ANC s tenures. The balance is obtained from direct fibre purchases. The Slave Lake deciduous FMA provides most of the fibre requirements of the Slave Lake Pulp mill, with the balance being obtained from logs purchased from local suppliers. The majority of the wood chips produced by our U.S. operations are sold to pulp mills at market prices pursuant to long-term contracts. Capital Expenditures and Acquisitions We regularly invest in upgrading and expanding our facilities and operations. However, during periods when earnings are weak, we will reduce capital and other expenditures in order to preserve liquidity. The following table shows the capital expenditures and acquisitions during the past five years. Capital Expenditures and Acquisitions ($ millions) Year ended December Lumber Panels Pulp & Paper Corporate & Other Acquisitions 391 Total Includes reimbursable expenditures under the Pulp and Paper Green Transformation Program. 2. Amounts for years prior to 2010 have not been restated under IFRS and are prepared under previous Canadian generally accepted accounting principles. We completed the U.S. Acquisition in Human Resources At December 31, 2011, we employed approximately 6,850 individuals, including our share of those in joint venture operations. Of the employees, approximately 40% are covered by collective agreements. In 2012, collective agreements covering approximately 850 employees will expire. Markets Our products are sold in markets open to a number of companies with similar products. Purchasing decisions by customers are generally based on price, quality and service. Prices and sales volumes are influenced by general economic conditions. The following table shows selected average benchmark prices for the past five years for products of the type we produced, although these prices do not necessarily reflect the prices we obtained.

15 Average Benchmark Prices (in US$ except plywood) x4 random length SPF (per Mfbm) SYP #2 West 2x4 (per Mfbm) Plywood (per Msf 3 /8 basis) 3 Cdn$ MDF (per Msf 3 /4 basis) Newsprint (per tonne) NBSK (per tonne) Sources: 1. Random Lengths 2x4, #2 & Better Net FOB mill. 4. Resource Information Systems, Inc. MDF Western U.S. Net FOB mill. 2. Random Lengths 2x4 Net FOB mill Westside. 5. Resource Information Systems, Inc. U.S. delivered 48.8 gram newsprint. 3. Crow s Market Report Delivered Toronto. 6. Resource Information Systems, Inc. U.S. list price, delivered U.S. Research and Development We support industry research and development organizations, and conduct research and development at several plants to improve processes, maximize resource utilization and develop new products and environmental applications. Lumber Capacity and Production (MMfbm) Capacity year-end 5,700 5,500 5,500 6,000 6,000 Production: B.C. Sawmills (SPF) Quesnel Williams Lake Smithers Chetwynd Fraser Lake Chasm Houston Mile House Other ,497 2,397 2,034 2,549 2,659 Alberta Sawmills (SPF) Blue Ridge Slave Lake Hinton Sundre U.S. Sawmills (SYP) Joyce, LA Huttig, AR Henderson, TX New Boston, TX Leola, AR Maplesville, AL Opelika, AL McDavid, FL 2, Seaboard, NC Armour, NC Newberry, SC Augusta, GA Folkston, GA 2, Whitehouse, FL Other ,503 1,365 1,269 1,570 1,516 Total Production 4,911 4,683 4,152 4,959 5, Includes production from mills shut or sold. 2. Mills acquired on March 31, Indefinitely curtailed. 15 ANNUAL INFORMATION FORM

16 Annual Information Form (continued) Lumber capacity by region and species is approximately 65% SPF (70% B.C. and 30% Alberta) and 35% SYP (all U.S.). Operations As of the date of this Annual Information Form, we own 26 sawmills of which 2 are currently indefinitely curtailed. We also have a woodtreating facility at the Sundre sawmill. Sales Lumber produced at our Canadian sawmills and sold to North American customers is marketed and sold from our sales office in Quesnel, while sales to offshore markets are made from our export sales office in Vancouver, B.C. Offshore sales activities are complemented by customer service offices in Japan and China. Lumber produced at our U.S. sawmills is marketed by the sales group in Memphis, Tennessee. From time to time, we purchase lumber for resale in order to meet requirements of customers. 16 ANNUAL INFORMATION FORM In 2011 sales of lumber from Canadian and U.S. operations were made to customers in the U.S. and Canada and to customers offshore, predominantly in China and Japan. Most lumber shipments to North American customers by the Canadian operations were made by rail and the rest by truck. Most lumber shipments to North American customers by the U.S. operations were delivered by truck and the rest by rail. Offshore shipments from both Canada and the U.S. were through various public terminals, mostly in container vessels and the rest by breakbulk carriers. Panels Capacity and Production Plywood (MMsf 3 /8 basis) Capacity year-end Production: Alberta Plywood Williams Lake Quesnel Total Production MDF (MMsf 3 /4 basis) Capacity year-end Production: Ranger Board WestPine Total Production LVL (Mcf) Capacity year-end 3,200 3,200 3,200 3,200 3,200 Production 1,634 1,918 1,643 1,264 2,291 Operations Our panel operations include three plywood mills that primarily produce standard softwood sheathing plywood, two MDF mills, each with the flexibility to manufacture varying thicknesses and sizes, an LVL mill, and a veneer mill that produces veneer for use in the Edmonton plywood mill. Sales Plywood and LVL are marketed from our sales office in Quesnel to retail outlets, wholesale distributors, remanufacturers and treating businesses. MDF is marketed under the names Ranger, WestPine, Eco-Gold and Ecopremium from our Edmonton, Alberta sales office and through distributors under the direction of our sales personnel. In 2011 sales of plywood were made to customers in Canada, sales of MDF were to customers in the U.S., Canada and other areas and sales of LVL were to customers in the U.S. and Canada. Shipments to North America were by rail or truck and offshore shipments were by bulk and container vessels.

17 Pulp & Paper Pulp Capacity and Production (Mtonnes) BCTMP Capacity year-end Production: QRp Slave Lake Pulp Total Production NBSK Capacity year-end Production: Hinton Cariboo Total Production Reflects West Fraser s 50% share of ownership. Operations BCTMP is produced, primarily from hardwood aspen, at our Slave Lake pulp mill and also produced, primarily from softwood, at our QRP mill. These pulps are used by paper manufacturers to produce paperboard products, printing and writing papers and a variety of other paper grades. NBSK is produced at our Hinton and Cariboo pulp mills and is used by paper manufacturers to produce a variety of paper products, including tissues and printing and writing papers. Sales Pulp is marketed out of our pulp sales office in Vancouver. In 2011, sales of both NBSK and BCTMP were to customers in North America, Asia, predominantly China, and to other offshore customers. Shipments within North America were primarily by rail and those to offshore customers were by rail to Vancouver and then by bulk or container vessels. Newsprint Capacity and Production 1 (Mtonnes) Capacity year-end Production Reflects West Fraser s 50% share of ownership. Operations The ANC mill at Whitecourt, Alberta produces standard newsprint in two basis weights: 45 and 48.8 grams per square metre. 17 ANNUAL INFORMATION FORM Sales Newsprint is sold to various publishers in North America through a partnership owned indirectly by the ANC owners. In 2011, sales were to customers in the U.S. and Canada. Shipments were by rail and truck. External Factors Affecting West Fraser s Business in 2011 Economic Conditions Our earnings are sensitive to changes in world economic conditions, primarily those in North America, Europe and Asia and particularly to the U.S. housing market. Most of our revenues are from sales of commodities for which prices are sensitive to variations in supply and demand. Since most of these sales are in foreign currencies, mainly U.S. dollars, currency exchange fluctuations against the Canadian dollar are a major source of earnings volatility for us. Softwood Lumber Agreement Effective October 12, 2006 a Softwood Lumber Agreement between Canada and the U.S. (the SLA 2006 ) came into force. The SLA 2006 originally had a term of seven years, but in January 2012 was extended and now expires in October 2015.

18 Annual Information Form (continued) Under the SLA 2006 we are required to pay a tax to the Government of Canada on softwood lumber we export into the U.S. The basic tax may range up to 15% of the value of the lumber for producers in B.C. and Alberta, and will vary depending on a reference lumber price. Subject to U.S. lumber consumption and the volume of lumber shipments to the U.S. from either province, an additional 50% surcharge on the applicable basic tax may be levied. In certain circumstances, exporters may be entitled to a refund of up to one-third of taxes paid. Energy Our pulp, paper and MDF operations consume substantial amounts of energy. The Hinton and Cariboo pulp mills have generating facilities which produce electricity to satisfy much of their energy requirements. In B.C., electricity is purchased from the provincial utility at regulated prices based largely on generation costs. In Alberta, electricity is purchased at market prices through the Alberta power pool. In Alberta, we are hedged against electricity market price fluctuations for a substantial volume of our electricity consumption through a long-term power purchase agreement that provides electricity at prices based largely on generation costs and inflation. Our exposure to energy costs includes the cost to purchase electricity, natural gas, gasoline, diesel fuels and fuel surcharges on purchased transportation. 18 ANNUAL INFORMATION FORM Environment Our manufacturing operations are subject to environmental protection laws and regulations. We have developed internal programs to ensure that our operations are in compliance with applicable laws and standards and to address any instances of non-compliance. We are committed to responsible stewardship of the environment and the continual improvement of our forest practices and manufacturing procedures to optimize the use of resources and minimize the impact of our operations on the environment. We have adopted an Environmental Policy, a copy of which is available on our website at Risk Factors A detailed discussion of risk factors related to the Company and its business is included in our Management s Discussion & Analysis for the year ended December 31, 2012 under the heading Risks and Uncertainties, which is incorporated herein by reference. Capital Structure Share Capital Our authorized share capital consists of 230,000,000 shares divided into: (a) 200,000,000 Common shares, (b) 20,000,000 Class B Common shares, and (c) 10,000,000 Preferred shares, issuable in series. The Common shares and Class B Common shares are equal in all respects, including the right to dividends, except that each Class B Common share may at any time be exchanged for one Common share. The Common shares are listed and traded on the Toronto Stock Exchange under the symbol WFT. As at December 31, 2011, the issued share capital consisted of 40,064,635 Common shares and 2,781,478 Class B Common shares for a total of 42,846,113 shares (December 31, ,834,912 shares).

19 Credit Ratings As shown in the table below, West Fraser is rated by three rating agencies. There were no rating changes during 2011 but Standard & Poor s changed its Outlook from Stable to Positive and Moody s changed its Outlook from Negative to Positive in April 2011 based on our low leverage and good operating performance. The ratings remain in the sub-investment grade range, as investment grade is one level higher than our current ratings. The ratings are assigned both on a corporate level and specifically to our US$300 million 144A notes maturing October The ratings are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by each rating agency. Ratings Agency Rating Outlook Dominion Bond Rating Service ( DBRS ) 1 BB(high) Stable Moody s 2 Ba1 positive Standard & Poor s ( S&P ) 3 BB+ positive 1. DBRS credit ratings for long-term obligations range from AAA to D. A rating of BB is described by DBRS as Speculative, non investment-grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events. Additional information on the rating is available on DBRS s website. 2. Moody s credit ratings for long-term obligations range from Aaa to C. Moody s describes obligations rated Ba as judged to have speculative elements and are subject to substantial credit risk. Additional information on the rating is available on Moody s website. 3. S&P credit ratings for long-term obligations range from AAA to D. A rating of BB is described by S&P as less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions. Additional information on the rating is available on S&P s website. Market Prices The following table sets forth market prices and trading volumes of our Common shares on the Toronto Stock Exchange for each month of 2011 and High Low Close Volume Close Volume ($) ($) ($) (000 s) ($) (000 s ) January , ,560 February , March , ,332 April , ,114 May , ,430 June , July , August , September , October , ,218 November , ,100 December , ,343 Total 18,552 14,538 Source: 19 ANNUAL INFORMATION FORM Dividends The declaration and payment of dividends is within the discretion of our Board of Directors. Historically, dividends have been declared on a quarterly basis payable after the end of each quarter. In 2009 we reduced the quarterly dividend starting in the second quarter from $0.14 to $0.03 but increased it to $0.06 starting in the third quarter of 2010 and to $0.14 starting in the first quarter of There can be no assurance that dividends will continue to be declared and paid by us in the future, as the discretion of the Board of Directors will be exercised from time to time taking into account our current circumstances. Transfer Agent Our transfer agent and registrar is CIBC Mellon Trust Company, with registers of transfers in Vancouver and Toronto. Experts Our auditors are PricewaterhouseCoopers LLP ( PwC ), who prepared the Auditors Report included with our Consolidated Financial Statements for the year ended December 31, PwC has confirmed that it is independent with respect to us, within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of B.C., as of February 15, 2012.

20 Annual Information Form (continued) Directors and Officers 20 ANNUAL INFORMATION FORM Directors The names and municipalities of residence of the directors of the Company, their principal occupations during the past five years and the periods during which they have been directors of the Company are as follows: Name and Municipality of Residence Principal Occupation Director Since Henry H. Ketcham Chairman, President and Chief Executive Officer September 16, 1985 Vancouver, B.C. Clark S. Binkley 1, 3 & 4 Managing Director, International Forestry Investment February 13, 1992 Portland, Oregon Advisors (advisory services) J. Duncan Gibson 1, 2 & 4 Investor April 29, 1997 Toronto, Ontario William P. Ketcham 4 Chairman of the Board, Henry H. Ketcham Lumber Co., Inc. December 1, 1966 Seattle, Washington (private investment) Samuel W. Ketcham 3 & 4 Investor April 27, 2010 Seattle, Washington Harald H. Ludwig 2 & 4 President, Macluan Capital Corporation (diversified private equity investments) May 2, 1995 West Vancouver, B.C. Brian F. MacNeill, C.M. 2 & 4 Corporate Director September 19, 2000 Calgary, Alberta Robert L. Phillips 3, 4 & 5 Corporate Director April 28, 2005 Vancouver, B.C. Janice G. Rennie 1, 3 & 4 Corporate Director April 28, 2004 Edmonton, Alberta 1. Member of the Audit Committee. 4. Member of the Governance & Nominating Committee. 2. Member of the Compensation Committee. 5. Lead Director. 3. Member of the Safety & Environment Committee. Each director has held the same or a similar principal occupation with the organization indicated or a predecessor thereof for the last five years except for Brian F. MacNeill who, before August 1, 2009, was Chair of the Board of PetroCanada. The term of office of each director will expire at the conclusion of the Company s next annual general meeting. Officers Name and Municipality of Residence Office Held Henry H. Ketcham Chairman, President and Chief Executive Officer Vancouver, B.C. D. Wayne Clogg Senior Vice-President, Woodlands Victoria, B.C. Raymond W. Ferris Vice-President, Wood Products Quesnel, B.C. Larry S. Hughes Vice-President, Finance and Chief Financial Officer Vancouver, B.C. Rodger M. Hutchinson Vice-President, Corporate Controller West Vancouver, B.C. Maureen F. Kuper Treasurer Burnaby, B.C. David P. Lehane Vice-President, Canadian Woodlands Quesnel, B.C. Christopher D. McIver Vice-President, Lumber Sales and Corporate Development Quesnel, B.C. Sean P. McLaren Vice-President, U.S. Lumber Operations Collierville, Tennessee Peter A. Rippon Vice-President, Pulp and Energy Quesnel, B.C. Edward R. Seraphim Executive Vice-President and Chief Operating Officer North Vancouver, B.C.

21 Each officer has held the same or a similar office with the organization indicated or a predecessor thereof for the last five years except for Raymond W. Ferris, who before January 1, 2009 was Vice-President, Lumber Operations and before September 15, 2007 was Operations Manager, Solid Wood; Larry S. Hughes, who before August 1, 2011 was Senior Vice-President and Secretary and before September 1, 2007 was Secretary and a partner in the law firm Lang Michener LLP; Maureen F. Kuper, who before April 25, 2007 was Manager, Treasury Operations; David P. Lehane, who before September 15, 2007 was Operations Manager, Solid Wood; Edward R. Seraphim, who before June 18, 2010 was Vice-President, Pulp & Paper and before February 15, 2007 was Vice-President, Pulp & Paper Sales; Christopher D. McIver, who before October 1, 2010 was Vice-President, Lumber Sales; Sean P. McLaren, who before October 1, 2010 was General Manager, Wood Products for the U.S. operations, before August 11, 2010 was Manufacturing Manager for the U.S. operations and before April 1, 2007 was General Manager, Williams Lake sawmill; and Peter A. Rippon, who before October 1, 2010 was Operations Manager, Mechanical Pulp and Energy and before May 14, 2008 was Operations Manager, Mechanical Pulp. Shareholdings of Directors and Officers The directors and executive officers of the Company as a group, beneficially owned or controlled or directed, directly or indirectly, the following shares of the Company: December 31, December 31, Common shares 2,716,763 2,726,228 % of total Common shares 7% 7% Class B Common shares 911, ,794 % of total Class B Common shares 33% 32% % of all shares outstanding 8% 8% Governance Corporate governance is guided by our Corporate Governance Policy, a copy of which may be viewed on our website: The Board of Directors has established a Governance & Nominating Committee comprised of all non-management directors. The Committee provides support for the stewardship and governance role of the Board in reviewing and making recommendations on the composition of the Board, the functioning of the Board and its committees, succession planning and all other corporate governance matters and practices. On the occasion of each regularly-scheduled meeting of the Board in 2011, the Committee met without management representatives present and reviewed these and other issues. Audit Committee The Audit Committee of our Board of Directors assists the Board in fulfilling its responsibility to oversee our financial reporting and audit process. The full text of the Audit Committee s Charter is attached as Schedule 1. Members The following identifies each current member of the Audit Committee, and the education and experience of each member that is relevant to the performance of the member s responsibilities as an Audit Committee member. All members of the Audit Committee are considered independent and financially literate within the meaning of NI J. Duncan Gibson Mr. Gibson holds a Bachelor of Commerce and a Masters of Business Administration. His career spanned 27 years with the Toronto- Dominion Bank, including nine years in the Corporate Banking, U.S. Division, and as Vice Chairman with responsibility for the Commercial Banking Division. 21 ANNUAL INFORMATION FORM Clark S. Binkley Dr. Binkley holds a Bachelor of Arts in Applied Mathematics and a PhD in Forestry and Environmental Studies. He was recently the Chief Investment Officer of the world s largest private equity timberland investment firm. He has served as a director of public and private forest products companies. Janice G. Rennie Mrs. Rennie, who holds a Bachelor of Commerce, is a Chartered Accountant. She was elected as Fellow of the Chartered Accountants in Mrs. Rennie has chaired or been a member of several audit committees of public companies, including Teck Resources Limited, Nova Chemicals Inc., Weldwood of Canada Limited, Canadian Hotel Income Properties REIT, Capital Power Corporation, Methanex Corporation, Major Drilling Group International Inc. and Matrikon Inc.

