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I have bought some craft store foam board 5mm thick that is covered on both sides in paper. I have read about removing the paper (via soaking in water etc), but is this step necessary when building terrain? What if only using the foam board for the base of a terrain piece?

Depends what you want to do. If you want to texture the foamboard to look like stone or something, etch bricks into it with a pen, then yeah remove the paper.

If you're gonna texture it with sand or some sort of texture paste then you can leave the paper on there. It will give a bit of extra strength to the foamboard. Just be careful about shrinkage causing warping.

Great idea, I didn't think like these. Thanks

If you do get warping you can sometimes fix it by covering the reverse side in PVA and then letting it dry completely over 24 hours. You've got to wait the full 24 but it can cancel out the warp. Worth trying on a test piece before committing.