22 Annual Information Form (continued) Pre-approval Policies and Procedures The Audit Committee has adopted a policy that sets out the pre-approval requirements related to services to be performed by our independent auditors. The policy provides that the Committee will annually review proposed audit, audit-related, tax and other services (to be submitted by the Chief Financial Officer and the independent auditor), and will provide general approval of described services, usually including specific maximum fee amounts. Unless a service has received general pre-approval, it will require specific pre-approval by the Committee. The Committee is permitted to delegate pre-approval authority to any of its members. The Committee reports on the pre-approval process to the full Board of Directors from time to time. 22 ANNUAL INFORMATION FORM Fees Paid to Auditors ($ thousands) Audit Fees Audit-related Fees Tax Fees Represents actual and estimated fees related to fiscal year-ends. 2. For assurance and related services that are reasonably related to the performance of the audit but are not reported as Audit Fees. Material Contracts On March 30, 2007, we entered into a committed revolving $600 million operating facility with an original maturity date of The facility has been amended from time to time to extend the maturity date, to reflect certain covenant adjustments and for the granting of security. On December 13, 2010 we reduced the facility from $600 million to $500 million and on September 30, 2011, we extended the maturity date to September The facility continues to include general floating security over our assets and, where required under applicable U.S. laws, mortgages on certain real properties in the U.S. Additional Information Additional information, including directors and officers remuneration and indebtedness, principal holders of our securities and securities authorized for issuance under equity compensation plans, is contained in the Information Circular for the annual general meeting of the Company to be held on April 19, Additional financial information is provided in our comparative consolidated financial statements and Management s Discussion & Analysis for the year ended December 31, Copies of our Annual Report, which includes this Annual Information Form and the documents incorporated by reference herein, our comparative consolidated financial statements (including the auditors report) for the year ended December 31, 2011, as well as each consolidated interim financial statement prepared for a period after December 31, 2011, and our Information Circular may be obtained at any time upon request from us, but we may require the payment of a reasonable charge if the request is made by a person who is not a security holder of the Company. This Annual Information Form, our Annual Report and additional information concerning the Company may also be obtained on the website and on the System for Electronic Document Analysis and Retrieval ( SEDAR ) at

23 Schedule 1 The Audit Committee Charter, which is set out below, was approved by the Board on December 8, General Mandate To assist the Board in fulfilling its responsibility to oversee the Company s financial reporting and audit processes, its system of internal controls and its process for monitoring compliance with applicable financial reporting and disclosure laws and its own policies. Responsibilities The Committee will carry out the following responsibilities: Financial Statements Review significant accounting and financial reporting issues, including complex or unusual transactions, significant contingencies and highly judgmental areas, and recent professional and regulatory pronouncements, and understand their impact on the Company s financial statements Review interim financial reports (including financial statements, management s discussion and analysis and related news releases) with management and the auditors, consider whether they are complete and consistent with the information known to Committee members and provide a recommendation to the Board with respect to the approval of the interim financial reports Understand how management develops interim financial information, and the nature and extent of auditor involvement Review with management and the auditors the results of the audit, including any difficulties encountered Review the annual financial statements, the annual management discussion and analysis and related news releases, and consider whether they are complete, consistent with information known to Committee members, and reflect appropriate accounting principles, and provide a recommendation to the Board with respect to the approval of the statements, the management discussion and analysis and the news release Review with management and the auditors all matters required to be communicated to the Committee under generally accepted auditing standards Approve, if so delegated by the Board, the interim financial reports and annual financial statements and the filing of the same together with all required documents and information with regulators Internal Control Require management of the Company to implement and maintain appropriate internal control procedures over annual and interim financial reporting Review with management and auditors the adequacy and effectiveness of the Company s internal control over annual and interim financial reporting, including information technology security and control and controls related to the prevention and detection of fraud and improper or illegal transactions or payments, the status of the remediation of any identified control deficiencies, and elicit recommendations for improvements 23 ANNUAL INFORMATION FORM Understand the scope of the auditors review of internal control over financial reporting, and obtain and review reports on significant findings and recommendations, including respecting the Company s accounting principles or changes to such principles or their application and the treatment of financial information discussed with management, together with management s responses Audit Review the auditors proposed audit scope and approach Review the performance of the auditors, and provide a recommendation to the Board with respect to the nomination of the auditors for appointment and remuneration Review and confirm the independence of the auditors by obtaining statements from the auditors on relationships between the auditors and the Company, including non-audit services, and discussing the relationships with the auditors Periodically evaluate the need for the establishment of an internal audit function and make appropriate recommendations to the Board

24 Annual Information Form (continued) Compliance Review the effectiveness of the system for monitoring compliance with financial reporting and disclosure laws and the results of management s investigation and follow-up (including disciplinary action) of any instances of non-compliance Review the findings of any examinations by regulatory agencies, and any auditor observations Obtain regular updates from management and Company legal counsel regarding compliance matters Reporting Requirements Regularly report to the Board about Committee activities, issues and related recommendations Provide an open avenue of communication between the auditors and the Board Review any reports the Company issues that relate to Committee responsibilities Other Responsibilities Institute and oversee special investigations as needed 24 ANNUAL INFORMATION FORM Develop and implement a policy for the approval of the provision of non-audit services by the auditors and assessing the independence of the auditors in the context of these engagements Establish procedures for: (a) the receipt, retention and treatment of complaints received regarding non-compliance with the Company s Code of Conduct, violations of laws or regulations, or concerns regarding accounting, internal accounting controls or auditing matters; and (b) the confidential, anonymous submission by officers or employees of the Company or by other persons of concerns regarding questionable accounting, auditing or financial reporting and disclosure matters or non-compliance with the Company s Code of Conduct or other matters that are of a sensitive or whistleblower nature Perform other activities related to this charter as requested by the Board Review and assess the adequacy of this charter annually, requesting Board approval for proposed changes Review terms of any Code of Conduct established by the Board and respond to any related compliance issues Confirm annually to the Board that all responsibilities outlined in this charter have been carried out Qualifications and Procedures The composition of the Committee will comply with applicable laws including requirements for independence, unrelated to management, financial literacy and audit experience The Committee will meet at least four times annually, and more frequently as circumstances dictate, and the CFO and a representative of the auditors should be available on request to attend all meetings The Committee should meet privately in executive session with representatives of each of management and of the auditors to discuss any matters of concern to the Committee or such members, including any post-audit management letter Minutes of each meeting should be prepared, approved by the Committee and circulated to the full Board

25 2011 Management s DIscussion & Analysis This discussion and analysis by West Fraser s management ( MD&A ) of West Fraser s financial performance during 2011 and the fourth quarter of 2011 should be read in conjunction with the 2011 annual audited consolidated financial statements and accompanying notes. Dollar amounts are expressed in Canadian currency, unless otherwise indicated. This MD&A contains historical information, descriptions of current circumstances and statements about potential future developments and anticipated financial results. The latter, which are forward-looking statements, are presented to provide reasonable guidance to the reader but their accuracy depends on a number of assumptions and is subject to various risks and uncertainties. Forward-looking statements are included under the headings Discussion & Analysis by Product Segment Lumber Segment concerning recovery of U.S. new home construction, the Phase II biomass projects and expectations concerning SYP lumber design specifications and Pulp & Paper Segment concerning expected utilization of GT Program credits and Business Outlook. As well, the table titled Earnings Sensitivity to Key Variables and descriptions of announced but not implemented actions such as projected capital expenditures should be considered as forward-looking statements. Actual outcomes and results of these statements will depend on a number of factors which are noted in this MD&A, and may differ materially from those anticipated or projected. Accordingly, readers should exercise caution in relying upon forward-looking statements and we undertake no obligation to publicly revise them to reflect subsequent events or circumstances except as required by applicable securities laws. Throughout this MD&A, reference is made to EBITDA (defined as operating earnings plus amortization). We believe that, in addition to earnings, EBITDA is a useful performance indicator and is a useful measure of cash available prior to debt service, capital expenditures and income taxes. Reference is also made to Adjusted earnings (loss) from continuing operations and Adjusted basic EPS calculated as set out in the table titled Annual Earnings Adjustments for Certain Non-operational Items (collectively, with EBITDA, these measures ). None of these measures is a generally accepted earnings measure under International Financial Reporting Standards ( IFRS ) and none has a standardized meaning prescribed by IFRS. Investors are cautioned that none of these measures should be considered as an alternative to earnings, earnings per share or cash flow, as determined in accordance with IFRS. As there is no standardized method of calculating any of these measures, our method of calculating each of them may differ from the methods used by other entities and, accordingly, our use of any of these measures may not be directly comparable to similarly titled measures used by other entities. This MD&A includes references to benchmark prices over selected periods for products of the type produced by West Fraser. These benchmark prices do not necessarily reflect the prices obtained by West Fraser for those products during such period. For definitions of various abbreviations and technical terms used in this MD&A please see the Glossary of Industry Terms found in our Annual Report. The information in this MD&A is as at February 16, 2012, unless otherwise indicated. 25 MANAGEMENT S DISCUSSION & ANALYSIS

26 Management s Discussion & Analysis (continued) Annual Results Sales and Earnings Comparison ($ millions, except as stated) Year ended December Sales by Segment Lumber 1,579 1,622 1,285 Panels Pulp & Paper Total 2,762 2,886 2,353 EBITDA Amortization (168) (185) (245) Asset impairments (17 ) Operating earnings (182) 26 MANAGEMENT S DISCUSSION & ANALYSIS Operating Earnings by Segment Lumber (20) 138 (190) Panels (8) Pulp & Paper (5) Corporate and Other 3 (36) (1) Total (182) Earnings continuing operations (194 ) Earnings after discontinued operations (341 ) Diluted earnings per share continuing operations ($) (4.54) Diluted earnings per share after discontinued operations 2 ($) (7.96) Cash dividends per share ($) Total assets 2,537 2,610 2,813 Long-term debt Cdn$1.00 converted to US$ average Amounts for 2009 have not been restated under IFRS and are prepared under previous Canadian generally accepted accounting principles. 2. For a description of discontinued operations see Discussion & Analysis by Product Segment Discontinued Operations. Selected Quarterly Information ($ millions, except earnings per share ( EPS ) amounts which are in $) Q4-11 Q3-11 Q2-11 Q1-11 Q4-10 Q3-10 Q2-10 Q1-10 Sales Earnings (loss) 1 (11) Earnings after discontinued operations Basic EPS 1 (0.25) Diluted EPS 1 (0.25) (0.29) (0.07) Basic EPS after discontinued operations Diluted EPS after discontinued operations (0.09) From continuing operations.

27 Annual Earnings Adjustments for Certain Non-Operational Items ($ millions except EPS amounts which are in $) Earnings from continuing operations Adjustments to earnings from continuing operations Equity-based compensation (3) 31 U.S. dollar-denominated long-term debt 7 (17 ) Sale of Terrace sawmill (8) Derivative contracts 4 Net tax effect on the above adjustments (1) Net effect of above items (4) 17 Adjusted earnings from continuing operations Adjusted basic EPS from continuing operations Discussion & Analysis of Non-Operational Items In 2011 we generated earnings from continuing operations of $27 million compared to $182 million in For a description of operational results see Discussion & Analysis by Product Segment which follows this section. Our results include several significant non-operational items which are identified as adjustments in the table immediately above this section. After taking into account these adjustments, we generated adjusted earnings from continuing operations of $23 million compared to $199 million in In 2011 a recovery of $3 million was recorded related to long-term equity-based compensation compared to an expense of $31 million in An expense is recorded on the issuance of share options or phantom or directors deferred share units and an additional expense or recovery is recorded each quarter based primarily on valuation models that consider various factors relating to outstanding options and units. The most significant of these factors is the change in the market value of our shares from the beginning to the end of the particular period. In 2011 the market value of the Company s shares decreased from $46.84 per share at the end of 2010 to $41.40 per share at the end of The expense or recovery does not necessarily represent the actual amount which will ultimately be paid by the Company in respect of options and units. The change in the value of the Canadian dollar relative to the value of the U.S. dollar results in the revaluation of certain U.S. dollardenominated liabilities and assets. A $7 million loss on U.S. dollar-denominated long-term debt for 2011 reflects a modest weakening of the Canadian dollar at the close of 2011 compared to The $17 million gain in 2010 reflected a significant strengthening of the Canadian dollar during that year. Included in other income is a translation gain on current monetary items of $3 million, compared to a loss of $7 million in In the third quarter of 2011 we completed the sale of the Terrace sawmill and related Crown timber tenures and recorded an $8 million gain which is included in other income. During the same quarter the deep-sea terminal and certain related assets that had been part of our linerboard and kraft paper mill located in Kitimat, B.C. were sold and near the end of 2011 we sold the only remaining Kitimat asset, the industrial site. The gain on these asset sales of $49 million is included in discontinued operations. The decline in interest expense from 2010 reflects higher net borrowings and borrowing rates in the earlier period. 27 MANAGEMENT S DISCUSSION & ANALYSIS The difference between our statutory income tax rate and our effective rate is explained in note 18 to the accompanying annual consolidated financial statements. The largest difference results from unrecognized tax assets which reduced the tax recovery by $12 million. The funded position of our defined benefit pension plans and other post-retirement plans, whether surplus or deficit, is estimated at the end of each quarter. The funded position, as shown in note 13 to the accompanying annual consolidated financial statements, is determined by subtracting plan assets from plan obligations. The decrease in the discount rate from the beginning of the year, combined with asset returns being lower than those anticipated during the year, resulted in actuarial losses that increased net liabilities accrued on our balance sheet at December 31, 2011 by $138 million. The actuarial losses for the year, net of taxes of $34 million, were charged to other comprehensive earnings.

28 Management s Discussion & Analysis (continued) Discussion & Analysis by Product Segment Lumber Segment Production (MMfbm) SPF 3,408 3,318 SYP 1,503 1,365 Shipments (MMfbm) SPF 3,389 3,341 SYP 1,471 1,352 Wood chip production SPF (M ODTs) 1,676 1,736 SYP (M green tons) 1,939 1, MANAGEMENT S DISCUSSION & ANALYSIS Sales ($ millions) 1,670 1,715 EBITDA ($ millions) EBITDA margin (%) 4 14 Operating earnings ($ millions) (20) 138 Capital expenditures ($ millions) Benchmark prices (per Mfbm) SPF #2 & Better 2x4 1 - $US SYP #2 West 2x4 2 - $US SPF #2 & Better 2x4 - $Cdn SYP #2 West 2x4 - $Cdn Source: Random Lengths 2x4, #2 & Better Net FOB mill. 2. Source: Random Lengths 2x4 Net FOB mill Westside. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. The operating loss generated by our lumber segment in 2011 reflected continuing weak demand, particularly in North America. In the early part of the year severe weather conditions impaired deliveries of SPF lumber and the benchmark price reached a high of US$321 in the first quarter of Near the end of the quarter lumber production increased dramatically and lumber prices fell sharply. MMfbm 4,700 4,500 4,300 4,100 3,900 North American Lumber Production (November 2010 to October 2011) 3,700 3,500 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Source: Western Wood Products Association and Statistics Canada The annualized rate of U.S. housing starts averaged 607,000 in 2011, an increase from 2010 s 585,000 starts, but well below pre-2006 levels (Source: U.S. Census Bureau). The absence of a recovery of new home construction in the U.S. to more normal levels is the main impediment to a recovery of North American lumber markets. The annualized rate of Canadian housing starts averaged 193,000 in 2011 which was similar to the 2010 rate (Source: Canadian Housing and Mortgage Corporation). Demand from Asia, particularly from China, for Canadian SPF lumber continued to grow during 2011 compared to 2010, although the rate of growth slowed in the fourth quarter.

29 In the second half of 2011 a series of events including the U.S. debt-ceiling deadlock and credit-rating downgrade and the European sovereign debt crisis created increased global economic uncertainty. This generally coincided with a weakening in demand for SPF lumber from China and certain dimensions of SYP lumber in the U.S. which resulted in temporary oversupply and downward pricing pressure. Benchmark lumber prices remained weak during the second half, rallying somewhat late in the year. The lumber segment s earnings were also adversely affected by the continuing strength of the Canadian dollar against the U.S. dollar. The Canadian dollar averaged above par over the first three quarters of the year before weakening to average below par in the final quarter. The increase in lumber shipments compared to 2010 reflects an increase in operating rates in our U.S. South facilities to 75% ( %). SPF lumber production increased slightly compared to 2010 as our Canadian sawmills continued to operate at or near capacity. Average unit log costs in Canada increased by 13% compared to 2010 and average unit manufacturing costs also rose. SYP lumber production increased over 2010 levels by 10% reflecting higher operating rates despite some market-related curtailments in the second half of the year. Unit cash costs at our U.S. sawmills were below 2010 levels reflecting increased production and lower log costs. Amortization costs declined in 2011 as some assets became fully amortized. Total export taxes on SPF lumber shipped to the U.S. declined slightly from 2010 reflecting lower shipments and SPF lumber prices only partially offset by lower export tax rates during three months of Shipments from Alberta attracted a surge duty (150% of the basic rate) in five months during 2011 compared to ten months in As previously noted, the sale of our Terrace sawmill and related Crown timber tenures was completed in the third quarter of 2011 resulting in an $8 million gain. In the third quarter of 2011 two of our green energy projects were selected by B.C. Hydro as part of its Phase II biomass call. The projects involve facilities to be constructed adjacent to each of our sawmills located in Fraser Lake and Chetwynd, B.C. The projects are expected to generate a total of approximately 180 GWh of electricity from wood biomass. This electricity will be sold to B.C. Hydro under 20-year contracts at pre-determined prices. In early 2011 the United States initiated an arbitration with Canada under the Softwood Lumber Agreement (the SLA ) over its concern that British Columbia has misapplied or altered its timber pricing rules. The formal statement of case was filed by the United States in August 2011 and the parties have exchanged pleadings during the fourth quarter. The arbitration hearing is scheduled for late February of In January 2012 Canada and the United States announced a two year extension of the SLA. We support this extension as it provides longer-term certainty of access to the U.S. market. On January 11, 2012 the American Lumber Standard Committee (the ALSC ) approved a reduction in some strength-related design values for visually-graded SYP 2x4s, with a recommended effective date of June 1, The ALSC also recommended that the agency responsible for recommending design values undertake and complete testing for other grades and sizes of SYP lumber in order to determine if any other design value changes should be made. We do not expect that the approved reduction will have a material effect on our SYP lumber business and we will continue to monitor possible future adjustments and consider any changes to our production and grading processes that may be appropriate. 29 MANAGEMENT S DISCUSSION & ANALYSIS

30 Management s Discussion & Analysis (continued) Panels Segment Plywood (MMsf 3 /8 basis) Production Shipments MDF (MMsf 3 /4 basis) Production Shipments LVL (Mcf) Production 1,634 1,918 Shipments 1,596 1,894 Sales ($ millions) EBITDA ($ millions) 8 58 EBITDA margin (%) 2 14 Operating earnings ($ millions) (8) 40 Capital expenditures ($ millions) 5 2 Benchmark prices Plywood (per Msf 3 /8 basis) 1 Cdn$ MDF (per Msf 3 /4 basis) 2 US$ MDF (per Msf 3 /4 basis) Cdn$ Source: Crow s Market Report Delivered Toronto. 2. Source: Resource Information Systems, Inc. MDF Western U.S. Net FOB mill. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. 30 MANAGEMENT S DISCUSSION & ANALYSIS The panels segment is comprised of our plywood, MDF and LVL operations. Virtually all plywood that we produce is sold to customers in Canada. A significant decline in the average benchmark plywood price began in the second half of 2010 reflecting an oversupply condition resulting from increased shipments of U.S. plywood entering the Canadian market in 2010 and The strong Canadian dollar combined with the continuing weakness of the U.S. housing market has resulted in the flow of U.S. plywood into Canada and since Canadian demand has remained relatively stable Canadian plywood prices have weakened as a result. The panel segment s results were also adversely affected by rising log costs and a stronger Canadian dollar. The Slave Lake fire in May 2011 contributed to increased manufacturing costs for the plywood segment as a result of veneer supply disruptions from our Slave Lake veneer mill. The demand for, and price of, MDF and LVL are influenced by new home construction. The MDF plants and the LVL plant operated on a curtailed basis throughout 2011 at approximately 60% and 50% respectively to more closely match supply with demand. LVL earnings were also adversely affected by increasing log costs in Pulp & Paper Segment (From continuing operations) Sales ($ millions) EBITDA ($ millions) EBITDA margin (%) Operating earnings ($ millions) Capital expenditures 1 ($ millions) Includes reimbursable expenditures under the Pulp and Paper Green Transformation Program.

31 The pulp & paper segment is comprised of our NBSK, BCTMP and newsprint businesses. Pulp Production NBSK (Mtonnes) Shipments NBSK (Mtonnes) Production BCTMP (Mtonnes) Shipments BCTMP (Mtonnes) Benchmark price NBSK (per tonne) 2 US$ Benchmark price NBSK (per tonne) Cdn$ For Cariboo Pulp & Paper Company, represents West Fraser s 50% share. 2. Source: Resource Information Systems, Inc. U.S. list price, delivered U.S. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. NBSK markets were strong during the first half of 2011 with the benchmark price reaching a peak of US$1,035 per tonne during the second quarter. The strong Canadian dollar partially offset the benefit of this high U.S.-dollar price level. However, by the end of the second quarter the restarting of previously-idled NBSK capacity resulted in an oversupply condition with increased worldwide NBSK inventories and the benchmark price declined over the balance of The average U.S.-dollar benchmark price for 2011 was slightly higher than in 2010 while the average Canadian-dollar benchmark fell by $23. BCTMP prices declined near the beginning of the year due to the start-up of new capacity in China, and these pricing levels carried through the balance of the year. The relative strength of the Canadian dollar also reduced BCTMP earnings. Operating earnings for the segment declined sharply from 2010 mainly as a weakening of NBSK and BCTMP markets and the stronger Canadian dollar resulted in lower returns. Production and shipments of NBSK declined from 2010 levels mainly as a result of the planned maintenance shutdown at our Hinton pulp mill. The shutdown, which was extended from a planned 18 days to 28 days due to the start-up of a major pulp machine upgrade and various operational disruptions which occurred after the mill restarted, resulted in lower production of approximately 38,000 tonnes. There was no major maintenance shutdown in Both our Cariboo and Quesnel River Pulp mills achieved annual production records in In 2009 we were allocated $88 million of credits under the Canadian federal government s Pulp and Paper Green Transformation Program (the GT Program ). We have received approval for seven projects under the GT Program which are expected to significantly reduce future energy consumption. We expect to fully utilize our allocation under the GT Program and as at the end of 2011 our expenditures under the GT Program totalled $79 million Production (Mtonnes) Shipments (Mtonnes) Benchmark price (per tonne) 2 US$ Benchmark price (per tonne) Cdn$ Represents West Fraser s 50% share of ANC. 2. Source: Resource Information Systems, Inc. delivered U.S gram. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. Production and shipments of newsprint declined compared to 2010 as operations were curtailed from time to time to reduce consumption of higher-priced electricity. Gains achieved from selling electricity during these periods more than offset the effects of lower production. The significant improvement in the U.S.-dollar benchmark price was also partially offset by the stronger Canadian dollar. 31 MANAGEMENT S DISCUSSION & ANALYSIS Discontinued Operations The linerboard and kraft paper mill located in Kitimat, B.C. ceased operations in the first quarter of Since the closure all finished inventory has been sold and accounts receivable collected. In 2010 we sold both paper machines and related assets to two unrelated parties and in 2011 we sold the remaining assets, a deep-sea wharf and the industrial site, to two other unrelated parties. These sales are included in discontinued operations. In October of 2009, when the closure of the Kitimat facility was announced, we estimated that closing costs would be approximately $70 million. After taking into account the proceeds of the asset sales described above, we estimate that the actual closure costs were a recovery of approximately $30 million.

32 Management s Discussion & Analysis (continued) 32 MANAGEMENT S DISCUSSION & ANALYSIS 4th Quarter Results Q Q Q Production Lumber (MMfbm) SPF SYP ,161 1,219 1,159 Plywood (MMsf 3 /8 basis) MDF (MMsf 3 /4 basis) LVL (Mcf) BCTMP (Mtonnes) NBSK (Mtonnes) Newsprint (Mtonnes) Shipments Lumber (MMfbm) SPF SYP ,168 1,268 1,187 Plywood (MMsf 3 /8 basis) MDF (MMsf 3 /4 basis) LVL (Mcf) BCTMP (Mtonnes) NBSK (Mtonnes) Newsprint (Mtonnes) Sales and Earnings Comparison ($ millions, except as stated) Sales by Segment Lumber Panels Pulp & Paper Total Operating Earnings by Segment Lumber (30) (15 ) 25 Panels (2) 3 Pulp & Paper Corporate & Other (5) 21 (15 ) Operating earnings (22) Interest expense (5) (5) (6) Exchange gain (loss) on long-term debt 9 (25) 10 Other income (expense) 1 17 (3) Recovery of (provision for) income taxes 6 (4) (16 ) Earnings (loss) from continuing operations (11) 6 28 Earnings from discontinued operations Earnings Cdn$1.00 converted to US$ average

33 Quarterly Earnings Adjustments for Certain Non-operational IteMS ($ millions except EPS amounts which are in $) Q Q Q Earnings (loss) from continuing operations (11) 6 28 Adjustments to earnings from continuing operations Equity-based compensation 4 (20) 19 U.S. dollar-denominated long-term debt (9) 25 (10 ) Sale of Terrace sawmill (8) Net tax effect on the above adjustments 1 (1) Net effect of above items (4) (4) 9 Adjusted earnings (loss) from continuing operations (15) 2 37 Adjusted basic EPS from continuing operations (0.35) Discussion & Analysis of Quarterly Non-operational Items In the fourth quarter of 2011 we generated a loss from continuing operations of $11 million compared to earnings of $6 million in the previous quarter and $28 million in the fourth quarter of For a description of our operational results see Discussion & Analysis by Product Segment which follows this section. Our results include several significant non-operational items which are identified as adjustments in the table immediately above this section. After taking into account the adjustments, we generated an adjusted loss from continuing operations of $15 million in the current quarter compared to adjusted earnings of $2 million in the previous quarter and $37 million in the fourth quarter of For a description of the key adjustments, see the corresponding section under Annual Results in this MD&A. Discussion & Analysis by Product Segment Lumber Segment Q Q Q Sales ($ millions) EBITDA ($ millions) (8) 6 41 EBITDA margin (%) 1 10 Operating earnings ($ millions) (30) (15 ) 25 Benchmark prices (per Mfbm) SPF #2 & Better 2x4 1 $US SYP #2 West 2x4 2 $US SPF #2 & Better 2x4 $Cdn SYP #2 West 2x4 $Cdn Source: Random Lengths 2x4, #2 & Better Net FOB mill. 2. Source: Random Lengths 2x4 Net FOB mill Westside. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. In the fourth quarter SPF lumber markets deteriorated as Asian demand slowed, creating downward pressure on prices. Although the average SPF lumber benchmark price for the quarter was comparable to the previous quarter s benchmark, largely as a result of a latequarter rally, prices for lower grades were much weaker compared to the previous quarter. Although the benchmark SYP lumber price also rallied late in the quarter, the benefits were largely offset by continuing weakness in prices for wide-dimension lumber. In addition, production and shipments declined in the current quarter compared to the previous quarter as a result of the effect of certain ongoing major construction projects in Canada and reduced operating hours in the U.S. Operating earnings declined compared to the previous quarter as a result of the erosion of lower-grade SPF, and wider-dimension SYP, lumber prices and reduced shipments. 33 MANAGEMENT S DISCUSSION & ANALYSIS Current quarter results were substantially lower than results from the fourth quarter of This largely resulted from a combination of lower SPF lumber prices, higher Canadian log costs as well as increased freight costs and depreciation.

34 Management s Discussion & Analysis (continued) Panels Segment Q Q Q Sales ($ millions) EBITDA ($ millions) EBITDA margin (%) Operating earnings ($ millions) (2) 3 Benchmark prices Plywood (Cdn$ per Msf 3 /8 basis) MDF (US$ per Msf 3 /4 basis) MDF (Cdn$ per Msf 3 /4 basis) Source: Crow s Market Report Delivered Toronto. 2. Source: Resource Information Systems, Inc. MDF Western U.S. Net FOB mill. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. dollar benchmark price. Operating earnings for panels were marginally higher compared to the previous quarter as plywood and Canadian dollar MDF prices improved and log costs for plywood and LVL were slightly better, partially offset by reduced shipments for all three panel products. 34 MANAGEMENT S DISCUSSION & ANALYSIS Operating earnings were below those of the fourth quarter of 2010 reflecting higher log costs, in the case of plywood and LVL, and higher additive and power costs for MDF. Pulp & Paper Segment Q Q Q Sales ($ millions) EBITDA ($ millions) EBITDA margin (%) Operating earnings ($ millions) Benchmark prices NBSK (US$ per tonne) Newsprint (US$ per tonne) NBSK (Cdn$ per tonne) Newsprint (Cdn$ per tonne) Source: Resource Information Systems, Inc. U.S. list price delivered U.S. 2. Source: Resource Information Systems, Inc. delivered 48.8 gram newsprint. 3. Calculated by applying the average Canadian/U.S. dollar exchange rate for the period to the U.S. benchmark price. Lower operating earnings for the current quarter compared to the previous quarter and the fourth quarter of 2010 reflect the continuing decline of Canadian-dollar NBSK prices. In the current quarter we experienced a sharp decline in both NBSK production and shipments as our Hinton Pulp mill lost approximately 38,000 tonnes of production due to its planned maintenance shutdown in October, 2011 which was extended from 18 to 28 days due to the start-up of a major pulp machine upgrade and various operational disruptions which occurred after the mill restarted. Business Outlook We are approaching 2012 with conservatism and caution in light of the continuing economic uncertainty in our key markets and the continuing potential volatility of the Canadian dollar. We intend to preserve our strong balance sheet and carefully balance significant expenditures against cash flows. Our primary focus over the next year will continue to be on internal improvement through a combination of strategic capital investment in, and management of, our existing businesses. Our solid wood and pulp & paper businesses have a high degree of exposure to North American and Asian markets, particularly the U.S. and China. In the shorter term, such as over the next 12 months, we are unable to predict with any level of comfort how the economies of the U.S. and China will perform. As a result, we maintain a guarded outlook for On a longer-term basis, we believe that the U.S. housing market will recover which will in turn support a recovery of the broader U.S. economy as a whole. We expect that a recovery of U.S. housing will benefit our solid wood operations while a strong U.S. economy should result in increased demand for our pulp. We also believe that, on a similar long-term basis, Asia, led by China, will generate strong demand for our SPF lumber and our pulp.

35 Near the end of 2010 we announced a $230 million capital expenditure program for 2011 and 2012, focused mainly on high-return projects in our Canadian and U.S. solid wood operations. During 2011 our capital spending in the lumber and panels segments totalled approximately $113 million and we expect to substantially complete the balance of the announced program in Projects being undertaken include major reconstruction at selected mills, the introduction at several mills of scanning technology for lumber production optimization and grading, as well as a variety of other cost-reduction measures. Major reconstruction projects are focused on reducing per unit manufacturing costs and, in some cases, increasing lumber production. By the end of the first quarter of 2012 we will have completed the seven projects that were approved under the Pulp and Paper Green Transformation Program. In 2012 we expect to complete the design stage and order the manufacture of equipment for two biomass energy projects, one at each of our Fraser Lake and Chetwynd, B.C. sawmills. The projects are intended to be commissioned in 2014 to supply electricity to B.C. Hydro under long-term contracts awarded in the third quarter of The specific design and final cost estimates of these projects are currently under review. Proceedings under the current Softwood Lumber Agreement (the SLA 2006 ) arbitration relating to B.C. timber pricing policies and practices are expected to be completed by the end of the first quarter of 2012 and a decision is expected before the end of If Canada prevails in the arbitration, no remedy will be required. If the U.S. prevails, in whole or in part, previous SLA 2006 arbitrations indicate that the remedy likely to be imposed will be an increase in the export duty paid by B.C. interior lumber producers until an amount equal to the remedy has been remitted. We do not expect a finding in favour of the U.S. to have a materially adverse effect on West Fraser. Earnings Sensitivity to Key Variables (based on year-end capacities 1 $ millions except where otherwise stated) Factor Variation Change in Earnings Lumber price 2,3 US$10 (per Mfbm) 48 Plywood price 2,3 Cdn$50 (per Msf) 31 MDF price 3 US$50 (per Msf) 11 NBSK price 3 US$50 (per tonne) 22 BCTMP price 3 US$50 (per tonne) 24 Newsprint price us$50 (per tonne) 5 U.S. Canadian $ exchange rate 4 US$0.01 (per Cdn $) 12 Sawlog cost Cdn$1 (per m 3 ) Assumes exchange rate of Cdn$1.00 per US$1.00 and an income tax rate of 25.0%. 2. Change does not include any potential change in log costs. 3. Change does not include any potential change in wood chip prices. 4. Excludes exchange impact on translation of U.S. dollar-denominated debt and other monetary items; assumes no change in commodity prices. Capital Structure and Liquidity The capital structure of the Company consists of Common share equity and long-term debt. In addition, the Company maintains a committed revolving credit facility that is available to meet additional funding requirements. The outstanding Common share equity consists of 40,066,539 Common shares and 2,781,478 Class B Common shares for a total of 42,848,017 shares issued and outstanding as at February 16, MANAGEMENT S DISCUSSION & ANALYSIS Class B Common shares are equal in all respects to Common shares and are exchangeable on a one-for-one basis for Common shares. Common shares are listed for trading on the Toronto Stock Exchange while Class B Common shares are not. In addition, as of February 16, 2012 there were 1,948,817 share purchase options outstanding with exercise prices ranging from $24.71 to $51.56 per Common share. In June and September 2011, West Fraser amended its $500 million committed revolving credit facility to, among other things, extend its maturity date to September The facility allows for additional borrowings of up to $150 million, subject to sourcing new lenders for this additional amount. To date the Company has not sought to access this additional facility. Security pledged to the banks and other lenders in early 2010 remains in place for as long as the Company s credit ratings by Standard & Poor s and Moody s remain below BBBand Baa3 respectively. In May 2011, West Fraser entered into an uncommitted $25 million line of credit for the purpose of establishing letters of credit. Security was also pledged to the lending bank of this facility on equal terms to the committed revolving facility. Copies of the committed facility and the June and September 2011 amendments are available at

36 Management s Discussion & Analysis (continued) On December 31, 2011 there was no balance owing under the credit facilities (2010 $9 million net of deferred financing costs). Letters of credit in the amount of $35 million were supported by both facilities, leaving approximately $490 million of credit available for further use. West Fraser s cash requirements, other than for operating purposes, are primarily for interest payments, repayment of debt, additions to property, plant, equipment and timber, acquisitions and payment of dividends. In normal business cycles and in years without a major acquisition or debt repayment, cash on hand and cash provided by operations have been sufficient to meet these requirements. During the year, the Company reduced its operating loan by $15 million. Summary of Financial Position ($ millions, except as otherwise indicated) As at December Cash Current assets Current liabilities Ratio of current assets to current liabilities Net debt Shareholders equity 1,483 1,534 Net debt to capitalization 3 14% 9% 1. Cash consists of cash and short-term investments less cheques issued in excess of funds on deposit. 2. Total debt less deferred financing costs less cash. 3. Net debt divided by net debt plus shareholders equity. As shown in the table below, West Fraser is rated by three leading rating agencies. There were no rating changes during 2011 but Standard & Poor s changed its Outlook from Stable to Positive and Moody s changed its Outlook from Negative to Positive in April 2011 based on the Company s low leverage and good operating performance. 36 MANAGEMENT S DISCUSSION & ANALYSIS Debt Ratings Agency Rating outlook Dominion Bond Rating Service BB(high) Stable Moody s Ba1 positive Standard & Poor s BB+ positive Selected Cash Flow Items ($ millions) For the year ended December Operating Activities Earnings from continuing operations Amortization Change in income taxes (57) 140 Contributions to benefit plans in excess of expense (58) (37) Other 5 (49) Cash provided by operating activities Financing Activities Debt and operating loans (15) (165) Interest paid (20) (24 ) Dividends and other (24) (13 ) Cash used in financing activities (59) (202) Investing Activities Additions to capital assets (213) (89) Other 49 (6) Cash used in investing activities (164) (83) Change in cash from continuing operations (138) 136 Change in cash from discontinued operations Change in cash (93 ) 170

37 Contractual Obligations as at December 31, 2011 ($ millions) thereafter total Long-term debt Operating leases Asset purchase commitments Total Contractual obligations means an agreement related to debt, leases and enforceable agreements to purchase goods or services on specified terms, but does not include asset retirement obligations, energy purchases under various agreements, accounts payable in the ordinary course of business or contingent amounts payable. 2. Represents U.S. dollar denominated debt of US$300 million. Significant Management Judgments Affecting Financial Results The preparation of financial statements requires management to make estimates and assumptions, and to select accounting policies, that affect the amounts reported. The significant accounting policies followed by our Company are disclosed in note 3 to the audited consolidated financial statements. The following judgments are considered the most significant. Recoverability of Long-lived Assets As required by IFRS, we assess the carrying value of an asset when there are indicators of impairment. The assessment compares the estimated discounted future cash flows of the asset to the carrying value of the asset. If the carrying value of the asset exceeds the estimated discounted future cash flows relating to the asset, the carrying value is written down to the higher of fair value less costs to sell and value in use. On transition to IFRS on January 1, 2010, there were asset impairments of $95 million recorded to opening retained earnings due to a difference in measurement criteria between the previous Canadian generally accepted accounting principles and IFRS. Please refer to note 1 and Appendix A in our annual consolidated financial statements for additional information. There have been no additional impairments recorded. We review the amortization periods for our manufacturing equipment and machinery to ensure that the periods appropriately reflect anticipated obsolescence and technological change. Current amortization periods for manufacturing equipment range from 6 to 20 years with sawmill equipment amortized over a maximum of 12 years. Timber rights are amortized over 40 years. Goodwill is not amortized. We compare the carrying value of goodwill and related assets, at least once a year, to the estimated discounted cash flows that the assets are expected to generate. If it is determined that the carrying value is more than the estimated discounted cash flows, then a goodwill impairment will be recorded. We tested goodwill for impairment in 2011 and concluded that the carrying value of goodwill is not impaired. The testing of goodwill for impairment involves significant estimates including future production and sales volumes, product selling prices, foreign currency exchange rates, operating costs, capital expenditures and the appropriate discount rate to apply. In all cases, we have used our best estimates of these projected amounts and values. Given the current global economic uncertainty and the volatility of the markets for our products, it is possible that our estimates will be adjusted in the future and that these adjusted estimates could result in the future impairment of goodwill. We also review the carrying value of deferred income tax assets to ensure that the carrying value is appropriate. The key factors considered are the Company s prior history of profitability, future expectations of profitability and the timing of expiry of tax loss carry-forwards. Reforestation and Decommissioning Obligations In Canada, provincial regulations require timber quota holders to carry out reforestation to ensure re-establishment of the forest after harvesting. Reforested areas must be tended for a period sufficient to ensure that they are well-established. The time to meet regulatory requirements depends on a variety of factors. 37 MANAGEMENT S DISCUSSION & ANALYSIS In our operating areas, the time to meet reforestation standards usually spans 12 to 15 years from the time of harvest. We record a liability for the estimated cost of the future reforestation activities when the harvesting takes place. This liability is reviewed, at least annually, and adjusted to our current estimate of the costs to complete the remainder of the reforestation activities. In 2011 the review of the reforestation obligation resulted in an increase to the obligation of $3 million (2010 decrease of $1 million). We record the estimated fair value of a liability for decommissioning obligations, such as landfill closures, in the period when a reasonable estimate of fair value can be made. We review these estimates at least annually, and adjust the obligations as appropriate. In 2011 the review resulted in a reduction to the obligation of $11 million (2010 reduction of $6 million). Defined Benefit Plan Assumptions We maintain several defined benefit pension plans for many of our employees. The annual funding requirements and pension expenses are based on various assumptions determined by us, with consultation with our actuaries, as well as on actual investment returns on the pension fund assets and changes to the employee groups in the pension plans.

38 Management s Discussion & Analysis (continued) Defined Benefit Pension Plan Obligation Assumptions Discount rate 5.0% 5.5% Expected rate of return on plan assets 6.5% 7.0% Rate of increase in future compensation 3.5% 3.5% 38 MANAGEMENT S DISCUSSION & ANALYSIS Impact of a 0.5% Change in Key Assumptions ($ millions) Obligation Pension Plans Expense Discount rate Decrease in assumption 82 4 Increase in assumption (76 ) (4) Expected rate of return on plan assets Decrease in assumption n/a 4 Increase in assumption n/a (3) Rate of increase in future compensation Decrease in assumption (16 ) (1) Increase in assumption 17 1 New Accounting Pronouncements Conversion to International Financial Reporting Standards We adopted IFRS effective January 1, Prior to the adoption of IFRS we prepared our financial statements in accordance with Canada s previous generally accepted accounting principles for publicly accountable profit-oriented enterprises. For additional conversion information, refer to Appendix A of the accompanying annual audited consolidated financial statements. New Accounting Pronouncements Issued but not yet Applied The International Accounting Standards Board periodically issues new standards and amendments or interpretations to existing standards. The new pronouncements listed below are those that the Company considers most significant. They are not intended to be a complete list of new pronouncements that may affect the financial statements. IFRS 9, Financial Instruments In November 2009 IFRS 9 was issued and in October 2010 was further amended. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit and loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive earnings. In December 2009 IFRS 9 was deferred and is now effective for annual periods beginning on or after January 1, 2015 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IFRS 10, Consolidated Financial Statements In May 2011 IFRS 10 was issued which provides a single model to be applied in the control analysis for all investees and supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IFRS 11, Joint Arrangements In May 2011 IFRS 11 was issued which provides guidance for determining if a joint arrangement is a joint venture or joint operation. The standard requires that joint ventures be accounted for by the equity method as opposed to the choice, presently available under IAS 31, of applying the equity method or proportionate consolidation. Joint operations are required to be accounted for using the proportionate consolidation method. IFRS 11 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements.

39 IFRS 12, Disclosure of Interests in Other Entities In May 2011 IFRS 12 was issued which sets out the required disclosures for companies that have adopted IFRS 10 and 11 described above. It requires disclosure of information that helps users to evaluate the nature, risks and financial effects associated with a company s interests in subsidiaries, associates and joint arrangements. IFRS 12 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IFRS 13, Fair Value Measurement In May 2011 IFRS 13 was issued which defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. Prior to the introduction of the standard there was no single source of guidance on fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IAS 19 Amendment, Employee Benefits In June 2011 IAS 19 was amended. The amendment will result in significant changes to the recognition and measurement of defined benefit pension expense and termination benefits the most significant being the replacement of interest cost and expected plan return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined liability (asset). The amendment is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company has not assessed the impact of the amendment. Risks and Uncertainties Product Demand and Price Fluctuations Our financial results are primarily dependent on the demand for, and selling prices of, our products, which are subject to significant fluctuations. The demand and prices for lumber, panels, pulp, newsprint, wood chips and other wood products are highly volatile and are affected by factors such as global economic conditions including the strength of the U.S. housing market, the growing importance of Asian markets, particularly China, changes in industry production capacity, changes in world inventory levels and other factors beyond our control. In addition, unemployment levels, interest rates and the rate of mortgage foreclosures have a significant effect on residential construction and renovation activity, which in turn influences the demand for, and price of, building materials such as lumber and panel products. We cannot predict future market conditions, demand or pricing for any of our products due to factors outside our control. Prolonged or severe weakness in the market for any of our principal products would adversely affect our financial condition. Our earnings sensitivity to changes in certain product prices is set out in the table titled Earnings Sensitivity to Key Variables (the Earnings Sensitivity Table ). Foreign Currency Exchange Rates We sell the majority of our products at prices denominated in U.S. dollars or based on prevailing U.S. dollar prices. A significant portion of our operational costs and expenses are incurred in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in Canadian dollar terms realized by us from sales made in U.S. dollars, which reduces operating margin and the cash flow available to fund operations. We are also exposed to the risk of exchange rate fluctuations in the period between sale and payment. We also have a substantial amount of long-term debt repayable in U.S. dollars which is valued in Canadian dollars at the end of each reporting period by applying the prevailing exchange rate. Exchange rate fluctuations result in exchange gains or losses. This results in significant earnings sensitivity to changes in the Canadian/U.S. dollar exchange rate as disclosed in the Earnings Sensitivity Table. The Canadian/U.S. dollar exchange rate is affected by a broad range of factors which makes future rates difficult to accurately predict. 39 MANAGEMENT S DISCUSSION & ANALYSIS Operations Availability of Fibre and Changes in Stumpage Fees Substantially all of our Canadian log requirements are harvested from Crown lands. Provincial governments prescribe the methodologies that determine the amounts of stumpage fees that are charged in respect of harvesting on Crown lands and changes to the methodologies or rates may adversely affect our results. We rely on log supply agreements in the U.S. which are subject to log availability and based on market prices. Based on year-end capacity, approximately 24% of the aggregate log requirements for our U.S. sawmills are supplied under long-term agreements with the balance purchased on the open market. Changes in market conditions for these logs may adversely affect our results.

40 Management s Discussion & Analysis (continued) Operational Curtailments and Transportation Limitations From time to time, we suspend operations at one or more of our facilities in response to market conditions, environmental risks, or other operational issues, including, but not limited to, power failures, equipment breakdowns, adverse weather conditions, labour disruptions and fire hazards. These unscheduled operational suspensions could have a material adverse effect on our financial condition. If wood chip production is reduced because of sawmill production curtailments, improved lumber manufacturing efficiencies or any other reason, pulp and paper operations may incur additional costs to acquire or produce additional wood chips or be forced to reduce production. Conversely, pulp and paper mill production curtailments may require sawmills to find other ways to dispose of residual wood fibre and may result in curtailment or suspension of lumber production. We rely primarily on third parties for the delivery of raw materials and the transportation of our products. From time to time, we must also respond to rail car and truck shortages that limit raw material deliveries to us and product deliveries to our customers, which may have a material adverse effect on our business. 40 MANAGEMENT S DISCUSSION & ANALYSIS Labour and Services Our operations rely on both skilled and unskilled workers as well as third party services such as logging and transportation. Because our operations are generally located away from major urban centres, we often face strong competition for workers, particularly skilled workers, and services from our competitors and other industries such as oil and gas production and mining. Shortages of workers or key services could impair our operations by reducing production or increasing costs. We employ a unionized workforce in a number of our operations. Walkouts or strikes by employees could result in lost production and sales, higher costs and supply constraints that could have a material adverse effect on our business. Also, we depend on a variety of third parties that employ unionized workers to provide critical services to us. Labour disputes experienced by these third parties could lead to disruptions at our facilities. Environment Our operations are subject to regulation by federal, provincial, state and local environmental authorities, including industry-specific environmental regulations relating to air emissions and pollutants, wastewater (effluent) discharges, solid waste, landfill operations, forestry practices, site remediation and the protection of endangered species and critical habitat. We have incurred, and will continue to incur, capital expenditures and operating costs to comply with environmental laws and regulations. No assurance can be given that changes in these laws and regulations or their application will not have a material adverse effect on our business, operations, financial condition and operational results. Similarly, no assurance can be given that capital expenditures necessary for future compliance with existing and new environmental laws and regulations could be financed from our available cash flow. We may discover currently unknown environmental problems, contamination, or conditions relating to our past or present operations. This may require site or other remediation costs to maintain compliance or correct violations or result in governmental or private claims for damage to person, property or the environment, which could have a material adverse effect on our business, financial condition and operational results. We have in place internal programs under which all our forestry and manufacturing operations are audited for compliance with laws and accepted standards and with our management systems. Our woodlands operations in Canada, and the harvesting operations of many of our key U.S. suppliers, are third-party certified to internationally-recognized sustainable forest management standards. Our operations and our ability to sell our products could be adversely affected if those operations did not, or were perceived by the public as failing to, comply with applicable laws and standards, including responsible environmental and sustainable forestry standards. Natural Disasters Our operations are subject to adverse natural events such as forest fires, severe weather conditions, timber disease and insect infestation, and earthquake activity. These events could damage or destroy our physical facilities or our timber supply and similar events could also affect the facilities of our suppliers or customers. Any such damage or destruction could adversely affect our financial results. Although we believe we have reasonable insurance arrangements in place to cover certain of such incidents, there can be no assurance that these arrangements will be sufficient to fully protect us against such losses. As is common in the industry, we do not insure loss of standing timber for any cause. Mountain Pine Beetle The long-term effect of the mountain pine beetle infestation on our Canadian operations is uncertain. The potential effects include a reduction of future AAC levels to below current and pre-infestation AAC levels. Many of our B.C. operations are experiencing a diminished

41 grade and volume of lumber recovered from beetle-killed logs, decreased quality of wood chips produced from such logs and increased production costs and these effects could spread to our Alberta operations as the mountain pine beetle infestation spreads. The timing and extent of the future effect on our timber supply, lumber grade and recovery, wood chip quality and production costs will depend on a variety of factors and at this time cannot be reasonably determined. First Nations Claims Issues relating to First Nations groups have the potential for a significant adverse effect on Canadian forest products companies including West Fraser. The main First Nations issues that are relevant to West Fraser relate to aboriginal rights and title, and consultation. We participate as requested by government in the consultation process, but rely on provincial governments to adequately discharge obligations to First Nations groups in order to preserve the validity of actions dealing with public rights, including the granting or transfer of Crown timber harvesting rights. As the jurisprudence and government policies respecting aboriginal rights and title and the consultation process continue to evolve, we cannot assure that First Nations claims will not in the future have a material adverse effect on our timber harvesting rights or our ability to exercise or renew them or secure other timber harvesting rights. Regulatory Our operations are subject to extensive general and industry-specific federal, provincial, state, municipal and other local laws and regulations, including those governing forestry, exports, taxes, employees, labour standards, occupational health and safety, waste disposal, environmental protection and remediation, protection of endangered and protected species and land use and expropriation. We are required to obtain approvals, permits and licences for our operations, which may impose conditions that must be complied with. If we are unable to extend or renew, or are delayed in extending or renewing, a material approval, permit or licence, our operations or financial condition could be adversely affected. There is no assurance that these laws, regulations or government policy, or the administrative interpretation or enforcement of existing laws and regulations, will not change in the future in a manner that may require us to incur significant capital expenditures, pay higher taxes or otherwise could adversely affect our operations or financial condition. Failure to comply with applicable laws or regulations, including approvals, permits and licences, could result in fines, penalties or enforcement actions, including orders suspending or curtailing our operations or requiring corrective measures or remedial actions. Competition Markets for our products are highly competitive. Our ability to maintain or improve the cost of producing and delivering products to those markets is crucial. Factors such as cost and availability of raw materials, energy and labour, the ability to maintain high operating rates and low per-unit manufacturing costs, and the quality of our final products and our customer service all affect our earnings. Trade Restrictions A substantial portion of our products that are manufactured in Canada are exported for sale. Our financial results are dependent on continued access to the export markets and tariffs and other trade barriers that restrict or prevent access represent a continuing risk to us. Our Canadian softwood lumber exports to the U.S. are currently subject to export duties imposed under the Softwood Lumber Agreement of 2006, the term of which was recently extended to October National economic protectionist measures more commonly arise during periods of broad economic downturn and so current global economic conditions could result in the adoption of additional trade barriers. Financial We rely on long-term borrowings and access to revolving credit in order to finance our ongoing operations. Any change in availability of credit in the market, as would happen during an economic downturn, could affect our ability to access credit markets on commercially reasonable terms. Although we have no immediate needs for new credit, in the future we may need to access public or private debt markets to issue new debt to replace or partially replace current borrowings. 41 MANAGEMENT S DISCUSSION & ANALYSIS Disclosure Controls and Internal Controls Over Financial Reporting West Fraser s management, including the Chairman, President and Chief Executive Officer and the Vice-President, Finance and Chief Financial Officer, acknowledge responsibility for the design and operation of disclosure controls and procedures and internal controls over financial reporting, and the requirement to evaluate the effectiveness of these controls on an annual basis. Management evaluated the effectiveness of these controls at the end of the reporting period and based on this evaluation concluded that our internal controls over financial reporting and the disclosure controls and procedures were effective as at December 31, Changes in Internal Controls Over Financial Reporting There has been no change in our internal controls over financial reporting during the year ended December 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

42 Responsibility of Management The management of West Fraser Timber Co. Ltd. is responsible for the preparation, integrity and objectivity of the consolidated financial statements. The consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards ( IFRS ) and necessarily include amounts that represent the best estimates and judgments of management. Management maintains a system of internal controls over financial reporting that encompasses policies, procedures and controls to provide reasonable assurance that assets are safeguarded against loss or unauthorized use, transactions are executed and recorded in accordance with management s authorization and financial records are accurate and reliable. The Company s independent auditors, who are appointed by the shareholders upon the recommendation of the Audit Committee and the Board of Directors, have completed their audit of the financial statements in accordance with IFRS and their report follows. 42 The Board of Directors provides oversight to the financial reporting process through its Audit Committee, comprised of three Directors, none of whom is an officer or employee of the Company. The Audit Committee meets regularly with management and the Company s auditors to review the statements and matters relating to the audit. The Company s auditors have full and free access to the Audit Committee. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for issuance to the shareholders. Henry H. Ketcham Chairman, President and Chief Executive Officer February 16, 2012 Larry Hughes Vice-President, Finance and Chief Financial Officer RESPONSIBILITY OF MANAGEMENT

43 Auditor s Report To the Shareholders of West Fraser Timber Co. Ltd. We have audited the accompanying consolidated financial statements of West Fraser Timber Co. Ltd., which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010 and the consolidated statements of earnings and comprehensive earnings, changes in equity and cash flows for the years ended December 31, 2011 and December 31, 2010, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 43 We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of West Fraser Timber Co. Ltd. as at December 31, 2011, December 31, 2010 and January 1, 2010 and its financial performance and its cash flows for the years ended December 31, 2011 and December 31, 2010 in accordance with International Financial Reporting Standards. AUDITOR S REPORT Chartered Accountants 250 Howe Street, Suite 700 Vancouver, BC February 16, 2012

44 Consolidated Balance Sheets (in millions of Canadian dollars) December 31, December 31, January 1, CONSOLIDATED BALANCE SHEETS Assets Current assets Cash and short-term investments $ 67.8 $ $ 12.0 Receivables (note 24) Income taxes receivable Inventories (note 6) Prepaid expenses Property, plant and equipment (note 7) ,031.9 Timber licences (note 8) Goodwill and other intangibles (note 8) Other assets (note 9) $ 2,537.3 $ 2,610.3 $ 2,613.8 Liabilities Current liabilities Cheques issued in excess of funds on deposit $ $ 2.4 $ 21.8 Operating loans (note 11) Payables and accrued liabilities (note 10) Income taxes payable 58.3 Reforestation and decommissioning (note 12) Current portion of long-term debt (note 11) Long-term debt (note 11) Other liabilities (note 12) Deferred income taxes (note 18) , , ,190.8 Shareholders Equity Share capital (note 14) Accumulated other comprehensive earnings (5.5) (9.6) Retained earnings , , ,423.0 $ 2,537.3 $ 2,610.3 $ 2,613.8 Approved by the Board of Directors Janice G. Rennie Director J. Duncan Gibson Director

45 Consolidated Statements of Earnings and Comprehensive Earnings For the years ended December 31, 2011 and 2010 (in millions of Canadian dollars) Sales $ 2,762.1 $ 2,885.9 Costs and expenses Cost of products sold 1, ,787.0 Freight and other distribution costs Export taxes Amortization Selling, general and administration Equity-based compensation (2.7) , ,611.3 Operating earnings Interest expense (note 16) (20.1) (27.7) Exchange gain (loss) on long-term debt (6.7) 16.9 Other income (expense) (note 17) 13.9 (8.5) Earnings from continuing operations before tax provision Tax provision (note 18) (18.1) (73.5) Earnings from continuing operations Earnings from discontinued operations (note 20) Earnings $ 72.7 $ Earnings per share (dollars) (note 21) Basic from continuing operations $ 0.63 $ 4.24 Diluted from continuing operations $ 0.41 $ 4.24 Basic after discontinued operations $ 1.70 $ 4.35 Diluted after discontinued operations $ 1.47 $ 4.35 Cash dividends per share $ 0.56 $ 0.18 Comprehensive earnings Earnings $ 72.7 $ Other comprehensive earnings Translation gain (loss) on foreign operations (9.6) Actuarial loss on employee future benefits 2 (104.0) (59.1 ) Comprehensive earnings $ (27.2) $ Recycled through earnings in the event of a reduction in net investment in foreign operations. 2. Adjusted through retained earnings. Net of income tax recovery of $33.6 (2010 $18.6). 45 CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE EARNINGS

46 Consolidated Statements of Changes in Equity For the years ended December 31, 2011 and 2010 (in millions of Canadian dollars) Issued capital Translation Number of foreign Retained Total of shares Amount operations earnings equity Balance January 1, ,815,809 $ $ $ $ 1,423.0 Changes in equity for 2010 Translation loss on foreign operations (9.6) (9.6) Actuarial loss on employee future benefits (59.1 ) (59.1 ) Issuance of Common shares 19, Earnings for the year Dividends (7.7) (7.7) Balance December 31, ,834, (9.6) ,533.8 Changes in equity for 2011 Translation gain on foreign operations Actuarial loss on employee future benefits (104.0) (104.0) Issuance of Common shares 11, Earnings for the year Dividends (24.0) (24.0) Balance December 31, ,846,113 $ $ (5.5) $ $ 1, CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

47 Consolidated Statements of Cash Flows For the years ended December 31, 2011 and 2010 (in millions of Canadian dollars) Operating activities Earnings from continuing operations $ 26.8 $ Adjustments Amortization Interest expense Exchange loss (gain) on long-term debt 6.7 (16.9) Tax provision Income taxes (paid) received (75.1) 66.1 Reforestation and decommissioning obligations Employee future benefits expense Contributions to employee future benefit plans (93.2) (66.2) Other (7.9) (12.9) Changes in non-cash working capital Receivables 7.7 (87.0) Inventories (23.9) (14.9) Prepaid expenses (0.9) 2.3 Payables and accrued liabilities (2.4) 50.1 Cash flows from operating activities Financing activities Repayment of long-term debt (0.3) (100.3) Repayment of operating loans (14.7) (64.2) Interest paid (19.8) (23.8) Dividends (24.0) (7.7) Other (0.5) (5.6) Cash flows from financing activities (59.3) (201.6) Investing activities Additions to capital assets (213.4) (89.1 ) Proceeds from Green Transformation Program (note 23) Proceeds from disposal of capital assets Other Cash flows from investing activities (164.3) (83.3) 47 CONSOLIDATED STATEMENTS OF CASH FLOWS Change in cash from continuing operations (138.6) Change in cash from discontinued operations (note 20) Cash beginning of year (9.8) Cash end of year $ 67.8 $ Cash consists of Cash and short-term investments $ 67.8 $ Cheques issued in excess of funds on deposit (2.4) $ 67.8 $ 160.7

48 Notes to Consolidated Financial Statements For the years ended December 31, 2011 and 2010 (in millions of Canadian dollars, except where indicated) 1. Nature of operations The Company is an integrated wood products company producing lumber, wood chips, LVL, MDF, plywood, pulp and newsprint with facilities in Canada and the southern United States. The Company s executive office is located at 858 Beatty Street, Suite 501, Vancouver, British Columbia. The Company was formed by articles of amalgamation under the Business Corporations Act (British Columbia) and is registered in British Columbia, Canada. The Company is listed on the Toronto Stock Exchange under the symbol WFT. 2. Basis of presentation and statement of compliance The Company adopted International Financial Reporting Standards ( IFRS ) effective January 1, Prior to the adoption of IFRS, the Company prepared its financial statements in accordance with Canadian generally accepted accounting principles ( CGAAP ). Comparative figures have been restated to conform to IFRS. 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These are the Company s first consolidated annual financial statements that comply with IFRS as issued by the International Accounting Standards Board ( IASB ). These consolidated financial statements were authorized for publication by the Company s Board of Directors on February 16, These consolidated annual financial statements should be read with consideration of the IFRS transition disclosures included in Appendix A. 3. Significant accounting policies Principles of consolidation These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of intercompany transactions and balances. The Company s principal operating subsidiaries are West Fraser Mills Ltd., West Fraser, Inc., Blue Ridge Lumber Inc., Sundre Forest Products Inc. and West Fraser Newsprint Ltd.. The Company s joint ventures, Alberta Newsprint Company and Cariboo Pulp & Paper Company, are accounted for by the proportionate consolidation method. Financial instruments The Company s financial assets are categorized as Loans and Receivables and its financial liabilities are categorized as Other Financial Liabilities. All of the Company s financial assets and liabilities are measured at amortized cost using the effective interest rate method except for derivatives. Derivatives are measured at fair value through profit and loss with changes reflected in other income (expense). A list of the Company s financial assets and liabilities is included in Note 24. Debt is shown net of deferred financing charges which are amortized over the life of the debt. Use of estimates The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant areas requiring estimates include recoverability of long-lived assets and goodwill, reforestation and decommissioning obligations, employee future benefits, equity-based compensation, income taxes and litigation. Actual amounts could differ materially from these and other estimates, the impact of which would be recorded in future periods. Revenue recognition Revenues are derived from product sales and are recognized upon the transfer of significant risks and rewards of ownership, provided collectibility is reasonably assured. Foreign currency translation The Company s functional and presentation currency is Canadian dollars. U.S. operations Assets and liabilities of the Company s U.S. operations have a functional currency other than Canadian dollars and are translated at the period-end exchange rate. Revenues and expenses are translated at average exchange rates during the reporting period. The resulting unrealized gains or losses are included in other comprehensive earnings.

49 Translation of other foreign currency balances and transactions Monetary assets and liabilities denominated in foreign currencies, including long-term debt, are translated into Canadian dollars at the period-end exchange rate. Income and expense items are translated at the average or transaction date exchange rates during the reporting period. The resulting gains or losses are included in other income (expense). Cash and short-term investments Cash and short-term investments consist of cash on deposit and short-term interest-bearing securities maturing within three months of the date of purchase. Inventories Inventories of logs, other raw materials and manufactured products are valued at the lower of average cost and net realizable value. Processing materials and supplies are valued at the lower of average cost and replacement cost. Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated amortization and impairment losses. Expenditures for additions and improvements are capitalized. Borrowing costs are capitalized when the asset construction period exceeds 12 months and the borrowing costs are directly attributable to the asset. Expenditures for maintenance and repairs are charged to earnings. Upon retirement, disposal or destruction of an asset, the cost and related amortization are removed from the accounts and any gain or loss is included in earnings. Property, plant and equipment are amortized on a straight-line basis over their estimated useful lives as follows: Buildings years Manufacturing equipment and machinery 6 20 years Fixtures, mobile and other equipment 3 10 years Roads not exceeding 40 years Major maintenance shutdowns 12 to 36 months Timber licences and other intangibles Timber licences and other intangible assets are stated at historical cost, less accumulated amortization and impairment losses, and are amortized on a straight-line basis over their estimated useful lives as follows: Timber licences 40 years Power purchase agreement over the life of the agreement Software 3 5 years Non-replaceable timber rights As timber is logged Impairment of property, plant, equipment, timber licences and other intangibles The Company reviews property, plant, equipment, timber licences and other intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be fully recoverable. For the purpose of impairment testing, property, plant, equipment, timber licences and other intangible assets are separated into cash generating units ( CGU ). The Company has identified each of its mills as a CGU for impairment testing of property, plant, equipment and other intangibles. Timber licences are tested for impairment by combining CGU s within the economic area of the related licence. Recoverability is assessed by comparing the CGU carrying amount to the discounted estimated net future cash flows the assets are expected to generate. If the carrying amount exceeds the discounted estimated net future cash flows, the assets of the CGU are written down to the higher of fair value less costs to sell and value in use (being the present value of the estimated net future cash flows of the relevant asset or CGU). 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Estimated net future cash flows are based on several assumptions concerning future circumstances including selling prices of products, U.S./Canadian dollar exchange rates, production rates, input costs and capital requirements. The estimated net future cash flows are discounted at rates based on management s estimate of the Company s weighted average cost of capital. Where an impairment loss subsequently reverses, the carrying amount of the asset or CGU is increased to the lesser of the revised estimate of its recoverable amount and the carrying amount that would have been recorded had no impairment loss been previously recognized. Goodwill Goodwill represents the excess of the purchase price paid for an acquisition over the fair value of the net assets acquired. Goodwill is not amortized, but is subject to an impairment test annually or more frequently if events or circumstances indicate that it may be impaired.

50 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) Goodwill impairment is assessed by comparing the fair value of its CGU to the underlying carrying amount of the CGU s net assets, including goodwill. When the carrying amount of the CGU exceeds its fair value, the fair value of the CGU s goodwill is compared with its carrying amount to measure the amount of impairment loss, if any. Reforestation and decommissioning obligations The Company harvests timber under various timber licences that require it to conduct reforestation. Future reforestation obligations are measured at the present value of the expenditures expected to be required to settle the obligations and are accrued and charged to earnings when timber is harvested. The reforestation obligation is reviewed periodically and changes to estimates are credited or charged to earnings. The Company records the present value of a liability for decommissioning obligations in the period that a reasonable estimate of present value can be made. The present value of the liability is added to the carrying amount of the associated asset and amortized over its useful life or, if there is no associated asset, it is expensed. Decommissioning obligations are reviewed annually and changes to estimates result in an adjustment of the carrying amount of the associated asset or, where there is no asset, they are expensed. 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reforestation and decommissioning obligations are discounted at the risk-free rate at the balance sheet date and accreted over time through periodic charges to earnings. The liabilities are reduced by actual costs of settlement. Government assistance Government assistance received that relates to the construction of manufacturing assets is applied to reduce the cost of those assets. Government assistance received that relates to operational expenses is applied to reduce the amount charged to earnings for the operating item. Equity-based compensation The Company s share option plan gives share option holders the right to elect to receive a cash payment in lieu of exercising an option to purchase Common shares. The Company estimates the fair value of outstanding options using a Black-Scholes option pricing model at each balance sheet date and records the resulting expense or recovery, over the vesting period, through a charge to earnings. The vesting period over which the expense or recovery is charged is the lesser of five years from the date the option was granted and the time period until the option holder reaches the holder s eligible retirement age. If the option holder is eligible to retire, the expense or recovery is charged to earnings immediately. If an option holder elects to purchase Common shares, both the exercise price and the accrued liability are credited to shareholders equity. Employee future benefits The Company accrues for its obligations under employee pension and non-pension benefit plans and the related costs net of plan assets. The Company has adopted the following policies: The measurement date used for accounting purposes is December 31; The cost of pensions and other retirement benefits earned by employees is determined using the projected unit credit method, pro-rated for estimated service periods where appropriate, and management s estimate of expected plan investment performance, discount rate, salary escalation, retirement ages of employees, expected heath-care costs and other relevant factors; For the purpose of calculating the expected return, plan assets are valued at fair value; Past service costs arising from plan amendments are recognized immediately to the extent the benefits are vested, and otherwise are amortized straight-line over the average period until the benefits become vested; and Actuarial gains or losses arise from the difference between the actual rate of return on plan assets for a period and the expected rate of return on plan assets for that period, or from changes in actuarial assumptions used to determine the accrued benefit obligation. Net actuarial gains or losses are reported as part of other comprehensive earnings in the period incurred.

51 Pension and other post-retirement benefit expense includes management s best estimate of the cost of benefits provided, interest cost of projected benefits and expected return on plan assets. For defined contribution plans, pension expense is the amount of contributions the Company is required to make in respect of services rendered by employees. Income taxes The tax expense for the period is comprised of current and deferred tax. Tax is recognized in the statement of earnings, except to the extent that it relates to items recognized in other comprehensive earnings in which case it is recognized in other comprehensive earnings. Deferred taxes are provided for using the liability method. Under this method, deferred taxes are recognized for temporary differences between the tax and financial statement bases of assets, liabilities and certain carry-forward items. Deferred tax assets are recognized only to the extent that it is probable that they will be realized. Current and deferred income taxes relating to items recognized directly in equity are also recognized directly in equity. Deferred income tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of substantive enactment. 4. Accounting standards issued but not yet applied The IASB periodically issues new standards and amendments or interpretations to existing standards. The new pronouncements listed below are those that the Company considers most significant. They are not intended to be a complete list of new pronouncements that may affect the financial statements. IFRS 9 Financial Instruments In November 2009 IFRS 9 was issued and in October 2010 was further amended. IFRS 9 addresses classification and measurement of financial assets and replaces the multiple category and measurement models in IAS 39 for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit and loss. IFRS 9 also replaces the models for measuring equity instruments and such instruments are either recognized at fair value through profit or loss or at fair value through other comprehensive earnings. In December 2009 IFRS 9 was deferred and is now effective for annual periods beginning on or after January 1, 2015 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IFRS 10 Consolidated Financial Statements In May 2011 IFRS 10 was issued which provides a single model to be applied in the control analysis for all investees and supersedes IAS 27 Consolidated and Separate Financial Statements and SIC-12 Consolidation Special Purpose Entities. IFRS 10 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IFRS 11 Joint Arrangements In May 2011 IFRS 11 was issued which provides guidance for determining if a joint arrangement is a joint venture or joint operation. The standard requires that joint ventures be accounted for by the equity method as opposed to the choice, presently available under IAS 31, of applying the equity method or proportionate consolidation. Joint operations are required to be accounted for using the proportionate consolidation method. IFRS 11 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. IFRS 12 Disclosure of Interests in Other Entities In May 2011 IFRS 12 was issued which sets out the required disclosures for companies that have adopted IFRS 10 and 11 described above. It requires disclosure of information that helps users to evaluate the nature, risks and financial effects associated with a company s interests in subsidiaries, associates and joint arrangements. IFRS 12 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IFRS 13 Fair Value Measurement In May 2011 IFRS 13 was issued which defines fair value, establishes a framework for measuring fair value and sets out disclosure requirements for fair value measurements. Prior to the introduction of the standard there was no single source of guidance on fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company does not expect this standard to have a significant effect on its financial statements.

52 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) IAS 19 Amendment, Employee Benefits In June 2011 IAS 19 was amended. The amendment will result in significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, the most significant being the replacement of interest cost and expected plan return on plan assets with a net interest amount that is calculated by applying the discount rate to the net defined liability (asset). The amendment is effective for annual periods beginning on or after January 1, 2013 with earlier application permitted. The Company has not assessed the impact of the amendment. 5. Investments in joint ventures The Company s joint ventures are Alberta Newsprint Company (50%) and Cariboo Pulp & Paper Company (50%). The combined proportionate share of the joint ventures is as follows: December 31, December 31, January 1, Current assets $ 74.4 $ 62.7 $ 57.8 Non-current assets Current liabilities (22.8) (20.2) (20.7) Non-current liabilities (25.5) (24.5) (18.5) Equity $ $ $ January 1 to January 1 to December 31, December 31, Sales $ $ Costs and expenses (173.6) (184.3) 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Earnings before income taxes $ 40.0 $ 33.8 Cash flows from operating activities $ 47.9 $ 53.6 Cash flows from investing activities $ (15.3) $ (8.0) 6. Inventories December 31, December 31, January 1, Logs and other raw materials $ $ 92.1 $ 76.5 Manufactured products Processing materials and supplies $ $ $ Inventories at December 31, 2011 were written down by $14.9 million (December 31, 2010 $3.8 million) to reflect net realizable value being lower than cost. The carrying amount of inventory recorded at net realizable value was $64.7 million at December 31, 2011 (December 31, 2010 $17.4 million), with the remaining inventory recorded at cost.

53 7. Property, plant and equipment Manufacturing plant, Construction- Roads and equipment & machinery in-progress bridges Other Total As at January 1, 2010 Cost $ 2,533.7 $ 13.3 $ $ 36.3 $ 2,719.6 Accumulated amortization (1,582.3) (100.5) (4.9) (1,687.7) Net $ $ 13.3 $ 35.8 $ 31.4 $ 1,031.9 As at January 1, 2010 $ $ 13.3 $ 35.8 $ 31.4 $ 1,031.9 Additions Disposals (0.1 ) (0.1 ) Amortization 1 (150.6) (6.1 ) (0.7) (157.4) Foreign exchange (7.0) (0.4) (7.4) Transfers 11.6 (11.5) (0.1 ) As at December 31, 2010 $ $ 12.8 $ 34.4 $ 30.4 $ As at December 31, 2010 Cost $ 2,524.9 $ 12.8 $ $ 36.1 $ 2,700.0 Accumulated amortization (1,677.8) (91.8) (5.7) (1,775.3) Net $ $ 12.8 $ 34.4 $ 30.4 $ As at December 31, 2010 $ $ 12.8 $ 34.4 $ 30.4 $ Additions Disposals (0.1) (0.2) (2.0) (2.3) Amortization 1 (133.8) (7.7) (0.7) (142.2) Foreign exchange Transfers 11.0 (11.3) 0.3 As at December 31, 2011 $ $ 44.9 $ 35.0 $ 28.4 $ As at December 31, 2011 Cost $ 2,581.7 $ 44.9 $ 89.5 $ 34.7 $ 2,750.8 Accumulated amortization (1,754.3) (54.5) (6.3) (1,815.1) Net $ $ 44.9 $ 35.0 $ 28.4 $ Amortization by function is $140.0 million cost of products sold and $2.2 million selling, general and administration (2010 $154.8 million and $2.6 million, respectively). 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

54 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) 8. Timber licences, goodwill and other intangibles P power purchase Goodwill and T timber licences Goodwill agreement other other intangibles As at January 1, 2010 Cost $ $ $ $ 25.0 $ Accumulated amortization (136.1 ) (34.7) (15.2) (49.9) Net $ $ $ 80.5 $ 9.8 $ As at January 1, 2010 $ $ $ 80.5 $ 9.8 $ Additions Disposals (0.5) (0.5) Amortization 1 (16.1 ) (7.3) (4.2) (11.5) As at December 31, 2010 $ $ $ 73.2 $ 8.5 $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As at December 31, 2010 Cost $ $ $ $ 23.7 $ Accumulated amortization (152.3) (42.0) (15.2) (57.2) Net $ $ $ 73.2 $ 8.5 $ As at December 31, 2010 $ $ $ 73.2 $ 8.5 $ Additions Disposals (0.7) (0.7) Amortization 1 (16.3) (7.3) (1.9) (9.2) Adjustment (3.2) As at December 31, 2011 $ $ $ 65.9 $ 7.0 $ As at December 31, 2011 Cost $ $ $ $ 24.3 $ Accumulated amortization (160.9) (49.3) (17.3) (66.6) Net $ $ $ 65.9 $ 7.0 $ Amortization by function is $24.1 million cost of products sold and $1.4 million selling, general and administration (2010 $25.8 million and $1.8 million respectively). Goodwill The Company has attributed $217.6 million of goodwill to a CGU made up of the Company s Canadian lumber operations and $46.1 million of goodwill to a CGU made up of the Company s plywood and LVL operations. For the purpose of the annual test of goodwill, the fair value of CGUs has been determined based on value-in-use calculations. These calculations use pre-tax cash flow projections based on the 2012 operating plan, a forecast of 2013 and 2014 and trend level earnings for subsequent years, all approved by management. Assumptions were developed by management based on industry sources, including Forest Economic Advisors, LLC, Resource Information Systems, Inc., and other industry analysts, taking into account management s best estimates. Power purchase agreement The Company has an interest in a power purchase agreement to acquire a portion of the electricity generated from a power plant in Alberta at substantially predetermined prices. The Company s share of electricity capacity to 2020 is expected to be approximately 115 megawatts per year. The Company sells the electricity acquired at prevailing market prices. At the same time, the Company s Alberta operations purchase electricity at prevailing market prices. The cost of the power purchase agreement is amortized over its term.

55 9. Other assets December 31, December 31, January 1, Pension surplus $ 18.9 $ 38.7 $ 26.4 Other $ 29.6 $ 41.5 $ Payables and accrued liabilities December 31, December 31, January 1, Trade accounts $ $ $ Accrued compensation Accrued equity-based compensation Dividends Interest Restructuring charges Other $ $ $ Restructuring charges Restructuring charges relate to the closure of the linerboard and kraft paper mill, located in Kitimat, B.C. and certain indefinitely idled sawmills. A reconciliation of restructuring charges included in payables and accrued liabilities are as follows: December 31, December 31, Accrued liability beginning of year $ 4.5 $ 40.2 Paid during period (3.3) (35.1 ) Change in accrual 0.9 (0.6) Accrued liability end of year $ 2.1 $ Long-term debt and operating loans Long-term debt December 31, December 31, January 1, US$300 million senior notes due October 2014; interest at 5.2% $ $ $ Term note due March 2010; interest at floating rates Note payable due in instalments to 2020; interest at 5.5% Less: Current portion (0.3) (0.3) (100.3) Deferred financing costs (1.0) (1.3) (1.8) $ $ $ Required principal repayments are disclosed in note 24. Operating loans The Company has $530 million in revolving lines of credit which were undrawn as at December 31, 2011 (December 31, 2010 $8.8 million, net of deferred financing costs of $6.2 million). Deferred financing costs of $5.7 million are included in other assets at December 31, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In September 2011, the Company and participating banks amended the $500 million revolving credit facility to extend its maturity until September 30, In addition to this facility the Company has a $25 million demand line of credit dedicated to letters of credit and a $5 million demand line of credit dedicated to a jointly-owned newsprint operation. Interest on the three facilities is payable at floating rates based on Prime, U.S. base, Bankers Acceptances or LIBOR at the Company s option. As at December 31, 2011, letters of credit in the amount of $35.3 million have been issued under these facilities. The $500 million committed revolving credit facility, the $25 million demand revolving credit facility and the US$300 million senior notes are secured by the Company s assets.

56 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) 12. Other long-term liabilities December 31, December 31, January 1, Post-retirement (note 13) $ $ $ 66.1 Reforestation Decommissioning Other $ $ $ Reforestation and decommissioning obligations The Company s reforestation and decommissioning obligations relate to its responsibility for reforestation under various timber licences, landfill closures and other site remediation costs. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in reforestation and decommissioning obligations are as follows: Reforestation Decommissioning obligations Beginning of year $ $ 98.8 $ 26.4 $ 35.8 Liabilities purchased 2.2 Liabilities recognized Liabilities settled (38.6) (35.2) (0.6) (4.4) Accretion expense Change in estimates 2.6 (1.0) (11.4) (5.7) End of year $ $ $ 14.9 $ 26.4 Less: current portion (40.7) (41.4) (0.3) (6.8) $ 70.5 $ 64.4 $ 14.6 $ 19.6 The total undiscounted amount of the estimated cash flows required to satisfy these obligations is $132.3 million (2010 $147.0 million). The cash flows have been discounted using interest rates ranging from 0.95% to 1.27% ( % to 2.41%) to determine fair value. The timing of the reforestation payments is based on the estimated period required to attain free to grow status in a given area, which is generally between 12 to 15 years. Payments relating to landfill closures and site remediation are expected to occur over periods ranging up to 21 years. 13. Employee future benefits The Company maintains defined benefit and defined contribution pension plans covering a majority of its employees. The defined benefit plans provide pension benefits based either on length of service or on earnings and length of service. The total pension expense for the defined benefit plans is $30.3 million (2010 $24.2 million) with total funding contributions of $88.8 million (2010 $62.2 million). The Company also provides group life insurance, medical and extended health benefits to certain employee groups for which it contributed $2.5 million (2010 $2.2 million). The total pension expense and funding contributions for the defined contribution pension plans is $1.9 million (2010 $1.8 million). Approximately $46.0 million is expected to be contributed by the Company to all pension and other benefit plans during 2012.

57 The status of the defined benefit pension plans and other benefit plans, in aggregate, is as follows: Pension Plans Other Benefit Plans Accrued benefit obligations Projected benefit obligations opening $ $ $ 45.8 $ 40.6 Current service cost Interest cost Benefits paid (45.4) (48.3) (2.5) (2.2) Actuarial loss Other 1.0 (0.3) 0.1 Projected benefit obligations ending $ 1,049.2 $ $ 48.6 $ 45.8 Plan assets Fair value opening $ $ $ $ Expected return on plan assets Actuarial investment gain (loss) (65.4) 31.1 Employer contributions Benefits paid (45.4) (48.3) (2.5) (2.2) Other 1.1 (0.4) Fair value ending $ $ $ $ Funded status Pension surplus (note 9) $ 18.9 $ 38.7 $ $ Post-retirement liabilities (note 12) (129.3) (72.4) (48.6) (45.8) $ (110.4) $ (33.7) $ (48.6) $ (45.8) Expense Current service cost $ 33.9 $ 26.7 $ 0.3 $ 0.3 Interest cost Expected return on plan assets 1 (55.8) (52.8) Expense $ 30.3 $ 24.2 $ 2.8 $ The actual return on plan assets is a loss of $9.6 million for the year ended December 31, 2011 (2010 gain of $83.9 million). The cumulative actuarial losses recognized in other comprehensive earnings are as follows: December 31, December 31, Cumulative actuarial losses $ $ 77.7 The significant actuarial assumptions used to determine the period-ending benefit obligation and the annual benefit plan expense are as follows: Pension Plans Other Benefit Plans December 31, December 31, December 31, December 31, Benefit obligations: Discount rate 5.0% 5.5% 5.0% 5.5% Future compensation rate increase 3.5% 3.5% n/a n/a Benefit expense: Discount rate beginning of year 5.5% 6.5% 5.5% 6.5% Expected rate of return on plan assets 6.5% 7.0% n/a n/a Future compensation rate increase 3.5% 3.5% n/a n/a 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The discount rate assumption used in determining the obligations for pension and other benefit plans reflects the market yields from high quality Canadian corporate bonds with cash flows that approximate expected benefit payments at the balance sheet date. The expected rate of return on plan assets is reviewed annually by management, in conjunction with our actuaries. The assumption is based on expected returns for the various asset classes, weighted by the portfolio allocation.

58 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) The Company funds health care benefit costs, shown under other benefit plans, on a pay as you go basis. The actuarial assumptions are for extended health care cost increases of 10% for one year, grading down over seven years to 5% per year thereafter, with an increase of 3% per year in the medical services plan costs. A 1% increase or decrease in the assumed health care cost trend rates would have the following effects for 2011: Increase Decrease Total of service and interest cost $ 0.1 $ (0.1 ) Accrued benefit obligations $ 2.0 $ (1.9) 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assets The weighted average asset allocations of the defined benefit plans at the measurement date, by asset category, are as follows: December 31, December 31, Equity investments 57% 60% Fixed income investments 42% 39% Other investments 1% 1% 100% 100% 14. Share capital Authorized 200,000,000 Common shares, without par value 20,000,000 Class B Common shares, without par value 10,000,000 Preferred shares, issuable in series, without par value Issued December 31, 2011 December 31, 2010 January 1, 2010 Number Amount number Amount number Amount Common 40,064,635 $ ,028,434 $ ,009,331 $ Class B Common 2,781, ,806, ,806, Total Common 42,846,113 $ ,834,912 $ ,815,809 $ During 2011, 25,000 Class B Common shares were exchanged for Common shares. Rights and restrictions of Common shares Common shares and Class B Common shares are equal in all respects except that each Class B Common share may at any time be exchanged for one Common share. 15. Equity-based compensation The Company has a share option plan, a phantom share unit plan and a director s deferred share unit plan which are described below. The compensation cost included in earnings for these plans in 2011 was a recovery of $2.7 million (2010 expense of $31.4 million). Share option plan The Company has a share option plan for its directors, officers and employees under which it may grant options to purchase up to 5,005,506 Common shares of which 549,443 remain available for issuance. Directors ceased to participate under the share option plan in The exercise price of a share option is the closing price of a Common share on the trading day immediately preceding the grant date. Options vest at the earlier of the date of retirement or death and 20% per year from the grant date, and expire after 10 years. The Company has recorded a recovery of $6.2 million (2010 expense of $23.5 million) related to the share option plan.

59 A summary of the activity in the share option plan is presented below: December 31, 2011 December 31, 2010 Number Amount number Amount Outstanding beginning of year 2,319,372 $ ,181,954 $ Granted 163, Exercised (522,855) (835,582) Expired/cancelled (3,000) (27,000) Outstanding end of year 1,956, ,319, Exercisable end of year 1,423,336 $ ,602,048 $ The following table summarizes information about the share options outstanding at December 31, 2011: Weighted average Weighted Weighted remaining average Number of average Number contractual exercise exercisable exercise Exercise price range outstanding life price options price (dollars) (number) (years) (dollars) (number) (dollars) $ , $ ,720 $ $33.30 $ , $ ,786 $ $37.65 $ , $ ,700 $ $ , $ ,520 $ $51.50 $ , $ ,610 $ ,956, $ ,423,336 $ The weighted average share price at the date of exercise for share options exercised during the year was $53.41 per share (2010 $42.11 per share). The accrued liability related to the Company s share option plan, determined by applying the Black-Scholes model, is $22.9 million at December 31, 2011 (December 31, 2010 $35.9 million; January 1, 2010 $23.6 million). The weighted average fair value of the options using the Black-Scholes valuation model was $11.69 per option at December 31, 2011 (December 31, 2010 $15.50 per option; January 1, 2010 $7.41 per option). The inputs to the model are as follows: December 31, December 31, January 1, Share price on balance sheet date $ $ $ Weighted average exercise price $ $ $ Expected dividend $ 0.56 $ 0.53 $ 0.43 Expected volatility 37.91% 35.41% 33.56% Weighted average interest rate 1.06% 1.99% 2.14% Expected life of options in years The expected dividend on the Company s shares was based on the annualized dividend rate at each period end. Expected volatility was based on five years of historical data. The interest rate for the life of the options was based on the implied yield available on government bonds with an equivalent remaining term at each period end. Historical data was used to estimate the expected life of the options and forfeiture rates. The intrinsic value of the Company s share option plan at December 31, 2011 was $11.7 million (December 31, 2010 $22.9 million; January 1, 2010 $7.0 million). The intrinsic value is determined based on the difference between the period-end share price and the exercise price (for options in the money), multiplied by the sum of the related vested options plus unvested options for those holders eligible to retire. 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Phantom share unit plan The Company s phantom share unit plan is intended to supplement or, in whole or in part, replace, the granting of share options as long-term incentives for officers and employees. The plan provides for two types of units which vest on the third anniversary of the grant date. A restricted share unit pays out based on the Common share price over the 20 trading days immediately preceding its vesting date (the vesting date value ). A performance share unit pays out at a value between 0% and 200% of its vesting date value contingent upon

60 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) the Company s performance relative to a peer group of companies over the three-year performance period. Officers and employees granted units under the plan are also entitled to additional units to reflect cash dividends paid on Common shares from the applicable grant date until payout. The Company records an expense or recovery through earnings over the vesting period based on the quoted market price of the Company s Common shares at each balance sheet date. The period over which the expense or recovery is charged is the lesser of three years from the issuance date and the time period until the unit holder reaches eligible retirement age. If the unit holder is eligible to retire, the expense or recovery is charged to earnings immediately. The Company has recorded an expense of $3.5 million (2010 $7.0 million) related to the phantom share unit plan. The number of units outstanding as at December 31, 2011 was 266,965 (December 31, ,145), including performance share units totalling 61,190 (December 31, ,290). 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Directors deferred share unit plan The Company has a deferred share unit plan ( DSU Plan ) which provides a structure for non-employee directors to accumulate an equity-like holding in the Company. The DSU Plan allows directors to participate in the growth of the Company by providing a deferred payment based on the value of a Common share at the time of redemption. Each director receives deferred share units ( Units ) in payment of an annual equity retainer and may elect to receive Units in payment of up to 100% of other fees earned. The Units are issued based on the Company s Common share price at the time of issue. Additional Units are issued to take into account the value of dividends paid on Common shares from the date of issue to the date of redemption. Units are redeemable only after a director retires, resigns or otherwise leaves the board. The redemption value is equal to the Common share price at the date of redemption. A holder of Units may elect to redeem Units in cash or receive Common shares having an equivalent value. The number of Units outstanding as at December 31, 2011 was 59,224 (December 31, ,096). 16. Interest expense December 31, December 31, Interest expense $ (20.9) $ (27.4) Interest income Accretion on long-term liabilities (0.9) (1.1 ) $ (20.1) $ (27.7) 17. Other income (expense) December 31, December 31, Foreign exchange gain (loss) net $ 2.8 $ (7.4) Gain on asset sales Other net 2.5 (3.7) $ 13.9 $ (8.5)

61 18. Tax provision The major components of income tax included in comprehensive earnings are as follows: December 31, December 31, Current tax for the year $ (8.4) $ (66.0) Current tax for previous periods (2.0) (3.0) Deferred tax for the year (7.7) (4.9) Deferred tax for previous periods 0.4 Tax provision on continuing operations (18.1) (73.5) Current tax on discontinued operations (2.8) (0.8) Deferred tax on discontinued operations (7.7) (1.5) Tax provision on discontinued operations (10.5) (2.3) Deferred tax on employee future benefits included in other comprehensive earnings Tax recovery (provision) on comprehensive earnings $ 5.0 $ (57.2) The Company s effective tax rate on earnings from continuing operations is as follows: December 31, 2011 December 31, 2010 Amount % Amount % Income taxes at statutory rates 1 $ (11.9) (26.5) $ (72.8) (28.5) Non taxable amounts (2.4) (0.9) Rate differentials between jurisdictions and on specified activities Unrecognized tax assets (11.7) (26.1) (1.4) (0.6) Other (2.1) (4.6) (2.5) (1.0) Tax provision $ (18.1) (40.3) $ (73.5) (28.8) 1. The statutory tax rate decreased by 2% from December 31, 2010 due to a federal corporate tax rate reduction. Changes in the deferred income tax components are adjusted through deferred tax expense except for $33.6 million (2010 $18.6 million) for employee future benefits which is adjusted through other comprehensive earnings. Of the following components of deferred income taxes payable, $11.3 million of the deferred tax assets and $20.4 million of the deferred tax liabilities are expected to be recovered within 12 months: December 31, December 31, January 1, Property, plant, equipment and intangibles $ $ $ Reforestation and decommissioning liabilities (27.6) (29.9) (31.5) Employee future benefits (48.2) (30.3) (18.9) Other (4.9) $ $ $ The Company has loss carry-forwards not recognized for accounting purposes that expire in various amounts in the years 2021 to Employee compensation The Company s employee compensation expense includes salaries and wages, employee future benefits, termination costs and bonuses, where applicable. Total compensation expense is $570.0 million (2010 $560.0 million). 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Salaries, benefits and incentive compensation expense for directors and officers is $5.0 million (2010 $7.1 million). In addition, various equity-based compensation plans are offered to key management. See Note 15 for additional details.

62 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) 20. Discontinued operation The Company permanently closed its linerboard and kraft paper mill, located in Kitimat, B.C. in January The results of the discontinued operation are as follows: December 31, December 31, Sales $ 0.2 $ 71.8 Operating earnings $ $ (8.4) Other income Earnings before tax provision Tax provision (10.5) (2.3) Earnings $ 45.9 $ 4.6 Cash flows from operating activities $ (4.3) $ 19.6 Cash flows from investing activities Increase in cash $ 45.7 $ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the year, the Company sold its remaining assets associated with the Kitimat mill for proceeds of $50.0 million resulting in a gain of $48.7 million. 21. Earnings per share Basic earnings per share is calculated based on earnings available to Common shareholders, as set out below, using the weighted average number of Common shares and Class B Common shares outstanding. Diluted earnings per share is calculated based on earnings available to Common shareholders adjusted to remove the actual share option expense (recovery) charged to earnings and after deducting a notional charge for share option expense assuming the use of the equity settled method, as set out below. The diluted weighted average number of shares is calculated using the treasury stock method. When earnings available to Common shareholders for diluted earnings per share are greater than earnings available to Common shareholders for basic earnings per share, the calculation is anti-dilutive and diluted earnings per share are deemed to be the same as basic earnings per share. December 31, 2011 December 31, 2010 From After From After continuing discontinued continuing discontinued operations operations operations operations Earnings Basic $ 26.8 $ 72.7 $ $ Share option (recovery) expense (6.2) (6.2) Equity settled share option adjustment (3.1) (3.1) (1.1 ) (1.1 ) Diluted $ 17.5 $ 63.4 $ $ Weighted average number of shares Basic 42,840,180 42,840,180 42,822,949 42,822,949 Share options 433, , , ,557 Diluted 43,273,865 43,273,865 43,247,506 43,247,506 Earnings per share (dollars) Basic $ 0.63 $ 1.70 $ 4.24 $ 4.35 Diluted $ 0.41 $ 1.47 $ 4.24 $ 4.35

63 22. Commitments Operating leases The Company is committed to make payments under certain operating leases for equipment, land, buildings and office space. Operating lease costs expensed during the year were $3.3 million (2010 $4.5 million). The future payments required under operating leases are as follows: 2012 $ $ 3.3 Product purchase and sale commitments The Company has long-term purchase and sale contracts with minimum annual volume commitments. All contracts are at market prices and on normal business terms. Capital expenditures The Company has capital commitments at December 31, 2011 of $14.1 million. 23. Government assistance Construction of manufacturing assets In 2009 the Government of Canada confirmed an allocation of credits totalling $88 million to the Company under the Pulp and Paper Green Transformation Program (the GT Program ). The GT Program provides funding for capital projects that improve the energy efficiency or environmental performance of Canadian pulp and paper mills. Credits may be used until the GT Program end date of March 31, In 2011 the Company received $36.9 million for eligible expenditures under the GT Program (December 31, 2010 $1.6 million). At December 31, 2011, $40.0 million is included in accounts receivable related to expenditures under the GT Program. Operational expenses Government assistance of $9.3 million (2010 $9.4 million) was recorded as a reduction to cost of products sold. The government assistance related primarily to research and development, bioenergy producer credits and apprentice tax credits. 24. Financial instruments a) Carrying and fair value of financial instruments by category Other Loans & financial Carrying Fair 2011 receivables liabilities value value Financial assets Cash and short-term investments $ 67.8 $ $ 67.8 $ 67.8 Receivables $ $ $ $ Financial liabilities Payables and accrued liabilities $ $ $ $ Long-term debt (note 11) $ $ $ $ The fair value of the long-term debt is based on rates available to the Company at December 31, 2011 for long-term debt with similar terms and remaining maturities. 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

64 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) Other L loans & financial Carrying Fair 2010 receivables liabilities value value Financial assets Cash and short-term investments $ $ $ $ Receivables $ $ $ $ Financial liabilities Cheques issued in excess of funds on deposit $ $ 2.4 $ 2.4 $ 2.4 Operating loans (note 11) Payables and accrued liabilities Long-term debt (note 11) $ $ $ $ The fair value of the long-term debt is based on rates available to the Company at December 31, 2010 for long-term debt with similar terms and remaining maturities. b) Financial risk management The Company s activities result in exposure to a variety of financial risks including risks related to commodity prices, currency fluctuation, credit, liquidity and interest rates. Commodity prices The Company s financial performance is principally dependent on the demand for, and selling prices of, its products. Both are subject to significant fluctuations. The markets for lumber, wood chips, LVL, MDF, plywood, pulp and newsprint are highly volatile and are affected by factors such as global economic conditions including the strength of the U.S. housing market, changes in industry production capacity, changes in world inventory levels and other factors beyond the Company s control. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Currency fluctuation Most of the Company s products are sold at prices denominated in U.S. dollars or based on prevailing U.S. dollar prices, and a significant portion of its operational costs and expenses are incurred in Canadian dollars. Therefore, an increase in the value of the Canadian dollar relative to the U.S. dollar reduces the revenue in Canadian dollar terms realized by the Company from sales made in U.S. dollars, which reduces operating margin and the cash flow available to fund operations. U.S. dollar-denominated debt and operations in the U.S. provide a partial offset to exchange exposure. From time to time, the Company uses derivatives to manage its exposure to U.S. dollar exchange fluctuations and commodity prices. The Company does not utilize derivative financial instruments for trading or speculative purposes and does not apply hedge accounting. Impact of U.S. dollar currency fluctuation on financial instruments The U.S. dollar balance sheet exposure at December 31, 2011 was as follows: Canadian operations 2011 Net working capital US$ Long-term debt (300.0) US$ (169.6) U.S. operations Net investment US$ 225.6

65 Based on these balances, with other variables unchanged, a $0.01 increase in the exchange rate for one U.S. dollar into Canadian currency would have resulted in a $1.6 million increase in earnings and a decrease of $2.2 million in the translation gain on foreign operations. A $0.01 decrease in this rate would have resulted in a $1.6 million decrease in earnings and an increase of $2.2 million in the translation gain on foreign operations. Credit Credit risk arises from the non-performance by counterparties of contractual financial obligations. Investments in cash and short-term investments and derivative contracts are primarily made using major banks and only made with counterparties meeting certain creditworthiness criteria. Credit risk for trade and other receivables is managed through established credit monitoring activities. Customer credit limits are established and monitored and ongoing evaluations of key customer financial conditions are performed. In certain market areas the Company has undertaken additional measures to reduce credit risk including credit insurance, letters of credit and prepayments. At December 31, 2011 approximately 59% of trade accounts receivable were covered by at least some of these additional measures. The Company has historically experienced minimal customer defaults and, as a result, it considers the credit quality of the trade accounts receivable at December 31, 2011 to be high. Bad debt expense of $0.4 million (2010 $nil) was recorded for the year. The aging analysis of trade accounts receivable is presented below: December 31, December 31, Trade accounts receivable gross Current $ $ Past due 1 to 30 days Past due 31 to 60 days Past due over 60 days Allowance for doubtful accounts (0.6) (0.6) Trade accounts receivable net Green Transformation Program Other Receivables $ $ Liquidity The Company manages liquidity by maintaining adequate cash and short-term investment balances and by having appropriate lines of credit available. In addition, the Company regularly monitors and reviews both actual and forecasted cash flows. Refinancing risks are managed by ensuring long-term debt has a balanced maturity schedule where possible. The following table summarizes the aggregate amount of contractual future cash outflows for long-term debt: Thereafter Total Long-term debt (note 11) $ 0.3 $ 0.3 $ $ 0.3 $ 0.3 $ 1.0 $ Interest on debt $ 16.2 $ 16.2 $ $ 0.4 $ 0.4 $ 1.2 $ Assumes debt level, foreign exchange rate and floating interest rates remain at December 31, 2011 levels and rates. Interest rates Interest rate risk relates mainly to cash and short-term investments and floating rate debt. The general practice of the Company is to fund its long-term capital with debt at fixed rates and various maturities. In addition, the Company has revolving lines of credit available that bear interest at floating rates on amounts drawn. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2011, with other variables unchanged, a 1% change in interest rates would not have a significant impact on earnings or other comprehensive earnings.

66 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) 25. Capital disclosures The Company s business is cyclical and is subject to significant changes in cash flow over the business cycle. In addition, financial performance can be materially influenced by changes in product prices and the relative values of the Canadian and U.S. dollar. The Company s objective in managing capital is to ensure adequate liquidity and financial flexibility at all times, particularly at the bottom of the business cycle and in a strong Canadian dollar environment. The Company s main policy relating to capital management is to maintain a strong balance sheet and otherwise meet financial tests that are commonly applied by rating agencies for investment grade issuers of public debt. The Company s debt is currently rated at below investment grade by major rating agencies primarily due to the poor economic fundamentals of the North American forest products industry. The Company believes that the goal of returning to an investment grade rating is an appropriately conservative approach in the context of the Company s cyclical business. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company monitors and assesses its financial performance in order to ensure that its net debt levels are prudent taking into account the anticipated direction of the business cycle. When financing acquisitions, the Company combines debt and equity financing in a proportion that is intended to maintain an investment grade rating for debt throughout the cycle. Long-term debt repayments are arranged, where possible, on a staggered basis that takes into account the uneven nature of anticipated cash flows. The Company has also established committed revolving lines of credit that provide liquidity and flexibility when capital markets are restricted. One key measurement used by the Company to monitor its capital position is net debt to total capital, calculated as follows at December 31: December 31, December 31, Net debt Cash and short-term investments $ (67.8) $ (160.7) Deferred financing fees (6.7) (7.5) Operating loans Long-term debt Shareholders equity 1, ,533.8 Total capital $ 1,716.1 $ 1,681.7 Net debt to total capital 14% 9% 1. Balance sheet presentation is net of deferred financing fees, where applicable.

67 26. Segment and geographical information The segmentation of manufacturing operations into lumber, panels and pulp and paper is based on a number of factors, including similarities in products, production processes and economic characteristics. Transactions between segments are at market prices and on normal business terms. The accounting policies of each segment are those described in Note 3. Pulp & Corporate 2011 Lumber Panels Paper & Other Total Sales at market prices To external customers $ 1,579.4 $ $ $ $ 2,762.1 To other segments $ 1,670.1 $ $ $ EBIDTA 1 $ 65.2 $ 7.8 $ $ 4.5 $ Amortization (84.7) (15.4) (65.0) (2.6) (167.7) Operating earnings (19.5) (7.6) Interest expense (10.8) (3.2) (6.1) (20.1) Exchange loss on long-term debt (6.7) (6.7) Other income Earnings from continuing operations before tax provision $ (20.5) $ (10.6) $ 80.2 $ (4.2) $ 44.9 Capital employed 1 $ 1,400.3 $ $ $ 10.8 $ 2,263.4 Total liabilities $ $ 47.4 $ $ $ 1,054.3 Assets before goodwill $ 1,302.3 $ $ $ 70.9 $ 2,273.6 Goodwill Total assets $ 1,519.9 $ $ $ 70.9 $ 2,537.3 Capital expenditures $ $ 4.9 $ 99.4 $ 1.0 $ Non-IFRS measures: a) EBITDA is defined as operating earnings plus amortization. b) Capital employed is defined as total assets less current non-interest bearing liabilities at year-end. P pulp & Corporate 2010 L lumber panels Paper & Other total Sales at market prices To external customers $ 1,621.4 $ $ $ $ 2,885.9 To other segments $ 1,715.0 $ $ $ EBIDTA 1 $ $ 57.6 $ $ (33.2) $ Amortization (94.0) (17.7) (70.3) (3.0) (185.0) Operating earnings (36.2) Interest expense (17.4) (2.8) (7.4) (0.1 ) (27.7) Exchange gain on long-term debt Other (expense) income (0.2) (1.0) (7.6) 0.3 (8.5) Earnings from continuing operations before tax provision $ $ 36.1 $ $ (19.1 ) $ Capital employed 1 $ 1,337.6 $ $ $ 64.7 $ 2,278.6 Total liabilities $ $ 48.5 $ 91.2 $ $ 1,076.5 Assets before goodwill $ 1,235.3 $ $ $ $ 2,346.6 Goodwill Total assets $ 1,452.9 $ $ $ $ 2,610.3 Capital expenditures $ 47.3 $ 1.5 $ 39.4 $ 0.9 $ Non-IFRS measures: a) EBITDA is defined as operating earnings plus amortization. b) Capital employed is defined as total assets less current non-interest bearing liabilities at year-end. 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

68 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) The geographic distribution of non-current assets and external sales is as follows: Non-current assets 1 Sales by geographic area Canada $ 1,626.7 $ 1,649.9 $ $ United States , ,409.8 China Other Asia Other $ 1,773.1 $ 1,782.5 $ 2,762.1 $ 2, Non-current assets exclude pension surplus of $18.9 million (2010 $38.7 million). 2. Sales distribution is based on the location of product delivery by the Company. 27. Contingency On January 18, 2011 the United States initiated arbitration with Canada under the Softwood Lumber Agreement ( SLA ) over its concern that the province of British Columbia ( B.C. ) has misapplied or altered its timber pricing rules and as a result has charged too low a price for certain timber harvested on public lands in the B.C. interior. In August 2011 the United States filed a detailed statement of case with the arbitration panel and the parties exchanged pleadings in the fourth quarter of A hearing before the arbitration panel is expected to take place in February 2012 with a final decision expected in the second half of The Company believes that Canada and B.C. are complying with their obligations under the SLA and intends to cooperate fully with the B.C. and Canadian governments in defending this claim. The results of the arbitration process are not determinable at this point in time and accordingly no provision has been recorded by the Company. 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

69 West Fraser Timber Co. Ltd. Appendix A to Annual Consolidated Financial Statements Transition to IFRS (figures are in millions of Candian dollars except where indicated) Transition to IFRS The Company s transition date is January 1, 2010 (the Transition Date ) and the Company has prepared its opening IFRS balance sheet as at that date. The Company prepared its financial statements by applying the existing IFRS with an effective date of December 31, 2011 or earlier. The Company s 2010 annual management s discussion and analysis included a January 1, 2010 IFRS balance sheet that provided a line by line reconciliation of the changes from CGAAP. This report can be found on the Company s website at and on the System for Electronic Document Analysis and Retrieval at under the Company s profile. The following tables and their notes reconcile IFRS equity and comprehensive earnings to the CGAAP version previously published: Comprehensive Earnings Adjustments on adoption of IFRS Earnings from Earnings from Translation For the year ended continuing discontinued of foreign Actuarial Comprehensive December 31, 2010 Notes operations operations Earnings operations gain (loss) earnings Earnings reported under CGAAP $ $ (3.6) $ $ (12.3) $ $ Earnings adjustment PPE 1 amortization Employee future benefits & long-term disability (77.6) (73.0) Reforestation & decommissioning obligations 4 (1.6) Share option expense Restructuring charges Deferred tax on above items 3,7 (4.7) (3.2) (7.9) Earnings adjustment (59.1) (36.2) Earnings reported under IFRS $ $ 4.6 $ $ (9.6) $ (59.1) $ PPE - property, plant and equipment Shareholders Equity Adjustment on adoption of IFRS Translation date at As at January 1, December 31, Notes Equity reported under CGAAP $ 1,618.2 $ 1,765.2 Retained earnings adjustment Opening retained earnings adjustment (195.2) PPE impairment 2 (94.8) PPE decommissioning obligation Employee future benefits & long-term disability 3 (106.8) Reforestation & decommissioning obligations 4 (15.2) Share option liability 5 (16.6) Restructuring liability 6 (6.0) Deferred income tax on above items Employee future benefits actuarial losses (net of tax) 3 (59.1 ) Earnings adjustments (see prior table) 20.2 Retained earnings adjustment (195.2) (234.1) Cumulative translation adjustment Equity reported under IFRS $ 1,423.0 $ 1, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

70 Notes to Consolidated Financial Statements (continued) (in millions of Canadian dollars, except where indicated) Notes to Comprehensive Earnings and Shareholders Equity Adjustments on adoption of IFRS 1. IFRS 1 Elected exemptions In accordance with IFRS 1 First-time Adoption of International Financial Reporting Standards ( IFRS 1 ), the Company has elected to apply the following exemptions from full retrospective application of IFRS: Business combinations The Company has elected to apply the business combination exemption in IFRS 1 to business combinations that occurred before January 1, Accordingly, the CGAAP purchase cost accounting values carry forward under IFRS. Fair value as deemed cost The Company has elected to apply the fair value as deemed cost exemption to items of property, plant, and equipment that were impaired under IFRS at the transition date. The result is that the asset cost base is restated to fair value for the items on which the exemption was applied. Employee future benefits The Company has elected to recognize the January 1, 2010 cumulative unamortized actuarial gains and losses in opening retained earnings for the Company s employee benefit plans. Cumulative translation differences The Company has elected to set the cumulative translation balance, which was included in accumulated other comprehensive earnings, to zero at January 1, 2010 by absorbing it into opening retained earnings. Decommissioning liabilities The Company has elected to apply the IFRS 1 exemption to its decommissioning liabilities included in the cost of property, plant and equipment. 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Borrowing cost The Company has elected to apply the IFRS 1 exemption on borrowing costs that should be capitalized on qualifying property, plant and equipment additions that occurred before January 1, Property, plant and equipment impairment IFRS requires the assessment of asset impairment to be based on discounted cash flows while CGAAP only requires discounting if the carrying value of assets exceeds the undiscounted cash flows. The assumptions used to estimate cash flows are based on industry sources, including Forest Economic Advisors, LLC and Resource Information Systems, Inc., as well as industry analysts and management estimates. Future cash flows were then discounted using an interest rate of 10% to determine the net present value of future cash flows. The difference in methodology resulted in asset impairment charges of $75.3 million related to certain U.S. sawmill assets and $19.5 million related to certain MDF assets being charged through Transition Date retained earnings. Amortization expense under IFRS was reduced by $13.6 million for the year ended December 31, 2010 due to the impairments. Fair value for the impaired items of property, plant and equipment at January 1, 2010 was $105.7 million after the impairment charge of $94.8 million. 3. Employee future benefits and long-term disability The significant differences between CGAAP and IFRS are as follows: i. The Company elected to recognize the January 1, 2010 cumulative deferred actuarial gains and losses in opening retained earnings for the Company s defined benefit pension plans under IFRS 1. ii. Under CGAAP the Company used an October 31st measurement date, while IFRS requires a December 31st measurement date. iii. The Company has chosen to adjust actuarial gains and losses after the Transition Date to retained earnings via other comprehensive earnings. Under CGAAP these amounts are deferred and amortized over the average remaining service period of the affected employees within certain limits.

71 The differences in methodology resulted in a reduction of deferred pension costs of $106.3 million and an increase in post-retirement obligations of $0.5 million on the Transition Date. Under IFRS, employee future benefit expense was reduced by $6 million and long-term disability expense was increased by $1.5 million for the year ended December 31, A charge of $59.1 million (net of tax of $18.5 million) was recorded to other comprehensive earnings for actuarial gains and losses related to the year ended December 31, Reforestation and decommissioning obligations Under CGAAP reforestation and decommissioning obligations are discounted at the risk-free rate in effect at the time the liability was recorded. IFRS requires reforestation and decommissioning obligations to be discounted at each balance sheet date based on the discount rate in effect at that date. The differences in methodology resulted in an increase to reforestation and decommissioning obligations of $15.2 million and an increase in property, plant and equipment of $1.8 million on the Transition Date. The reforestation and decommissioning liability adjustment decreased expenses by $0.3 million for the year ended December 31, Share option liability The determination of fair value of the Company s share option liability under CGAAP is based on the intrinsic value method which uses the balance sheet date share price to calculate the liability. IFRS requires the use of a share option valuation model to fair value the share option liability. The differences in methodology resulted in an increase to the liability of $16.6 million on the Transition Date. The share option expense was decreased by $3.7 million for the year ended December 31, Restructuring charges Under CGAAP the Company was required to record certain restructuring charges related to discontinued operations in the first quarter of IFRS required these charges to be recorded in the fourth quarter of 2009 upon the announcement of the mill closure. The difference in methodology resulted in an increase to payables and accrued liabilities of $6.0 million on the Transition Date. The restructuring charge adjustment for the year ended December 31, 2010 was a $6.0 million decrease in expenses. 7. Deferred income taxes The deferred income tax adjustments reflect the change in temporary differences resulting from the effect of the IFRS adjustments described in these notes. The Transition Date adjustments resulted in a decrease in deferred taxes of $42.4 million. The deferred tax expense increase for the year ended December 31, 2010 was $7.9 million. 8. Cumulative translation adjustment The Company elected to set the cumulative translation balance, which was included in accumulated other comprehensive earnings, to zero at January 1, 2010 by absorbing the $59.8 million into opening retained earnings. The foreign currency translation of IFRS adjustments to the Company s U.S. operations decreased the cumulative translation loss by $2.7 million for the year ended December 31, Cash flow statement The cash flow statement presented under IFRS includes interest paid as part of cash flows from financing activities, interest received as part of cash flows from investing activities and expenditures on major planned maintenance shutdowns as cash flows from investing activities. Previously these items were included in cash flows from operating activities. 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

72 72 FIVE-YEAR FINANCIAL REVIEW Five-Year Financial Review (in millions of dollars, except as otherwise indicated) Earnings Sales 2, , , , ,022.2 Cost of product sold 1, , , , ,294.0 Freight and other distribution costs Export taxes Amortization Selling, general and administration Equity-based compensation (2.7) (2.3) (7.5) Asset impairments & restructuring charges 22.1 Operating earnings (181.3) (140.5) (133.0) Interest expense - net (20.1) (27.7) (26.5) (34.1 ) (28.1 ) Exchange gain (loss) on long-term debt (6.7) (68.0) 52.2 Other income (expense) 13.9 (8.5) (3.7) 27.5 (3.6) Income tax recovery (expense) (18.1) (73.5) (33.0) Earnings from continuing operations (194.4) (133.6) (13.3) Earnings from discontinued operations (146.4) (3.5) (22.9) Earnings (340.8) (137.1 ) (36.2) Cash flows from operating activities (224.2 ) Capital expenditures & acquisitions Financial position Current assets PPE & timber licenses 1, , , , ,211.0 Goodwill & other intangibles Other assets Total assets 2, , , , ,521.5 Current liabilities Long-term debt Other liabilities Deferred income taxes Shareholders equity 1, , , , ,086.5 Total liabilities & equity 2, , , , ,521.5 Per common share (dollars) Basic EPS from continuing operations (4.54) (3.12 ) (0.31 ) Basic EPS after discontinued operations (7.96) (3.20) (0.85) Price range high low close Cash dividends declared Shares outstanding at year-end ( 000s) 42,846 42,835 42,816 42,805 42,805 Ratios (before unusual items) EBITDA margin 8.2% 15.9% 3.4% 4.0% 3.5% Return on capital employed 2 3.9% 9.1% -11.4% -3.6% -0.5% Return on common shareholders equity 2 4.7% 12.5% -18.7% -6.7% -1.7% Net debt to capitalization 14.0% 9.0% 24.0% 24.0% 25.0% Number of employees at year-end 3 6,850 6,740 7,300 8,500 9,000 Production Lumber (MMfbm) 4,911 4,683 4,152 4,959 5,046 Pulp (Mtonnes) 1,132 1,141 1,024 1,042 1,043 Newsprint (Mtonnes) MDF ( 3 /4 MMsf) Plywood ( 3 /8 MMsf) LVL (Mcf) 1,634 1,918 1,643 1,264 2,291 1 Amounts for years prior to 2010 have not been restated under IFRS and are prepared under previous Canadian generally accepted accounting principles. 2 After discontinued operations includes discontinued operation employees.

73 Corporate Information DIRECTORS principal OCCUPATION Henry H. Ketcham Chairman, President and Chief Executive Officer Clark S. Binkley Managing Director, International Forestry Investment Advisors (advisory services) J. Duncan Gibson Investor William P. Ketcham Chairman of the Board, Henry H. Ketcham Lumber Co., Inc. (private investment) Samuel W. Ketcham Investor Harald H. Ludwig president, Macluan Capital Corporation (diversified private equity investments) Brian F. MacNeill Corporate Director Robert L. Phillips Corporate Director Janice G. Rennie Corporate Director OFFICERS OFFICE HELD Henry H. Ketcham Chairman, President and Chief Executive Officer D. Wayne Clogg Senior Vice-President, Woodlands Raymond W. Ferris Vice-President, Wood Products Larry S. Hughes Vice-President, Finance and Chief Financial Officer Rodger M. Hutchinson Vice-President, Corporate Controller Maureen F. Kuper Treasurer David P. Lehane Vice-President, Canadian Woodlands Christopher D. McIver Vice-President, Lumber Sales and Corporate Development Sean P. McLaren Vice-President, U.S. Lumber Operations Peter A. Rippon Vice-President, Pulp and Energy Edward R. Seraphim executive Vice-President and Chief Operating Officer 73 CORPORATE INFORMATION

74 Corporate Information 74 CORPORATE INFORMATION ANNUAL GENERAL MEETING The Annual General Meeting of the shareholders of the Company will be held on April 19, 2012 at 11:30 a.m. at Quesnel, British Columbia, Canada. AUDITORS PricewaterhouseCoopers LLP Vancouver, British Columbia, Canada LEGAL COUNSEL McMillan LLP Vancouver, British Columbia, Canada TRANSFER AGENT CIBC Mellon Trust Company Vancouver, Calgary, Regina, Winnipeg, Toronto, Montreal and Halifax, Canada FILINGS Shares are listed on the Toronto Stock Exchange under the symbol: WFT INVESTOR CONTACTS Larry S. Hughes Vice-President, Finance and Chief Financial Officer Rodger M. Hutchinson Vice-President, Corporate Controller Tel: (604) Fax: (604) Address WEBSITE CORPORATE OFFICE 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) Fax: (604) SALES SPF Lumber 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) Fax: (250) SPF Export Lumber 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) Fax: (604) SYP Lumber 1900 Exeter Road, Suite 105, Germantown, Tennessee, USA, Tel: (901) Fax: (901) Laminated Veneer Lumber 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) Fax: (250) MDF Avenue, Edmonton, Alberta, Canada, T6E 0L1 Tel: (780) Fax: (780) Plywood 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) Fax: (250) Pulp & Paper 858 Beatty Street, Suite 501, Vancouver, British Columbia, Canada, V6B 1C1 Tel: (604) Fax: (604) Newsprint W Georgia Street, Vancouver, British Columbia, Canada, V6B 4N8 Tel: (604) Fax: (604) OPERATIONS Lumber, Plywood and LVL Canadian Operations 1250 Brownmiller Road, Quesnel, British Columbia, Canada, V2J 6P5 Tel: (250) Fax: (250) US Operations 1900 Exeter Road, Suite 105, Germantown, Tennessee, USA, Tel: (901) Fax: (901) MDF WestPine 300 Carradice Road, Quesnel, British Columbia, Canada, V2J 5Z7 Tel: (250) Fax: (250) Ranger Board Box 2000, Whitecourt, Alberta, Canada, T7S 1P9 Tel: (780) Fax: (780) Pulp & Paper Cariboo Pulp & Paper P.O. Box 7500, 50 North Star Road, Quesnel, British Columbia, Canada, V2J 3J6 Tel: (250) Fax: (250) Quesnel River Pulp 1000 Finning Road, Quesnel, British Columbia, Canada, V2J 6A1 Tel: (250) Fax: (250) Hinton Pulp 760 Switzer Drive, Hinton, Alberta, Canada, T7V 1V7 Tel: (780) Fax: (780) Slave Lake Pulp P.O. Box 1790, Slave Lake, Alberta, Canada, T0G 2A0 Tel: (780) Fax: (780) Alberta Newsprint Company Postal Bag 9000, Whitecourt, Alberta, Canada, T7S 1P9 Tel: (780) Fax: (780)

75 Glossary of Industry Terms AAC Annual Allowable Cut The volume of timber that may be harvested annually from a specific timber tenure. BCTMP Bleached Chemithermomechanical Pulp Dimension Lumber Standard commodity lumber ranging in sizes from 1 x 3 s to 2 x 12 s, in various lengths. EBITDA Refers to operating earnings plus amortization and asset impairment charges. FMA Forest Management Agreement An FMA is granted by the Alberta government and entitles the holder to establish, grow and harvest timber on specified lands. GHG Greenhouse Gases A gas that absorbs and re-emits infrared radiation, warming the earth s surface. LVL Laminated Veneer Lumber Large sheets of veneer bonded together with resin, then cut to lumber equivalent sizes. m 3 A solid cubic metre, a unit of measure for timber, equal to approximately 35 cubic feet. Mcf One thousand cubic feet. A unit of measure for laminated veneer lumber. MDF Medium Density Fibreboard A composite product made from wood fibre. Mfbm One thousand board feet (equivalent to one thousand square feet of lumber, one inch thick). MMfbm means one million board feet. Msf A unit of measure for MDF and plywood equal to one thousand square feet on a 3 /4 inch basis for MDF and on a 3 /8 inch basis for plywood. MMsf means one million square feet. Net Debt to Capitalization Net debt (total debt less cash and shortterm investments) divided by net debt plus shareholders equity. NBSK Northern Bleached Softwood Kraft Pulp Return on Capital Employed Earnings before after-tax financing expense divided by average assets less average current non-interest bearing liabilities. Return on Common Shareholders Equity Earnings available to common shareholders divided by average shareholders equity. SPF Dimension lumber produced from spruce/ pine/balsam fir species. SYP Dimension lumber produced from southern yellow pine species. Ton A unit of weight equal to 2,000 pounds, generally known as a U.S. ton. Tonne A unit of weight in the metric system equal to one thousand kilograms or approximately 2,204 pounds. Mtonne means one thousand tonnes. 75 GLOSSARY OF INDUSTRY TERMS

76 West Fraser Timber Co. Ltd. Tel: Fax: