20-F 1 d725706d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 17, 2019

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

Commission File Number: 33-99720

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

(Exact name of Registrant as specified in its charter)

Arauco and Constitution Pulp Inc.

(Translation of Registrant’s name into English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

(Address of principal executive offices)

Gianfranco Truffello

Tel.: 56-2-2461-7221

E-mail: gianfranco.truffello@arauco.com

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

Title of each class:

7.250% Notes due 2019

5.000% Notes due 2021

4.750% Notes due 2022

4.500% Notes due 2024

3.875% Notes due 2027

5.500% Notes due 2047

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: Shares of Common Stock, without par value: 113,159,655

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes   No 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  Yes ☐  No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). N/A

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer      Accelerated Filer  
Non-Accelerated Filer      Emerging Growth Company  

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  

 

The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statement included in this filing:

 

U.S. GAAP  ☐   

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

   Other  ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow: Item  17 ☐  Item 18 ☐

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   No 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

        Page  

PART I

     

    Item 1.

   Identity of Directors, Senior Management and Advisers      1  

    Item 2.

   Offer Statistics and Expected Timetable      1  

    Item 3.

   Key Information      1  

    Item 4.

   Information on our Company      20  

    Item 5.

   Operating and Financial Review and Prospects      52  

    Item 6.

   Directors, Senior Management and Employees      73  

    Item 7.

   Major Shareholders and Related Party Transactions      80  

    Item 8.

   Financial Information      82  

    Item 9.

   The Offer and Listing      86  

    Item 10.

   Additional Information      87  

    Item 11.

   Quantitative and Qualitative Disclosures About Market Risk      95  

    Item 12.

   Description of Securities Other than Equity Securities      97  

PART II

     

    Item 13.

   Defaults, Dividend Arrearages and Delinquencies      98  

    Item 14.

   Material Modifications to the Rights of Security Holders and Use of Proceeds      98  

    Item 15.

   Controls and Procedures      98  

    Item 16A.

   Audit Committee Financial Expert      99  

    Item 16B.

   Code of Ethics      99  

    Item 16C.

   Principal Accountant Fees and Services      99  

    Item 16D.

   Exemptions from the Listing Standards for Audit Committees      101  

    Item 16E.

   Purchases of Equity Securities by the Issuer and Affiliated Purchasers      101  

    Item 16F.

   Change in Registrant’s Certifying Accountant      101  

    Item 16G.

   Corporate Governance      101  

    Item 16H.

   Mine Safety Disclosures      101  

PART III

     

    Item 17.

   Financial Statements      101  

    Item 18.

   Financial Statements      101  

    Item 19.

   Exhibits      102  

 

 

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CERTAIN TERMS AND CONVENTIONS

Celulosa Arauco y Constitución S.A. is a sociedad anónima (corporation) organized under the laws of the Republic of Chile, and subject to certain rules applicable to sociedades anónimas abiertas (Chilean public corporations). Except where otherwise specified or the context otherwise requires, when we refer to the “Company,” “Arauco” or “we,” in this annual report, we mean Celulosa Arauco y Constitución S.A. and its consolidated subsidiaries. When we refer to “Chile,” we mean the Republic of Chile; when we refer to “Argentina,” we mean the Argentine Republic; when we refer to “Brazil,” we mean the Federative Republic of Brazil; when we refer to “the U.S.,” “U.S.A.,” or “the United States,” we mean the United States of America; when we refer to “Uruguay,” we mean the Oriental Republic of Uruguay; and when we refer to “Mexico,” we mean the United Mexican States. All references to “tonnes” are to metric tons (1,000 kilograms), which equal 2,204.7 pounds. One “hectare” equals 10,000 square meters or 2.471 acres. Discrepancies in any table between totals and the sums of the amounts listed may be due to rounding.

Unless otherwise specified, all references to “$,” “U.S.$,” “U.S. dollars” or “dollars” are to United States dollars; references to “Chilean pesos” or “Ch$” are to Chilean pesos; references to “Argentine pesos” or “AR$” are to Argentine pesos; references to “Brazilian reais” “Brazilian reals” or “R$” are to Brazilian reais; references to “€” or “euro” are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; and references to “UF” are to Unidades de Fomento. The UF is a unit of account that is linked to, and adjusted daily to reflect changes in, the Chilean consumer price index reported by the Instituto Nacional de Estadísticas (Chilean National Institute of Statistics). As of December 31, 2018, one UF equaled U.S.$39.68 and Ch$27,565.79.

Regarding our pulp business, references to “hardwood” kraft pulp are to pulp made from eucalyptus or short fiber, and references to “softwood” kraft pulp are to pulp made from pine or long fiber.

PRESENTATION OF FINANCIAL AND OTHER DATA

This report includes the audited consolidated statement of financial position of Arauco and our subsidiaries as of December 31, 2018 and 2017 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years for the period ended December 31, 2018 (collectively, the “audited consolidated financial statements” or “financial statements”). In addition, this report includes selected financial information as of and for the periods ended December 31, 2014, 2015, 2016, 2017 and 2018.

We make statements in this report about the pulp market partly on the basis of information from third-party sources. This information is principally sourced from reports published by Hawkins Wrights Ltd. and Resource Information Systems Inc., which are specialized consultants in the pulp market.

For your convenience, this annual report contains certain translations of Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the observed exchange rate reported by Banco Central de Chile, which we refer to as the “Central Bank of Chile” or the “Central Bank.” The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. On December 31, 2018, the observed exchange rate for Chilean pesos, as published in the Diario Oficial de la República de Chile (Official Gazette) on January 2, 2019, was Ch$694.77 to U.S.$1.00, and on April 12, 2019, the observed exchange rate was Ch$660.67 to U.S.$1.00. See “Item 3. Key Information—Exchange Rates.” You should not construe these translations as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise specified, references to the devaluation or the appreciation of the Chilean peso against the U.S. dollar are in nominal terms (without adjusting for inflation) based on the observed exchange rates published by the Central Bank of Chile for the relevant period.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial information as of December 31, 2014, 2015, 2016, 2017 and 2018 and for each of the five years then ended is derived from, should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

     As of and for the year ended December 31,  
     2018     2017     2016     2015     2014  
     (in thousands of U.S. dollars, except ratios and share data)  

INCOME STATEMENT DATA

  

Revenue

     5,954,833       5,238,341       4,761,385       5,146,740       5,342,643  

Cost of sales

     (3,722,749     (3,574,532     (3,498,905     (3,511,425     (3,654,146

Gross profit

     2,232,084       1,663,809       1,262,480       1,635,315       1,688,497  

Other income

     124,304       111,513       257,863       273,026       368,924  

Distribution costs

     (556,805     (523,300     (496,473     (528,470     (556,837

Administrative expenses

     (561,284     (521,294     (474,469     (551,977     (550,809

Other expenses

     (95,880     (240,165     (77,415     (83,388     (138,769

Other income (loss)

     14,213       0       0       0       0  

Finance income

     20,895       19,640       29,701       50,284       30,772  

Finance costs

     (214,779     (287,958     (258,467     (262,962     (246,473

Share of profit (loss) of associates and joint ventures accounted for using equity method

     17,246       17,017       23,939       6,748       7,481  

Exchange rate differences

     (26,470     98       (3,935     (41,171     (9,961

Income before income tax

     953,524       239,360       263,224       497,405       592,825  

Income tax

     (226,765     30,992       (45,647     (129,694     (448,652
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     726,759       270,352       217,577       367,711       144,173  

BALANCE SHEET DATA

          

Current assets

     3,441,160       2,770,363       2,722,360       2,686,412       3,140,715  

Property, plant and equipment

     7,174,693       7,034,299       6,919,495       6,896,396       7,119,583  

Biological assets(1)

     3,652,263       3,766,942       3,898,991       3,826,597       3,846,353  

Total assets

     14,593,748       13,994,600       14,006,181       13,670,391       14,593,214  

Total current liabilities

     1,579,764       1,399,394       1,346,064       1,034,251       1,547,086  

Total non-current liabilities

     5,675,013       5,478,313       5,660,834       5,989,695       6,231,392  

Issued capital

     353,618       353,618       353,618       353,618       353,618  

Total equity

     7,338,971       7,116,893       6,999,283       6,646,445       6,814,736  

CASH FLOW DATA

          

Net cash flow from operating activities

     1,280,921       1,072,425       773,584       853,650       985,175  

Net cash flow from investing activities

     (893,982     (633,348     (640,212     (477,780     (655,158

Net cash flow from financing activities

     129,871       (439,101     (38,484     (812,176     (7,885
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and equivalents before effect of exchange rate changes

     516,810       (24     94,888       (436,306     322,132  

OTHER FINANCIAL DATA

          

Capital expenditures(2)

     937,934       844,082       556,633       564,795       604,155  

Depreciation and amortization

     407,422       421,551       409,387       400,145       353,434  

Fair value cost of timber harvested(3)

     319,448       334,100       340,199       306,673       353,273  

EBIT(3)

     1,147,408       507,678       491,990       710,083       808,526  

Adjusted EBITDA(3)

     1,850,537       1,353,159       1,067,121       1,290,486       1,280,481  

Adjusted EBITDA(3)/finance costs

     8.62       4.70       4.13       4.91       5.20  

Adjusted EBITDA(3)/revenue

     31.1     25.8     22.4     25.1     24.0

Average debt(4)/Adjusted EBITDA(3)

     2.37       3.23       4.12       3.64       3.95  

Total debt(5)

     4,510,276       4,273,518       4,481,003       4,305,435       5,078,430  

Total debt(5)/capitalization(6)

     38.1     37.5     39.0     39.3     42.7

Total debt(5)/equity attributable to parent company

     61.8     60.4     64.4     65.1     75.0

Working capital(7)

     1,861,396       1,370,969       1,376,296       1,652,161       1,593,629  

Number of shares

     113,159,655       113,159,655       113,159,655       113,159,655       113,159,655  

Net income per share (U.S.$ per share)

     6.4       2.4       1.9       3.2       1.2  

Dividends paid

     257,421       121,586       130,624       143,003       141,089  

Dividends per share (U.S.$ per share)

     2.27       1.07       1.15       1.26       1.25  

 

(1)

Biological assets refer to our forests and long-standing trees (current and non-current).

(2)

Includes capital expenditures in respect of property, plant and equipment and biological assets accrued for the period. Excludes acquisitions of companies.

(3)

We calculate EBIT as “net income” before “finance costs,” “finance income” and “income tax.” We calculate EBITDA as EBIT, plus “depreciation and amortization.”

 

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Adjusted EBITDA is calculated by adding “fair value cost of timber harvested,” “exchange rate differences” and other expenses, and deducting “gain from changes in fair value of biological assets” to EBITDA. “Fair value cost of timber harvested” is a non-cash expense included in our cost of sales (as a component of raw materials) that represents the fair value of the wood harvested and sold from our own plantations, which is commonly excluded from the non-generally accepted accounting principles (non-GAAP) measures used by analysts to compare participants in our industry as it is a non-cash item (purchases of wood from third parties are cash expenses that are not included in “fair value cost of timber harvested”). “Gain from changes in fair value of biological assets” is a gain that does not represent cash flow. We believe that Adjusted EBITDA provides investors with a useful supplemental indicator of the performance of our core business because (i) it cancels out the effects of fair value that are independent of the cost efficiency of our operating facilities and (ii) it excludes the effect of exchange rate differences, which are mainly derived from our debt instruments.

In evaluating the performance of Arauco, we believe that each of these non-GAAP financial measures should be considered together with and should not be considered in isolation, or as a substitute for, the analysis of our results as reported under IFRS. Some of the limitations of our non-GAAP financial measures are that EBIT, EBITDA and Adjusted EBITDA do not reflect: (i) our cash expenditures, or future requirements, for capital expenditures or contractual commitments; (ii) changes in, or cash requirements for, working capital needs; or (iii) the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our outstanding debt.

Because not all companies calculate EBIT, EBITDA or Adjusted EBITDA in the same manner, such measures as calculated by us may differ from such measures calculated by other companies. We compensate for these limitations by using EBIT, EBITDA and Adjusted EBITDA as supplemental measures to monitor our performance and by relying primarily on our financial statements that have been prepared in accordance with IFRS.

The following table presents, for the periods indicated, the reconciliation of EBIT, EBITDA and Adjusted EBITDA to net income.

 

     As of and for the year ended December 31,  
     2018     2017     2016     2015     2014  
     (in thousands of U.S. dollars)  

Net income

     726,759       270,352       217,577       367,711       144,173  

(+) Finance costs

     214,779       287,958       258,467       262,962       246,473  

(-) Finance income

     (20,895     (19,640     (29,701     (50,284     (30,772

(+) Income Tax

     226,765       (30,992     45,647       129,694       448,652  

EBIT

     1,147,408       507,678       491,990       710,083       808,526  

(+) Depreciation and amortization(*)

     407,422       421,551       409,387       400,145       353,434  

EBITDA

     1,554,830       929,229       901,377       1,110,228       1,161,960  

(+) Fair value cost of timber harvested

     319,448       334,100       340,199       306,673       353,273  

(-) Gain from changes in fair value of biological assets

     (84,476     (83,031     (208,562     (210,479     (284,497

(+) Exchange rate differences

     26,470       (98     3,935       41,171       9,961  

(+) Others(**)

     34,265       172,959       30,172       42,893       39,784  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     1,850,537       1,353,159       1,067,121       1,290,486       1,280,481  

 

(*)

See Note 7 and Note 19 of our audited consolidated financial statements for more detail on depreciation and amortization.

(**)

“Others” includes other non-cash expenses or gains, mainly associated with charges for forestry losses due to fires and impairment for fixed assets and others. The increased in “Others” for 2017 is mainly due to provision for forestry losses that accounted U.S.$138 million due to wildfires that affected our forests at the beginning of 2017.

 

(4)

Average debt is calculated as the average of total debt between the beginning and the end of the applicable year.

(5)

Total debt is calculated as the sum of other current financial liabilities and other non-current financial liabilities, minus hedging instruments.

(6)

Capitalization is calculated as total debt, including accrued interest, plus total equity.

(7)

Working capital is calculated by subtracting current liabilities from current assets.

 

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EXCHANGE RATES

The following table sets forth, for the periods and dates indicated, certain information concerning the observed exchange rates reported by the Central Bank. No representation is made that the Chilean peso or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Chilean pesos, as the case may be, at the rates indicated or at any other rate. The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. See “Item 10. Additional Information—Exchange Controls.”

 

     Daily Observed Exchange Rate  

Year Ended December 31,

   High      Low      Average(1)      Period-End  
     Ch$ per U.S.$  

2014

     621.41        527.53        570.34        606.75  

2015

     715.66        597.10        654.66        710.16  

2016

     730.31        645.22        676.67        669.47  

2017

     679.05        614.75        649.12        614.75  

2018

     698.56        588.28        640.62        694.77  

Months (2018-2019)

           

October

     698.56        656.25        678.57        698.56  

November

     688.76        667.46        676.24        671.09  

December

     695.69        666.49        683.23        694.77  

January

     697.64        666.76        675.38        657.81  

February

     665.90        649.22        656.00        651.79  

March

     683.73        656.57        668.95        678.53  

April (through April 12)

     672.56        660.67        665.46        660.67  

 

Source: Central Bank of Chile

 

(1)

For each year, the average of the month-end exchange rates for the relevant year. For each month, the average daily exchange rate for the relevant month.

On April 12, 2019, the observed exchange rate, as published in the Official Gazette on April 15, 2019, was Ch$660.67 to U.S.$1.00.

 

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FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains words such as “believe,” “expect,” “anticipate” and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. Such statements constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the United States Private Securities Litigation Reform Act of 1995, as amended.

Forward-looking statements involve inherent risks and uncertainties. These forward-looking statements are based on current plans, estimates and projections; therefore, readers should not place undue reliance on them. Actual results could differ materially from those projected in such forward-looking statements because of various factors that may be beyond our control, including but not limited to our ability to service our debt, fund our working capital requirements, comply with financial covenants in certain of our debt instruments, fund and implement our capital expenditure programs and maintain our relationships with customers, as well as a change in control, the effects on us from competition, future demand for forestry and wood products in the Chilean, Argentine, Brazilian, Uruguayan and North American export markets, international prices for forestry and sawn timber, the condition of our forests, possible shortages of energy, including electricity, the state of the Chilean and world economies and manufacturing industries, the relative value of the Chilean peso compared to other currencies, inflation, increases in interest rates, the effects of earthquakes, floods, tsunamis or other catastrophic events and changes in our regulatory environment, including our ability to comply with new or stricter environmental regulations and to resolve environmental liabilities. Forward-looking statements in this annual report speak only as of their dates, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

 

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RISK FACTORS

We are subject to various changing economic, political, social and competitive conditions, particularly in our principal markets. Any of the following risks, if they actually occur, could materially and adversely affect our business, financial condition, results of operations and cash flows.

Risks Relating to the Company

Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows.

Prices for many of the products we sell can fluctuate significantly. The prices of our products are highly correlated with international prices. Consequently, prices of our products are highly dependent on prevailing international and regional prices. Historically, such prices have been subject to substantial variations.

During the period from January 1, 2014 to December 31, 2018, the average price for Norscan bleached softwood kraft market pulp (pulp produced in North American, Nordic and Central European countries and sold to manufacturers of paper products delivered in Northern Europe, or “NBSK”), which is the benchmark for bleached softwood pulp, ranged from a low of U.S.$789.20 per tonne in April 2016 to a high of U.S.$1,230 per tonne in October and November 2018. Throughout 2014, NBSK prices maintained a steady upward trend, reaching U.S.$932.15 per tonne in mid-January 2015, mainly driven by increased demand from China. Throughout 2015 and during the first half of 2016, NBSK prices followed a downward trend, decreasing to U.S.$789.2 per tonne at the end of April 2016, as China began to change its economic structure from export-driven growth to domestic-demand-driven growth. In addition, the price gap between softwood and hardwood fibers increased, creating incentives for pulp customers to switch from softwood to hardwood, and adding downward pressure to prices. For the remainder of 2016, prices slightly recovered and finally stabilized, ending the year at U.S.$808.83 per tonne. Throughout 2017, NBSK prices had a positive trend, ending the year at U.S.$999.63. Such upward trend continued through October and November 2018 when prices reached U.S.$1,230, followed by a slight decrease in December 2018, ending the year at U.S.$1,200.02. The 2017 and 2018 rise in prices was mainly driven by an increase of demand in China and stable capacity levels.

During the period from January 1, 2014 through December 31, 2018, prices of bleached hardwood kraft pulp (pulp made from eucalyptus or birch which is sold in Europe and is the benchmark for Bleached Eucalyptus Kraft Pulp, or “BEKP”) ranged from a low of U.S.$651.46 per tonne in January 2017 to a high of U.S.$1,050.01 per tonne in May 2018. In 2014, two new short fiber pulp mills entered the market with a combined annual production capacity of 2.8 million tonnes. The additional supply caused BEKP prices to decline during the first nine months of 2014, reaching a price of U.S.$724.27 per tonne in September 2014. Thereafter, BEKP began an upward trend, reaching U.S.$811.17 per tonne in November 2015, following increased demand, particularly from China, which was able to absorb the increased supply. However, the expectation of additional supply during 2016 and especially in 2017 continued to place downward pressure on prices, which reached their lowest level in January 2017, at U.S.$651.46 per tonne. A new pulp mill located in Indonesia began its ramp-up in November 2016, initially with an annual capacity of estimated at 2.8 million tonnes. As the ramp-up of new capacity was delayed, pulp prices started to rise at the beginning of 2017, which was also supported by stronger than expected demand from China. Throughout 2017, prices continued to rise as the expected output of the mill located in Indonesia was revised to 1.7 million tonnes for the next three to four years and the lower capacity of other mills due to operational problems, leading to further increases in prices, reaching U.S.$979.31 per tonne at the end of 2017. The increase in prices continued through May 2018 when prices reached a peak at U.S.$1,050.01. During the rest of the year, prices stabilized with a slight decrease towards the end of 2018, ending the year at U.S.$1,025.73. The increase in prices through May 2018 was mainly due to sustained demand and stable capacity levels. The decrease in demand registered by the end of 2018 was mainly explained by the trade tensions between China and the United States.

Although wood products markets improved until mid-year 2015, new competition from countries with depreciated currencies increased supply to our traditional markets, such as North America, which caused average prices to decrease. Markets recovered during 2016, although Latin American exports continued to affect prices in countries such as the United States. The North American market showed an improvement in the construction sector, which provided steady demand. During 2017, the construction sector continued to improve, and average prices for wood products increased during certain months of the year. During the first half of 2018, Latin American countries (including Mexico) showed stable demand levels for wood products. Towards the end of 2018, the uncertainty surrounding the trade tensions between China and the United States affected demand. The construction sector in the United States experienced a slight increase compared to 2017, which was sustained throughout 2018. Average prices remained stable in 2018 compared to 2017, showing variations depending on the product.

 

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Global economic conditions may exert downward pressure on commodity prices, including the international prices of the products we sell, which could result in material and adverse declines in our revenues, results of operations and financial condition. We have no control over the factors that cause prices to change which include, among others:

 

   

worldwide demand (which may be affected by a number of factors, including economic or political conditions in Asia, Latin America, North America and Europe);

 

   

prevailing world prices, which historically have been subject to significant fluctuations over relatively short periods of time, depending on worldwide demand;

 

   

world production capacity;

 

   

the business strategies adopted by major integrated forestry, pulp and paper producers and other major producers; and

 

   

the availability of substitutes.

In addition, the prices of many of the products we sell are correlated to some extent, and historical fluctuations in the price of one product have usually been accompanied by similar fluctuations in the prices of other products. If the price of one or more of the products that we sell were to decline significantly from current levels, it could have a material adverse effect on our revenues, results of operations and financial condition.

Worldwide competition in the markets for our products could adversely affect our business, financial condition, results of operations and cash flows.

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines. Several of our competitors are larger than we are and have greater financial and other resources, which, among other things, may enhance their ability to support strategic expenditures directed to increase their market share. Our market share may be adversely affected if we are unable to successfully continue to expand our production capacity at the same pace as our competitors.

The pulp industry is sensitive to changes in industry capacity and producer inventories, as well as to cyclical changes in the world’s economies, all of which may significantly affect selling prices and, thereby, our profitability. One or more of these factors could materially and adversely affect our business, financial condition, results of operations and cash flows.

Global economic developments, and particularly economic developments in the Asian, European and U.S. economies, could have an adverse effect on the demand for our products, our financial condition, results of operations and cash flows.

The global economy, and in particular global industrial production, is the primary driver of demand for pulp, paper and wood products. Our wood products segment, which is highly dependent on the strength of the home-building industry, has experienced decreases in its prices and demand for its products from time to time.

A decrease in the level of activity in either the domestic or the international markets within which we operate could adversely affect the demand and the price of our products and thus our cash flows and operational and financial results.

The devaluation of the Chinese Yuan during the third quarter of 2015 increased volatility in the markets and resulted in a decline in global demand for commodities. Also in 2015, the currencies of several countries depreciated, such as the Canadian dollar, the Euro, the Chilean peso, the Brazilian real and the Argentine peso, resulting in increased competition in exports, which in turn negatively impacted the average price of our wood products. A similar trend continued throughout 2016, although certain of these currencies recovered compared to the previous year. During 2017, certain currencies continued to recover such as the Canadian dollar, the Brazilian real, the Euro and the Chilean peso. The Argentine peso depreciated throughout the year. Similar to what happened in 2015, throughout 2018 the currencies of several countries depreciated, including the Brazilian real, the Chilean peso, the Canadian dollar, and the Argentine peso (which depreciated the most).

Export sales to Asia accounted for 40.1% of our revenues in 2018 compared to 36.2% in 2017 and 32.6% in 2016, and export sales to North America accounted for 11.2% of our revenues in 2018 compared to 12.8% in 2017 and 13.2% in 2016.

Our business, financial condition, results of operations and cash flows could be materially and adversely affected if the economic conditions in Asia, Europe, the United States and elsewhere deteriorate, and if we are unable to reallocate our wood products and other products to other markets on equally beneficial terms, which could require us to recognize additional impairment charges.

 

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We depend on free international trade as well as economic and other conditions in our principal export markets.

In 2018, export sales, defined as sales out of the country where our goods were produced, accounted for 67.8% of our total revenues. During this period, 59.1% of our export sales were to customers in Asia and Oceania, 16.4% to customers in North America, 11.9% to customers in Europe, 7.2% to customers in Central and South America and 5.4% to customers in other countries. As a result, our results of operations and cash flows depend, to a significant degree, on economic, political and regulatory conditions in our principal export markets. Our ability to compete effectively in our export markets could be materially and adversely affected by a number of factors beyond our control, including deterioration in macroeconomic conditions, exchange rate volatility, government subsidies and the imposition of increased tariffs or other trade barriers. If our ability to sell our products competitively in one or more of our principal export markets were impaired by any of these developments, it might be difficult to reallocate our products to other markets on equally favorable terms and our business, financial condition, results of operations and cash flows might be adversely affected.

We are located in a seismic area that exposes our properties in Chile to the risk of earthquakes and tsunamis, and we experienced significant business disruption and losses as a result of the February 27, 2010 earthquake.

Our properties in Chile are located in a seismic area that exposes our facilities, plants, equipment and inventories to the risk of earthquakes and even subsequent tsunamis in some areas. A significant earthquake or other catastrophic event could severely affect our ability to meet our production targets or satisfy customer demand and could require us to make unplanned capital expenditures, resulting in lower sales and having a material adverse effect on our financial results.

On February 27, 2010, an earthquake measured at a magnitude of 8.8 on the Richter scale, followed by a tsunami that affected the coast, occurred in the South-Central Region of Chile, an area where we maintain a substantial portion of our Chilean industrial operations. Immediately after the earthquake, all of our production units implemented their contingency plans, which involved shutting down operations and evaluating the damage caused to each facility by the earthquake. As a result of the earthquake and the subsequent tsunami, our Mutrún sawmill was destroyed.

The suspension of our operations in Chile resulted in significant asset impairment charges due to earthquake-related damage to property and inventories as well as a significant decrease in our sales volumes due to plant closures, which had an adverse effect on our results of operations and cash flows. Our insurance policies provided coverage up to an aggregate amount of U.S.$650 million for damages to our property, plant, equipment and inventories, with a deductible of U.S.$1 million for property damage, and for losses due to business interruption caused by such damage after the first 15 days of business interruption. On November 15, 2011, we and the insurers accepted the final report of the insurance adjusters. In accordance with such final report, we received a total recovery payment of U.S.$532.0 million.

We cannot assure you that we will not experience other suspensions or interruptions or unexpected damage to our property as a result of other earthquakes, aftershocks, tsunamis, any related repair and maintenance or other consequences associated with such events, or that our insurance coverage will be sufficient, any of which could have a material adverse effect on our revenue, results of operations and financial condition.

The costs to comply with, and to address liabilities arising under, environmental laws and regulations could adversely affect our business, financial condition, results of operations and cash flows.

In each country where we have operations, we are subject to a wide range of national and local environmental laws and regulations concerning, among other matters, the preparation of environmental impact assessments for our projects, the protection of the environment and human health, the generation, storage, handling and disposal of waste, the discharge of pollutants and the remediation of contamination. As a forest products manufacturer, we generate air and water emissions and solid and hazardous wastes. These emissions and our waste disposal are subject to limits and controls prescribed by law or by our operating permits, and we may be required to install or upgrade our pollution control equipment in order to meet these legal requirements. We have made, and expect to continue to make, expenditures to maintain compliance with environmental laws. Notwithstanding our policy to strictly comply with all requirements established by applicable environmental laws, any failure to comply with such environmental laws may result in civil, administrative or criminal fines or sanctions, claims for environmental damages, remediation obligations, the revocation of environmental authorizations or the temporary or permanent closure of facilities. Environmental regulations in Chile and other countries in which we operate have become increasingly stringent in recent years (for example, in connection with the approval and development of new projects), and this trend is likely to continue. Future changes in environmental laws, or in the application, interpretation or enforcement of those laws, including new or stricter requirements related to harvesting activities, air and water emissions and/or climate change regulations, could result in substantially increased capital, operating or compliance costs, impose conditions that restrict or limit our operations or otherwise adversely affect our business, financial condition, results of operations and cash flows. These changes could also limit the availability of our funds for other purposes, which could adversely affect our business, financial condition, results of operations and cash flows.

 

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We have been subject to a number of environmental administrative and judicial proceedings in Chile, including proceedings related to the Valdivia Mill, the Arauco Mill, the Nueva Aldea complex, the Licancel Mill and the Constitución Mill. As a result of these proceedings, we have been subject to monetary fines as well as sanctions, including orders to suspend or limit our operations.

In November 2015, the Cruces river, where the Valdivia Mill disposes its effluents, became subject to the Secondary Water Quality Standard for the Valdivia River Basin (hereinafter, the “Norm” or “SWQSVR”). The Valdivia Mill discharges its treated effluents into the Cruces River, which is part of the Valdivia River Basin.

The Company and other local entities challenged the validity of the Norm before the Third Environmental Court in January 2016, expressing concerns, among others, regarding various aspects of the Norm’s General Environmental and Social Impact Assessment (AGIES, for its acronym in Spanish). These objections included the lack of identification and consideration for the effective economic and social costs resulting from the adoption of the Norm. Other objections included that the Norm’s parameters and limits exceeded the reviewed water quality criteria enforced by reference countries in both quantity and stringency; and that many of the parameters and limits were not technically or environmentally reasonable. The Third Environmental Court ruled in our favor on September 29, 2016, declaring the invalidity of the Norm, which decision was upheld by the Supreme Court in July 2017.

In December 2017, the government restarted the rulemaking process and published a new draft SWQSVR for public comments. The draft proposes to regulate using practically the same parameters and limits included in the previous Norm declared void by the Supreme Court. In our opinion, the draft presents flaws similar to those detected in the previous rulemaking process, among others, the lack of identification and consideration of its actual economic and social costs and that most of its parameters and limits are not technically or environmentally reasonable. The public comment process finished in March 2018 and several comments from the public and different stakeholders were submitted, including various technical, economical and legal reports from third parties. According to applicable regulations, the government shall analyze and weigh the comments to prepare a final draft, prior to submitting for consideration by the Sustainability Ministers’ Committee (Consejo de Ministros para la Sustentabilidad) and the President of the Republic. Once the new norm enters into force, we cannot exclude that the authority may declare that the Valdivia River Basin is contaminated and thus initiate an administrative proceeding to impose a decontamination plan, which may include new limits on discharges of wastewater applicable to the Valdivia Mill.

In the United States, our Moncure mill was subject to an administrative proceeding by the North Carolina Department of Environment and Natural Resources. We negotiated a settlement (Special Order by Consent) in 2015 with the Environmental Management Commission (an agency of the state of North Carolina), which included a monetary fine and an agreement to replace certain emissions control equipment. Arauco is pursuing an additional agreement with the state of North Carolina to obtain additional time for modifications and acclimation of abatement equipment installed under such 2015 Special Order by Consent.

In 2016, the Moncure mill was subject to an administrative proceeding for alleged infringements by the North Carolina Department of Environmental Quality (NCDEQ), which has terminated, as corrective actions have been executed, including ongoing training, the installation of alarms/interlocks and the installation of certain control devices.

Our Eugene, Oregon mill was subject to an administrative proceeding by the Lane Regional Air Protection Agency. We negotiated a settlement that included monetary fines and an agreement to implement improvements to certain emissions control equipment and processes. The mill will be assessed a civil penalty and this should close the matter unless the mill fails to meet emission standards in future compliance testing. Additional proceedings, enforcement actions or claims related to compliance with environmental requirements or alleged environmental damages may also be brought against us in the future.

Any such proceedings or claims may have an adverse effect on our business, financial condition, results of operations and cash flows. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company—Environmental concerns led to the temporary suspension of our operations at the Valdivia Mill in 2005, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows.”

Environmental concerns led to the temporary suspension of our operations at the Valdivia Mill in 2005, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows.

Our operations at the Valdivia Mill have been subject to environmental scrutiny by Chilean environmental regulators and the Chilean public since the mill began its operations in 2004. A variety of concerns and claims have been raised regarding the mill’s potential environmental impacts in the area. Primarily, it has been alleged that the mill’s operations impacted the habitat of the nearby Carlos Anwandter Nature Sanctuary and contributed to the migration and death of black-neck swans living in the area. In connection with an environmental administrative proceeding, environmental regulators required us to temporarily suspend operations at the Valdivia Mill for approximately one month in January 2005.

 

 

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In February 2009, as previously required by the environmental authorities, we submitted an environmental impact study for the construction of a pipeline to discharge the Valdivia Mill’s wastewater in the Pacific Ocean near Punta Maiquillahue, complying with the requirement that such wastewater be discharged in a body of water other than the Cruces River, the Carlos Anwandter Nature Sanctuary or their respective sources. In February 2010 and October 2012, the environmental authorities approved this environmental impact study subject to some conditions. On April 30, 2013, the Committee of Ministers passed Exempt Resolution No. 391, which modified certain paragraphs of the above mentioned approval (establishing effluent discharge limits for 13 parameters).

The construction and operation of the pipeline requested by the environmental authority in order to discharge the Valdivia Mill’s wastewater in a body of water other than the Cruces River, the Carlos Anwandter Nature Sanctuary or their respective sources, remains subject to many environmental, regulatory, engineering and political uncertainties. As of the date of this annual report, it has not been possible to obtain the relevant permits and authorizations for the project. As a result, we cannot provide any assurances that the project will be completed and that any deadline extensions would be granted, even if we comply with all the requirements that may be set forth by those authorities. If the installation of the pipeline is delayed for reasons attributable to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mill’s environmental permit for operation.

The suspension of operations at the Valdivia Mill in 2005 adversely affected our business, financial condition, results of operations and cash flows. Any future suspension of operations at the Valdivia Mill or at any other of our significant operating plants can be expected to have similar adverse effects. We offer no assurance that the Valdivia Mill, or our other mills, will be able to operate without further interruption.

We have been subject to legal proceedings related to our mills which could adversely affect our business, financial condition, results of operations and cash flows.

In April 2005, the Consejo de Defensa del Estado (National Defense Council), the Chilean national agency that institutes legal proceedings on behalf of the Chilean government, instituted a civil lawsuit seeking reparations, damages and indemnification from us for environmental harm to the Carlos Anwandter Nature Sanctuary allegedly caused by effluent discharges from our Valdivia Mill. On July 27, 2013, a civil court of Valdivia ruled that the alleged environmental events were mainly caused by the Valdivia Mill. We decided not to appeal this ruling, in order to create the conditions to shortly begin an effective implementation of measures in such Nature Sanctuary, without delay of further legal action. In April 2014, we agreed with and paid to the National Defense Council an indemnification amount of approximately U.S.$5,000,000. This indemnification was in addition to another payment of U.S.$5,000,000, used for social programs for the benefit of the community of Valdivia. There were four additional measures ordered by the ruling (although not included in the agreement with the National Defense Council), which were discussed by the members of the Consejo Científico Social (Social Council), which includes representatives of Arauco, the National Defense Council, academic institutions, NGOs and public authorities. These measures were: (i) conducting a study, within one year, undertaken by an interdisciplinary committee of experts, about the status of the wetland (which has been completed); (ii) creating an artificial sentinel wetland for representative species, upriver from the discharge of effluents (which has been constructed); (iii) implementing a monitoring program of environmental impact, within a five-year period; and (iv) creating a new research center focused on wetlands (Centro de Investigación de Humedales). The National Defense Council and Arauco agreed upon the manner in which these measures have been implemented.

Since the end of 2004, we have been subject to various criminal proceedings relating to alleged violations of several environmental laws in Chile, some of which have been either terminated or abandoned by the prosecutor (decisión de no perseverar) as of the date of this annual report. However, in connection with the death of fish in the Cruces River in January 2014 close to the Valdivia Mill’s effluent discharge, in January 2019, the public prosecutor’s local office (in Mariquina) filed charges (“formalización de la investigación”) against five individuals, four of them currently working for the Company. This process will be under investigation for six months, which period could be extended for up to two years. Also in January 2019, the National Defense Council instituted a civil lawsuit seeking reparations from us for environmental harm allegedly caused by our Valdivia Mill in connection with the death of fish in the Cruces River in January 2014. The National Defense Council did not determine the damages in this lawsuit, which could be sought by the National Defense Council in a separate proceeding before a civil court. The Company filed its defense in February 2019. The lawsuit remains under review by the court as of the date of this annual report. We cannot predict the outcome or impact of this lawsuit or when it may be resolved. If the result of such lawsuit is unfavorable to us, we may be required to conduct studies on ecosystems and biodiversity as well as to implement programs to both repopulate and monitor species under conservation. We may be required to incur in significant costs to repair any environmental harm a court determines we have caused, which could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

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The commencement of similar criminal proceedings against Arauco at any time in the future could adversely affect some of our mills. We can neither predict the likelihood that we will face such similar proceedings in the future, nor the likely outcome or impact of any such proceedings.

We are also subject to certain administrative proceedings as a result of the Cruces River event in 2014, and a pipe leakage in the Arauco Mill in February 2016, both of which are currently under investigation by the competent authorities. In addition, in 2016 the Superintendence of the Environment initiated administrative proceedings against the Valdivia, Nueva Aldea, Licancel and Constitución mills. In 2017, the Superintendence of the Environment initiated an administrative proceeding against the Arauco Mill. The first part of the proceeding against the Valdivia Mill concluded in 2017. On December 15, 2017, the Superintendence of the Environment decided that the Valdivia Mill was liable for ten out of eleven charges and imposed a fine of 7,777 UTA (approximately U.S.$6.5 million as of December 2018). We appealed this decision on April 5, 2018 before the Third Environmental Court. A final decision by the Third Environmental Court is expected to be rendered during 2019 and may be further appealed before the Supreme Court. In 2016, the Nueva Aldea and Constitución mills decided to submit compliance programs according to applicable regulations, both of which were approved by the Superintendence of the Environment. These programs require the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. In December 2018, the Nueva Aldea mill’s compliance program was officially terminated (“declaración de ejecución satisfactoria”) by the Superintendence of the Environment. With regard to the Constitución mill’s compliance program, once the activities are completed, the proceedings will end. We expect that such proceedings will end in 2019. With regard to the Licancel Mill, the Company filed its defense in June 2016. In February 2017, the Superintendence of the Environment found the Licancel Mill liable for three out of four charges and imposed a fine of 239 UTA (approximately U.S.$205,000). This decision was appealed before the above Superintendence, which on August 7, 2017, materially reduced the fine. Arauco paid the fine and this case was closed. Finally, with regard to the proceeding against Arauco Mill, the Company filed its defense in September 2017 and, in May 2018 the Superintendence of the Environment found the Arauco mill liable for two charges and imposed a fine of 699,6 UTA (approximately U.S.$635,000). Arauco paid the fine with a 25% reduction (taking advantage of a benefit established by Chilean law) and this case has been closed.

As a result of such proceedings, we cannot assure you that our mills will be able to operate without interruption. Any such interruption, or unexpected costs to resolve such proceedings, could have a material and adverse effect on our business, financial condition, results of operations and cash flows.

Our ability to access local and international credit or capital markets may be restricted at a time when we need financing, which could have a material adverse effect on our flexibility to react to changing economic and business conditions.

As of December 31, 2018, we had approximately U.S.$4.5 billion of outstanding indebtedness. See “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Condition, Results of Operations and Cash Flows—Liquidity and Capital Resources—Contractual Obligations.” The economic environment prevailing at any point in time may prevent us from accessing, or restrict our access to, credit and capital markets to satisfy our financing needs, or we may not be able to refinance our existing indebtedness on terms that are favorable to us or at all. If we are unable to refinance our indebtedness as it becomes due, or if we refinance such indebtedness on terms that are not favorable to us, our business, results of operations and financial condition could be materially and adversely affected.

Material disruptions at any of our manufacturing, mills processing or remanufacturing facilities could negatively impact our financial results.

A material disruption at any of our manufacturing, processing or remanufacturing facilities could prevent us from satisfying customer demand for our products, meeting our production targets and/or require us to make unplanned capital expenditures, resulting in lower sales, which could have a negative effect on our financial results. Our Chilean facilities are located in a region known for seismic activity that exposes our facilities in Chile to the risk of earthquakes and, in some areas, to subsequent tsunamis.

In addition, our facilities (or any of our machines within an otherwise operational facility) could cease operations unexpectedly due to a number of events, including:

 

   

unscheduled maintenance outages;

 

   

prolonged power failures;

 

   

an equipment failure;

 

   

fires, floods, hurricanes or other adverse weather;

 

   

disruptions in the transportation infrastructure, including roads, bridges, railroad tracks, tunnels and ports;

 

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a chemical spill or release;

 

   

explosion of a boiler;

 

   

the effect of a drought or reduced rainfall on its water supply;

 

   

labor difficulties;

 

   

terrorism or threats of terrorism;

 

   

domestic and international laws and regulations applicable to our Company and our business partners, including joint operation partners, around the world; and

 

   

other operating problems.

In connection with losses to our production plants, facilities and equipment caused by material disruptions, our insurance coverage may be insufficient. The incurrence of losses or other liabilities that are not covered by insurance could result in significant and unexpected additional costs. Moreover, the terms and conditions for the renewal of our insurance policies may change in the future depending upon market circumstances and the type and amount of risks insured. See “Item 4. Information on our Company—Description of Business—Insurance”.

Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial condition, results of operations and cash flows.

Our operations are subject to various risks affecting our forests and manufacturing facilities, including disease and fire. Although to date certain pests and diseases afflicting radiata or taeda pine plantations in other parts of the world have not significantly affected the forestry industries in Chile, Argentina, Brazil or Uruguay, these pests or diseases may migrate and may significantly affect the forestry industries in Chile, Argentina, Brazil or Uruguay in the future. Similarly, forest fires are always a risk, particularly during the forestry fires season that in Chile typically extends from the last quarter of each year through the southern hemisphere summer to the end of the first quarter of the following year.

In January and February 2017, wildfires, exacerbated by high temperatures, the action of the winds, low atmospheric humidity and the complexity of combatting multiple focal points that appeared simultaneously in different places, broke out in the central and southern regions of Chile, and in respect of the Company, in the Maule and Bío Bío regions. As a consequence of such fires, the Company suffered the burning of approximately 72,500 hectares of forest plantations, which had a fair value of approximately U.S.$210 million, according to IFRS accounting rules. The affected forest plantations represented approximately 5.6% of the IFRS value of the total of the forest plantations of the Company, and approximately 1.5% of the total assets of Arauco. The affected plantations have been managed by the Company in order to minimize the damage suffered as a consequence of the fires.

The forest plantations affected by the fires had insurance coverage, with their corresponding deductibles and limits. Based on the final report of the insurance appraisers, in October 2017 our subsidiary Forestal Arauco S.A. recovered a total of U.S.$35 million, after applying the U.S.$15 million deductible.

Also in 2017, our El Cruce sawmill, which is owned by our subsidiary Maderas Arauco S.A., was destroyed by the wildfires. El Cruce sawmill had a book value of approximately U.S.$4.5 million and an annual production capacity of 115,881 cubic meters, representing approximately 4.2% of our total sawmill production capacity at the time of the event. With regard to the insurance claim, in October 2017 we recovered U.S.$50.9 thousand on account of affected inventory, and in 2018, we received approximately U.S.$1.04 million (net of the deductible) on account of property damage. In addition, during the fourth quarter of 2017, our Viñales sawmill and remanufacturing facility suffered a stoppage of seven days due to a wildfire.

During the 2017-2018 forestry fire season, wildfires were considerably less severe than in the 2016-2017 season. Nevertheless, 587 hectares of the Company’s forest plantations burned in the 2017-2018 season (which represented 0.8% of the plantations affected by fires in the 2016-2017 season). The affected forest plantations had an accounting value of approximately U.S.$2.6 million, according to IFRS accounting rules, representing approximately 0.07% of the IFRS value of the Company’s total forest plantations and approximately 0.02% of the total assets of Arauco.

During the 2018-2019 forestry fire season, approximately 1,579 hectares of our forest plantations were affected.

In connection with losses to our production plants, facilities and equipment caused by fires, our insurance coverage may be insufficient. We do not maintain insurance coverage against pests, diseases and, in certain areas, fires that could affect our planted forests. The incurrence of losses or other liabilities that are not covered by insurance could result in significant and unexpected additional costs. Moreover, the terms and conditions for the renewal of our insurance policies may change in the future depending upon market circumstances and the type and amount of risks insured. See “Item 4. Information on our Company—Description of Business—Insurance.”

 

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Climate change may negatively affect our business, financial condition, results of operations and cash flows.

A significant number of scientists, environmentalists, international organizations, regulators and other commentators maintain that global climate change has contributed, and will continue to contribute, to the increasing unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, droughts, tornadoes, freezes, other storms and fires) in certain parts of the world. As a result, a number of legal and regulatory measures as well as social initiatives have been introduced in numerous countries in an effort to reduce carbon dioxide and other greenhouse gas emissions and combat global climate change. Such reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment. In addition, our plantations are located in regions which have ideal climatic conditions for a short growing cycle. Any climate changes that negatively affect such favorable climate conditions in central or southern Chile or in any region in which we benefit from favorable climate conditions could adversely affect the growth rate and quality of our plantations, or our production costs. Although we cannot predict the impact of changing global climate conditions, if any, or if legal, regulatory and social responses to concerns about global climate change, any such occurrences may negatively affect our business, financial condition, results of operations and cash flows.

We may undertake mergers, acquisitions and investments to expand or complement our operations that could result in operating difficulties or otherwise adversely affect our business, financial conditions and results of operations.

From time to time, we carry out mergers, acquisitions and investments to expand or complement our operations. In connection with such transactions, we may be exposed to various risks, including those arising from: (i) not having accurately assessed the value, future growth potential, strengths, weaknesses and potential profitability of potential acquisition targets; (ii) difficulties in successfully integrating, operating, maintaining or managing newly-acquired operations, including personnel; (iii) unexpected costs of such transactions; or (iv) unexpected contingent or other liabilities or claims that may arise from such transactions. If any of these risks were to materialize, it could adversely affect our business, financial condition and results of operations.

Our operations could be adversely affected by labor action and contractual disputes.

Approximately 53% of our employees in Chile, 49% of our employees in Argentina, 30% of our employees in Uruguay, 9% of our employees in Brazil (although 100% are represented by the unions) and none of our employees in the United States or Canada were unionized as of December 31, 2018. In the past, certain work slowdowns, stoppages and other labor-related disruptions have adversely affected our operations.

In Chile we experienced (i) one stoppage during April 2018 (lasting nine days), (ii) three stoppages caused by employees of our third party contractors in our Horcones complex during February (lasting two days), April (lasting two days) and November (lasting five days) of 2017; (iii) seven separate occasions of blockades during 2016, which included stoppages in the Horcones complex for four days and another for one day; a three-day stoppage at the entrance of our El Colorado sawmill; three one-day stoppages in our Viñales sawmill during the months of April, August and November 2016; and a three-stoppage in our Constitución Mill during May 2016; (iv) four separate occasions of transportation contractors blocking the entrance of our Horcones complex on January 13, February 17, March 24, and September 21, 2015; (v) a one-day stoppage at the Valdivia Pulp Mill on June 12, 2014 and an eight-day stoppage between August 29 and September 5, 2014, caused by employees of third party service providers; and (vi) four separate occasions of transportation contractors blocking the entrances of our Horcones complex on February 24 and 25, September 3, October 22 and 23, and November 20, 2014. During 2015, the pulp union carried out three work stoppages and blockades; the first event occurred on May 25, lasting three days, the second on August 3, lasting three days and the last one on September 1, which lasted 14 days.

At the end of 2017, the Constitución pulp mill and the Viñales sawmill and remanufacturing facility experienced a 40-day stoppage caused by workers of certain transportation companies.

Our Argentine operations have experienced the following work stoppages in the last five years: (i) a four-day stoppage at Arauco Argentina’s pulp mill in December 2014, as a result of a strike by the pulp union; (ii) a five-day stoppage at Arauco Argentina’s mill in Misiones in January 2015, as a result of a road blockage lead by the truckers union; (iii) a 6-hour stoppage in Arauco Argentina’s mill in Zarate; and (iv) a stoppage of three days during May 2015 and August 2015, as well as a 14-day stoppage during September 2015 in Arauco Argentina’s pulp mill, Puerto Esperanza. During December 2018, we renewed the collective bargaining agreement with the chemical union that represents the employees of Petroquímica General San Martín.

 

 

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Our Brazilian operations have not experienced any work stoppages for the last eight years, other than a generalized truckers strike in 2018 that affected our operations. As a consequence of this event, the Company was prevented from receiving raw materials and dispatching products, and our employees could not easily access our Brazilian mills during such time, which resulted in a stoppage of ten days. As a result, transportation costs increased 25% in average, which directly affected the cost of our final product, rising them from 3% to 5% depending on the type of product.

During 2018, our Uruguayan operations did not experience any relevant work stoppages. Also, during 2018 and 2017, we entered into a labor agreement with unions representing the employees of our pulp mill and forestry nursery in Uruguay.

On June 4, 2016, the Montes del Plata mill’s activity was suspended for five days as a result of labor unrest involving employees of our logistics contractors, who blocked the access to the mill. Montes del Plata is the name of the 50/50 joint operation between Arauco and Stora Enso in Uruguay.

During 2014, we experienced 7.5 days of work stoppages during the final phase of construction at Montes del Plata in Uruguay and the start of operations, caused by contractors and third parties. During 2015, there were 28 minor events amounting to 5.5 days of work stoppages, caused by transportation and timber logistics contractors.

During the last seven years, there have been no strikes or other material work stoppages at our U.S. and Canadian subsidiaries.

We renewed all collective-bargaining agreements that expired during 2018 in Chile. We cannot assure you that a work slowdown, or a work stoppage or strike, will not occur prior to or upon the expiration of our labor agreements, and we are unable to estimate the extent to which any such work slowdown, stoppage or strike may adversely affect our sales.

In addition, we depend to a significant extent on employees of contractors to which we outsource a wide range of services including management of certain of our plantations and transportation of raw materials and products.

In Chile, as of December 31, 2018, we had contracts with approximately 377 contractors, who employed approximately 19,153 employees. During 2018, we incorporated approximately 481 employees in the wood products business, who were previously employed by certain suppliers. Such employees work in the Horcones Complex, the Valdivia Complex, the Nueva Aldea Complex and the Arauco plywood mill. In June 2018, we also commenced an insourcing process in three forest nurseries that were previously managed by contractor companies, which involved the hiring of 715 employees directly.

In Brazil, as of December 31, 2018, we had contracts with approximately 73 contractors, who in turn employed approximately 477 employees.

Under Chilean and Brazilian labor legislation, we are secondarily liable for the payment of labor and social security obligations owed to employees of our contractors. In Chile, in the event that we do not exercise the rights granted to us by the labor laws regarding the supervision of our contractors in their compliance of their labor and social security obligations, then our responsibility is elevated from secondary to joint and several, thus enabling an employee of a contractor to bring a claim relating to these obligations against both the contractor and us, as the party hiring such contractor, although the contractor would remain primarily liable for such obligations. Generally, we are also responsible for the health and safety conditions of the contractors’ workers and are obligated to ensure that the contractors comply with all obligations related to such conditions while such workers are performing activities for us within our corporate purpose.

In Argentina, substantially similar joint liability rules apply to a principal and its contractors. In addition, national rural labor law, Law No. 26,727, promulgated on December 28, 2011 and fully in effect since March 2013, permits contractor employees under forestry contracts to bring actions directly against the principal to whom the employees’ services are being provided, instead of requiring them to bring actions against the contractor. For work or services related to the ordinary production process of a principal, the law provides that an employment relationship is deemed to exist between the principal and the employee of the contractor.

Our U.S. operations must comply with the regulations of the Occupational Safety & Health Administration (OSHA) and the Federal Labor Standards Act (FLSA), among others.

Our Canadian operations must comply with the regulations of the Occupational Safety & Health Administration (OSHA).

 

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As a result of the foregoing, we may be affected by future strikes, work slowdowns, stoppages or other labor-related developments in the various countries in which we operate, including such developments attributable to employees of contractors performing outsourced services, and such strikes, slowdowns, stoppages or other developments could have a material adverse effect on our business, financial condition, results of operations or prospects.

Cybersecurity events, such as a cyberattack could adversely affect our business, financial condition and results of operations

Our business depends on information technology systems to effectively manage our production processes. Therefore, interruptions in these systems caused by employee error or attacks, external cyber-attacks, obsolescence or technical failures can deeply harm our business operations. Cybersecurity risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyberattacks. Any failure of our systems related to sensitive information could disrupt our business and result in production errors, processing inefficiencies and the loss of sales and customers, which in turn could result in decreased revenue, increased costs and excess or out-of-stock inventory levels.

Additionally, cyberattacks or internal actions, including negligence or misconduct of our employees and suppliers, may have a negative impact on our reputation, our relationship with external entities (government, regulators, partners, among others) and our strategic positioning with relation to our competitors. Any significant security breaches or disruptions in the performance of our information technology systems could have a material adverse effect on our results of operations and financial condition.

Risks Relating to Chile

Adverse changes in Chile’s political, legal, tax and economic conditions could directly impact our business and the market price of our securities.

As of December 31, 2018, 60.8% of our property, plant and equipment and forest assets were directly owned by Arauco and our Chilean subsidiaries, and in 2018, 61.8% of our revenues were attributable to our Chilean operations. Accordingly, our business, financial condition, results of operations and cash flows depend, to a considerable extent, upon economic conditions in Chile. Future changes in the Chilean economy – affecting interest rates, inflation, tax rates or charges on imports and/or exports, among others – could adversely affect our business, financial condition, results of operations and cash flows and may impair our ability to proceed with our strategic plan of business. In addition, such changes may impact the market price of our securities. The Chilean government’s actions have had and may continue to have a material effect on private sector entities. We have no control over and cannot predict how government intervention and policies will affect the Chilean economy or, directly and indirectly, our operations and revenues.

The Chilean government has exercised and continues to exercise substantial influence over many aspects of the economy.

As a way of example, on September 29, 2014, Law No. 20,780 (as amended) introduced significant changes to the Chilean taxation system and strengthened the powers of the Servicio de Impuestos Internos (Chilean IRS) to control, prevent, and counter tax evasion. The tax reform increased the income tax rates applicable to us, currently corresponding to 27%. In addition, the former SVS, through the Oficio Circular 856 dated October 17, 2014, obliged companies under its supervision not to follow IFRS with respect to the effect of the tax reform on deferred taxes in the statutory financial statements filed with the SVS. Further amendments could affect our income tax rates. We cannot predict how tax reforms will affect, directly or indirectly, our operations and financial condition and the market price of our securities.

We have no control over and cannot predict how government intervention and policies will affect the Chilean economy or, directly and indirectly, our operations and revenues. Our operations and financial condition and the market price of our securities may be adversely affected by changes in policies involving exchange controls, taxation and other matters.

Chile has different corporate disclosure standards from those with which you may be familiar in the United States, and Chile’s securities laws may not afford you the same protections as U.S. securities laws.

The securities disclosure requirements applicable to certain foreign private issuers differ from those applicable to issuers domiciled in the United States in some important respects. Accordingly, the information about us available to you will not be the same as the information disclosed by a U.S. company required to file reports with the U.S. Securities and Exchange Commission, or “SEC.”

In addition, although Chilean law imposes restrictions on insider trading and price manipulation, applicable Chilean securities laws and regulations are different from those in the United States, and some investor protections available in the United States may not be available in the same form, or at all, in Chile.

 

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Currency fluctuations may have a negative effect on our financial results.

The Chilean peso has been subject to depreciations and appreciations in the past and may be subject to significant fluctuations in the future. We transact a significant portion of our business in U.S. dollars, and the U.S. dollar is the currency of the primary economic environment in which we operate. A portion of our operating costs, however, is denominated in Chilean pesos. An increase in the Chilean peso/U.S. dollar exchange rate increases our Chilean peso-denominated costs.

In addition, as an international company operating in Chile and several other countries, we transact a portion of our business and have assets and liabilities in Chilean pesos and other non-U.S. dollar currencies, such as the Euro, the Argentine peso, the Uruguayan peso, the Brazilian real, the Colombian peso, the Mexican peso and the Canadian dollar, among others. To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic revenues may be adversely affected when expressed in U.S. dollars. The same effects may occur for our domestic sales in Argentina, Brazil and Canada, or other countries where we have operations for revenues related to products sold in each of the respective local currencies. As a result, fluctuations in the exchange rates of such foreign currencies relative to the U.S. dollar may have a material adverse effect on our business, results of operations, financial condition and cash flows.

Risks Relating to Argentina

The economic conditions in Argentina may adversely affect our financial condition, results of operations and cash flows.

As of December 31, 2018, 7.8% of our property, plant and equipment and forest assets were owned by our Argentine subsidiaries, and in 2018, 8.1% of our revenues were attributable to our Argentine operations. The financial condition and results of our Argentine operations, including the ability of our Argentine subsidiary Arauco Argentina S.A. (or “Arauco Argentina”, formerly known as Alto Paraná S.A.), to raise capital, depend, among other factors, upon economic conditions prevailing in Argentina. See “Item 4. Information on our Company—Description of Business—History.”

There are various aspects of the Argentine economy that could adversely affect our operations, including, among others, inflation, interest rates, foreign exchange controls and taxes. Between 2001 and 2016, there have been several monetary and currency exchange control measures implemented in Argentina, which included the obligation to repatriate foreign currency earned abroad and tight restrictions on transferring funds abroad, with certain exceptions for authorized transactions. In 2016 and 2017, most of these measures were eliminated or relaxed by the Argentine administration that took office as of December 10, 2015. After moving quickly to eliminate foreign-exchange restrictions and shifting to a more flexible exchange rate, the government announced its intention to reduce inflation gradually. However, during 2018, the Argentine economy deteriorated due to certain factors such as (i) the increase in the U.S. interest rate, which partially caused capital outflows from Argentina leading to a depreciation of the Argentine peso and increased inflation; and (ii) a strong drought that affected soy crops, causing a sharp drop in U.S. dollar income derived from exports. In addition, during the second semester of 2018 the economy began to show signs of recession and the Argentine government adopted certain measures to contain fluctuations in exchange rates and aimed at reducing inflation. In this regard, an agreement for U.S.$57.1 billion was entered into with the International Monetary Fund (IMF), establishing a credit program requiring monetary restriction and certain fiscal reforms, including the adoption of an export tax. At the end of the year, the Argentina peso/U.S. dollar exchange rate had increased by 104.2% (year over year) and the inflation rate reached 47.6% (year over year).

In 2017, we signed an intercompany loan with Arauco Argentina for U.S.$250 million, which proceeds were used to repay in full certain Arauco Argentina debt that we guaranteed. During 2018, Arauco Argentina prepaid U.S.$90 million. Therefore, the balance due after such prepayment is U.S.$160 million.

Although past restrictions did not materially affect Arauco Argentina’s business, financial condition, results of operations and cash flows, including its ability to service its debt or transfer funds abroad, if in the future such payments are restricted, our financial condition, results of operations and cash flows would be negatively affected.

We have no control over and cannot predict how any future changes in economic policy or other changes in the Argentine economy could affect our operations and revenues in Argentina.

Risks Relating to Brazil

Economic conditions in Brazil may have a direct impact on our business, financial condition, results of operations and cash flows.

As of December 31, 2018, 9.0% of our property, plant and equipment and forest assets were owned by our Brazilian subsidiaries, and in 2018, 8.4% of our revenues were attributable to our Brazilian operations. See “Item 4. Information on our Company—Description of Business.” As a result of the foregoing, to a certain extent, our business, financial condition, results of operations and cash flows will be dependent on economic conditions in Brazil.

 

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The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian political and economic conditions have a direct impact on our business.

The Brazilian government has exercised and continues to exercise a substantial influence over many aspects of the Brazilian economy. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, wage and price controls, currency devaluations, capital controls and limits on imports. The business, financial condition, results of operations and cash flows of our Brazilian subsidiaries may be adversely affected by such matters, changes in policy or regulation involving tariffs and exchange controls, as well as by factors such as:

 

   

currency fluctuations;

 

   

inflation;

 

   

social instability;

 

   

price instability;

 

   

real estate ownership restrictions and expropriation;

 

   

interest rates;

 

   

liquidity of domestic capital and lending markets,

 

   

tax policy;

 

   

political instability; and

 

   

other political, diplomatic, social and economic developments in or affecting Brazil.

The Brazilian government’s actions have had and may continue to have a material effect on private sector entities, including our operations in Brazil. We have no control over and cannot predict how government intervention and policies will affect the Brazilian economy or, directly and indirectly, our operations and revenues.

Future economic, social and political developments in Brazil may adversely affect the business, financial condition, results of operations and cash flows of our Brazilian subsidiaries.

Inflation and efforts by the Brazilian government to combat inflation may contribute significantly to economic uncertainty in Brazil and could harm the business of our Brazilian subsidiaries.

Brazil has, in the past, experienced high rates of inflation. More recently, Brazil’s rates of inflation were 6.4% in 2014, 10.7% in 2015, 6.3% in 2016, 3.0% in 2017 and 3.8%% in 2018, as measured by the Índice de Preços ao Consumidor-Amplo (Brazilian Consumer Price Index). In the past, inflation, governmental measures to combat inflation and public speculation about possible future actions have had significant effects on the Brazilian economy and on the financial condition and results of operation of business, such as ours, operating in Brazil.

Fluctuations in the value of Brazil’s currency against the value of the U.S. dollar may result in uncertainty in the Brazilian economy, which may adversely affect the financial condition, results of operations and cash flows of our recently acquired Brazilian subsidiaries.

The Brazilian real has historically suffered frequent devaluation. In the past, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, periodic mini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Depreciation over shorter periods has resulted in significant fluctuations in the exchange rate between the Brazilian real and the U.S. dollar and other currencies.

For example, the Brazilian real depreciated against the U.S. dollar by 1.8% in 2017 and by 14.6% in 2018. The Brazilian real/U.S. dollar exchange rate may continue to fluctuate and may rise or decline substantially compared to current levels. From January 1 to March 31, 2019 the Brazilian real appreciated by 0.90%. with respect to the U.S. dollar. The cost of many raw materials is closely correlated with the U.S dollar, so, if the Brazilian real appreciates against the U.S dollar, the cost of production will decrease and our EBTIDA margin would increase.

 

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Fluctuations of the Brazilian real and currency instability may adversely affect our results of operation and financial condition in terms of U.S. dollars and could adversely affect the ability of our Brazilian subsidiaries to meet their foreign currency obligations in the future and could result in a monetary loss relating to these obligations.

Risks Relating to Uruguay

Economic conditions in Uruguay, or the failure of Montes del Plata and its affiliates to service their debt, may have a direct impact on our financial condition, results of operations and cash flows.

As of December 31, 2018, 15.6% of our property, plant and equipment and forest assets were owned by Montes del Plata and its affiliates in Uruguay, and in 2018, 8.0% of our revenues were attributable to the Uruguayan operations of Montes del Plata. See “Item 4. Information on our Company—Description of Business.”

We have made significant investments in Uruguay and we may make additional investments in Uruguay in the future. As a result, our financial condition and results of operations may consequently depend, to a certain extent, on political and economic conditions in Uruguay. Certain future actions by the Uruguayan government, including, among others, actions with respect to inflation, interest rates, foreign exchange controls and taxes, could have a material adverse effect on our operations in Uruguay.

Risks Relating to the United States and Canada

Economic conditions in the United States and Canada may have a direct impact on our business, financial condition, results of operations and cash flows.

As of December 31, 2018, 6.4% of our property, plant and equipment and forest assets were owned by our U.S. subsidiaries, and in 2018, 10.1% of our revenues were attributable to our U.S. subsidiaries. See “Item 4. Information on our Company—Description of Business.”

As of December 31, 2018, 0.4% of our property, plant and equipment and forest assets were owned by our Canadian subsidiaries, and in 2018, 3.6% of our revenues were attributable to our consolidated Canadian subsidiaries, which includes our Canadian subsidiaries’ operations in the United States. See “Item 4. Information on our Company—Description of Business.”

As a result of the foregoing, to a certain extent, our business, financial condition, results of operations and cash flows will be dependent on economic conditions in the United States and Canada.

Risks Relating to Other Markets

Our business, earnings and prospects may be adversely affected by developments in other countries that are beyond our control.

Our business, financial condition, results of operations and cash flows depend on the level of economic activity, government and foreign exchange policies and political and economic developments in our principal export markets. In 2016, 2017 and 2018, 92.2%, 94.2% and 95.2% respectively, of our total pulp sales, and 43.1%, 42.6% and 42.7%, respectively, of our total sales of forestry and wood products, were attributable to exports, principally to customers in Asia, the Americas and Western Europe, collectively. Our business, earnings and prospects, as well as our financial condition, results of operations, cash flows and the market price of our securities, may be materially and adversely affected by developments in these export markets relating to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation, social instability or other political, economic or diplomatic developments. For example, certain target countries to which we export may impose buying restrictions in our industry, which may adversely affect our sales. We have no control over these conditions and developments which could adversely affect us and our business, financial condition, results of operations and cash flows or the price or market of our securities.

Developments in other emerging and developed markets may adversely affect the market price of our securities and our ability to raise additional financing.

Our financial condition and the market price of our securities may be adversely affected by declines in the international financial markets and world economic conditions. Chilean securities markets are, to varying degrees, influenced by general economic, political, social and market conditions in other emerging and developed market countries, especially those in the United States, Europe, China and Latin America. Investors’ reactions to developments in one country can affect the securities markets and the securities of issuers in other countries, including Chile. Negative developments in the international financial markets in the future could adversely affect the market price of our securities and impair our ability to raise additional capital.

 

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Risks Relating to Our Securities

The non-payment of funds by our subsidiaries could have a material adverse effect on our business, financial condition, results of operations and ability to service our debt, including our securities.

Our cash flow and ability to service debt is dependent, in part, on the cash flow and earnings of our subsidiaries and the payment of funds by those subsidiaries to us, in the form of loans, interest, dividends or otherwise. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due under the terms of our securities or to make any funds available for such purpose.

Furthermore, claims of creditors of our subsidiaries, including trade creditors, will have priority over our creditors, including holders of our securities, with respect to the assets and cash flow of our subsidiaries. Our right to receive assets of any of our subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of our securities to participate in those assets) will be effectively subordinated to the claims of our subsidiaries’ creditors.

Changes in Chilean tax laws could lead us to redeem our securities.

Under current Chilean law and regulations, payments of interest made from Chile to holders of debt securities who are neither residents nor domiciled or organized in Chile for purposes of Chilean taxation will, generally, be subject to Chilean withholding tax at a rate of 4.0%. Subject to certain exceptions, we will pay additional amounts (as described in “Item 10. Additional Information—Taxation”) so that the net amounts received by the holder of our notes (including additional amounts) after such Chilean withholding tax will equal the amounts that would have been received in respect of the notes in the absence of such Chilean withholding tax. In the event of certain changes in Chilean tax laws requiring that we pay additional amounts that are in excess of the additional amounts that we would owe if payments of interest on our securities were subject only to a 4.0% withholding tax, we will have the right to redeem our securities.

Credit rating downgrades below investment grade could have a material and adverse effect on our business, financial condition, results of operations and ability to service our debt, including our securities.

Credit rating agencies could downgrade our ratings either due to factors specific to us, a prolonged cyclical downturn in the forestry industry or macroeconomic trends (such as global or regional recessions) and trends in credit and capital markets more generally. Any decline in our credit rating would increase our cost of borrowing and may significantly harm our financial condition, results of operations and profitability, including our ability to refinance our existing indebtedness.

On June 19, 2014, Moody’s changed our ratings outlook from negative to stable. Also, the Baa3 note rating of our Argentine subsidiary Arauco Argentina, was affirmed, and its outlook changed to stable.

On October 5, 2016, Fitch Ratings changed our ratings outlook from stable to negative, citing a slower-than-expected decline of our net leverage due to weak operational cash flows, which in turn were affected by lower pulp prices throughout the year.

On September 25, 2018, Fitch Ratings changed our ratings outlook from negative to stable, mentioning that the ratings were supported by the Company’s strong financial position and business position as a low-cost producer of market pulp.

On January 31, 2019, Feller Rate changed our local rating from AA- to AA, stating that this change was attributable to the strategic plan of the Company, focused on high internationalization through investments and acquisitions, which has led to an improvement in business profile and main credit indicators.

We cannot assure you that we will not be subject to further credit rating downgrades. Credit rating downgrades below investment grade could have a material and adverse effect on our ability to service our debt, including our securities, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

 

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Item 4. Information on our Company

DESCRIPTION OF BUSINESS

We believe that we are one of Latin America’s largest forest plantation owners and one of the world’s largest producers of bleached and unbleached softwood kraft pulp, bleached hardwood kraft pulp and wood products in terms of production capacity. We have industrial operations in Chile, Argentina, Brazil, Mexico, the United States and Canada. We also have industrial operations in Uruguay, via our 50% share in Montes del Plata, and in Spain, Portugal, Germany and South Africa, via our 50% share in Sonae Arauco. As of December 31, 2018, we had more than 1.0 million hectares of plantations in Chile, Argentina, Brazil and Uruguay combined.

Based on information published by Hawkins Wright Ltd., an independent research company for the pulp and paper industry, as of December 31, 2018, we were one of the world’s largest producers of bleached hardwood kraft market pulp and bleached and unbleached softwood kraft market pulp in terms of production capacity.

During 2018, we sold 3.7 million metric tons of pulp, in the form of hardwood bleached pulp, softwood bleached pulp, softwood unbleached pulp and fluff. During 2018, we harvested 22.3 million cubic meters of sawlogs and pulplogs and sold 8.2 million cubic meters of wood products, including sawn timber (green and kiln-dried lumber), remanufactured wood products, plywood and panels (medium-density fiberboard, or MDF, particleboard, or PBO, and high-density fiberboard, or HB). In 2018, export sales constituted approximately 67.8% of our total revenue. During 2018, sales in Asia, South and Central America and North America accounted for 40.1%, 23.4% and 24.8%, respectively, of our total revenue for such year.

As of December 31, 2018, our planted forests consisted of 64.7% radiata, taeda and elliottii pine and 33.0% eucalyptus. We seek to manage our forestry resources in a way that ensures that the annual growth of our forests is equal to or greater than the volume of resources harvested each year. In 2018, we planted a total of 85,243 hectares, and harvested a total of 65,441 hectares in Chile, Argentina, Brazil and Uruguay.

History

Celulosa Arauco y Constitución S.A. is a sociedad anónima (corporation) organized under the laws of Chile and subject to certain rules applicable to sociedades anónimas abiertas (Chilean public corporations). We were formed on September 14, 1979 in a merger between Industrias de Celulosa Arauco S.A., or Industrias Arauco, and Celulosa Constitución S.A., or Celulosa Constitución. Our two predecessor companies were created in the late 1960s and early 1970s by Corporación de Fomento de la Producción, or Corfo, a Chilean government development corporation, to develop forest resources, improve soil quality in former farming areas and promote employment. As part of the Chilean government’s privatization program, Corfo sold Industrias Arauco to Compañía de Petróleos de Chile S.A., or Copec, in 1977 and Celulosa Constitución to Copec in 1979. In October 2003, Copec transferred all of its gasoline- and fuel-related business assets to a new subsidiary, and changed its legal name to Empresas Copec S.A., or Empresas Copec. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

In 1996, we acquired Alto Paraná S.A., an Argentine company (that, effective January 1, 2015, changed its name to Arauco Argentina S.A.), which, at the time of the acquisition, owned plantations and other land in Argentina and manufactured and sold bleached softwood kraft pulp. With this acquisition, we expanded our market opportunities outside of Chile.

In 2005, 2006 and 2007, we expanded our presence in Chile, Argentina and Brazil through a series of acquisitions that increased our land holdings and the production capacity of various sectors of our business.

On May 17, 2009, our subsidiary Inversiones Arauco Internacional Limitada (previously known as Arauco Internacional S.A.), or Arauco Internacional, and a subsidiary of Stora Enso agreed through a joint operation partnership to acquire the Uruguayan subsidiaries of ENCE, which acquisition was completed on October 16, 2009. The companies acquired by the joint operation partnership were Eufores S.A., Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A. The main assets of these Uruguayan companies included 130,000 hectares of land, of which 73,000 had forestry plantations, 6,000 hectares under agreements with third parties, an industrial site, the necessary environmental permits for the construction of a pulp mill, a river terminal, a chip producing mill and a nursery. The agreed value of these assets, pursuant to the aforementioned transaction, was U.S.$335 million, of which we paid 50% (or U.S.$167.5 million).

On August 26, 2009, our subsidiary Placas do Paraná S.A. (now, Arauco do Brasil S.A.) acquired 100% of the shares of Tafisa Brasil, by means of a share purchase agreement executed among SCS Beheer, B.V., Tafiber—Tableros de Fibras Ibéricos, S.L. (each of which is a subsidiary of Sonae Indústria, SGPS, S.A.) and Placas do Paraná S.A. Pursuant to the transaction, we paid a purchase price of U.S.$227 million, of which U.S.$165.2 million was allocated to pay the value of the shares of Tafisa Brasil, with the balance corresponding to liabilities that the acquired company maintained. The primary asset of Tafisa Brasil (which has been renamed Arauco do Brasil S.A.) is a panel production facility located in the city of Piên, Brazil, which is in the state of Paraná. The facility has an annual total installed capacity of 750,000 cubic meters, which includes three production lines: two lines producing MDF and one line producing PBO. The facility also has added-value lines to produce products for the construction and furniture industries.

 

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On September 27, 2009, Arauco and its subsidiary Arauco Internacional, executed a series of joint operation agreements with Stora Enso, pursuant to which Stora Enso Amsterdam B.V. agreed to transfer the ownership of 100% of the shares of Stora Enso Uruguay S.A. to Forestal Cono Sur. As a consequence of this transaction, Arauco and Stora Enso equally control all assets that both companies own in Uruguay. Such joint operation, named Montes del Plata, is formed by the companies Forestal Cono Sur S.A., Stora Enso Uruguay S.A., Eufores S.A., Celulosa y Energía Punta Pereira S.A., Zona Franca Punta Pereira S.A., Ongar S.A., Terminal Logística e Industrial M’Bopicuá S.A.and El Esparragal Asociación Agraria de R.L.

In April 2010, our subsidiary Arauco do Brasil S.A. acquired 50% of the shares of Dynea Brasil S.A. from Dynea AS for U.S.$15 million. As a result of this acquisition, we became the owner of 100% of the shares of Dynea Brasil S.A., which was absorbed by Arauco do Brasil S.A. in May 2010.

On January 18, 2011, as per the Montes del Plata joint operation, Arauco and Stora Enso agreed to carry out the construction of a state of the art pulp mill with an annual capacity of 1.3 million tonnes, a port and a power producing unit based on renewable sources, all located in Punta Pereira in the department of Colonia, Uruguay. The total investment was approximately U.S.$2.5 billion. The pulp mill entered the production phase in June 2014 and reached full production capacity in October 2015.

In November 2011, Centaurus Holdings S.A., a Brazilian company that is 51% owned by Klabin S.A. and 49% owned by our subsidiary Arauco Forest Brasil S.A., acquired the shares of Florestal Vale do Corisco Ltda., which has 107,000 hectares of land in the Brazilian state of Paraná. The total purchase price for the transaction was U.S.$473.5 million, of which we paid 49%. On May 31, 2012, Centaurus Holdings S.A. was absorbed by Florestal Vale do Corisco Ltda.

In 2011, Arauco Argentina acquired 100% of the shares of Greenagro S.A. or Greenagro, a company duly incorporated under the laws of Argentina, for a total purchase price of U.S.$10.7 million. Greenagro is engaged in forestry activities in the area of Isla Victoria, province of Entre Ríos, Argentina.

In 2012, Arauco Panels USA, one of our U.S. subsidiaries, acquired an industrial facility in Moncure, North Carolina, for U.S.$56 million plus approximately U.S.$6 million in respect of working capital, subject to adjustment based on actual working capital at closing. The facility includes MDF and high-density fiberboard, or HDF, production lines with annual production capacity of up to 330,000 cubic meters, a PBO production line with annual production capacity of up to 270,000 cubic meters and two melamine product production lines. This transaction closed in January 2012.

On June 7, 2012, we signed a share purchase agreement to acquire 100% of the shares of Flakeboard Company Limited or Flakeboard, a Canadian company, for a total purchase price of U.S.$242.5 million. Flakeboard is a key North American producer of wood paneling for furniture. It owns and operates seven panel mills in Canada and the U.S. with an aggregate annual production capacity of 1.2 million cubic meters of MDF panels, an annual production capacity of 1.2 million cubic meters of PBO, and an annual production capacity of 634,000 cubic meters of melamine. This transaction closed in September 2012.

During the second quarter of 2013, our wholly-owned forestry subsidiaries—Bosques Arauco S.A., Forestal Valdivia S.A., Forestal Arauco S.A., and Forestal Celco S.A.—were merged with and into Forestal Celco S.A. This process started on July 1, 2013, when Bosques Arauco was merged with and into Forestal Valdivia. Subsequently, on September 1, 2013, Forestal Valdivia was merged with and into Forestal Arauco. On December 1, 2013, Forestal Arauco was merged with and into Forestal Celco. Finally, in May 2014, Forestal Celco changed its name to Forestal Arauco S.A.

On July 28, 2015, Mahal Empreendimentos e Participações S.A., a Brazilian company, of which our subsidiary Arauco Forest Brasil S.A. owned 84.53% (at the time of the purchase mentioned below) and Empreendimentos Florestais Santa Cruz Ltda. owned 15.47%, acquired 37,625 hectares of land in the Brazilian state of Mato Grosso do Sul. The total purchase price for the transaction was U.S.$53 million.

On October 27, 2015, our subsidiary Arauco Forest Brasil S.A acquired 51% of the shares of Novo Oeste Gestão de Ativos Florestais S.A. As a result of this acquisition, we became owners of 100% of the shares of Novo Oeste Gestão de Ativos Florestais S.A., which has 26,229 hectares of forestry plantations in the Brazilian state of Mato Grosso do Sul.

On December 1, 2015, Arauco’s wholly-owned subsidiaries Paneles Arauco S.A., Aserraderos Arauco S.A. and Arauco Distribución S.A. were merged into Paneles Arauco S.A., company which operates in the wood products segment (previously referred to as timber segment), including in the panel and sawmill businesses. In August 2016, Paneles Arauco S.A. changed its name to Maderas Arauco S.A.

 

 

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On November 30, 2015, our subsidiary Arauco Internacional, entered into a share purchase agreement with Sonae Industria, or Sonae, under which the purchase of 50% of the shares of a Spanish subsidiary of Sonae, currently named Tableros de Fibras S.A., was agreed, along with the name change to “Sonae Arauco”. According with the executed agreements, both Sonae and Arauco agreed to jointly control Sonae Arauco. On May 31, 2016, we closed the Sonae Arauco transaction. The price paid was the amount of €137,500,000 (equivalent to U.S.$153.1 million at the time of the purchase). Sonae Arauco and its subsidiaries produce market wood panels, of the OSB, MDF and PBO type, and sawn timber through the operation of: (i) two panel plants and one sawmill in Spain; (ii) two panel plants and one resin plant in Portugal; (iii) four panel plants and one impregnation papers plant in Germany, (iv) and two panel mills in South Africa. In the aggregate, the production capacity of Sonae Arauco is approximately 460,000 cubic meters of OSB, 1,450,000 cubic meters of MDF, 2,270,000 cubic meters of particleboards and 100,000 cubic meters of sawn timber.

On October 25, 2016, Arauco informed the approval by its board of directors of the commencement of the construction of the “MDP Grayling” project, to be located in the State of Michigan, United States of America. Such project will be carried out by our U.S. subsidiary Flakeboard America Limited. The project comprises the construction and operation of a plant that will manufacture medium-density particle board, or MDP. Arauco expects that the production capacity of the plant will be 800,000 cubic meters of finished product per year, of which approximately 300,000 cubic meters will be coated with melamine paper. The project started its operations by the end of 2019’s first quarter. The execution of this project required an estimated investment of U.S.$450 million, which was financed using Arauco’s own resources and bank loans.

On September 13, 2017, Arauco announced the approval by its board of directors of the “Dissolving Pulp” project, relating to the Valdivia mill, which aims to diversify the type of pulp produced in the Valdivia mill, by enabling it to produce dissolving pulp. Arauco estimates that this project will require an investment of approximately U.S.$190 million (as revised in 2018). This project will be carried out in the current facilities of the Valdivia mill, implementing certain adjustments and incorporating new equipment. Among others, the project contemplates the installation of two new additional digesters to optimize the production level of dissolving pulp, a new discharging tank (storing process) of pulp and certain modifications to the treatment areas. In addition, the project is expected to increase the Valdivia’s mill capacity to inject energy to the Chilean power grid (Sistema Eléctrico Central, or SEN, formerly the Sistema Interconectado Central) from the current units of the mill. We expect that this project will start operations at the end of 2019.

On December 6, 2017, our Brazilian subsidiary Arauco do Brasil S.A. purchased from Masisa S.A., or Masisa, all of the equity rights in Masisa do Brasil Ltda., currently named Arauco Indústria de Painéis Ltda. The enterprise value of the transaction was U.S.$102.8 million, subject to certain deductions made under the contract. The main assets owned by Masisa do Brasil Ltda. consist of two industrial complexes located in Ponta Grossa (Paraná) and in Montenegro (Rio Grande do Sul). They have a line of MDF boards with an annual installed capacity of 300,000 m3, a line of MDP boards with a current annual installed capacity of 500,000 m3, and four lines of melamine coating, with a total annual installed capacity of 660,000 m3. The amount paid for the equity rights of Masisa do Brasil Ltda. was U.S.$ 32.9 million.

On December 19, 2017, Arauco’s subsidiaries Arauco Internacional and AraucoMex, S.A. de C.V., agreed with the Chilean company, Masisa, the purchase of all of the shares of Masisa’s Mexican subsidiaries, namely Maderas y Sintéticos de México, S.A. de C.V., Maderas y Sintéticos Servicios, S.A. de C.V., Masisa Manufactura, S.A. de C.V., Placacentro Masisa México, S.A. de C.V. and Masnova Química, S.A. de C.V., or Masisa’s Mexican Subsidiaries. The transaction closed on January 31, 2019 as detailed below.

On July 24, 2018, the project for the Modernization and Expansion of the Arauco Mill (Proyecto Modernización y Ampliación de la Planta Arauco, or MAPA project) was approved by the board of directors of the Company. The MAPA project contemplates an estimated investment of U.S.$2,350 million and is located at the commune and province of Arauco, in the Bio Bio Region, Chile. The project consists of the construction and start-up of a new production line of 1,560,000 annual tonnes of bleached hardwood kraft pulp (Line 3). Line 1 of the Arauco Mill will cease its operations once the Line 3 comes online. Therefore, this project is expected to increase the net production of the Arauco Mill by approximately 1,270,000 tonnes of pulp, reaching a total production capacity of approximately 2,100,000 annual tonnes. We expect that this project will start operations in the second quarter of 2021.

On January 31, 2019, Arauco’s subsidiaries Arauco Internacional and AraucoMex, S.A. de C.V., acquired the shares of the Masisa’s Mexican Subsidiaries. The price of the transaction was U.S.$160 million. The main assets acquired consist of two industrial complexes located in Durango and Zitácuaro, that jointly account for three particleboard (PBO) lines with an annual installed capacity of 339,000 m3; an MDF boards line of with an annual installed capacity of 220,000 m3; melamine coating (or TFL) lines with an annual installed capacity of 309,000 m3; a chemical plant with an installed capacity of 60,000 tonnes of resins and 60,600 tonnes of formaldehyde; and impregnation lines with an aggregate annual installed capacity of 28.9 million of m2. Further, one of Masisa’s Mexican Subsidiaries, i.e. Maderas y Sintéticos de México, S.A. de C.V., is the lessee of a chemical plant in Lerma, with an installed capacity of 43,200 tonnes of resins and 21,600 tonnes of formaldehyde.

 

 

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Our principal executive offices are located at Avenida El Golf 150, 14th Floor, Las Condes, Santiago, Chile, and our telephone number is +56-2-2461-7200. Our website is www.arauco.cl or www.arauco.com. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

 

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Corporate Structure

We are substantially wholly owned by Empresas Copec S.A., a public company listed on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. Empresas Copec is a holding company, the principal interests of which are in Arauco, gasoline and gas distribution, electricity, fishing and mining. See “Item 7. Major Shareholders and Related Party Transactions—Major Shareholders.”

The following table sets forth our ownership interests in our subsidiaries as of December 31, 2018.

 

     Country of
incorporation
   Total stock held  
Agenciamiento y Servicios Profesionales S.A. de C.V.    Mexico      99.9990
Arauco Argentina S.A.    Argentina      99.9801  
Arauco Australia Pty Ltd.    Australia      99.9990  
Arauco Bioenergía S.A.    Chile      99.9999  
Arauco Colombia S.A.    Colombia      99.9982  
Arauco do Brasil S.A.    Brazil      99.9990  
Arauco Europe Cooperatief U.A.    The Netherlands      99.9990  
Arauco Florestal Arapoti S.A.    Brazil      79.9992  
Arauco Forest Brasil S.A.    Brazil      99.9992  
Arauco Indústria de Painéis Ltda    Brazil      99.9990  
Arauco Middle East DMCC    Dubai      99.9990  
Arauco North America, Inc. (ex Flakeboard America Limited) (1)    U.S.A.      99.9990  
Arauco Nutrientes Naturales SpA    Chile      99.9484  
Arauco Perú S.A.    Peru      99.9990  
Arauco Wood (China) Company Limited    China      99.9990  
Araucomex S.A. de C.V.    Mexico      99.9990  
Consorcio Protección Fitosanitaria Forestal S.A.    Chile      57.0831  
Empreendimentos Florestais Santa Cruz Ltda.    Brazil      99.9985  
Flakeboard Company Limited    Canada      99.9990  
Forestal Arauco S.A.    Chile      99.9484  
Forestal Cholguán S.A.    Chile      98.5479  
Forestal Los Lagos S.A.    Chile      79.9587  
Forestal Nuestra Señora del Carmen S.A.    Argentina      99.9805  
Forestal Talavera S.A.    Argentina      99.9942  
Greenagro S.A.    Argentina      97.9805  
Inversiones Arauco Internacional Ltda.    Chile      99.9990  
Investigaciones Forestales Bioforest S.A.    Chile      99.9489  
Leasing Forestal S.A.    Argentina      99.9801  
Maderas Arauco S.A. (Ex Paneles Arauco S.A.)    Chile      99.9995  
Maderas Arauco Costa Rica S.A.    Costa Rica      99.9990  
Mahal Empreendimentos e Participacoes S.A.    Brazil      99.9991  
Novo Oeste Gestão de Ativos Florestais S.A.    Brazil      99.9991  
Savitar S.A.    Argentina      99.9841  
Servicios Aéreos Forestales Ltda.    Chile      99.9990  
Servicios Logísticos Arauco S.A.    Chile      99.9997  

 

(1)

On December 31, 2018, both Arauco Wood Products Inc. and Arauco Panels USA, LLC merged into Flakeboard America Limited (currently, Arauco North America, Inc). This event did not have an impact on the consolidated financial statements.

Business Strategy

Our strategy consists of focusing on maximizing value from, and pursuing growth opportunities with respect to, our forestland, managing our operations sustainably and developing products that contribute to an economy based on renewable resources that we believe improves the quality of life of millions of people around the world. We seek to implement our strategy through the following principles and initiatives:

 

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Striving to combine science, technology and innovation in order to unlock the full potential of our plantations and develop renewable products in our forestry, pulp, timber, panels and clean energy business areas.

 

   

Seeking to manage our operations responsibly by adopting the best environmental practices and promoting the safety and development of our employees and contractors.

 

   

Creating high quality products and materials for the paper, packaging, furniture, construction and energy industries, and providing high quality service to our customers.

 

   

Consolidating and expanding our presence internationally, in regions we believe offer comparative advantages in the industry sectors in which we operate.

Domestic and Export Sales

The following table sets forth our revenues derived from exports and domestic sales for the years indicated.

 

     Year ended December 31,  
     2018      2017      2016  
     (in millions of U.S. dollars)  

Export Sales

        

Bleached pulp

   $ 2,402      $ 1,935      $ 1,628  

Unbleached pulp

     410        285        253  

Sawn timber

     421        400        400  

Remanufactured wood products

     230        231        218  

Plywood

     215        197        185  

Panels

     340        325        305  

Other

     22        10        2  
  

 

 

    

 

 

    

 

 

 

Total export revenue

   $ 4,040      $ 3,383      $ 2,991  
  

 

 

    

 

 

    

 

 

 

Domestic Sales

        

Bleached pulp

   $ 135      $ 127      $ 152  

Unbleached pulp

     8        9        7  

Sawn timber

     67        76        80  

Remanufactured wood products

     23        28        28  

Plywood

     40        41        42  

Panels

     1,385        1,318        1,229  

Logs

     72        73        63  

Chips

     31        25        21  

Electric power

     87        94        103  

Other

     67        64        45  
  

 

 

    

 

 

    

 

 

 

Total domestic revenue

   $ 1,915      $ 1,855      $ 1,770  
  

 

 

    

 

 

    

 

 

 

Revenue

   $ 5,955      $ 5,238      $ 4,761  
  

 

 

    

 

 

    

 

 

 

The following table sets forth a geographic market breakdown of our export revenues for the years indicated.

 

     Year ended December 31  
     2018      2017      2016  
     (in millions of U.S. dollars)  

Asia and Oceania

   $ 2,388      $ 1,898      $ 1,553  

North America

     664        671        627  

Europe

     479        361        326  

Central and South America

     289        256        299  

Other

     220        197        186  
  

 

 

    

 

 

    

 

 

 

Total

   $ 4,040      $ 3,383      $ 2,991  
  

 

 

    

 

 

    

 

 

 

 

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Forestry Activity

Radiata pine grows at the fastest rates within a narrow band of latitude and under certain climatic conditions. One of Chile’s main advantages in the forestry industry lies in the short growing cycle of its radiata pine plantations. The faster growth rate of radiata pine trees in Chile allows harvesting of pulplogs and sawlogs 16 to 18 years after planting and of high quality sawlogs 25 years after planting. For most temperate softwood forests in the Northern Hemisphere this range is 18 to 45 years for pulplogs and 50 to 150 years for high quality sawn timber. Consequently, the Chilean forestry industry is a relatively low-cost producer, since a Chilean producer generally requires less time and a smaller area to produce the same volume of pine as its North American or European competitors, who face lower forest growth rates and higher transportation and investment costs as a result of the larger tracts of forests necessary to produce equivalent yields of softwood. Accordingly, since the mid-1970s, we have focused our forest management toward the application of advanced genetic and silviculture techniques to increase productivity and the quality of our plantations.

Eucalyptus, which we began planting in 1989, grows well in the forest regions of Chile. Once planted, eucalyptus trees require no further forest management (other than fire control and reduction of weeds) until harvest. The average harvest cycle of eucalyptus plantations is approximately 12 years. Once harvested, eucalyptus can be replanted or regrown.

Throughout our history, we have demonstrated a continued commitment to the improvement of our forest management policies. We have adopted environmentally sensitive policies towards our holdings of native forests, which are protected and preserved in their entirety. Our products come from our established plantations only; we do not sell any products derived from our native forests. We conduct our forestry operations in accordance with current legislative and environmental sustainability standards. Certain of our subsidiaries have received various environmental certifications as of the date of this annual report. See “Item 4. Information on our Company—Certifications.”

Forest Plantations

The information in this section refers to 100% of the plantations owned by Forestal Arauco S.A. (Chile), 80% of the plantations owned by Forestal Los Lagos S.A., 100% of the plantations owned by Arauco Argentina, 50% of the plantations we own in Uruguay through the Montes del Plata joint operation, 100% of the plantations owned by Arauco Forest Brasil, 80% of the plantations owned by Arauco Florestal Arapoti and 100% of the plantations owned by Mahal Empreendimentos e Participacoes S.A., unless otherwise mentioned.

As of December 31, 2018, our planted forests consisted of 64.7% radiata, taeda and elliottii pine and 33.0% eucalyptus. Radiata, taeda and elliottii pine have a rapid growth rate and a short harvest cycle compared to other commercial softwoods. These pine species are sufficiently versatile for both the production of forestry and timber and the production of long-fiber pulp for sale to manufacturers of paper and packaging. Eucalyptus is used to produce short-fiber pulp for sale to manufacturers of paper and tissue.

We seek to manage our forestry resources seeking to ensure that the annual growth of our forest is equal to or greater than the volume of resources harvested each year. In 2018, Arauco planted a total of 85,243 hectares and harvested a total of 65,441 hectares in Chile, Argentina, Brazil and Uruguay.

Our planted radiata pine forests are located in central and southern Chile, and most are located in close proximity to our major production facilities. As of December 31, 2018, our aggregate radiata pine holdings comprised 39.0% of all Chilean radiata pine plantations. As of December 31, 2018, we owned approximately 1.1 million hectares of land in Chile, of which 674 thousand hectares are forest plantations.

As of December 31, 2018, we owned approximately 263,213 hectares of forest and other land in Argentina, approximately 249,324 hectares of forest and other land in Brazil and approximately 125,843 hectares of forest and other land that Montes del Plata owns in Uruguay. Of the total land we own in Uruguay through Montes del Plata, 100% is planted with eucalyptus: dunnii (91.9%), globulus (1.1%), grandis (3.3%) and other species (3.7%).

Of the total land we own in these three countries, approximately 165,921 hectares of land are planted with taeda pine and elliottii pine, both species of softwood that have a growth rate similar to that of radiata pine, and 157,564 hectares with eucalyptus. The balance includes plantations of other species of trees, land to be planted, protected areas and native forests.

 

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The following table sets forth the number of hectares and types of uses of our land holdings and rights, as of December 31, 2018.

 

     As of December 31, 2018  
     Total      Distribution  
     (in hectares)      (percentage)  

Pine plantations (1)

     

0-5 years

     185,243        10.5

6-10 years

     142,526        8.1

11-15 years

     137,656        7.8

16-20 years

     97,424        5.5

21+ years

     95,739        5.4

Subtotal

     658,588        37.2

Eucalyptus plantations (2)

     336,164        19.0

Plantations of other species

     23,020        1.3

Subtotal of Plantations

     1,017,772        57.5

Land for plantations

     111,165        6.3

Land for other uses (3)

     640,062        36.2
  

 

 

    

 

 

 

Total (4)

     1,768,999        100.0
  

 

 

    

 

 

 

 

(1)

All years are calculated from the date of planting.

(2)

Approximately 83% of our eucalyptus plantations are less than 10 years old.

(3)

Includes roads, firebreaks, native forests and yards.

(4)

Includes 100% of the plantations owned by Forestal Arauco S.A. (Chile), 80% of the plantations owned by Forestal Los Lagos S.A., 100% of the plantations owned by Arauco Argentina, 50% of the plantations we own in Uruguay through the Montes del Plata joint operation, 100% of the plantations owned by Arauco Forest Brasil, 80% of the plantations owned by Arauco Florestal Arapoti and 100% of the plantations owned by Mahal Empreendimentos e Participacoes S.A.. Also includes 15,320 hectares for which we have the right to harvest but do not own the land, of which 15,015 hectares are in Chile, and 305 hectares are in Argentina; there are no hectares are in Uruguay.

Land Acquisition and Afforestation

Our total land assets have increased from fewer than 170,000 hectares in 1980 to 1,768,999 hectares as of December 31, 2018. In the five years ending December 31, 2018, we purchased 4,763 hectares of land, all of which were purchased in Chile. For more information regarding our material acquisitions, see “Item 4. Information on our Company—Description of the Business —History”.

We expect to acquire additional land if we have the possibility to do so at a desired price or location. There can be no assurance that we would be able to acquire land at a desired price or in a desired location.

We plan to continue our policy of supplementing our pulplog production with purchases from domestic third parties. We believe that this policy is economically efficient, given the significant quantities of pulplog available from third parties and our increasing proportion of sawlogs yielded from our plantations. We believe that the aggregate of our existing plantations, the land that we own which we intend to afforest and the volume that we purchase from third-parties will be sufficient to satisfy our anticipated future demand for sawlogs and pulplogs.

Forest Management

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although some land is not suitable for the production of pruned logs, as of December 31, 2018, approximately 63% of our pine forests in Chile were conducive to clear wood production.

For our eucalyptus plantations, our forestry management activities seek to increase the amount of fiber production per hectare through advanced genetic techniques and planting and site preparation procedures. Eucalyptus is more expensive to plant than pine; however, after planting, eucalyptus requires minimal forest management, yields more fiber per hectare and has a shorter growth cycle and greater wood density than pine, resulting in a greater amount of pulp production per hectare.

 

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As of December 31, 2018, we had 7 nurseries in Chile, Argentina, Brazil and Uruguay (through Montes del Plata), in which we grow seedlings using seeds and cuttings from genetically selected trees. To achieve higher quality trees and an increased growth rate, we apply strict selection criteria to the trees from which seedlings are produced. We then plant the seedlings manually or mechanically. Depending upon the species of tree to be planted and the nutrient and physical characteristics of the soil, we may also undertake a certain amount of ground preparation before planting. Our other principal forest activities are thinning, pruning and harvesting.

Thinning, or cuting inferior trees from the plantation, occurs when commercially necessary. Thinned trees are used in pulp production or, depending on the quality of the land, as sawlogs. Commercial thinning occurs when trees are 8 to 14 years old and results in an average reduction of the number of trees per hectare from the original stocking of 1,000 and 1,333, depending on the productivity of the land, to 700 in the first thinning (8 to 9 years) and to approximately 450 in the second thinning (12 to 14 years).

This high level of thinning benefits Arauco for the following reasons:

 

   

the cost of planting is relatively low,

 

   

the higher number of young trees provide each other with natural protection from the elements, and

 

   

the high degree of selection that thinning makes possible leaves only the highest quality trees to be harvested.

Pruning involves removing branches, the source of knots, which are the main defect in sawn timber. Pruning results in a high-quality clear wood saw log of 5.8 meters from each tree, and is conducted three times:

 

   

when trees are five to seven years old,

 

   

one year later, when trees are six to eight years old, and

 

   

one year later, when trees are seven to nine years old.

Our eucalyptus plantations are neither thinned nor pruned.

Harvesting timber involves felling trees, removing branches from the logs, cutting the logs into appropriate sections and loading the logs onto trucks for transport to sawmills, panel mills or pulp mills. We use the lower section of the radiata pine, comprising the first 7 to 12 meters, in sawmills and plywood mills. We use the mid-section of the radiata pine, comprising, on average, the next 8 to 13 meters, in either sawmills or pulp mills, depending on the diameter and quality of the pine. We use the top section of the tree for pulp, MDF and MDP production.

We monitor product demand and our current inventory levels, and we match harvests from sections of our plantations that will provide the optimal yield given our product requirements. This process involves the use of sophisticated research models and close communication between our different operating areas to ensure that the correct amounts of timber of the required characteristics are supplied. We replant as soon as practicable after harvesting, with an average period between harvesting and replanting of one year.

The following table illustrates, on a hectare basis, the extent of our thinning, pruning and harvesting activities in Chile during the periods indicated.

 

     2018      2017      2016  
     (in hectares)  

Thinning

     10,358        5,553        16,229  

Pruning

     36,172        32,869        33,547  

Harvesting

     36,267        38,932        31,863  

We manage our forest activities, but we hire independent contractors to perform the bulk of our operations, including planting, maintenance, thinning, pruning, harvesting, transportation and access road construction. As of December 31, 2018, we had arrangements with more than 338 independent contractors that employed over 12,822 workers in Chile. Many of these contractors have long-standing relationships with us, but we award the majority of contracts based on competitive bids. We believe that our arrangements with independent contractors provide greater flexibility and efficiency than performing these activities directly.

Our plantations are interspersed with native forest and farmland, and, as a result, they are naturally protected against the spread of certain diseases. In addition, our subsidiary Investigaciones Forestales Bioforest S.A., or Bioforest, has developed strategies to protect our forests from pests and diseases. During the last seven years, radiata pine plantations in Chile have been affected by two health problems: 1) the Sirex noctilio, a wasp which attacks stressed trees, has caused a natural selection for thinning and 2) the disease produced by Phytophthora pinifolia has reduced the growth rate of certain trees. To mitigate the effects of the Sirex noctilio, Bioforest has implemented a biological control program under which it has released into the affected forests natural enemies of the Sirex noctilio, including the nematode, the Beddingia siricidicola and the parasitoid Ibalia leucospoide. To control the spread of phytophthora pinifolia, Bioforest has begun a genetic program to make our trees more tolerant to this disease and has also begun dispersing in our forests a fertilizer that further promotes resistance. For more information regarding certain risks to our forests presented by disease, see “Item 3. Key Information—Risk Factors—Risks Relating to the Company—Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial condition, results of operation and cash flows.”

 

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We operate an extensive fire control organization to minimize any fire damage to our forests. The operation consists primarily of a system of spotter towers and cameras, manned 24 hours a day during the summer months, from which spotters report the direction of any fire observed to a central command post, where the fire’s exact location is determined, and an appropriate ground and/or aerial response is formulated. The focus of this operation is to detect the fires as soon as possible and to reach the location in less than 20 minutes in order to prevent fires from spreading. Also, when feasible, we work in firefighting activities with authorities, other fire control organizations and local communities. During the years 2015 and 2016, this system limited fire damage to our forests to an average of 3,907 hectares of the plantations per year. Notwithstanding such system, during January and February 2017, large forest fires affected Arauco’s plantations in the Maule and Bio Bio Regions in southern Chile. About 72,500 hectares of our forest plantations were damaged to some extent and our El Cruce Sawmill was destroyed as a result of these fires.

During the 2015-2016 forestry fire season, fires that affected our forest plantations destroyed 618 hectares. During the 2016-2017 season, approximately 82,040 hectares of our forest plantations were affected. In the 2017-2018 season, approximately 587 hectares of our forest plantations were affected by forest fires.

Forest Production

We harvested 22.3 million cubic meters of logs during the year ended December 31, 2018, consisting of 9.2 million cubic meters of sawlogs, 8.0 million cubic meters of pine pulplogs and 5.1 million cubic meters of eucalyptus pulplogs and other logs. During 2018, our sawmills and panel mills used 7.3 million cubic meters of sawlogs. We also sold 1.8 million cubic meters of sawlogs to unaffiliated domestic sawmills during 2018.

A log merchandising facility located at the same site as our Horcones I and Horcones II sawmills optimizes, cuts and classifies wood destined for our plywood facility, sawmills or pulp mills with an annual processing capacity of 2.0 million cubic meters of logs per year. The Nueva Aldea complex also includes a log merchandising facility, with an annual processing capacity of 2.6 million cubic meters of logs per year.

Pulp

We believe that we were Chile’s largest producer of bleached and unbleached softwood market pulp in terms of production in 2018. For the year ended December 31, 2018, our pulp sales were U.S.$ 3.0 billion, representing 49.6% of our total revenues for the period.

Pulp obtained from wood fibers is mainly used in the manufacture of printing and writing paper, hygienic and sanitary paper, board and packaging. Whether a specific kind of pulp is suitable for a particular end use depends not only on the type of wood but also on the process used to transform the wood into pulp. Pulp made from softwoods, such as radiata pine, has long fibers and it is used to provide strength to paper products. Bleached hardwood pulp is used primarily for printing and writing papers and for tissue. Unbleached pulp is used primarily for linerboard (a packaging material). Pulp made from hardwoods, such as eucalyptus, has short fibers and is used in combination with long fiber in manufacturing paper products.

We use a chemical process, known as the kraft process, in our pulp mills in Chile, Argentina, and Uruguay. The raw wood is in the form of pulplogs and chips, which are used in the production process to produce pulp. The pulplogs are first debarked and chipped. The chips are then screened, mixed and cooked with chemicals to separate the bulk of the lignin from the wood fibers. After the material is screened and washed, it is then passed to high-density tanks. For bleached pulp, the next step is a bleaching process using chemicals, primarily chlorine dioxide. At all of our pulp mills, the bleaching process is preceded by an oxygen delignification stage. Then, the fibers are subject to a final stage where a sheet is formed and subsequently dried and baled to be transported to customers. The lignin and bark produced during this process are used as fuel in the boilers to produce steam, providing heat and generating electricity for the mill. Our bleached pulp is bleached to a 90+ brightness level, as measured by the ISO test procedure, which is one of the industry’s measurement methods.

 

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Pulp Mills

As of December 31, 2018, we owned and operated five pulp mills in Chile, one in Argentina, and jointly owned and operated one in Uruguay with Stora Enso, with an aggregate installed annual production capacity of approximately 4.0 million tonnes. This figure includes 50% of our Uruguay (Montes del Plata) joint operation. Our six pulp mills, together with the 50% volume we include from our interest in the Montes del Plata mill, produced 3.3 million tonnes of bleached pulp and 0.5 million tonnes of unbleached pulp in 2018.

All our pulp mills in Chile, the Puerto Esperanza pulp mill in Argentina and the Montes del Plata mill in Uruguay are certified under international standards. See “Item 4. Information on our Company—Certifications”.

The following table sets out bleached and unbleached kraft pulp production by plant for each of the years indicated.

 

     Year ended December 31,  
     2018      2017      2016      2015      2014  
     (in thousands of tonnes)  

Chile

              

Arauco Mill

              

Arauco I (bleached)

     271        264        258        268        269  

Arauco II (bleached)

     451        456        475        474        483  

Arauco II (unbleached)

     32        21        —          —          —    

Valdivia Mill (bleached)

     548        550        550        549        550  

Constitución Mill (unbleached)

     318        270        278        303        310  

Nueva Aldea Mill (bleached)

     1,033        992        999        935        985  

Licancel Mill (unbleached)

     158        144        152        152        150  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,811        2,697        2,712        2,681        2,747  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Argentina

              

Puerto Esperanza Mill (bleached)

     326        310        341        314        282  

Uruguay

              

Montes del Plata (bleached - 50%)

     654        688        643        608        240  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,791        3,695        3,696        3,603        3,269  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

The following is a description of each of our pulp mills in Chile, Argentina and Uruguay.

Chile

Arauco I. Arauco I or Line 1, which began operations in 1972, is located at the Arauco Mill in the heart of a group of our radiata pine plantations in the Eighth Region of Chile. Arauco I produces elementary chlorine-free pulp, which does not use chlorine gas. Elementary chlorine-free pulp is also produced by most of our competitors in each of the world’s major pulp producing regions. The installed annual production capacity of Arauco I is approximately 290,000 tonnes of bleached hardwood kraft pulp.

Arauco II. Also located at the Arauco Mill, Arauco II was completed in 1991. Arauco II’s pulping process is generally the same as that of Arauco I, but it includes technological improvements in its production process and environmental design. Arauco II is also equipped to produce elementary chlorine-free pulp. The installed annual production capacity of Arauco II is approximately 510,000 tonnes. Although the mill mainly produces bleached softwood kraft pulp, it could also produce unbleached softwood kraft pulp.

On July 24, 2018, the MAPA project was approved by the board of directors of the Company. The MAPA project contemplates an estimated investment of U.S.$2,350 million and is to be located at the commune and province of Arauco, in the Bio Bio Region, Chile. The project consists of the construction and start-up of a new production line of 1,560,000 annual tonnes of bleached hardwood kraft pulp (Line 3). Line 1 of the Arauco Mill will cease its operations once Line 3 comes online. Therefore, this project is expected to increase the net production of the Arauco Mill by approximately 1,270,000 tonnes of pulp, reaching a total production capacity of approximately 2,100,000 annual tonnes. We expect that this project will start operations in the second quarter of 2021.

Constitución Mill. The Constitución Mill is located in the heart of a group of our radiata pine forests in the Maule Region, Chile. As of December 31, 2018, the Constitución Mill was the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of approximately 355,000 tonnes. The unbleached pulp produced in this mill does not use any chlorine in its production process.

 

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Licancel Mill. We acquired the Licancel Mill in September 1999. It is located in Licantén, which is 250 kilometers south of Santiago. Investments made during 2018 increased the mill’s installed annual production capacity from approximately 155,000 tonnes to 160,000 tonnes of unbleached softwood kraft pulp.

Valdivia Mill. The Valdivia Mill commenced operations in February 2004. The Valdivia Mill is located in the Fourteenth Region of Chile (which was previously part of the Tenth Region of Chile), an area with significant radiata pine and eucalyptus plantations. The Valdivia Mill has an installed potential annual production capacity of approximately 550,000 tonnes of bleached pulp, consisting of softwood and hardwood pulp. The Valdivia Mill is equipped to produce elementary chlorine-free pulp.

In February 2015, the Environmental Assessment Service (SEA) unanimously approved the Environmental Impact Statement submitted by Arauco in order to move forward with the dissolving pulp project being developed at Valdivia Pulp Mill. This initiative, which requires a U.S.$190 million (as revised in 2018) investment, will allow Arauco to be the first company in Chile to produce this type of pulp, in addition to creating a value-added product and diversifying its supply to the market. Dissolving pulp is mainly used in the manufacture of viscose, which is known for its softness, shine, purity and high water absorption, making it suitable for use in the production of fabric medical items and personal care items, specifically clothing. Unlike synthetic fibers that are mostly produced from oil based sources, dissolving pulp is natural and renewable. In addition, this project will increase the facility’s power generation by 15 megawatts, or MW, in comparison with the power generation during bleached hardwood kraft pulp campaign. In July 2017, the project was approved by the authorities and in September 2017, the board of directors of Arauco unanimously approved the project, which has started its construction phase in the fourth quarter of 2017. We expect that this project will start operations at the end of 2019.

Nueva Aldea Mill. Located in the Eighth Region of Chile, this mill was completed in 2006, and after certain investments made during 2018, it increased its production capacity from 1,027,000 tonnes per year to 1,040,000 tonnes per year, half of which is dedicated to the production of bleached softwood kraft pulp and the other half of which is dedicated to the production of bleached hardwood kraft pulp. The Nueva Aldea Mill is equipped to produce elementary chlorine-free pulp.

Argentina

Puerto Esperanza Mill. Arauco Argentina’s softwood pulp mill is located in the Province of Misiones, a region whose soil and climate are favorable for the rapid growth of pine trees. The Puerto Esperanza Mill (formerly known as Alto Paraná mill) is the only bleached softwood kraft market pulp facility in Argentina. The mill has an installed annual production capacity of 350,000 tonnes of pulp, consisting of fluff pulp and bleached softwood pulp.

Uruguay

Montes del Plata. Located in Punta Pereira in the department of Colonia, Uruguay, the Montes del Plata Pulp Mill began operations in June 2014. The total investment was approximately U.S.$2.7 billion. The mill has an annual installed capacity of 1.4 million air dry tonnes of bleached pulp. On June 4, 2014, the environmental authorities of Uruguay (MVOTMA) approved an annual production capacity of the Montes del Plata mill of 1.5 million tonnes per year.

Regarding our Montes del Plata mill in Uruguay, during 2017 we made some operational improvements that led to an increase in the annual capacity of the mill, reaching approximately 1.4 million tonnes from 1.3 million tonnes. Of the total annual capacity of the mill we own the 50% due to the joint operation we had with Stora Enso, which correspond approximately to 700 thousand tonnes of annual capacity.

Production Costs

Based on information published by Hawkins Wright Ltd., our cash costs for softwood pulp production are lower than the average costs of market pulp producers in Canada, the United States and Scandinavia, particularly with respect to transportation, which enables our costs to be lower than the average costs of our Northern Hemisphere competitors, on a total delivered cost basis. The following table sets forth our costs for the production of bleached softwood kraft pulp.

 

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     Arauco(1)  Bleached
Softwood Kraft Pulp Cash Costs
 
     (in U.S.$ per tonne)  

Wood

     182  

Chemicals

     62  

Labor and Others(2)

     145  

Total cash cost

     389  

Transportation(3)

     35  

Marketing and Sales

     3  

Total delivered cash cost

     427  
  

 

 

 

 

Source: Arauco

(1)

Only includes Arauco’s operations in Chile.

(2)

Includes labor, energy, maintenance costs, and other mill costs.

(3)

Delivered in China.

Sales

Estimated installed bleached kraft pulp capacity worldwide for the year ended December 31, 2018 equaled 65.9 million tonnes. Based on information published by Hawkins Wright Ltd., we believe that our production capacity represented 5.1% of this market in 2018. During the same year, we exported 98.3% of our bleached pulp (in terms of tonnes sold), principally to customers in Asia and Western Europe.

Integrated manufacturers dominate the world production of unbleached softwood pulp, as opposed to non-integrated companies that sell market pulp, like us. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. With a worldwide installed capacity of unbleached softwood kraft pulp of 2.4 million tonnes for 2018, according to Hawkins Wright Ltd., we are the world’s largest single producer of unbleached softwood market pulp, based on production capacity, with 20.0% of the total market in 2018. During the same year, 98.2% of our total unbleached market pulp sales (in terms of tonnes sold) consisted of export sales. While for the last six years Asia has been our principal export market for unbleached market pulp, we continually seek niche markets for our products in Western Europe and the United States. The following table sets forth, by region, the sales volumes of bleached and unbleached pulp for the years indicated.

 

     For the Year Ended December 31,  
     2018      2017      2016  
     (in tonnes)  

Bleached Pulp

        

Asia and Oceania

     2,289,694        2,311,090        2,153,550  

Europe

     597,116        547,012        557,726  

North and South America

     301,226        335,251        399,195  

Other

     532        134,422        130,289  
  

 

 

    

 

 

    

 

 

 

Total

     3,188,568        3,327,775        3,240,760  
  

 

 

    

 

 

    

 

 

 

Unbleached Pulp

        

Asia and Oceania

     407,659        338,648        326,332  

North and South America

     81,600        88,425        94,288  

Europe

     1,186        2,073        4,618  

Other

     3,729        15,948        14,446  
  

 

 

    

 

 

    

 

 

 

Total

     494,174        445,094        439,684  
  

 

 

    

 

 

    

 

 

 

While there are many grades and varieties, pulp is a commodity that is marketed primarily based on price and service. In marketing our pulp, we seek to establish long-term relationships with non-integrated end users of pulp by providing a competitively priced, high-quality, consistent product and excellent service. The quality of our pulp derives from the high standards of production that we maintain at our mills and our use of a single species of tree, in contrast to pulp producers in some of the world’s major softwood pulp producing regions that mix different species, depending on availability and seasonality. Our bleached pulp is marketed under the brand names “Arauco” and “Arauco Argentina” and our unbleached pulp is marketed under the brand name “Celco.” The 50% share of the pulp produced from Montes del Plata is marketed under the brand name “Arauco.”

 

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Prices for bleached kraft market pulp produced from radiata pine and eucalyptus normally fluctuate depending on prevailing world prices, which historically have been cyclical. The fluctuations generally depend on worldwide demand, world production capacity, business strategies adopted by major forestry, pulp and paper producers, the availability of substitutes and the relative strength of the U.S. dollar. See “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Conditions, Results of Operations and Cash Flows—Overview” and “—Pulp Prices” and “Item 3. Key Information—Risk Factors—Risks Relating to the Company—Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows.”

The following table sets forth our average bleached and unbleached pine pulp prices per tonne for each quarter, of the years referenced.

 

     2018      2017      2016  
     (U.S.$ per tonne)  

Bleached Pulp

        

1Q

     784        565        570  

2Q

     804        620        590  

3Q

     808        633        564  

4Q

     773        730        558  

Unbleached Pulp

        

1Q

     847        596        594  

2Q

     873        664        608  

3Q

     876        660        573  

4Q

     864        768        574  

In accordance with customary pulp market practice, we do not have long-term sales contracts with our customers (except for a few limited cases); rather, we maintain long-standing relationships with our customers with whom we periodically reach agreements on specific volumes and prices. We have a diversified customer base located throughout the world and totaling, as of December 31, 2018, more than 250 customers. As of December 31, 2018, we employed 12 sales agents to represent us in more than 33 countries. We manage this worldwide sales network from our headquarters in Chile.

 

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Wood Products

We produce panels (fiberboard and particleboard), sawn timber (green, kiln-dried lumber and flitches), remanufactured wood products and plywood. For the year ended December 31, 2018, sales of wood products totaled U.S.$2.7 billion, representing 45.7% of our total revenues.

Exports, which include sales to countries other than the countries in which the goods are produced, accounted for 44.3% of our total revenues of wood products for the year ended December 31, 2018. We sell panels primarily to customers in North America, Brazil, Chile, Argentina and other countries in Latin America.

The following table sets forth our wood products sales to unaffiliated third parties for each of the years indicated.

 

     Year ended December 31,  
     2018      2017      2016      2015      2014  
     (in thousands of cubic meters)  

Panels

     5,410        4,866        4,754        4,915        4,840  

Sawn timber

     1,825        1,893        2,022        2,079        2,361  

Remanufactured wood products

     438        445        442        422        429  

Plywood

     532        567        564        594        444  

Total

     8,205        7,771        7,782        8,010        8,074  

As of December 31, 2018, we owned and operated two panel mills, seven sawmills and two plywood mills in Chile; two panel mills and one sawmill in Argentina; four panel mills in Brazil; six panel mills in the United States and two panel mills in Canada. Total aggregate installed annual production capacity as of December 31, 2018 was approximately 7.4 million cubic meters. We operate our sawmills in coordination with our forestry and sales operations, since our sawn timber is generally produced in accordance with customer specifications. All our sawmills are located near our pine plantations. As of December 31, 2018, we also owned five remanufacturing facilities—four in Chile and one in Argentina—that reprocess sawn timber into remanufactured wood products, such as moldings, jams and pre-cut pieces that end users require for doors, furniture and door and window frames. These facilities produced 387,442 cubic meters of remanufactured wood products in 2018.

In December 2011, we entered into an asset purchase agreement to acquire an industrial facility in Moncure, North Carolina for U.S.$56 million plus approximately U.S.$6 million in working capital. In June 2012, we entered into a share purchase agreement as a result of which we acquired five panel mills in the United States, one of which was located in Albany, Oregon; two in Bennettsville, South Carolina; one in Eugene, Oregon; and one in Malvern, Arkansas and two panel mills in Canada, located in St. Stephen, New Brunswick and Sault Ste. Marie, Ontario.

On July 1, 2012, we commenced the process of insourcing the operation of 13 sawn timber industrial facilities in Chile, which had previously been managed by third-party companies. As a result, we incorporated 2,900 people into our workforce in that same year.

In 2015, we agreed to purchase a 50% of Sonae Arauco for a total purchase price of €137.5 million (equivalent to U.S.$153.1 million at the time of the purchase), comprising the following operations: (i) two panel plants and one sawmill in Spain; (ii) two panel plants and one resin plant in Portugal; (iii) four panel plants and one impregnation of melamine papers plant in Germany, (iv) and two panel mills in South Africa. The transaction closed on May 31, 2016.

On December 6, 2017, our Brazilian subsidiary Arauco do Brasil S.A. purchased all of the equity rights in Masisa do Brasil Ltda. See “Item 4. Information on our Company—Description of Business—History.”

On January 31, 2019, Arauco’s subsidiaries Arauco Internacional and AraucoMex, S.A. de C.V., acquired the shares of Masisa’s Mexican Subsidiaries. See “Item 4. Information on our Company—Description of Business—History.”

Our wood products mills in Chile, North America, Argentina and Brazil are certified under international standards. See “Item 4. Information on our Company—Certifications.”

 

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Chile

Teno Mill. This mill, which began production on July 4, 2012, has an installed annual production capacity of 300,000 cubic meters of PBO and 240,000 cubic meters of melamine laminate panels. The complex has a continuous PBO panel production line, two laminated panel production lines and one impregnation line. In 2018, Teno mill started its production capacity increase project through the Teno 340 project, to increase the PBO annual installed capacity up to 340,000 cubic meters.

Trupán-Cholguán Mill. This mill has an installed annual production capacity of approximately 575,000 cubic meters of panels and 40,000 cubic meters of melamine panels. It has three production lines, one of which produces HB with an annual capacity of 60,000 cubic meters and the other two of which produce MDF with an annual production capacity of 165,000 and 350,000 cubic meters, respectively. The HB line has been recently shut down.

Arauco Mill. This mill has an installed annual production capacity of approximately 350,000 cubic meters of plywood panels. It has two production lines with respective production capacities of 140,000 and 210,000 cubic meters.

Nueva Aldea Plywood Mill. This mill was built on the same site as the original mill, which was destroyed as a result of the 2011 wildfires in the Bio-Bio Region of Chile. The new Nueva Aldea Mill started operating on December 18, 2013. It has an annual production capacity of 360,000 cubic meters of plywood panels.

Cholguán Sawmill and Remanufacturing Facilities. This sawmill has installed annual production capacity of approximately 317,000 cubic meters of lumber, as well as drying kiln facilities with installed annual production capacity of approximately 273,000 cubic meters and two remanufacturing facilities with installed annual production capacity of approximately 92,000 cubic meters of remanufactured wood products. The Cholguán sawmill also has a special facility for making laminating beams with installed annual production capacity of approximately 12,500 cubic meters.

Colorado Sawmill. This sawmill has an installed annual production capacity of approximately 273,000 cubic meters of lumber and produces “green” sawn timber (or sawn timber that is not kiln dried) for the Chilean, Japanese and Middle Eastern markets. It also has drying facilities with installed annual production capacity of approximately 175,000 cubic meters.

Horcones I Sawmill and Remanufacturing Facility. This sawmill has an installed annual production capacity of approximately 484,000 cubic meters of lumber. It also has drying kilns with an installed annual capacity of approximately 362,000 cubic meters and a remanufacturing facility with an installed annual production capacity of approximately 130,000 cubic meters of remanufactured wood products.

Horcones II Sawmill. The annual production capacity of this mill is approximately 242,000 cubic meters of lumber. It also has drying facilities with an installed annual capacity of approximately 166,000 cubic meters.

Nueva Aldea Sawmill. This mill has installed annual production capacity of approximately 431,000 cubic meters of sawn timber and is equipped with drying kilns with installed annual capacity of approximately 351,000 cubic meters.

Valdivia Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 464,000 cubic meters of lumber. It also has drying facilities with an installed annual capacity of approximately 336,000 cubic meters and a remanufacturing facility with installed annual capacity of approximately 85,000 cubic meters of remanufactured wood products.

Viñales Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 377,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual capacity of approximately 358,000 cubic meters and a remanufacturing facility with an installed annual capacity of approximately 101,000 cubic meters of remanufactured wood products.

Argentina

Piray MDF Mill. This mill has an installed annual production capacity of approximately 300,000 cubic meters of MDF panels and 120,000 cubic meters of melamine lamination.

Zárate Mill. This mill has an installed annual production capacity of approximately 260,000 cubic meters of PBO panels and 220,000 cubic meters of melamine lamination, in addition to producing PBO.

 

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Piray Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 318,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 308,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 67,000 cubic meters of remanufactured wood products.

Brazil

Jaguariaiva Mill. This mill produces MDF and has an installed annual production capacity of approximately 780,000 cubic meters of MDF panels through the first production line and 500,000 cubic meters of MDF panels through the second production line. Its total melamine lamination capacity is 480,000 cubic meters.

Piên Mill. This mill has an installed annual production capacity of approximately 750,000 cubic meters of panels distributed among two production lines with a production capacity of 440,000 cubic meters of MDF boards, 310,000 cubic meters of PBO and 264,000 cubic meters of melamine lamination. In December 2018, the powder silo of one of the lines in this mill suffered damage that paralyzed the operations of the PBO panels for approximately ten days. This event did not cause a material impact on the financial statements.

Montenegro Mill. This mill has an installed annual production capacity of approximately 410,000 cubic meters of PBO panels and 200,000 cubic meters of melamine lamination.

Ponta Grossa Mill. This mill produces MDF and has an installed annual production capacity of approximately 310,000 cubic meters of MDF panels. Its melamine lamination capacity is 360,000 cubic meters.

México

Durango Mill. This mill includes two PBO production lines with an annual installed capacity of 155,000 cubic meters; one MDF production line with an annual installed capacity of 220,000 cubic meters and four melamine lines with an annual installed capacity of 210,000 cubic meters. The Durango mill was acquired in January 2019.

Zitácuaro Mill. This mill includes one PBO production line with an annual installed capacity of 184,000 cubic meters and three melamine production lines with an annual installed capacity of 107,120 cubic meters. Zitácuaro mill was acquired on January 2019.

United States

Duraflake Mill. This mill located in Oregon, has an installed annual production capacity of approximately 442,000 cubic meters of PBO and 132,000 cubic meters of melamine lamination.

Bennettsville Mill. This mill located in South Carolina has an installed annual production capacity of approximately 251,000 cubic meters of MDF.

Eugene Mill. This mill located in Oregon has an installed annual production capacity of approximately 154,000 cubic meters of MDF.

Malvern Mill. This mill located in Arkansas has an installed annual production capacity of approximately 310,000 cubic meters of MDF.

Carolina Mill. This mill located in South Carolina has an installed annual production capacity of approximately 600,000 cubic meters of PBO and 285,000 cubic meters of melamine lamination. An expansion project was completed in the fourth quarter of 2016, increasing the mill’s PBO production capacity by 104,000 cubic meters and melamine capacity by 153,000 cubic meters.

Moncure Mill. This facility located in North Carolina includes an MDF production line with an annual production capacity of 285,000 cubic meters, a PBO production line with an annual production capacity of 262,000 cubic meters and two melamine lamination production lines with a combined annual production capacity of 150,000 cubic meters.

Grayling Mill. This facility is located in Michigan and includes one production line with an annual installed production capacity of 800,000 cubic meters of PBO. This facility had been under construction since 2017 and started its operations during the first quarter of 2019.

 

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Panolam Mill. This facility is located in Oregon and includes two thermally fused lamination lines with an annual installed production capacity of 75,000 cubic meters of melamine. It was acquired in July 2018.

Canada

Sault Sainte Marie Mill. This mill located in Ontario has an installed annual production capacity of approximately 310,000 cubic meters of MDF and 115,000 cubic meters of melamine lamination.

St. Stephen Mill. This mill located in New Brunswick has an installed annual production capacity of approximately 376,000 cubic meters of panels distributed between two production lines with a production capacity of 216,000 cubic meters of PBO and 160,000 cubic meters of thin HDF, in addition to a melamine lamination capacity of 255,000 cubic meters, paint/print and décor paper lines and with an on-site resin facility.

Sonae Arauco

Sonae Arauco, of which we own 50%, and its subsidiaries produce market wood panels, of the OSB, MDF and PBO type, and sawn timber through the operation of: (i) two panel plants and one sawmill in Spain; (ii) two panel plants and one resin plant in Portugal; (iii) four panel plants and one impregnation of melamine papers plant in Germany, (iv) and two panel mills in South Africa (one of them is currently shut down). In the aggregate, the production capacity of Sonae Arauco is approximately 516,000 cubic meters of OSB, 1,482,000 cubic meters of MDF, 2,330,000 cubic meters of particleboards and 50,000 cubic meters of sawn timber.

 

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Forestry Products

Our forestry products are sawlogs, pulplogs, posts and chips. As a result of our forest management policies and the increasing maturity of our plantations, our plantations are yielding increasing volumes of forestry products, particularly clear wood. As the volume of clear wood has grown, we have broadened our range of forestry products. For the year ended December 31, 2018, sales of forestry products were U.S.$105 million, representing 1.8% of our revenues for such year.

The following table sets forth, by category, forestry product sales to unaffiliated third parties for each of the years indicated.

 

     Year ended December 31,  
     2018      2017      2016      2015      2014  
     (in thousands of cubic meters)  

Sawlogs

     1,794        1,608        1,328        1,793        2,262  

Pulplogs

     746        616        459        591        499  

Posts

     —          —          —          —          2  

Chips

     546        443        366        278        303  

Energy and Sustainable Development

We utilize renewable fuels such as forest biomass sub-products in power plants that cogenerate the steam and electricity required for our manufacturing operations, thus contributing to reducing greenhouse emissions. Biomass co-generation allows for a high thermal efficiency, approaching 80% in some cases. In addition to meeting our own energy needs, in Chile we generate a significant amount of surplus power, which we deliver to the SEN, which distributes electrical power throughout the Central and Southern Regions of Chile. In Uruguay, biomass sub-products from our Montes del Plata Mill also cogenerate the steam and electricity to meet our energy needs, and surplus power is delivered to the Uruguayan power grid.

The following table sets forth, by country and mill, our energy producing facilities and their annual installed capacities, maximum generation, average consumption and surplus power as of December 31, 2018:

 

Country/Mill

  Installed Capacity
(MW)
    Maximum
Generation
(MW)
    Average
Consumption
(MW)
    Surplus power delivered
to Power Grid
(MW)
 

Chile

       

Arauco

    127       105       81       24  

Constitución

    40       30       22       8  

Cholguán

    29       28       15       13  

Licancel

    29       20       14       6  

Valdivia

    140       115       54       61  

Horcones (gas/diesel)

    24       24       —         24  

Nueva Aldea I

    30       28       14       14  

Nueva Aldea II (diesel)

    10       N.A.       —         10  

Nueva Aldea III

    136       100       63       37  

Bioenergía Viñales

    41       31       9       22  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Chile

    606       481       272       219  
 

 

 

   

 

 

   

 

 

   

 

 

 

Uruguay

       

Montes del Plata (1)

    91       90       39       50  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Uruguay

    91       90       39       50  
 

 

 

   

 

 

   

 

 

   

 

 

 

Argentina

       

Piray

    38       30       16       15  

Puerto Esperanza

    44       44       39       —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Argentina

    82       74       55       15  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

    779       645       366       284  
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Considers 50% of joint operation Montes del Plata

 

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As of December 31, 2018, we had registered five co-generation power plants in Chile as greenhouse emission reduction project activities under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Three of them were registered during 2006, Trupán, Nueva Aldea (first phase) and Nueva Aldea (second phase); a fourth plant was registered in 2009, the Valdivia biomass power plant; and the fifth one was registered in January 2011, the Horcones power plant expansion project. Each of these power plants generates electricity through forestry biomass (forestry and wood industrial sub-products, including the wood pulp by-product called “black liquor”), which is a renewable carbon-neutral fuel that allows the facilities to decrease their reliance on fossil-fuel intensive grid electricity.

Arauco was the first Chilean forestry company to issue Certificates of Emission Reductions (CERs or carbon credits) through the CDM of the Kyoto Protocol in Chile. From 2007 to December 31, 2018, Arauco had contributed 7.8% of total carbon credits in the energy generation from residual biomass projects portfolio registered worldwide in accordance with the CDM standard. This represents a net issuance of 4.2 million CERs with our CDM projects.

As of the date of this annual report, accumulated in the period from 2007 to 2018, we have sold 2.98 million CERs, mainly to European companies subject to compliance obligations under the European Trading Scheme (ETS) and to global companies who aim to compensate their emissions in the voluntary market. The following table presents the total amount of CERs issued and sold by Arauco for each of the years indicated:

 

     Year ended December 31  
     2018      2017      2016      2015      2014      2013      2012-2007  

CERs issued (net of the commission paid to United Nations Framework Convention on Climate Change, or UNFCCC)

     247,588        457,309        109,844        827,971        403,317        488,475        1.67 million  

CERs sold or donated

     658,512        1,095,780        561,619        1,375        42,567        —          1.04 million  

In 2015, Arauco entered into a long-term sale agreement with Vattenfall Energy Trading Netherlands N.V., pursuant to which Arauco agreed to sell all its CERs generated between 2013 and 2020 to Vattenfall. This agreement provides for the sale of our carbon credits in the European compliance market, which is the largest carbon credit market currently in operation. In 2018, Arauco sold 626,650 CERs to Vattenfall Energy Trading Netherlands N.V. under the long-term agreement.

The Viñales biomass power plant, which began operations on May 17, 2012, reached its maximum production capacity on August 29, 2012. The power plant is located alongside the Viñales sawmill, in Chile’s Seventh Region. The plant includes a biomass-fueled power boiler with capacity to produce 210 tonnes of steam per hour and a 41 Megawatt extraction-condensing turbo generator. This power plant was also developed as an emission reduction project initiative by Arauco. On January 27, 2013, the Viñales emission reduction project activity was successfully registered as a greenhouse gas emission reduction project activity under the voluntary carbon standard: Verified Carbon Standard (VCS). This project issued 96,110 Verified Carbon Units (VCUs) as its first verified emission reductions (VERs) on January 3, 2017. In addition, during the second quarter of 2018, the project issued 506,776 VCUs as its second VERs.

During January 2013, the biomass cogeneration power plant located in the Montes del Plata pulp mill facility in Uruguay was successfully registered as a CDM project activity. This was the eleventh CDM project registered in Uruguay. This project activity is expected to generate an average of 124,000 CERs per year, during its first 7-year crediting period. On April 26, 2018, the first issuance of CERs was accomplished by generating 66,006 CERs with the Punta Pereira biomass power plant project.

Competition

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines.

Pulp

In general, our main competitors in the pulp market have activities in many regions, considering pulp variety and commercial presence. Fibria Cellulose S.A., or Fibria, and CMPC Celulosa S.A., or CMPC, are our main competitors because they have a wide geographical presence, the former in hardwood and the latter in hardwood and softwood pulp. Furthermore, there are competitors such as Suzano Papel e Cellulose S.A., or Suzano, and El Dorado Brasil Celulose S.A., or El Dorado, with a relevant presence in the Asian markets, specifically in China and Korea where the main both hardwood and softwood customers are located. Competitors from all regions participate in the diversified European market, where we mainly face competition from Brazilian, Scandinavian and U.S. producers. Our main competitors in Asia in unbleached softwood pulp come from New Zeland, Canada and Russia.

 

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On January 14, 2019, a merger between Fibria and Suzano was consummated, as publicly reported by the companies.

Wood Products

Arauco’s main competitors in the MDF market are: in Latin America, Duratex S.A., Masisa, Berneck, Proteak, Guararapes and other large South American producers; in North America, local producers such as Roseburg Forest Products Co., West Fraser and Plum Creek; in Asia, producers from Malaysia and China; and in the Middle East, European producers.

For sales of PBO, in the Latin American market we compete mainly with Duratex S.A., Masisa, Novopan, Berneck S.A., Egger and Fibraplac S.A. In North America, we mainly compete with Panolam, Roseburg Forest Products Co., Funder America, Uniboard, Temple-Inland Inc., Kaycan Ltd. and Sonae Indústria, SGPS, SA.

Arauco’s principal competitors in the plywood markets are located in the United States, Finland, Chile, Brazil and China. We compete mainly with CMPC, Eagon, Roseburg, Georgia-Pacific, and UPM, among others.

For remanufactured wood products, our main competitors are located in Chile, China, Brazil and the United States. For sawn timber, our main competitors are located in Europe, New Zealand, Canada and Chile. We believe that our operating efficiencies, competitive logistics costs, ability to serve customers with multiple specifications, geographical presence in 40 countries and the versatility of our radiata and taeda pine allow us to compete effectively in the world market for timber products.

Transportation, Storage and Distribution

To remain competitive worldwide, we ship our products to various distribution centers around the world from which final delivery to the customer is made.

The following are the principal Chilean ports that we use, each of which is operational as of the date of this annual report:

 

   

Coronel. A private port located between Concepción and the Arauco Mill, which we built as a member of a consortium with five other companies and in which we have an equity interest of 50%. We shipped 47.3% of our aggregate export volume through this port in 2018;

 

   

Lirquén. A private port in Concepción in which as of December 31, 2018, we had an equity interest of 20.3% and through which we shipped 26.2% of our aggregate export volume during 2018. On April 5, 2019, we sold such equity interest to DP World Holding UK Ltd., or DP; and

 

   

San Vicente. A state-owned port near the city of Concepción through which we shipped 26.4% of our aggregate export volume during 2018.

The closest ports to our Chilean mills are located as follows: approximately 60 kilometers from the Arauco Mill, 310 kilometers from the Constitución Mill, 370 kilometers from the Licancel Mill, 70 kilometers from the Nueva Aldea Mill and 430 kilometers from the Valdivia Mill. We do not own pulp storage warehouses at any of these ports.

We ship pulp to various ports in Europe, North and South America and Asia and, as is customary in the pulp industry, we store some stock in those ports. We use 12 foreign ports that have warehouse facilities available, and standard storage terms provide that we are entitled to a certain period of storage free of charge. We seek to ensure that we do not exceed the free storage period for each shipment. As of December 31, 2018, we had approximately 140,561 tonnes of pulp in storage in warehouses at foreign ports.

We believe that our shipping costs are comparable to those of our international competitors, notwithstanding Chile’s general greater distance from main markets, because of the proximity of our plantations and mills to the Pacific coast and the economies of scale we achieve through the volume of our exports.

In Argentina, timely and competitively priced delivery of finished products to our customers is an important factor in our ability to compete effectively, and we ship most orders either by truck or railway almost immediately after they are produced.

In Brazil, our efficient distribution system, which delivers finished products to more than 870 customers in over 350 cities, many of which are separated by long distances, is a key component to our competitiveness.

In Uruguay, our finished product of hardwood pulp is mainly shipped to Europe and Asia through our own Montes del Plata Mill port located next to the pulp mill in Punta Pereira, Colonia, Uruguay.

 

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In North America, products sourced from our South American operations are shipped into 20 major ports of entry and storaged in 14 warehouses. These are dispatched to more than 3,500 locations in the United States and Canada. Arauco’s eight composite panel plants (one in construction and two impregnation plants) in North America service over 580 customers throughout the region mainly through trucks, in addition to exporting products to Central America.

Description of Property

The following table presents our principal properties as of December 31, 2018. (1)

 

Country

 

Forestry

  

Plants and Facilities

Chile  

1,130,618 total hectares

674,020 hectares of plantations

  

5 Pulp Mills

1 PBO Mill

1 MDF-HB Mill(2)

2 Plywood Mills

7 Sawmills

4 Remanufacturing Facilities

Argentina  

263,213 total hectares

132,617 hectares of plantations

  

1 Pulp Mill

1 MDF Mill

1 PBO Mill

1 Sawmill

1 Remanufacturing Facility

1 Resin Plant

Brazil  

249,324 total hectares

134,331 hectares of plantations

  

2 MDF Mill

1 PBO Mill

1 MDF-PBO Mill

1 Resin Plant

Uruguay (3)  

125,842 total hectares

76,804 hectares of plantations

   50% of 1 Pulp Mill
United States     

3 PBO Mills

3 MDF Mills

1 MDF-PBO Mill

1 Impregnation of melamine papers Plant

Canada     

1 MDF Mill

1 HDF-PBO Mill

1 Resin Plant

Portugal     

50% of 1 MDF Mill (4)

50% of 1 PBO Mill (4)

50% of 1 Resin Plant (4)

Spain     

50% of 1 MDF Mill (4)

50% of 1 PBO Mill (4)

50% of 1 Sawmill (4)

Germany     

50% of 2 MDF Mills (4)

50% of 1 MDF-PBO Mill (4)

50% of 1 PBO-OSB Mill (4)

50% of 1 Impregnation of melamine

papers Plant (4)

South Africa     

50% of 1 PBO Mill (4)(5)

50% of 1 MDF-PBO Mill (4)

 

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(1)

Does not include Mexican mills acquired in January 2019.

(2)

The HB line has been recently shut down

(3)

Corresponds to 50% of Montes del Plata.

(4)

Corresponds to 50% of Sonae Arauco.

(5)

This mill is currently shut down.

Future expansion plans will depend on global market conditions. For information regarding environmental risks associated with our use of our properties, see “Item 3. Key Information—Risk Factors—Risks Relating to the Company.”

Insurance

We carry a global insurance program, consistent with industry practice, covering our production plants, facilities and equipment. This insurance provides coverage, in the event of fire, explosion, machinery breakdowns or natural disasters, including earthquakes and tsunamis. Our insurance covers up to U.S.$750 million per loss in Chile, U.S.$300 million per loss in Argentina, United States and Canada (for Arauco North America) and R$839 million per loss in Brazil, including physical damage and business interruption for up to 18 months for Chile, Argentina and Brazil, and up to 12 months for United States and Canada. The deductibles for Chile and Argentina for physical damage are U.S.$3 million per occurrence for damages caused. In case of damages caused by earthquakes and tsunamis in Chile, the deductible is 2% of the total insured amount for each location, subject to a cap of U.S.$25 million. Deductibles for Chile and Argentina for business interruption are 30 days for all losses, 45 days for machinery breakdowns and 45 days for machinery breakdowns of turbines. For Chile and Argentina, we also have an annual self-insurance retention of U.S.$15 million, with a U.S.$7.5 million maximum per event. The deductible for Arauco North America, including physical damage and business interruption is U.S.$2.5 million. The deductible for Brazil, including physical damage and business interruption is R$5 million. Our insurance policy covering our production plants, facilities and equipment in Chile are carried by Seguros Generales Suramericana S.A. (50.0%), Mapfre S.A. (25.0%) and Chubb Seguros Chile S.A. (25.0%); in Argentina and Brazil are carried by Seguros Generales Suramericana S.A. (100%); in the United States is carried by SOMPO Japan Insurance Company of America (100%), and in Canada by Royal & Sun Alliance Insurance Company of Canada, Inc. (100%).

The insurance policies for plantations located in the Delta del Paraná, Argentina, are carried by Sancor Seguros and have a maximum limit of U.S.$7 million with a deductible of U.S.$100 thousand. Our insurance policies for some of our plantations located in Mato Grosso do Sul, Brazil, are carried by Fairfax Insurance and have a maximum limit of R$30 million (approximately U.S.$9.2 million as of December 31, 2018) with a deductible per event of R$1.5 million (approximately U.S.$0.5 million as of December 31, 2018).

In addition, we have contracted fire insurance coverage for all of our Chilean forest holdings and nurseries but do not insure against pests or disease. In Argentina, we maintain fire insurance for 16,324 hectares of timber assets located in the Delta del Paraná, close to Buenos Aires and Entre Ríos. For the rest of our Argentine operations, we do not maintain fire insurance for our timber assets because we believe that the risk of damage from fire is low as Argentina receives significant amounts of rainfall, particularly during the summer months. For our forests in Brazil we maintain fire insurance for 26,000 hectares of Novo Oeste’s timber assets located in Mato Grosso do Sul. For the rest of our forests in Brazil, we do not maintain fire insurance because we believe the risk of damage from fire does not justify the costs of carrying insurance. Terms, deductibles and the limits of our insurance policies in all the countries where we operate are consistent with industry practice, which in conjunction with the Company’s own resources, allow it to minimize these risks

In January and February 2017, wildfires, exacerbated by high temperatures, the action of the winds, low atmospheric humidity and the complexity of combatting multiple focal points that appeared simultaneously in different places, broke out in the central and southern regions of Chile, and in respect of the Company, in the Maule and Bio Bio regions. As a consequence of such fires, the Company suffered the burning of approximately 72,500 hectares of forest plantations, which had a fair value of approximately U.S.$210 million, according to IFRS. The forest plantations affected by the fires had insurance coverage, with their corresponding deductibles and limits. In accordance with the final report of the insurance adjusters, in October 2017 our subsidiary Forestal Arauco S.A. recovered U.S.$35 million, after applying the U.S.$15 million deductible.

Also, in 2017, our El Cruce sawmill, which is owned by our subsidiary Maderas Arauco S.A., was destroyed by wildfires. El Cruce sawmill had a book value of approximately U.S.$4.5 million and an annual production capacity of 115,881 cubic meters, representing approximately 4.2% of our total sawmill production capacity at the time of the event. With regard to the insurance claim, in October 2017 we recovered U.S.$50.9 thousand on account of affected inventory, and during the first quarter of 2018 we received approximately U.S.$1.04 million (net of the deductible) on account of property damage.

 

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After the 2017 wildfires in Chile, we increased the limits of our forestry insurance coverage in Chile to U.S.$85 million with a deductible of U.S.$25 million for the whole season (regardless of the number of the events). This policy is carried by Mapfre Compañía de Seguros Generales S.A. (100%) and the insurance period is from October 3, 2018 to October 3, 2019. We also established satellite-assessment for damaged areas, which enables us to face potencial claims in a faster way.

During the 2017-2018 forestry fire season, wildfires were considerably less severe than in the 2016-2017 season. Nevertheless, 587 hectares of the Company’s forest plantations burned in the 2017-2018 season (which represented 0.8% of the plantations affected by fires in the 2016-2017 season). The affected forest plantations had a fair value of approximately U.S.$2.6 million, according to IFRS accounting rules, representing approximately 0.07% of the IFRS value of the Company’s total forest plantations and approximately 0.02% of the total assets of Arauco.

In connection with losses to our production plants, facilities, forests and equipment caused by fires or otherwise, our insurance coverage may be insufficient. The incurrence of losses or other liabilities that are not covered by insurance could result in significant and unexpected additional costs. Moreover, the terms and conditions for the renewal of our insurance policies may change in the future depending upon market circumstances and the type and amount of risks insured. For more information regarding the risks for which we insure our property, see “Item 3. Key Information—Risk Factors—Risks Relating to the Company.”

Cybersecurity

We have developed a cybersecurity policy based on the guidelines and criteria contemplated by the international standards ISO 27001 and ISO 27002, as well as control mechanisms, technologies, processes and procedures developed on the basis of guidelines and criteria addressed by the international standard ISO 27032 / NIST. Additionally, we periodically make security assessments, which allow us to complement and improve ongoing initiatives. For more information regarding cybersecurity risk, see “Item 3. Key Information—Risk Factors—Risk Relating to Our Company—Cybersecurity events, such as a cyber-attack could adversely affect our business, financial condition and results of operations.”

 

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CAPITAL EXPENDITURES

To utilize our increasing volume of forest production, we have added to, expanded and modernized our processing facilities.

For the year ended December 31, 2016, our aggregate capital expenditures were U.S.$556.6 million, consisting primarily of U.S.$419.2 million for addition of property, plant and equipment and U.S.$137.4 million for the addition of biological assets.

For the year ended December 31, 2017, our aggregate capital expenditures were U.S.$844.1 million, consisting primarily of U.S.$533.8 million for addition of property, plant and equipment and U.S.$310.3 million for the addition of biological assets. The increase with respect to 2016 was mainly attributable to higher capital expenditures in respect of biological assets to replace those lost because of the wildfires in 2017.    

For the year ended December 31, 2018, our aggregate capital expenditures were U. S.$938.0 million, consisting primarily of U.S.$730.5 million for addition of property, plant and equipment and U.S.$207.5 million for the addition of biological assets. The increase with respect to 2017 was mainly attributable to higher capital expenditures in ongoing projects.

For the year ending December 31, 2019, we have planned capital expenditures of U.S.$1,892 million, which principally include U.S.$469 million for maintenance of our existing mills, U.S.$1,073 million for expansion and other strategic initiatives, and U.S.$350 million for maintenance and acquisition of biological assets.

 

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GOVERNMENT REGULATION

Environmental Regulation

In each country where we have operations, we are subject to numerous national and local environmental laws, regulations, decrees and municipal ordinances concerning, among other things, health, the handling and disposal of solid and hazardous waste, discharges into the air, soil and water and other environmental impacts. Some of these laws require us to conduct environmental impact studies of future projects or activities (or major modifications thereto). Under these laws, our operations may be subject to specific approvals, consents and regulatory requirements, and emissions and discharges may be required to meet specific standards and limitations. We have made and will continue to make substantial expenditures to comply with such environmental laws, regulations, decrees and ordinances.

Chile

The Chilean legislation to which we are subject includes the Ley Sobre Bases Generales del Medio Ambiente (Chilean Environmental Law) and related regulations. Current environmental institutions include the following public entities: the Ministry of the Environment (aimed at developing national environmental policy), the Service of Environmental Evaluation (in charge of administering the environmental assessment system), the Evaluation Commissions (in charge of evaluating projects and activities within the Environmental Impact Evaluation System), and the Superintendence of Environment (in charge of supervising and auditing environmental compliance).

Under the Chilean Environmental Law, we are required to conduct environmental impact studies or declarations on the environmental impact of any future projects or activities (or their significant modifications) that may affect the environment. These and other regulations also establish procedures for private citizens to object to the plans or studies submitted by project owners.

Governmental agencies may participate in the oversight of the implementation of projects in accordance with their environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law and other regulations, affected private citizens, public agencies and local authorities can sue to enforce compliance with environmental regulations. Enforcement remedies include temporary or permanent closure of facilities and fines. The Superintendence of Environment has issued numerous resolutions, instructions and requirements to various companies, officials and supervised parties, including our Company.

In November 2015, the Cruces river, where the Valdivia Mill disposes its effluents, became subject to the Norm (as defined above). The Valdivia Mill discharges its treated effluents into the Cruces River, which is part of the Valdivia River Basin.

The Company and other local entities challenged the validity of the Norm before the Third Environmental Court in January 2016, expressing concerns, among others, regarding various aspects of the Norm’s General Environmental and Social Impact Assessment (AGIES, for its acronym in Spanish). These objections included the lack of identification and consideration for the effective economic and social costs resulting from the adoption of the Norm. Other objections included that the Norm’s parameters and limits exceeded the reviewed water quality criteria enforced by reference countries in both quantity and stringency; and that many of the parameters and limits were not technically or environmentally reasonable. The Third Environmental Court ruled in our favor on September 29, 2016, declaring the invalidity of the Norm, which decision was upheld by the Supreme Court in July 2017.

In December 2017, the government restarted the rulemaking process and published a new draft SWQSVR for public comments. The draft proposes to regulate using practically the same parameters and limits included in the previous Norm declared void by the Supreme Court. In our opinion, the draft presents flaws similar to those detected in the previous rulemaking process, among others, the lack of identification and consideration of its actual economic and social costs and that most of its parameters and limits are not technically or environmentally reasonable. The public comment process finished in March 2018 and several comments from the public and different stakeholders were submitted, including several technical, economical and legal reports from third parties, were submitted. According to applicable regulations, the government shall analyse and weigh the comments to prepare a final draft, prior to submitting for the consideration by the Sustentability Ministers’ Committee (Consejo de Ministros para la Sustentabilidad) and the President of the Republic. Once the new norm enters into force, we cannot exclude that the authority may declare that the Valdivia River Basin is contaminated and thus initiate an administrative proceeding to impose a decontamination plan, which may include new limits on discharges of wastewater applicable to the Valdivia Mill.

The application of these environmental laws and remedies may adversely affect the manner in which we seek to implement our business strategy and our ability to realize our strategy. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company—The costs to comply with, and to address liabilities arising under, environmental laws and regulations could adversely affect our business, financial condition, results of operations and cash flows.”

 

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As of the date of this annual report, we have been subject to certain administrative proceedings as a result of a pipe leakage in the Nueva Aldea Mill in 2013, the death of fish in the Cruces River in January 2014, close to the Valdivia Mill effluent discharge, and a pipe leakage in the Arauco Mill in February 2016, all of which are currently under investigation by the competent authorities.

In addition, in 2016 the Superintendence of the Environment initiated administrative proceedings against the Valdivia, Nueva Aldea, Licancel and Constitución mills. In 2017, the Superintendence of the Environment initiated an administrative proceeding against the Arauco Mill. The first part of the proceeding against the Valdivia Mill concluded in 2017. On December 15, 2017, the Superintendence of the Environment decided that the Valdivia Mill was liable for ten out of eleven charges and imposed a fine of 7,777 UTA (approximately U.S.$6.5 million as of December 31, 2018). We appealed this decision on April 5, 2018 before the Third Environmental Court. A final decision by the Third Environmental Court is expected to be rendered during 2019 and may be further appealed before the Supreme Court. In 2016, the Nueva Aldea and Constitución mills decided to submit compliance programs according to applicable regulations, both of which were approved by the Superintendence of the Environment. These programs require the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. In December 2018, the Nueva Aldea mill compliance program was officially terminated (declaración de ejecución satisfactoria) by the Superintendence of the Environment. With regard to the Constitución mill’s compliance program, once the activities are completed, the proceedings will end. We expect that such proceedings will end in 2019. With regard to the Licancel Mill, the Company filed its defense in June 2016. In February 2017, the Superintendence of the Environment found the Licancel Mill liable for three out of four charges and imposed a fine of 239 UTA (approximately U.S.$205,000). This decision was appealed before the above Superintendence, which on August 7, 2017, materially reduced the fine. Arauco paid the fine and this case has been closed. Finally, with regard to the proceeding against Arauco the Company filed its defense in September 2017 and, in May 2018, the Superintendence of the Environment found the Arauco mill liable for two charges and imposed a fine of 699,6 UTA (approximately U.S.$635,000). Arauco paid the fine with a 25% reduction (taking advantage of a benefit established by Chilean law) and this case has been closed.

We have faced, and continue to face, certain other environmental proceedings in connection with certain of our mills. For a description of these proceedings, see “Item 8. Financial Information—Legal Proceedings.” and Note 18 of our audited consolidated financial statements.

Argentina

Our operations in Argentina are subject to Argentine environmental legislation, including regulation by municipal, provincial and federal governmental authorities.

Argentine environmental legislation includes the requirement that water used or recovered in the production process must be chemically, biologically and thermally treated before being returned to public waters, such as the Paraná River. In addition, all gaseous emissions must be scrubbed to ensure satisfactory levels of waste particle recovery and odor removal. Regular testing of river water, soil and air quality is used to monitor the ultimate impact of the mill on the environment.

We believe that we are currently in material compliance with all applicable local and national environmental regulations governing our operations in Argentina.

Brazil

Our Brazilian operations are subject to environmental legislation, including municipal, regional and federal governmental laws, regulations and licensing requirements. Law No. 6,938 establishes strict liability for environmental damage, mechanisms for the enforcement of environmental standards and licensing requirements for activities that are damaging or potentially damaging to the environment. A violation of environmental laws and regulations may result in:

 

   

fines,

 

   

partial or total suspension of activities,

 

   

forfeiture or restriction of tax incentives or benefits, or

 

   

forfeiture or suspension of participation in credit lines with official credit establishments.

As a result, we may become liable for environmental damages caused by the management of our materials, including damages caused during the transportation, treatment and disposal of our industrial waste, even where third parties manage such activities on our behalf.

 

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Law No. 9,605 provides that individuals or entities whose conduct or activities cause harm to the environment are subject to criminal and administrative sanctions and are liable for any costs to repair the damages resulting from such harm. For individuals who commit environmental crimes, criminal sanctions range from fines to imprisonment; for legal entities, criminal sanctions may include fines, partial or total suspension of activities, restrictions on participation in government contracts and, in cases of bad faith, dissolution. In addition, Law No. 9,605 establishes that the corporate structure of a company may be disregarded if the structure impedes the recovery for harm caused to the environment. We are not aware of any successful assertion of claims against shareholders under this provision of Law No. 9,605.

We believe we are currently in material compliance with all applicable local and national environmental regulations governing our operations in Brazil.

Uruguay

Our activities at Montes del Plata are subject to Uruguayan national and municipal environmental regulations. The principal environmental authorization required to carry out such project’s construction activities was the environmental authorization, or AAP, regulated by the Environmental Impact Assessment Act, Law No. 16,466, and its regulatory Decree No. 349/005. AAPs are granted by the National Environmental Bureau, or DINAMA, which pertains to the Ministry of Housing, Land Use Management and Environment, or MVOTMA. In order to obtain this authorization, an applicant must submit a complete report regarding all aspects of any proposed works including a classification of the same by a competent professional in one of the three categories, A, B or C. If the proposed project is classified as B or C, a comprehensive environmental impact assessment (which includes all aspects of the project, including water and noise, among others) is required and in some cases a public hearing may be required. Once the AAP is granted, the interested party is required to perform the project in accordance with the terms and conditions of such authorization.

For certain activities (including construction of an industrial plant) listed in Article 2 of Decree No. 349/005, a Viability Location Report, or VAL, is required. This report should be submitted before the National Environmental Bureau and must include a notification to the municipal government where the project is to be located (Intendencia) and the delivery of information similar to that required for the AAP. This process contemplates a period for public comment on summary information that is available. The Intendencia involved in any such project may submit its findings to the DINAMA for consideration. The VAL, if needed, must be obtained prior to the AAP. The relevant companies that comprise Montes del Plata have already obtained the AAP and the VAL.

Once construction is completed according to the approved project and the AAP conditions, and prior to starting operations, a company needs to obtain the environmental authorization for operation, or AAO, which is regulated by the same decree, comes to regulate the environmental compliance of the relevant companies in the operational phase of the endeavor and needs to be renewed every 3 years. Montes del Plata obtained this authorization from the National Environmental Bureau, DINAMA, in June 2014, and has been renewed until December 2020.

We believe that the Montes del Plata operation is currently in material compliance with applicable local and national environmental regulations in Uruguay.

United States and Canada

Our North American operations are subject to U.S. and Canadian environmental legislation, including federal, provincial, state and local laws and regulations. Such laws and regulations govern the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain hazardous materials and wastes, the remediation of contaminated soil and groundwater, plant and wildlife protection, landfill sites and the health and safety of employees. For example, under the Clean Air Act, the United States Environmental Protection Agency, or the EPA, has established Maximum Achievable Control Technology, or MACT, environmental regulations that establish emission standards for point sources of pollution, such as press and dryer exhausts, process vents and equipment leaks. In addition, some of our operations require environmental permits and controls to prevent and reduce air and water pollution. Our failure to comply with applicable environmental, health and safety requirements, including permits related thereto, may result in:

 

   

civil penalties;

 

   

supplemental environmental projects;

 

   

enforcement actions or other sanctions, such as judicial orders enjoining or curtailing operations or requiring corrective measures;

 

   

loss of operating permits;

 

   

required installation of pollution control equipment; or

 

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remedial actions.

In addition, we may become liable for third-party claims for personal injury and property damage due to contamination at our mills, even where the activity that caused such contamination occurred before we owned the mills.

We believe we are currently in material compliance with all applicable local and national environmental regulations and orders governing our operations in the United States and Canada.

Forestry, Land-Use and Land Ownership Regulations

Chile

The management and exploitation of forests in Chile is regulated by the Forests Law of 1931, as amended, and Decree Law No. 701 of 1974, as amended. The Forests Law and Decree Law No. 701 impose a variety of restrictions on the management and exploitation of forests. Forestry activities, including thinning, on land that is designated as preferably suited for forests or that has native or planted forests, are subject to management plans that require the approval of the Corporación Nacional Forestal, or National Forest Service, or CONAF. In addition, the Forests Law and Decree Law No. 701 impose fines for the harvesting or destruction of trees and shrubs in violation of the terms of a forest management plan. We believe that we are in material compliance with the Forests Law and Decree Law No. 701.

Law No. 20,283, published in the Official Gazette on July 30, 2008, provides for the management and conservation of native tree forests and forest development. Its purposes are the protection, recovery and improvement of native forests in order to guarantee both forest sustainability and environmental policy. This law established a fund for the conservation and sustainable management of native forests. According to this law, owners of native forests are able to exploit them so long as they have a “management plan” approved by the CONAF. Depending on the owner’s approved plan, as well as other factors, the subsidy provided by the fund may vary between U.S.$200 and U.S.$400 per hectare. The law also prohibits the harvesting of native trees in certain areas and under certain conditions. In compliance with applicable regulations, we have adopted environmentally sensitive policies towards our holdings of native forests, which are protected and preserved in their entirety. Our products come from established plantations only; we do not sell any wood derived from our native forests. Arauco’s forestry operations adhere to our international control systems, which are all in accordance with current legislative and environmental sustainability standards. We believe that we are in material compliance with Law No. 20,283. See “Item 4. Information on our Company—Description of Business—Forestry Activity.”

Argentina

The management and exploitation of forests in Argentina is regulated by National Law No. 13,273, National Law No. 25,080 (as amended and extended), National Decree No. 710, Provincial Law No. 854, Provincial Law No. 3,426 and other regulations promulgated thereunder, which collectively constitute the regulatory framework. The regulatory framework imposes a variety of restrictions on the management and exploitation of forests in Argentina. The regulatory framework regulates the replanting of land after harvesting.

On December 28, 2011, National Law No. 26,737 was promulgated, which established limitations on the ability of foreigners to purchase rural land in Argentina. This law provides that foreigners cannot acquire more than 15% of all rural land in the country, and that no foreigner can individually hold more than 30% of said 15%. For the purposes of the National Law No. 26,737, rural land is all land located outside the urban area.

We believe that our Argentine operations are in material compliance with the regulatory framework.

Brazil

Environmental laws and regulations relating to the management and exploitation of forests and the protection of Brazilian plants and wildlife govern our Brazilian forestry operations. Under this regulatory framework Brazilian authorities establish forest preservation areas and regulate replanting of forests after harvesting.

 

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There are discussions about certain Brazilian legal restrictions on the acquisition of rural properties by foreign companies and by Brazilian companies controlled by foreign persons. Those restrictions are contained in the Opinion issued by the Office of the General Counsel to the Federal Government in August 2010, which has been subject to several judicial challenges. Currently, there is a pending litigation before the Supremo Tribunal Federal (Highest Court in Brazil) to determine if Federal Law No. 5,709/1971 is applicable to Brazilian companies with foreign shareholders, as it could arguably be contrary to the Brazilian constitution. Our local counsel has advised us that although in their opinion these restrictions are not applicable to the transactions consummated by our Brazilian subsidiaries, they could apply from August 2010 and to future transactions which have as object, the acquisition of land by persons that have foreign majority capital. We believe that our Brazilian operations are in material compliance with the applicable regulatory framework.

Uruguay

The management and exploitation of forests in Uruguay is regulated primarily by Law No. 15,939 (as amended by Law No. 18,083 and by the regulatory decree No. 452/988), which has declared forestry activity as an area of national interest. This law classifies forests into three categories: protectors, yield and general, and provides certain tax and financial benefits related to forests classified as protectors and yield located in areas classified as forestry priority. If such forests were planted after January 1, 2007, they must also comply with the definition of quality wood. In order to obtain such classification, interested parties must submit a forestry management plan to the General Forestry Bureau. This law also establishes certain conservation requirements and controls for each category of forest.

Additionally, forest activity is subject to environmental and soil care regulations. According to Law No. 16,466 and Decree No. 349/005, plantations of more than 100 hectares need prior environmental authorization. Law No. 15,239 also provides certain measures that must be adopted to reduce erosion and degradation of the soil to promote its restoration when necessary. Forestry regulations from local municipalities may also require additional permits depending on the forest location.

We believe that the Montes del Plata forestry operations are in material compliance with the applicable regulatory framework.

 

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Certifications

Forestry

Certain of our subsidiaries have received various international and local environmental certifications as of the date of this annual report, which include, but are not limited to the following:

 

   

Forest Stewardship Council® Forest Management Certification: a forest management certification aimed at promoting forest management that is environmentally responsible, socially beneficial and economically viable for the world’s forests. FSC® is a non-profit organization devoted to encouraging the responsible management of the world’s forests (Forestal Arauco license code: FSC-C108276, Forestal Los Lagos license code: FSC-C008129, Eufores S.A. (Montes del Plata) license code: FSC-C016979, Arauco Argentina S.A- license code: FSC-C128100, Arauco Argentina S.A. license code: FSC-C128100, Arauco Florestal Arapoti license code: FSC-C010673, Arauco Forest Brasil-Tunas do PR license code: FSC-C116843, Arauco Forest Brasil- C.Tenente e Sengés license code: FSC-C010303 and Mahal Empreendimentos e Participações S/A license code: FSC-C131921);

 

   

Sustainable Forest Management Certification (CERTFOR): the Chilean certification of sustainable forest management, as determined since 2004 by the PEFC (Program for the Endorsement of Forest Certifications Schemes). PEFC is an international non-profit, non-governmental organization dedicated to promoting sustainable forest management;

 

   

CERTFOR Chain of Custody Certification: a certification granted by the PEFC and designed to ensure that certified raw materials are used in finished products;

 

   

FSC® Chain of Custody Certification: a certification from the FSC® that is designed to ensure traceability from certified forest and other controlled sources to the finished product (Forestal Arauco Zona Norte license code: FSC – C013026, Forestal Arauco Zona Centro license code: FSC – C008122, Forestal Arauco Zona Sur license code: FSC – C017136, Forestal Los Lagos license code: FSC – C018322 and Eufores S.A. (Montes del Plata) code: FSC-C023409);

 

   

Environmental Management System ISO 14001: a certification issued by the International Standards Organization (ISO), awarded to organizations that comply with environmental legislation, monitor significant environmental impacts, prevent pollution and maintain a continuing program of environmental improvement. ISO is an international non-profit, non-governmental organization dedicated to developing international business standards; and

 

   

Occupational Health and Safety Assessment Series (OHSAS) 18001: a certification awarded for the effective management of conditions and factors that may adversely affect the work environment of employees, temporary workers, contractors and other persons who are in the workplace.

Pulp

All our pulp mills in Chile are certified under ISO 9001, ISO 14001 and under standard Chain of Custody FSC® and CERTFOR (PEFC Homologated). The Puerto Esperanza Pulp Mill in Argentina is certified under ISO 14001, OHSAS 18001 and Chain of Custody FSC®. The Montes del Plata Mill in Uruguay is certified under Chain of Custody FSC®. The following list sets forth the codes of license COC FSC® for each pulp mill:

 

   

Arauco Pulp Mill: FSC-C006552

 

   

Licancel Pulp Mill: FSC-C109896

 

   

Constitución Pulp Mill: FSC-C109895

 

   

Nueva Aldea Pulp Mill: FSC-C011929

 

   

Valdivia Pulp Mill: FSC-C005084

 

   

Puerto Esperanza Pulp Mill: FSC-C121377

 

   

Celulosa y Energía Punta Pereira (Montes del Plata) Pulp Mill: FSC-C116413

Wood Products

Our panel mills in Chile are certified under standard Chain of Custody FSC (License Code FSC-C119538), which includes two panel mills. Also, our seven sawmills, two plywood mills and the remanufacturing facilities are certified under the Chain of Custody FSC standard (License Code FSC-C119538). Additionally, all our timber mills in Chile are certified under CERTFOR (PEFC homologated), ISO 14001 and Occupational Health and Safety Assessment Series (OHSAS) 18001.

 

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In North America, all our panel mills are certified under the Chain of Custody FSC standard (License Code FSC-C019364) and our composite panel mills are also certified under the ISO 14001/ OHSAS 18001 standard.

Our Zárate Mill and Piray sawmill in Argentina are certified under the Chain of Custody FSC standard (License Code FSC-C119529 and License Code FSC-C130094). All our mills in Argentina are certified under the Environmental Management System ISO 14001 standard, as well as under the Occupational Health and Safety Assessment Series (OHSAS) 18001 standard. The sawmill Piray, remanufacture Piray, Zarate Mill and Chemical Arauco Argentina are certified under ISO 9001.

All our panel mills in Brazil are certified under the Environmental Management System ISO 14001. Occupational health and safety management OHSAS 18001 and Quality Management ISO 9001. The Jaguariaíva Pien Mills, Ponta Grossa e Motenegro Mills are certified under the Chain of Custody FSC Multi-site standard (License Code FSC-C010928).

 

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Item 5. Operating and Financial Review and Prospects

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS

The following discussion is based on and should be read in conjunction with our audited consolidated financial statements and the notes thereto, included elsewhere in this annual report. Our consolidated financial statements are prepared in U.S. dollars in accordance with IFRS.

Overview

We derive our revenues from the sale of bleached and unbleached pulp, wood products such as MDF, PBO, HB, plywood, sawn timber and remanufactured wood products, forestry products, such as sawlogs and pulplogs, and sales of electricity. Export sales constituted 64.6% of our total revenues for the year ended December 31, 2017 and 67.8% of our total sales revenues for the year ended December 31, 2018. Sales of pulp constitute the single largest component of our revenues. As occurs with other commodities, pulp is subject to significant cyclical price fluctuations determined by global supply and demand. Accordingly, our revenues are subject to cyclical fluctuations. Prices for wood and forestry products, also fluctuate significantly among domestic markets. Although prices tend to have the most significant effect on our results of operations, sales volume and product mix, production costs and exchange rate fluctuations also can have a substantial impact on our results.

Our business, results of operations and cash flows depend, to a large extent, on the level of economic activity, on government and foreign exchange policies and on political and economic developments in our principal export markets. In 2014, we exported our products to Asia, North, Central and South America, Europe and, to a lesser extent, Africa and the Middle East. In 2014 and 2015, 91.8% and 90.8%, respectively, of total pulp revenues were export sales, and 43.9% and 42.3%, respectively, of total wood and forestry products revenues were export sales. In 2016, 92.2% of our total pulp revenues were export sales, and 43.1% of total wood and forestry products revenues were also export sales. In 2017, 94.2% of our total pulp revenues were exports sales, and 42.6% of total wood and forestry products revenues were also export sales. In 2018, 95.2% of our total pulp revenues and 42.7% of total wood and forestry products revenues were export sales. Our business, earnings and prospects may be materially and adversely affected by developments in our export markets with respect to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation or social instability, as well as by political, economic or diplomatic developments.

As of December 31, 2018, 60.8% of our property, plant, equipment and forest assets were directly owned by us and our Chilean subsidiaries, 7.8% by our Argentine subsidiaries, 9.0% by our Brazilian subsidiaries, 6.8% by our U.S. and Canadian subsidiaries and 15.6% by our joint operation in Uruguay. In 2018, 61.8% of our consolidated revenues were derived from our operations in Chile, 8.1% of our consolidated revenues were derived from our operations in Argentina, 8.4% of our consolidated revenues were derived from our operations in Brazil, 13.7% of our consolidated revenues were derived from our operations in the United States and Canada and 8.0% of our revenues were derived from our operations in Uruguay. Accordingly, our financial condition, results of operations and cash flows are affected by, to a significant degree, economic conditions in Chile, Argentina, Brazil, Uruguay, the United States and Canada.

Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada

Chile

According to the Central Bank of Chile, Chile’s GDP increased by 1.6% in real terms during 2016, and in 2017 and 2018 it grew at rates of 1.1% and 4.2%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile.”

 

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Argentina

According to the Instituto Nacional de Estadística y Censos (the Argentine National Statistics and Census Institute, or the “INDEC”), Argentina’s GDP declined by 2.0% in real terms during 2016, and in 2017, it increased by 2.7%. For 2018, the INDEC reported a decline of 2.5% in real GDP. In 2016 and 2017, the Argentine peso depreciated against the U.S. dollar by 20.9% and 16.4%, respectively. In 2018, the Argentine peso depreciated against the U.S. dollar by 105.3%. The INDEC’s national CPI (as defined below) has registered an increase of 24.7% on a year-over-year comparison for 2017, and an increase of 47.6% for 2018.

On January 8, 2016, the new Argentine administration declared a state of administrative emergency for the national statistical system and the INDEC that remained in effect through December 31, 2016. Following the emergency declaration, the INDEC ceased publishing statistical data until a rearrangement of its technical and administrative structure was finalized. As of the date of this annual report, the INDEC has published certain revised data, including the Indice de Precios al Consumidor (Consumer Prices Index, or the “CPI”) monthly data since May 2016 and foreign trade and balance of payment statistics. On June 29, 2016, the INDEC published a report including revised GDP data for the years 2004 through 2015. On July 11, 2017, the INDEC started to publish the national CPI. The INDEC has since then published the national CPI for each month through March 2019.

Although reports published by the International Monetary Fund (IMF) stated that their staff used alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation rates considerably higher than those published by the INDEC between 2007 and 2015, on November 9, 2016, the IMF Executive Board lifted its censure on Argentina, noting that Argentina had resumed the publication of data in a manner consistent with its obligations under the Articles of Agreement of the IMF. Future economic, social and political developments in Argentina, over which we have no control, could impair Arauco Argentina’s business, financial condition or results of operations. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina.”

Brazil

According to the Instituto Brasileiro de Geografia e Estatística (the Brazilian Institute of Geography and Statistics), Brazil’s GDP decreased in real terms by 3.6% during 2016, and increased in real terms by 1.0% in 2017. In 2018, Brazil’s GDP increased in real terms by 1.1%. In 2016, the Brazilian real appreciated against the U.S. dollar by 19.8% and in 2017 the Brazilian real depreciated against the U.S. dollar by 1.8%. In 2018, the Brazilian real depreciated against the U.S. dollar by 14.6%. See “Item 3. Key Information—Risk Factors—Risks Relating to Brazil.”

Uruguay

According to the Banco Central del Uruguay (the Central Bank of Uruguay), Uruguay’s GDP increased by 1.5% in real terms during 2016, and in 2017 and 2018 it grew in real terms at rates of 2.9% and 1.6%, respectively. In 2016, the Uruguayan peso appreciated against the U.S. dollar by 3.2% but in 2017 it depreciated against the U.S. dollar by 1.0%. In 2018, the Uruguayan peso depreciated against the U.S. dollar by 12.9%. See “Item 3. Key Information—Risk Factors—Risks Relating to Uruguay.”

United States

According to the U.S. Bureau of Economic Analysis, the United States GDP increased by 1.6% in real terms during 2016, and in 2017 and 2018 it grew in real terms at rates of 2.3% and 2.9%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

Canada

According to the Bank of Canada, Canada’s GDP increased by 1.4% in real terms during 2016, and in 2017 and 2018 it grew in real terms at rates of 3.0% and 1.8%, respectively. The Canadian dollar depreciated against the U.S. dollar by 3.8% in 2016, 6.8% in 2017 and 6.9% in 2018. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

Exchange Rate Fluctuations

We generally express our export prices in U.S. dollars, whereas our domestic sales in Chile are priced in Chilean pesos except for pulp sales, which are priced in U.S. dollars; domestic sales in Brazil are priced in Brazilian reals and domestic sales in Argentina are priced in Argentine pesos except for pulp sales, which are priced in U.S. dollars. To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic revenues may be adversely affected when expressed in U.S. dollars. The same effects may occur for our domestic sales in Argentina and Brazil for products sold in each of the respective local currencies.

 

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The Chilean peso has been subject to devaluation in the past and could be subject to significant fluctuations in the future. During 2018, the value of the Chilean peso relative to the U.S. dollar decreased by 14.0% in nominal terms, based on the observed exchange rates on December 31, 2017 and December 31, 2018. The observed exchange rate on April 12, 2019, as published in the Official Gazette on April 15, 2019, was Ch$660.67 to U.S.$1.00. For information regarding historical rates of exchange in Chile from January 1, 2014, see “Item 3. Key Information—Exchange Rates.”

The effect of exchange rate fluctuations is partially offset by the fact that certain of our operating expenses are denominated in U.S. dollars (such as our freight costs and selling expenses in the form of commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2018, our U.S. dollar-denominated indebtedness was U.S.$4.5 billion. In addition, if the U.S. dollar appreciates against the legal currency in any of our export markets, we must, from time to time, express our sales in that local currency to compete effectively.

Future developments in the Chilean, Argentine, Brazilian, Uruguayan, Canadian and U.S. economies may impair our ability to proceed with our strategic plan, including with respect to pricing. For additional discussion regarding the risks we face in each of the aforementioned markets, see “Item 3. Key Information—Risk Factors—Risks Relating to Chile,” “—Risks Relating to Argentina,” “—Risks Relating to Brazil,” “—Risks Relating to Uruguay” and “—Risks Relating to the United States and Canada.”

In recent years, our revenues have been affected by price level volatility in the export market. The prices for each of our pulp, wood and forestry products depend on the markets in which they are sold. While prices are generally similar for a given product on a global basis, domestic market conditions affect prices in markets such as Asia, Europe and the United States.

The following table sets forth, for the periods indicated, average unit sales prices for our products.

 

     Year ended
December 31,(1)
 

Product(2)

   2018      2017      2016  
     (U.S.$ per tonne)(3)  

Pulp

        

Bleached pulp

     795.6        619.7        549.5  

Unbleached pulp

     846.7        659.0        592.4  
     (U.S.$ per cubic meter)(3)  

Wood Products

        

Sawn timber

     272.7        258.5        246.8  

Remanufactured wood products

     577.1        582.8        556.1  

Plywood

     480.7        420.5        402.4  

Panels

     318.9        337.7        322.6  

Forestry Products

        

Logs

     27.8        32.7        35.3  

 

(1)

Calculated as average unit prices for the year based on our internally collected data.

(2)

Each category of product contains different grades and types and the shipping terms vary with the product, as well as the customer.

(3)

We generally quote our prices in U.S. dollars for export sales and in Chilean pesos, Argentine pesos or Brazilian reals, as applicable for domestic sales.

Pulp Prices

Overview

Historically, world pulp prices have been subject to significant fluctuations over relatively short periods of time. Pulp prices mainly depend on worldwide demand, world production capacity, worldwide pulp and paper inventory levels and availability of substitutes, and in general terms, are directly related to global economic growth. All of these factors are beyond our control. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company— Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows”.

Prices for bleached grades of hardwood pulp, including eucalyptus, generally follow the same cyclical pattern as prices for NBSK, which is the benchmark for bleached softwood kraft pulp. However, the latter historically has had higher prices mainly due to lower global supply. Moreover, during the last five years, the majority of the added global pulp production capacity has been dedicated to the production of hardwood pulp, particularly eucalyptus pulp.

 

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Prices for unbleached softwood market pulp also follow cyclical patterns related to worldwide demand, stock levels and supply. Based on information published by Hawkins Wright Ltd., unbleached softwood market pulp represents about 3.3% of the total wood pulp market. The majority of such pulp is sold in Asia, and its price does not necessarily follow the cycle of prices for NBSK or BEKP.

In 2015, a new pulp mill entered the short fiber pulp market with an annual production capacity of 1.3 million tonnes. During the first half of 2015 the short fiber market remained stable, with a peak price of U.S.$ 811.2 per tonne in October 2015. Following the October peak BEKP prices began to decrease as a result of the global economic downturn and lower demand in the Chinese market as a result of the devaluation of the Yuan, ending the year at a price of U.S.$788.9 per tonne. Expectations of new supply during 2016 and especially in 2017, continued to pressure prices down, reaching their lowest level for 2016 in December 2016, at U.S.$652.58 per tonne. A new pulp mill located in Indonesia began its ramp-up in November 2016. With an annual capacity of 2.8 million tonnes, it is currently one of the largest pulp mills worldwide. Throughout 2015 and the first half of 2016, NBSK prices followed a downward trend, reaching U.S.$789.2 per tonne at the end of April 2016. For the remainder of the year, prices slightly recovered and stabilized, finishing the year at U.S.$808.83 per tonne.

During 2017, average prices of BEKP and NBSK followed an upward trend, with NBSK reaching U.S.$999.63 per tonne at the end of the year, the highest level since 2011. BEKP prices increased significantly during 2017 reaching U.S.$979.31 at the end of the year (the rise in this type of fiber has reduced the gap between both fibers). Prices increased mainly because the expected capacity of the mill located in Indonesia was revised to 1.7 million tonnes for the next three to four years and the lower capacity of other existing mills due to operational problems. Demand had a steady rise during 2017, which also drove prices to reach higher levels.

During 2018, average prices of BEKP and NBSK followed an upward trend, slightly decreasing in the last part of the year, with NBSK reaching U.S.$1,200.02 per tonne and BEKP U.S.$1,025.73 per tonne. The positive trend during most of the year was mainly due to strong demand and stable capacity levels, while the slight decrease at the end of 2018 was mainly driven by the trade tensions between China and the United States.

Prices of NBSK(1)

The following table sets forth the prices for NBSK for the years indicated, as well as the variation with respect to the previous year, as listed on the NBSK index for the periods indicated:

 

                                     

List Price as of

December 31,

          Change YoY*  

2015

     808.36        (13.8 )% 

2016

     808.83        0.7

2017

     999.63        23.6

2018

     1,200.02        20.0

 

  *

YoY means year over year

Prices of BEKP(1)

The following table sets forth the prices for BEKP for the years indicated, as well as the variation with respect to the previous year, as listed on the BEKP index for the periods indicated

 

                                     

List Price as of

December 31,

          Change YoY  

2015

     788.91        6.2

2016

     652.58        (17.3 )% 

2017

     979.31        50.1

2018

     1,025.73        4.7

 

  (1)

Source: RISI.

 

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Prices of UKP

The following table sets forth the market price of UKP for the years indicated, as well as the variation with respect to the previous year:

 

Price as of

December 31,

          Change YoY  

2015

     601.70        (7.5 )% 

2016

     573.82        (4.6 )% 

2017

     768.03        33.8

2018

     853.77        11.2

Source: Arauco.

Forestry and Wood Products Prices

Over the last five years, the average prices for our forestry and sawn timber products have fluctuated significantly, reflecting the effect on demand of global economic developments.

During 2014, the sawn timber market improved, with increased demand that permitted the sales mix and prices to improve compared to 2013. Asian markets, in particular Japan, South Korea and China followed this positive trend. The North American market, despite an improvement in the Housing Starts index, did not show significant improvement, even though prices rose in our solid wood moldings business. Also, our MDF and PBO sales in North America had positive and stable price levels. In Brazil, our panels business had relatively stable price levels in Brazilian reals.

During 2015, average prices and sales volume for our wood products declined by 5.3% and 0.9% respectively, compared to 2014. Overall, countries with depreciated currencies increased their exports, resulting in greater supply in several markets, which in turn, lowered prices. In Brazil, for example, overall average prices dropped due to the country’s economic slowdown. In North America, increased competition mainly affected the MDF market, with increased exports from Brazilian and Canadian producers, among others. Prices for our moldings products remained stable. As a result of the decrease in Argentina’s competitiveness in the export market, we focused our sales efforts with respect to panels primarily on the domestic market. The higher production of our Nueva Aldea Mill increased our plywood sales volume throughout the year. Particleboards also showed increased sales profits from production at our Teno Mill, which reached full production capacity during the first quarter of 2015. We were also able to improve product mix sales, increasing sales of our greater value added products (such as melamine products). In addition, we experienced increased competition in the Middle East in the sawn timber market during the first six months of 2015 due to higher supply from European markets.

During 2016, average prices for our panels and sawn timber declined by 0.7% and 2.7% respectively, in each case compared to 2015. Sales volumes decreased compared to 2015, with panels sales volume dropping by 3.3% and sawn timber sales volume dropping by 4.6%. Argentine markets continued to be pressured during 2016, and opportunities to export to other countries were limited. Brazilian markets followed a similar trend, although there were higher export opportunities, where the depreciation of their local currency against the U.S. dollar made margins more competitive. These export opportunities were mainly to North America, where higher supply volumes entered the market, partially offset by healthy demand throughout the year. Our new commercial sales office in the Middle East also enabled us to reach new customers and have a better presence in those markets.

During 2017, average prices for our wood products division increased by 5.1% compared to 2016. The panels market increased in average prices and sales volume by 4.7% and 2.4% respectively compared to 2016. Our sawn timber average prices increased by 4.7% compared to 2016, offset by a decrease of 5.3% in sales volume. North American market demand improved in 2017 fueled by the construction and retail sectors. The Brazilian market has been recovering slowly after the economic and political crisis. The Argentine market has improved in sales volume. Despite the new MDF mills in Brazil and Mexico that increased competition, we were able to maintain and increase prices in some markets. With the acquisition of the assets of Masisa in Brazil, we expect to consolidate our position in the market.

During 2018, average prices of our wood products decreased by 1.7% compared to 2017. The panels market showed a decrease in average prices by 5.6% while sales volumes showed an increase of 11.2%. The downward trend in prices was explained by an oversupply mainly from Brazil, Chile, the United States and Asia, and seasonality in the northern hemisphere. Sawn timber had a 5.5% increase in average prices throughout 2018, partially offset by a slight decrease in sales volume of 2.9%, which was mainly explained by lower demand from China, which in turn is related to the uncertainty surrounding the trade tensions between this country and the United States.

 

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Prices for our forestry and sawn timber may decline in the future. Our results of operations may be materially affected if the prices of our products decline from current levels.

Costs

Our major costs of sales are the following:

 

   

timber,

 

   

harvesting (forestry works),

 

   

maintenance,

 

   

chemicals,

 

   

depreciation and amortization, and

 

   

energy and fuel.

Our major administrative and selling expenses are wages and salaries, traffic, shipping and freight costs, information technology (IT) expenses, insurance expenses and commissions.

Our property, plant and equipment are depreciated on a straight-line basis over the remaining useful lives of the underlying assets. However, the amount of such depreciation that relates to our fixed production assets, such as pulp mills, panels mills and sawmills, is allocated to finished goods held as inventories and accumulates until charged to cost of sales when the finished goods are sold. Forests and land are not depreciated. For additional information relating to the accounting treatment of our biological assets, see “—Critical Accounting Policies—Biological Assets.”

Selling expenses consist primarily of per tonne fees we pay to our selling agents. Traffic, shipping and freight costs are the outbound logistics costs of carrying the product to the client’s destination.

In 2014, our cost of sales increased 2.7% when compared with 2013. However, as a percentage of our revenues, in 2014 and 2013 cost of sales represented 68.6% and 69.1% of total revenues, respectively. The 2.7% increase in cost of sales reflects the volume increase in our sales of pulp, sawn timber and panels by 6.5%, 3.6% and 2.3%, respectively.

In 2015, our cost of sales decreased 3.9% when compared to 2014. Energy and fuel costs decreased 25.5% when compared to 2014, mainly due to the global decline in crude oil prices and its derivatives. In addition, cost of timber declined 20.7% mainly due to the decrease in the volume of sales of sawn timber, especially in Chile. The depreciation of each of the Chilean peso, the Argentine peso and the Brazilian real against the U.S. Dollar had a positive effect on costs denominated in those depreciated currencies.

In 2016, our cost of sales decreased by 0.4% when compared to 2015. The cost of chemical products and energy and fuels for use during our production process decreased by 11.2% and 18.9% respectively, in each case compared to 2015. Energy prices followed a downward trend during the entire 2016, while fuel prices continued at levels much lower than their historical average (despite certain recovery in price levels during the second half of the year). Lower forestry labor costs also allowed for lower total cost of sales. A partially offsetting factor was the cost of timber which increased by 14.7% mostly as a result of our increase in sales volume in our pulp segment by 4.0% and an increase in the fair value cost of timber harvested by 10.9%.

In 2017, our cost of sales increased by 2.2% compared to 2016. The cost of energy and fuels for our production processes increased by 33.3% and the cost for our chemical products increased by 8.0% in 2017 compared to 2016. Fuel prices rose during 2017, following an upward trend of various commodities. Higher indirect cost and forestry labor cost also had an impact on the higher cost of sales. These cost increases were partially offset by lower maintenance cost and other raw materials cost that decreased 16.2% and 14.9%, respectively, compared to 2016.

In 2018, our costs of sales increased by 4.1% compared to 2017. The main reason was the 8.3% increase in the cost of chemical products used in our production processes. Additionally, the cost of forestry labor increased by 6.5% compared to 2017, and other raw materials costs were 21.1% higher. These higher costs were partially offset by a 4.7% decrease in the cost of wood and a 18.3% decrease in costs of electricity.

 

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Critical Accounting Policies

A summary of our significant accounting policies is included in Note 1 to our audited consolidated financial statements, which are included in this annual report. The preparation of consolidated financial statements in accordance with IFRS requires management to make subjective estimates and assumptions that affect the amounts reported. Estimates are based on historical experience and various other assumptions that are believed to be reasonable, though actual results and timing could differ from the estimates. Management believes that the accounting policies below take into account those matters that require the exercise of judgment, but acknowledge that different judgments could result in substantially different results. The most critical accounting policies and estimates are described below.

Biological Assets

IAS 41 requires that biological assets, such as standing trees, are shown on the statement of financial position at fair value. Our forests are thus accounted for at fair value minus estimated point-of-sale costs at harvest, considering that the fair value of these assets can be measured reliably.

The recovery of forest plantations is based on discounted cash flow models, which means that the fair value of biological assets is calculated using cash flows from continuing operations on the basis of sustainable forest management plans and considering the potential growth of forests. This recovery is performed on the basis of each forest stand identified and for each type of tree species.

These discounted cash flows require estimates in growth, harvest, sales prices and costs. It is therefore important that management make appropriate estimates of future levels and trends for sales and costs, as well as administer regular surveys of the forests to establish the volumes of wood available for harvesting and their current growth rates. The principal considerations used to calculate the valuation of forest plantations and sensibility analysis over significant inputs are presented in Note 20 to our audited consolidated financial statements.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimate of the value in use of the cash-generating units to which goodwill has been allocated. Arauco estimates the value either based on appraisals and/or the future cash flows expected to arise from the cash-generating unit and a suitable discount rate to calculate present value. See Note 17 to our audited consolidated financial statements.

 

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Litigation and Contingencies

Arauco, its subsidiaries and our Uruguayan joint operation Montes del Plata are subject to certain ongoing lawsuits, the future effects of which need to be estimated by our management in collaboration with our legal advisors. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company—We have been subject to legal proceedings related to our mills which could adversely affect our business, financial condition, results of operations and cash flows” and “Item 8. Financial Information—Legal Proceedings.” See Note 18 to our audited consolidated financial statements.

Recently Issued Accounting Standards

Note 1 to our audited consolidated financial statements discusses new standards, interpretations and amendments that are mandatory for the first time for the annual period beginning on January 1, 2018 and also the new standards, interpretations and amendments, the application of which is not yet mandatory, which have not been adopted in advance.

Results of Operations

The following table provides a breakdown of our financial results of operations and sales volumes as of and for the years ended December 31, 2016, 2017 and 2018. The table and the discussion that follows are based on and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, as of and for the years ended December 31, 2016, 2017 and 2018 included elsewhere herein. The audited consolidated financial statements included herein are prepared in U.S. dollars and in accordance with IFRS.

 

     For the year ended December 31,  
     2018      2017      2016  
     Sales     %     Volume      Sales     %     Volume      Sales     %     Volume  
     (in millions of U.S. dollars, except where indicated)  

Revenue

                    

Pulp

                    

Bleached pulp(1)

     2,536.9       42.6       3,188.6        2,062.4       39.4       3,327.8        1,780.6       37.4       3,240.8  

Unbleached pulp(1)

     418.4       7.0       494.2        293.3       5.6       445.1        260.5       5.5       439.7  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     2,955.3       49.6       3,682.7        2,355.7       45.0       3,772.9        2,041.1       42.9       3,680.5  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Wood Products

                    

Panels(2)

     1,725.1       29.0       5,410.0        1,643.3       31.4       4,866.2        1,533.6       32.2       4,753.9  

Sawn timber(2)

     487.7       8.2       1,788.4        476.1       9.1       1,841.6        479.8       10.1       1,943.8  

Remanufactured wood products(2)

     252.6       4.2       437.7        259.3       5.0       445.0        245.5       5.2       441.6  

Plywood

     255.5       4.3       531.6        238.2       4.5       566.5        226.9       4.8       563.9  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     2,721.0       45.7       8,167.8        2,616.9       50.0       7,719.3        2,485.8       52.2       7,703.2  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Forestry

                    

Logs, net(2)

     71.9       1.2       2,539.9        72.6       1.4       2,223.7        63.1       1.3       1,787.5  

Chips

     31.4       0.5       546.0        25.2       0.5       443.4        20.8       0.4       366.2  

Other

     4.1       0.1       0.1        8.2       0.1       5.2        6.1       0.1       7.8  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     107.4       1.8       3,086.0        106.0       2.0       2,672.3        90.0       1.9       2,161.5  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Energy

     86.7       1.5          93.8       1.8          103.4       2.2    

Other

     84.4       1.4          65.9       1.2          41.1       0.9    
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

   

Total revenue

     5,954.8       100          5,238.3       100          4,761.4       100    
  

 

 

   

 

 

      

 

 

   

 

 

      

 

 

   

 

 

   

Cost of sales

                    

Timber

     (691.1          (725.1          (736.4    

Forestry labor costs

     (672.2          (631.3          (600.3    

Maintenance costs

     (280.7          (262.8          (313.5    

Chemical costs

     (560.2          (517.5          (479.3    

Depreciation

     (377.6          (389.8          (378.0    

Other costs of sales

     (1,140.9          (1,048.0          (991.4    
  

 

 

        

 

 

        

 

 

     

Total cost of sales

     (3,722.7          (3,574.5          (3,498.9    
  

 

 

        

 

 

        

 

 

     

Gross profit

     2,232.1       37.5        1,663.8       31.8        1,262.5       26.5  

Other income

     124.3            111.5            257.9      

Distribution costs

     (556.8          (523.3          (496.5    

Administrative expenses

     (561.3          (521.3          (474.5    

Other expenses

     (95.9          (240.1          (77.4    

Other income (loss)

     14.2            —              —        

Financial income

     20.9            19.6            29.7      

Financial costs

     (214.8          (287.9          (258.5    

Share of profit (loss) of associates and joint ventures accounted for using equity method

     17.2            17.0            23.9      

Exchange rate differences

     (26.5          0.1            (3.9    

Income before income tax

     953.5            239.4            263.2      

Income tax

     (226.8          31.0            (45.6    

Net income

     726.8            270.4            217.6      

 

(1)

Volumes measured in thousands of tonnes. Does not include subproduct sales (i.e. energy, chemicals) which are presented in the pulp reportable segment in Note 24 in our audited consolidated financial statements.

(2)

Volumes measured in thousands of cubic meters. Does not include subproduct sales (i.e. energy, chemicals) which are presented in the wood products reportable segment in Note 24 in our audited consolidated financial statements.

 

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Year Ended December 31, 2017 Compared to Year Ended December 31, 2018

Revenue

Revenues increased by 13.7% from U.S.$5,238.3 million in 2017 to U.S.$5,954.8 million in 2018, primarily as a result of:

 

   

a 25.5%, or U.S.$599.6 million, increase in revenues from pulp;

 

   

a 4.0%, or U.S.$104.1 million, increase in revenues from wood products;

 

   

a 1.3%, or U.S.$1.4 million, increase in revenues from forestry products

Pulp. Revenues from bleached and unbleached pulp increased by 25.5% from U.S.$ 2,355.7 million in 2017 to U.S.$2,955.3 million in 2018, reflecting a 28.5% increase in average prices, partially offset by a 2.4% decrease in sales volume. Sales of bleached pulp increased by 23.0% due to a 28.4% increase in average prices, partially offset by a 4.2% decrease in sales volume. Revenues from unbleached pulp increased by 42.6% during 2018, mainly due to a 28.5% increase in average prices and a 11.0% increase in sales volume. Prices for both types of fiber (softwood and hardwood) showed a similar upward trend throughout most of 2018, and demand remained stable until the last quarter. By the end of the year, both prices and demand were impacted by the effects of the trade tensions between China and the United States.

Wood products. Revenues from wood products increased by 4.0% from U.S.$2,616.9 million in 2017 to U.S.$2,721.0 million in 2018, primarily due to a 5.8% increase in sales volume, partially offset by a slight average price decrease of 1.7%.

Panel products sales had a 5.0% increase compared to 2017, driven by a 11.2% increase in sales volume, which was partially offset by an average price decrease of 5.6%.

Revenues from sawn timber increased by 2.4%, from U.S.$476.1 million in 2017 to U.S.$487.7 million in 2018 due to a 5.5% increase in average prices, partially offset by a 2.9% decrease in sales volume. Trade tension between China and the United States resulted in lower demand during the second half of 2018 from the Asian markets. Plywood revenues increased by 7.3% from U.S.$238.2 million in 2017 to U.S.$255.5 million in 2018, mainly due to a 14.3% increase in average prices, slightly offset by 6.2% decrease in sales volume.

Forestry products. Revenues from forestry products increased by 1.3% from U.S.$106.0 million in 2017 to U.S.$107.4 million in 2018. This increase was primarily the result of a U.S.$6.2 million increase in chips sales partially offset by a slight decrease in logs sales of 1.1%, explained by a U.S.$3.2 million decrease in sawlogs sales.

 

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Other revenue. Revenues from other sources, consisting mainly of sales of energy, chemicals and other services, increased by 7.1% from U.S.$159.7 million in 2017 to U.S.$171.1 million in 2018, primarily as a result of a U.S.$18.5 million increase in other export sales of fire-damaged wood. This was partially offset by a U.S.$7.0 million decrease in energy sales.

Cost of sales

Cost of sales increased by 4.1% from U.S.$3,574.5 million in 2017 to U.S.$3,722.7 million in 2018, primarily as a result of a 8.3% increase in chemical products and a 6.5% increase in forestry labor cost due to higher production. These increased costs were partially offset by a 4.7% decrease in the cost of timber.

Gross Profit

As a percentage of total revenue, our gross profit increased from 31.8% in 2017 to 37.5% in 2018, primarily as a result of a 13.7% increase in sales revenue, while cost of sales rose slightly by 4.1%.

Other income

Other income increased by 11.5% from U.S.$111.5 million in 2017 to U.S.$124.3 million in 2018. This was mainly due to compensations received in our energy business of U.S.$4.6 million and an increase of profits from changes in the fair value of our biological assets of U.S.$1.4 million.

Distribution costs

Distribution costs increased by 6.4% from U.S.$523.3 million in 2017 to U.S.$556.8 million in 2018, primarily due to an increase of 7.6%, or U.S.$31.1 million in total freight costs. This increase was mainly explained by higher freight tariffs in the United States (due to a certified truck driver shortage), and higher sales volume. As a percentage of revenue, distribution costs remained fairly stable at 9.4% in 2018, compared to 10.0% in 2017.

Administrative expenses

Administrative expenses increased by 7.7% from U.S.$521.3 million in 2017 to U.S.$561.3 million in 2018. As a percentage of revenue, administrative expenses remained stable at 9.4% in 2018, compared to 10.0% in 2017.

Other expenses

Other expenses decreased by 60.0% from U.S.$240.2 million in 2017 to U.S.$95.9 million in 2018 due to lower forestry fires in comparison with the ones affecting our forests during 2017.

Other income (loss)

Other income (loss) reached U.S.$14.2 million in 2018, explained by a profit due to bargain acquisition recognized following the acquisition of Masisa’s assets in Brazil.

Finance costs

Finance costs decreased by 25.4%, from U.S.$287.9 million in 2017 to U.S.$214.8 million in 2018, primarily due to lower incurred costs compared to 2017 when we repurchased our Notes due in 2019, 2021 and 2022, including a premium payment that amounted to approximately U.S.$60 million.

Exchange rate differences

Losses from exchange rate differences totaled U.S.$26.5 million in 2018 compared to the U.S.$0.1 million gain in 2017. These losses were primarily due to the depreciation of the Argentine peso, the Brazilian real and the Chilean peso. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada.”

Income tax

We recorded an income tax expense of U.S.$226.8 million in 2018 compared to a gain of U.S.$31.0 million in 2017. This increase was attributable to our higher income from operational activities in 2018, which is mainly explained by higher revenues in Chile by 18.5%. During 2017 we had a positive effect in deferred taxes, as a result of tax rate reductions in the United States and Argentina which accounted for U.S.$17.6 million and U.S.$62.7 million, respectively.

 

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Net income

Net income in 2018 increased by 168.8% from U.S.$270.4 million in 2017 to U.S.$726.8 million in 2018. This is explained by higher sales in our different business segments, which in the aggregate increased our gross profit by 34.2% or U.S.$568.3 million, as well as a decrease in financial costs and other operating expenses, all of which was partially offset by higher income tax losses.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2017

Revenue

Revenues increased by 10.0% from U.S.$4,761.4 million in 2016 to U.S.$5,238.3 million in 2017, primarily as a result of:

 

   

a 15.4%, or U.S.$314.6 million, increase in revenues from pulp;

 

   

a 5.3%, or U.S.$131.1 million, increase in revenues from wood products;

 

   

a 17.8%, or U.S.$16.0 million, increase in revenues from forestry products

Pulp. Revenues from bleached and unbleached pulp increased by 15.4% from U.S.$2,041.1 million in 2016 to U.S.$2,355.7 million in 2017, reflecting a 2.5% increase in sales volume and a 12.6% increase in average prices. Sales of bleached pulp increased by 15.8% due to a 12.8% increase in average prices and a 2.7% increase in sales volume. 2017 started with a large gap between softwood and hardwood, with both prices increasing. The growth in hardwood prices was greater than the increase in softwood prices, which implied that through the year the gap between both prices decreased significantly. The increase in hardwood prices was driven by lower expected supply capacity of the pulp mill in Indonesia, because the market expected a capacity of 2.8 million tonnes annually and instead we expect the capacity to be stable at 1.7 million tonnes for the next three to four years. Lower capacity due to operational problems in existing mills in the industry also impacted the supply and compensated the new production. Demand has had a steady rise during 2017 as certain policies, including import restrictions of unsorted waste paper, put in place by the Chinese government to stimulate internal consumption, helped support pulp demand in China. Revenues from unbleached pulp increased by 12.6% during 2017, mainly due to a 11.2% increase in average prices and a 1.2% increase in sales volume.

Wood products. Revenues from wood products increased by 5.3% from U.S.$2,485.8 million in 2016 to U.S.$2,616.9 million in 2017. This increase in revenues was primarily due to a 5.1% increase in average prices, and by a 0.2% increase in sales volume. Despite additional supply from Brazil and North America competitors, revenues from panels increased by 7.1%, driven by a 4.7% increase in average prices and a 2.4% increase in sales volume. Argentina showed an increase in prices and sales volume in MDF and PBO, mainly due to better conditions in the economy. In Brazil PBO and MDF average prices improved, due to economic growth compared to a contraction in the two prior years.

Revenues from sawn timber decreased by 0.8%, from U.S.$479.8 million in 2016 to U.S.$476.1 million in 2017 due to a 5.3% decrease in sales volume, partially offset by a 4.7% increase in average prices. During the first quarter of 2017, forestry fires in Chile damaged our El Cruce Sawmill, which stopped its operations. Our other sawmills were able to absorb the lack of production. Demand from Asia and Middle East, our principal customers for these products, have shown improvements during the year. Remanufactured products revenues increased 5.6% from U.S.$245.5 million in 2016 to U.S.$259.3 million in 2017 due to a 4.8% increase in average prices and a 0.8% in sales volume. Plywood revenues increased 5.0% from U.S.$226.9 million in 2016 to U.S.$238.2 million in 2017 with sales volumes increasing 0.5% and prices increasing 4.5%. The North American market showed a high demand in retail, distribution and industrial customers.

Forestry products. Revenues from forestry products increased by 17.8% from U.S.$90.0 million in 2016 to U.S.$106.0 million in 2017. This increase was primarily the result of a U.S.$9.6 million increase in logs sales, driven in turn by a U.S.$8.2 million increase in sales in sawlogs, and a U.S.$1.4 million increase in sales in pulplogs.

Other revenue. Revenues from other sources, consisting mainly of sales of energy and chemicals, increased by 10.5% from U.S.$144.5 million in 2016 to U.S.$159.7 million in 2017. This was primarily the result of a U.S.$24.9 million increase in other services, partially offset by a U.S.$ 9.6 million decrease in energy sales.

 

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Cost of sales

Cost of sales increased by 2.2% from U.S.$3,498.9 million in 2016 to U.S.$3,574.5 million in 2017, primarily as a result of a 33.3% increase in cost of energy and fuel used in our operations mainly driven by higher average prices of fuel. Our forestry labor cost increased by 5.2% due to increased forestry production and our chemical products costs increased by 8.0%. These increased costs were largely offset by a 16.2% decrease in our maintenance costs.

Gross Profit

As a percentage of total revenue, our gross profit increased from 26.5% in 2016 to 31.8% in 2017, primarily as a result of a 10.0% increase in sales revenue, while cost of sales rose slightly by 2.2%.

Other income

Other income decreased by 56.8% from U.S.$257.9 million in 2016 to U.S.$111.5 million in 2017. Profits from changes in the fair value of our biological assets decreased by 60.2% compared to 2016, mainly due to a change in the forest valuation contained in the IFRS forest assessment. This change in estimation originated from forest inventory differences, associated to pruning and thinning that were not carried out according to schedule, climate reasons, and an update in the growth tables considered in the valuation.

Distribution costs

Distribution costs increased by 5.4% from U.S.$496.5 million in 2016 to U.S.$523.3 million in 2017, primarily due to an increase of 7.0%, or U.S.$26.9 million, in total freight costs. This increase was explained by an increase in sales volume in our pulp division. As a percentage of revenue, distribution costs remained fairly stable, at 10.0% in 2017, compared to 10.4% in 2016.

Administrative expenses

Administrative expenses increased by 9.9% from U.S.$474.5 million in 2016 to U.S.$521.3 million in 2017. As a percentage of revenue, administrative expenses remained stable at 10.0% in 2017 and 2016.

Other expenses

Other expenses increased by 210.3% from U.S.$77.4 million in 2016 to U.S.$240.2 million in 2017 due to the forestry fires that affected our forest during 2017. Loss totaled approximately U.S.$173.1 million net of U.S.$35.0 million that we received from the insurance company; thereby the loss was U.S.$138.1 million.

Finance costs

Finance costs increased by 11.4%, from U.S.$258.5 million in 2016 to U.S.$287.9 million in 2017. This increase is explained by our repurchase of Notes due in 2019, 2021 and 2022 in November 2017. The costs incurred in the repurchase primarily included a premium payment that amounted to approximately U.S.$60 million. During 2017 we continued to focus on our deleveraging process.

Exchange rate differences

Gains from exchange rate differences totaled U.S.$0.1 million in 2017, compared to the U.S.$3.9 million loss that we had in 2016. This was primarily due to the appreciation of the Chilean peso which increased our cash and cash equivalents and outstanding debt in this currency. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada.”

Income tax

We recorded an income tax gain of U.S.$31.0 million in 2017 compared to an expense of U.S.$45.6 million in 2016. This increase is attributable to lower income before tax and the effect in deferred taxes a result of the tax rate reduction in United States and Argentina which accounted for U.S.$17.6 million and U.S.$62.7 million.

Net income

Net income in 2017 increased by 24.3% from U.S.$217.6 million in 2016 to U.S.$270.4 million in 2017. Higher sales in all of our business segments increased our gross profit by 31.8% or U.S.$401.3 million and our income tax gain, all of which was partially offset by higher other operating expenses and lower other operating income.

 

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Liquidity and Capital Resources

Our primary sources of liquidity are funds from operations, domestic and international borrowings from commercial and investment banks and debt offerings in the domestic and international capital markets.

Arauco has a liquidity policy, approved by the Board of Directors, which maintains conservative criteria regarding Arauco’s liquidity management.

We also have access to two committed credit facility lines, which total U.S.$314.4 million. The first line has an available amount of UF 2,885,000, or approximately U.S.$114.4 million and expires on January 29, 2020. The second line has a maximum available amount of U.S.$200.0 million and expires on March 27, 2020. As of the date of this annual report, Arauco has not used any of these committed credit facility lines.

Cash Flow from Operating Activities

Our net cash flow provided by operating activities was U.S.$1,280.9 million in 2018 and U.S.$1,072.4 million in 2017. This increase was principally due to a U.S.$621.1 million increase in sales of goods and services, partially offset by a U.S.$449.0 million increase in payments to suppliers and employees.

Our net cash flow provided by operating activities was U.S.$1,072.4 million in 2017 and U.S.$773.6 million in 2016. This increase was principally due to a U.S.$488.2 million increase in our collection of sales of goods and services, partially offset by a U.S.$104.0 million increase in other payments for operating activities.

Cash Flow Used in Investing Activities

Our net cash used in investing activities was U.S.$893.9 million in 2018 and U.S.$633.3 million in 2017. This increase was principally due to an increase in capital expenditures of 50.8%, or U.S.$227.7 million, mainly as a result of purchases of property, plant and equipment. Capital expenditures in 2018 included U.S.$196.6 million in the “MDP Grayling” project in Michigan (United States), U.S.$124.9 million in the “MAPA” project, U.S.$52.9 million in the “Dissolving Pulp” project and U.S.$16.2 million in the water treatment plant in the Arauco mill.

Our net cash used in investing activities was U.S.$633.3 million in 2017 and U.S.$640.2 million in 2016. This decrease was principally due to a decrease in capital expenditure, mainly as a result of U.S.$15.9 million increase in cash flows used to purchase in associates. Capital expenditures in 2017, included U.S.$183.4 million in the “MDP Grayling” project in Michigan, U.S.$179.2 million in plantations and U.S.$26.9 million in the water treatment plant in the Arauco mill.

Cash Flow from Financing Activities

Our net cash provided by financing activities was U.S.$129.8 million in 2018, compared to the U.S.$439.1 million used in 2017. During 2018, we received U.S.$863.6 million in loan proceeds, and we paid U.S.$475.2 million of principal of and interest on our debt. In addition, we paid U.S.$257.4 million in dividends.

Our net cash provided by financing activities was U.S.$439.1 million in 2017, compared to U.S.$38.5 million used in 2016. During 2017, we received U.S.$1,312.5 million in loan proceeds, and we paid U.S.$1,627.7 million of principal of and interest on our debt, including U.S.$877.0 million in a U.S. dollar-denominated bonds, U.S.$270.0 million in a U.S. dollar-denominated bond of our subsidiary Arauco Argentina, and U.S.$100.0 million in the prepayment of debt of a credit loan. In addition, we paid U.S.$121.6 million in dividends.

We believe that cash flow generated by operations, cash balances, borrowings from commercial banks and debt offerings in the domestic and international capital markets will be sufficient to meet our working capital, debt service and capital expenditure requirements for the foreseeable future. See “Item 4.—Information on our Company—Capital Expenditures.”

Contractual Obligations

As is customary practice in the pulp industry, we generally do not have long-term sales contracts with our customers; rather, we maintain relationships with our customers, with whom we reach agreements from time to time on specific volumes and prices.

 

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The following table sets forth certain contractual obligations as of December 31, 2018, and the period in which the contractual obligations come due.

 

     Payments Due by Period  
     Less than 1
year
     1-3 years      3-5 years      More than
5 years
     Total  
     (in thousands of U.S. dollars)  

Debt obligations (1)

     504,920        957,724        932,115        2,632,108        5,026,867  

Purchase obligations (2)

     352,449        370,427              722,876  

Capital (finance) lease obligations

     30,916        26,296        10,975           68,187  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     888,285        1,354,447        943,090        2,632,108        5,817,930  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Includes estimated interest payments related to debt obligations based on market values as of December 31, 2018. In the case of floating rate debt, interest rate is calculated using the current index setting in place as of December 31, 2018, and assume no changes in the year-end index for any of the future periods. The interest rate on our floating rate debt is determined principally by reference to the London inter-bank offered rate (LIBOR), and as of December 31, 2018, the average spread for our U.S. dollar floating rate debt over six-month LIBOR was 1.50%. Approximately 15.6% of our total debt is floating rate debt as December 31, 2018.

(2)

Excludes contracts entered into with independent contractors to perform operations on our behalf. Our payment obligations under such contracts are not pre-determined, but rather depend on the performance of certain variables. Accordingly, we cannot quantify our contractual obligations under such contracts.

Investing Activities

During 2018, our main investment activities were investments in projects; sustaining our panel, sawmill and pulp mills, and sustaining our biological assets. The project capitalization investments included primarily:

 

   

U.S.$219.0 million invested in the “MDP Grayling” project;

 

   

U.S.$128.1 million invested in the “MAPA” project; and

 

   

U.S.$65.0 million invested in the “Dissolving Pulp” project in the Valdivia mill.

Financing Activities

During 2018, our principal financing activities were as follows:

On October 25, 2018, we issued two series of bonds in the local capital markets for a total amount of U.S.$337.2 million. The amount of the issuance of the 10-year Series was UF 3.0 million, equivalent to U.S.$119.0 million as of December 31, 2018, while the amount of the 25-year series was UF 5.5 million, equivalent to U.S.$218.2 million as of December 31, 2018. The proceeds from the issuance were used for the financing of the MAPA project.

On September 27, 2018, we refinanced U.S.$200 million of a loan due in September 28, 2018, extending the final maturity date to September 2023.

As of December 31, 2018, the current portion of our bank debt was U.S.$215 million of which 96.8% was U.S. dollar-denominated. As of December 31, 2018, our total non-current portion of our bank debt was U.S.$725.4 million of which 98.9% was U.S. dollar-denominated.

As of December 31, 2018, we also had total capital markets borrowings (including the current portion of such debt) of U.S.$3.5 billion, 58.9% of which were U.S. dollar-denominated.

As of December 31, 2018, the weighted average maturity of our non-current debt was 8.96 years. The interest rate on our floating rate debt is determined principally by reference to the London inter-bank offered rate (LIBOR), and as of December 31, 2018, the average spread for our U.S. dollar floating rate debt over six-month LIBOR was 1.50%. As of December 31, 2018, the average interest rate for our U.S. dollar fixed rate debt was 4.75%. These average rates do not reflect the effect of swap agreements.

As of December 31, 2018, we guaranteed obligations of U.S.$322.2 million related to Montes del Plata, U.S.$287.0 million related to Flakeboard America and U.S.$15.2 million related to Arauco Forest Brazil and Mahal.

 

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The instruments and agreements governing our bank loans and local bonds set limits on our incurrence of debt and liabilities through the use of financial covenants. The principal financial covenants contained in the bank loan agreements in effect on December 31, 2018 are as follows:

 

   

Our debt to equity ratio must not exceed 1.2:1; and

 

   

Our interest coverage ratio must not be less than 2:1.

The principal financial covenant contained in the local bond agreements is:

 

   

Our debt to equity ratio must not exceed 1.2:1.

We were in compliance with all bank loan and bond covenants as of December 31, 2018. Our U.S. dollar-denominated bonds do not contain financial covenants.

 

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OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

 

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TREASURY MANAGEMENT

Our corporate financial policy establishes a set of guidelines, procedures and responsibilities to minimize certain financial risks to which we are exposed and to regulate such policy with a global corporate view. This policy seeks to manage such risks in our best interests, covering all countries where we operate, and is administered by our Corporate Finance Department (based in Chile).

We manage the treasury activities of all our Chilean subsidiaries and certain foreign commercial offices on a centralized basis. In the case of our Argentine, North American and Brazilian subsidiaries, the management of their daily treasury activities is independent from our Corporate Finance Department, although following the same corporate policy.

The treasury activities of our Uruguayan joint operations are governed by a corporate financial policy approved by its board of directors based on the same principles underlying our cash and deposits policy. In addition, the Uruguayan joint operations are supervised by a financial committee integrated by members of both shareholders’ finance departments.

The treasury activities of Sonae Arauco, our joint venture with Sonae, are governed by a corporate financial policy approved by its board of directors, based on the same principles underlying our cash and deposits policy. In addition, they are supervised by a financial committee integrated by members of both shareholders.

 

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HEDGING

We periodically review our exposure to risks arising from fluctuations in foreign exchange rates and interest rates and decide, on a case-by-case basis, at our senior management level whether to hedge such risks. Our Derivatives Policy establishes the minimum requisites our counterparties must meet, as well as proper procedures. As a result, from time to time we enter into currency and interest rate swaps with respect to a portion of our borrowings. See Note 23 to our audited consolidated financial statements. Arauco applies hedge accounting for financial instruments whose purpose is to hedge against foreign currency fluctuations.

Cross Currency Swap Agreements

We have outstanding the following cross currency swap agreements in Chile to hedge our local bonds issued in UF:

 

Bank

   UF Notional
Amount
     U.S.$ Notional
Amount
     Hedging Start
Date
     Maturity  

Deutsche—U.K.

     1,000,000        43,618,307        10-30-2011        10-30-2021  

JP Morgan—N.A.

     1,000,000        43,618,307        10-30-2011        10-30-2021  

Deutsche—U.K.

     1,000,000        37,977,065        04-30-2014        04-30-2019  

Scotiabank—Chile

Scotiabank—Chile

    

1,000,000

1,000,000

 

 

    

38,426,435

38,378,440

 

 

    

10-30-2014

10-30-2014

 

 

    

04-30-2023

04-30-2023

 

 

Santander—Chile

     1,000,000        37,977,065        10-30-2014        04-30-2023  

BCI—Chile

     1,000,000        37,621,562        10-30-2014        04-30-2023  

Corpbanca—Chile

     1,000,000        42,864,859        09-01-2010        09-01-2020  

Scotiabank—Chile

     1,000,000        42,864,859        09-01-2010        09-01-2020  

Deutsche—U.K.

     1,000,000        42,864,859        09-01-2010        09-01-2020  

Santander—Spain

     1,000,000        42,873,112        09-01-2010        09-01-2020  

Scotiabank—Chile

     1,000,000        42,864,257        09-01-2010        09-01-2020  

Corpbanca—Chile

     1,000,000        46,474,122        05-15-2012        11-15-2021  

JP Morgan—N.A.

     1,000,000        47,163,640        11-15-2012        11-15-2021  

Scotiabank—Chile

     1,000,000        42,412,852        11-15-2013        11-15-2023  

Santander—Chile

     1,000,000        41,752,718        11-15-2013        11-15-2023  

Deutsche—U.K.

     1,000,000        41,752,718        11-15-2013        11-15-2023  

Santander—Chile

     3,000,000        128,611,183        10-01-2014        04-01-2024  

JP Morgan—U.K.

     1,000,000        43,185,224        10-01-2014        04-01-2024  

Corpbanca—Chile

     1,000,000        43,277,070        10-01-2014        04-01-2024  

BCI—Chile

     625,000        26,990,765        10-01-2014        04-01-2021  

BCI—Chile

     625,000        26,997,935        10-01-2014        04-01-2021  

Santander—Chile

     5,000,000        201,340,031        11-15-2016        11-15-2026  

Banco de Chile—Chile

     954,545        36,250,835        04-30-2019        10-30-2029  

Goldman Sachs—N.A.

     1,000,000        40,521,750        10-10-2018        10-10-2028  

Goldman Sachs—N.A.

     1,000,000        40,066,555        10-10-2018        10-10-2028  

Scotiabank—Chile

     1,000,000        40,537,926        10-10-2018        10-10-2028  

Santander—Chile

     3,000,000        118,400,504        10-10-2018        10-10-2038  

Santander—Chile

     2,500,000        97,971,786        10-10-2018        10-10-2038  

TOTAL

     37,704,545        1,555,656,742        

These cross-currency swap agreements allow us to hedge our currencies exposures regarding exchange rates. Through these agreements, we receive cash flows in UF, which allow us to comply with the terms of our outstanding bonds and pay fixed amounts in U.S. dollars, the currency in which a significant amount of our assets and sales are denominated.

The aggregate fair value of our cross-currency swap agreements as of December 31, 2018, represented a liability of U.S.$51.2 million as compared to December 31, 2017, when they represented an asset of U.S.$47.5 million.

 

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Interest Rate Swap Agreements

We have outstanding the following interest rate swap agreements to hedge fluctuations in floating rates for long-term debt in Uruguay:

 

Bank    Currency      U.S.$ Notional Amount  

DNB Bank ASA

     USD        42,198,006 (1)  

 

  (1)

U.S.$ notional amount includes multiple contract agreements.

The fair value of this agreement as of December 31, 2018, represented an asset of U.S.$936,000 for Arauco. The fair value shown in the table above is 50% of total fair value, since these agreements were entered into by Montes del Plata (of which Arauco owns 50% of its shares).

Forward Agreements

As of December 31, 2018, we have outstanding forward agreements in Colombia and Uruguay to hedge fluctuations in their respective local currencies, as follows:

 

Bank    Exchange Rate      U.S.$ Notional Amount     Hedging Start Date      Maturity  

Corpbanca Colombia

     USD-COP        1,500,000       10-31-2018        01-09-2019  

Corpbanca Colombia

     USD-COP        1,700,000       11-26-2018        02-12-2019  

Corpbanca Colombia

     USD-COP        1,600,000       12-20-2018        03-12-2019  

Banco Santander Uruguay

     USD-UYU        14,880,000 (1)       —          —    

HSBC Uruguay

     USD-UYU        11,610,000 (1)       —          —    

Citibank U.K.

     USD-UYU        4,425,000 (1)       —          —    

 

  (1)

U.S.$ notional amount includes multiple contract agreements.

The fair value of these agreements as of December 31, 2018, represented an asset of U.S.$613,000 for Arauco, which includes the Colombian forward agreements and the 50% of total fair value of the forward agreements entered into by Montes del Plata (of which Arauco owns 50% of its shares).

Commodity Swap Agreements

We have also analyzed our exposure to risks associated with fluctuations in the prices of commodities, including fuel oil. As of December 31, 2018, we had outstanding the following commodity swap agreements to hedge fluctuations in the prices of fuel oil in Uruguay:

 

Bank    Exchange Rate      U.S.$ Notional Amount  

JPMorgan Chase Bank, N.A.

     Fuel Oil No. 6      6,189,275 (1)  

DNB Bank ASA

     Fuel Oil No. 6        4,836,938 (1)  

Citibank U.K.

     Fuel Oil No. 6        401,075 (1)  

 

  (1)

U.S.$ notional amount includes multiple contract agreements.

The fair value of these agreements as of December 31, 2018, represented a liability of U.S.$1.4 million for Arauco. The fair value shown in the table above is 50% of total fair value, since these agreements were entered into by Montes del Plata (of which Arauco owns 50% of its shares).

 

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RESEARCH AND DEVELOPMENT

We spent U.S.$10.0 million in 2016, U.S.$9.8 million in 2017 and U.S.$12.0 million in 2018 on research and development. We conduct our principal research and development programs through our subsidiary, Bioforest, which concentrates its efforts on applying and implementing advanced technologies to the specific characteristics of our forests and mills.

In our forestry product business segment, we are continuously researching and attempting to develop different strains of long-fiber pine and short fiber eucalyptus trees to improve their quality and to shorten their average harvest cycle. Additionally, we maintain close relations with certain international research institutes and the scientific community that participate in our industry. Bioforest has increased the growth rate of our radiata pines, eucalyptus globulus and eucalyptus nitens, adding more value to our plantations.

In the pulp and panels business segments, Bioforest has been adding value to Arauco through researching and developing new technologies in order to produce our goods in a more efficient way and improve the quality of our products, to use them in new ways and to create a better understanding and knowledge of our process.

 

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TREND INFORMATION

During the end of 2018, pulp demand decreased due to higher inventories of paper producers who decreased their exports as a result of the trade tensions between China and the United States, which led to a decrease in pulp prices. During January and February 2019, prices remained stable. After the Chinese New Year, at the beginning of February, paper producers reduced their inventories and pulp demand started to restore.

From December 31, 2018 through April 2, 2019, prices for bleached softwood kraft pulp decreased by 8.2%, reaching U.S.$1,101.9 per tonne in NBSK index, while prices for bleached hardwood kraft pulp decreased by 5.4%, to U.S.$970.8 per tonne in the BEKP index. During the first quarter of 2019, pulp demand in Europe was lower, following the Asian trend seen at the end of 2018. The Asian market showed a stable demand as it was expected. For the rest of 2019, we expect no significant capacity scheduled to enter the market.

Regarding wood products segment, we expect demand from the northern hemisphere will be stable this year, which will also depend on the trade tensions development. In addition, the Housing Starts index in the United States market appears to maintain a healthy trend in the first quarter of 2019. Likewise, Mexico has showed stable demand levels and a positive trend is expected for 2019. In Brazil, there are favorable economic prospects and volume sales are expected to be balanced between local sales and exports. Argentina is a market that is going through a difficult economic situation, which has affected margins and it is believed that the current situation is not going to improve in the first quarter of 2019. However, in this country, commercial strategies are already being considered for the next months.

Sales of remanufactured wood and sawn timber products, in general, are expected to remain stable even though there is currently an oversupply from Latin American and U.S. competitors, which may also affect prices. The market situation in Asia and Oceania is expected to be better after trade tensions are resolved, which may result in a recovery of demand and stabilize prices.

For more information regarding trends in our business, see “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Condition, Results of Operations and Cash Flows s—Overview” and “—Exchange Rate Fluctuations.” For risks affecting our business, see “Item 3. Key Information—Risk Factors.”

 

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Item 6. Directors, Senior Management and Employees

DIRECTORS AND EXECUTIVE OFFICERS

Directors

A Board of Directors manages our business. Our estatutos (by-laws) require that the Board of Directors consist of nine directors. Our directors cannot also be our executives. The entire board is elected every three years and can be re-elected for any number of periods. The current board was elected in April 2017, and their terms will be renewed in April 2020. The board may appoint replacements to fill any vacancies that occur during periods between elections; however, at the annual shareholders’ meeting following any such replacement, an election of the entire board must take place. Scheduled meetings of the Board of Directors are generally held once a month. Extraordinary board meetings are called when summoned by the Chairman or when requested by at least two directors. We have not entered into any contracts with our current directors to provide any benefits upon the termination of their relationship with us. We do not have a compensation committee.

Our current directors are listed below.

 

Name

  

Years as Director

  

Position

  

Age

Manuel Bezanilla

   32    Chairman    74

Roberto Angelini

   32    First Vice-Chairman    70

Jorge Andueza

   25    Second Vice-Chairman    70

Alberto Etchegaray

   25    Director    73

Eduardo Navarro

   11    Director    53

Timothy C. Purcell

   14    Director    59

Franco Mellafe

   4    Director    43

Juan Ignacio Langlois

   3    Director    51

Jorge Bunster(1)

   18    Director    66

 

(1)

Jorge Bunster was Director from 1996-2010. He rejoined the Board of Directors in April 2017.

Included below are brief biographical descriptions of each of our directors.

Manuel Bezanilla became a Director on April 30, 1986 and became Chairman of the Board of Directors on April 23, 2013. He served as Second Vice-Chairman of the Board of Directors from May 4, 2007 to April 23, 2013. He is also a partner of the law firm Portaluppi, Guzmán y Bezanilla. He serves as Chairman of the board of Forestal Arauco and serves as a member of the boards of directors of Empresas Copec, COPEC, Pesquera Iquique-Guanaye S.A., AntarChile and Inversiones Siemel S.A. Mr. Bezanilla holds a law degree from the Catholic University of Chile.

Roberto Angelini became a Director on April 30, 1986 and became First Vice-Chairman of the Board of Directors on May 4, 2007. He served as Vice-Chairman of the Board of Directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as Second Vice-Chairman of the Board of Directors from January 27, 2005 to May 4, 2007. He serves as Chairman of the board of directors of Empresas Copec, COPEC, AntarChile, Corpesca S.A., Pesquera Iquique-Guanaye S.A., Inversiones Alxar S.A. and Servicios Corporativos Sercor S.A. He also serves as a member of the boards of directors of Forestal Arauco, Empresa Pesquera Eperva S.A., Orizon S.A., Cumbres Andinas S.A.C. and Inversiones Siemel S.A. Mr. Angelini holds a degree in civil engineering from the Catholic University of Chile.

Jorge Andueza became a Director on April 11, 1994 and was appointed Second Vice-Chairman of the Board of Directors on April 23, 2013. He is also the Chairman of the board of directors of Inversiones Siemel S.A. and Orizon S.A., and serves as a member of the boards of directors of COPEC, Empresas Copec, Forestal Arauco, Empresa Pesquera Eperva S.A., Corpesca S.A., Pesquera Iquique-Guanaye S.A., Organización Terpel S.A. and Servicios Corporativos Sercor S.A. Mr. Andueza holds a degree in electronic civil engineering from Federico Santa María Technical University.

Alberto Etchegaray became a Director on April 11, 1994 and served as Chairman of the Board of Directors from January 4, 2005 to May 4, 2007, when he voluntarily resigned. He is also a partner of Domet Ltda., Vice Chairman of the Board of Directors of Salfacorp S.A., and serves as a member of the board of directors of Compañía de Seguros Confuturo S.A. and Compañía de Seguros Corpseguros S.A. He served as the Chilean Minister of Housing for four years. Mr. Etchegaray holds a degree in civil engineering from the Catholic University of Chile.

 

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Eduardo Navarro became a Director on September 25, 2007. He is also the Chief Executive Officer of Empresas Copec S.A., the Chief Executive Officer of Pesquera Iquique-Guanaye S.A., and serves as chairman of the board of Abastible S.A. and a member of the board of directors of COPEC, Solgas S.A., Duragas S.A., Corpesca S.A., Orizon S.A., Inversiones Alxar S.A., Inversiones Laguna Blanca S.A., Cumbres Andinas S.A.C. and Inversiones del Nordeste. Mr. Navarro holds degrees in commercial engineering and economics, and a master’s degree in economics, all from the Catholic University of Chile.

Timothy C. Purcell became a Director on April 26, 2005. He is also Managing Partner of Linzor Capital Partners, LP. Mr. Purcell currently serves as a member of the Board of Directors of Komax, S.A., Engenium Capital S.A. de C.V., Tip de México, S.A. de C.V., and Corporación Santo Tomás. He is also Chairman of the board of directors of Enseña Chile, Trustee of International House in New York and member of the board of directors of Colegios Cree in Chile. Mr. Purcell received an undergraduate degree with distinction in economics from Cornell University, as well as a master’s degree in international studies from the University of Pennsylvania and a master’s degree in business from Wharton Business School.

Franco Mellafe became a director on April 21, 2015. He has also served as member of the board of directors of Forestal Arauco and Inversiones Angelini y Compañía Limitada since July 2013. Mr. Mellafe holds a Master’s Degree in Business Administration from Babson College and an undergraduate degree in Business Administration from Gabriela Mistral University. Before joining our Board of Directors, Mr. Mellafe worked for twelve years in different positions in Arauco.

Juan Ignacio Langlois became a director on April 26, 2016. He is also Partner of Tyndall Group. Mr. Langlois currently serves as a member of the board of directors of Metrogas S.A. He also serves as alternative director of Minera Las Cenizas S.A. Mr. Langlois received a law degree with maximum distinction from the Universidad de Chile School of law as well as a master’s degree in business administration (MBA) from the Kenan-Flagler Business School, University of North Carolina at Chapel Hill.

Jorge Bunster served as a member of the Board of Directors of the Company between April 1994 and March 2010, when he voluntarily resigned to assume the position of Vice Minister of Foreign Trade at the Ministry of Foreign Affairs of Chile, and subsequently, on April 2012, as Minister of Energy until March of 2014. Mr. Bunster serves as a member of the boards of directors of COPEC, Orizon S.A. and Empresa Pesquera Eperva S.A. Mr. Bunster holds degrees in commercial engineering and economics from the Catholic University of Chile and a master’s degree in business administration from IESE, Navarra University, Spain.

Executive Officers

Our executive officers are appointed by the Board of Directors and hold office at its discretion. Our current principal executive officers and the directors of each area or department are listed below.

 

Name

  

Years with

   Arauco   

  

Position

     Age  

Matías Domeyko (1)

   32   

Chief Executive Officer

   57

Cristián Infante

   23   

President & Chief Operating Officer

   52

Gianfranco Truffello

   24   

Chief Financial Officer

   50

Robinson Tajmuch

   28   

Senior Vice-President Comptroller

   62

Iván Chamorro

   18   

Senior Vice-President Human Resources & EHS

   45

Franco Bozzalla

   29   

Senior Vice-President Wood Pulp & Energy

   56

Charles Kimber

   33   

Senior Vice-President Commercial & Corporate Affairs

   57

Antonio Luque

   26   

Senior Vice-President Wood Products

   62

Camila Merino

   8   

Senior Vice-President Forestry

   51

Gonzalo Zegers

   11   

Senior Vice-President International & Business Development

   58

Felipe Guzmán

   11   

General Counsel

   49

Pablo Franzini

   14   

Senior Vice-President International

   44

 

(1)

Matías Domeyko worked at Arauco from 1987 to 1994. He rejoined Arauco in 1997.

Included below are brief biographical descriptions of each of our executive officers and the directors of each area or department.

Matías Domeyko is the Chief Executive Officer of Arauco. Mr. Domeyko worked at Arauco from 1987 to 1994, and then rejoined in 1997 as our Chief Financial Officer. In 2005, Mr. Domeyko assumed the position of Chief Executive Officer of Arauco. He previously served as the Director of Development of Copec. Mr. Domeyko holds a degree in commercial engineering from the University of Chile.

 

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Cristián Infante is the President & Chief Operating Officer of Arauco, a position that was created by Arauco in July 2011. He joined Arauco in 1996 as a wood pulp sales representative, and in 1998 was appointed sales manager for industrial lumber and remanufactured products of Forestal Arauco. He then moved to Centromaderas S.A., where he worked until 2001. Mr. Infante later served as the Corporate Management & Development and Atlantic Region Managing Director. Mr. Infante holds a degree in civil engineering from the Catholic University of Chile.

Gianfranco Truffello is the Chief Financial Officer of Arauco. He joined Arauco in 1994 and was previously our Finance Manager. He also served as the Chief Financial Officer of Arauco Argentina S.A. Mr. Truffello holds a degree in civil engineering from the Catholic University of Chile and a master’s degree in business administration from the Massachusetts Institute of Technology.

Robinson Tajmuch is the Senior Vice-President Comptroller of Arauco. He joined Arauco in 1991 and was previously our Comptroller. Before joining Arauco, he served as Auditing Manager at Pricewaterhouse. Mr. Tajmuch holds a degree in accounting and auditing from the Santiago University of Chile.

Iván Chamorro is the Senior Vice-President Human Resources & EHS of Arauco. He holds a degree in civil engineering and MBA from the Catholic University of Chile. Mr. Chamorro joined the company in 2001, working in the commercial department and later, as its Manager of Public Affairs and Communications.

Franco Bozzalla is the Senior Vice-President Wood Pulp & Energy of Arauco. He joined Arauco in 1990. He was formerly a sales representative of Forestal Arauco and the Panels Area Managing Director. Mr. Bozzalla holds a degree in civil engineering from the Catholic University of Chile.

Charles Kimber is the Senior Vice-President Commercial & Corporate Affairs of Arauco. He graduated from the Catholic University of Chile with a degree in Commercial Engineering and joined Arauco in 1986, where he has held several positions in sales. He was previously Managing Director of Arauco Wood Products Inc.

Antonio Luque is the Senior Vice-President Wood Products of Arauco. He joined Arauco in 1993. Before joining Arauco, he was the General Manager of Cabildo S.A. and a research engineer at Compañía Industrial. Mr. Luque holds a degree in civil engineering from the University of Chile.

Camila Merino is the Senior Vice-President Forestry of Arauco. Prior to joining Arauco, Ms. Merino served as the Labor Minister of the Chilean government. She also served as Chief Executive Officer at Metro de Santiago and Corporate Vice President at SQM. Ms. Merino holds a degree in civil engineering from the Catholic University of Chile and a master’s degree in business administration from the Massachusetts Institute of Technology.

Gonzalo Zegers is the Senior Vice-President International & Business Development of Arauco. He joined Arauco in 2008. Before joining our Company, he was the general manager of Agrofruta S.A. from 1991 to 1995, Chief Financial Officer (1995-1996) and Chief Executive Officer (1996-2005) of Masisa, and Chief Executive Officer of ATC Panels Inc. (USA) until 2008. Mr. Zegers holds a degree in commercial engineering from the Santiago University of Chile.

Felipe Guzmán is the General Counsel of Arauco. He joined Arauco in December 2008. Before joining our Company, he worked at the law firm Portaluppi, Guzmán & Bezanilla (1996-2008), and he spent a year as an International Associate at Simpson, Thacher & Bartlett in New York (2000-2001). Mr. Guzmán holds a law degree from Finis Terrae University, and a Master of Law from Duke University.

Pablo Franzini is Arauco’s Senior Vice President International. He has worked in the Company since 2005, performing in the financial, logistic and commercial areas of Arauco in Argentina, and later held the position of Managing Director at Arauco Brasil. He is a Business Economics graduate from Torcuato Di Tella University, Argentina, and has an MBA from Erasmus Universiteit in Rotterdam, Netherlands.

Compensation

For 2018, the aggregate compensation of all our directors and executive officers and senior managers paid or accrued in that year for services in all capacities, including salaries and compensation for their service to those executive officers who serve as directors, was U.S.$2.6 million. We do not maintain any pension or retirement programs or incentive compensation plans for our directors or executive officers. We also do not maintain any plans providing for benefits upon termination of employment. The following table sets out the compensation of our directors, executive officers and senior managers for their services in 2018.

 

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Name

   2018  

Manuel Bezanilla

   U.S.$ 569,811  

Roberto Angelini

     339,533  

Jorge Andueza

     339,533  

Cristián Infante

     108,990  

Matías Domeyko

     108,990  

Jorge Garnham M.

     73,703  

Alberto Etchegaray

     127,272  

Eduardo Navarro

     127,272  

Timothy C. Purcell

     127,272  

Franco Mellafe

     188,262  

Alvaro Saavedra

     88,152  

Jorge Serón

     12,714  

Robinson Tajmuch

     14,739  

Antonio Luque

     18,000  

Gonzalo Zegers

     24,000  

Pablo Ruival

     18,456  

Sergio Gantuz

     18,456  

Camila Merino

     30,714  

Jorge Bunster

     127,272  

Pablo Mainardi

     18,456  

Juan Ignacio Langlois

     127,272  

Pablo Franzini

     6,000  
  

 

 

 

Total Compensation

     2,614,867  
  

 

 

 

 

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Board Practices

In 2013, we created an audit committee, which was composed of two directors, Jorge Andueza and Timothy C. Purcell, as well as the Chief Executive Officer of Arauco, the Chief Operating Officer of Arauco, the Senior Vice-President Comptroller of Arauco and the General Counsel of Arauco. Our securities are not listed on any U.S. national securities exchange and, therefore, we are not subject to the rules relating to audit committees imposed by the Sarbanes-Oxley Act of 2002, as amended. In the Board of Director´s Meeting of November 24, 2015, it was agreed to reinforce the role of the audit committee, giving it new powers and amplifying its members. It is now composed by three directors: Jorge Andueza, Timothy C. Purcell, and Eduardo Navarro, as well as the Chief Executive Officer of Arauco, the President and Chief Operating Officer of Arauco, the Senior Vice-President Comptroller of Arauco, and the General Counsel of Arauco. It was also agreed that it would report to the Board of Directors on a biannual basis.

We also have an ethics committee that ensures compliance with our ethics code, which defines, promotes and regulates behavior of professional and personal excellence consistent with our philosophy and values to be followed by all our staff. The members of the ethics committee are Jorge Andueza (second vice president of the Board of Directors), Matías Domeyko (CEO), Cristián Infante (President and COO) and Felipe Guzmán (General Counsel).

Employees

The following table provides a breakdown of our employees by main category of activity as of the end of each year in the three-year period ended December 31, 2018.

 

      2018      2017      2016  

Executives

     448        498        450  

Professionals and Technicians

     5,059        4,453        4,192  

Workers

     11,745        10,428        9,597  
  

 

 

    

 

 

    

 

 

 

Total

     17,252        15,379        14,239  

Under Chilean and Brazilian labor legislation, we are secondarily liable for the payment of labor and the social security obligations owed to employees of our contractors. In Chile, in the event that we do not exercise the rights granted to us by the labor laws regarding the supervision of our contractors in their compliance of their labor and social security obligations, then our responsibility is elevated from secondary to joint and several, thus enabling an employee of a contractor to bring a claim relating to these obligations against both the contractor and to us, as the party hiring such contractor, although the contractor would remain primarily liable for such obligations. Furthermore, as a general rule, we are also responsible for some of the health and safety conditions of the contractors’ workers, and we are obligated to supervise the compliance by our contractors with all obligations related to such conditions while such workers are performing activities for us within our corporate purpose.

In Argentina, substantially similar joint liability rules apply to a principal and its contractors. In addition, national rural labor law, Law No. 26,727, promulgated on December 28, 2011 and fully operational in March 2013 after publication of certain relevant regulations, permits contractor employees under forestry contracts to bring actions directly against the principal to whom the employees’ services are being provided, instead of requiring them to bring actions against the contractor. For work or services related to the ordinary production process of a principal, the law provides that an employment relationship exists between the principal and the employee of the contractor.

Approximately 53% of our employees in Chile, 49% of our employees in Argentina, 30% of our employees in Uruguay, 9% of our employees in Brazil and none of our employees in the United States or Canada were unionized as of December 31, 2018. We negotiate collective bargaining agreements of two, three or four years’ duration with unionized employees.

We have stable employee relations in Chile, Argentina, Brazil, Uruguay, the United States and Canada.

In Chile we experienced (i) one stoppage during April 2018 (lasting nine days), (ii) three stoppages caused by employees of our third party contractors in our Horcones complex during February (lasting two days), April (lasting two days) and November (lasting five days) of 2017; (iii) seven separate occasions of blockades during 2016, which included stoppages in the Horcones complex for four days and another for one day; a three-day stoppage at the entrance of our El Colorado sawmill; three one-day stoppages in our Viñales sawmill during the months of April, August and November 2016; and a three-day stoppage in our Constitución Mill during May 2016; (iv) four separate occasions of transportation contractors blocking the entrance of our Horcones complex on January 13, February 17, March 24, and September 21, 2015; (v) a one-day stoppage at the Valdivia Pulp Mill on June 12, 2014 and an eight-day stoppage between August 29 and September 5, 2014, caused by employees of third party service providers, and (vi) four separate occasions of transportation contractors blocking the entrances of our Horcones complex on February 24 and 25, September 3, October 22 and 23, and November 20, 2014. During 2015, the pulp union carried out three work stoppages and blockade; the first event occurred on May 25 lasting three days; the second on August 3, lasting three days; and the last one on September 1, which lasted 14 days.

 

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Our Argentine operations have not experienced any work stoppages in the last five years other than (i) a four-day stoppage at Arauco Argentina’s pulp mill in December 2014, as a result of a strike by the pulp union; (ii) a five-day stoppage at Arauco Argentina’s mill in Misiones in January 2015, as a result of a road blockage lead by the truckers union; (iii) a 6-hour stoppage in Arauco Argentina’s mill in Zarate; and a stoppage of three days during May 2015 and August 2015, as well as a 14-day stoppage during September 2015 in Arauco Argentina’s pulp mill, Puerto Esperanza. During December 2018, we renewed the collective bargaining agreement with the chemical union that represents the employees of Petroquímica General San Martín.

Our Brazilian operations have not experienced any work stoppages in the last eight years, other than a generalized truckers strike in 2018 that affected our operations. As a consequence of this event, the Company was prevented from receiving raw materials and dispatching products, and our employees could not easily access our Brazilian mills during such time, which resulted in a stoppage of ten days.

During 2018, our Uruguayan operations have not experienced any relevant work stoppages. Also, during 2018 and 2017, we entered into a labor agreement with unions representing the employees of our pulp mill and forestry nursery in Uruguay.

On June 4, 2016, the Montes del Plata mill’s activity was suspended for five days as a result of labor unrest involving employees of our logistics contractors, who blocked the access to the mill.

During 2014, we experienced 7.5 days of work stoppages during the final phase of construction at Montes del Plata in Uruguay and the start of operations, caused by contractors and third parties. During 2015, there were 28 minor events amounting to 5.5 days of work stoppages, caused by transportation and timber logistics contractors. Montes del Plata is the name of the 50/50 joint operation between Arauco and Stora Enso in Uruguay.

During the last seven years, there have been no strikes or other material work stoppages at our U.S. and Canadian subsidiaries.

 

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SHARE OWNERSHIP

Our First Vice-Chairman, Roberto Angelini, owns directly and indirectly 29.7% of Inversiones Angelini y Compañía Limitada, or Inversiones Angelini, which is the principal shareholder of AntarChile. He directly owns 0.2% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Roberto Angelini beneficially owns 11.6% of our shares. Our Director Franco Mellafe owns indirectly a 4.9% of Inversiones Angelini. He also directly owns 0.059% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Franco Mellafe beneficially owns 1.96% of our shares.

None of our other directors or executive officers beneficially owns 1% or more of our shares.

 

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Item 7. Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

Our only outstanding voting securities are shares of common stock of a single series, without nominal (par) value. The following table sets forth certain information concerning ownership of our common stock, as of April 2, 2019, with respect to each shareholder known by us to own more than 5% of the outstanding shares of our common stock and all of our directors and executive officers, as a group.

 

     Number of
Shares Owned
     Percentage
Ownership
 

Empresas Copec

     113,134,814        99.98  

Directors and executive officers of our Company, as a group

     —          —    

Through its ownership of our Common Stock, Empresas Copec currently has voting control over us.

Empresas Copec is a Chilean public company listed on the Santiago Stock Exchange and the Chilean Electronic Stock Exchange. It is a holding company, the principal interests of which are in Arauco, gasoline distribution, electricity, gas distribution, fishing and mining. Before October 1, 2003, Empresas Copec’s legal name was Compañía de Petróleos de Chile S.A. As of that date, Compañía de Petróleos de Chile S.A. transferred all its gasoline and fuel-related business assets to a new subsidiary, Compañía de Petróleos de Chile COPEC S.A., and changed its legal name to Empresas Copec S.A. As of December 31, 2018, AntarChile owned 60.8% of Empresas Copec.

Through its ownership in Empresas Copec, AntarChile beneficially owned 60.8% of our shares as of December 31, 2018. As of April 2, 2019, AntarChile beneficially owned 60.8% of our shares. Inversiones Angelini in turn owns 63.4% of AntarChile’s shares, and certain other related investors own an additional 10.9% of AntarChile. Inversiones Angelini and such other investors are defined herein as the “Angelini Group.”

The principal equity owners of interest in Inversiones Angelini are Mrs. María Noseda Zambra with 10.9%, Mr. Roberto Angelini Rossi directly and indirectly with 29.7%, and Mrs. Patricia Angelini Rossi directly and indirectly with 24.3%. Mrs. María Noseda Zambra passed away on April 15, 2018.

As of December 31, 2018, and April 2, 2019, the Angelini Group controlled Arauco through the ownership structure described above.

 

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RELATED PARTY TRANSACTIONS

We engage in a variety of transactions in the ordinary course of business with related parties. Related parties include, among others, directors, officers and affiliates of our Company. The norms for transactions with related parties by and among public corporations and their subsidiaries are mainly regulated by Title XVI of the Chilean Companies Act, or Title XVI, which was included by Law No. 20,382 published in the Official Gazette on October 20, 2009, and articles 44 and 89 of the Chilean Companies Act. Title XVI requires that our transactions with related parties contribute to our Company’s interest and be on a market basis or on terms similar to those prevailing in the market. In addition, Title XVI provides that related party transactions must be approved by an informed majority of the disinterested members of the Board of Directors. If a majority of the disinterested directors abstains from voting on a particular transaction, the transaction must be approved by a unanimous vote of the non-abstaining disinterested directors or by two-thirds of the shares with voting rights. Resolutions approving any such transactions must be reported to our shareholders at the next annual shareholders’ meeting.

Notwithstanding the above, in accordance with Article 147 of the Chilean Companies Act, our Board has resolved that the following transactions with related parties do not need to follow the procedure set forth in the previous paragraph: (i) transactions which do not involve material amounts; (ii) transactions with affiliates in which we control 95% or more of the equity; and (iii) transactions that are considered by our Board to be performed in the ordinary course of our business in accordance with our general policy of customary dealings, which was approved by our Board on March 27, 2018 and is available to shareholders at our main office and is published on our website, at www.arauco.cl or www.arauco.com.

Article 146 of the Chilean Companies Act defines related party transactions as negotiations, acts, contracts or transactions between a corporation and any other person or entity that involve the following:

 

   

directors or officers of the corporation (or their respective spouses and certain other relatives) acting on their own or on behalf of persons different from the corporation;

 

   

directors or officers of the corporation (or their respective spouses and certain other relatives) who have a direct or indirect ownership interest of at least 10% of the equity shares of the other company or are also directors or officers of such other company;

 

   

persons who have been in the last 18 months previous to the transaction, directors or officers of the corporation; and

 

   

“related persons” of the corporation, as defined in article 100 of the Chilean Securities Markets Law.

Article 100 of the Chilean Securities Markets Law establishes that the following are “related persons” to a company: (i) the entities of the grupo empresarial (corporate group) to which such company belongs; (ii) the entities that are either parent company, subsidiary, owners of at least 10% of the equity of a company or other companies in which the company owns at least 10%; (iii) directors or officers of the company (or their respective spouses and certain other relatives); (iv) any person who, individually or with other persons under a voting agreement can designate at least one member of the management of the company or control at least 10% of the capital of such company; and (v) any other person who is indicated as such by the Chilean Superintendencia de Valores y Seguros, which has been replaced by the Commission for the Financial Market since January 2018, in accordance with certain parameters established by the above-mentioned Article 100.

Our transactions with affiliates include the following:

 

   

We purchase goods and services that may also be provided by other suppliers. Among the most significant are our fuel purchases from COPEC, a subsidiary of Empresas Copec, our majority shareholder;

 

   

We purchase port services from our 20.2% affiliates Puertos y Logística S.A. (formerly Puerto de Lirquén S.A.) and Puerto Lirquén S.A. (formerly Portuaria Sur de Chile S.A.), and our 50% affiliate Compañía Puerto de Coronel S.A. On April 5, 2019, we sold such equity interest to DP;

 

   

We purchase from EKA Chile, a chlorate sodium supplier, which is 50% controlled by Arauco, and we provide EKA Chile with electricity; and

 

   

We obtain legal services from Portaluppi, Guzmán y Bezanilla, a law firm of which one of our directors, Manuel Bezanilla, is a partner. In addition, José Tomás Guzmán, a former director who resigned in December 2015, is also a partner of such firm.

Financial information concerning transactions with affiliates is included in Note 13 to our audited consolidated financial statements.

 

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Item 8. Financial Information

See “Item 18.—Financial Statements.”

EXPORT SALES

Export sales constituted 67.8% of our revenues for the year ended December 31, 2018. Our total export revenues for 2018 were U.S.$4,040.2 million. Our principal overseas markets are Asia, North America and Western Europe. See “Item 4. Information on our Company—Description of Business—Domestic and Export Sales.”

 

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LEGAL PROCEEDINGS

From time to time, we have been subject to environmental proceedings related to allegations by the Chilean environmental regulators and private parties. We are also subject to certain other legal proceedings arising from the ordinary course of our business. For more information regarding the environmental proceedings and other legal proceedings see Note 18 to our audited consolidated financial statements.

While Chilean law in general provides that only individuals can be convicted in criminal actions, there are several regulations that provide exceptions to this general rule, under which criminal responsibility of legal entities can be established for criminal offenses related to, among others, the financing of terrorism, asset laundering, receiving or bribery. We do not have knowledge of any fact that could result in our criminal responsibility under such regulations.

We are also subject to certain administrative proceedings as a result of the death of fish in the Cruces River in January 2014, and a pipe leakage in the Arauco Mill in February 2016, both of which are currently under investigation by the competent authorities. In addition, in 2016 the Superintendence of the Environment initiated administrative proceedings against the Valdivia, Nueva Aldea, Licancel and Constitución mills. In 2017, the Superintendence of the Environment initiated an administrative proceeding against the Arauco Mill. The first part of the proceeding against the Valdivia Mill concluded in 2017. On December 15, 2017, the Superintendence of the Environment decided that the Valdivia Mill was liable for ten out of eleven charges and imposed a fine of 7,777 UTA (approximately U.S.$6.5 million as of December, 2018). We appealed this decision on April 5, 2018 before the Third Environmental Court. A final decision by the Third Environmental Court is expected to be rendered during 2019 and may be further appealed before the Supreme Court. In 2016, the Nueva Aldea and Constitución mills decided to submit compliance programs according to applicable regulations, both of which were approved by the Superintendence of the Environment. These programs require the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. In December 2018, the Nueva Aldea mill’s compliance program was officially terminated (“declaración de ejecución satisfactoria”) by the Superintendence of the Environment. With regard to the Constitución mill’s compliance program, once the activities are completed, the proceedings will end. We expect that such proceedings will end in 2019. With regard to the Licancel Mill, the Company filed its defense in June 2016. In February 2017, the Superintendence of the Environment found the Licancel Mill liable for three out of four charges and imposed a fine of 239 UTA (approximately U.S.$205,000). This decision was appealed before the above Superintendence, which on August 7, 2017, materially reduced the fine. Arauco paid the fine and this case was closed. Finally, with regard to the proceeding against Arauco Mill, the Company filed its defense in September 2017 and, in May 2018, the Superintendence of the Environment found the Arauco mill liable for two charges and imposed a fine of 699,6 UTA (approximately U.S.$635,000). Arauco paid the fine with a 25% reduction (using a benefit established by Chilean law) and this case has been closed.

Tax Litigation in Argentina

On December 14, 2007, the Administración Federal de Ingresos Públicos (Federal Administration of ublic Revenues, or AFIP), Argentina’s internal revenue service, notified our Argentine subsidiary, Alto Paraná S.A., which effective January 1, 2015, changed its name to Arauco Argentina S.A., or Arauco Argentina, of a claim for alleged unpaid taxes for fiscal years 2002, 2003 and 2004 in the aggregate amount of AR$418 million (or approximately U.S.$22 million at December 31, 2017 exchange rate) including principal, interest and penalties accrued through such date, arising from a dispute regarding certain income tax deductions (related to debt issued by Arauco Argentina in 2001 and repaid in 2007) taken by Arauco Argentina and challenged by the AFIP. On February 8, 2010, the Tribunal Fiscal de la Nación (Argentina’s Tax Court), issued an administrative ruling requiring that Arauco Argentina pay the AFIP’s claim in full.

Arauco Argentina appealed this administrative ruling to the Court of Appeals, in addition to filing an injunctive action requesting that the court stay Arauco Argentina’s payment obligation until resolution of its pending appeal. On May 13, 2010, the Court of Appeals granted an injunction of Arauco Argentina’s payment obligation in exchange for the posting of a surety bond in the amount of AR$633.6 million (or approximately U.S.$34 million at December 31, 2017 exchange rate). On December 28, 2012, the Court of Appeals dismissed Arauco Argentina’s appeal. Arauco Argentina appealed this decision before the Argentine Supreme Court of Justice, or the Argentine Supreme Court. The appeal was under consideration by the Argentine Supreme Court since May 29, 2013.

On July 22, 2016, Argentine Law N° 27,260 was promulgated, which established a regime for the exceptional regularization of tax, social security and customs obligations that were at that time subject to judicial proceedings (the “Regularization Regime”).

 

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In September 2016, and considering the significant advantages offered by the Regularization Regime, Arauco Argentina accepted participating in the regime in relation to the above-mentioned claim by AFIP. Entering the Regularization Regime meant for Arauco Argentina the exemption of the applicable fines as well as the release of a portion of accrued interests. As a result, the disbursement amounted to AR$ 248.5 million (or approximately U.S.$13 million at December 31, 2017 exchange rate). Additionally, Arauco Argentina must carry out the payment of the costs and expenses to be determined by the courts, determination which is still pending at the time of this annual report. The decision to enter into the Regularization Regime required an unconditional release of Arauco Argentina in relation to the regularized obligations, as well as the release and waiver of any action derived for it in the above proceedings. On November 1, 2016, the Supreme Court accepted Arauco Argentina’s release and ordered the return of the file to the competent court. On April 18, 2017, Chamber I of the National Court of Appeals declared that the Company had abandoned its actions and rights, including its repetition rights, thus condoning the fine and the corresponding interests. Additionally, the Court of Appeals deferred the court fee determination until payment of the state attorneys has been decided by the lower court, ordering as well, the reimbursement of the contingency insurance posted. The bond has been released and returned to the insurance company. The fees of the state’s lawyers have been determined by the lower Court and the Court of Appeals and the Company is paying fees in installments, as permitted by the “Regularization Regime”.

Tax Litigation in Chile

On August 25, 2005, the Chilean IRS issued tax calculations No. 184 and No. 185 of 2005 objecting to certain capital reduction transactions effected by Arauco on April 16, 2001 and October 31, 2001, and furthermore, requesting reimbursement for amounts returned to us in respect of certain claimed tax losses. On November 7, 2005, we requested a Revisión de la Actuación Fiscalizadora (Review of the Supervision Action, or RAF), which is an administrative review of the tax action brought by the Chilean IRS, and subsequently, a claim was filed against the above-mentioned tax calculations No. 184 and No. 185 of 2005. The RAF was resolved on January 9, 2009 by the Chilean IRS, which resolution, however, only partially sustained our request. In response, we filed an additional complaint with regard to the portion of the RAF that was not granted administrative review. On September 20, 2017, the Chilean Tax and Custom Court resolved to confirm the Chilean IRS tax calculations No. 184 and No. 185. On October 12, 2017, Arauco appealed this decision before the Santiago Court of Appeals. On June 29, 2018, the Santiago Court of Appeals confirmed the first instance ruling. On July 19, 2018, Arauco filed a “recurso de casación en el fondo y en la forma” (nullity recourse) before the Supreme Court. As of the date of this annual report, the aforementioned nullity recourse is still under review.

Our Company believes that its position in respect of this complaint is supported by solid legal arguments and that there is a reasonable likelihood that this matter will result in a favorable outcome for us. However, if this result does not occur, it is possible that an obligation will arise for the amount specified, which was Ch$3,362,265,453 (equivalent to U.S.$5.02 million), plus any accrued interest as of the payment date.

Tax Litigation in Brazil

On November 8, 2012, Brazilian Tax Authorities issued an Infraction Notice against one of our Brazilian subsidiaries, Arauco do Brasil S.A., for alleged unpaid taxes purportedly due by such company for the years 2006 to 2010 in the aggregate amount of R$172 million (approximately U.S.$85 million). In particular, the Tax Authorities (i) objected to the deductibility of certain payments made and expenses incurred (including premium amortization, interest and legal expenses) by Arauco do Brasil between 2005 and 2010 and (ii) alleged that Arauco do Brasil made certain underpayments in respect of the Brazilian Corporate Income Tax and the Brazilian Social Contribution on Net Profits during 2010. Currently, the aggregate amount of the claims asserted in the Infraction Notice, plus interest, correspond to R$185 million (approximately U.S.$79 million).

On December 11, 2012, Arauco do Brasil filed an objection to cancel the Infraction Notice before the Judgment Office of the Brazilian Revenue Service, first administrative level.

On July 20, 2015, the Judgment Office of the Brazilian Revenue Service rejected Arauco do Brasil’s objection. Arauco do Brasil filed an appeal before the CARF (Conselho Administrativo de Recursos Fiscais), which is the second administrative level.

The CARF’s decision occurred on May 16, 2017, which accepted some of the company’s arguments but maintained other charges. On September 27, 2018, Arauco do Brasil S.A. was notified of CARF’s decision, which determined the current value of the alleged infraction in R$ 57.5 million (equivalent to U.S.$ 14.45 million, as per the R$/U.S.$ exchange rate as of March 28, 2019), plus interest and inflation adjustments until the end of the trial. Arauco do Brasil S.A.filed a motion for clarification (embargos de declaración), requesting the CARF to clarify certain aspects of the decision. On January 25, 2019, the CARF decided that there were no clarifications or omissions pending, and therefore, the company filed a special resource (recurso especial) with the Superior Chamber of Fiscal Appeals of the CARF (Cámara Superior de Recursos Fiscales, or CSRF) on February 2, 2019, reiterating the arguments of the company regarding the issues under discussion. As of the date of this annual report, the decision with respect to such special resource is pending. In accordance with the decision regarding the motion for clarification, CARF calculated the amount under discussion at R$ 58,059,580.30 as of January 31, 2019 (equivalent to U.S.$ 14.59 million, as per the R$/U.S.$ exchange rate as of March 28, 2019), plus interest and inflation adjustments from January 31, 2019 until the end of the trial.

 

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We consider that Arauco do Brasil S.A.’s objection to the Infraction Notice is supported by solid legal arguments and that there is a reasonable chance that this matter will result in a favorable outcome for Arauco do Brasil S.A.. If the special recourse is rejected, the company will be able to discuss the Infraction Notice before the Brazilian courts of justice. However, if the cancellation of the Infraction Notice does not occur, it is possible that an obligation will arise for the amount above specified, plus any accrued interest and penalties as of the payment date.

 

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DIVIDEND POLICY

Chilean law currently requires that, unless otherwise decided by the unanimous vote of our issued and subscribed shares eligible to vote, public corporations distribute a cash dividend in an amount equal to at least 30% of the corporation’s consolidated net income for each year, unless and except to the extent the corporation has unabsorbed losses from prior years. In April 2002, our shareholders approved the current dividend policy, setting the cash dividend at 40% of our consolidated net income for each year, which was determined on a Chilean GAAP basis through the year ended December 31, 2008, and has been determined on an IFRS basis since January 1, 2009. In accordance with IFRS, the determination of the dividend amount is based on the effective realized profit net of any relevant variations in the value of unrealized assets and liabilities.

For the year ended December 31, 2014, under IFRS, our results were affected by an increase in our deferred taxes resulting from the increase of the tax rate set forth in Law No. 20,780. However, according to Oficio Circular 856 of the SVS dated October 17, 2014, we were required to record the difference in assets and liabilities for deferred taxes as a charge to our net worth for purposes of our financial statements reported to the SVS. As such, our annual dividend distribution for the year ended December 31, 2014 was based on our profit calculated according to IFRS, as modified by Oficio Circular 856 of the SVS. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile—A tax reform bill with significant changes for companies was approved in September 2014 and the Chilean Superintendence of Securities and Insurance, or SVS, modified accounting reporting standards for companies under its supervision in October 2014.”

On April 21, 2015, our shareholders approved a final dividend of U.S.$0.866672295 per share for 2014, which was distributed on May 13, 2015. On November 24, 2015, our Board of Directors approved an interim dividend of U.S.$0.385117532 per share, which was distributed on December 16, 2015. On April 26, 2016, our shareholders approved a final dividend of U.S.$0.876827598 per share for 2015, which was distributed on May 11, 2016. On November 22, 2016, our Board of Directors approved an interim dividend of U.S.$0.2613312999 per share, which was distributed on December 14, 2016. On April 25, 2017, our shareholders approved a final dividend of U.S.$0.52142834529 per share for 2016, which was distributed on May 10, 2017. On November 28, 2017, our Board of Directors approved an interim dividend of U.S.$0.5345863395 per share, which was distributed on December 20, 2017. On April 24, 2018, our shareholders approved a final dividend of U.S.$1.0054189337 per share for 2017, which was distributed on May 10, 2018. On November 27, 2018, our Board of Directors approved an interim dividend of U.S.$1.2571231207 per share, which was distributed on December 12, 2018. On March 26, 2019, our Board of Directors approved a final dividend of U.S.$1.6086974655 per share for 2018, to be distributed on May 8, 2019, all of which is subject to shareholders’ approval at the meeting to be held on April 23, 2019.

Although the Board of Directors has no current plans to recommend changes in our dividend policy, the policy has been changed in the past and no assurance can be given that the policy will not be changed in the future, due to changes in Chilean law, capital requirements, operating results or other factors.

Item 9. The Offer and Listing

Neither our stock nor our SEC-registered securities are listed on any stock exchange or other regulated market.

Trading in our securities takes place primarily in the over-the-counter market. Accordingly, we are unable to obtain reliable information on such trading.

 

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Item 10. Additional Information

ARTICLES OF INCORPORATION AND BY-LAWS

When we refer to the “Company,” “Arauco” or “we,” in this description of the articles of incorporation and by-laws, we mean Celulosa Arauco y Constitución S.A.

Organization and Registration

We are a sociedad anónima (corporation) organized in Chile under the laws of Chile, subject to certain rules applicable to sociedades anónima abiertas (Chilean public corporations), which bylaws were approved on August 18, 1971, by resolution 300-S of the Chilean Securities Commission and recorded in the Santiago Commercial Register of 1971 on page 6433 under entry number 2994 and on page 6431 under entry number 2993. Notice was published in the Official Gazette on September 4, 1971.

Objects and Purposes

Our purpose, as stated in our estatutos (by-laws), includes the manufacture of forestry products, the management of forestry lands and other activities.

Capital

In 2002, our by-laws were amended such that our capital is denominated in U.S. dollars. In 2002, we and two of our subsidiaries, Aserraderos Arauco and Paneles Arauco, which are currently merged into Maderas Arauco (formerly Paneles Arauco), received authorization from the Chilean IRS to prepare our audited consolidated financial statements in U.S. dollars, beginning January 1, 2002. On January 1, 2003, our subsidiaries Forestal Arauco, Bosques Arauco, Forestal Valdivia, Forestal Celco, which are currently merged into Forestal Arauco (formerly Forestal Celco), and Cholguán obtained the same permission from the Chilean IRS. The same permission from the Chilean IRS was obtained by our subsidiary Arauco Internacional in January 2003, by our subsidiary Forestal Los Lagos in January 2005 and by our subsidiaries Arauco Bioenergía S.A. and Servicios Logísticos Arauco S.A in January 2008.

Directors

Pursuant to our by-laws, our Board of Directors is composed of nine members elected at a regular meeting of our shareholders. Our directors are not required to be shareholders. Our by-laws state that the amount of compensation to be received by the directors for their directorial services shall be fixed by the shareholders’ meeting. Directors may be compensated for any non-directorial services rendered to us at levels of compensation comparable with compensation commonly paid for these services, compensation which is compatible with the directors’ compensation fixed by the shareholders’ meeting. The by-laws also state that our Board of Directors has all the authorities of administration and disposal that Chilean law or the by-laws do not confer upon the shareholders’ meeting. The Board of Directors has the right to act on our behalf without the need for a special power of attorney, even in cases where a power of attorney is required by law. In particular, the by-laws provide that the Board of Directors is empowered to encumber our assets, real and personal property with mortgages, easements or pledges regardless of the value of such property or the amount of the respective encumbrances and to borrow money paying interest, with or without a guaranty for the loan.

Our by-laws provide that we may enter into acts or contracts in which one or more directors are interested only if the interested director’s interest is made known to the board, the acts or contracts are approved by the board and the terms of the act or contract conform to those prevailing in the market. In addition, board resolutions approving interested director transactions must be reported by the chair of the meeting at the first shareholders’ meeting following the approval of the interested director transaction. See “Item 7. Major Shareholders and Related Party Transaction” for further information on related party transactions.

See “Item 6. Directors, Senior Management and Employees” for further information about our Board of Directors.

Shareholders

Our share capital consists of common stock shares of a single series, without nominal (par) value issued in registered form. Record holders of shares are registered in our share register. Any transfer of shares must be noted in our share register.

 

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Voting Rights

Each share of our stock entitles the holder to one vote at any meeting of shareholders. Resolutions may be taken upon a vote of an absolute majority of the voting shares present or represented. Any resolution relating to amendments to our by-laws must be approved by an absolute majority of the voting shares issued. Resolutions with regard to the following matters, among others, require the affirmative vote of two-thirds of the voting shares issued:

 

   

transformation, including division or merger with another company;

 

   

advanced dissolution;

 

   

change of corporate domicile;

 

   

reduction in our equity capital;

 

   

approval and appraisal of non-cash capital contributions;

 

   

reduction in the number of members of the Board of Directors;

 

   

the disposal of 50% or more of our assets, whether or not such disposal also includes any of our liabilities; the disposal of 50% or more of the assets of one our subsidiaries, provided that such subsidiary represents at least 20% of our assets; and any disposal of shares by our Company that causes us to lose control of a subsidiary that represents at least 20% of our assets; and

 

   

changes to the way in which corporate benefits will be distributed.

According to our by-laws, holders of our shares also have the right to vote at the regular shareholders’ meeting for the election of directors. Shareholders or their representatives may accumulate their votes in favor of one candidate or distribute them among various candidates. A vote on the election of directors may be omitted if an election is proposed by acclamation and none of the shareholders present or represented opposes the motion. The Board of Directors may also be dismissed by a regular or special shareholders’ meeting, though the shareholders may only vote to dismiss the board as a whole.

Changes to Shareholders’ Rights

To change the rights of holders of our shares or create a new series of our shares, we must amend our by-laws. Any reduction of the rights of our shares requires a two-thirds majority vote of all holders of our shares under Chilean law. Chilean law also requires that public corporations distribute a cash dividend in an amount equal to at least 30% of the corporation’s consolidated net income for each year (on an IFRS basis), unless otherwise decided by a unanimous vote of the corporation’s issued and subscribed shares eligible to vote. Any changes to the way in which corporate benefits are distributed must be approved by a two-thirds majority of all holders of the corporation’s shares.

Shareholders’ Meetings

Our by-laws provide that the Board of Directors shall call shareholders’ meetings. Notice of shareholders’ meetings must be made by a prominent notice published at least three times, on different days, in the newspaper of one of our corporate domiciles, as determined by a shareholders’ meeting, or in the absence of a determination, in the Official Gazette.

A shareholder must be registered in our share register as of the meeting date to be entitled to participate and vote at any shareholders’ meeting. In addition, other persons may represent shareholders at meetings. Powers of attorney must be given in writing and must be granted with respect to all of the shares the shareholder is entitled to vote as of the date of the shareholders’ meeting.

Shareholders’ meetings may be regular or special meetings. Regular shareholders’ meetings are held once a year within the first four months of the year. Among other things, the regular shareholders’ meeting appoints independent external auditors to examine our accounts, inventory, balance sheet and other financial results. The by-laws provide that the following matters are to be considered at regular shareholders’ meetings:

 

   

the review of our results of operations and external auditors’ reports and the approval or rejection of our annual report, our balance sheet and financial statements;

 

   

the distribution of profits of each financial period and the distribution of our dividends;

 

   

the election or dismissal of the members of the Board of Directors; and

 

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any matter of corporate interest that is not considered transacted at a special shareholders’ meeting pursuant to the Chilean law.

Special shareholders’ meetings may be held at any time required by corporate needs to consider any matter that the law or our by-laws require to be considered at a shareholders’ meeting. Our by-laws require the meeting notice to disclose any matters to be discussed at a special shareholders’ meeting. According to the by-laws, the following matters must be considered at special shareholders’ meetings:

 

   

dissolution;

 

   

transformation, merger or division and the amendment of our by-laws;

 

   

the issue of bonds or debentures convertible into shares;

 

   

the disposal of 50% or more of our assets, whether or not such disposal also includes any of our liabilities, and the formulation or modification of any business plan that contemplates the disposal of assets for an amount higher than such percentage; the disposal of 50% or more of the assets of one of our subsidiaries, provided that such subsidiary represents at least 20% of our assets; and any disposal of shares by the Company that causes us to lose control of a subsidiary that represents at least 20% of our assets; and

 

   

the grant of real or personal guarantees to secure obligations of third parties, unless they are subsidiaries, in which case the approval of the Board of Directors will be sufficient.

Any other matters within the competence of regular shareholders’ meetings may be considered at special shareholders’ meetings.

Any act of a shareholders’ meeting relating to our dissolution, transformation, merger or division, the amendment of our by-laws, any disposal of 50% or more of our assets or the issue of bonds convertible into shares or convertible debentures must be held before a notary public, who must certify that the minutes of such meeting are the true expression of what occurred and was resolved at such meeting.

Allocation of Net Income and Distribution of Dividends

Our by-laws provide that the shareholders at a regular shareholders’ meeting shall determine the annual distribution of our net profits for each financial period, within the limitations prescribed by law. The shareholders shall also set the date on which any distribution shall be paid, within the time limits prescribed by law. Chilean law prescribes that distributions shall be paid within 30 days of the regular shareholders’ meeting at which such distribution was determined.

In accordance with Chilean law, in the event of liquidation, capital can be distributed to the shareholders only after the rights of the creditors have been secured or debts owed to creditors have been paid. Our by-laws provide that a shareholders’ meeting will appoint one or more liquidators to carry out the liquidation and to call shareholders’ meetings, as required under Chilean law.

Regulation of and Restrictions on Foreign Investors

There are no limitations on the rights to hold securities, including rights of non-resident or foreign shareholders to hold or exercise voting rights on securities.

Disclosure of Shareholder Ownership

We register certain information about our shareholders in our shareholder registry. We are required to disclose this information to the Chilean Securities Commission on a quarterly basis.

Rights of Shareholders

Our by-laws provide that, in the case of a dispute between shareholders or between shareholders and management, the parties will submit their dispute to an arbitrator, who may determine the procedural rules to be used in the arbitration but must issue a final judgment in accordance with Chilean law. Subject to limited exceptions, the arbitrator’s judgment shall not be subject to appeal. The parties shall appoint the arbitrator by mutual agreement and if no agreement is reached, an arbitrator will be appointed by the civil court system from among present and former associate justices of the Supreme Court of Justice of Chile.

 

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EXCHANGE CONTROLS

The Central Bank is responsible for, among other things, monetary policies and exchange controls in Chile. Prior to 1989, Chilean law permitted the purchase and sale of foreign currency only in cases explicitly authorized by the Central Bank. Law No. 18,840, the Ley Orgánica Constitucional del Banco Central de Chile (Organic Law of the Central Bank of Chile), or the Central Bank Act, enacted in 1989, liberalized the rules that govern the ability to buy and sell foreign currency.

The Central Bank Act empowers the Central Bank to determine which types of foreign exchange operations must be carried out in the Formal Exchange Market rather than the Mercado Cambiario Informal (Informal Exchange Market). The Central Bank has ruled that certain foreign exchange transactions, including those attendant to foreign investments and bond issuances, may be effected only in the Formal Exchange Market. The Central Bank may also impose restrictions on foreign exchange operations that are conducted or are required to be conducted in the Formal Exchange Market. These restrictions may include the requirement of prior authorization from the Central Bank, the imposition of reserve requirements and the limitation of foreign exchange operations that may be conducted by the entities that participate in the Formal Exchange Market.

The Formal Exchange Market consists of banks and other entities authorized by the Central Bank to participate in such Formal Exchange Market. On April 16, 2001, the Central Bank agreed that, effective April 19, 2001, the prior foreign exchange restrictions would be eliminated and a new Compendio de Normas de Cambios Internacionales (Compendium of Foreign Exchange Regulations, or the Compendium) would be applied.

The main objective of this change was to facilitate capital movements from and into Chile and to encourage foreign investment.

The following specific restrictions were eliminated:

 

   

a reserve requirement with the Central Bank for a period of one year;

 

   

the requirement for prior approval by the Central Bank for certain operations, such as repatriation of investments and payments to foreign creditors;

 

   

the mandatory return of foreign currencies to Chile; and

 

   

the mandatory conversion of foreign currencies into Chilean pesos.

Under the amended regulations, only the following limitations are applicable to these operations:

 

   

the Central Bank must be provided with information related to certain operations, such as foreign investments and foreign credits; and

 

   

certain operations, such as money transfers to and from Chile related to foreign investments and foreign credits, must be conducted within the Formal Exchange Market.

 

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International Issue of Bonds

In accordance with the regulations issued by the Central Bank, which are included in the Chapter XIV of the Compendium, any international issue of bonds in an aggregate amount exceeding U.S.$1,000,000 must be registered and dated by the Central Bank or by a bank or other entity authorized by the Central Bank to participate in the Formal Exchange Market before the proceeds from the issuance can be remitted to Chile and received by the issuer or simultaneously with the remittance into Chile of such proceeds. The issuer must submit forms regarding the offering to the registering entity or directly to the Central Bank, along with a letter of instructions indicating whether it prefers to receive the proceeds in Chilean pesos or in a foreign currency. If presented through a Formal Exchange Market entity, such entity must, in turn, verify that the forms submitted by the issuer are in accordance with the documentation relating to the issue and inform the Central Bank of the operation no later than 11:00 a.m. on the banking business day following the date on which the proceeds of the issue are transferred to the issuer.

If the issuer opts to receive the proceeds of the issue outside of Chile, it must report this to the Central Bank directly or through a Formal Exchange Market entity during the first ten calendar days of the month following the one in which the proceeds were received.

Chapter XIV of the Compendium also states that proceeds from the issue, as well as payment of capital and interest relating to the issue, must be received and sent from and through the Formal Exchange Market, but purchases of U.S. dollars in connection with payments on debt securities issued directly by us can be made either in the Formal or in the Informal Exchange Market. There can be no assurance, however, that we will be able to purchase U.S. dollars in the Informal Exchange Market or in the Formal Exchange Market at the time or in the amounts required to pay debt service related to any such debt securities, since the registration of the debt securities with the Central Bank does not grant us access to the Formal Exchange Market for the purchase of U.S. dollars necessary to make payments in respect of those securities. There can also be no assurance that further Central Bank regulations or legislative changes to the current foreign exchange control regime in Chile would not restrict or prevent our purchase of U.S. dollars to make payments under our securities.

We will also be required to inform the Central Bank quarterly of the outstanding amounts due under our securities and from time to time of any information that has been previously filed.

The regulations of Chapter XIV of the Compendium do not make any reference to the one-year mandatory deposit in the Central Bank that was previously required by Chapter XIV. However, the Central Bank is authorized, under the Central Bank Act, to impose such a requirement.

There can be no assurance that we will be able to purchase U.S. dollars in the Informal Exchange Market or in the Formal Exchange Market at the time or in the amounts required to pay debt service related to any such debt securities. There can also be no assurance that further Central Bank regulations or legislative changes to the current foreign exchange control regime in Chile and will not restrict or prevent our purchase of U.S. dollars to make payments under our securities from Chile.

 

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TAXATION

General

The following summary contains a description of certain Chilean and United States federal income tax consequences of the purchase, ownership and disposition of our securities, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase our securities. This summary does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States and Chile.

This summary is based on the tax laws of Chile and the United States as in effect on the date of this Form 20-F, as well as regulations, rulings and decisions of Chile and the United States available on or before such date and now in effect. All of the foregoing is subject to change, and any changes could apply retroactively and could affect the continued validity of this summary.

Prospective purchasers of our securities should consult their own tax advisors as to the Chilean, United States or other tax consequences of the purchase, ownership and disposition of our securities, including, in particular, the application to their particular situations of the tax considerations discussed below, as well as the application of state, local, foreign or other tax laws.

Chile and the United States have executed an income and capital tax treaty for the avoidance of double taxation and the prevention of fiscal evasion, but this treaty is not in effect, and its effectiveness is contingent upon ratification in the United States Senate. At this time, it is not clear when the United States Senate will consider ratification, and therefore the effective date of the treaty is uncertain.

Chilean Taxation

The following is a general summary of the principal consequences under Chilean tax law, as currently in effect, of an investment in our securities made by a foreign holder. Foreign holder means either:

 

   

in the case of an individual, a person who is neither a resident nor is domiciled in Chile. For purposes of Chilean taxation, (a) an individual is resident in Chile if he or she has remained in Chile for more than six months in one calendar year, or a total of more than six months in two consecutive fiscal years and (b) an individual is domiciled in Chile if such individual resides in Chile with the intention of remaining in Chile (the intention will be determined according to the circumstances); or

 

   

in the case of a legal entity, a legal entity that is not organized under the laws of Chile, unless our securities are assigned to a branch or a permanent establishment of such entity in Chile.

Under Chile’s income tax law, our payments of interest made from Chile in respect to our securities to a foreign holder will generally be subject to a Chilean withholding tax assessed at a rate of 4.0%, or the Chilean Interest Withholding Tax, only to the extent the requirements for applying a 4.0% rate are complied with.

We have agreed, subject to specific exceptions and limitations, to pay to the foreign holders of notes additional amounts in respect of the Chilean Interest Withholding Tax in order to ensure that the interest amount the foreign holder receives is net of Chilean Interest Withholding Tax. If we pay additional amounts in respect of the Chilean Interest Withholding Tax, any tax refunds in respect of these amounts will be for our benefit. In the event that certain changes in Chilean tax laws require us to pay additional interest amounts in respect of the Chilean Interest Withholding Tax at a rate in excess of 4.0%, we have the right to redeem our securities.

Under existing Chilean law and regulations, a foreign holder will not be subject to any Chilean taxes in respect of payments of principal that we make with respect to our securities. Our payments with respect to our securities of amounts not considered principal or interest may be subject to a Chilean withholding tax of up to 35%.

The Chilean Income Tax Law provides that a foreign holder is subject to income tax on his Chilean source income. For this purpose, Chilean source income means earnings from activities performed in Chile or from the sale, disposition or other transactions in connection with assets or goods located in Chile. Article 11 of the Chilean income tax law states that, for this purpose, notes and other private or public securities will only be considered as located in Chile if they are issued in Chile by a Chilean issuer. In consideration that our securities are not issued in Chile, any capital gains realized on the sale or other disposition by a foreign holder of our securities generally will not be subject to any Chilean income taxes.

 

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A foreign holder will not be liable for estate, gift, inheritance or similar taxes with respect to its holdings unless the securities held by a foreign holder:

 

   

are located in Chile at the time of such foreign holder’s death or at the time the transfer takes place, or

 

   

were purchased or acquired with monies obtained from Chilean sources.

A foreign holder will not be liable for Chilean stamp, registration or similar taxes.

The issue of our securities directly by us was subject to the Chilean stamp tax, which we paid.

United States Taxation

This summary of certain United States federal income tax considerations deals principally with United States Holders that acquired our securities as part of the initial offering of our securities, hold our securities as capital assets and whose functional currency is the United States dollar. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular investor, and generally does not address the tax treatment of United States Holders that may be subject to special tax rules, such as banks, financial institutions, tax-exempt entities, regulated investment companies, real estate investment trusts, insurance companies, partnerships and partners therein, dealers in securities or currencies, traders in securities electing to mark to market, certain short-term holders of our securities, persons that will hold our securities as a position in a “straddle” or conversion transaction, or as part of a “synthetic security” or other integrated financial transaction, persons that own (or are deemed to own for United States tax purposes) 10% or more of our stock by vote or value or persons that are not United States Holders. United States Holders should be aware that the U.S. federal income tax consequences of holding our securities may be materially different for investors described in the previous sentence, including as a result of certain laws applicable to investors with short holding periods or that engage in hedging transactions.

U.S. holders that use an accrual method of accounting for U.S. federal income tax purposes generally will be required to include certain amounts in income no later than the time such amounts are reflected on certain financial statements. The application of this rule thus may require the accrual of income earlier than would be the case under the general tax rules applicable to accrual basis taxpayers, although the precise application of this rule is unclear at this time. This rule generally will be effective for tax years beginning after December 31, 2017 or, for debt securities issued with original issue discount, for tax years beginning after December 31, 2018. U.S. holders that use an accrual method of accounting should consult with their tax advisors regarding the potential applicability of this legislation to their particular situation.

As used under this section “United States Taxation,” the term “United States Holder” means a beneficial owner of a Note that is a citizen or resident of the United States or a United States domestic corporation or that otherwise is subject to United States federal income taxation on a net income basis in respect of our securities.

Taxation of Interest and Additional Amounts

A United States Holder will treat the gross amount of interest and Additional Amounts (i.e., without reduction for Chilean Interest Withholding Tax, determined utilizing the 4.0% Chilean Interest Withholding Tax rate applicable to all United States Holders of our securities) as ordinary interest income in respect of our securities at the time that such payments are accrued or are received, in accordance with the United States Holder’s method of tax accounting. Any Chilean Interest Withholding Tax paid will be treated as foreign income taxes eligible for credit against such United States Holder’s United States federal income tax liability, subject to generally applicable limitations and conditions, or, at the election of such United States Holder, for deduction in computing such United States Holder’s taxable income. Interest and Additional Amounts will constitute income from sources outside the United States for foreign tax credit purposes. Such income generally will constitute “passive category income.” Foreign tax credits will not be allowed for withholding taxes imposed in respect of certain short-term or hedged positions in securities and may not be allowed for withholding taxes imposed in respect of arrangements in which a United States Holder’s expected economic profit is insubstantial. United States Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.

The calculation of foreign tax credits and, in the case of a United States Holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a United States Holder’s particular circumstances. United States Holders should consult their own tax advisors regarding the availability of foreign tax credits and the treatment of Additional Amounts.

 

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A Holder of our securities that is, with respect to the United States, a foreign corporation or a nonresident alien individual (a “Non-U.S. Holder”) generally will not be subject to United States federal income or withholding tax on interest income or Additional Amounts earned in respect of our securities, unless such income is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States.

Taxation of Dispositions

A United States Holder will generally recognize gain or loss on the sale, exchange or other disposition of a security in an amount equal to the difference between the amount realized on the sale, exchange or other disposition and the tax basis in the security. If Chilean income tax is withheld on the sale, exchange or other disposition of our securities, the amount realized by a U.S. holder will include the gross amount of the proceeds of that sale, exchange or other disposition before deduction of the Chilean income tax. A United States Holder’s tax basis in a security will generally equal its cost. Gain or loss realized by a United States Holder on the sale, redemption or other disposition of our securities generally will be treated as capital gain or loss and such gain or loss will be long-term capital gain or loss if at the time of the disposition, our securities have been held for more than one year. The net amount of long-term capital gain realized by a United States Holder that is an individual is generally taxed at a reduced rate. Gain, if any, realized by a United States Holder generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of gain from the disposition of securities that is subject to Chilean income tax, a United States Holder may not be able to benefit from the foreign tax credit for that Chilean income tax, unless the United States Holder can apply the credit against U.S. federal income tax payable on other income from foreign sources. Alternatively, the United States Holder may generally elect to take a deduction for the Chilean income tax paid. The rules governing foreign tax credits are complex and a United States Holder should consult its own tax advisor regarding the availability of foreign tax credits under its particular circumstances.

A Non-U.S. Holder of our securities will not be subject to United States federal income or withholding tax on gain realized on the sale or other disposition of our securities unless (i) such gain is effectively connected with the conduct by the Non-U.S. Holder of a trade or business in the United States or (ii) in the case of gain realized by an individual Non-U.S. Holder, the Non-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.

Specified Foreign Financial Assets

Certain United States Holders that own “specified foreign financial assets” with an aggregate value in excess of USD 50,000 are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer (which would include our securities) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. United States Holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Holders should consult their own tax advisors concerning the application of these rules to their investment in the Securities, including the application of the rules to their particular circumstances.

Backup Withholding and Information Reporting

Payments of principal, premium, if any, and interest on our securities and payment of the proceeds of any disposition of our securities made to certain United States Holders may be subject to U.S. information reporting requirements. In addition, certain United States Holders may be subject to a U.S. backup withholding tax in respect of such payments if they do not provide their taxpayer identification numbers to the payor or otherwise establish an exemption. Non-U.S. Holders generally are exempt from these withholding and reporting requirements, but may be required to comply with applicable certification and identification procedures to establish their eligibility for such an exemption.

 

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DOCUMENTS ON DISPLAY

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this Annual Report and the exhibits thereto, may be inspected and copied at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the materials may be obtained from the Public Reference Room at the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the Commission maintains an Internet website at http://www.sec.gov, from which these materials may be electronically accessed. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at 1-800-SEC-0330.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our risk management activities includes forward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in such forward-looking statements.

We are exposed to market risk from changes in interest rates and currency exchange rates. Our Board of Directors approves our policies that address these risks. From time to time, we assess our exposure and monitor opportunities to manage these risks, including entering into derivative contracts. For information on the currency and interest rate swaps into which we entered with respect to a portion of our borrowings, see “Item 5. Operating and Financial Review and Prospects—Hedging” and Note 23 to our audited consolidated financial statements. In the normal course of business, we also face risks that are either non-financial or non-quantifiable. Such risks principally include country risk, credit risk and legal risk and are not represented in the tables below.

Interest Rate Risk

Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates. As of December 31, 2018, we had outstanding U.S.$4.5 billion of indebtedness, including accrued interest and discounts and costs of issuance, of which 84.4% bore interest at fixed interest rates and 15.6% bore interest at floating rates of interest. The fixed and floating rates do not reflect the effect of swap agreements. 66.2% of our indebtedness was denominated in U.S. dollars as of that date. The interest rate on our variable rate debt is determined principally by reference to LIBOR. As of December 31, 2018, we were party to an interest rate swap agreement in our Uruguayan joint operation to hedge fluctuations in floating rates for long-term debt. See “Item 5. Operating and Financial Review and Prospects—Hedging” and Note 23 to our audited consolidated financial statements.

The following table summarizes our debt obligations, as of December 31, 2018. These obligations are sensitive to changes in interest rates. The table presents the aggregate principal amount of each category of indebtedness maturing in each year, at the weighted average interest rate for each category of indebtedness. Average interest rates for liabilities are calculated based on the prevailing interest rate for each loan as of December 31, 2018.

 

     Average
Interest
Rate
    2019      2020      2021      2022      2023      Thereafter      Total
Debt
     Fair
Value
 
     (U.S.$ in millions)  

Interest

                         

Bearing Debt

                         

Fixed Rate

                         

(U.S.$-denominated)

     4.75     309.7        45.2        245.4        300.3        23.6        1,373.7        2,297.9        2,191.2  

(UF/CLP$-denominated)

     3.12     85.7        256.6        48.6        48.8        48.8        1,019.4        1,507.8        1,608.3  

(R$-denominated)

     7.94     0.4        0.5        0.7        0.6        —          —          2.2        2.2  

Floating Rate

                         

(U.S.$denominated) LIBOR+

     1.50     133.6        40.4        39.4        39.3        237.8        199.3        689.9        742.0  

(R$-denominated) TJLP +

     3.76     6.4        4.6        0.8        0.6        —          —          12.4        12.4  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

       535.8        347.3        334.9        389.6        310.2        2,592.4        4,510.3        4,556.1  
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Foreign Currency Risk

Our principal exchange rate risk involves changes in the value of the Chilean peso and, to a lesser extent, the Brazilian real, the Argentine peso and the Euro relative to the U.S. dollar. We estimate that a majority of our consolidated costs and expenses are denominated in U.S. dollars. As of December 31, 2018:

 

   

75.2% of our accounts receivable were denominated in U.S. dollars, 11.9% in Chilean pesos and 7.9% were denominated in Brazilian reais;

 

   

77.6% of our cash and short-term investments were denominated in U.S. dollars, 16.8% were denominated in Chilean pesos, 0.3% in Argentine pesos and 4.1% in Brazilian reais;

 

   

66.2% of our debt was denominated in U.S. dollars before swaps; and

 

   

a significant portion of our consolidated total assets was denominated in U.S. dollars.

Substantially all of our foreign currency-denominated revenues, receivables and indebtedness are denominated in U.S. dollars and the majority of our costs and expenses are denominated in U.S. dollars. As of December 31, 2018, 66.2% of our debt was denominated in U.S. dollars before swaps. As of December 31, 2018, we were party to cross currency swap agreements in Chile to hedge our local bonds in UF, and forward agreements to swap local currencies to U.S. dollars. See “Item 5. Operating and Financial Review and Prospects—Hedging” and Note 23 to our audited consolidated financial statements. Accordingly, variations in the value of the Chilean peso relative to the U.S. dollar will not have a significant effect on the cost in U.S. dollars of our foreign debt service obligations.

 

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Commodity Risk

Prices for pulp, forestry and wood products can fluctuate significantly, and our revenues are highly sensitive to fluctuations in such prices. For a more detailed discussion and sensitivity analysis relating to the risks arising from changes in the market price of pulp, which is our primary commodity risk, see Note 23 to our audited consolidated financial statements. As of December 31, 2018, we were party to derivative contracts to partially hedge our exposure to fuel oil in Uruguay, which include commodity swap agreements. See “Item 5. Operating and Financial review and Prospects – Hedging” and Note 23 to our audited consolidated financial statements.

Item 12. Description of Securities Other than Equity Securities

Not applicable.

 

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PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

(a) Disclosure controls and procedures. We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Senior Vice-President Comptroller, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2018. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Senior Vice-President Comptroller concluded that the disclosure controls and procedures, as of December 31, 2018, were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Senior Vice-President Comptroller, as appropriate to allow timely decisions regarding required disclosure.

(b) Management’s annual report on internal controls and procedures. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our Chief Executive Officer and Senior Vice-President Comptroller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2018.

 

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(c) Attestation Report of the registered public accounting firm. Not applicable.

(d) Changes in internal controls over financial reporting. There has been no change in our internal control over financial reporting during 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

We have an audit committee, described in “Item 6. Directors, Senior Management and Employees—Directors and Executive Officers.” We believe that the members of our audit committee have sufficient financial and other experience to perform their responsibilities. Our Board of Directors has determined that Timothy C. Purcell qualifies as an “audit committee financial expert” within the meaning of Item 16A of Form 20-F and is independent as that term is defined in Rule 10A-3 under the Exchange Act. For a description of Mr. Purcell’s professional experience, see “Item 6. Directors, Senior Management and Employees—Directors and Executive Officers.”

Item 16B. Code of Ethics

We have adopted a code of ethics, as defined in Item 16B of Form 20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to all of our employees, including, but not limited to, our Chief Executive Officer, Chief Financial Officer and Senior Vice-President Comptroller. We will provide any person without charge, upon request, a copy of such code of ethics. Requests for a copy of the code of ethics may be made to Celulosa Arauco y Constitución S.A., El Golf 150, 14th Floor, Santiago, Chile, Attn: Gianfranco Truffello, tel. (562) 2461-7200, fax (562) 2461-7541. Our code of ethics is also published on our website at www.arauco.cl or www.arauco.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and Senior Vice-President Comptroller, or if we grant any waiver of such provisions, we will disclose the amendment or waiver in our annual report on Form 20-F. On December 20, 2016, we amended our code of ethics to incorporate provisions relating to the protection of corporate property, a declaration of Arauco’s five corporate values, an extension of the scope of persons who can inform breaches under the code of ethics and an amendment to the list of crimes for which the company may be liable, to include the crime of reception (delito de receptación).

Item 16C. Principal Accountant Fees and Services

Audit and Non-Audit Fees

The following table sets forth the fees billed to us by our independent auditors PricewaterhouseCoopers Consultores Auditores SpA, or PwC, during the fiscal years ended December 31, 2017 and 2018.

 

     Year ended December 31,  
     2018      2017  
     (U.S.$ in thousands)  

Audit fees

   $ 2,109      $ 2,466  

Audit-related fees

     146        509  

Tax fees

     1,181        1,702  

Other fees

     —          1,093  

Total fees

   $ 3,436      $ 5,770  

Audit fees in the above table are the aggregate fees billed by PwC for the fiscal years ended December 31, 2018 and 2017, in each case in connection with the audit of our annual financial statements in accordance with IFRS, as well as the review of other filings.

Audit-related fees in the above table are the aggregate fees billed by PwC for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor, including due diligence in Brazil and Mexico.

Tax fees in the above table are fees billed by PwC for the fiscal years ended December 31, 2018 and 2017, associated with tax compliance services in Chile, Brazil, Argentina, Colombia, Uruguay and Mexico; and tax consultation services in Chile, Argentina, Spain and the United States.

 

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Other fees in the above table are fees billed by PwC related to an assessment of internal control over financial reporting for the fiscal year 2017 with the purpose of issuing a report indicating control deficiencies associated with either control design deficiencies or control effectiveness for the Company’s entities in Chile, United States, Argentina and Brazil.

 

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Audit Committee Approval Policies and Procedures

Our Board of Directors has established pre-approval policies and procedures for the engagement of our independent auditors. Pursuant to our pre-approval policy, our Board of Directors has pre-approved a list of services that our independent auditors are allowed to provide to us or our subsidiaries.

Additionally, our Board of Directors expressly approves, on a case-by-case basis, any engagement of our independent auditors for audit and non-audit services that are not included on the pre-approved list.

All services described in each of paragraphs (b) through (d) of this Item were approved by the Board of Directors pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

Not applicable. Neither our stock nor our SEC-registered securities are listed on any stock exchange or other regulated market.

Item 16H. Mine Safety Disclosures

Not applicable.

PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

Our audited consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and are included in this annual report beginning at page F-1.

 

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Item 19. Exhibits

Documents filed as exhibits to this annual report:

 

1.1    English translation of the estatutos (by-laws) of Celulosa Arauco y Constitución S.A., as of April 22, 2014 (incorporated by reference to Exhibit 1.1 to Arauco’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013, filed on April 29, 2014, Commission file No. 033-99720).
8.1    List of subsidiaries
12.1    Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
12.2    Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
13.1    Certification of chief executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS        XBRL Instance Document
101.SCH        XBRL Taxonomy Extension Schema Linkbase Document
101.CAL        XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF        XBRL Taxonomy Extension Definition Linkbase Document
101.LAB        XBRL Taxonomy Extension Label Linkbase Document
101.PRE        XBRL Taxonomy Extension Presentation Linkbase Document

Omitted from the exhibits filed with this annual report are certain instruments and agreements with respect to our long-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the SEC copies of any such omitted instruments or agreements as the SEC requests.

 

 

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Index of Exhibits

 

1.1    English translation of the by-laws (estatutos) of Celulosa Arauco y Constitución S.A., dated as of April 22, 2014 (incorporated by reference to Exhibit 1.1 to Arauco’s Annual Report on Form 20-F for the fiscal year ended December 31, 2013, filed on April 29, 2014, Commission file No. 033-99720).
8.1    List of subsidiaries.
12.1    Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2    Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1    Certification of chief executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section  906 of the Sarbanes-Oxley Act of 2002.
101.INS        XBRL Instance Document

 

101.SCH

 

101.CAL

 

101.DEF

 

101.LAB

 

101.PRE

  

 

XBRL Taxonomy Extension Schema Linkbase Document

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

XBRL Taxonomy Extension Definition Linkbase Document

 

XBRL Taxonomy Extension Label Linkbase Document

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


Table of Contents

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.
By:   /s/ Matías Domeyko
  Matías Domeyko
  Chief Executive Officer

Date: April 17, 2019

 


Table of Contents

CONSOLIDATED

FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017


Table of Contents

INDEX

 

     Page  

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     F-1  

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

     F-2  

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

     F-4  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

     F-5  

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

     F-6  

CONSOLIDATED STATEMENTS OF CASH FLOWS

     F-7  

NOTE 1. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

     F-8  

NOTE 2. ACCOUTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

     F-32  

NOTE 3. DISCLOSURE OF OTHER INFORMATION

     F-33  

NOTE 4. INVENTORIES

     F-38  

NOTE 5. CASH AND CASH EQUIVALENTS

     F-39  

NOTE 6. INCOME TAXES

     F-40  

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

     F-45  

NOTE 8. LEASES

     F-48  

NOTE 9. REVENUE

     F-49  

NOTE 10. EMPLOYEE BENEFITS

     F-50  

NOTE 11. BALANCES IN FOREIGN CURRENCY AND FOREIGN CURRENCY EXCHANGE RATE IMPACT IN PROFIT OR LOSS

     F-51  

NOTE 12. BORROWING COSTS

     F-56  

NOTE 13. RELATED PARTIES

     F-56  

NOTE 14. CONSOLIDATED FINANCIAL STATEMENTS

     F-60  

NOTE 15. INVESTMENTS IN ASSOCIATES

     F-62  

NOTE 16. INTERESTS IN JOINT ARRANGEMENTS

     F-65  

NOTE 17. IMPAIRMENT OF ASSETS

     F-68  

NOTE 18. PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES

     F-69  

NOTE 19. INTANGIBLE ASSETS

     F-78  

NOTE 20. BIOLOGICAL ASSETS

     F-79  

NOTE 21. ENVIRONMENTAL MATTERS

     F-82  

NOTE 22. NON-CURRENT ASSETS HELD FOR SALE

     F-84  

NOTE 23. FINANCIAL INSTRUMENTS

     F-85  

NOTE 24. REPORTABLE SEGMENTS

     F-107  

NOTE 25. OTHER NON-FINANCIAL ASSETS AND NON-FINANCIAL LIABILITIES

     F-113  

NOTE 26. DISTRIBUTABLE NET PROFIT AND EARNINGS PER SHARE

     F-114  

NOTE 27. SUBSEQUENT EVENTS

     F-116  


Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Celulosa Arauco y Constitución S.A.

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial position of Celulosa Arauco y Constitución S.A. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ PricewaterhouseCoopers

Santiago, Chile

April 17, 2019

We have served as the Company’s auditor since 2015.

 

F-1


Table of Contents

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

 

     Note      12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Assets

        

Current Assets

        

Cash and cash equivalents

     5        1,075,942        589,886  

Other current financial assets

     23        497        3,504  

Other current non-financial assets

     25        129,854        129,837  

Trade and other current receivables

     23        839,184        814,412  

Accounts receivable due from related companies

     13        7,324        3,488  

Current inventories

     4        1,030,196        868,462  

Current biological assets

     20        315,924        307,796  

Current tax assets

        36,513        49,471  

Total Current Assets other than assets or disposal groups classified as held for sale

        3,435,434        2,766,856  

Non-Current Assets or disposal groups classified as held for sale

     22        5,726        3,507  

Non-Current Assets or disposal groups classified as held for sale

        5,726        3,507  

Total Current Assets

        3,441,160        2,770,363  

Non-Current Assets

        

Other non-current financial assets

     23        20,346        56,600  

Other non-current non-financial assets

     25        86,948        121,521  

Trade and other non-current receivables

     23        15,149        16,040  

Accounts receivable due from related companies, non-current

     13        481        1,056  

Investments accounted for using equity method

     15-16        358,053        368,772  

Intangible assets other than goodwill

     19        90,093        88,615  

Goodwill

     17        65,851        69,922  

Property, plant and equipment

     7        7,174,693        7,034,299  

Non-current biological assets

     20        3,336,339        3,459,146  

Deferred tax assets

     6      4,635        8,266  

Total Non-Current Assets

        11,152,588        11,224,237  

Total Assets

        14,593,748        13,994,600  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-2


Table of Contents

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)

 

     Note      12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Equity and Liabilities

       

Liabilities

       

Current Liabilities

       

Other current financial liabilities

     23        537,596       500,344  

Trade and other current payables

     23        659,618       717,346  

Accounts payable to related companies

     13        10,229       11,208  

Other current provisions

     18        413       2,728  

Current tax liabilities

     6        153,642       8,088  

Current provisions for employee benefits

     10        5,656       5,730  

Other current non-financial liabilities

     25        212,610       153,950  

Total Current Liabilities other than assets included in disposal groups classified as held for sale

        1,579,764       1,399,394  

Total Current Liabilities

        1,579,764       1,399,394  

Non-Current Liabilities

       

Other non-current financial liabilities

     23        4,044,279       3,778,567  

Non-current payables

        2,230       —    

Other non-current provisions

     18        33,884       36,008  

Deferred tax liabilities

     6        1,417,658       1,485,365  

Non-current provisions for employee benefits

     10        64,895       66,033  

Other non-current non-financial liabilities

     25        112,067       112,340  

Total Non-Current Liabilities

        5,675,013       5,478,313  

Total Liabilities

        7,254,777       6,877,707  

Equity

       

Issued capital

     3      353,618       353,618  

Retained earnings

        7,824,045       7,425,133  

Other reserves

        (875,884     (703,778

Equity attributable to parent company

        7,301,779       7,074,973  

Non-controlling interests

        37,192       41,920  

Total Equity

        7,338,971       7,116,893  

Total Equity and Liabilities

        14,593,748       13,994,600  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-3


Table of Contents

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

 

            For the years ended December 31,  
     Note      2018
ThU.S.$
    2017
ThU.S.$
    2016
ThU.S.$
 

Statements of profit or loss

         

Revenue

     9        5,954,833       5,238,341       4,761,385  

Cost of sales

     3        (3,722,749     (3,574,532     (3,498,905

Gross profit

        2,232,084       1,663,809       1,262,480  

Other income

     3        124,304       111,513       257,863  

Distribution costs

     3        (556,805     (523,300     (496,473

Administrative expenses

     3        (561,284     (521,294     (474,469

Other expense

     3        (95,880     (240,165     (77,415

Other gains (losses)

     14        14,213       —         —    

Profit from operating activities

        1,156,632       490,563       471,986  

Finance income

     3        20,895       19,640       29,701  

Finance costs

     3        (214,779     (287,958     (258,467

Share of profit of associates and joint ventures accounted for using equity method

     15        17,246       17,017       23,939  

Exchange rate differences

        (26,470     98       (3,935

Profit before income tax

        953,524       239,360       263,224  

Income Tax

     6        (226,765     30,992       (45,647

Net Profit

        726,759       270,352       217,577  
     

 

 

   

 

 

   

 

 

 

Net profit attributable to

         

Net profit attributable to parent company

        725,482       269,724       213,801  

Net profit attributable to non-controlling interests

        1,277       628       3,776  

Net Profit

        726,759       270,352       217,577  
     

 

 

   

 

 

   

 

 

 
         

Basic and diluted earnings per share (in U.S.$ per share)

         

Basic and diluted earnings per share from continuing operations

        6.4111       2.3836       1.8894  

Basic and diluted earnings per share

        6.4111       2.3836       1.8894  
     

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Table of Contents

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

           

For the years

ended December 31,

 
     Note      2018
ThU.S.$
    2017
ThU.S.$
    2016
ThU.S.$
 

Net profit

        726,759       270,352       217,577  

Components of other comprehensive income that will not be reclassified to profit or loss before tax:

         

Other comprehensive income before tax actuarial gain (losses) on defined benefit plans

     10        1,856       2,499       (5,593

Share of other comprehensive income of associates and joint ventures accounted for using equity method

        (1,657     8,754       132  

Other Comprehensive Income that will not be reclassified to profit or loss before tax

        199       11,253       (5,461

Components of other comprehensive income that will be reclassified to profit or loss before tax:

         

Exchange differences on translation

         

Gains (losses) on exchange differences on translation, before tax

     11        (184,876     11,873       173,754  

Other Comprehensive Income before tax exchange differences on translation

        (184,876     11,873       173,754  

Cash flow hedges

         

Gains (losses) on cash flow hedges, before tax

     23        30,321       22,212       84,045  

Recycle of cash flow hedges to profit or loss before tax

     23        (15,286     (16,965     (10,198

Other Comprehensive Income before tax Cash flow hedges

        15,035       5,247       73,847  

Other Comprehensive income that will be reclassified to profit or loss before tax

        (169.841     17,120       247,601  

Income tax relating to components of other comprehensive Income that will not be reclassified to profit or loss before tax

         

Income tax relating to actuarial losses on defined benefit plans

        (501     (673     1,509  

Income tax relating to share of other comprehensive income of associates and joint ventures accounted for using equity method

        176       (2,086     (106

Income tax relating to components of other comprehensive Income that will be reclassified to profit or loss before tax

         

Income tax relating to cash flow hedges

     6        (4,474     (5,917     (20,055

Income tax relating to recycle of cash flow hedges

        —         4,326       2,700  

Income tax relating to components of other comprehensive income that will be reclassified to profit or loss

        (4,474     (1,591     (17,355

Other comprehensive (loss) income

        (174,441     24,023       226,188  

Comprehensive (loss) income

        552,318       294,375       443,765  

Comprehensive Income attributable to

         

Comprehensive (loss) income, attributable to owners of parent company

        555,294       293,988       435,119  

Comprehensive (loss) income, attributable to non-controlling interests

        (2,976     387       8,646  

Total comprehensive (loss) income

        552,318       294,375       443,765  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

 

12-31-2018    Issued
Capital
ThU.S.$
     Reserve of
exchange
differences
on
translation
ThU.S.$
    Reserve of
cash flow
hedges

ThU.S.$
    Reserve
of
actuarial
losses on
defined
benefit
plans
ThU.S.$
    Other
Reserves
ThU.S.$
    Total other
Reserves
ThU.S.$
    Retained
Earnings
ThU.S.$
    Equity
attributable
to owners

of parent
ThU.S.$
    Non -
controlling
interests
ThU.S.$
    Total
Equity
ThU.S.$
 

Opening balance at 01-01-2018

     353,618        (691,772     4,752       (18,926     2,168       (703,778     7,425,133       7,074,973       41,920       7,116,893  

Increase (decrease) for changes in accounting policies

          (1,918         (1,918     (1,957     (3,875     —         (3,875

Restated opening balance

     353,618        (691,772     2,834       (18,926     2,168       (705,696     7,423,176       7,071,098       41,920       7,113,018  

Changes in Equity:

                     

Comprehensive income

                     

Net profit

                  725,482       725,482       1,277       726,759  

Other comprehensive income, net of tax

     —          (180,623     10,561       1,355       (1,481     (170,188     —         (170,188     (4,253     (174,441

Comprehensive income

     —          (180,623     10,561       1,355       (1,481     (170,188     725,482       555,294       (2,976     552,318  

Dividends

                  (324,295     (324,295     (1,752     (326,047

Increase (decrease) from transfers and other changes

                  (318     (318     —         (318

Changes in equity

     —          (180,623     10,561       1,355       (1,481     (170,188     400,869       230,681       (4,728     225,953  

Closing balance at 12-31-2018

     353,618        (872,395     13,395       (17,571     687       (875,884     7,824,045       7,301,779       37,192       7,338,971  
12-31-2017    Issued
Capital
ThU.S.$
     Reserve of
exchange
differences
on
translation
ThU.S.$
    Reserve of
cash flow
hedges

ThU.S.$
    Reserve
of
actuarial
losses on
defined
benefit
plans
ThU.S.$
    Other
Reserves
ThU.S.$
    Total other
Reserves
ThU.S.$
    Retained
Earnings
ThU.S.$
    Equity
attributable
to owners

of parent
ThU.S.$
    Non -
controlling
interests
ThU.S.$
    Total
Equity
ThU.S.$
 

Opening balance at 01-01-2017

     353,618        (703,886     1,096       (20,752     (4,500     (728,042     7,329,675       6,955,251       44,032       6,999,283  

Changes in Equity:

                     

Comprehensive income

                     

Net profit

                  269,724       269,724       628       270.352  

Other comprehensive income, net of tax

        12,114       3,656       1,826       6,668       24,264         24,264       (241     24.023  

Comprehensive income

     —          12,114       3,656       1,826       6,668       24,264       269,724       293,988       387       294.375  

Dividends

                  (174,266     (174,266     (2,483     (176.749

Increase (decrease) from transfers and other changes

                  —         —         (16     (16

Changes in equity

     —          12,114       3,656       1,826       6,668       24,264       95,458       119,722       (2,112     117.610  

Closing balance at 12-31-2017

     353,618        (691,772     4,752       (18,926     2,168       (703,778     7,425,133       7,074,973       41,920       7,116,893  
12-31-2016    Issued
Capital
ThU.S.$
     Reserve of
exchange
differences
on
translation
ThU.S.$
    Reserve of
cash flow
hedges

ThU.S.$
    Reserve
of
actuarial
losses on
defined
benefit
plans
ThU.S.$
    Other
Reserves
ThU.S.$
    Total other
Reserves
ThU.S.$
    Retained
Earnings
ThU.S.$
    Equity
attributable
to owners

of parent
ThU.S.$
    Non -
controlling
interests
ThU.S.$
    Total
Equity
ThU.S.$
 

Opening balance at 01-01-2016

     353,618        (872,770     (55,396     (16,668     (4,526     (949,360     7,204,452       6,608,710       37,735       6,646,445  

Changes in Equity:

                     

Comprehensive income

                     

Net profit

                  213,801       213,801       3.776       217.577  

Other comprehensive income, net of tax

        168,884       56,492       (4,084     26       221,318         221,318       4.870       226.188  

Comprehensive income

     —          168,884       56,492       (4,084     26       221,318       213,801       435,119       8.646       443.765  

Dividends

                  (88,578     (88,578     (2,250     (90.828

Increase (decrease) from transfers and other changes

                  —         —         (99     (99

Changes in equity

     —          168,884       56,492       (4,084     26       221,318       125,223       346,541       6,297       352.838  

Closing balance at 12-31-2016

     353,618        (703,886     1,096       (20,752     (4,500     (728,042     7,329,675       6,955,251       44,032       6,999,283  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    

For the years

ended December 31,

 
     2018
ThU.S.$
    2017
ThU.S.$
    2016
ThU.S.$
 

STATEMENTS OF CASH FLOWS

      

Cash Flows from (used in) Operating Activities

      

Classes of cash receipts from operating activities

      

Receipts from sales of goods and rendering of services

     6,129,806       5,508,705       5,020,551  

Other cash receipts from operating activities

     377,085       365,238       470,765  

Classes of cash payments

      

Payments to suppliers for goods and services

     (4,299,395     (3,850,367     (3,914,976

Payments to and on behalf of employees

     (558,230     (532,223     (320,738

Other cash payments from operating activities

     (192,254     (128,314     (232,271

Interest paid

     (172,280     (261,186     (191,573

Interest received

     11,738       18,966       29,380  

Income taxes paid

     (12,742     (37,942     (83,903

Other inflows (outflows) of cash, net

     (2,807     (10,452     (3,651

Net Cash flows from Operating Activities

     1,280,921       1,072,425       773,584  

Cash flows (used in) investing activities

      

Cash flow used in obtaining control of subsidiaries or other businesses

     (17,049     (15,918     —    

Cash used for contributions and purchase of associates and joint ventures

     (3,023     —         (153,135

Other cash receipts from sales of equity or debt instruments in other entities

     2       1       6,781  

Proceeds from sale of property, plant and equipment

     9,392       6,308       17,685  

Purchase of property, plant and equipment

     (675,958     (448,314     (356,153

Purchase of intangible assets

     (2,682     (10,468     (14,858

Proceeds from sales of other long-term assets

     5,437       2,609       1,644  

Purchase of other non-current assets

     (222,029     (179,184     (140,707

Dividends received

     10,880       7,287       4,772  

Other inflows (outflows) of cash, net

     1,048       4,331       (6,241

Cash flows used in Investing Activities

     (893,982     (633,348     (640,212

Cash flows from (used in) Financing Activities

      

Total borrowings obtained

     863,551       1,312,481       737,653  

Debt obtained in long-term

     485,077       1,025,096       187,845  

Debt obtained in short-term

     378,474       287,385       549,808  

Repayments of borrowings

     (475,284     (1,627,711     (645,211

Dividends paid

     (257,421     (121,586     (130,624

Other outflows of cash, net

     (975     (2,285     (302

Cash flows from (used in) Financing Activities

     129,871       (439,101     (38,484

Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes

     516,810       (24     94,888  

Effect of exchange rate changes on cash and cash equivalents

     (30,754     (2,343     (2,660

Net increase (decrease) of Cash and Cash equivalents

     486,056       (2,367     92,228  

Cash and cash equivalents, at the beginning of the period

     589,886       592,253       500,025  

Cash and cash equivalents, at the end of the period

     1,075,942       589,886       592,253  

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2018 AND 2017

 

NOTE 1.

PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

Entity Information

Celulosa Arauco y Constitución S.A. and subsidiaries, (hereafter “Arauco” or the “Company”), tax identification number 93,458,000-1, is a closely held corporation, that was registered in the Securities Registry (the “Registry”) of the Chilean Commission for the Financial Market (“CMF”) as No. 042 on June 14, 1982. Additionally, the Company is registered as a non-accelerated filer in the Securities and Exchange Commission (SEC) of the United States of America.

The Company’s head office address is El Golf Avenue 150, 14th floor, Las Condes, Santiago, Chile.

Arauco is principally engaged in the production and sale of products related to the forestry and timber industries. Its main operations are focused on business areas of pulp, wood products and forestry.

Arauco is controlled by Empresas Copec S.A., which owns 99.9780% of Arauco, and is registered in the Securities Registry as No. 0028. Each of the above mentioned companies is subject to the oversight of the CMF.

The ultimate shareholders of Arauco are Mrs. María Noseda Zambra de Angelini (who passed away on April 15, 2018), Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi, who have control fundamentally as follows:

 

  (i)

Through Inversiones Angelini y Cía. Ltda., entity wich has 63.4015% of the shares of AntarChile S.A. and

 

  (ii)

Mr. Roberto Angelini Rossi through the statutory control of Inversiones Golfo Blanco Ltda., direct owner of 5.77307% of the shares of AntarChile S.A.; and Mrs. Patricia Angelini Rossi, through the statutory control of Inversiones Senda Blanca Ltda., direct owner of 4.329804% of the shares of AntarChile S.A.

Arauco’s Consolidated Financial Statements were prepared on a going concern basis.

 

F-8


Table of Contents

Presentation of Consolidated Financial Statements

The Financial Statements presented by Arauco are comprised by the following:

 

   

Consolidated Statements of Financial Position as of December 31, 2018 and 2017.

 

   

Consolidated Statements of Profit or Loss for the years ended December 31, 2018, 2017 and 2016.

 

   

Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017 and 2016.

 

   

Consolidated Statements of Changes in Equity for the years ended December 31, 2018, 2017 and 2016.

 

   

Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016.

 

   

Explanatory disclosures (notes)

Period Covered by the Consolidated Financial Statements

As of December 31, 2018 and 2017 and for the periods between January 1 and December 31, 2018, 2017 and 2016.

Date of Approval of Consolidated Financial Statements

These consolidated financial statements were approved by the Board of Directors of the Company (the “Board”) at the Extraordinary Meeting on April 17, 2019.

Abbreviations used in this report:

IFRS – International Financial Reporting Standards

IASB – International Accounting Standards Board

IAS – International Accounting Standards

IFRIC – International Financial Reporting Standards Interpretations Committee

MU.S.$ – Millions of U.S. dollars

ThU.S.$ – Thousands of U.S. dollars

U.F. – Inflation index-linked units of account

UTA – Annual Tax Unit

ICMS – Tax movement of inventories and services (Brazil)

Functional and Presentation Currency

Arauco and most of its subsidiaries determined the United States (“U.S.”) Dollar as its functional currency since the majority of its revenues from sales of its products are derived from exports denominated in U.S. Dollars, while their costs of sales are to a large extent related or indexed to the U.S. Dollar.

For the pulp reportable segment, most of the sales are exports denominated in U.S. Dollars and costs are mainly related to plantation costs which are settled in U.S. Dollars.

For the wood products and forestry reportable segments, although total sales include a mix of domestic and exports sales, prices of the products are established in U.S. Dollars, which is also the case for the cost structure of the related raw materials.

In relation to the cost of sales, although labor and services costs are generally billed and paid in local currency, these costs are not as significant as the costs of raw materials, which are driven mainly by global markets and therefore, influenced mostly by the U.S. Dollar.

 

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The presentation currency of the consolidated financial statements is the U.S. Dollar. Figures on these consolidated financial statements are presented in thousands of U.S. Dollar (ThU.S.$).

Summary of significant accounting policies

 

a)

Basis for preparation of consolidated financial statements

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and they represent the explicit and unreserved adoption of IFRS.

The consolidated financial statements have been prepared on the historical cost basis, except for biological assets and certain derivative financial instruments which are measured at revalued amounts or fair value at the end of each period as explained in the following significant accounting policies.

 

b)

Critical accounting estimates and judgments

The preparation of these financial statements, in accordance with IFRS, requires management to make estimates and assumptions that affect the carrying amounts reported. These estimates are based on historical experience and various other assumptions that are considered to be reasonable. Actual results may differ from these estimates. Management believes that the accounting policies below are the critical judgments that have the most significant effect on the amounts recognized in the consolidated financial statements.

- Biological Assets

The recovery of forest plantations is based on discounted cash flow models which means that the fair value of biological assets is calculated using cash flows from continuing operations on a discounted basis, based on our sustainable forest management plans and the estimated growth of forests.

These discounted cash flows require estimates in growth, harvest, sales prices and costs; therefore, it is important that management make appropriate estimates of future levels and trends for sales and costs, as well as conduct regular surveys of the forests to establish the volumes of wood available for harvesting and their current growth rates. The main considerations used to measure forest plantations are presented in Note 20, including a sensitivity analysis.

 

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- Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of the Group’s holding in the identifiable net assets of the acquired subsidiary at the date of acquisition. The aforementioned fair value is determined whether based on assessments and/or the discounted future flow method using hypotheses in their determination, such as sales prices and industry indexes, among others. See Note 17.

- Litigation and Contingencies

Arauco and its subsidiaries are subject to certain litigation proceedings. Future impact on Arauco’s financial condition derived from such litigations is estimated by management, in collaboration with its legal advisors. Arauco applies judgment when interpreting the reports of its legal advisors who provide updated estimates of the legal contingencies at each reporting period and/or at each time a modification is determined to be necessary. For a description of current litigations see Note 18.

 

c)

Consolidation

The consolidated financial statements include all entities over which Arauco has the power to direct the relevant financial and operating activities. Subsidiaries are consolidated from the date on which control is obtained and up to the date that control ceases.

Specifically, a company controls an investee or subsidiary if, and only if, they have all of the following:

(a) power over the investee, i.e. the investor has existing rights which give it the ability to direct the relevant activities (the activities that significantly affect the investee’s returns)

(b) exposure or rights to variable returns from involvement with the investee; and

(c) the ability to use power over the investee to affect the amount of the investor’s returns.

When Arauco holds less than the majority of voting rights in a company in which it participates, it nonetheless has the power over said company - when these voting rights are enough - to grant it in practice the ability to unilaterally direct said company’s relevant activities. Arauco takes into account all facts and circumstances in order to assess if the voting rights in a company in which it participates are enough for granting it the power, including:

a) the size of the investor’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

b) potential voting rights held by the investor, other vote holders or other parties;

c) rights arising from other contractual arrangements; and

d) any additional facts and circumstances that indicate the investor has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

The Company will reevaluate whether or not it holds control of a company in which participates if the facts and circumstances indicate that changes have occurred in one or more of the three elements of control mentioned above.

Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee. An entity includes the income and expenses of an acquired or sold subsidiary in the consolidated financial statements from the date it gains control until the date when the entity ceases to control the subsidiary.

 

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The profit or loss of each component of other comprehensive income is attributed to owners of the parent company and the non-controlling interest, as appropriate. Total comprehensive income is attributed to the owners of the parent company and non-controlling interests even if the results of the non-controlling interest have a deficit balance.

If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for transactions and other events in similar circumstances, appropriate adjustments are made to the consolidated financial statements of subsidiaries in order to ensure compliance with Arauco’s accounting policies.

All intercompany transactions and unrealized gains and losses from subsidiaries have been fully eliminated from consolidated financial statements and non-controlling interest is presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

The consolidated financial statements at the end of this period include the assets, liabilities, income and expenses of the subsidiaries shown in Note 13.

Certain consolidated subsidiaries have Brazilian Real, Argentine Pesos, Canadian Dollars and Chilean Pesos as their functional currencies. For consolidation purposes, the financial statements of those subsidiaries have been prepared in accordance with IFRS and translated into the presentation currency as indicated in Note 1 (e) (ii).

A parent company will present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

 

d)

Segments

Arauco has defined its reportable segments according to its business areas, based on the products and services sold to its customers. This definition is consistent with the management, resource allocation and performance assessment made by key personnel responsible for making relevant decisions related to the Company’s operation. The personnel responsible for making such decisions are the Executive Vice-president and the Chief Executive Officer who are the highest authorities for making decisions and are supported by the Corporate Managing Directors of each segment.

Based on the aforementioned process, the Company has established reportable segments according to the following business units:    

 

   

Pulp

 

   

Wood products

 

   

Forestry

Refer to Note 24 for detailed financial information by reportable segment.

 

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e)

Functional currency

(i) Functional currency

All items in the financial statements of Arauco and each of its subsidiaries, associates and jointly controlled entities are measured using the currency of the primary economic environment in which each entity operates (the functional currency). The consolidated financial statements are presented in U.S. dollars, which is Arauco’s functional and presentation currency.

(ii) Translation to the presentation currency of Arauco

For the purposes of presenting consolidated financial statements, assets and liabilities of Arauco’s operations in a functional currency different from Arauco’s are translated into U.S. dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange rate differences are recognized in other comprehensive income and accumulated in “Other reserves” within–equity.

(iii) Foreign Currency Transactions

Transactions in currencies other than the functional currency are recognized at the exchange rates prevailing at the dates of the transactions. Profit or loss on transactions in currencies other than the functional currency resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in the statements of profit or loss, except those which are recorded in other comprehensive income and accumulated in equity such as cash flows hedging derivatives.

 

f)

Cash and cash equivalents

Cash and cash equivalents include cash-on-hand, deposits held on demand at financial entities and other short term highly liquid investments with an original maturity of three months or less and which are subject to an insignificant risk of changes in value.

 

g)

Financial Instruments

Financial assets

Initial classification

Arauco classifies its financial assets into the following categories: fair value through profit or loss, amortized cost, and Fair Value through other comprehensive income.

The classification is based on the business model used to manage the assets and the characteristics of their contractual cash flows.

 

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Management determines the classification of its financial assets at the time of their initial registration.

(a) Financial assets at fair value through profit or loss: these instruments are initially measured at fair value. Net income and losses, including any income from interest or dividends, are registered in the profit or loss of the period. Financial assets are classified in the category of financial assets at fair value through profit or loss when they are maintained for negotiation or designated in their initial registration as assets at fair value through profit or loss. A financial asset can be classified in this category if it is acquired mainly for the purposes of being sold in the short-term. Gain or losses of assets held for negotiations are registered in the consolidated statements of Profit or Loss, and the related interest is registered independently as financial income. Derivatives are classified as acquired for negotiation also unless they are designated as hedging instruments.

(b) Assets measured at amortized cost: they are initially registered at the fair value of the transaction, adding or subtracting the transaction costs are directly attributable to the issuance of the financial asset or financial liability. The financial asset is maintained within a business model, the objective of which is to maintain financial assets to obtain contractual cash flows and the contractual conditions of the asset give rise, on specified dates, to cash flows that are solely payments of principal and interests (“SPPI”) over the amount of the outstanding principal.

Subsequent measurement

Financial instruments are subsequently measured at “Fair value through profit or loss”, Amortized Cost or Fair Value through other comprehensive income.

The classification is based on two criteria: i) the Company’s business model for the management of financial instruments, and ii) whether the contractual cash flows related to the financial instruments represent “Solely Payments of Principal and Interests”.

a) Fair value through profit or loss: these instruments are subsequently measured at fair value. Net earnings and losses, including income from interests and dividends, are registered as profits or losses for the period. These instruments are held for negotiation and they are mainly acquired to be sold in the short term. Derivatives are also classified as held for negotiation, unless they are registered as hedging instruments. Financial instruments of this type are classified as Other Current and Non-Current Financial Assets. They are subsequently valuated by determining their fair value, registering changes in value in the consolidated statements of Profit or Loss, in the items of Financial Income or Financial Costs.

b) Financial assets measured at amortized cost: These instruments are subsequently measured at amortized cost minus accumulated amortizations, using the effective interest method and adjusted by loss allowance and volume discounts, in the case of financial assets. Financial income and expenses, foreign exchange income and losses, and impairment are registered in results. Any earnings or losses due to initial or subsequent reductions of the value of the asset are registered in the statement of profit or loss of the period. Loans and receivables are non-derivative financial instruments with fixed or determinable payments not traded in any active market. They are registered at amortized cost, registering accrued conditions directly in profit or loss.

Arauco measures accumulated losses in a quantity equivalent to expected credit losses during the lifelong commitment. Expected credit losses are based on contractual cash flow differences based on the allowance of each contract and the cash flows that Arauco expects. The difference is then discounted based on an approximation of the asset’s original effective interest rate. The asset’s carrying value is reduced as the allowance is used, and the loss is recognized in sales expenses in the financial statements. When an account receivable cannot be collected, it is regularized against the allowance account for receivables. Subsequent recoveries of previously impaired amounts are recognized as a debit in distribution costs.

 

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Derivative financial instruments are explained in Note 1 h)

Financial liabilities

Arauco classifies its financial liabilities as follows: fair value through profit or loss, derivatives designated as effective hedging instruments and amortized costs.

Management determines the classification of its financial liabilities upon initial recognition. Financial liabilities are derecognized when the obligation is cancelled, settled or expired. When an existing financial liability is replaced with another of the same provider under substantially different terms, or where the terms of an existing liability are substantially amended, such exchange or modification is treated as a write-off of the original liability, with a new liability being recognized, and the difference between the respective carrying amounts is recognized in the statement of profit or loss.

Financial liabilities are initially recognized at fair value, and in the case of loans, they include the costs directly attributable to the transaction. The subsequent measurement of the financial liabilities depends on their classification:

Financial Liabilities at fair value through profit or loss

Financial liabilities are included in the category of financial liabilities at fair value through profit or loss when they are held for trading or originally designated at fair value through profit or loss. Income and losses from liabilities held for trading are recognized in profit or loss. This category includes non-designated derivatives for hedging accounting.

Financial Liabilities at Amortized Cost

Other financial liabilities are subsequently valued at their amortized cost based on the effective interest rate method. The amortized cost is calculated taking into account any premium or acquisition discount, and includes the costs of transactions that are an integral part of the effective interest rate. This category includes Commercial Accounts Payable and Other Accounts Payable, as well as the loans included in Other Current and Non-Current Financial Liabilities.

 

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h)

Derivative financial instruments

(i) Derivative Financial Instruments - The Company enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts, interest rate swaps, currency swaps and zero cost collar contracts. The Company’s policy is to enter into derivatives contracts only for economic hedging purposes and there are no instruments with speculation objectives.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently re-measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss unless the derivative is designated as a hedging instrument and complies with hedge accounting requirements, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

(ii) Embedded derivatives - The Company assesses the existence of embedded derivatives in financial instrument contracts. Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at FVTPL as a whole. Arauco has determined that no embedded derivatives currently exist.

(iii) Hedge accounting - The Company designates certain hedging instruments as either fair value hedges or cash flow hedges.

At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, Arauco documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

-Fair Value Hedges - Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

-Cash flow hedges - The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the Finance costs line item in the consolidated statement of profit or loss. Amounts previously recognized in other comprehensive income are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognized hedged item.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognized in other comprehensive income and accumulated in equity at that time remains in equity and is recognized when the forecasted transaction is ultimately recognized in profit or loss. When a forecasted transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

 

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i)

Inventories

Inventories are stated at the lower of cost and net realizable value. Cost is determined using the weighted average cost method.

The cost of finished and in process products includes the cost of raw materials, direct labor, other direct costs and manufacturing overhead expenses.

Initial costs of harvested wood are determined at fair value less cost of sale at the point of harvest.

Biological assets are transferred to inventories when forests are harvested.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When market conditions result in the production costs of a product exceeding its net realizable value, the inventories are written-down to their net realizable value. This write-down also includes obsolescence amounts resulting from slow moving inventories and technical obsolescence.

Spare parts that will be consumed in a period of less than twelve months are presented in inventories and recognized as an expense when they are consumed.

 

j)

Non-current assets held for sale

The Group classifies certain property, plant and equipment, intangible assets, investments in associates and disposal groups (groups of assets to be sold together with their directly associated liabilities) as non-current assets held for sale which as of the date of the statements of financial position are the subject of active sale efforts which are estimated to be highly probable. Non-current assets held for sale are presented separately from the other assets in the balance sheet.

These assets or disposal groups are measured at the lower of the carrying amount or the fair value less the costs to sell, and are no longer depreciated or amortized from the time they are classified as non-current assets held for sale.

 

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k)

Business Combinations

Arauco applies the acquisition method to account for a business combination. This method requires the identification of the acquirer, determination of the acquisition date, recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and recognition and measurement of goodwill or a gain from a bargain purchase. Identifiable assets acquired and liabilities assumed and any contingent liabilities in a business combination are initially measured at fair value at the acquisition date, except:

-deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 respectively;

-liabilities or equity instruments related to share-based payment arrangements of the acquiree or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with IFRS 3 at the acquisition date; and

-assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with such standard.

Acquisition-related costs are accounted for as expenses when they are incurred, except for costs to issue debt or equity securities which are recognized in accordance with IAS 32 and IFRS 9.

A parent will present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

Changes in the ownership interest of a parent in its subsidiary that do not result in a loss of control are treated as equity transactions. Any difference between the amount by which non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the parent company. No adjustment is made to the carrying amount of goodwill, neither gains nor losses are recognized in the statement of profit or loss.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may initially be measured either at fair value or at the present ownership instruments’ proportionate share of non-controlling interests, in the recognized amounts of the acquirer’s identifiable net assets. The choice is made on a transaction-by-transaction basis.

Arauco measures the fair value of the acquired company in the business combination achieved in stage (“step acquisition”), recognizing the effects of remeasurement of previously held equity in the acquiree in the statements of profit or loss.

If the initial accounting for a business combination is not completed by the end of the reporting period in which the combination occurs, Arauco reports preliminary amounts for the items for which the accounting is incomplete. During the measurement period (no more than one year), these preliminary amounts are retrospectively adjusted, or additional assets or liabilities are recognized to reflect new information about facts and circumstances that existed at the acquisition date, if known, would have affected the amounts recognized at that date.

 

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Business combinations that are under common control transactions are accounted using as a reference the pooling of interest. Under this method, assets and liabilities related to the transaction carry over the previous carrying values. Any difference between assets and liabilities included in the consolidation and the consideration transferred, is accounted in equity.

 

l)

Investments in associates and joint arrangements

Associates are entities over which Arauco exercises significant influence, but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Joint arrangement is defined as an entity over which there is joint control, which exists only when the decisions about strategic of activities, both financial and operational, require the unanimous consent of the parties sharing control.

Investments in joint arrangements are classified as a joint venture or as a joint operation. A joint operation is a joint arrangement in which the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement in which the parties that have joint control of the arrangement (i.e., participants in a joint venture) have rights to the net assets of the arrangement.

Investments in associates and joint ventures are accounted for using the equity method and are initially recognized at cost. Their carrying amount is increased or decreased to recognize the portion corresponding to the statement of profit or loss or to the statement of comprehensive income. Dividends received are recognized by deducting the amount received from the carrying amount of the investment. Arauco’s investment in associates includes goodwill (both net of any accumulated impairment loss).

The investments in joint operations are recognized through consolidation of assets, liabilities and results of operations in relation to Arauco’s ownership percentage.

If the acquisition cost is lower than the fair value of the net assets of the associate acquired, the difference is recognized directly in statement of profit or loss in line Other gains (losses).

Investments in associates and joint ventures are presented in the consolidated statement of financial position in the line item “Investments accounted for using equity method”.

If Arauco’s share of losses of an associate or joint venture equals or exceeds its interest in the associate or joint venture, Arauco discontinues recognizing its share of further losses. After Arauco’s carrying value in the investee is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that Arauco has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, Arauco resumes recognizing its share of those profits only after its share of the profits equals the share of losses not recognized.

 

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m)

Intangible assets other than goodwill

After initial recognition, intangible assets with finite useful lives are carried at cost less any accumulated amortization and impairment losses.

Amortization of an intangible asset with a finite useful life is allocated over the asset’s useful life. Amortization begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

(i) Computer Software

Computer software licenses are capitalized in terms of the costs incurred to acquire and make them compatible with existing software. These costs are amortized over the estimated useful lives of the software.

(ii) Water Rights, Easements and Other Rights

This item includes water rights, easements and other acquired rights recognized at historical cost which have indefinite useful lives as there is no foreseeable limit to the period over which these assets are expected to generate future cash flows. These rights are not amortized, but are tested for impairment at least annually, or when there is any indication that the assets might be impaired.

(iii) Customers and trade relations with customers

Correspond to the valuation over the time of the established relationship with customers, from the sale of products and services through its sales team. These relations will materialize in sales orders, which generate revenue and cost of sales. The useful life has been determined to be 15 years.

 

n)

Goodwill

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquired company, and the fair value of the acquirer’s previously held equity interest in the acquired company (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statements of profit or loss.

Goodwill is not amortized but tested for impairment on annual basis.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of impairment testing, goodwill in a business combination is allocated as of the acquisition date to the cash generating unit or a group of cash generating units expected to benefit from the synergies of the combination irrespective of whether other assets or liabilities of the acquired company are allocated to those units or group of units.

The goodwill generated on acquisitions of foreign companies, is expressed in the functional currency of such foreign company.

Goodwill recognized for the acquisition of the subsidiary Arauco do Brasil S.A. whose functional currency is the Brazilian Real, is translated into U.S. Dollars at the closing exchange rate.

 

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o)

Property, Plant and Equipment

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. The cost includes expenditures that are directly attributable to the acquisition of the assets.

Subsequent costs, such as improvements and replacement of components, are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Arauco and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized from property, plant and equipment. All other repairs and maintenance costs are expensed in the period in which they are incurred.

Arauco capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets as part of the cost of those assets, until the assets are ready for their intended use (See Note 12).

Depreciation is calculated by components using the straight-line method.

The useful lives of the items of property, plant and equipment is estimated according to the expected use of the assets. The residual values and useful lives of assets are reviewed and adjusted, if appropriate, annually.

 

p)

Leases

Arauco applies IFRIC 4 to assess whether an arrangement is, or contains, a lease. Leases of assets in which Arauco substantially holds all the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

Finance leases are initially recognized at the lower of the fair value at the inception of the lease of the leased property and the present value of the minimum lease payments.

When assets are leased under a finance lease, the present value of lease payments are recognized as financial accounts receivable. Finance income, which is the difference between the gross receivable and the present value of such amount, is recognized as the interest rate of return.

Leases in which substantially all risks and rewards are not transferred to the lessee are classified as operating leases. Payments under operating leases (net of any incentives received from the lessor) are recognized as an expense on a straight-line basis over the lease term.

Arauco evaluates the economic nature of the contracts that grant the right to use certain assets, for the purposes of determining the existence of implied leases. In these cases, the Company separates - at the beginning of the contract, and based on relative reasonable values - payments and considerations associated with the lease, from the rest of the elements incorporated to the contract.

 

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q)

Biological Assets

IAS 41 requires that biological assets, such as standing trees, are measured at fair value less cost to sell in the statement of financial position. Forestry plantations are accounted for at fair value less costs to sell, based on the presumption that fair values of these assets can be measured reliably.

The measurement of forestry plantations is based on discounted cash flow models whereby the fair value of the biological assets is determined using estimated future cash flows from continuing operations calculated using our sustainable forest management plans and including the estimated growth of the forests. This valuation is performed on the basis of each identifiable farm block and for each type of tree.

The measurement of new forestry plantations made during the current year is made at cost, which corresponds to the fair value at that date. After twelve months, the valuation methodology used is that explained in the preceding paragraph.

Biological assets shown as current assets correspond to those forestry plantations that will be harvested in the short term.

Biological growth and changes in fair value of forestry plantations are recognized in the line item “Other income” in the consolidated statement of profit or loss.

 

r)

Income taxes

The tax liabilities are recognized in the consolidated financial statements based on the determination of taxable income for the year and calculated using the tax rates in force in the countries where Arauco operates.

Deferred income tax is recognized using liability method, on the temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated annual accounts. Deferred income tax is determined using tax rates contained in laws adopted as of the date of the financial statements and that are expected to be applicable when the related deferred tax asset is realized or the deferred income tax liability is settled.

Deferred taxes are recognized in accordance with the standards established in IAS 12 - Income Tax.

The goodwill arising on business combinations does not give rise to deferred tax.

The deferred tax assets and tax credits are generally recognized for all deductible temporary differences to the extent that it is probable that future taxable profit will be available against which those deductible temporary differences can be utilized.

 

s)

Provisions

Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period.

 

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t)

Revenue recognition

Revenues are valued at fair value of the consideration received or to be received, derived from them.

Arauco analyses and takes under consideration all relevant facts and circumtances to apply the five-step model established under IFRS 15 to customer contracts: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price, and (v) recognise revenue. Aditionally, Arauco evaluates the incremental costs of obtaining a contract and the costs incurred to comply with a contract.

Arauco recognizes revenues when the steps established in IFRS have been satisfactorily complied with.

Accounts receivable are recognized when control over goods or services has been transferred to the customer, because at this point of the time collection is unconditional and the passage of time is only needed to receive payment.

(i) Revenue recognition from the Sale of Goods

Revenue from the sale of goods is recognized when Arauco has transferred to the buyer the significant risks and rewards of ownership of the committed goods, when the amount of revenue can be reliably measured, when Arauco does not retain any managerial involvement over the goods sold and when it is probable that the economic benefits associated with the transaction will flow to Arauco and the costs incurred in respect of the transaction can be measured reliably. Revenue from the sale of goods are recognised when there is no obligation unsatisfied that could affect the customer’s acceptance of the product. The delivery is effective when the products are sent to the specific location, the risks of obsolescence and loss have been transferred to the customer and when Arauco has objective evidence that all acceptance criteria have been satisfied.

Sales are recognized in terms of the price agreed to in the sales contract, less any volume discounts and estimated product returns at the date of the sale. There is no significant financing component given that receivables from sales are collected within a short period, which is in line with market practices.

The structure for recognizing revenue from export sales is based on the 2010 Incoterms, which are the official rules for the interpretation of commercial terms issued by the International Chamber of Commerce.

The main Incoterms used by Arauco are the following:

“CFR (Cost and freight)”, where the company bears all costs including main transportation, until the products arrives at its port of destination. The risk is transferred to the purchaser once the products have been loaded onto the vessel, in the country of origin.

“CIF (Cost Insurance & Freight)”, where the Company organizes and pays for external freight services and some other expenses. Arauco is no longer responsible for the products once they have been delivered to the ocean carrier company. The point of sale is the delivery of the products to the carrier chartered by the seller.

 

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(ii) Revenue recognition from Rendering of Services

Revenue from the rendering of services is recognized as long as the performance obligation have been satisfied.

Revenue is recognized considering the stage of completion of the transaction at the date of the reporting period, when Arauco has the enforceable right of payment from the rendering of the services.

There is no significant financing component, given that sales are made with a reduced average collection period, which is in line with market practice.

Arauco mainly provides power supply services which are transacted principally in the spot market of the Sistema Eléctrico Nacional (SEN) (“National Electrical System”). According to current regulations, the prices on that market called “Marginal Costs” are calculated by the Coordinador Eléctrico Nacional (CEN) (“National Electrical Coordinator”) and are generally recognized in the period in which the services are rendered.

Electrical power is generated as a by-product of the pulp and wood process and is a complementary business to it, which is initially supplied to the group’s subsidiaries and any surplus is sold to the SEN.

Arauco provides other non-core services such as port services and pest control whose revenues are derived from fixed price service contracts are recognized considering the stage of completion of the services rendered at the date of reporting, generally during the period of the service contract on a straight-line basis over the term of the contract.

Revenues from reportable segments mentioned in Note 24 are measured in accordance with the policies indicated in the preceding paragraphs.

Revenues from inter-segment sales (which are made at market prices) are eliminated in the consolidated financial statements.

 

u)

Minimum dividend

Article No. 79 of the Chilean Corporations Law states that, unless otherwise unanimously agreed by the shareholders, corporations must distribute annually at least 30% of net income for the current year as cash dividend to shareholders determined in proportion to their shares or in the proportion established in the by-laws for preferred shares, if any, except where necessary to absorb accumulated losses from prior years.

The General Shareholders’ Meeting of Arauco agreed to distribute annual dividends at 40% of net distributable income, including an interim dividend to be distributed at year end. Dividends payable are recognized as a liability in the financial statements in the period when they are declared and approved by the Arauco’s shareholders or when arises the corresponding present obligation based on existing legislation or distribution policies established by the Shareholders’ Meeting.

The dividends payable provision is registered for 40% of the liquid distributable profit and against a lower equity, based on the yearly resolution of the Shareholders’ Meeting.

Dividends payable are presented in the line item “Other current non-financial liabilities” in the consolidated statement of financial position.

 

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v)

Earning per share

Basic earnings per share are calculated by dividing the net profit for the period attributable to the parent company by the weighted average number of ordinary shares outstanding during the period, excluding the average number of shares in the Company held by a subsidiary, if such circumstance exists. Arauco has not performed any type of transaction with a potential dilutive effect that would cause diluted earnings per share to be different from basic earnings per share.

 

w)

Impairment

Non-financial Assets

The recoverable amount of property, plant and equipment and other long-term assets with finite useful lives are measured whenever there are any circumstances indicating that the assets have to recognize an impairment loss. Among the circumstances to consider as evidence of impairment are significant declines in the assets’ market value, significant adverse changes in the technological environment, obsolescence or physical damages of assets and changes in the manner in which the asset is used or expected to be used). Arauco evaluates at the end of each reporting period whether there is any evidence of the indications above mentioned.

A previously recognized impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount however a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

For the purposes of assessing impairment losses, assets are grouped at the lowest level for which there is identifiable cash flows separately for each cash-generating unit. Non-financial assets, other than goodwill, which had recognized an impairment loss, are reviewed at the end of each reporting period whether there are any circumstances indicating that an impairment loss previously recognized may no longer exists or has decreased.

“Cash-generating units” are the smallest identifiable groups of those cash inflows that are largely independent of the cash inflow from other assets or groups of assets.

Goodwill

Goodwill and intangible assets with indefinite useful life are tested annually for impairment or whenever circumstances indicate it. The recoverable amount of an intangible asset is the higher of its fair value less costs to sell and its value in use. An impairment loss is recognized whenever the carrying amount exceeds the recoverable amount.

A cash-generating unit, for which goodwill has been allocated, is tested for impairment annually or more frequently when there are circumstances indicating that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets pro rata based on the carrying amount of each asset in the unit. Any impairment loss of goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

 

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Goodwill is allocated to cash-generating units for impairment testing purposes. The allocation is made between cash-generating units or groups of cash generating units expected to benefit from the synergies of the combination.

Financial Assets

At the end of each reporting period, an assessment is performed in order to identify whether there is any objective evidence that a financial asset or a group of financial assets may have been impaired.

An allowance for doubtful accounts is established based on a measurement of expected losses using a simplified approach.

The allowance for doubtful accounts is measured as the difference between the carrying amount of receivables and the present value of estimated future cash flows. The carrying amount of the receivable is reduced through the use of the allowance. If the impairment loss decreases in later periods, it is reversed either directly or by adjusting the provision for doubtful accounts, with effect in profit or loss.

 

x)

Employee Benefits

Arauco constitutes labor obligations for severance payable in all circumstances for certain of its employees with at least 5 years of work in the Company, based on the terms of the staff’s collective and individual bargaining agreements.

The related provision is an estimate of the years of service to be recognized as a future labor obligation liability, in accordance with contracts between Arauco and its employees and pursuant to actuarial valuation criteria for this type of liability. This post-employment benefit is considered a defined benefit plan.

The main factors considered for calculating the actuarial value of severance obligation for years of service are employee turnover, salary increases and life expectancy of the workers included in this benefit.

Actuarial gains and losses are recognized in other comprehensive income in the year they are incurred.

These obligations are related to post-employee benefits in accordance with current standards.

 

y)

Employee Vacations

Arauco recognizes the expense for employee vacation according to labor legislation in each country on an accrual basis.

This obligation is presented in line item “Trade and Other current payables” in the consolidated statements of financial position.

 

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z)

Recent accounting pronouncements

a) Standards, interpretations and amendments that are mandatory for the first time for annual periods beginning on January 1, 2018:

 

Standards and interpretations

  

Content

  

Mandatory application
for annual periods
beginning on or after

IFRS 9   

Financial Instruments

 

Supersedes IAS 39. This final version includes requirements for the classification and measurement of financial assets and liabilities and introduces an ‘expected credit loss’ model for the measurement of the impairment. Hedge accounting part was included in IFRS 9 published at November 2013.

   January 1, 2018
IFRS 15   

Revenue from Contracts with Customers

 

Provides a single, principles based five-step model to be applied to all contracts with customers. The principles include information related to nature, amount, opportunity and uncerntainty of the revenue and cash flows from contracts with customers.

   January 1, 2018
IFRIC 22   

Transactions in Foreign Currency and Anticipated Considerations

 

Applies to a transaction in foreign currency (or partially in foreign currency) when an entity recognizes a non-financial asset or a non-financial liability arising from the payment or collection of an anticipated consideration, before recognizing the related asset, expense, or income.

   January 1, 2018

Amendments and improvements

  

Content

  

Mandatory application
for annual periods
beginning on or after

IFRS 1   

First-time Adoption of International Financial Reporting Standards

Deletes the short-term exemptions for first time adopters regarding to IFRS 7, IAS 9 and IFRS 10.

 

   January 1, 2018
IFRS 2   

Share-based payment

 

Clarifies the measurement of cash settled share-based payment transactions and the accounting for amendments that change such payments to equity instruments.

   January 1, 2018
IFRS 15   

Revenue from contracts with customers.

 

Introduces clarifications to the guidelines and examples related to the transition towards the new rule.

   January 1, 2018
IFRS 4   

Insurance contracts

 

Introduces two approaches: overlap and temporary exemption of IFRS 9.

   January 1, 2018
IAS 40   

Investment properties

 

Clarifies the requirements needed to transfer to, or from, investment properties.

   January 1, 2018
IAS 28   

Investments in associates and joint ventures

 

Measurement of the investments in associates and joint ventures at fair value.

   January 1, 2018

 

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IFRS 9 - Financial Instruments.

IFRS 9 came into force on January 1, 2018, replacing IAS 39, and its application has not given rise to significant impact on Arauco’s Consolidated Financial Statements. The Company carried out a detailed assessment of the three aspects of the standard and its impact on the consolidated financial statements, which can be summarized as follows:

i) Classification and measurement: as required by IFRS 9, Arauco changed its classification method for financial assets based on two concepts: the characteristics of the financial assets’ contractual cash flows and of Arauco’s business model, the purpose of which is achieved through the collection of contractual cash flows and the sale of financial assets. Under this new method the four classification categories of IFRS 39 were replaced with the following:

- Amortized cost, where the financial assets are kept in a business model the purpose of which is the generation of contractual cash flows;

- Fair value through other comprehensive income, where the financial assets are kept in a business model the purpose of which is achieved by generating contractual cash flows and selling financial assets;

- Fair value through profit or loss, a residual category which comprises financial instruments that are not kept under any of the business models referenced above, including those kept for negotiation and those designated at fair value in their initial recognition.

With regard to the measurement of financial liabilities, IFRS 9 retains to a great extent the prior accounting treatment of IAS 39, with limited amendments, under which the majority of these liabilities are measured at amortized cost, thereby enabling the designation of a financial liability at fair value with changes in results, provided that certain criteria are met. However, the standard introduced new provisions for liabilities designated at fair value through profit or loss, by virtue of which under certain circumstances the changes in the fair value related to the variation of the “own credit risk” are recognized in other comprehensive income.

Management reviewed and assessed Arauco’s financial assets as of January 1, 2018, based on the hitherto prevailing events and circumstances, and concluded that the new classification requirements do not have an impact on the accounting of its financial assets. The loans and the accounts receivable are maintained in order to obtain the contractual cash flows that only represent the payment of principal and interest; therefore, the criteria for them to be measured at amortized cost under IFRS 9, are fulfilled. Regarding the impairment of the financial assets, IFRS 9 requires an expected credit losses model, as opposed to the incurred loss model set forth by IAS 39. This means that, under IFRS 9, impairments are recorded, generally, earlier compared with the previous model. The new impairment model is applied to the financial assets measured at amortized cost or measured at their fair value through other comprehensive income, except for investments in equity instruments. Impairment provisions are measured based on:

 

   

The expected credit losses for the upcoming 12 months; or

 

   

The expected credit losses during the entire lifespan of the asset, if on the date of submission of the Consolidated Financial Statements, a significant increase in the credit risk of a financial instrument were to occur, as from the initial recognition thereof.

IFRS 9 also establishes a simplified approach to measure the correction of values for losses at a sum equal to the expected credit loss during the lifespan of the asset for commercial accounts receivable, contractual assets, or accounts receivable for leases. Arauco chose to apply this policy for the aforementioned financial assets.

 

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ii) Hedging accounting: IFRS 9 also introduced a new model for hedging accounting, with the purpose of aligning accounting more closely with the risk management activities of the companies and of establishing an approach that would be more principle-based. The new approach allows for an improved reflection of the risk management activities in the financial statements, allowing for more elements to be eligible as hedged elements: risk component of non-financial items, net positions and aggregate exposures (in other words, a combination of a non-derivative exposure and a derivative). The most significant changes regarding the hedging instruments, when compared with the hedging accounting method employed under IAS 39, pertains to the possibility of deferring the temporary value of an option, the forward points of forward contracts, and the difference of the monetary base in other comprehensive income, until the time when the hedged element has an impact on results. IFRS eliminated the quantitative requirement from the effectiveness tests envisaged under IAS 39, whereby the results had to be within the 80%-125% range, thus allowing for the evaluation of the efficacy to be aligned with the management of the risk through the demonstration of the existence of an economic ratio between the hedging instrument and the hedged item, while also allowing the possibility of rebalancing the hedging ratio if the risk management objective remains unaltered. Nevertheless, retrospective inefficacy must still be valuated and recognized. Arauco applied the new requirements of IFRS 9 as of the date of the adoption of the same, as of January 1, 2018.

The application of IFRS has had the following initial impacts as of January 1, 2018, in Arauco’s Consolidated Financial Statements:

Hedging assets net

 

      ThU.S.$  

Closing balance at December 31, 2017 - calculated under IAS 39

     52,057  

Amounts restated through reserves

     (2,627

Opening balance at January 1, 2018 - under IFRS 9

     49,430  

Loss allowance for trade receivables

  
      ThU.S.$  

Closing loss allowance at December 31, 2017 - calculated under IAS 39

     (17,785

Amounts restated through retained earnings

     (2,875

Closing loss allowance at January 1, 2018 - under IFRS 9

     (20,660

IFRS 9 adjustments net of deferred taxes

  
      ThU.S.$  

Amounts restated through reserves

     (2,627

Amounts restated through retained earnings

     (2,875

Deferred taxes

     1,627  

Increase (decrease) due to changes to accounting policies

     (3,875

IFRS 15 – Revenue from Contracts with Customers.

As from January 1, 2018, Arauco has decided to apply IFRS 15 using the modified retrospective method, recognizing the accumulated effect of the initial application as an adjustment to the opening balance of the retained earnings of year 2018. However, no significant effects impacting Arauco’s Consolidated Financial Statements were identified and there were no adjustment to the opening balance of retained earnings.

This standard requires more detailed disclosures than those required under the previous current standards, with the purpose of supplying more complete information regarding the nature, amounts, schedule and certainty of the income and cash flows derived from the contracts with clients.

 

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In addition to the submission of more extensive disclosures regarding Arauco’s income transactions, the application of IFRS 15 has not had any impact upon Arauco’s financial position or financial performance. During 2017, the Arauco Group carried out an implementation project, in order to identify and measure the potential impacts of applying IFRS 15 to its consolidated financial statements. This project identified all of the income flows from Arauco’s ordinary activities, the knowledge of the business’s traditional practices, a thorough evaluation of each type of contract with clients, and the determination of the registration methodology for this income under the current rules. A special evaluation was carried out regarding the contracts that contain key aspects of IFRS 15 and certain features that are of particular interest for Arauco, such as: identification of contractual obligations, contracts with multiple obligations and moment of the recognition, contracts with a variable consideration, significant financing components, principal versus agent analysis, existence of warranties for type of service, and capitalization of the costs of obtaining and performing a contract. As mentioned in this Note 1, Arauco’s main activity is the production and sale of products related to the forestry and timber industry. Considering the nature of the goods and services that are being offered as well as the aforementioned characteristics of the income flows, Arauco did not identify impacts over the consolidated financial statements at the moment of initially applying IFRS 15, that is, as of January 1, 2018. The type of revenue and acknowledgments are described in Notes 9 and 24.

b) Standards, interpretations and amendments, the application of which is not yet mandatory, which have not been adopted in advance:

 

Standards and interpretations

  

Content

  

Mandatory application
for annual periods
beginning on or after

IFRS 16

  

Leases

 

The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.

   January 1, 2019

IFRIC 23

  

Uncertain tax positions

 

It clarifies the method for applying the acknowledgment and measurement requirements of IAS 12 when there is uncertainty regarding the fiscal treatments.

   January 1, 2019

IFRS 17

  

Insurance Contracts

 

Supersedes IFRS 4. It changes mainly the accounting for insurance contracts and inverstments contracts.

   January 1, 2021

 

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Amendments and improvements

  

Content

  

Mandatory application
for annual periods
beginning on or after

IFRS 10 y IAS 28-

Amendments

   Sale or Contribution of assets among an Investor and its Associates or Joint Ventures.    Indeterminate

IAS 19

  

Employee Benefits

 

Prescribe the accounting and disclosure for employee benefits, requiring an entity to recognise a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service.

   January 1, 2019

IAS 28

  

Investments in associates and joint ventures

 

It clarifies that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied.

   January 1, 2019

IFRS 9

  

Financial instruments

 

Allows assets to be measured at amortised cost.

   January 1, 2019

IFRS 3

  

Business Combinations

 

Clarifies that when an entity obtains control of a business that is a joint operation, it is a business combination achieve by steps.

   January 1, 2019

IFRS 11

  

Joint Arrangements

 

Clarifies that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.

   January 1, 2019

IAS 12

  

Income taxes

 

Clarifies the income tax consequences of dividends from financial instruments at amortized cost should be recognized according to the past transactions or events that generated distributable profits.

   January 1, 2019

IAS 23

  

Borrowing Costs

 

Clarifies that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the general borrowings.

   January 1, 2019

IAS 1 y IAS 8

   Presentation of Financial Statementes and Accounting Policies, Changes in Accounting Estimates and Errors. Clarifies the definition of material and align the definition used in the Conceptual Framework and the standards themselves.    January 1, 2020

IFRS 3

  

Definition of a Business

 

Narrows the definitions of a business

   January 1, 2020

According to the performed evaluations, the adoption of the other standards, amendments and interpretations described above will not have a significant impact on Arauco’s Consolidated Financial Statements during its initial application period, except for the effects of the adoption of IFRS 16, which is described below.

IFRS 16 – Leases

IFRS 16 has not been applied at the closing of these Consolidated Financial Statements, and is applicable as of the annual periods beginning on January 1, 2019.

IFRS 16 – Leases includes changes in Arauco’s accounting as lesee, by requiring a similar treatment than that of financial leases for all the leases that are currently classified as operational with an effective term exceeding 12 months. This means, in general terms, that it will be necessary to acknowledge an asset that represents the right of use over the goods that are subject to operational leasing agreements as well as a liability, equal to the present value of the payments associated to the agreement. Regarding the effects over the results, the payment of monthly leases shall be replaced by the depreciation for the asset’s right of use and the acknowledgement of a financial expense.

 

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Arauco will recognize leases retroactively with the cumulative effect of the initial application of the standard recognized as of January 1, 2019, consistently with all leases where it acts a lessee.

Given this alternative, it will not be necessary to restate the comparative information.

Arauco has chosen not to recognize a liability and an asset for right-of-use for low value leases or whose term of the contract is 12 months or less.

In the impact assessment project of IFRS 16 in the Consolidated Financial Statements of Arauco, we have estimated that we will recognize assets for right-of-use with their corresponding obligations for right-of-use for an approximate amount of MU.S.$ 300.

 

NOTE 2.

ACCOUTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

Changes to accounting policies

Arauco applied IFRS 15 “Revenue from Contracts with Customers” and IFRS 9 “Financial instruments” for the first time. These new standards require an assessment of the impacts over each of the affected accounting accounts and balances as of January 1, 2018, as part of the transition to the new accounting standards.

The Company has identified the changes as a result of the application of the standards, acknowledging the accumulated effect of their initial application as a restatement of the opening balances of the retained earnings and reserves as of January 1, 2018; therefore, the financial statements as of December 31, 2017 have not been modified.

The impact of the implementation of IFRS 9 - Financial instruments, and IFRS 15 - Revenue from Contracts with Customers, is explained in note 1 z).

Changes to accounting estimates

As of December 31, 2018, there have been no changes regarding the accounting estimates for the 2017 financial year.

 

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NOTE 3.

DISCLOSURE OF OTHER INFORMATION

 

a)

Disclosure of information on Issued Capital

At the date of these consolidated financial statements the share capital of Arauco is ThU.S.$353,618.

100% of Capital corresponds to ordinary shares

 

     12-31-2018    12-31-2017

Description of Ordinary Capital Share Types

   100% of Capital corresponds to ordinary shares

Number of Authorized Shares by Type of Capital in Ordinary Shares

   113,159,655

Nominal Value of Shares by Type of Capital in Ordinary Shares

   ThU.S.$0.0031210 per share

Amount of Capital in Shares by Type of Ordinary Shares that Constitute Capital

   ThU.S.$353,618
     12-31-2018    12-31-2017

Number of Shares Issued and Fully Paid by Type of Capital in Ordinary Shares

   113,159,655

 

b)

Dividends paid

The interim dividend paid in December 2018 was equivalent to 20% of the distributable net profit calculated as of the end of September 2018 and was considered a decrease in the statements of changes in equity.

The final dividend paid each year on may corresponds to the difference between the 40% of the prior year distributable net profit and the amount of the interim dividend paid.

The ThU.S.$324,295 (ThU.S.$ 174,266 as of December 31, 2017) presented in the statements of changes in equity correspond to the minimum dividend provision recorded for the period 2018.

In the Statements of Cash Flow in the line item “Dividends Paid” an amount of ThU.S.$257,421 is presented for the year ended December 31, 2018 (ThU.S.$ 121,586 for the year ended December 31, 2017), of which ThU.S.$256,029 (ThU.S.$ 119,499 for the year ended December 31, 2017) correspond to the payment of dividends of the parent company.

 

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The following are the dividends paid and per share amounts during the periods 2018, 2017 and 2016:

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

     Interim Dividend  

Type of Shares for which there is a Dividend Paid

     Ordinary Shares  

Date of Dividend Paid

     12-12-2018  

Amount of Dividend

     ThU.S.$ 142,256  

Number of Shares for which Dividends are Paid

     113,159,655  

Dividend per Share

     U.S.$ 1.25712  

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

     Final Dividend  

Type of Shares for which there is a Dividend Paid

     Ordinary Shares  

Date of Dividend Paid

     05-10-2018  

Amount of Dividend

     ThU.S.$113,773  

Number of Shares for which Dividends are Paid

     113,159,655  

Dividend per Share

     U.S.$ 1.00542  

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

     Interim Dividend  

Type of Shares for which there is a Dividend Paid

     Ordinary Shares  

Date of Dividend Paid

     12-20-2017  

Amount of Dividend

     ThU.S.$60,494  

Number of Shares for which Dividends are Paid

     113,159,655  

Dividend per Share

     U.S.$0.53459  

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

     Final Dividend  

Type of Shares for which there is a Dividend Paid

     Ordinary Shares  

Date of Dividend Paid

     05-10-2017  

Amount of Dividend

     ThU.S.$59,005  

Number of Shares for which Dividends are Paid

     113,159,655  

Dividend per Share

     U.S.$0.52143  

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

     Interim Dividend  

Type of Shares for which there is a Dividend Paid

     Ordinary Shares  

Date of Dividend Paid

     12-14-2016  

Amount of Dividend

     ThU.S.$29,572  

Number of Shares for which Dividends are Paid

     113,159,655  

Dividend per Share

     U.S.$0.26133  

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid

     Final Dividend  

Type of Shares for which there is a Dividend Paid

     Ordinary Shares  

Date of Dividend Paid

     05-11-2016  

Amount of Dividend

     ThU.S.$99,221  

Number of Shares for which Dividends are Paid

     113,159,655  

Dividend per Share

     U.S.$0.87683  

 

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c)

Disclosure of Information on Reserves

Other reserves comprise reserves of exchange differences on translation, reserves of cash flow hedges and other reserves. Arauco does not have any restrictions associated with these reserves.

Reserves of exchange differences on translation

Reserves of exchange differences on translation correspond to exchange differences relating to the translation of the results and net assets of Arauco’s subsidiaries whose functional currency is other than Arauco’s presentation currency.

Reserves of cash flow hedges

The hedging reserve includes the cash flow hedge reserve and the costs of hedging reserve. The cash flow hedge reserve is used to recognise the effective portion of gains or losses on derivatives that are designated and qualify as cash flow hedges.

Reserve of Actuarial Losses in Defined Benefit Plans

This corresponds to changes in the present value of the obligation for defined benefits resulting from experience adjustments (the effect of the differences between the previous actuarial assumptions and the events that occurred within the context of the plan) and the effects of the changes in the actuarial assumptions.

Other reserves

This mainly corresponds to the share of other comprehensive income of investments in associates and joint ventures.

 

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Other items in the Statements of Profit or Loss

The table below sets forth other income, other expenses, finance income, finance costs and share of profit (loss) of associates and joint ventures for the years ended December 31, 2018, 2017 and 2016 are as follows:

 

     January - December  
     2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Classes of Other Income

        

Other Income, Total

     124,304        111,513        257,863  

Gain from changes in fair value of biological assets (See note 20)

     84,476        83,031        208,562  

Net income from insurance compensation

     1,788        1,305        3,222  

Revenue from export promotion

     3,570        3,542        2,350  

Lease income

     2,156        3,061        4,687  

Gain on sales of assets

     13,164        13,444        17,485  

Access easement

     260        565        3,756  

Recovery of tax credits

     —          —          2,033  

Compensations received

     4,554        283        139  

Other operating results (*)

     14,336        6,282        15,629  

Classes of Other Expenses by activity

        

Total of Other Expenses by activity

     (95,880      (240,165      (77,415

Depreciation

     (523      (466      (562

Legal expenses

     (3,832      (3,882      (5,087

Impairment provision for property, plant and equipment and others

     (31,680      (33,240      (14,979

Operating expenses related to plants stoppage

     (2,718      (7,275      (3,926

Expenses related to projects

     (15,497      (2,139      (1,620

Loss of asset sales

     (8,533      (4,691      (2,283

Loss and repair of assets

     (430      (3,739      (1,307

Loss of forest due to fires (**)

     (2,584      (138,139      (15,193

Other Taxes

     (16,821      (17,463      (8,261

Research and development expenses

     (1,888      (2,594      (2,684

Fines, readjustments and interests

     (788      (3,675      (1,004

Loss on disposal of associates

     —          —          (10,369

Other expenses

     (10,586      (22,862      (10,140

Classes of financing income

        

Financing income, total

     20,895        19,640        29,701  

Financial income from mutual funds – term deposits

     13,177        11,023        11,439  

Financial income resulting from swap – forward instruments

     596        3,602        7,226  

Other financial income

     7,122        5,015        11,036  

Classes of financing costs

        

Financing costs, Total

     (214,779      (287,958      (258,467

Interest expense, Banks loans

     (29,320      (31,014      (33,224

Interest expense, Bonds

     (142,846      (223,602      (183,203

Interest expense, other financial instruments

     (18,716      (15,706      (17,221

Other financial costs

     (23,897      (17,636      (24,819

Share of profit (loss) of associates and joint ventures accounted for using equity method

        

Total

     17,246        17,017        23,939  

Investments in associates

     3,043        4,855        16,348  

Joint ventures

     14,203        12,162        7,591  

 

(*)

”Other operating results” includes extraction of sand and gravel from wharfage and indemnities, among others.

(**)

Loss of forest due to fires are presented net of ThU.S.$35,000 from insurance compensation as of December 2017.

 

F-36


Table of Contents

The analysis of expenses by nature contained in these consolidated financial statements is presented below:

 

     January - December  

Cost of sales

   2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Timber

     691,129        725,114        736,399  

Forestry labor costs

     672,233        631,276        600,320  

Depreciation

     377,557        389,847        377,983  

Maintenance costs

     280,715        262,764        313,500  

Chemical costs

     560,241        517,478        479,335  

Sawmill Services

     140,106        109,776        117,340  

Other Raw Materials

     228,701        188,874        221,950  

Other Indirect costs

     185,424        178,447        143,074  

Energy and fuel

     207,712        186,041        139,527  

Cost of electricity

     34,301        42,008        39,960  

Wage and salaries

     344,630        342,907        329,517  

Total

     3,722,749        3,574,532        3,498,905  

 

(*)

Total amount is composed of the cost of inventory sales for ThU.S.$ 3,662,348 (ThU.S.$3,510,009 and ThU.S.$ 3,423,439 at December 31, 2017 and 2016, respectively) and the cost of rendering services for ThU.S.$ 60,401 (ThU.S.$ 64,523 as of December 31, 2017)

 

     January - December  

Distribution cost

   2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Selling costs

     39,402        39,175        33,557  

Commissions

     14,629        14,880        13,880  

Insurance

     4,266        3,620        3,216  

Provision for doubtful accounts

     3,144        (245      910  

Other selling costs

     17,363        20,920        15,551  

Shipping and freight costs

     517,403        484,125        462,916  

Port services

     28,064        30,996        28,028  

Freights

     440,886        409,801        382,894  

Other shipping and freight costs (internation, warehousing, stowage, customs and other costs)

     48,453        43,328        51,994  

Total

     556,805        523,300        496,473  
     January - December  

Administrative expenses

   2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Wages and salaries

     247,927        218,720        198,042  

Marketing, advertising, promotion and publications expenses

     12,650        10,046        9,937  

Insurances

     15,538        17,122        21,526  

Depreciation and amortization

     27,879        28,210        29,285  

Computer services

     27,434        27,193        27,735  

Lease rentals (offices, other property and vehicles)

     14,249        14,195        13,391  

Donations, contributions, scholarships

     13,952        12,772        10,396  

Fees (legal and technical advisors)

     51,039        43,107        43,809  

Property taxes, city permits and rights

     17,645        17,281        15,962  

Cleaning services, security services and transportation

     24,089        25,153        26,975  

Third-party variable services (maneuvers, logistics)

     43,573        46,097        40,277  

Basic services

     9,467        8,423        8,653  

Maintenance and repair

     6,973        5,579        7,617  

Seminars, courses, training materials

     3,117        2,526        3,560  

Other administration expenses (travels, clothing and safety equipment, enviromental expenses, audits and others)

     45,752        44,870        17,304  

Total

     561,284        521,294        474,469  

 

F-37


Table of Contents
NOTE 4.

INVENTORIES

 

Components of Inventory

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Raw materials

     56,213        103,049  

Production supplies

     122,794        98,548  

Work in progress

     66,432        56,194  

Finished goods

     610,203        441,726  

Spare Parts

     174,554        168,945  

Total Inventories

     1,030,196        868,462  

Inventories recognized as cost of sales at December 31, 2018 were ThU.S.$3,662,348 (ThU.S.$3,510,009 and ThU.S.$ 3,423,439 at December 31, 2017 and 2016, respectively).

In order to have the inventories recorded at net realizable value at December 31, 2018, a net decrease of inventories was recognized associated with a higher provision of obsolescence of ThU.S.$2,038 (ThU.S.$1,264 and ThU.S.$ 8,397 at December 31, 2017 and 2016, respectively). As of December 31, 2018, the amount of obsolescence provision is ThU.S.$29,658 (ThU.S.$28,684 at December 31, 2017).

At December 31, 2018, there were inventory write-offs of ThU.S.$6,760 (ThU.S.$ 1,427 and ThU.S.$ 1,332 at December 31, 2017 and 2016, respectively)

The inventory obsolescence provision is calculated based on the sales conditions of products and age of inventory (inventory turnover).

As of the date of these consolidated financial statements, there are no inventories pledged as security to report.

 

F-38


Table of Contents
NOTE 5.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, bank checking account balances, time deposits and mutual funds. These are short-term highly liquid investments that are readily convertible to known amounts of cash, and are subject to an insignificant risk of changes in value.

The investment objective of time deposits is to maximize the amounts of cash surpluses in the short-term. These instruments are permitted under Arauco’s Investment Policy which allows investing in fixed income securities. These instruments have a maturity of less than three months from the date of acquisition.

Arauco invests in local and international mutual funds in order to maximize the returns of cash surpluses denominated in Chilean Pesos or in foreign currencies such as U.S. Dollars or Euros. These instruments are permitted under Arauco’s Investment Policy.

As of the date of these consolidated financial statements, there are no amounts of cash and cash equivalents with restrictions on use.

 

Components of Cash and Cash Equivalents

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Cash on hand

     126        148  

Bank checking account balances

     327,006        209,037  

Time deposits

     478,775        292,105  

Mutual funds

     270,035        73,170  

Other cash and cash equivalents (*)

     —          15,426  

Total

     1,075,942        589,886  

(*) Applies to purchase contracts with resale commitments.

The risk classification of the mutual funds in effect as of December 31, 2018 and December 31, 2017 is shown below.

 

     December
2018
ThU.S.$
     December
2017
ThU.S.$
 

AAAfm

     268,237        64,471  

No classification

     1,798        8,699  

Total Mutual Funds

     270,035        73,170  

Changes in Financial Liabilities

 

            Cash Flow                           
     Opening balance
01-01-2018
ThU.S.$
     Borrowings
obtained
ThU.S.$
     Borrowings
paid
ThU.S.$
    Interest
paid
ThU.S.$
    Accrued
interest
ThU.S.$
     Inflation
adjustment
ThU.S.$
    Non-cash
movements
ThU.S.$
    Closing balance
12-31-2018
ThU.S.$
 

Borrowings from banks

     858,457        534,474        (453,789     (28,397     30,133        761       (1,204     940,435  

Hedging liabilities

     5,393        —          —         (803     —          (138     67,147       71,599  

Bonds and promissory notes

     3,302,685        329,077        (21,495     (143,080     144,116        (112,773     3,124       3,501,654  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     4,166,535        863,551        (475,284     (172,280     174,249        (112,150     69,067       4,513,688  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
            Cash Flow                           
     Opening balance
01-01-2017
ThU.S.$
     Borrowings
obtained
ThU.S.$
     Borrowings
paid
ThU.S.$
    Interest
paid
ThU.S.$
    Accrued
interest
ThU.S.$
     Inflation
adjustment
ThU.S.$
    Non-cash
movements
ThU.S.$
    Closing balance
12-31-2017
ThU.S.$
 

Borrowings from banks

     914,358        421,309        (481,205     (28,141     27,894        (439     4,681       858,457  

Hedging liabilities

     87,364        —          —         —         —          —         (81,971     5,393  

Bonds and promissory notes

     3,452,658        891,172        (1,146,506     (233,045     218,326        122,324       (2,244     3,302,685  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     4,454,380        1,312,481        (1,627,711     (261,186     246,220        121,885       (79,534     4,166,535  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

F-39


Table of Contents
NOTE 6.

INCOME TAXES

The tax rates applicable in the countries in which Arauco operates are 27% in Chile, 30% in Argentina, 34% in Brazil, 25% in Uruguay and 21% in the United States (federal tax).

On September 29, 2014, the Official Gazette enacted Law No. 20,780, which introduced various amendments to the current income tax system, as well as to other taxes in Chile. The main amendment was the establishment of an option between two tax regimes: attributed income system and the partially integrated system. One of the effects of the regime selection is that it attaches a progressive increase in the First Category Tax for the fiscal years of 2014, 2015, 2016 and 2017 onwards, increasing to 21%, 22,5%, 24% y 25%, respectively, if the Company chooses the application of an attributed income system, or an increase to 21%, 22.5%, 24%, 25.5% y 27% for the fiscal years 2014, 2015, 2016, 2017, 2018 and thereafter, if the Company chooses the application of the partially integrated system.

Subsequently, on February 28, 2016, the Official Gazette enacted Law No. 20,899, which introduced amendments to Law No. 20,780. Among the main amendments is the incorporation of certain limitations for applying to the attributed income system, and therefore Arauco’s Chilean companies must apply the general rule, that is, the partially integrated system.

On December 22, 2017, a new law was enacted in the United States that amended several articles of the Income Tax Act. The most relevant amendments of this law include the reduction of the income tax rate, from 35% as to 21% by 2018 fiscal year. This amendment generated a benefit of ThU.S.$ 17,600 for Arauco’s subsidiaries in that country as of December 31, 2017, as a result of the reduction of the net deferred liabilities generated by the reduction of the federal income tax rate.

On December 29, 2017, Law No. 27,430 was enacted in the Official Gazette of Argentina, which amended several articles of the Income Tax Act. The most relevant amendments include the reduction of the federal income tax rate from 35% to 30% by 2018 and 2019 fiscal years, and 25% by 2020. This amendment generated a benefit of ThU.S$ 62,677 for Arauco’s subsidiaries in that country as of December 31, 2017, as a result of the reduction of the net deferred liabilities generated by the reduction of the federal income tax rate.

 

F-40


Table of Contents

Deferred Tax Assets

The following table sets forth the deferred tax assets as of the dates indicated:

 

     12-31-2018     12-31-2017  

Deferred Tax Assets

   ThU.S.$     ThU.S.$  

Deferred tax Assets relating to Provisions

     6,105       7,433  

Deferred tax Assets relating to Accrued Liabilities

     10,906       11,267  

Deferred tax Assets relating to Post-Employment benefits

     19,072       19,276  

Deferred tax Assets relating to Property, Plant and equipment

     10,125       11,657  

Deferred tax Assets relating to Financial Instruments

     9,761       4,348  

Deferred tax Assets relating to Tax Loss Carryforward

     109,320       62,706  

Deferred tax Assets relating to Inventories

     5,532       5,941  

Deferred tax Assets relating to Provisions for Income

     7,443       21,354  

Deferred tax Assets relating to Allowance for Doubtful Accounts

     5,001       5,149  

Intangible revaluation differences

     7,651       10,389  

Deferred tax Assets relating to Other Deductible Temporary Differences

     21,108       27,364  

Total Deferred Tax Assets

     212,024       186,884  
  

 

 

   

 

 

 

Offsetting presentation

     (207,389     (178,618
  

 

 

   

 

 

 

Net Effect

     4,635       8,266  
  

 

 

   

 

 

 

Certain subsidiaries of Arauco mainly in Chile, Brazil and Uruguay, as of the date of these consolidated financial statements, present tax losses for which we estimate that, given the projection of future profits, will allow the recovery of these assets. The total amount of these tax losses is ThU.S.$368,938 (ThU.S.$ 216,397 at December 31, 2017), which are mainly originated by operational and financial losses.

In addition, as of the closing of these consolidated financial statements there are ThU.S.$183,162 (ThU.S.$ 167,862 at December 31, 2017) of non-recoverable tax losses from companies in Uruguay as joint operations based on the participation of Arauco and subsidiaries in USA, for which deferred tax assets have not been recognized. The estimated recovery period exceeds the expiry date of such tax losses.

Deferred Tax Liabilities

The following table sets forth the deferred tax liabilities as of the dates indicated:

 

     12-31-2018     12-31-2017  

Deferred Tax Liabilities

   ThU.S.$     ThU.S.$  

Deferred tax Liabilities relating to Property, Plant and Equipment

     829,288       860,498  

Deferred tax Liabilities relating to Financial Instruments

     14,225       12,684  

Deferred tax Liabilities relating to Biological Assets

     661,582       676,876  

Deferred tax Liabilities relating to Inventory

     39,025       32,580  

Deferred tax Liabilities relating to Prepaid Expenses

     37,897       41,600  

Deferred tax Liabilities relating to Intangible

     20,240       22,014  

Deferred tax Liabilities relating to Other Taxable Temporary Differences

     22,790       17,731  

Total Deferred Tax Liabilities

     1,625,047       1,663,983  
  

 

 

   

 

 

 

Offsetting presentation

     (207,389     (178,618
  

 

 

   

 

 

 

Net Effect

     1,417,658       1,485,365  
  

 

 

   

 

 

 

The effect of changes in current and deferred tax liabilities related to financial hedging instruments corresponds to a credit of ThU.S.$4,474 for the year ended December 31, 2018 (compared to a credit of ThU.S.$ 1,591 for the year ended December 31, 2017), which is presented net in Reserves for Cash Flow Hedges in the Consolidated Statement of changes in Equity.

 

F-41


Table of Contents

Reconciliation of deferred tax assets and liabilities

 

Deferred Tax Assets

   Opening
Balance
01-01-2018
IAS 39
ThU.S.$
     Amounts
restated
ThU.S.$
     Opening
Balance
01-01-2018
IFRS 9
ThU.S.$
     Deferred
tax
Expenses
(Income)
ThU.S.$
    Deferred
tax of
items
charged
to other
comprehensive
income
ThU.S.$
    Increase
(decrease)
Net
exchange
differences
ThU.S.$
    Closing
balance
12-31-2018
ThU.S$
 

Deferred tax Assets relating to Provisions

     7,433           7,433        (1,015     —         (313     6,105  

Deferred tax Assets relating to Accrued Liabilities

     11,267           11,267        (361     —         —         10,906  

Deferred tax Assets relating to Post-Employment benefits

     19,276           19,276        297       (504     3       19,072  

Deferred tax Assets relating to Property, Plant and equipment

     11,657           11,657        (1,532     —         —         10,125  

Deferred tax Assets relating to Financial Instruments

     4,348        709        5,057        (507     5,211       —         9,761  

Deferred tax Assets relating to Tax Loss Carryforward

     62,706           62,706        53,103       —         (6,489     109,320  

Deferred tax Assets relating to Inventories

     5,941           5,941        (378     —         (31     5,532  

Deferred tax Assets relating to Provisions for Income

     21,354           21,354        (13,910     —         (1     7,443  

Deferred tax Assets relating to Allowance for Doubtful Accounts

     5,149        918        6,067        (843     —         (223     5,001  

Intangible revaluation differences

     10,389           10,389        (1,244     —         (1,494     7,651  

Deferred tax Assets relating to Other Deductible Temporary Differences

     27,364           27,364        (3,838     —         (2,418     21,108  

Total Deferred Tax Assets

     186,884        1,627        188,511        29,772       4,707       (10,966     212,024  

Deferred Tax Liabilities

   Opening
Balance
01-01-2018
IAS 39
ThU.S.$
     Amounts
restated
ThU.S.$
     Opening
Balance
01-01-2018
IFRS 9
ThU.S.$
     Deferred
tax
Expenses
(Income)
ThU.S.$
    Deferred
tax of
items
charged
to other
comprehensive
income
ThU.S.$
    Increase
(decrease)
Net
exchange
differences
ThU.S.$
    Closing
balance
12-31-2018
ThU.S$
 

Deferred tax Liabilities relating to Property, Plant and Equipment

     860,498        —          860,498        (23,428     —         (7,782     829,288  

Deferred tax Liabilities relating to Financial Instruments

     12,684        —          12,684        1,542       —         (1     14,225  

Deferred tax Liabilities relating to Biological Assets

     676,876        —          676,876        2,060       —         (17,354     661,582  

Deferred tax Liabilities relating to Inventory

     32,580        —          32,580        6,445       —         —         39,025  

Deferred tax Liabilities relating to Prepaid Expenses

     41,600        —          41,600        (3,703     —         —         37,897  

Deferred tax Liabilities relating to Intangible

     22,014        —          22,014        (562     —         (1,212     20,240  

Deferred tax Liabilities relating to Other Taxable Temporary Differences

     17,731        —          17,731        6,450       —         (1,391     22,790  

Total Deferred Tax Liabilities

     1,663,983        —          1,663,983        (11,196     —         (27,740     1,625,047  

 

Deferred Tax Assets

   Opening
Balance
01-01-2017
ThU.S.$
     Deferred
tax
Expenses
(Income)
ThU.S.$
    Deferred
tax of
items
charged
to other
comprehensive
income
ThU.S.$
    Increase
(decrease)
through
Business
Combination
ThU.S.$
     Increase
(decrease)
Net
exchange
differences
ThU.S.$
    Closing
balance
12-31-2017
ThU.S$
 

Deferred tax Assets relating to Provisions

     5,771        931       —         726        5       7,433  

Deferred tax Assets relating to Accrued Liabilities

     11,716        (405     —         —          (44     11,267  

Deferred tax Assets relating to Post-Employment benefits

     17,618        2,286       (673     —          45       19,276  

Deferred tax Assets relating to Property, Plant and equipment

     9,806        1,850       —         —          1       11,657  

Deferred tax Assets relating to Financial Instruments

     12,699        1,414       (9,764     —          (1     4,348  

Deferred tax Assets relating to Tax Loss Carryforward

     50,917        7,271       —         6,093        (1,575     62,706  

Deferred tax Assets relating to Inventories

     7,158        (1,435     —         221        (3     5,941  

Deferred tax Assets relating to Provisions for Income

     14,300        7,054       —         —          —         21,354  

Deferred tax Assets relating to Allowance for Doubtful Accounts

     4,886        (854     —         1,133        (16     5,149  

Intangible revaluation differences

     10        (954     —         11,333        —         10,389  

Deferred tax Assets relating to Other Deductible Temporary Differences

     22,985        (3,807     —         9,134        (948     27,364  

Total Deferred Tax Assets

     157,866        13,351       (10,437     28,640        (2,536     186,884  

Deferred Tax Liabilities

   Opening
Balance
01-01-2017
ThU.S.$
     Deferred
tax
Expenses
(Income)
ThU.S.$
    Deferred
tax of
items
charged
to other
comprehensive
income
ThU.S.$
    Increase
(decrease)
through
Business
Combination
ThU.S.$
     Increase
(decrease)
Net
exchange
differences
ThU.S.$
    Closing
balance
12-31-2017
ThU.S$
 

Deferred tax Liabilities relating to Property, Plant and Equipment

     934,892        (82,445     —         9,735        (1,684     860,498  

Deferred tax Liabilities relating to Financial Instruments

     7,186        5,497       —         —          1       12,684  

Deferred tax Liabilities relating to Biological Assets

     719,577        (79,947     —         37,997        (751     676,876  

Deferred tax Liabilities relating to Inventory

     31,072        1,508       —         —          —         32,580  

Deferred tax Liabilities relating to Prepaid Expenses

     42,881        (1,281     —         —          —         41,600  

Deferred tax Liabilities relating to Intangible

     27,222        (4,880     —         —          (328     22,014  

Deferred tax Liabilities relating to Other Taxable Temporary Differences

     20,004        (6,730     —         4,467        (10     17,731  

Total Deferred Tax Liabilities

     1,782,834        (168,278     —         52,199        (2,772     1,663,983  

 

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Temporary Differences

The following tables summarize the deductible and taxable temporary differences:

 

     12-31-2018      12-31-2017  
     Deductible      Taxable      Deductible      Taxable  
     Difference      Difference      Difference      Difference  

Detail of classes of Deferred Tax Temporary Differences

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Deferred Tax Assets

     102,704           124,178     

Deferred Tax Assets - Tax loss carryforward

     109,320           62,706     

Deferred Tax Liabilities

        1,625,047           1,663,983  

Total

     212,024        1,625,047        186,884        1,663,983  

 

     January - December  
     2018     2017      2016  

Detail of Temporary Difference Income and Loss Amounts

   ThU.S.$     ThU.S.$      ThU.S.$  

Deferred Tax Assets

     (23,331     6,079        9,093  

Deferred Tax Assets - Tax loss carryforward

     53,103       7,270        11,498  

Deferred Tax Liabilities

     11,196       168,279        (3,868

Total

     40,968       181,628        16,723  

Income Tax Expense

Income tax expense consists of the following:

 

     January - December  
     2018     2017     2016  

Income Tax composition

   ThU.S.$     ThU.S.$     ThU.S.$  

Current income tax expense

     (270,252     (155,292     (58,831

Tax benefit arising from unrecognized tax assets previously used to reduce current tax expense

     4,471       3,018       —    

Prior period current income tax adjustments

     (1,732     (227     (6,899

Other current benefit tax (expenses)

     (220     1,865       3,360  

Current Tax Expense, Net

     (267,733     (150,636     (62,370

Deferred tax expense relating to origination and reversal of temporary differences

     (12,135     174,358       5,225  

Tax benefit arising from previously unrecognized tax loss carryforward

     53,103       7,270       11,498  

Total deferred Tax benefit (expense), Net

     40,968       181,628       16,723  

Income Tax benefit (expense), Total

     (226,765     30,992       (45,647

 

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The following table presents the current income tax expense detailed by foreign and domestic (Chile) companies at December 31, 2018, 2017 and 2016:

 

     January - December  
      2018
ThU.S.$
    2017
ThU.S.$
    2016
ThU.S.$
 

Foreign current income tax expense

     (35,442     (28,071     (27,931

Domestic current income tax expense

     (232,291     (122,565     (34,439

Total current income tax expense

     (267,733     (150,636     (62,370

Foreign deferred tax benefit (expense)

     19,940       94,228       7,794  

Domestic deferred tax benefit (expense)

     21,028       87,400       8,929  

Total deferred tax benefit (expense)

     40,968       181,628       16,723  

Total tax benefit (expense)

     (226,765     30,992       (45,647

Reconciliation of income tax expense from statutory tax rate to the effective tax rate.

The reconciliation of income tax expense is as follows:

 

     January - December  
     2018     2017     2016  

Reconciliation of Income tax from Statutory Rate to Effective Tax Rate

   ThU.S.$     ThU.S.$     ThU.S.$  

Statutory domestic (Chile) income tax rate

     27.0     25.5     24.0

Tax Expense at statutory tax rate

     (257,451     (61,037     (63,174

Tax effect of foreign tax rates

     3,464       (7,118     (13,368

Tax effect of revenues exempt from taxation

     82,521       40,133       33,834  

Tax effect of not deductible expenses

     (53,510     (28,783     (10,987

Tax rate effect of tax loss carry forwards

     15       (44     —    

Tax effect of Previously Unrecognized Tax Benefit in the Statements of Profit or Loss

     (91     195       —    

Tax effect of a new evaluation of assets for deferred not recognized taxes

     —         5,311       17,157  

Tax rate effect from change in tax rate (opening balances)

     —         78,946       (3,681

Tax rate effect of adjustments for current tax of prior periods

     (1,732     (227     (6,899

Other tax rate effects

     19       3,616       1,471  

Total adjustments to tax expense at applicable tax rate

     30,686       92,029       17,527  

Tax benefit (expense) at effective tax rate

     (226,765     30,992       (45,647

Current tax liabilities

The current tax liabilities balances are as follow:

 

     12-31-2018     12-31-2017  

Current tax Liabilities

   ThU.S.$     ThU.S.$  

Provision tax income (First category)

     260,538       126,404  

Monthly Provisional Payments (MPP)

     (107,023     (119,753

Other taxes

     127       1,437  
  

 

 

   

 

 

 

Total

     153,642       8,088  
  

 

 

   

 

 

 

 

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Table of Contents
NOTE 7.

PROPERTY, PLANT AND EQUIPMENT

 

     12-31-2018      12-31-2017  

Property, Plant and Equipment, Net

   ThU.S.$      ThU.S.$  

Construction work in progress

     1,030,730        597,351  

Land

     972,143        1,008,310  

Buildings

     2,062,887        2,135,201  

Plant and equipment

     2,921,462        3,112,755  

Information technology equipment

     23,292        22,665  

Fixtures and fittings

     15,906        12,297  

Motor vehicles

     14,916        15,959  

Other property, plant and equipment

     133,357        129,761  

Total Net

     7,174,693        7,034,299  

Property, Plant and Equipment, Gross

     

Construction work in progress

     1,030,730        597,351  

Land

     972,143        1,008,310  

Buildings

     3,959,186        3,926,157  

Plant and equipment

     6,388,843        6,410,561  

Information technology equipment

     86,558        82,765  

Fixtures and fittings

     44,694        40,388  

Motor vehicles

     53,507        49,756  

Other property, plant and equipment

     157,301        159,720  

Total Gross

     12,692,962        12,275,008  

Accumulated depreciation and impairment

     

Buildings

     (1,896,299      (1,790,956

Plant and equipment

     (3,467,381      (3,297,806

Information technology equipment

     (63,266      (60,100

Fixtures and fittings

     (28,788      (28,091

Motor vehicles

     (38,591      (33,797

Other property, plant and equipment

     (23,944      (29,959

Total

     (5,518,269      (5,240,709

Description of Property, Plant and Equipment Pledged as Security for Liabilities

As of December 31, 2018, there are no significant assets pledged as collateral to be disclosed in these consolidated financial statements.

Disbursements commitments for the acquisition of property, plant and equipment and disbursements for property, plant and equipment under construction.

 

      12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Amount committed for the acquisition of property, plant and equipment

     798,631        112,924  

 

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Table of Contents

Reconciliation of Property, Plant and Equipment

The following tables set forth the reconciliation of the carrying amount of property, plant and equipment as of December 31, 2018 and December 31, 2017:

 

Movement of Property, Plant
and Equipment

   Construction
work in
progress
ThU.S.$
    Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipment
ThU.S.$
    IT
Equipment
ThU.S.$
    Fixtures
and fittings
ThU.S.$
    Motor
vehicles
ThU.S.$
    Other
Property, Plant
and Equipment
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance 01-01-2018

     597,351       1,008,310       2,135,201       3,112,755       22,665       12,297       15,959       129,761       7,034,299  

Changes

                  

Additions

     660,918       3       6,949       42,467       1,125       1,146       2,352       15,516       730,476  

Acquisitions through business combinations

     —         3,900       —         4,887       —         —         —         —         8,787  

Disposals

     (1,994     (448     (770     (702     (42     —         (129     (528     (4,613

Retirements

     (6,269     (4,466     (1,656     (17,680     (42     (28     (84     (5,599     (35,824

Depreciation

     —         —         (125,407     (316,118     (5,791     (2,870     (3,920     (3,660     (457,766

Impairment loss recognized in profit or loss

     —         —         (654     (356     (5     (20     —         —         (1,035

Increase (decrease) through net exchange differences

     (4,115     (34,204     (15,444     (42,059     (175     (210     (217     (6,332     (102,756

Reclassification of assets held for sale

     —         (2,193     (5     5,323       —         —         —         —         3,125  

Increase (decrease) through transfers from construction in progress

     (215,161     1,241       64,673       132,945       5,557       5,591       955       4,199       —    

Total changes

     433,379       (36,167     (72,314     (191,293     627       3,609       (1,043     3,596       140,394  

Closing balance 12-31-2018

     1,030,730       972,143       2,062,887       2,921,462       23,292       15,906       14,916       133,357       7,174,693  

Movement of Property, Plant
and Equipment

   Construction
work in
progress
ThU.S.$
    Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipment
ThU.S.$
    IT
Equipment
ThU.S.$
    Fixtures
and fittings
ThU.S.$
    Motor
vehicles
ThU.S.$
    Other
Property, Plant
and Equipment
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance 01-01-2017

     321,031       991,450       2,169,731       3,256,348       24,154       9,880       16,858       130,043       6,919,495  

Changes

                  

Additions

     440,394       277       12,932       65,938       787       556       2,161       10,788       533,833  

Acquisitions through business combinations

     3,460       4,009       17,214       46,415       164       986       241       2,022       74,511  

Disposals

     —         (1,878     (48     (5,492     (26     (26     (292     (262     (8,024

Retirements

     (1,585     (75     (3,809     (3,900     (4     (29     (127     (7,211     (16,740

Depreciation

     —         —         (125,692     (311,819     (6,080     (2,268     (3,546     (5,421     (454,826

Impairment loss recognized in profit or loss

     (208     —         (769     (8,271     (5     (310     —         (338     (9,901

Increase (decrease) through net exchange differences

     290       (2,728     961       (2,394     51       (31     67       69       (3,715

Reclassification of assets held for sale

     (418     —         —         84       —         —         —         —         (334

Increase (decrease) through transfers from construction in progress

     (165,613     17,255       64,681       75,846       3,624       3,539       597       71       —    

Total changes

     276,320       16,860       (34,530     (143,593     (1,489     2,417       (899     (282     114,804  

Closing balance 12-31-2017

     597,351       1,008,310       2,135,201       3,112,755       22,665       12,297       15,959       129,761       7,034,299  

 

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The depreciation expense for the period ending December 31, 2018, 2017 and 2016 is as follows:

 

     January-December  
     2018      2017      2016  

Depreciation for the year

   ThU.S.$      ThU.S.$      ThU.S.$  

Cost of sales

     377,557        389,847        371,170  

Administrative expenses

     15,530        14,883        21,546  

Other expenses

     1,986        3,494        2,119  

Total

     395,073        408,224        394,835  

The useful lives of property, plant and equipment are estimated based on the expected use of the assets. The average useful lives by asset class are as follow:

 

      Years of
Useful
Life
(Average)
 

Buildings

     58  

Plant and equipment

     30  

Information technology equipment

     8  

Fixtures and fittings

     28  

Motor vehicles

     7  

Other property, plant and equipment

     14  

See Note 12 for details of capitalized borrowing costs.

 

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NOTE 8. LEASES

Arauco acting as lessee

 

     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Property, Plant and Equipment under finance leases

     76,020        116,534  

Plant and equipment

     76,020        116,534  

Reconciliation of Financial Lease Minimum Payments:

 

      12-31-2018  
     Present Value  

Periods

   ThU.S.$  

Less than one year

     30,916  

Between one and five years

     37,271  

More than five years

     —    

Total

     68,187  
      12-31-2017  
     Present Value  

Periods

   ThU.S.$  

Less than one year

     44,341  

Between one and five years

     68,035  

More than five years

     —    

Total

     112,376  

Lease obligations are presented in the consolidated statements of financial position in line items “Other current financial liabilities” and “Other non-current financial liabilities” depending on their respective maturities as stated above.

 

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Table of Contents

Arauco acting as lessor

Reconciliation of Financial Lease Minimum Payments:

 

     12-31-2018  
     Gross      Interest      Present Value  

Periods

   ThU.S.$      ThU.S.$      ThU.S.$  

Less than one year

     1,180        49        1,131  

Between one and five years

     837        —          837  

More than five years

     —          —          —    

Total

     2,017        49        1,968  
     12-31-2017  
     Gross      Interest      Present Value  

Periods

   ThU.S.$      ThU.S.$      ThU.S.$  

Less than one year

     12,001        69        11,932  

Between one and five years

     1,174        —          1,174  

More than five years

     —          —          —    

Total

     13,175        69        13,106  

Finance lease receivables are presented in the consolidated statements of financial position in line items “Trade and other current receivable” and “Trade and other non-current receivable” depending on their maturities stated above.

Arauco accounts for its lease contracts as finance leases. These lease contracts are for a term of less than five-years at market interest rates and leased assets are forestry machinery and equipment. They also include an early termination option, under general and special conditions stipulated in each contract.

Arauco holds leases as lessee and lessor, described in the previous tables, for which there are no impairment contingent payments or restrictions to report.

 

NOTE 9.

REVENUE

 

     January - December  

Classes of revenue

   2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Revenue from sales of goods

     5,857,584        5,133,339        4,649,581  

Revenue from rendering of services

     97,249        105,002        111,804  

Total

     5,954,833        5,238,341        4,761,385  

The reportable segments revenues by business area and by geographical area are presented in Note 24.

 

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Table of Contents
NOTE 10.

EMPLOYEE BENEFITS

Classes of Benefits and Expenses by Employee

 

     2018
ThU.S.$
    2017
ThU.S.$
    2016
ThU.S.$
 

Employee expenses

     627,614       563,117       532,957  

Wages and salaries

     602,936       542,981       506,993  

Severance indemnities

     24,678       20,136       25,964  
  

 

 

   

 

 

   

 

 

 
     2018     2017     2016  

Discount rate

     5.91     5.11     4.52

Inflation

     3.00     2.77     2.79

Annual rate of wage growth

     5.22     5.22     5.22

Mortality rate (1)

     RV-2014       RV-2014       RV-2009  

 

(1)

For the purposes of determining the technical reserves, Chilean annuity providers are required by law to utilize the mortality tables specified by the SVS (currently Chilean Commission for the Financial Market). The most recent table is the RV-2014, which is based on Chilean pensioner experience from 2006-2013 (SP & SVS, 2013). The mortality tables distinguish between males and females.

 

Sensitivities to assumptions

   2018
ThU.S.$
 

Discount rate

  

Increase in 100 bps

     (4,476

Decrease in 100 bps

     5,151  

Wage growth rates

  

Increase in 100 bps

     4,881  

Decrease in 100 bps

     (4,468

The following tables set forth the balances and the reconciliation of the present value of severance indemnities obligations as of December 31, 2018 and December 31, 2017:

 

     12-31-2018     12-31-2017  
     ThU.S.$     ThU.S.$  

Current

     5,656       5,730  

Non-current

     64,895       66,033  

Total

     70,551       71,763  

Reconciliation of the present value of severance indemnities obligations      

   12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Opening balance

     71,763       65,328  

Current service cost

     5,201       5,583  

Interest cost

     3,723       3,208  

(Gains) losses from changes in actuarial assumptions

     (172     (3,711

Actuarial gains and losses arising from experience

     (1,685     1,212  

Benefits paid

     (4,773     (5,654

Costs from past services

     4,710       —    

Increase (decrease) for foreign currency exchange rates changes

     (8,216     5,797  

Closing balance

     70,551       71,763  

 

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Table of Contents
NOTE 11.

BALANCES IN FOREIGN CURRENCY AND FOREIGN CURRENCY EXCHANGE RATE IMPACT IN PROFIT OR LOSS.

 

     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Total Current Assets

     3,441,160        2,770,363  

Cash and Cash Equivalents

     1,075,942        589,886  

U.S Dollar

     834,513        501,352  

Euros

     8,295        4,306  

Brazilian Real

     44,605        47,314  

Argentine Pesos

     2,854        10,038  

Other currencies

     5,375        3,685  

Chilean Pesos

     180,300        23,191  

Other current financial assets

     497        3,504  

U.S Dollar

     497        3,497  

Other currencies

     —          7  

Other current non-financial assets

     129,854        129,837  

U.S Dollar

     49,170        48,632  

Euros

     125        104  

Brazilian Real

     19,018        17,158  

Argentine Pesos

     5,855        5,832  

Other currencies

     5,325        5,306  

Chilean Pesos

     50,361        52,805  

Trade and other current receivables

     839,184        814,412  

U.S Dollar

     631,047        550,674  

Euros

     7,399        20,498  

Brazilian Real

     66,500        89,673  

Argentine Pesos

     15,044        26,863  

Other currencies

     15,458        17,702  

Chilean Pesos

     99,950        106,442  

U.F.

     3,786        2,560  

Accounts receivable from related companies

     7,324        3,488  

U.S Dollar

     591        726  

Brazilian Real

     83        171  

Chilean Pesos

     6,169        2,192  

U.F.

     481        399  

Current Inventories

     1,030,196        868,462  

U.S Dollar

     957,529        809,689  

Brazilian Real

     72,667        58,773  

Current biological assets

     315,924        307,796  

U.S Dollar

     253,672        270,761  

Brazilian Real

     62,252        37,035  

Current tax assets

     36,513        49,471  

U.S Dollar

     16,042        7,769  

Euros

     262        —    

Brazilian Real

     4,978        6,721  

Other currencies

     1,501        3,188  

Chilean Pesos

     13,730        31,793  

Non-current assets or disposal groups classified as held for sale

     5,726        3,507  

U.S Dollar

     5,152        2,835  

Brazilian Real

     574        672  

 

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Table of Contents
     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Total Non-Current Assets

     11,152,588        11,224,237  

Other non-current financial assets

     20,346        56,600  

U.S Dollar

     20,346        56,600  

Other non-current non-financial assets

     86,948        121,521  

U.S Dollar

     79,615        104,711  

Brazilian Real

     4,946        4,629  

Argentine Pesos

     1,427        11,303  

Other currencies

     730        693  

Chilean Pesos

     230        185  

Trade and other non-current receivables

     15,149        16,040  

U.S Dollar

     7,733        4,247  

Brazilian Real

     1,040        3,345  

Other currencies

     27        —    

Chilean Pesos

     3,267        6,692  

U.F.

     3,082        1,756  

Accounts receivable from related companies, non-current

     481        1,056  

U.F.

     481        1,056  

Investments accounted for using equity method

     358,053        368,772  

U.S Dollar

     135,805        130,276  

Euros

     177,548        185,410  

Brazilian Real

     42,052        53,080  

Chilean Pesos

     2,648        6  

Intangible assets other than goodwill

     90,093        88,615  

U.S Dollar

     87,729        87,007  

Brazilian Real

     2,364        1,516  

Chilean Pesos

     —          92  

Goodwill

     65,851        69,922  

U.S Dollar

     42,573        42,656  

Brazilian Real

     23,278        27,266  

Property, plant and equipment

     7,174,693        7,034,299  

U.S Dollar

     6,675,290        6,443,081  

Brazilian Real

     498,993        585,202  

Chilean Pesos

     410        6,016  

Non-current biological assets

     3,336,339        3,459,146  

U.S Dollar

     2,924,266        2,934,819  

Brazilian Real

     412,073        524,327  

Deferred tax assets

     4,635        8,266  

U.S Dollar

     4,558        4,319  

Brazilian Real

     36        3,622  

Other currencies

     41        32  

Chilean Pesos

     —          293  

 

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Table of Contents
     12-31-2018      12-31-2017  
     Up to 90 days      From 91 days to
1 year
     Total      Up to 90 days      From 91 days to
1 year
     Total  
     ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Total Liabilities, current

     1,160,815        418,949        1,579,764        1,045,364        354,030        1,399,394  

Other current financial liabilities

     121,606        415,990        537,596        148,778        351,566        500,344  

U.S Dollar

     110,329        334,747        445,076        134,125        284,293        418,418  

Brazilian Real

     1,880        4,948        6,828        2,383        4,660        7,043  

Chilean Pesos

     1,334        3,683        5,017        1,508        4,116        5,624  

U.F.

     8,063        72,612        80,675        10,762        58,497        69,259  

Bank Loans

     84,778        130,271        215,049        110,700        282,172        392,872  

U.S Dollar

     82,898        125,323        208,221        108,317        277,512        385,829  

Brazilian Real

     1,880        4,948        6,828        2,383        4,660        7,043  

Financial Leases

     7,265        23,651        30,916        9,928        34,413        44,341  

Chilean Pesos

     1,334        3,683        5,017        1,508        4,116        5,624  

U.F.

     5,931        19,968        25,899        8,420        30,297        38,717  

Other Loans

     29,563        262,068        291,631        28,150        34,981        63,131  

U.S Dollar

     27,431        209,424        236,855        25,808        6,781        32,589  

U.F.

     2,132        52,644        54,776        2,342        28,200        30,542  

Trade and other current payables

     659,618        —          659,618        717,342        4        717,346  

U.S Dollar

     184,989        —          184,989        193,562        —          193,562  

Euros

     7,450        —          7,450        9,099        —          9,099  

Brazilian Real

     64,873        —          64,873        124,917        —          124,917  

Argentine Pesos

     15,590        —          15,590        29,243        —          29,243  

Other currencies

     9,650        —          9,650        4,936        —          4,936  

Chilean Pesos

     348,886        —          348,886        333,525        4        333,529  

U.F.

     28,180        —          28,180        22,060        —          22,060  

Accounts payable to related companies

     10,229        —          10,229        11,208        —          11,208  

U.S Dollar

     1,777        —          1,777        1,354        —          1,354  

Chilean Pesos

     8,452        —          8,452        9,854        —          9,854  

Other current provisions

     413        —          413        2,728        —          2,728  

U.S Dollar

     413        —          413        622        —          622  

Brazilian Real

     —          —          —          2,106        —          2,106  

Current tax liabilities

     152,994        648        153,642        6,361        1,727        8,088  

U.S Dollar

     88        —          88        283        —          283  

Euros

     7        —          7        158        —          158  

Argentine Pesos

     16,730        —          16,730        46        —          46  

Other currencies

     102        —          102        479        —          479  

Chilean Pesos

     136,067        648        136,715        5,395        1,727        7,122  

Current provisions for employee benefits

     4,923        733        5,656        5,595        135        5,730  

Brazilian Real

     51        —          51        —          —          —    

Chilean Pesos

     4,872        733        5,605        5,595        135        5,730  

Other current non-financial liabilities

     211,032        1,578        212,610        153,352        598        153,950  

U.S Dollar

     187,740        606        188,346        119,309        582        119,891  

Euros

     49        —          49        77        —          77  

Brazilian Real

     12,340        —          12,340        18,016        —          18,016  

Argentine Pesos

     3,037        —          3,037        3,215        —          3,215  

Other currencies

     4,104        —          4,104        3,906        —          3,906  

Chilean Pesos

     3,762        972        4,734        8,809        16        8,825  

U.F.

     —          —          —          20        —          20  

 

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Table of Contents
     12-31-2018      12-31-2017  
     From 13
months to 5
years
     More than 5
years
     Total      From 13
months to 5
years
     More than 5
years
     Total  
     ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Total non-current liabilities

     2,506,687        3,168,326        5,675,013        3,025,553        2,452,760        5,478,313  

Other non-current financial liabilities

     1,451,888        2,592,391        4,044,279        1,455,641        2,322,926        3,778,567  

U.S Dollar

     1,041,304        1,573,044        2,614,348        970,631        1,508,999        2,479,630  

Brazilian Real

     7,827        —          7,827        16,506        —          16,506  

Chilean Pesos

     5,821        —          5,821        9,839        —          9,839  

U.F.

     396,936        1,019,347        1,416,283        458,665        813,927        1,272,592  

Bank Loans

     526,062        199,324        725,386        327,424        138,161        465,585  

U.S Dollar

     518,235        199,324        717,559        310,918        138,161        449,079  

Brazilian Real

     7,827        —          7,827        16,506        —          16,506  

Financial Leases

     37,271        —          37,271        68,035        —          68,035  

Chilean Pesos

     5,821        —          5,821        9,839        —          9,839  

U.F.

     31,450        —          31,450        58,196        —          58,196  

Other Loans

     888,555        2,393,067        3,281,622        1,060,182        2,184,765        3,244,947  

U.S Dollar

     523,069        1,373,720        1,896,789        659,713        1,370,838        2,030,551  

U.F.

     365,486        1,019,347        1,384,833        400,469        813,927        1,214,396  

Non-current payables

     2.230        —          2.230        —          —          —    

U.S Dollar

     2.230        —          2.230        —          —          —    

Other non-current provisions

     33,884        —          33,884        36,008        —          36,008  

U.S Dollar

     9        —          9        7        —          7  

Brazilian Real

     5,839        —          5,839        4,682        —          4,682  

Argentine Pesos

     28,035        —          28,035        31,316        —          31,316  

Chilean Pesos

     1        —          1        3        —          3  

Deferred tax liabilities

     841,723        575,935        1,417,658        1,355,531        129,834        1,485,365  

U.S Dollar

     751,356        575,935        1,327,291        1,247,096        129,834        1,376,930  

Brazilian Real

     90,367        —          90,367        108,435        —          108,435  

Non-current provisions for employee benefits

     64,895        —          64,895        66,033        —          66,033  

Other currencies

     159        —          159        129        —          129  

Chilean Pesos

     64,736        —          64,736        65,904        —          65,904  

Other non-current non-financial liabilities

     112,067        —          112,067        112,340        —          112,340  

U.S Dollar

     19        —          19        13        —          13  

Brazilian Real

     111,841        —          111,841        111,634        —          111,634  

Argentine Pesos

     29        —          29        480        —          480  

Chilean Pesos

     178        —          178        213        —          213  

The table below sets forth the subsidiaries that have determined a functional currency other than the U.S. Dollar as follows:

 

Subsidiary

   Country    Functional
Currency

Arauco do Brasil S.A.

   Brazil    Brazilian Real

Arauco Forest Brasil S.A.

   Brazil    Brazilian Real

Arauco Florestal Arapoti S.A.

   Brazil    Brazilian Real

Arauco Industria de Paineis Ltda.

   Brazil    Brazilian Real

Empreendimentos Florestais Santa Cruz Ltda.

   Brazil    Brazilian Real

Mahal Empreendimentos e Participacoes S.A.

   Brazil    Brazilian Real

Novo Oeste Gestao de Ativos Florestais S.A.

   Brazil    Brazilian Real

Consorcio Protección Fitosanitaria Forestal S.A.

   Chile    Chilean Pesos

Forestal Nuestra Señora del Carmen S.A.

   Argentina    Argentine Pesos

Forestal Talavera S.A.

   Argentina    Argentine Pesos

Greeneagro S.A.

   Argentina    Argentine Pesos

Leasing Forestal S.A.

   Argentina    Argentine Pesos

Savitar S.A.

   Argentina    Argentine Pesos

Flakeboard Company Limited

   Canada    Canadian Dollar

 

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Table of Contents

The table below shows a detail per company of the effect in the period of the Reserve of Exchange Differences on translation:

 

     January - December  
     2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Arauco do Brasil S.A.

     (70,685      (6,537      73,087  

Arauco Forest Brasil S.A.

     (65,196      (6,929      68,314  

Arauco Florestal Arapoti S.A.

     (17,007      (1,051      19,523  

Sonae Arauco S.A.

     (9,811      20,547        —    

Arauco Argentina S.A.

     (7,584      (752      4,989  

Flakeboard Company Limited

     (7,879      6,529        2,984  

Others

     (2,461      307        (13
  

 

 

    

 

 

    

 

 

 

Total reserve of exchange differences on translation

     (180,623      12,114        168,884  
  

 

 

    

 

 

    

 

 

 

Effect of foreign exchange rates changes

 

     January-December  
     2018      2017      2016  
     ThU.S.$      ThU.S.$      ThU.S.$  

Exchange differences recognized in profit or loss, except for those arising on financial instruments measured at fair value through profit or loss

     (26,470      98        (3,935

Reserve of exchange differences on translation (with Non-controlling interests)

     (185,038      11,873        173,754  

 

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Table of Contents
NOTE 12.

BORROWING COSTS

Arauco capitalizes interest at effective rate on current investment projects.

At the date of issuance of these consolidated financial statements, Arauco has capitalized financial interest related to the modernization and extension of Planta Arauco (MAPA) project in Chile and to the Grayling project in the United States.

 

     January - December  
     2018     2017  
     ThU.S.$     ThU.S.$  

Property, plant and equipment capitalized cost

    

Property, plant and equipment capitalized interest cost rate

     3.74     4.57

Amount of the capitalized interest cost, property, plant and equipment

     16,469       6,830  

 

NOTE 13.

RELATED PARTIES

Related Party Disclosures

Related parties are those entities defined in IAS 24 and under the rules of the Chilean Commission for the Financial Market and the Chilean Corporations Law.

The receivable and payable amounts among related parties at the end of each period correspond to commercial and financing transactions denominated in Chilean Pesos, U.S. dollars and Brazilian Real, where collection or payment deadlines are shown in the following tables and in general do not bear interest, except for financing transactions.

As of the date of these consolidated financial statements, the main transactions with related parties are related to fuel purchases with Compañía de Petróleos de Chile S.A. and sodium chlorate purchases at EKA Chile S.A.

As of the date of these consolidated financial statements, there are neither provisions for doubtful accounts nor any guarantees granted or received related to the balances with related parties.

Name of Group’s Main Shareholders

The ultimate shareholders of Arauco, direct and indirectly, are Mrs. Maria Noseda Zambra de Angelini (who passed away on April 15, 2018), Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi.

Name of the Intermediate Controlling Entity that Produces Consolidated Financial Statements for Public Use

Empresas Copec S.A.

 

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Table of Contents

Compensation to Key Management Personnel

Compensation to key management personnel, including directors, managers and deputy managers, consist of a fixed monthly salary, and managers and deputy managers also receive an annual bonus subject to the results of the Company and the fulfillment of goals of the business as well as individual performance.

Pricing Strategy Terms and Conditions Corresponding to Transactions with Related Parties

Transactions carried out with related parties are intended to contribute to the corporate interest, are adjusted in price, terms and conditions to those prevailing in the market at the time of approval, and meet the requirements and procedures set forth in the law.

The table below sets forth information about the Relationship between the Parent Company and its Subsidiaries

 

            Functional   % Ownership interest
12-31-2018
    % Ownership interest
12-31-2017
 

ID N°

 

Company Name

  Country   Currency   Direct     Indirect     Total     Direct     Indirect     Total  
 

Agenciamiento y Servicios Profesionales S.A.

  Mexico   U.S. Dollar     0.0020       99.9970       99.9990       0.0020       99.9970       99.9990  
 

Arauco Argentina S.A.

  Argentina   U.S. Dollar     9.9753       90.0048       99.9801       9.9753       90.0048       99.9801  
 

Arauco Australia Pty Ltd.

  Australia   U.S. Dollar     —         99.9990       99.9990       —         99.9990       99.9990  
96547510-9  

Arauco Bioenergía S.A.

  Chile   U.S. Dollar     98.0000       1.9999       99.9999       98.0000       1.9999       99.9999  
 

Arauco Colombia S.A.

  Colombia   U.S. Dollar     1.4778       98.5204       99.9982       1.4778       98.5204       99.9982  
 

Arauco do Brasil S.A.

  Brazil   Brazilian Real     1.0681       98.9309       99.9990       1.1624       98.8366       99.9990  
 

Arauco Europe Cooperatief U.A.

  Netherlands   U.S. Dollar     0.5689       99.4301       99.9990       0.5689       99.4301       99.9990  
 

Arauco Florestal Arapoti S.A.

  Brazil   Brazilian Real     —         79.9992       79.9992       —         79.9992       79.9992  
 

Arauco Forest Brasil S.A.

  Brazil   Brazilian Real     9.7714       90.2278       99.9992       9.9971       90.0021       99.9992  
 

Arauco Industria de Paineis Ltda.

  Brazil   Brazilian Real     —         99.9990       99.9990       —         99.9990       99.9990  
 

Arauco Middle East DMCC

  Dubai   U.S. Dollar     —         99.9990       99.9990       —         99.9990       99.9990  
 

Arauco North America, Inc. (ex Flakeboard America Limited)

  USA   U.S. Dollar     0.0001       99.9989       99.9990       —         99.9990       99.9990  
76620842-8  

Arauco Nutrientes Naturales SPA

  Chile   U.S. Dollar     —         99.9484       99.9484       —         99.9484       99.9484  
 

Arauco Panels USA, LLC

  USA   U.S. Dollar     —         —         —         —         99.9990       99.9990  
 

Arauco Perú S.A.

  Peru   U.S. Dollar     0.0013       99.9977       99.9990       0.0013       99.9977       99.9990  
 

Arauco Wood (China) Company Limited

  China   U.S. Dollar     —         99.9990       99.9990       —         —         —    
 

Arauco Wood Products, Inc.

  USA   U.S. Dollar     —         —         —         0.0004       99.9986       99.9990  
 

Araucomex S.A. de C.V.

  Mexico   U.S. Dollar     0.0005       99.9985       99.9990       0.0005       99.9985       99.9990  
96657900-5  

Consorcio Protección Fitosanitaria Forestal S.A.

  Chile   Chilean Pesos     —         57.0831       57.0831       —         57.5223       57.5223  
 

Empreendimentos Florestais Santa Cruz Ltda.

  Brazil   Brazilian Real     —         99.9985       99.9985       —         99.9795       99.9795  
 

Flakeboard Company Ltd.

  Canada   Canadian
Dollar
    —         99.9990       99.9990       —         99.9990       99.9990  
85805200-9  

Forestal Arauco S.A.

  Chile   U.S. Dollar     99.9484       —         99.9484       99.9484       —         99.9484  
93838000-7  

Forestal Cholguán S.A.

  Chile   U.S. Dollar     —         98.5479       98.5479       —         98.4826       98.4826  
78049140-K  

Forestal Los Lagos S.A.

  Chile   U.S. Dollar     —         79.9587       79.9587       —         79.9587       79.9587  
 

Forestal Nuestra Señora del Carmen S.A.

  Argentina   Argentine pesos     —         99.9805       99.9805       —         99.9805       99.9805  
 

Forestal Talavera S.A.

  Argentina   Argentine pesos     —         99.9942       99.9942       —         99.9942       99.9942  
 

Greenagro S.A.

  Argentina   Argentine pesos     —         97.9805       97.9805       —         97.9805       97.9805  
96563550-5  

Inversiones Arauco Internacional Ltda.

  Chile   U.S. Dollar     98.0186       1.9804       99.9990       98.0186       1.9804       99.9990  
79990550-7  

Investigaciones Forestales Bioforest S.A.

  Chile   U.S. Dollar     1.0000       98.9489       99.9489       1.0000       98.9489       99.9489  
 

Leasing Forestal S.A.

  Argentina   Argentine pesos     —         99.9801       99.9801       —         99.9801       99.9801  
96510970-6  

Maderas Arauco S.A.

  Chile   U.S. Dollar     99.0000       0.9995       99.9995       99.0000       0.9995       99.9995  
 

Maderas Arauco Costa Rica S.A.

  Costa Rica   U.S. Dollar     —         99.9990       99.9990       —         —         —    
 

Mahal Empreendimentos e Participacoes S.A.

  Brazil   Brazilian Real     —         99.9991       99.9991       —         99.9961       99.9961  
 

Novo Oeste Gestao de Ativos Florestais S.A.

  Brazil   Brazilian Real     —         99.9991       99.9991       —         99.9991       99.9991  
 

Savitar S.A.

  Argentina   Argentine pesos     —         99.9841       99.9841       —         99.9841       99.9841  
76375371-9  

Servicios Aéreos Forestales Ltda.

  Chile   U.S. Dollar     0.0100       99.9890       99.9990       0.0100       99.9890       99.9990  
96637330-K  

Servicios Logísticos Arauco S.A.

  Chile   U.S. Dollar     45.0000       54.9997       99.9997       45.0000       54.9997       99.9997  

 

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The companies in the table below are classified as joint operations in accordance with IFRS 11. The assets, liabilities, income and expenses are recorded in relation to the Company’s ownership percentage in accordance with accounting standards applicable in each case.

 

Company Name

   Country    Functional
Currency

Eufores S.A.

   Uruguay    U.S. Dollar

Celulosa y Energía Punta Pereira S.A.

   Uruguay    U.S. Dollar

Zona Franca Punta Pereira S.A.

   Uruguay    U.S. Dollar

Forestal Cono Sur S.A.

   Uruguay    U.S. Dollar

Stora Enso Uruguay S.A.

   Uruguay    U.S. Dollar

El Esparragal Asociación Agraria de R.L.

   Uruguay    U.S. Dollar

Ongar S.A.

   Uruguay    U.S. Dollar

Terminal Logística e Industrial M’Bopicua S.A.

   Uruguay    U.S. Dollar

There are no significant restrictions on the ability of subsidiaries to transfer funds to Arauco, in the form of cash dividends or repayment of loans and/or advances.

Employee Benefits for Key Management Personnel

 

     January - December  
     2018      2017      2016  
     ThU.S.$      ThU.S.$      ThU.S.$  

Salaries and bonuses

     72,666        59,501        73,398  

Per diem compensation to members of the Board of Directors

     2,560        2,566        1,783  

Termination benefits

     9,068        4,936        6,174  

Total

     84,294        67,003        81,355  

Related Party Receivables, Current

 

Name of Related Party

  Tax ID No.     Nature of
Relationship
    Country   Currency   Maturity     12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Forestal Mininco S.A.

    91.440.000-7       Common Stockholder     Chile   Chilean pesos     30 days       14       25  

Eka Chile S.A.

    99.500.140-3       Joint Venture     Chile   Chilean pesos     30 days       2,362       2,027  

Forestal del Sur S.A.

    79.825.060-4      
Associate of a subsidiary’s
minority shareholder
 
 
  Chile   Chilean pesos     30 days       3,740       4  

Unilin Arauco Pisos Ltda.

    —         Joint Venture     Brazil   Brazilian Real     30 days       83       171  

Colbún S.A.

    96.505.760-9       Common Stockholder     Chile   Chilean pesos     30 days       52       136  

CMPC Celulosa S.A.

    96.532.330-9       Common Stockholder     Chile   Chilean pesos     30 days       1       —    

Fundación Acerca Redes

    65.097.218-K      
Parent company is founder and
contributor
 
 
  Chile   U.S. Dollar     30 days       221       726  

Sonae Arauco Portugal S.A.

    —         Subsidiary of a Joint Venture     Portugal   U.S. Dollar     30 days       370       —    

Compañía Puerto de Coronel S.A.

    79.895.330-3       Subsidiary of an Associate     Chile   U.F.     30 days       481       399  

TOTAL

              7,324       3,488  

Related Party Receivables, Non-Current

 

Name of Related Party

  Tax ID No.     Nature of
Relationship
    Country     Currency     Maturity     12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Compañía Puerto de Coronel S.A.

    79.895.330-3       Subsidiary of an Associate       Chile       U.F.       —         —         528  

Compañía Puerto de Coronel S.A.

    79.895.330-3       Subsidiary of an Associate       Chile       U.F.       Jan-20       481       528  

TOTAL

              481       1,056  

 

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Table of Contents

Related Party Payables, Current

 

Name of Related Party

  Tax ID No.     Nature of
Relationship
    Country     Currency     Maturity     12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Compañía de Petróleos de Chile S.A.

    99.520.000-7       Common controlling parent       Chile       Chilean pesos       30 days       7,019       8,837  

Abastible S.A.

    91.806.000-6       Common controlling parent       Chile       Chilean pesos       30 days       601       545  

Fundación Educacional Arauco

    71.625.000-8       Common director       Chile       Chilean pesos       30 days       616       54  

Red to Green S.A. (Ex-Sigma Servicios Informáticos S.A.)

    86.370.800-1       Common Stockholder       Chile       Chilean pesos       30 days       14       1  

Portaluppi, Guzman y Bezanilla Asesorías Ltda.

    78.096.080-9       Common director       Chile       Chilean pesos       —         —         146  

Empresa Nacional de Telecomunicaciones S.A.

    92.580.000-7       Common Stockholder       Chile       Chilean pesos       30 days       123       137  

Servicios Corporativos Sercor S.A.

    96.925.430-1       Associate       Chile       Chilean pesos       30 days       11       29  

Puerto Lirquén S.A.

    96.959.030-1       Subsidiary of an associate       Chile       U.S. Dollar       30 days       1,003       1,354  

Compañía Puerto de Coronel S.A.

    79.895.330-3       Subsidiary of an associate       Chile       U.S. Dollar       30 days       772       —    

Depósitos Portuarios Lirquén S.A.

    96.871.870-3       Subsidiary of an associate       Chile       U.S. Dollar       30 days       2       —    

Adm.Estaciones de Servicio Serco Ltda.

    79.689.550-0       Common controlling parent       Chile       Chilean pesos       30 days       1       1  

Adm. de Ventas al Detalle Arco Prime Ltda.

    77.215.640-5       Common controlling parent       Chile       Chilean pesos       30 days       1       14  

Empresa Distrib. Papeles y Cartones S.A.

    88.566.900-k       Common Stockholder       Chile       Chilean pesos       30 days       8       —    

Elemental S.A.

    76.659.730-0       Indirect associate of controlling parent       Chile       Chilean pesos       30 days       1       4  

Woodtech S.A.

    76.724.000-7       Indirect associate of controlling parent       Chile       Chilean pesos       30 days       28       86  

Orizon S.A.

    96.929.960-7       Common controlling parent       Chile       Chilean pesos       30 days       1       —    

Vía Limpia SPA

    79.874.200-0       Common controlling parent       Chile       Chilean pesos       30 days       9       —    

Air BP Copec

    96.942.120-8       Common controlling parent       Chile       Chilean pesos       30 days       19       —    

TOTAL

              10,229       11,208  

Related Party Transactions

Purchases

 

Name of Related Party

  Tax ID No.   Nature of
Relationship
  Country   Currency   Transaction
Descriptions
  12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
    12-31-2016
ThU.S.$
 

Abastible S.A.

  91.806.000-6   Common controlling parent   Chile   Chilean pesos   Fuel     3,668       3,115       2,199  

Compañía de Petróleos de Chile S.A.

  99.520.000-7   Common controlling parent   Chile   Chilean pesos   Fuel and other     75,328       66,789       39,732  

Compañía Puerto de Coronel S.A.

  79.895.330-3   Subsidiary of the Associate   Chile   U.S. Dollar   Transport and stowage     10,607       9,986       8,633  

Puerto Lirquén S.A.

  96.959.030-1   Subsidiary of the Associate   Chile   U.S. Dollar   Port services     8,488       6,956       7,311  

EKA Chile S.A.

  99.500.140-3   Joint Venture   Chile   Chilean pesos   Sodium chlorate     47,209       44,055       47,236  

Forestal del Sur S.A.

  79.825.060-4   Associate of a subsidiary’s
minority shareholder
  Chile   Chilean pesos   Wood and ships     1,675       1,310       2,093  

Portaluppi, Guzman y Bezanilla Abogados

  78.096.080-9   Common director   Chile   Chilean pesos   Legal services     897       1,496       1,295  

Empresa Nacional de Telecomunicaciones S.A.

  92.580.000-7   Common Stockholder   Chile   Chilean pesos   Telephone services     617       460       512  

CMPC Maderas S.A.

  95.304.000-K   Common Stockholder   Chile   Chilean pesos   Wood and logs     644       330       511  

Forestal Mininco S.A.

  91.440.000-7   Common Stockholder   Chile   Chilean pesos   Wood and logs     261       62       180  

Colbún Transmisión S.A.

  76.218.856-2   Common director   Chile   Chilean pesos   Electrical Power     453       389       383  

Woodtech S.A.

  76.724.000-7   Indirect associate of
controlling parent
  Chile   Chilean pesos   Wood volumen
measurement services
    2,449       2,239       982  

Inversiones Siemel S.A.

  94.082.000-6   Common Stockholder   Chile   Chilean pesos   Rentals     326       596       777  

Sercor S.A.

  96.925.430-1   Associate   Chile   Chilean pesos   Other purchases     148       150       —    

Vía Limpia

  79.874.200-0   Common controlling parent   Chile   Chilean pesos   Other purchases     257       —         —    

CMPC Celulosa S.A.

  96.532.330-9   Common Stockholder   Chile   Chilean pesos   Others purchases     11       965       3  
Sales                                      

Name of Related Party

  Tax ID No.   Nature of
Relationship
  Country   Currency   Transaction
Descriptions
  12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
    12-31-2016
ThU.S.$
 

Compañía de Petróleos de Chile S.A.

  99.520.000-7   Common controlling parent   Chile   Chilean pesos   Charter Services     75       202       —    

Colbún S.A.

  96.505.760-9   Common director   Chile   Chilean pesos   Electrical Power     277       1,128       5,999  

EKA Chile S.A.

  99.500.140-3   Joint venture   Chile   Chilean pesos   Electrical Power     24,857       19,182       16,326  

Forestal del Sur S.A.

  79.825.060-4   Common director   Chile   Chilean pesos   Harvesting services,
Wood and chips
    26,308       25,322       21,657  

Unilin Arauco Pisos Ltda.

  —     Joint venture   Brazil   Brazilian Real   Wood     1,474       2,966       5,263  

 

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NOTE 14.

CONSOLIDATED FINANCIAL STATEMENTS

On December 31, 2018, Arauco Wood Products Inc and Arauco Panels USA, LLC merged into Flakeboard America Limited (currently Arauco North America, Inc). This transaction had no effect on Arauco’s profit or loss.

On May 7, 2018, the company Maderas Arauco Costa Rica S.A. was created through the subsidiary Inversiones Arauco Internacional Ltda., with a capital of 10,000 colones (equivalent to U.S.$ 18). On December 24, 2018 Inversiones Arauco Internacional Ltda. made a capital contribution of U.S.$300,000 to the company Maderas Arauco Costa Rica S.A.

On August 3. 2018, the company Arauco Wood (China) Company Limited was created through the subsidiary Inversiones Arauco Internacional Ltda. with a capital of U.S.$ 500,000 which it has not been paid.

On December 6, 2017, the subsidiary Arauco do Brasil S.A. acquired all the equity rights of Masisa do Brasil Ltda. (currently Arauco Industria de Paineis Ltda.) for ThU.S.$ 32,914. During December 2017, Arauco paid ThU.S.$ 15,918. Later, in February 2018, the balance of ThU.S$ 16,996 was paid. The main assets acquired consist of 2 industrial complexes that would give Arauco an installed capacity of approximately 10 million m3.

Arauco recognized the acquisition of Arauco Industria de Paineis Ltda. over on the basis of the information available at the date of the transaction, performing a preliminary calculation of the allocation of fair values in the acquisition of this Company. The recorded assets and liabilities are considered provisional amounts and may be adjusted during the measurement period of this acquisition, in order to reflect new information obtained regarding facts and circumstances existing as of the date of acquisition which, had they been known, would have affected the measurements of the amounts recorded by that date. During the year 2018, after finalizing the determination of the fair values for the acquisition of Arauco Industria de Paineis Ltda., Arauco recognized a profit of ThU.S.$ 16,501 in Other Gains (Losses) in the Consolidated Statements of Profit or Loss, net of exchange difference for conversion for ThU.S.$ 2,288.

The table below shows the fair values of assets and liabilities at the date of the transaction:

 

ARAUCO INDUSTRIA DE PAINEIS LTDA.

   12-06-2017
ThU.S.$
 

Cash and cash equivalent

     4,345  

Trade and other current receivables

     48,877  

Inventories

     23,335  

Property, plant and equipment

     91,956  

Other assets

     20,929  

Total assets

     189,442  

Other financial liabilities, current and non-current

     43,218  

Trade and other payables

     22,018  

Other liabilities

     74,791  

Total liabilities

     140,027  

Total equity

     49,415  

The following table shows revenue and net profit recognized at the acquisition day:

 

ARAUCO INDUSTRIA DE PAINEIS LTDA.

   January 1, 2017  to
December 31, 2017
ThU.S.$
 

Revenue

     11,830  

Net loss

     (1,376

 

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If the acquisition had occurred on January 1, 2017, consolidated pro-forma revenue and profit for the year ended December 31, 2017 would have been:

 

CELULOSA ARAUCO Y CONSTITUCIÓN S.A. AND SUBSIDIARIES

   January-December  2017
(Pro-forma)

ThU.S.$
 

Revenue

     5,395,859  

Net profit

     261,776  

These amounts have been calculated using the subsidiary’s results and adjusting them for property, plant and equipment impairments before the acquisition.

The details of the subsidiaries included in the consolidation of Arauco are disclosed in Note 13.

 

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NOTE 15.

INVESTMENTS IN ASSOCIATES

On May 2, 2018, the company E2E S.A. was incorporated through the subsidiary Maderas Arauco S.A., with a total capital of ThU.S.$ 6,000, under 50% ownership of Arauco. As of this date, ThU.S.$ 2,241 have been contributed.

On January 19, 2018, the company Parque Eólico Ovejera Sur SpA was incorporated through the subsidiary Arauco Bioenergía S.A., under 50% ownership of Arauco. The capital contributed by Arauco was ThU.S.$ 782.

The following tables set forth information about Investments in associates.

 

Name

   Puertos y Logística S.A.

Country

   Chile

Functional Currency

   U.S. Dollar

Corporate purpose

   Docking and warehousing operations for proprietary and third party use, cargo of all classes of goods, as well, as warehousing and transport operations.

Ownership interest (%)

   20.2767%
    

12-31-2018

   12-31-2017

Carrying amount

   ThU.S.$62,511    ThU.S.$62,225

Name

   Inversiones Puerto Coronel S.A.

Country

   Chile

Functional Currency

   U.S. Dollar

Corporate purpose

   Investments in movables and real estate, acquisition of companies, securities and investment instruments, investment management and development and/or participation in all kind of businesses and companies related to industrial, shipping, forestry and commercial activities.

Ownership interest (%)

   50.0000%
    

12-31-2018

   12-31-2017

Carrying amount

   ThU.S.$52,643    ThU.S.$47,619

Name

   Servicios Corporativos Sercor S.A.

Country

   Chile

Functional Currency

   Chilean Pesos

Corporate purpose

   Consulting services related to business management to Boards of Directors and Senior Management of all Arauco’s entities.

Ownership interest (%)

   20.0000%
    

12-31-2018

   12-31-2017

Carrying amount

   ThU.S.$ 193    ThU.S.$ 191

Name

   Genómica Forestal S.A.

Country

   Chile

Functional Currency

   Chilean Pesos

Corporate purpose

   Developing forestry genomics, through the use of biotechnological, molecular and bioinformatics tools with the purpose of strengthening genetic programs so as to improve the competitive position of the Chilean forestry industry for priority tree species.

Ownership interest (%)

   25.0000%
    

12-31-2018

   12-31-2017

Carrying amount

   ThU.S.$(1)    ThU.S.$(4)

 

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Table of Contents

Name

   Consorcio Tecnológico Bioenercel S.A.

Country

   Chile

Functional Currency

   Chilean Pesos

Corporate purpose

   Developing of technologies which will promote the development of a biofuels industry in Chile, obtained from lingo-cellulosic materials. The future execution of this sustainable project is financed by the Innova Chile Committee.

Ownership interest (%)

   20.0000%
    

12-31-2018

  

12-31-2017

Carrying amount

   ThU.S.$7    ThU.S.$6

Name

   Vale do Corisco S.A.

Country

   Brazil

Functional Currency

   Brazilian Real

Corporate purpose

   Management of forestry activities.

Ownership interest (%)

   49.0000%
    

12-31-2018

  

12-31-2017

Carrying amount

   ThU.S.$38,497    ThU.S.$ 48,921

Name

   E2E S.A.

Country

   Chile

Functional Currency

   Chilean pesos

Corporate purpose

   Development of construction solutions

Ownership interest (%)

   50.0000%
    

12-31-2018

  

12-31-2017

Carrying amount

   ThU.S.$2,044    ThU.S.$ —

Name

   Parque Eólico Ovejera Sur SpA

Country

   Chile

Functional Currency

   Chilean pesos

Corporate purpose

   Electrical power projects

Ownership interest (%)

   50.0000%
    

12-31-2018

  

12-31-2017

Carrying amount

   ThU.S.$597    ThU.S.$ —

 

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Table of Contents

Summarized Financial Information of Associates

 

    Assets  

12-31-2018

  Puertos y
Logística  S.A.
ThU.S.$
    Inversiones Puerto
Coronel  S.A.
ThU.S.$
    Serv.Corporativos
Sercor S.A.
ThU.S.$
    E2E S.A.
ThU.S.$
    Parque Eólico
Ovejera del
Sur SpA.
ThU.S.$
    Vale do
Corisco S.A.
ThU.S.$
    Consorcio  Tecnológico
Bioenercel S.A.
ThU.S.$
    Genómica
Forestal  S.A.
ThU.S.$
    Total
ThU.S.$
 

Current

    97,866       29       22,870       680       1,246       4,295       2       25       127,013  

Non-current

    566,484       105,354       907       3,600       703       105,836       36       19       782,939  

Total

    664,350       105,383       23,777       4,280       1,949       110,131       38       44       909,952  
    Liabilities  
    Puertos y
Logística S.A.
ThU.S.$
    Inversiones Puerto
Coronel S.A.
ThU.S.$
    Serv.Corporativos
Sercor S.A.
ThU.S.$
    E2E S.A.
ThU.S.$
    Parque Eólico
Ovejera del
Sur SpA.
ThU.S.$
    Vale do
Corisco S.A.
ThU.S.$
    Consorcio Tecnológico
Bioenercel S.A.
ThU.S.$
    Genómica
Forestal S.A.
ThU.S.$
    Total
ThU.S.$
 

Current

    28,938       82       22,192       192       754       81       —         7       52,246  

Non-current

    327,124       —         619       —         —         31,485       5       42       359,275  

Equity

    308,288       105,301       966       4,088       1,195       78,565       33       (5     498,431  

Total

    664,350       105,383       23,777       4,280       1,949       110,131       38       44       909,952  

12-31-2018

                 

Revenues

    160,889       6,080       4,841       1       —         8,106       —         37       179,954  

Expenses

    (158,421     —         (4,855     (370     (295     (8,711     (2     (29     (172,683

Profit or loss (continuing operations)

    2,468       6,080       (14     (369     (295     (605     (2     8       7,271  

Other comprehensive income

    (1,676     2,202       —         —         —         —         —         —         526  

Total comprehensive income

    792       8,282       (14     (369     (295     (605     (2     8       7,797  

Dividends

    —         —         —         —         —         3,277       —         —         3,277  
    Assets  

12-31-2017

  Puertos y
Logística S.A.
ThU.S.$
    Inversiones Puerto
Coronel S.A.
ThU.S.$
    Serv.Corporativos
Sercor S.A.
ThU.S.$
    E2E S.A.
ThU.S.$
    Parque Eólico
Ovejera del
Sur SpA.
ThU.S.$
    Vale do
Corisco S.A.
ThU.S.$
    Consorcio Tecnológico
Bioenercel S.A.
ThU.S.$
    Genómica
Forestal S.A.
ThU.S.$
    Total
ThU.S.$
 

Current

    92,816       29       4,296       —         —         6,384       5       25       103,555  

Non-current

    590,309       97,072       769       —         —         126,215       45       24       814,434  

Total

    683,125       97,101       5,065       —         —         132,599       50       49       917,989  
    Liabilities  
    Puertos y
Logística S.A.
ThU.S.$
    Inversiones Puerto
Coronel S.A.
ThU.S.$
    Serv.Corporativos
Sercor S.A.
ThU.S.$
    E2E S.A.
ThU.S.$
    Parque Eólico
Ovejera del
Sur SpA.
ThU.S.$
    Vale do
Corisco S.A.
ThU.S.$
    Consorcio Tecnológico
Bioenercel S.A.
ThU.S.$
    Genómica
Forestal S.A.
ThU.S.$
    Total
ThU.S.$
 

Current

    44,564       82       3,219       —         —         123       —         14       48,002  

Non-current

    331,681       —         871       —         —         32,636       5       50       365,243  

Equity

    306,880       97,019       975       —         —         99,840       45       (15     504,744  

Total

    683,125       97,101       5,065       —         —         132,599       50       49       917,989  

12-31-2017

                 

Revenues

    130,720       4,741       5,211       —         —         34,449       2       30       175,153  

Expenses

    (132,538     —         (5,246     —         —         (29,648     (10     (36     (167,478

Profit or loss (continuing operations)

    (1,818     4,741       (35     —         —         4,801       (8     (6     7,675  

Other comprehensive income

    5,850       —         —         —         —         —         —         —         5,850  

Total comprehensive income

    4,032       4,741       (35     —         —         4,801       (8     (6     13,525  

Dividends

    —         —         —         —         —         —         —         —         —    

 

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Reconciliation of Investment in Associates and Joint Ventures

 

     12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Opening balance as of January 1

     368,772       446,548  

Changes

    

Investment in joint ventures, Additions

     3,028       —    

Share of profit (loss) in investment in associates

     3,043       4,855  

Share of profit (loss) in investment in joint ventures

     14,203       12,162  

Dividends Received, Investments in Associates

     (11,307     (8,586

Increase (Decrease) in foreign exchange currency on translation of Associates and Joint Ventures

     (17,287     22,726  

Other increase (decrease) in investment and associates and joint ventures (*)

     (2,399     (108,933

Total changes

     (10,719     (77,776

Closing balance

     358,053       368,772  

 

(*)

In May 2017, Arauco’s associate Florestal Vale do Corisco S.A. performed a return of capital to its shareholders. This transaction did not generate effects in the Consolidated Statements of Profit or Loss nor modified Arauco’s shareholding in Florestal Vale do Corisco S.A.

 

     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Carrying amount of associates accounted for using equity method

     155,609        158,967  

Carrying amount of joint ventures accounted for using equity method

     202,444        209,805  

Total investment accounted for using equity method

     358,053        368,772  

 

NOTE 16.

INTERESTS IN JOINT ARRANGEMENTS

Investments and contributions made

As of December 31, 2018 and 2017, Arauco has not carried out any contributions to Uruguayan companies Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A.

The investments in Uruguay qualify as a joint operation. In relation to “other rights and contractual conditions”, the joint operation has the primary objective of providing the parties an output. As established in the “Pulp Supply Agreement”, both Arauco and its partner have the obligation to acquire 100% of the yearly pulp produced by the joint operation. Arauco has recognized the assets, liabilities, income and expenses associated with its interest ownership, as of January 1, 2013, pursuant to IFRS 11.

Arauco holds a 50% interest in Sonae Arauco, which subsidiary produces and commercializes wood panels, of the type of MDF, PB and OSB, and sawn timber, through the operation of 2 panel plants and one sawmill in Spain; 2 panel plants and one resin plant in Portugal; 4 panel plants in Germany and 2 panel plants in South Africa.

Furthermore, Arauco holds a 50% ownership interest in Unilin Arauco Pisos Laminados Ltda., a Brazilian company, and in Eka Chile S.A. (“Eka”), a company that sells sodium chlorate to cellulose plants in Chile. There is a contractual agreement with these companies whereby Arauco has engaged in an economic activity subject to common control, which is classified as a joint venture.

 

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The following tables set forth summarized financial information of the more significant interests in joint arrangements, which qualify as joint operations:

 

      12-31-2018      12-31-2017  

Celulosa y Energía Punta Pereira S.A. (Uruguay)

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     220,699        204,455        202,669        186,626  

Non-current

     2,044,534        441,010        2,076,255        586,034  

Equity

     —          1,619,768        —          1,506,264  

Total Joint Arrangement

     2,265,233        2,265,233        2,278,924        2,278,924  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment

     809,884           753,132     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     904,853           768,508     

Expenses

     (611,444         (650,174   

Joint Arrangement Net Income (Loss)

     293,409           118,334     
     12-31-2018      12-31-2017  

Forestal Cono Sur S.A. (consolidated)

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     23,528        1,668        33,012        22,582  

Non-current

     170,443        1,957        174,943        2,314  

Equity

     —          190,346        —          183,059  

Total Joint Arrangement

     193,971        193,971        207,955        207,955  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment

     95,173           91,530     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     25,642           15,113     

Expenses

     (19,748         (9,926   

Joint Arrangement Net Income (Loss)

     5,894           5,187     
     12-31-2018      12-31-2017  

Eufores S.A. (consolidated)

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     160,708        159,988        183,175        180,298  

Non-current

     638,832        8,282        612,187        7,948  

Equity

     —          631,270        —          607,116  

Total Joint Arrangement

     799,540        799,540        795,362        795,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment

     315,635           303,558     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     284,039           336,705     

Expenses

     (261,683         (286,616   

Joint Arrangement Net Income (Loss)

     22,356           50,089     
     12-31-2018      12-31-2017  

Zona Franca Punta Pereira S.A. (Uruguay)

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     5,482        106,676        6,105        97,233  

Non-current

     472,539        27,863        483,884        43,180  

Equity

     —          343,482        —        349,576  

Total Joint Arrangement

     478,021        478,021        489,989        489,989  

Investment

     171,741           174,788     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     17,880           22,129     

Expenses

     (23,975         (24,413   

Joint Arrangement Net Income (Loss)

     (6,095         (2,284   

 

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The following tables set forth summarized financial information of the more significant interests in joint ventures:

 

     12-31-2018      12-31-2017  

Unilin Arauco Pisos Ltda.

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     6,165        3,591        7,270        4,461  

Non-current

     4,574        37        5,535        28  

Equity

     —          7,111        —          8,316  

Total Joint Arrangement

     10,739        10,739        12,805        12,805  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment

     3,556           4,158     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     16,984           17,910     

Expenses

     (16,881         (18,736   

Joint Arrangement Net Income (Loss)

     103           (826   

Other comprehensive income

     —             —       

Comprehensive income

     103           (826   

Dividends

     —             —       
     12-31-2018      12-31-2017  

Eka Chile S.A.

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     19,840        4,443        18,876        5,388  

Non-current

     32,363        5,078        32,040        5,054  

Equity

     —          42,682        —          40,474  

Total Joint Arrangement

     52,203        52,203        50,916        50,916  
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment

     21,341           20,237     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     47,798           43,678     

Expenses

     (44,490         (40,111   

Joint Arrangement Net Income (Loss)

     3,308           3,567     

Other comprehensive income

     —             —       

Comprehensive income

     3,308           3,567     

Dividends

     550           —       
     12-31-2018      12-31-2017  

Sonae Arauco S.A.

   Assets
ThU.S.$
     Liabilities
ThU.S.$
     Assets
ThU.S.$
     Liabilities
ThU.S.$
 

Current

     272,030        221,393        265,578        235,676  

Non-current

     655,856        351,397        664,689        323,770  

Equity

     —          355,096        —          370,821  

Total Joint Arrangement

     927,886        927,886        930,267        930,267  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net assets

     146,762           151,920     

Net asset adjustment (Goodwill)

     30,786           33,491     

Investment

     177,548           185,411     
  

 

 

       

 

 

    
     12-31-2018
ThU.S.$
            12-31-2017
ThU.S.$
        

Income

     1.057,535           976,936     

Expenses

     (1.032,435         (954,979   

Joint Arrangement Net Income (Loss)

     25,100           21,957     

Other comprehensive income

     —             —       

Comprehensive income

     25,100           21,957     

Dividends

     7,480           —       

 

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NOTE 17.

IMPAIRMENT OF ASSETS

Provisions for impairment of property, plant and equipment due to technical obsolescence have been recorded as of December 31, 2018 and December 31, 2017, respectively, as shown below:

 

Disclosure of Asset Impairment

  

Principal classes of Assets affected by Impairment and Reversal of Losses

   Machinery and Equipment

Principal Facts and Circumstances that lead to Recognizing Impairment and Reversal of losses

   Technical Obsolescence and Claim
     12-31-2018    12-31-2017

Provisions for impairment of property, plant and equipment

   ThU.S.$16,328    ThU.S.$17,396

Goodwill

Goodwill is allocated to the groups of cash-generating units that are expected to benefit from the synergies of the combination.

At the date of these consolidated financial statements, the balance of goodwill is ThU.S.$65,851 (ThU.S.$69,922 at December 31, 2017), as shown below:

 

Goodwill

   12-31-2018
ThU.S.$
    12-31-2017
ThU.S.$
 

Opening balance at January 1

     69,922       74,893  

Impairment

     —         (4,640

Increase (decrease) in foreign currency exchange

     (4,071     (331

Closing balance

     65,851       69,922  

Of the total of goodwill, ThU.S.$40,661 (ThU.S.$ 39,841 as of December 31, 2017) are generated by the acquisition of “Flakeboard”, a company that, directly and/or through its subsidiaries, possesses and operates 7 panel plants, for which Arauco acquired and paid, on September 24, 2012, the price of ThU.S.$242,502 for the 100% interest ownership.

The recoverable amount for Flakeboard’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections covering a 5-year term, applying a real discount rate of 6.7% which reflects current market assessments for the wood products segment in North America.

The investment in the panel plant in Pien, Brazil generated a goodwill of ThU.S.$23,278 (ThU.S.$ 27,266 as of December 31, 2017).

The recoverable amount for the Pien plant’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections based on the operational plan approved by the Administration, covering a 5-year term, applying a 7% real discount rate that reflects current evaluations for the panel segment in Brazil.

As a result of the annual impairment test at December 31, 2017, the carrying value of the goodwill of the plants exceeded their recoverable value, and therefore impairment losses of ThU.S.$4,640 were recognized. As of December 31, 2018, the carrying value of the goodwill of the plants did not exceed their recoverable value, and therefore there was no need to recognize impairment losses.

 

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NOTE 18.

PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES

The contingent liabilities for outstanding litigations are as follows:

Celulosa Arauco y Constitución S.A.

1. On August 25, 2005, the Chilean Servicio de Impuestos Internos (the “Chilean IRS”) issued tax resolutions No. 184 and No. 185 of 2005, and objected certain income tax returns made by Arauco on April 16, 2001 and October 31, 2001, and furthermore, requested the reimbursement of the amounts returned in connection with tax losses, along with the amendment of the FUT (Tax Profits Fund) Registry balance. In consideration to the foregoing, the above mentioned tax resolutions ordered the restitution of the historical amount of $4,571,664,617 (equal to ThU.S.$6,580 as of December 31, 2018). On November 7, 2005, the Company requested a Review of the Supervision Action (Revisión de la Actuación Fiscalizadora, or “RAF”), which is an administrative review of the tax action brought by the Chilean IRS, and filed a claim disputing the above mentioned tax resolutions No. 184 and 185 of 2005. The RAF was resolved on January 9, 2009 by the Chilean IRS, partially sustaining the Company’s request, granting a discount to the total amount of $1,209,399,164 (equal to ThU.S.$1,741 as of December 31, 2018), resulting in a total disputed amount of $3,362,265,453 (equal to ThU.S.$4,839 as of December 31, 2018) plus fines and interests. On February 19, 2010, the Court acknowledged receipt of the Company’s request. Subsequently, the tax authority issued a report and the Company commented on such report.

On September 26, 2014, Arauco requested the submission of this claim to the competent jurisdiction of the new Tax and Customs Courts. On October 10, 2014, Arauco’s request was granted. Currently the action is being considered by these new Courts under the Docket No. RUC 14-9-0002087-3. On March 20, 2015, the SII responded to the allegations submitted by Arauco against Liquidations No. 184 and 185 of 2005. On June 19, 2017, the Court issued the evidence production ruling, which resolution was notified via certified letter on July 23 of 2017. Arauco lodged a motion for reconsideration and a supplementary appeal, requesting the terms of the evidence production ruling be modified. On July 7, 2017, the Court upheld the motion for reconsideration. On September 20, 2017, the Court issued its first instance decision confirming the liquidations. On October 12, 2017, Arauco challenged the decision through an appeal, requesting the Court of Appeals of Santiago to revoke the first instance decision and uphold Arauco’s claim instead. On June 29, 2018, the Court of Appeals of Santiago issued a ruling on appeal, confirming the first instance decision. On July 19, 2018, Arauco lodged a cassation appeal based on formal and substantial flaws before the Supreme Court. Proceedings pending.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

2. Through Res. Ex. N° 1 issued by the Superintendence of the Environment (“SMA”) on January 8, 2016, notified on January 14, 2016, the SMA formulated 11 charges against the Company, due to alleged breaches of certain Environmental Qualification Resolutions for the Valdivia Plant and of DS No. 90/2000. The 11 charges were classified as follows by the SMA: 1 critical, 5 severe, 5 minor.

On February 12, 2016, the Company submitted its defenses.

 

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On December 15, 2017, the Superintendence of the Environment issued Exempted Resolution No. 1,487, closing the punitive administrative proceeding, absolving the company with regards to one of the charges and convicting for other 10 charges, applying a fine of 7,777 UTA (equal to ThU.S.$ 6,495 as of December 31, 2018). On December 22, 2017, the Company submitted a motion for reconsideration regarding Exempted Resolution No. 1,487, before the SMA, requesting that we be absolved of all infringements, with the exception of the charge specified under number 7 (late submission of the water quality report regarding the Cruces river). Exempted Resolution No. 357, issued by the Superintendence of the Environment (SMA) was notified on March 23, 2018, through which the reconsideration appeal lodged by the company was rejected. In consideration to the foregoing, on April 5, 2018, a judicial claim was submitted before the Third Environmental Court against Exempted Resolutions No. 1487 and No. 357 of the SMA. On August 7, the hearing of the case took place but it remains under review. On August 22, 2018 court personnel proceeded with the inspection. Proceedings pending.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company, and therefore as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

3. Through Res. Ex. N° 1 of the SMA, dated February 17, 2016 notified on February 23, 2016, the SMA formulated 8 charges against the company due to alleged breaches of certain Environmental Qualification Resolutions for the Nueva Aldea Plant. The 8 charges were qualified by the SMA as follows: 7 severe and 1 minor.

On March 15, 2016, the company submitted - within the established term - a compliance program which contains 30 actions and goals, related to each one of the 8 alleged infringements. On July 15, 2016, the Exempted Resolution No. 11 of the SMA was notified, which approved the compliance program and suspended the punitive proceedings. If the program is satisfactorily implemented, it would be possible to conclude the proceedings without applying any sanctions.

On August 3, 2016, third-party complainants in the administrative proceeding filed a complaint appeal against Exempted Resolution No. 11 issued by the SMA, which approved the compliance program. On December 24, 2016, the Third Environmental Court rejected such complaint filed against Ex. Res. No. 11 SMA, which approved the compliance program. The petitioners did not file a cassation remedy.

On October 31, 2017, a final report was submitted regarding the Compliance Program, which evidenced the complete and comprehensive performance of all actions and measures envisaged in said program. The SMA must issue its opinion regarding the satisfactory performance of the Compliance Program.

4. Through Exempted Resolution No. 1/File F-031-2016, dated September 15, 2016, the SMA formulated three charges against the company due to certain alleged breaches of certain Environmental Qualification Resolutions of the Constitución Plant, and an alleged contravention of Law No. 19,300 resulting from a purported circumvention of the Environmental Assessment System. The SMA classified the three charges as follows: 1 severe and 2 minor.

On October 17, 2016, the company filed a Compliance Program containing 7 actions and objectives. On January 3, 2017, the SMA served its resolution approving the compliance program submitted by the Company. If the compliance program is executed satisfactorily, the proceedings would conclude without the application of any sanctions.

The final report regarding the Compliance Program was submitted on October 2, 2017, and further supplemented on December 11, 2017, evidencing the complete and comprehensive performance of all the actions and measures envisaged in said program. The SMA must issue its opinion regarding the satisfactory performance of the Compliance Program.

 

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Celulosa Arauco y Constitución S.A., Forestal Arauco S.A., Maderas Arauco S.A. y Servicios Logísticos Arauco S.A.

1. On August 13, 2018, Asociación Gremial de Dueños de Camiones de Constitución (ASODUCAM) filed a complaint seeking the performance of a contract and claiming compensation for damages against Forestal Arauco S.A., Servicios Logísticos Arauco S.A., Celulosa Arauco y Constitución S.A. and Maderas Arauco S.A. The complaint is based on alleged breaches of some agreements for the allocation, distribution and supply of cargo volumes for the years 2001 and 2005, initially executed by associates of ASODUCAM with Forestal Arauco S.A., and then, allegedly, with Servicios Logísticos Arauco S.A., in favor of the other two defendants, Celulosa Arauco and Constitución S.A. and Maderas Arauco S.A.

The complaint seeks to enforce the contract, plus $575,000,000 (equal to ThU.S.$ 828 as of December 31, 2018) in compensation for damages. As subsidy, it claims (a) $11,189,270,050 (equivalent to ThU.S.$ 16,105 as of December 31, 2018), for actual damages; (b) $ 11,189,270,050 monthly during the entire course of the trial, until the termination of the contract is declared in the final judgment, for loss of profits, and (c) $5,000,000,000 (equivalent to ThU.S.$ 7,197 as of December 31, 2018) for moral damages.

On August 28, 2018 the claim was served upon Celulosa Arauco y Constitución S.A., Forestal Arauco S.A. and Maderas Arauco S.A., service is pending on Servicios Logísticos Arauco S.A. (Rol C-757-2018 with the Civil Court of Constitución).

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and, therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

Forestal Arauco S.A.

1. Maquinarias y Equipos Klenner Limitada filed a civil damages claim before the First Civil Court of Valdivia, Case File number C-375-2015, against Forestal Arauco S.A. The claim seeks compensation for alleged damages brought as a result of the termination of a service provision contract that took place on February 9, 2010. The plaintiff valued the damages in the amount of $4,203,216,164 (equivalent to ThU.S.$ 6,050, as of December 31, 2018).

On November 14, 2016, the lower court issued a ruling partially upholding the claim, convicting Forestal Arauco S.A. to pay the sum of $115,026,673 (equivalent to ThU.S.$ 166 as of December 31, 2018) as general damage, and the sum of $607,849,413 (equivalent to ThU.S.$ 875 as of December 31, 2018) for loss profit, rejecting the claim for alleged moral damage, all without ordering the payment of litigation expenses.

Forestal Arauco S.A. challenged the ruling filing a cassation remedy based on procedural violations as well as an appeal. The plaintiff also challenged the ruling through an appeal. On August 14, 2017, the Court of Appeals decided to only uphold the appeal filed by Forestal Arauco S.A., dismissing the claim in its entirety.

 

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On September 1, 2017, the plaintiff challenged the decision rendered by the Court of Appeals, filing a formal cassation appeal and a cassation appeal on the merits before the Supreme Court, which was rejected on September 14, 2018. On October 19, 2018, it was certified as enforceable. Case finished.

2. On April 28, 2015, the company was notified of and answered the action for recovery submitted in ordinary proceedings by Mr. Rodrigo Huanquimilla Arcos and Mr. Mario Andrades Rojas, attorneys at law, on behalf of 24 members of the Arcos succession, who claiming to be owners of the estate that they identify as Hacienda Quivolgo, of 5,202 hectares, request that Forestal Celco S.A., currently Forestal Arauco S.A., be sentenced to return the above mentioned real property plus civil and natural fruits or revenues as well as any estates adhered to it, along with any damages that the real property may have suffered, with litigation costs.

The company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

The Court ordered that this trial be joined with Case File C-54-2015.

On December 9, 2016, the Court summoned the parties for the issuance of the ruling. On February 24, 2017, the first instance final ruling was notified, which ruling dismissed the claim in its entirety.

On March 8, 2017, the claimant appealed against the first instance decision. On May 25, 2018, the first instance ruling was confirmed by the Court, with court costs.

On June 12, 2018, the plaintiff challenged the decision of the Court of Appeals, filing a cassation appeal based on substantial flaws before the Supreme Court. Pending case to be heard. (Case File 16,583-2018).

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

3. On April 6, 2015, the company was notified through a rogatory letter regarding the claim submitted by Mr. Gustavo Andrés Ochagavía Urrutia, attorney at law, acting on behalf of 23 members of the Arcos succession, who claim to be the owners of the estate that they identify as Hacienda Quivolgo, of 5,202 hectares, requesting that Forestal Celco S.A., currently Forestal Arauco S.A., be ordered to return the above mentioned real property plus civil and natural fruits or revenues as well as any estates adhered to it, along with any damages that the real property may have suffered, with litigation costs. They base their claim in that Forestal Celco S.A., currently Forestal Arauco S.A., is allegedly in possession but does not own the real property in question.

On April 28, 2015, the company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

On January 8, 2016, the defendant requested a consolidation of the proceedings with Case file 334-2014. The Court ordered the requested consolidation.

On February 24, 2017, the final ruling of the lower court was notified, completely dismissing the claim, with litigation costs.

 

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On March 8, 2017, the plaintiff filed an appeal against the lower court final ruling. On May 25, 2018, the Court of Appeals of Talca upheld the first instance final ruling with litigation costs. (Court of Appeals of Talca Case File No. 949-2017).

On June 12, 2018, the plaintiff challenged the decision of the Court of Appeals, filing a cassation appeal based on substantial flaws before the Supreme Court. Pending case to be heard. (Case File 16,583-2018).

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

4. On July 11, 2017, the company was notified of a civil claim for recovery in ordinary proceedings, filed by Mrs. Carmen Muñoz Domínguez on behalf of Forestal Ezrece S.A. The plaintiff argues that its client would be the rightful owner – as a result of an assignment and sale – of 87.5% of the hereditary rights in the rural real estate property called “Pino Huacho,” located in the boroughs of Los Alamos and of Cañete, province of Lebu, Eighth Region, for a surface area amounting to 5,144.22 hectares, which actions would be under the possession of Forestal Arauco S.A. The claimant has requested the court to order Forestal Arauco S.A. to be sentenced to restitute these actions and rights. Forestal Arauco S.A. answered the claim, requesting its total dismissal, with litigation costs, and further filing a counterclaim based on the ordinary prescription and, in lieu thereof, based on extraordinary prescription.

Proceedings currently at the evidence production stage. Proceedings pending. (Case File C-109-2017 First Instance and Guarantee Court of Lebu).

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

5. Mrs. Estela Jaramillo, filed a lawsuit in a special indigenous procedure, before the First Civil Court of Osorno (Case C-2540-2018), requesting the absolute nullity of the contract of sale signed in 1999, by which Consorcio Forestal S.A. sold to Forestal Valdivia S.A., today Forestal Arauco S.A., 1,505.6 hectares under the name of Fundo San Nicolás Dos Lote Uno Norte. It also demands compensation for damages for the exploitation and use of indigenous lands against Forestal Arauco S.A.

On November 10, 2018, Forestal Arauco SA was notified of the lawsuit. On January 16, 2019, the Court dismissed the lawsuit regarding Consorcio Forestal S.A., who was not notified of the complaint.

The response of the proceedings is currently pending.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

 

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6. Ricardo Guzmán Reyes filed a claim for compensation for damages before the Court of First Instance (C-678-2018), in which he requests to be compensated for the damages caused as a result of a precautionary measure decreed in a possessory complaint filed by Forestal Celco S.A. - which was rejected by the court in 2014-, alleging that said precautionary measure prevented the plaintiff from extracting rocks and moving aggregates from the mining property called “Puente Nuevo 1, 1 a 14 de la Constitución “, for a period of 463 days.

The plaintiff assesses damages in CLP$ 8,519,046,182 (equivalent to Th.U.S.$ 12,262 as of December 31, 2018), which correspond to CLP$ 7,899,046,182 (equivalent to Th.U.S.$ 11,369 as of December 31, 2018) for emerging damages, CLP$ 500,000,000 (equivalent to ThU.S.$ 720 as of December 31, 2018) for lost profits and CLP$120,000,000 (equivalent to ThU.S. $ 173 as of December 31, 2018) for moral damages.

On December 14, 2018, the lawsuit was notified to Forestal Arauco S.A. On December 26, 2018, Forestal Arauco S.A. filed an incident of inability with respect to the subrogation judge, Rodrigo Silva Marchant, also requesting the nullity of the proceedings and rulings issued by him. On January 11, 2019, the Subrogation Judge Mr. Rodrigo Silva Marchant declared himself disqualified from continuing to hear the matter, with the Court accepting the nullity incident on January 16 of the same year.

On February 14, 2019, the court issued a ruling accepting the exception of res judicata filed as dilatory by Forestal Arauco S.A. This resolution was not subject to appeal by the plaintiff, so the case is finished.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

7. Inversiones Forestales Los Alpes Limitada and Forestal Neltume-Carrasco S.A. filed a claim against Forestal Arauco S.A. before the Civil Court of Angol (C-502-2015), in which they request that Forestal Arauco S.A. restitute the material possession of 1,855.9 hectares, which would be part of their property “Resto del Fundo Los Alpes”, which would have an area of approximately 2,700 hectares. Likewise, they requested that it be declared that the property is the exclusive domain of the actors, the restitution of the civil and natural fruits, in addition to the deteriorations that the property would have experienced, with costs.

On January 22, 2019, the lawsuit was notified to Forestal Arauco S.A., and the deadline for its response is pending.

On February 13, 2019 Forestal Arauco S.A. filed dilatory exceptions, which are pending resolution.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

 

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Arauco Argentina S.A.

1. Pursuant to law No. 25,080, the former Secretary of Agriculture, Livestock, Fishing and Foodstuffs, the enforcement agency referred to in the law approved, by Res. No. 952/2000, the forestry and industrial-forestry projects submitted by Arauco Argentina S.A. In the context of these projects, the Company afforested: 1) 4,777 hectares during 2000, in observance of its committed yearly plan; and 2) 23,012 hectares between 2000 and 2006 as a part of the multi-year afforestation plan. Likewise, a sawmill was built with installed capacity to produce 250,000 m3 of sawn timber per year.

On January 11, 2001, Arauco Argentina S.A. submitted an expansion for the approved industrial-forestry project. The expansion was approved via Res. No. 84/03 issued by the former Secretary of Agriculture, Livestock, Fishing and Foodstuffs. In accordance with the assumed obligations, the Company built a MDF board (panels) plant and afforested 8,089 hectares between 2001 and 2006.

Additionally, the Company has filed yearly forestry plans between years 2007 and 2017 for its local operations in the Provinces of Misiones and Buenos Aires.

In March 2005, Note No. 145/05 of the Undersecretary of Agriculture, Livestock and Afforestation suspended the benefit that exempted Arauco Argentina S.A. from paying export duties under Law No. 25,080. This measure is currently under discussion by the Company. On November 8, 2006, the V Chamber of the National Appeals Court for Adversarial Administrative and Federal Matters issued a ruling ordering Arauco Argentina S.A. to continue to enjoy an exemption from paying the exportation duties, in the same manner and scope it had prior to the suspension ordered by Note No. 145/05, if the clearance of merchandise is performed pursuant to the guarantee regime established in article 453, subsection a) of the Customs Code, for the exempted tax obligation. The judicial measure became effective beginning on March of 2007 by collateralization through the granting of bond (caución) policies for each shipment permits exempted from payment of export duty. The company maintains an assignment of funds equivalent to $885,528,092 Argentine Pesos (ThU.S.$ 23,463 as of December 31, 2018) for guaranteed export duties, which appears under not current provisions. Additionally, the Company filed a restitution claim for a total amount of US$6,555,207, plus interests accrued from the service of the claim, corresponding to export duties between March 2005 and March 2007, as a result of the application of Note 145/05 issued by the Undersecretary of Agriculture, Livestock and Afforestation. Both the underlying issue and the restitution claim have yet to be resolved.

On the other hand, in April 2016, the Secretary of Agriculture, Livestock and Fishing issued Resolution No.154 – E/2016, that requires that the holders of enterprises that have received the fiscal benefits envisaged by Law No. 25,080, establish collateral to cover a third of the duration of the project, with a minimum term of five years. During May of 2018, the Company modified the duly established collateral in accordance to the terms of said Resolution, for which reason the security was ultimately established at an amount of $330,929,852 Argentine Pesos (ThU.S.$8,768 as of December 31, 2018).

Arauco Argentina S.A. believes that it has complied with all of the obligations imposed upon it by the system set forth under Law No. 25,080.

Arauco do Brasil S.A.

On November 8, 2012, the Brazilian tax authorities issued an Infringement Notice against one of our Brazilian subsidiaries, Arauco do Brasil S.A., for allegedly unpaid taxed owed by said company during the period from 2006 to 2010. Specifically, the tax authorities (i) objected to the deductibility of certain payments made, and expenses incurred (including the amortization of premiums, interest and litigation costs) by Arauco do Brasil between 2005 and 2010, and, (ii) argued that Arauco do Brasil made certain insufficient payments regarding the Brazilian Corporate Tax (“IRPJ”) and the Corporate Contribution over Net Profits (“CSLL”) during 2010.

 

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On July 20, 2015, Arauco do Brasil was notified of the first-level administrative ruling which partially upheld the Infringement, at the estimated amount of R$164,159,000 (ThU.S.$42,435 as of December 31, 2018). Against this ruling, a Voluntary Appeal was filed seeking to revoke the Infringement Notice before the Brazilian Administrative Tax Council (Conselho Administrativo de Recursos Fiscais de Brasil or “CARF”), which is the second administrative level. The CARF’s decision was issued on May 16, 2017, and took into consideration certain arguments presented by the Company regarding the premia, but preserving other charges. On September 27, 2018, Arauco do Brasil was notified of the CARF decision, representing the final amount of this case R$57,556,262 (ThU.S.$ 14,878 as of December 31, 2018), interests and readjustments will be added to that value until the discussion is over. Arauco do Brasil S.A. filed an appeal for declaration embargoes, to elicit clarifications from the CARF regarding certain points of the decision. After these clarifications, Arauco will present the Special Appeal to the CSRF - Superior Chamber of Fiscais Resources (final administrative instance), to continue the discussion of the part of the accusation that remains.

The company believes that its challenge against the Infringement Notice is based on sound legal grounds and that a reasonable possibility exists that this matter will be resolved in favor of the company. Otherwise, as the next step, the Company will discuss the Infringement Notice before the Brazilian Justice Courts.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2018, Arauco has not made any provision whatsoever in connection with this contingency.

At the closing date, there are no other contingencies in which the Companies act as obligor, that may significantly affect their financial, economic or operational conditions.

Provisions recorded as of December 31, 2018 and December 31, 2017 are as follows:

 

Classes of Provisions

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Provisions, Current

     413        2,728  

Provisions for litigations

     413        616  

Other provisions

     —          2,112  

Provisions, non-Current

     33,884        36,008  

Provisions for litigations

     10,384        12,556  

Other provisions

     23,500        23,452  
  

 

 

    

 

 

 

Total Provisions

     34,297        38,736  
  

 

 

    

 

 

 

 

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     12-31-2018  

Movements in Provisions

   Litigations (*)
ThU.S.$
    Other
Provisions (**)
ThU.S.$
    Total
ThU.S.$
 

Opening balance

     13,172       25,564       38,736  

Changes in provisions

      

Increase in existing provisions

     1,660       2       1,662  

Used provisions

     (887     —         (887

Increase (decrease) in foreign currency exchange

     (5,262     —         (5,262

Other Increases (Decreases)

     2,114       (2,066     48  

Total Changes

     (2,375     (2,064     (4,439

Closing balance

     10,797       23,500       34,297  

 

(*)

The increase in legal claims is composed mainly of ThU.S.$886 and ThU.S.$776 (Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsuits.

(**)

The decrease in Other Increases (Decreases) in Other provisions is due to legal claims from Arauco Industrias de Paineis which were classified as Other provisions in 2017 and were included as Litigations in December 2018

 

     12-31-2017  

Movements in Provisions

   Litigations (*)
ThU.S.$
    Other
Provisions (**)
ThU.S.$
    Total
ThU.S.$
 

Opening balance

     15,123       23,857       38,980  

Changes in provisions

      

Increase in existing provisions

     1,314       16       1,330  

Increase through business combinations

     —         2,106       2,106  

Used provisions

     (1,578     —         (1,578

Increase (decrease) in foreign currency exchange

     (1,493     —         (1,493

Other Increases (Decreases)

     (194     (415     (609

Total Changes

     (1,951     1,707       (244

Closing balance

     13,172       25,564       38,736  

 

(*)

The increase in legal claims is composed mainly of ThU.S.$908 and ThU.S.$375 (Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsuits.

(**)

The change in Other Increases (Decreases) in Other provisions is due to a reverse of the provision in Zona Franca Punta Pereira (Uruguay). The increase through business combination corresponds to the acquisition of Arauco Industrias de Paineis.

 

      12-31-2016  

Movements in Provisions

   Litigations (*)
ThU.S.$
    Other
Provisions (**)
ThU.S.$
    Total
ThU.S.$
 

Opening balance

     11,400       23,999       35,399  

Changes in provisions

      

Increase in existing provisions

     5,363       1       5,364  

Used provisions

     (998     (39     (1,037

Increase (decrease) in foreign currency exchange

     (609     —         (609

Other Increases (Decreases)

     (33     (104     (137

Total Changes

     3,723       (142     3,581  

Closing balance

     15,123       23,857       38,980  

 

(*)

The increase in legal claims is composed mainly of ThU.S.$ 863 and ThU.S.$ 2,255 (Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsuits, and ThU.S.$1,490 from Arauco Argentina in connection of fees in lawsuits.

(**)

The change in Other Increases (Decreases) in Other provisions is due to a reverse of the ThU.S.$ 100 corresponding to Arauco Argentina.

Provisions for litigations are related to labor and tax claims whose payment period is uncertain. Other provisions mainly include the recognition of a liability related to investments in associates and joint ventures accounted under the equity method with net asset deficiency at the end of the reporting period.

 

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NOTE 19.

INTANGIBLE ASSETS

 

     12-31-2018     12-31-2017  

Classes of Intangible Assets, Net

   ThU.S.$     ThU.S.$  

Intangible assets, net

     90,093       88,615  

Computer software

     26,545       26,747  

Water rights

     5,966       5,697  

Customer

     41,634       47,144  

Other identifiable intangible assets

     15,948       9,027  

Classes of intangible Assets, Gross

     185,895       173,426  

Computer software

     88,177       81,907  

Water rights

     5,966       5,697  

Customer

     71,443       72,685  

Other identifiable intangible assets

     20,309       13,137  

Classes of accumulated amortization and impairment

    

Total accumulated amortization and impairment

     (95,802     (84,811

Accumulated amortization and impairment, intangible assets

     (95,802     (84,811

Computer software

     (61,632     (55,160

Customer

     (29,809     (25,541

Other identifiable intangible assets

     (4,361     (4,110

Reconciliation of the carrying amount of intangible assets at the beginning and end of each reporting period balances

 

     12-31-2018  

Reconciliation of intangible assets

   Computer
Software
ThU.S.$
    Water
Rights
ThU.S.$
     Customer
ThU.S.$
    Others
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance

     26,747       5,697        47,144       9,027       88,615  

Changes

           

Additions

     6,369       269        —         7,424       14,062  

Disposals

     (1     —          —         —         (1

Amortization

     (7,132     —          (4,808     (409     (12,349

Increase (Decrease) related to foreign currency translation

     (287     —          (702     (31     (1,020

Other Increases (Decreases)

     849       —          —         (63     786  

Changes Total

     (202     269        (5,510     6,921       1,478  

Closing Balance

     26,545       5,966        41,634       15,948       90,093  
     12-31-2017  

Reconciliation of intangible assets

   Computer
Software
ThU.S.$
    Water
Rights
ThU.S.$
     Customer
ThU.S.$
    Others
ThU.S.$
    TOTAL
ThU.S.$
 

Opening Balance

     26,370       5,689        50,982       6,456       89,497  

Changes

           

Additions

     7,487       8        —         2,973       10,468  

Additions through business combination

     320       —          —         —         320  

Disposals

     (181     —          —         —         (181

Amortization

     (8,122     —          (4,797     (408     (13,327

Increase (Decrease) related to foreign currency translation

     873       —          959       (96     1,736  

Other Increases (Decreases)

     —         —          —         102       102  

Changes Total

     377       8        (3,838     2,571       (882

Closing Balance

     26,747       5,697        47,144       9,027       88,615  

 

     Years of Useful  life
(Average)
 

Computer Software

     5  

Customer

     15  

Brands

     7  

The amortization of customer and computer software is presented in the Consolidated Statements of Profit or Loss under the “Administrative Expenses” line item.

 

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NOTE 20.

BIOLOGICAL ASSETS

Biological assets comprise forestry plantations, mainly radiata and taeda pine, and to a lesser extent eucalyptus. The plantations are located in Chile, Argentina, Brazil and Uruguay, with a total surface of 1.77 million hectares as of December 31, 2018 out of which 1.02 million hectares are used for forestry planting, 441 thousand hectares are native forest, 199 thousand hectares are used for other purposes and 111 thousand hectares not yet planted.

For the year ended December 31, 2018, the production volume of logs totaled 20.3 million m3 (20.7 million m3 as of December 31, 2017).

Measurements of fair value of Arauco’s biological assets are classified as Level 3, due to the fact that inputs are not observable. However, this information reflects the assumptions that market participants would use in pricing the asset, including assumptions about risk.

These unobservable inputs were developed using the best information available and includes internal data from Arauco. These unobservable inputs can be adjusted if the available information indicates that other market participants would use different information or there is something specific in Arauco that is not available to other market participants.

The main considerations in determining the fair value of biological assets include the following:

 

 

Arauco uses discounted expected future cash flows of its forest plantations, which are

 

 

based on a harvest projection date for all existing plantations.

 

 

Current forestry plantations are projected based on a net volume that will not decrease, with a minimum growth equivalent to the current supply demand.

 

 

Future plantations are not considered.

 

 

The harvest of forestry plantations supplies raw materials for all other products that Arauco produces and trades. By directly controlling the development of forests that will be processed, Arauco ensures high quality timber for each of its products.

 

 

Expected cash flows are determined in terms of harvest and expected sale of forestry products, associated with the demand from the Company’s own industrial centers and sales to third parties at market prices. Sales margin of the different products that are harvested in the forest is also considered in the valuation. The changes in the value of the plantations pursuant to the criteria defined above are accounted for in the results for the fiscal year, as established in IAS 41. These changes are presented in the Consolidated Statements of Profit or Loss under the line item Other income per function, which as of December 31, 2018 amounted to ThU.S.$84,476 (ThU.S.$ 83,031 as of December 31, 2017). The appraisal of biological assets resulted in a greater cost of the lumber sold in comparison to the real incurred cost, which is presented included in the cost of sales which as of December 31, 2018 amounted to ThU.S.$207,346 (ThU.S.$ 213,234 as of December 31, 2017).

 

 

Forestry plantations are harvested according to the needs of Arauco’s production plants.

 

 

The discount rates used are 6.4% in Chile (7.5% at 2017), 7.9% Brazil, 10.5% in Argentina and 6.9% in Uruguay.

 

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It is expected that prices of harvested timber are constant in real terms based on market prices.

 

 

Cost expectations with respect to the lifetime of the forests are constant based on estimated costs included in the projections made by Arauco.

 

 

The average crop age by species and country is:

 

     Chile      Argentina      Brazil      Uruguay  

Pine

     24        15        15        —    

Eucalyptus

     12        10        7        10  

The following table sets forth changes in fair value of biological assets considering variations in significant assumptions considered in calculating the fair value of the assets:

 

            ThU.S.$  

Discount rate

     0,5        (130,319
     -0,5        137,784  

Margins (%)

     10        390,729  
     -10        (390,729

The adjustment to fair value of biological assets is recorded in the Consolidated Statements of Profit or Loss, under the line item Other Income or Other Expenses, depending on whether it corresponds to profits or losses.

Forestry plantations classified as current Biological assets are those to be harvested and sold within twelve months after the reporting period.

The Company has contracted fire insurance policies for its forestry plantations, which in conjunction with the Company’s resources, allow risks to be minimized.

Detail of Biological Assets Pledged as Security

As of December 31, 2018, there are no forestry plantations pledged as security.

Detail of Biological Assets with Restricted Ownership

As of the date of these consolidated financial statements, there are no biological assets with restricted ownership.

No significant government grants have been received.

Current and Non-Current Biological Assets

As of the date of these consolidated financial statements, the Current and Non-current biological assets are as follows:

 

     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Current

     315,924        307,796  

Non-current

     3,336,339        3,459,146  

Total

     3,652,263        3,766,942  

 

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Reconciliation of carrying amount of biological assets

 

     12-31-2018  

Movement

   Current
ThU.S.$
    Non-current
ThU.S.$
    Total
ThU.S.$
 

Opening Balance

     307,796       3,459,146       3,766,942  

Changes in real incurred cost

     34,684       (27,174     7,510  

Additions through acquisition and costs of new plantations

     2,105       205,353       207,458  

Sales

     (52     (315     (367

Harvest

     (117,729     —         (117,729

Increases (decreases) in Foreign Currency Translation

     (5,424     (76,672     (82,096

Loss of forest due to fires

     —         (8,702     (8,702

Transfers from non-current to current

     155,789       (155,789     —    

Other Increases (decreases)

     (5     8,951       8,946  

Changes in fair value

     (26,556     (95,633     (122,189

Gain (losses) arising from changes in fair value minus sale costs

     (8,684     93,160       84,476  

Sales

     —         (445     (445

Harvest

     (203,164     —         (203,164

Loss of forest due to fires

     —         (3,056     (3,056

Transfers from non-current to current

     185,292       (185,292     —    

Total Changes

     8,128       (122,807     (114,679

Closing balance

     315,924       3,336,339       3,652,263  
     12-31-2017  

Movement

   Current
ThU.S.$
    Non-current
ThU.S.$
    Total
ThU.S.$
 

Opening Balance

     306,117       3,592,874       3,898,991  

Changes in real incurred cost

     16,866       82,448       99,314  

Additions through acquisition and costs of new plantations

     6,088       176,234       182,322  

Increase due to non-cash capital distribution of Vale do Corisco S.A. (see Note 15)

     —         127,927       127,927  

Sales

     —         (4,979     (4,979

Harvest

     (118,414     —         (118,414

Increases (decreases) in foreign currency translation

     (365     (5,427     (5,792

Loss of forest due to fires

     —         (81,750     (81,750

Transfers from non-current to current

     129,557       (129,557     —    

Changes in fair value

     (15,187     (216,176     (231,363

Gain (losses) arising from changes in fair value less costs to sale

     (9,029     92,060       83,031  

Sales

     —         (310     (310

Harvest

     (222,694     —         (222,694

Loss of forest due to fires

     —         (91,389     (91,389

Transfers from non-current to current

     216,536       (216,536     —    

Other increases (decreases)

     —         (1     (1

Total Changes

     1,679       (133,728     (132,049

Closing balance

     307,796       3,459,146       3,766,942  

 

(*)

On May 2017, Arauco’s associate Vale do Corisco S.A. performed a return of capital to its shareholders. This operation did not generate effects in the Consolidated Statements of Profit or Loss nor modified Arauco’s shareholding in Florestal Vale do Corisco S.A.

In January 2017, Arauco was affected by fires that consumed 72,564 hectares of forest plantations, recorded in the balance sheet in MU.S.$ 210, representing 5.6% of the value of Arauco’s forestry plantations.

The affected plantations have been managed by the company in order to minimize the damage caused by the fires. This management has allowed for the recovery of 17.6% of the afore mentioned amount of MU.S.$210. Additionally, the forest plantations affected by the fires were insured, with their corresponding deductibles and limitations. As a consequence of the above, the sum recovered from the insurance company amounted to MU.S$ 35.

As of the date of these consolidated financial statements, there are no committed disbursements related to the acquisition of biological assets.

 

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NOTE 21.

ENVIRONMENTAL MATTERS

Environment Management

For Arauco, sustainability means management strategy. This strategy incorporates values, commitments and standards, that together with the adoption of best practices as well as the use of the latest available technologies, seek to continuously improve the Company’s environmental management. It is the environmental department and each of its specialists that ensure these guidelines are met and are put in to practice in everyday company operations.

All of Arauco’s production units have certified environmental management systems, which reinforce the Company’s commitment to environmental performance and ensure the traceability of all raw materials used.

Arauco uses several supplies in its productive processes such as wood, chemical products, and water, etc., which in turn produce liquid and gas emissions. As a way to make the Company’s environmental management more efficient, significant progress has been made to reduce consumption and emissions.

Environmental investments have been made related to the control of atmospheric emissions, process improvements, water and waste management, as well as effluent treatment, in order to improve the environmental performance of all of Arauco’s business units.    

These investments are reflected in the Consolidated Financial Statements as Properties, Plants and Equipment when they refer to disbursements in major works executed and are reflected in Expenses when they refer to improvements or management not directly associated with investment projects.

 

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Detail information of disbursements related to the environment

As of December 31, 2018 and December 31, 2017 Arauco has made and / or has committed the following disbursements by major environmental projects:

 

   

12-31-2018

  Disbursements undertaken 2018     Committed Disbursements  

Company

 

Name of project

  State of
project
    Amount
ThU.S.$
    Asset
Expense
  Asset/expense
destination
item
    Amount
ThU.S.$
    Estimated
date
 

Arauco do Brasil S.A.

 

Environmental improvement studies

    In process       1,771     Assets    
Property, plant
and equipment
 
 
    4,001       2019  

Arauco do Brasil S.A.

 

Environmental improvement studies

    In process       3,284     Expense    
Administration
expenses
 
 
    2,723       2019  

Celulosa Arauco y Constitucion S.A.

 

Investment projects for the control and management of gas emissions from industrial process

    In process       6,467     Assets    
Property, plant
and equipment
 
 
    8,271       2019  

Celulosa Arauco y Constitucion S.A.

 

Environmental improvement studies

    In process       29,419     Assets    
Property, plant
and equipment
 
 
    63,035       2019  

Celulosa Arauco y Constitucion S.A.

 

Investment projects for the control and management of gas emissions from industrial process

    Finished       563     Expense     Operating cost       —      

Celulosa Arauco y Constitucion S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    In process       21,978     Assets    
Property, plant
and equipment
 
 
    9,233       2019  

Celulosa Arauco y Constitucion S.A.

 

Environmental improvement studies

    Finished       25,684     Expense     Operating cost       —      

Arauco Argentina S.A.

 

Construction emisario

    In process       1,454     Assets    
Property, plant
and equipment
 
 
    797       2019  

Maderas Arauco S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    In process       499     Expense     Operating cost       —      

Maderas Arauco S.A.

 

Expansion of solid industrial waste dumpsite for management of these in the future

    In process       1,471     Expense     Operating cost       —      

Maderas Arauco S.A.

 

Environmental improvement studies

    In process       —       Assets    
Property, plant
and equipment
 
 
    291       2019  

Forestal Arauco S.A.

 

Environmental improvement studies

    In process       1,547     Expense    
Administration
expenses
 
 
    1,957       2019  

Celulosa y Energía Punta Pereira S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    In process       52     Assets    
Property, plant
and equipment
 
 
    3,266       2019  

Celulosa y Energía Punta Pereira S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    Finished       281     Assets    
Property, plant
and equipment
 
 
    —      

Forestal Los Lagos S.A.

 

Environmental improvement studies

    In process       236     Expense     Operating cost       273       2019  
     

 

 

       

 

 

   
      TOTAL       94,706           93,847    
     

 

 

       

 

 

   
   

12-31-2017

  Disbursements undertaken 2017     Committed Disbursements  

Company

 

Name of project

  State of
project
    Amount
ThU.S.$
    Asset
Expense
  Asset/expense
destination
item
    Amount
ThU.S.$
    Estimated
date
 

Arauco do Brasil S.A.

 

Environmental improvement studies

    In process       1,008     Assets    
Property, plant
and equipment
 
 
    48       2018  

Arauco do Brasil S.A.

 

Environmental improvement studies

    In process       1,058     Expense    
Administration
expenses
 
 
    296       2018  

Celulosa Arauco y Constitucion S.A.

 

Investment projects for the control and management of gas emissions from industrial process

    In process       18,501     Assets    
Property, plant
and equipment
 
 
    6,928       2018  

Celulosa Arauco y Constitucion S.A.

 

Environmental improvement studies

    In process       48,512     Assets    
Property, plant
and equipment
 
 
    65,798       2018  

Celulosa Arauco y Constitucion S.A.

 

Environmental improvement studies

    Finished       10,326     Assets    
Property, plant
and equipment
 
 
    —      

Celulosa Arauco y Constitucion S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    In process       55,655     Assets    
Property, plant
and equipment
 
 
    18,226       2018  

Celulosa Arauco y Constitucion S.A.

 

Environmental improvement studies

    In process       26,578     Expense     Operating cost       6,214       2018  

Arauco Argentina S.A.

 

Construction emisario

    In process       2,312     Assets    
Property, plant
and equipment
 
 
    797       2018  

Arauco Argentina S.A.

 

Expansion of solid industrial waste dumpsite for management of these in the future

    In process       139     Assets    
Property, plant
and equipment
 
 
    28       2018  

Arauco Argentina S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    In process       19     Assets    
Property, plant
and equipment
 
 
    5,921       2018  

Maderas Arauco S.A.

 

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

    In process       432     Expense     Operating cost       —      

Maderas Arauco S.A.

 

Expansion of solid industrial waste dumpsite for management of these in the future

    In process       1,346     Expense     Operating cost       —      

Maderas Arauco S.A.

 

Environmental improvement studies

    In process       89     Assets    
Property, plant
and equipment
 
 
    332       2018  

Forestal Arauco S.A.

 

Environmental improvement studies

    In process       983     Expense    
Administration
expenses
 
 
    1,165       2018  

Forestal Los Lagos S.A.

 

Environmental improvement studies

    In process       229     Expense     Operating cost       290       2018  
     

 

 

       

 

 

   
      TOTAL       167,187           106,043    
     

 

 

       

 

 

   

 

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NOTE 22.

NON-CURRENT ASSETS HELD FOR SALE

Arauco decided to sell assets in previous years corresponding mainly to sawmills in Chile and remains committed to its sales plan.

The following table sets forth information on the main types of non-current assets held for sale:

 

     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Land

     2,352        160  

Buildings

     1,284        1,122  

Property, plant and equipment

     2,090        2,225  

Total

     5,726        3,507  

As of December 31, 2018, 2017 and 2016, there were no significant effects on results related to the sale of assets held for sale.

 

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NOTE 23.

FINANCIAL INSTRUMENTS

23.1 Classification

Arauco’s financial instruments as of December 31, 2018 and December 31, 2017, are displayed in the table below. Regarding those instruments valued at an amortized cost, as estimation of their fair value is displayed for informational purposes.

 

     December 2018      December 2017  

Financial Instruments

Thousands of dollars    

   Carrying
amount
     Fair Value      Carrying
amount
     Fair Value  

Financial assets at fair value through profit or loss (held for trading)

     270,110        270,110        74,849        74,849  

Derivatives (1)

     75        75        1,679        1,679  

Mutual funds (2)

     270,035        270,035        73,170        73,170  

Financial assets at amortized cost

     1,669,587        1,669,587        1,354,366        1,354,366  

Cash and cash equivalents (amortized cost)

     805,907        805,907        516,716        516,716  

Cash

     327,132        327,132        209,185        209,185  

Time deposits

     478,775        478,775        292,105        292,105  

Agreements

     —          —          15,426        15,426  

Accounts Receivable (net)

     854,333        854,333        830,452        830,452  

Trade and other receivables

     751,158        751,158        709,983        709,983  

Lease receivable

     1,968        1,968        13,106        13,106  

Other receivables

     101,207        101,207        107,363        107,363  

Accounts receivable due from related parties

     7,805        7,805        4,544        4,544  

Other financial assets

     1,542        1,542        2,654        2,654  

Hedging Assets

     19,226        19,226        55,771        55,771  

Financial liabilities at amortized cost (3)

     5,182,353        5,206,334        5,002,072        5,198,654  

Bonds issued denominated in U.S. Dollars

     2,062,044        1,948,482        2,057,746        2,135,893  

Bonds issued denominated in U.F. (4)

     1,439,610        1,544,813        1,244,939        1,333,087  

Bank Loans in U.S. Dollars

     925,780        962,866        835,099        870,399  

Bank borrowing denominated in U.S. Dollars

     14,655        14,655        23,358        23,358  

Financial leasing

     68,187        63,441        112,376        107,363  

Trade and other payables

     661,848        661,848        717,346        717,346  

Accounts payable to related parties

     10,229        10,229        11,208        11,208  

Financial liabilities at fair value through profit or loss

     289        289        137        137  

Hedging Liabilities

     71,310        71,310        5,256        5,256  

 

(1)

The derivatives are presented in the line item “other financial assets” in the consolidated statements of financial position.

(2)

Although mutual funds are measured at fair value through profit or loss for purposes of the consolidated statements of financial position mutual funds are classified as “Cash and cash equivalents” due to the are highly liquid short-term investment.

(3)

Financial liabilities measured at amortized cost, other than “Trade and other payables”, “Accounts payable to related parties” and derivatives are presented in the consolidated statements of financial position in the line item “Other financial liabilities” as current and non-current based on their maturity.

(4)

The Unidad de Fomento (“U.F.”) is a unit of account that is linked to, and is adjusted daily to reflect changes in the Chilean consumer price index.

 

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23.2 Fair Value Hierarchy of Financial Assets and Liabilities

The assets and liabilities measured at fair value in the consolidated statements of financial position as of December 31, 2018, have been measured based on the valuation methodologies provided in IFRS 13. The methodologies applied for each financial instrument are classified according to their hierarchy as follows:

 

 

Level 1: Securities or quoted prices in active markets for identical assets and liabilities

 

 

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

 

 

Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).

 

Fair Value

   December 2018
ThU.S.$
     Level 1
ThU.S.$
     Level 2
ThU.S.$
     Level 3
ThU.S.$
 

Financial assets at fair value

           

Derivatives

     75           75     

Mutual Funds

     270,035        270,035        

Other financial assets

     19,226           19,226     

Financial liabilities at fair value

           

Bonds issued denominated in U.S. Dollars

     1,948,482        1,948,482        

Bonds issued denominated in U.F. (4)

     1,544,813        1,544,813        

Bank loans in U.S. Dollars

     962,866           962,866     

Bank borrowing denominated in other currencies

     14,655           14,655     

Financial leasing

     63,441           63,441     

Financial liabilities at fair value through profit or loss

     289           289     

Hedging liabilities

     71,310           71,310     

23.3 Explanation of the valuation of Financial Instruments.

Cash and cash equivalent and accounts receivable

The carrying amount of accounts receivable, cash and cash equivalents (including mutual funds), and other financial assets and liabilities approximate their fair value due to the short-term nature of such instruments.

Derivative financial instruments

Interest rate and currency swaps are valued under the cash flow discount method at the rate applicable according to the transaction’s risk, using an internal methodology based on the information obtained from Bloomberg. In this particular case, given that cross currency swaps correspond to future flows in UF and future flows in Dollars, Arauco calculates the current value of such flows by using 2 discount curves: the UF zero coupon curve and the Dollar zero coupon.

The fair value of the interest rate swap contracts is calculated by reference to the rate differential between the agreed upon rate and the market rate as of the end date of these financial statements.

The fair value of the currency forward contracts is calculated by reference to the current forward exchange rates of contracts with similar maturity profiles.

 

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Financial Liabilities

The fair value of bonds issued was determined with reference to quoted market prices as they have standard terms and conditions.

The fair value of bank borrowings was determined based on discounted cash flow analysis, applying the corresponding discount yield curves to the remaining term to maturity.

Disclosures of the fair value of financial liabilities at amortized cost are determined via the use of discounted cash flows, calculated over variables of the observable markets as of the date of informing the consolidated financial statements, and correspond to Level 2 of the fair value hierarchy.

The following table sets forth a reconciliation between the financial liabilities and the consolidated statements of financial position as of December 31, 2018 and 2017:

 

Thousands of dollars

   December 2018  
   Up to 90
days
     From 91
days to

1 year
     Other
current
financial
liabilities,
Total
     From 13
months to

5 years
     More than
5 years
     Other
non-current
financial
liabilities,
Total
     Total  

Bonds obligations

     27,803        262,068        289,871        818,716        2,393,067        3,211,783        3,501,654  

Bank borrowing

     84,778        130,271        215,049        526,062        199,324        725,386        940,435  

Financial Leasing

     7,265        23,651        30,916        37,271        —          37,271        68,187  

Swap and Forward

     1,760        —          1,760        69,839        —          69,839        71,599  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Financial Liabilities, Total (a)

     121,606        415,990        537,596        1,451,888        2,592,391        4,044,279        4,581,875  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Thousands of dollars

   December 2018  
   Up to 90
days
     From 91
days to

1 year
     Total
Current
     From 13
months to

5 years
     More than
5 years
     Total
non-current
     Total  

Trades and other payables

     659,618        —          659,618        2,230        —          2,230        661,848  

Accounts payable to related companies

     10,229        —          10,229        —          —          —          10,229  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Accounts Payable, Total (b)

     669,847        —          669,847        2,230        —          2,230        672,077  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities, Total (a) + (b)

     791,453        415,990        1,207,443        1,454,118        2,592,391        4,046,509        5,253,952  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Thousands of dollars

   December 2017  
   Up to 90
days
     From 91
days to

1 year
     Other
current
financial
liabilities,
Total
     From 13
months to

5 years
     More than
5 years
     Other
non-current
financial
liabilities,
Total
     Total  

Bonds obligations

     28,013        34,981        62,994        1,054,926        2,184,765        3,239,691        3,302,685  

Bank borrowings

     110,700        282,172        392,872        327,424        138,161        465,585        858,457  

Financial leasing

     9,928        34,413        44,341        68,035        —          68,035        112,376  

Swap and Forward

     137        —          137        5,256        —          5,256        5,393  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Financial Liabilities, Total (a)

     148,778        351,566        500,344        1,455,641        2,322,926        3,778,567        4,278,911  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Thousands of dollars

   December 2017  
   Up to 90
days
     From 91
days to

1 year
     Total
Current
     From 13
months to

5 years
     More than
5 years
     Total
non-current
     Total  

Trades and other payables

     717,342        4        717,346        —          —          —          717,346  

Accounts payable to related companies

     11,208        —          11,208        —          —          —          11,208  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Accounts Payable, Total (b)

     728,550        4        728,554        —          —          —          728,554  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial Liabilities, Total (a) + (b)

     877,328        351,570        1,228,898        1,455,641        2,322,926        3,778,567        5,007,465  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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23.4 Derivative Instruments

Hedging instruments recorded as of December 31, 2018 and 2017 are cash flow hedges. Arauco uses derivatives for hedging purposes, such as cross currency swaps, currency and commodity forwards, interest rate swaps, and options. Depending on the fair value of each instrument, the position could be either an asset or a liability, and they are listed in the Statements of Financial Position under Other Non-Current Financial Assets or Other Non-current Financial Liabilities, respectively. The effects for the period are presented under Equity as Other Comprehensive Income or the Statements of Comprehensive Income as Finance Income or Finance Costs, net of differences in exchange rate of the hedged items and the deferred tax.

A summary of the derivative financial instruments included in the Statements of Financial Position as of the end of this period, is presented below:

 

Financial Instruments

   December 2018
Fair Value
ThU.S.$
     December 2017
Fair Value
ThU.S.$
 

Assets at fair value through profit or loss (held for trading)

     75        1,679  

Derivative-Uruguay (1)

     75        1,672  

Forward (2)

     —          7  

Hedging Assets

     19,226        55,771  

Derivative-Uruguay (1)

     1,357        3,037  

Cross Currency Swaps

     17,869        52,734  

Financial liabilities at fair value through profit or loss

     (289      (137

Forward (2)

     (2      (137

Derivative-Uruguay (1)

     (287      —    

Hedging Liabilities

     (71,310      (5,256

Cross Currency Swaps

     (69,086      (5,248

Derivative-Uruguay (1)

     (2,224      (8

 

(1)

Includes Swap and Forward from Uruguay tables.

(2)

Includes Forwards from Colombia and Chile.

23.4.1. Chile

Cross currency swaps

Arauco is exposed to the risk of variability in cash flows from changes in foreign exchange rates and inflation, mainly due to balances of assets denominated in U.S. Dollars and other currencies different from the functional currency, which causes mismatches that could affect operating results.

 

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Below are the cross currency swaps that Arauco has as of December 31, 2018 and 2017 to cover the exposure to the exchange rate risk generated from bonds denominated in U.F.:

 

Bond

 

Institution

  Amount U.S.$     Amount U.F.     Starting date     Ending date     Fair Value ThU.S.$ 2018     Fair Value ThU.S. 2017  

F

  Deutsche—England     43,618,307       1,000,000       10-30-2011       10-30-2021       (3,105     213  

F

  JP Morgan—N.A.     43,618,307       1,000,000       10-30-2011       10-30-2021       (3,039     306  

F

  Deutsche—England     37,977,065       1,000,000       04-30-2014       04-30-2019       1,707       6,599  

F

  Scotiabank—Chile     38,426,435       1,000,000       10-30-2014       04-30-2023       2,041       5,252  

F

  Scotiabank—Chile     38,378,440       1,000,000       10-30-2014       04-30-2023       2,273       5,550  

F

  Santander—Chile     37,977,065       1,000,000       10-30-2014       04-30-2023       2,715       6,051  

F

  BCI—Chile     37,621,562       1,000,000       10-30-2014       04-30-2023       3,148       6,549  

F

  Banco de Chile—Chile     36,250,835       954,545       04-30-2019       10-30-2029       155       —    

J

  Corpbanca—Chile     42,864,859       1,000,000       09-01-2010       09-01-2020       (3,289     (292

J

  Scotiabank—Chile     42,864,859       1,000,000       09-01-2010       09-01-2020       (3,289     (292

J

  Deutsche—England     42,864,859       1,000,000       09-01-2010       09-01-2020       (3,313     (356

J

  Santander—Spain     42,873,112       1,000,000       09-01-2010       09-01-2020       (3,273     (263

J

  Scotiabank—Chile     42,864,257       1,000,000       09-01-2010       09-01-2020       (3,197     (152

P

  Corpbanca—Chile     46,474,122       1,000,000       05-15-2012       11-15-2021       (4,978     (1,775

P

  JP Morgan—N.A.     47,163,640       1,000,000       11-15-2012       11-15-2021       (5,102     (1,753

P

  Scotiabank—Chile     42,412,852       1,000,000       11-15-2013       11-15-2023       (882     1,854  

P

  Santander—Chile     41,752,718       1,000,000       11-15-2013       11-15-2023       (89     2,777  

P

  Deutsche—England     41,752,718       1,000,000       11-15-2013       11-15-2023       (92     2,800  

Q

  BCI—Chile     26,990,765       625,000       10-01-2014       04-01-2021       (1,679     1,022  

Q

  BCI—Chile     26,997,935       625,000       10-01-2014       04-01-2021       (1,655     1,070  

R

  Santander—Chile     128,611,183       3,000,000       10-01-2014       04-01-2024       (7,016     (365

R

  JP Morgan—England     43,185,224       1,000,000       10-01-2014       04-01-2024       (1,996     329  

R

  Corpbanca—Chile     43,277,070       1,000,000       10-01-2014       04-01-2024       (2,015     327  

S

  Santander—Chile     201,340,031       5,000,000       11-15-2016       11-15-2026       5,830       12,035  

W

  Goldman Sachs     40,521,750       1,000,000       10-10-2018       10-10-2028       (2,392     —    

W

  Scotiabank—Chile     40,537,926       1,000,000       10-10-2018       10-10-2028       (2,294     —    

W

  Goldman Sachs     40,066,555       1,000,000       10-10-2018       10-10-2028       (1,861     —    

X

  Santander—Chile     118,400,504       3,000,000       10-10-2018       10-10-2038       (7,976     —    

X

  Santander—Chile     97,971,786       2,500,000       10-10-2018       10-10-2038       (6,554     —    
           

 

 

   

 

 

 
              (51,217     47,486  
           

 

 

   

 

 

 

Arauco needs to minimize the risk of the exchange rate, as it holds debt in pesos, adjustable to reflect inflation. The objective of this position in the swap is to eliminate the uncertainty of the exchange rate, exchanging the flows derived from obligations expressed in adjustable pesos of the bonds described above, with flows in U.S. dollars (Arauco’s functional currency), at a fixed and determined exchange rate as of the agreement’s execution date.

Through an effectiveness test, and pursuant to IFRS 9, we were able to validate that the aforementioned hedging instruments are highly effective within an acceptable range for Arauco, for the purposes of eliminating the uncertainty of the exchange rate in the commitments derived from the hedged object.

23.4.2. Colombia

Forward contracts that are in force and effect, executed by Arauco Colombia as of December 31, 2018 and 2017, are detailed in the following table:

 

Exchange rate

   Institution      Amount
ThU.S.$
     Starting date      Ending date      December 2018
Fair Value
ThU.S.$
 

USDCOP

     Corpbanca Colombia        1,500        10-31-2018        01-09-2019        (2

USDCOP

     Corpbanca Colombia        1,700        11-26-2018        02-12-2019        —    

USDCOP

     Corpbanca Colombia        1,600        12-20-2018        03-12-2019        —    
              

 

 

 
                 (2
              

 

 

 

Exchange rate

   Institution      Amount
ThU.S.$
     Starting date      Ending date      December 2017
Fair Value
ThU.S.$
 

USDCOP

     BBVA Colombia        6,000        10-11-2017        01-10-2018        (1

USDCOP

     Corpbanca Colombia        8,000        11-14-2017        02-13-2018        (136

USDCOP

     Corpbanca Colombia        2,100        12-21-2017        03-12-2018        7  
              

 

 

 
                 (130
              

 

 

 

 

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23.4.3. Uruguay

Forward

As of December 31, 2018 and 2017, Arauco Uruguay maintains the following forward contracts in force and effect for the purposes of ensuring an exchange rate for sale of dollars:

 

Exchange rate

   Institution      Notional
ThU.S.$
     December 2018
Fair Value
ThU.S.$
 

UYUUSD

     Banco Santander Uy        14,880        (586

UYUUSD

     HSBC Uruguay        11,610        (56

UYUUSD

     Citibank U.K.        4,425        29  
           (613
        

 

 

 

 

Exchange rate

   Institution      Notional
ThU.S.$
     December 2017
Fair Value
ThU.S.$
 

UYUUSD

     Banco Santander Uy        24,000        1,213  

UYUUSD

     Citibank U.K.        —          —    

UYUUSD

     HSBC Uruguay        9,000        543  
        

 

 

 
           1,756  
        

 

 

 

Arauco Uruguay’s profits and losses also face exposure to the price variation of certain fuels, as occurs with Fuel Oil N°6, which is used during the cellulose manufacturing process. In order to minimize this risk, the volatility of future flows associated to the purchase of Fuel Oil No. 6 for years 2018, 2019 and part of 2020 has been limited, through forwards of this commodity. The agreements that are in force and effect as of December 31, 2018 and 2017, are detailed below:

 

Commodity

   Institution    Notional
ThU.S.$
     December 2018
Fair Value
ThU.S.$
 

Fuel Oil N°6

   JPMorgan Chase Bank, N.A.      6,189        (800

Fuel Oil N°6

   Citibank U.K.      401        (34

Fuel Oil N°6

   DNB Bank ASA      4,837        (568
        

 

 

 
           (1,402
        

 

 

 

 

Commodity

   Institution    Notional
ThU.S.$
     December 2017
Fair Value
ThU.S.$
 

Fuel Oil N°6

   JPMorgan Chase Bank, N.A.      4,760        1,372  

Fuel Oil N°6

   DNB Bank ASA      4,002        732  

Fuel Oil N°6

   Citibank U.K.      761        112  
        

 

 

 
           2,216  
        

 

 

 

 

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Interest Rate Swap

In addition, Arauco Uruguay’s maintains an Interest Rate Swap in force and effect, a derivative instrument which purpose is to set the interest rate of a variable rate debt in the same currency (USD). The valuation off this instrument as of December 31, 2018 and 2017, is shown below:

 

Exchange rate

   Institution      Notional
ThU.S.$
     December 2018
Fair Value
ThU.S.$
 

USD

     DNB Bank ASA        42,198        936  

 

Exchange rate

   Institution      Notional
ThU.S.$
     December 2017
Fair Value
ThU.S.$
 

USD

     DNB Bank ASA        50,638        729  

23.5 Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the consolidated statements of financial position, they are included in line items “Cash and cash equivalents” (certain components of cash and cash equivalents), “Trade and Other Current/Non-Current Receivables” and “Accounts receivable from related parties”.

Loans and receivables are measured at amortized cost using the effective interest method and are tested for impairment. Financial assets that are classified as loans and receivables are: cash and cash-equivalents, time deposits, repurchase agreements, trade and other current/non-current receivables, and accounts receivable from related parties

As of December 31, 2018 and 2017, there are provisions for impairment for ThU.S.$ 15,147 and ThU.S.$ 17,785, respectively.

 

     December 2018
ThU.S.$
     December 2017
ThU.S.$
 

Financial assets at amortized cost

     1,669,587        1,354,366  

Cash and cash equivalents

     805,907        516,716  

Cash

     327,132        209,185  

Time Deposits

     478,775        292,105  

Agreements

     —          15,426  

Trade and other receivables (net)

     862,138        834,996  

Trade and other receivables

     751,158        709,983  

Lease receivable

     1,968        13,106  

Other receivables

     101,207        107,363  

Accounts receivable due from related parties

     7,805        4,544  

Other financial assets

     1,542        2,654  

23.5.1. Cash and Cash Equivalents

Includes cash on hand, bank checking account balances and time deposits and other short term highly liquid investments with an original maturity of three months or less. They are short-term, highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of changes in value.

 

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The composition of cash and cash equivalents (including the balance of mutual funds displayed in this note as valuation, instruments at fair value with profit or loss) at December 31, 2018 and December 31, 2017, classified by origin coins is as follows:

 

     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Cash and Cash Equivalents

     1,075,942        589,886  

U.S. Dollars

     834,513        501,352  

Euro

     8,295        4,306  

Other currencies

     52,834        61,037  

Chilean pesos

     180,300        23,191  

23.5.2 Time Deposits and Repurchase Agreements: The investment objective of time deposits and repurchase agreements is to maximize in the short-term the amounts of cash surpluses. These instruments are authorized by Arauco’s Investment Policy, which allows investing in fixed income securities. These instruments have a maturity of less than three months from the date of acquisition.

23.5.3 Trade and Other Receivables: These represent enforceable rights for Arauco resulting from the normal course of the business.

23.5.4 Other Receivables: These correspond to receivables from sales, services or loans that are not considered within the normal course of the business.

The allowance for doubtful accounts is presented as a deduction of trade and other receivables. The provision for doubtful accounts is established based on an analysis of the age of the portfolio and considering the insurance coverage on accounts receivable. Other conditions are assessed for example when there is objective evidence that Arauco will not receive payments under the original sale terms and when the customer is a party to a bankruptcy court agreement or cessation of payments, and is written-off when Arauco has exhausted all levels of recovery of the receivable in a reasonable time.

23.5.5 Accounts receivable from related parties: Represent enforceable rights for Arauco resulting from the normal course of business, calling normal to the line of business, activity or purpose of exploitation and financing, and which Arauco owns a non-controlling ownership of the counterparty.

The following table sets forth trade and other current/non-current receivables classified by currencies as of December 31, 2018 and December 31, 2017:

 

      12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Trades and other current receivables

     839,184        814,412  

U.S. Dollars

     631,047        550,674  

Euros

     7,399        20,498  

Other currencies

     97,002        134,238  

Chilean pesos

     99,950        106,442  

U.F.

     3,786        2,560  

Accounts receivable from related parties, current

     7,324        3,488  

U.S. Dollars

     591        726  

Other currencies

     83        171  

Chilean pesos

     6,169        2,192  

U.F.

     481        399  

Trade and other non-current receivables

     15,149        16,040  

U.S. Dollars

     7,733        4,247  

Other currencies

     1,067        3,345  

Chilean pesos

     3,267        6,692  

U.F.

     3,082        1,756  

Accounts receivable from related parties, non-current

     481        1,056  

U.F.

     481        1,056  

 

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23.6 Total Financial Liabilities

Arauco’s financial liabilities to the date of these consolidated financial statements are as follows:

 

     December
2018
ThU.S.$
     December
2017
ThU.S.$
 

Financial Liabilities

Total Financial Liabilities

     5,253,952        5,007,465  

Financial liabilities at fair value through profit or loss (held for trading)

     289        137  

Hedging Liabilities

     71,310        5,256  

Financial Liabilities Measured at Amortized Cost

     5,182,353        5,002,072  

The following table sets forth the current portion of the non-current bank borrowings and debt issued as of December 31, 2018 and 2017.

 

     December 2018
ThU.S.$
     December 2017
ThU.S.$
 

Bank borrowings - current portion

     99,397        92,693  

Bonds issued - current portion

     81,060        107,268  

Total

     180,457        199,961  

23.7 Financial Liabilities Measured at Amortized Cost

Financial liabilities correspond to non-derivative financial instruments with contractual cash-flow payments that can be either fixed or variable.

Also, this category includes those non-derivative financial liabilities for services or goods delivered to Arauco at the end of each reporting period that have not yet been paid. These amounts are not insured and are generally paid within thirty days after being recognized.

At the end of each reporting period, Arauco includes in this category bank borrowings, bonds issued denominated in U.S. Dollars and in U.F., trade and other payables.

 

             12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
     12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 
     Currency      Amortized Cost      Fair Value  

Total Financial Liabilities

        5,182,353        5,002,072        5,206,334        5,198,654  

Bonds Issued

     U.S. Dollar        2,062,044        2,057,747        1,948,482        2,135,893  

Bonds Issued

     U.F.        1,439,610        1,244,938        1,544,813        1,333,087  

Bank borrowings

     U.S. Dollar        925,780        834,908        962,866        870,399  

Bank borrowings

     Other currencies        14,655        23,549        14,655        23,358  

Financial Leasing

     U.F.        57,349        96,913        53,594        92,542  

Financial Leasing

     Chilean pesos        10,838        15,463        9,847        14,821  

Trades and Other Payables

     U.S. Dollar        187,219        194,342        187,219        194,342  

Trades and Other Payables

     Euro        7,450        8,848        7,450        8,848  

Trades and Other Payables

     Other currencies        90,113        158,567        90,113        158,567  

Trades and Other Payables

     Chilean pesos        348,886        333,529        348,886        333,529  

Trades and Other Payables

     U.F.        28,180        22,060        28,180        22,060  

Related party payables

     U.S. Dollar        1,777        1,354        1,777        1,354  

Related party payables

     Chilean pesos        8,452        9,854        8,452        9,854  

 

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The financial liabilities at amortized cost presented in the consolidated statements of financial positions as of December 31, 2018 and 2017 are as follows:

 

            December 2018
ThU.S.$
        
   Current      Non Current      Total  

Other financial liabilities

     535,836        3,974,440        4,510,276  

Trade and other payables

     659,618        2,230        661,848  

Accounts payable to related parties

     10,229        —          10,229  

Total Financial Liabilities Measured at Amortized Cost

     1,205,683        3,976,670        5,182,353  
            December 2017
ThU.S.$
        
   Current      Non Current      Total  

Other financial liabilities

     500,207        3,773,311        4,273,518  

Trade and other payables

     717,346        —          717,346  

Accounts payable to related parties

     11,208        —          11,208  

Total Financial Liabilities Measured at Amortized Cost

     1,228,761        3,773,311        5,002,072  

 

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23.8 Cash Flow Hedges Reserve Reconciliation

The following table sets forth the reconciliation balances of cash flow hedges presented in Other Comprehensive Income:

 

     January-December  
     2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Opening balance - under IAS 39 and IFRS 9, respectively

     4,752        1,096        (55,396

Amounts restated through reserve of cash flow hedges

     (1,918      —          —    

Opening balance - in accordance with IFRS 9

     2,834        1,096        (55,396

Gains (losses) on cash flow hedges

     30,321        22,212        84,045  

Recycle of cash flow hedges to profit or loss

     (15,286      (16,965      (10,198

Income tax

     (4,474      (5,917      (20,055

Recycle of income tax

     —          4,326        2,700  

Closing balance

     13,395        4,752        1,096  

23.9 Capital Disclosures

23.9.1 Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco’s policies on capital management have the objective of:

 

  a)

Ensuring business continuity and normal operations in the long term;

  b)

Ensuring funding for new investments to achieve sustainable growth over time;

  c)

Keeping adequate capital structure considering all economic cycles that impact the business and the nature of the industry; and

  d)

Maximizing the Company’s value and providing an adequate return to shareholders.

23.9.2 Qualitative Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco determines and manages its capital structure based on its carrying amount of equity plus its financial debt (bank borrowings and bonds issued).

23.9.3 Quantitative Information on Capital Management

The following table sets forth the financial covenants that the Company has to comply with as part of the terms of certain of its obligations:

 

Instrument

   December 2018
ThU.S.$
     December 2017
ThU.S.$
     Interest
coverage
>= 2,0x
   Debt level
(1) <= 1,2x

Domestic bonds (Chile)

     1,439,610        1,244,939      N/R    Ö

Syndicate Loan Scotia

     200,563        199,597      Ö    Ö

Syndicate Loan Banco Estado—Grayling

     287,565        130,953      Ö    Ö

 

N/R:

Not required for the financial obligation

 

(1)

Debt to equity ratio (financial debt divided by equity plus non-controlling interests)

As of December 31, 2018 and December 31, 2017, Arauco has complied with all of its financial covenants.

 

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The following table sets forth the credit ratings of our debt instruments as of December 31, 2018, are as follows:

 

Instrument

   Standard &
Poor’s
   Fitch
Ratings
   Moody’s    Feller
Rate
Local bonds    —      AA-    —      AA-

Foreign bonds

   BBB-    BBB    Baa3    —  

Capitalization requirements are established based on the Company’s financial needs and on maintaining an adequate liquidity level and complying with financial covenants established in current debt arrangements. The Company manages its capital structure and makes adjustments based on the prevailing economic conditions in order to mitigate the risks associated with adverse market conditions, and based on opportunities that may arise to improve the Company’s level of liquidity.

The capitalization of Arauco as of December 31, 2018 and December 31, 2017 is as follows:

 

     December
2018
ThU.S.$
     December
2017
ThU.S.$
 

Equity

     7,338,971        7,116,893  

Bank borrowings

     940,435        858,457  

Financial leasing

     68,187        112,376  

Bonds issued

     3,501,654        3,302,685  
  

 

 

    

 

 

 

Capitalization

     11,849,247        11,390,411  
  

 

 

    

 

 

 

23.10 Risk Management

Arauco’s financial instruments are exposed to various financial risks: credit risk, liquidity risk and market risk (including exchange rate risks, interest rate risks and price risks).

Arauco’s overall risk management program focuses on uncertainty in financial markets and aims to minimize potential adverse effects on Arauco’s financial profitability.

Arauco’s financial risk management is overseen by the Corporate Finance Department. This department identifies, assesses and hedges financial risks in close collaboration with Arauco’s operational units.

23.10.1 Type of Risk: Credit Risk

Description

Credit risk refers to financial uncertainty at different periods of time relating to the fulfillment of obligations with counterparties, at the time of exercising the contract rights to receive cash or other financial assets on behalf of Arauco.

 

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Explanation of Credit Risk Exposure and How This Risk Arises

Arauco’s exposure to credit risk is directly related to each of its customer’s individual abilities to fulfill their contractual commitments, reflected in trade receivables.

Accounts exposed to credit risk are: trade receivable, financial lease debtors and other debtors.

Arauco does not have a securitized portfolio.

 

     December 2018
ThU.S.$
     December 2017
ThU.S.$
 

Current Receivables

     

Trade receivables

     747,258        706,485  

Financial lease receivables

     1,131        11,932  

Other debtors

     90,795        95,995  

Net subtotal

     839,184        814,412  

Trade receivables

     755,809        716,455  

Financial lease receivables

     1,131        12,033  

Other debtors

     93,370        101,663  

Gross subtotal

     850,310        830,151  

Provision for doubtful trade receivables

     8,551        9,970  

Provision for doubtful lease receivables

     —          101  

Provision for doubtful other debtors

     2,575        5,668  

Subtotal Bad Debt

     11,126        15,739  

Non-Current Receivables

     

Trade receivables

     3,900        3,498  

Financial lease receivables

     837        1,174  

Other debtors

     10,412        11,368  

Net Subtotal

     15,149        16,040  

Trade receivables

     7,921        5,544  

Financial lease receivables

     837        1,174  

Other debtors

     10,412        11,368  

Gross subtotal

     19,170        18,086  

Provision for doubtful trade receivables

     4,021        2,046  

Provision for doubtful lease receivables

     —          —    

Provision for doubtful other debtors

     —          —    

Subtotal Bad Debt

     4,021        2,046  

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

The Credit and Collections Sub-Division, dependent from the Treasury Division, is the area entrusted with minimizing the credit risk of the accounts receivable, supervising the delinquency of the accounts. The regulations and procedures applicable for the control and administration of the Arauco Group can be found in the Corporate Credit Policy.

As of December 31, 2018, Arauco’s balance for commercial Debtors was ThU.S.$ 763,730 of which, according to the agreed sales conditions, 50.36% corresponded to sales on credit (open account), 48.74% to sales with letters of credit and 0.91% to other types of sales, distributed in 2,265 debtors. The client with the largest Open Account debt represented 3.98% of the total accounts receivable as of that date.

Below we provide detail regarding accounts receivable, classified in tranches:

 

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December 31, 2018

 

Age of trade receivables  

 

 

Days

   Non-past due     1 to 30     31 to 60     61 to 90     91 to 120     121 to 150     151 to 180     181 to 210     211 to 250     More than 250     Total  

ThU.S.$

     688,024       59,844       854       36       111       43       141       127       69       14,481       763,730  

%

     90.09     7.84     0.11     0.00     0.01     0.01     0.02     0.02     0.01     1.89     100

December 31, 2017

 

Age of trade receivables  

 

 

Days

   Non-past due     1 to 30     31 to 60     61 to 90     91 to 120     121 to 150     151 to 180     181 to 210     211 to 250     More than 250     Total  

ThU.S.$

     664,202       39,459       551       955       50       34       2,238       56       97       12,311       719,953  

%

     92.26     5.48     0.08     0.13     0.01     0.00     0.31     0.01     0.01     1.71     100

Arauco applies the simplified approach regarding the expected losses from commercial debtors, which allows for the use of an estimate of expected credit losses over the instrument’s lifespan for all commercial accounts receivable. In order to establish this estimate, the commercial debtors have been grouped in relation to the corresponding risks for sales conditions as well as for tranches, including clients that are up-to-date or in default.

 

Days

  Non-past due     1 to 30     31 to 60     61 to 90     91 to 120     121 to 150     151 to 180     181 to 210     211 to 250     More than 250     Total  

Letters of credit

    355,755       17,524       8       —         —         —         —         —         —         —         373,287  

Loss allowance provision

    —         —         —         —         —         —         —         —         —         —         —    

Expected loss rate

    0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00     0.00  

Credit line

    332,871       40,629       708       37       36       26       27       18       35       9,552       383,939  

Loss allowance provision

    —         —         7       4       4       3       3       18       35       9,552       9,626  

Expected loss rate

    0.00     0.00     0.96     10.00     10.00     10.00     10.00     100.00     100.00     100.00  

Others

    1,879       1,473       71       13       124       15       112       106       32       2,679       6,504  

Loss allowance provision

    —         —         1       1       62       8       56       106       32       2,679       2,945  

Expected loss rate

    0.00     0.00     0.96     10.00     50.00     50.00     50.00     100.00     100.00     100.00  

Trade receivables, total (ThU.S.$)

    690,505       59,626       787       50       160       41       139       124       67       12,231       763,730  

Allowance for doubtful accounts, total (ThU.S.$)

    —         —         8       5       66       11       59       124       67       12,231       12,571  

Arauco does not conduct rescheduling or renegotiations with its clients that imply an amendment to the maturity of the invoices and, should it be necessary, any debt renegotiation with a client shall be analyzed on a case-by-case basis and subjected to the approval of the Corporate Finance Division.

Regarding the loss allowance provision for trade receivables and others, below we provide detail for the movements as of December 31, 2018, 2017 and 2016:

 

     2018
ThU.S.$
    2017
ThU.S.$
    2016
ThU.S.$
 

Opening balance at January 1 - under IAS 39

     (17,785     (16,644     (19,860

Amounts restated through opening retained earnings

     (2,875     —         —    

Opening loss allowance as at January 1, 2018 - under IFRS 9

     (20,660     (16,644     (19,860

Increase in loan loss allowance recognised in profit or loss during the year

     (5,027     (3,423     (2,479

Receivables written off during the year as uncollectible

     8,620       1,806       5,250  

Unused amount reversed

     1,920       476       445  

Closing balance

     (15,147     (17,785     (16,644

Currently there is a policy for provisions for doubtful accounts receivable under IFRS for all the Arauco group companies.

Explanation regarding the Sales Risk with Letters of Credit

The sales with letters of credit mainly occur in markets in Asia and the Middle East. Periodically, a credit assessment is conducted regarding the banks that issue the letters of credit with the purpose of obtaining their score over the basis of risk-qualification ratings, country-specific risk and financial statements. The decision of approving the issuing bank or asking for confirmation of the letter of credit is made in consideration to this assessment.

 

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Explanation of the Sales Risk with Credit Line

Sales on credit are subject to the credit limit for each customer. The approval or rejection of a credit limit for all term sales is conducted by the Corporate Credit Sub-Division, as well as by the Credit and Collections area for North America, Brazil and Argentina, which report to the Corporate Finance Division. The regulations and procedures applicable for the correct control and risk management over the sales on credit are ruled by the Credit Policy.

A procedure that must be applied by all the companies of the Arauco group has been established for the approval and/or modification of client credit lines. Credit line requests are entered to the SAP that analyzes all available information. Afterwards, the same are either approved or rejected in each one of the internal committees of each company belonging to the Arauco group, depending on the maximum amount authorized by the Credit Policy. Lines of credit are renewed during this internal process on a yearly basis.

All sales are automatically controlled by a credit verification system, which has been configured to block any orders from clients who are delinquent in a given percentage of a debt and/or from clients whose line of credit, as of the time of the product’s shipping, has been exceeded or is overdue.

In order to minimize the credit risk for term or Open Account sales, it is Arauco’s policy to take out insurance to cover the export sales of companies Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Forestal Arauco S.A., and Arauco do Brasil S.A., as well as the domestic sales of Arauco México S.A. de C.V., Arauco Wood Inc, Arauco Colombia S.A., Arauco Perú S.A., Arauco Panels USA LLC, Flakeboard Company Ltd., Flakeboard America Ltd. (currently Arauco North America, Inc)., Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Arauco Florestal Arapoti, Arauco Forest Brasil S.A., Arauco do Brasil S.A., Arauco Industria de Paineis Ltda. and Arauco Nutrientes S.P.A., Arauco works with credit insurance company Euler Hermes World Agency (Aa3 rating, as per risk rating companies Moody’s and AA by S&P),

The company grant a 90% coverage over the amount of each invoice, without deductibles, for registered clients and of 90% for non-registered clients. (Non-registered clients are those whose lines are under ThU.S.$ 100 (equivalent currency of their invoicing) of the local sales of companies Arauco Perú S.A., Arauco Colombia S.A., Arauco México S.A. de C.V., Arauco Do Brasil S.A., Arauco Argentina S.A. and Maderas Arauco S.A. Lines in excess of the aforesaid amounts correspond to registered clients).

 

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As another way of minimizing risk and supporting a line of credit approved by the Credit Committee, Arauco holds guarantees such as mortgages, pledges, Standby letters of credit, bank performance bonds, checks, promissory notes, loans or any other that could be required under the laws of each country. The total amount held in guarantees amounts to ThU.S.$58.94 million, effective as of December 2018, as summarized in the following chart. The procedure for guarantees is regulated by Arauco’s Policy on Guarantees, whose purpose is to control their accounting, due date and custody.

 

Guarantees Arauco Group (ThU.S.$)

 

Guarantees Debtors

(received from clients)

     

Certificate of deposits

     7,107        12.1

Standby

     9,142        15.5

Promissory notes

     31,036        52.7

Finance

     3,605        6.1

Mortgage

     4,551        7.7

Pledge

     2,099        3.6

Promissory notes

     1,400        2.3

Total Guarantees

     58,940        100.0

The maximum exposure to credit risk is limited to the value at amortized cost of the Debtors’ account for sales registered as of the date of this report, minus the percentage of sales insured by the aforementioned credit insurance companies and the guarantees granted in favor of Arauco.

In summary, the open account debt covered by the various insurance policies and guarantees amounts to 93.4% and, therefore, Arauco’s portfolio exposure amounts to 6.6%.

 

Secured Open Accounts Receivable

   ThU.S.$      %  

Total open accounts receivable

     424,278        100.0

Secured receivables (*)

     396,275        93.4

Unsecured receivables

     28,003        6.6

 

(*)

Insured Debt is deemed to be the portion of accounts receivable that is covered by a credit company or by guarantees such as standby letters of credit, mortgages, performance bonds, among others

Investment Policy:

Arauco has an Investment Policy which identifies and limits the financial instruments and the entities into which the Arauco companies, in particular Celulosa Arauco y Constitucion S.A., are authorized to invest. The Company’s Treasury Department is centralized with operations in Chile. The Head Office is responsible for carrying out investments, cash flow surplus investments, and short and long term debt subscriptions. Exceptions to this rule apply to short and long-term debt, and will be for specific investments made through other companies where authorization is required from the Chief Financial Officer.

For financial instruments, the only permitted investments are fixed income investments with adequate liquidity. Each instrument has defined classifications and limits, depending on duration and type of issuer.

Regarding intermediaries (such as banks, securities brokers and dealers of mutual funds that are bank affiliates), a scoring methodology is used to determine the relative degree of risk of each intermediary based on their financial position and assign score points that result in a credit risk rating to each intermediary. Arauco uses this scoring system to determine its investment limits for each intermediary.

 

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The required information to evaluate the various criteria are obtained from published financial statements from the banks under evaluation and from the credit risk ratings of short and long term debt securities obtained from rating agencies authorized by the Superintendence of Banks and Financial Institutions (Fitch Ratings Chile, Humphreys and Feller Rate).

Any necessary exceptions regarding investment limits in each particular instrument or entity must have the authorization from Arauco’s Chief Financial Officer.

23.10.2 Type of Risk: Liquidity Risk

Description

This risk corresponds to Arauco’s ability to fulfill its financial obligations upon maturity.

Explanation of Liquidity Risk Exposure and How This Risk Arises

Arauco’s exposure to liquidity risk is mainly from its obligations to bondholders, banks and financial institutions, creditors and other payables. Liquidity risk may arise if Arauco is unable to meet the net cash flow requirements, which sustain its operations under both normal and exceptional circumstances.

Explanation of Objectives, Policies and Processes for Risk Management, and Measurement Methods

The Financial Management Department monitors on an ongoing basis the Company’s cash flow forecasts based on short and long term forecasts and available financing alternatives. In order to manage the risk level of financial assets, Arauco follows its investment policy.

The following tables detail Arauco’s liquidity analysis for its financial liabilities as of December 31, 2018 and December 31, 2017. The tables have been drawn up based on the contractual undiscounted cash outflows and their remaining contractual maturities:

 

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December 31, 2018

 

     Maturity     Total            

Tax ID

   Name      Currency      Name -
Country
Loans with

banks
  Up to 3
months
ThU.S.$
    3 to 12
months
ThU.S.$
    1 to 2
years
ThU.S.$
    2 to 3
years
ThU.S.$
    3 to 4
years
ThU.S.$
    4 to 5
years
ThU.S.$
    More
than 5
years
ThU.S.$
    Current
ThU.S.$
    Non
Current
ThU.S.$
    Effective
rate
   

Nominal rate

93.458.000-1

    

Celulosa Arauco
y Constitución
S.A.
 
 
 
     U.S. Dollars      Scotiabank-
Chile
    —         1,930       7,951       7,951       7,951       206,584       —         1,930       230,437       3.70   Libor + 1.10%

—  

    
Arauco
Argentina S.A.
 
 
     U.S. Dollars      Banco Bice     5,040       —         —         —         —         —         —         5,040       —         2.10   2.10%

—  

    
Arauco
Argentina S.A.
 
 
     U.S. Dollars      Banco Macro     10,054       —         —         —         —         —         —         10,054       —         6.00   6.00%

—  

    
Arauco
Argentina S.A.
 
 
     U.S. Dollars      BBVA     —         13,071       —         —         —         —         —         13,071       —         5.90   5.90%

—  

    

Zona Franca
Punta Pereira
S.A.
 
 
 
     U.S. Dollars      Interamerican
Development
Bank
    1,184       1,032       2,435       2,335       2,233       2,126       —         2,216       9,129       4.62   Libor + 2.05%

—  

    

Zona Franca
Punta Pereira
S.A.
 
 
 
     U.S. Dollars      Interamerican
Development
Bank
    2,940       2,786       5,701       —         —         —         —         5,726       5,701       4.37   Libor + 1.80%

—  

    

Zona Franca
Punta Pereira
S.A.
 
 
 
     U.S. Dollars      BBVA     —         14,103       —         —         —         —         —         14,103       —         4.06   Libor + 1.30%

—  

    

Zona Franca
Punta Pereira
S.A.
 
 
 
     U.S. Dollars      Citibank     —         4,517       —         —         —         —         —         4,517       —         4.19   Libor + 1.25%

—  

    

Zona Franca
Punta Pereira
S.A.
 
 
 
     U.S. Dollars      Scotiabank     —         2,509       —         —         —         —         —         2,509       —         4.39   Libor + 1.50%

—  

    

Celulosa y
Energia Punta
Pereira S.A.
 
 
 
     U.S. Dollars      Banco
Interamericano
de Desarrollo
    4,770       4,179       9,826       9,411       9,008       8,605       —         8,949       36,850       4.62   Libor + 2.05%

—  

    

Celulosa y
Energia Punta
Pereira S.A.
 
 
 
     U.S. Dollars      Banco
Interamericano
de Desarrollo
    11,871       11,274       23,035       —         —         —         —         23,145       23,035       4.37   Libor + 1.80%

—  

    

Celulosa y
Energia Punta
Pereira S.A.
 
 
 
     U.S. Dollars      Finnish Export
Credit
    24,850       21,578       49,484       47,930       47,207       23,562       —         46,428       168,183       3.20   3.20%

—  

     Eufores S.A.        U.S. Dollars      Banco
Republica
Oriental de
Uruguay
    8       27,073       —         —         —         —         —         27,081       —         4.12   Libor + 1.3%

—  

     Eufores S.A.        U.S. Dollars      Citibank     3       —         —         —         —         —         —         3       —         3.43   Libor + 2%

—  

     Eufores S.A.        U.S. Dollars      Banco Itau -
Uruguay
    24       12,511       —         —         —         —         —         12,535       —         4.17   Libor + 1.75%

—  

     Eufores S.A.        U.S. Dollars      Heritage     1,352       —         —         —         —         —         —         1,352       —         4.30   Libor + 1.75%

—  

     Eufores S.A.        U.S. Dollars      Banco
Santander
    20,235       5,021       —         —         —         —         —         25,256       —         3.86   Libor + 1.3%

—  

    
Arauco Do Brasil
S.A.
 
 
     Brazilian Real      Banco
Santander
    21       64       48       6       —         —         —         85       54       9.50   9.50%

—  

    
Arauco Do Brasil
S.A.
 
 
     Brazilian Real      Banco Alfa     17       48       64       64       5       —         —         65       133       10.35   Tljp+2%+ spread 1.75%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco Itau     3       —         —         —         —         —         —         3       —         7.00   3.50%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco
Bradesco
    9       22       —         —         —         —         —         31       —         6.00   6.00%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco
Votorantim
    14       —         —         310       310       —         —         14       620       5.00   5.00%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco Safra     18       —         —         —         —         —         —         18       —         6.00   6.00%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco Safra     6       17       23       10       —         —         —         23       33       10.00   10.00%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco
Santander
    3       14       136       44       44       —         —         17       224       8.38   8.38%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco
Santander
    34       33       50       129       129       —         —         67       308       10.32   10.32%

—  

    
Arauco Florestal
Arapoti S.A.
 
 
     Brazilian Real      Banco
Santander
    4       11       14       11       2       —         —         15       27       10.47   10.49%

—  

    
Arauco Forest
Brasil S.A.
 
 
     Brazilian Real      Banco
Bradesco
    21       23       24       24       14       —         —         44       62       9.00   9.00%

—  

    
Arauco Forest
Brasil S.A.
 
 
     U.S. Dollars      Banco Alfa     2       7       9       5       —         —         —         9       14       17.00   Cesta+2%+spread 1.8%

—  

    
Arauco Forest
Brasil S.A.
 
 
     Brazilian Real      Banco Alfa     5       14       19       10       —         —         —         19       29       0.22   Tljp+2%+Spread 1.8%

—  

    
Arauco Forest
Brasil S.A.
 
 
     Brazilian Real      Banco
Votorantim -
Brazil
    162       198       —         276       276       —         —         360       552       16.00   Tljp+1.8%+Spread 2%

—  

    
Arauco Forest
Brasil S.A.
 
 
     U.S. Dollars      Banco
Votorantim -
Brazil
    34       45       —         —         —         —         —         79       —         10.40   Cesta+1.3%+spread 2%

—  

    
Arauco Forest
Brasil S.A.
 
 
     Brazilian Real      Banco Bndes
Subcrédito
A-B-D
    3       —         98       394       295       —         —         3       787       21.78   Tljp + 2.91%

—  

    
Arauco Forest
Brasil S.A.
 
 
     U.S. Dollars      Banco Bndes
Subcrédito C
    5       —         24       145       120       —         —         5       289       15.22   Cesta+2.91%

—  

    
Arauco Forest
Brasil S.A.
 
 
     Brazilian Real      Banco
Santander
    43       58       181       173       138       —         —         101       492       8.67   8.67%

—  

    

Mahal
Emprendimientos
Pat. S.A.
 
 
 
     Brazilian Real      Bndes
Subcrédito E-I
    663       1,946       1,946       —         —         —         —         2,609       1,946       19.78   Tljp + 2.91%

—  

    

Mahal
Emprendimientos
Pat. S.A.
 
 
 
     Brazilian Real      Bndes
Subcrédito F-J
    399       1,167       1,167       —         —         —         —         1,566       1,167       21.78   Tljp + 3.91%

—  

    

Mahal
Emprendimientos
Pat. S.A.
 
 
 
     U.S. Dollars      Bndes
Subcrédito
G-K
    520       1,528       1,697       —         —         —         —         2,048       1,697       15.22   Cesta + 2.91%

—  

    

Mahal
Emprendimientos
Pat. S.A.
 
 
 
     Brazilian Real      Bndes
Subcrédito
H-L
    444       1,297       1,297       —         —         —         —         1,741       1,297       24.18   Tljp + 5.11%

—  

    

Mahal
Emprendimientos
Pat. S.A.
 
 
 
     Brazilian Real      Banco
Santander
    6       18       23       23       —         —         —         24       46       21.96   Tljp+2%+Spread 2%

—  

    

Mahal
Emprendimientos
Pat. S.A.
 
 
 
     U.S. Dollars      Banco
Santander
    3       9       13       12       —         —         —         12       25       17.40   Cesta+2%+Spread 2%

—  

    

Novo Oeste
Gestao de Ativos
Florestais S.A.
 
 
 
     Brazilian Real      Banco
Santander
    5       18       24       24       2       —         —         23       50       21.96   Tljp+2%+Spread 2%

—  

    

Novo Oeste
Gestao de Ativos
Florestais S.A.
 
 
 
     U.S. Dollars      Banco
Santander
    3       9       13       13       2       —         —         12       28       17.40   Tljp+2%+Spread 2%

—  

    
Flakeboard
Company Ltd.
 
 
     U.S. Dollars      Banco del
Estado de
Chile
    —         2,141       13,164       41,497       40,184       38,872       203,906       2,141       337,623       3.00   Libor + 1.65%
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
         Total     84,778       130,271       118,466       110,797       107,920       279,749       203,906       215,049       820,838      
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

December 31, 2018

 

        Maturity     Total              

Tax ID

  

Name

   Currency     Name - Country
Bonds
     Up to 3
months
ThU.S.$
     3 to 12
months
ThU.S.$
     1 to 2
years
ThU.S.$
    2 to 3
years
ThU.S.$
    3 to 4
years
ThU.S.$
    4 to 5
years
ThU.S.$
     More than  5
years
ThU.S.$
    Current
ThU.S.$
    Non
Current
ThU.S.$
    Effective
rate

 

    Nominal
rate

 

 

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-F        —          19,425        25,413       24,656       23,899       23,143        116,673       19,425       213,784       4.24     4.21

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-F        —          7,770        10,189       9,884       9,579       9,274        47,339       7,770       86,265       4.25     4.21

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-J        2,132        —          204,731       —         —         —          —         2,132       204,731       3.23     3.22

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-P        —          1,004        7,857       7,857       25,713       24,999        193,697       1,004       260,123       3.96     3.96

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-Q        —          20,207        20,576       10,398       —         —          —         20,207       30,974       2.96     2.98

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-R        —          1,770        7,079       7,079       7,079       7,079        278,892       1,770       307,208       3.57     3.57

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-S        —          592        4,733       4,733       4,733       4,733        204,991       592       223,923       2.44     2.40

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-W        —          559        2,487       2,487       2,487       2,487        127,578       559       137,526       2.12     2.09

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.       Barau-X        —          1,317        5,853       5,853       5,853       5,853        326,508       1,317       349,920       2.70     2.68

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollars      
Yankee
Bonds 2019
 
 
     6,168        202,643        —         —         —         —          —         208,811       —         7.26     7.25

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollars       Yankee 2021        4,422        —          10,013       204,527       —         —          —         4,422       214,540       5.02     5.00

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollars       Yankee 2022        5,705        —          12,153       12,153       259,785       —          —         5,705       284,091       4.77     4.75

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollars       Yankee 2024        9,375        —          22,500       22,500       22,500       22,500        527,024       9,375       617,024       4.52     4.50

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollars       Yankee 2027        —          3,175        19,375       19,375       19,375       19,375        77,500       3,175       155,000       3.90     3.88

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollars       Yankee 2047        —          3,607        22,000       22,000       22,000       22,000        528,000       3,607       616,000       5.50     5.50
          

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

     
          Total        27,802        262,069        374,959       353,502       403,003       141,443        2,428,202       289,871       3,701,109      
          

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

     

 

December 31, 2018

               Maturity     

 

     Total      Effective
rate
     Nominal
rate
 

Tax ID

   Name    Currency    Name- Country Lease      Up to 3
months
ThU.S.$
     3 to 12
months
ThU.S.$
     1 to 2
years
ThU.S.$
     2 to 3
years
ThU.S.$
     3 to 4
years
ThU.S.$
     4 to 5
years
ThU.S.$
     More than  5
years
ThU.S.$
     Current
ThU.S.$
     Non
Current
ThU.S.$
 

85.805.200-9

   Forestal Arauco S.A.    U.F.      Banco Santander        148        410        599        599        —          —          —          558        1,198        —          —    

85.805.200-9

   Forestal Arauco S.A.    U.F.      Banco Scotiabank        1,288        3,158        2,368        2,368        478        478        —          4,446        5,692        —          —    

85.805.200-9

   Forestal Arauco S.A.    U.F.      Banco Estado        639        1,885        989        989        —          —          —          2,524        1,978        —          —    

85.805.200-9

   Forestal Arauco S.A.    U.F.      Banco de Chile        1,998        8,891        3,618        3,618        1,556        1,556        —          10,889        10,348        —          —    

85.805.200-9

   Forestal Arauco S.A.    U.F.      Banco BBVA        545        273        —          —          —          —          —          818        —          —          —    

85.805.200-9

   Forestal Arauco S.A.    U.F.      Banco Credito e Inversiones        1,313        5,351        2,897        2,897        3,220        3,220        —          6,664        12,234        —          —    

85.805.200-9

   Forestal Arauco S.A.    Chilean pesos      Banco Chile        284        690        520        520        —          —          —          974        1,040        —          —    

85.805.200-9

   Forestal Arauco S.A.    Chilean pesos      Banco Credito e Inversiones        679        2,036        1,484        1,484        —          —          —          2,715        2,968        —          —    

85.805.200-9

   Forestal Arauco S.A.    Chilean pesos      Banco Scotiabank        371        957        673        673        233        234        —          1,328        1,813        —          —    
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       
           Total        7,265        23,651        13,148        13,148        5,487        5,488        —          30,916        37,271        
           

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

       

As part of the policy of Arauco, it considers compliance with all Accounts Payable, whether with related (see Note 13) or third parties, within a period not exceeding 30 days.

 

F-102


Table of Contents
December 31, 2017   Maturity     Total          

Tax ID

  

Name

   Currency   

Name-
Country Loans
with

banks

  Up to 3
months
ThU.S.$
    3 to 12
months
ThU.S.$
    1 to 2
years
ThU.S.$
    2 to 3
years
ThU.S.$
    3 to 4
years
ThU.S.$
    4 to 5
years
ThU.S.$
    More
than 5
years
ThU.S.$
    Current
ThU.S.$
    Non
Current
ThU.S.$
    Effective
rate
 

Nominal

rate

93.458.000-1

   Celulosa Arauco y Constitución S.A.    U.S. Dollar    Scotiabank- Chile     25       199,572       —         —         —         —         —         199,597       —       1.70%   Libor + 0.70%

   Zona Franca Punta Pereira    U.S. Dollar    Interamerican Development Bank     1,167       1,032       2,434       2,361       2,282       2,201       2,120       2,199       11,398     3.51%   Libor + 2.05%

   Zona Franca Punta Pereira    U.S. Dollar    Interamerican Development Bank     2,953       2,787       5,870       5,676       —         —         —         5,740       11,546     3.26%   Libor + 1.80%

   Zona Franca Punta Pereira    U.S. Dollar    BBVA     14,007       —         —         —         —         —         —         14,007       —       3.13%   Libor + 1.75%

   Zona Franca Punta Pereira    U.S. Dollar    Citibank     —         4,503       —         —         —         —         —         4,503       —       3.10%   Libor + 1.75%

   Zona Franca Punta Pereira    U.S. Dollar    Scotiabank     3       2,506       —         —         —         —         —         2,509       —       3.17%   3.17%

   Celulosa y Energia Punta Pereira    U.S. Dollar    Banco Interamericano de Desarrollo     4,723       4,161       9,828       9,526       9,201       8,885       8,570       8,884       46,010     3.51%   Libor + 2.05%

   Celulosa y Energia Punta Pereira    U.S. Dollar    Banco Interamericano de Desarrollo     11,946       11,255       23,735       22,938       —         —         —         23,201       46,673     3.26%   Libor + 1.80%

   Celulosa y Energia Punta Pereira    U.S. Dollar    Finnish Export Credit     25,176       21,214       50,198       49,484       47,929       47,207       23,564       46,390       218,382     3.20%   3.20%

   Celulosa y Energia Punta Pereira    U.S. Dollar    Dnb Nor Bank     —         45       —         —         —         —         —         45       —       0.00%   Libor + 2%

   Eufores S.A.    U.S. Dollar    Banco Republica Oriental de Uruguay     24,746       12,564       —         —         —         —         —         37,310       —       3.08%   Libor + 1.75%

   Eufores S.A.    U.S. Dollar    Citibank     6       —         —         —         —         —         —         6       —       3.43%   Libor + 2%

   Eufores S.A.    U.S. Dollar    Banco HSBC- Uruguay     1,200       —         —         —         —         —         —         1,200       —       2.91%   Libor + 1.75%

   Eufores S.A.    U.S. Dollar    Banco Itau -Uruguay     4       12,513       —         —         —         —         —         12,517       —       3.08%   Libor + 1.75%

   Eufores S.A.    U.S. Dollar    Heritage     1,352       —         —         —         —         —         —         1,352       —       3.03%   Libor + 1.75%

   Eufores S.A.    U.S. Dollar    Banco Santander     20,230       5,013       —         —         —         —         —         25,243       —       3.06%   Libor + 1.75%

   Arauco Do Brasil S.A.    Brazilian Real    Banco Santander     23       67       89       46       —         —         —         90       135     9.50%   9.50%

   Arauco Do Brasil S.A.    Brazilian Real    Banco Alfa     18       56       74       74       74       7       —         74       229     10.75%   Tljp+2%+ spread 1.75%

   Arauco Do Brasil S.A.    Brazilian Real    Banco Santander     3       7       10       10       7       —         —         10       27     11.00%   Tljp+2%+ spread 2%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Itau     1       —         —         —         —         —         —         1       —       2.50%   2.50%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Itau     13       37       4       —         —         —         —         50       4     3.50%   3.50%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Bradesco     11       33       36       —         —         —         —         44       36     6.00%   6.00%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Votorantim     16       —         —         —         364       364       —         16       728     5.00%   5.00%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Safra     22       65       22       —         —         —         —         87       22     6.00%   6.00%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Safra     7       20       27       27       11       —         —         27       65     10.00%   10.00%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Santander     981       907       —         —         —         —         —         1,888       —       9.50%   9.50%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Santander     —         16       16       8       —         —         —         16       24     9.00%   9.00%

   Arauco Florestal Arapoti S.A.    Brazilian Real    Banco Santander     12       52       85       74       64       54       —         64       277     10.49%   10.49%

   Arauco Forest Brasil S.A.    Brazilian Real    Banco Bradesco     20       69       53       28       28       16       —         89       125     9.00%   9.00%

   Arauco Forest Brasil S.A.    U.S. Dollar    Banco Alfa     2       7       9       9       5       —         —         9       23     8.20%   Cesta+2%+spread 1.8%

   Arauco Forest Brasil S.A.    Brazilian Real    Banco Alfa     6       17       23       22       11       —         —         23       56     10.80%   Tljp+2%+Spread 1.8%

   Arauco Forest Brasil S.A.    Brazilian Real    Banco Itau -Brazil     1       —         —         —         —         —         —         1       —       2.50%   2.50%

   Arauco Forest Brasil S.A.    Brazilian Real    Banco Votorantim - Brazil     192       619       403       —         322       322       —         811       1,047     8.10%   Tljp+1.8%+Spread 2%

   Arauco Forest Brasil S.A.    U.S. Dollar    Banco Votorantim - Brazil     34       —         78       —         —         —         —         34       78     7.70%   Cesta+1.3%+spread 2%

   Arauco Forest Brasil S.A.    Brazilian Real    Banco Bndes Subcrédito A-B-D     4       —         —         115       458       344       —         4       917     9.82%   Tljp + 2.91%

   Arauco Forest Brasil S.A.    U.S. Dollar    Banco Bndes Subcrédito C     5       —         —         24       145       120       —         5       289     7.30%   Cesta+2.91%

   Arauco Forest Brasil S.A.    Brazilian Real    Banco Santander     995       984       107       212       202       161       —         1,979       682     8.90%   8.90%

   Mahal Emprendimientos Pat. S.A.    Brazilian Real    Bndes Subcrédito E-I     23       754       3,017       2,262       —         —         —         777       5,279     9.91%   Tljp + 2.91%

   Mahal Emprendimientos Pat. S.A.    Brazilian Real    Bndes Subcrédito F-J     16       452       1,810       1,358       —         —         —         468       3,168     10.91%   Tljp + 3.91%

   Mahal Emprendimientos Pat. S.A.    U.S. Dollar    Bndes Subcrédito G-K     63       339       2,037       1,697       —         —         —         402       3,734     7.31%   Cesta + 2.91%

   Mahal Emprendimientos Pat. S.A.    Brazilian Real    Bndes Subcrédito H-L     19       504       2,011       1,509       —         —         —         523       3,520     12.11%   Tljp + 5.11%

   Mahal Emprendimientos Pat. S.A.    Brazilian Real    Banco Santander     —         —         27       27       27       —         —         —         81     11.00%   Tljp+2%+Spread 2%

   Mahal Emprendimientos Pat. S.A.    U.S. Dollar    Banco Santander     —         —         13       13       12       —         —         —         38     8.40%   Cesta+2%+Spread 2%

   Novo Oeste Gestao de Ativos Florestais S.A.    Brazilian Real    Banco Santander     —         1       26       28       28       2       —         1       84     11.00%   Tljp+2%+Spread 2%

   Novo Oeste Gestao de Ativos Florestais S.A.    U.S. Dollar    Banco Santander     —         1       12       13       13       1       —         1       39     8.40%   Tljp+2%+Spread 2%

   Flakeboard America Ltd    U.S. Dollar    Banco del Estado de Chile     675       —         5,060       4,839       17,925       17,925       111,309       675       157,058     3.00%   Libor + 1.65%
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
         Total     110,700       282,172       107,114       102,380       79,108       77,609       145,563       392,872       511,774      
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

December 31, 2017   Maturity     Total              

Tax ID

  

Name

   Currency     Name - Country
Bonds
  Up to 3
months
ThU.S.$
    3 to 12
months
ThU.S.$
    1 to 2
years
ThU.S.$
    2 to 3
years
ThU.S.$
    3 to 4
years
ThU.S.$
    4 to 5
years
ThU.S.$
    More
than 5
years
ThU.S.$
    Current
ThU.S.$
    Non
Current
ThU.S.$
    Effective
rate
    Nominal
rate
 

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-F     —         1,528       28,132       27,301       26,469       25,638       156,181       1,528       263,721       4.24%       4.21%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-F     —         611       11,340       11,005       10,670       10,335       62,958       611       106,308       4.25%       4.21%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-J     2,342       —         7,027       224,916       —         —         —         2,342       231,943       3.23%       3.22%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-P     —         1,103       8,633       8,633       8,633       28,334       240,175       1,103       294,408       3.96%       3.96%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-Q     —         22,364       23,445       22,796       11,154       —         —         22,364       57,395       2.96%       2.98%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-R     —         1,944       7,777       7,777       7,777       7,777       314,228       1,944       345,336       3.57%       3.57%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.F.     Barau-S     —         650       5,200       5,200       5,200       5,200       230,228       650       251,028       2.44%       2.89%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollar     Yankee 2019     6,168       —         217,034       —         —         —         —         6,168       217,034       7.26%       7.25%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollar     Yankee 2021     4,422       —         10,013       10,013       204,138       —         —         4,422       224,164       5.02%       5.00%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollar     Yankee 2022     5,705       —         12,153       12,153       12,153       259,072       —         5,705       295,531       4.77%       4.75%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollar     Yankee 2024     9,375       —         22,500       22,500       22,500       22,500       548,324       9,375       638,324       4.52%       4.50%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollar     Yankee 2027     —         3,175       19,375       19,375       19,375       19,375       582,479       3,175       659,979       3.90%       3.88%  

93.458.000-1

   Celulosa Arauco y Constitución S.A.      U.S. Dollar     Yankee 2047     —         3,607       22,000       22,000       22,000       22,000       943,160       3,607       1,031,160       5.50%       5.50%  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
        Total     28,012       34,982       394,629       393,669       350,069       400,231       3,077,733       62,994       4,616,331      
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

December 31, 2017     Maturity     Total              

Tax ID

  

Name

   Currency      Name - Country Lease     Up to 3
months
ThU.S.$
    3 to 12
months
ThU.S.$
    1 to 2
years
ThU.S.$
    2 to 3
years
ThU.S.$
    3 to 4
years
ThU.S.$
    4 to 5
years
ThU.S.$
    More
than 5
years
ThU.S.$
    Current
ThU.S.$
    Non
Current
ThU.S.$
    Effective
rate
    Nominal
rate
 

85.805.200-9

   Forestal Arauco S.A.      U.F.        Banco Santander       168       1,026       983       983       —         —         —         1,194       1,966       —         —    

85.805.200-9

   Forestal Arauco S.A.      U.F.        Banco Scotiabank       1,563       3,772       4,139       4,139       638       638       —         5,335       9,554       —         —    

85.805.200-9

   Forestal Arauco S.A.      U.F.        Banco Estado       749       2,182       2,318       2,318       230       230       —         2,931       5,096       —         —    

85.805.200-9

   Forestal Arauco S.A.      U.F.        Banco de Chile       3,346       13,995       7,886       7,886       2,247       2,247       —         17,341       20,266       —         —    

85.805.200-9

   Forestal Arauco S.A.      U.F.        Banco BBVA       1,151       3,421       447       447       —         —         —         4,572       894       —         —    

85.805.200-9

   Forestal Arauco S.A.      U.F.        Banco Credito e Inversiones       1,443       5,901       4,856       4,856       5,354       5,354       —         7,344       20,420       —         —    

85.805.200-9

   Forestal Arauco S.A.      Chilean Pesos        Banco Santander       50       17       —         —         —         —         —         67       —         —         —    

85.805.200-9

   Forestal Arauco S.A.      Chilean Pesos        Banco Chile       607       1,547       1,015       1,015       123       123       —         2,154       2,276       —         —    

85.805.200-9

   Forestal Arauco S.A.      Chilean Pesos        Banco Credito e Inversiones       767       2,301       3,032       3,032       179       179       —         3,068       6,422       —         —    

85.805.200-9

   Forestal Arauco S.A.      Chilean Pesos        Banco Scotiabank       84       251       334       334       237       236       —         335       1,141       —         —    
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     
           Total       9,928       34,413       25,010       25,010       9,008       9,007       —         44,341       68,035      
          

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

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Guarantees

As of the date of these consolidated financial statements, Arauco has financial assets of approximately MU.S.$47 that have been pledged to third parties (beneficiaries), as direct guarantee. If Arauco does not fulfill its obligations, the guarantors could execute the guarantees.

As of December 31, 2018, the total assets pledged as an indirect guarantee were MU.S.$624. In contrast to direct guarantees, indirect guarantees are given to secure obligations assumed by a third party.

On September 29, 2011, Arauco entered into a Security Agreement under which it granted a non-joint guarantee limited to 50% of the obligations of the Uruguayan companies (joint ventures) Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A., under the IDB Facility Agreement in the amount of up to MU.S.$454 and the Finnevera Guaranteed Facility Agreement in the amount of up to MU.S.$900. Both loan agreements were signed with the International Development Bank. Such guarantee is included in the table below, under indirect guarantees.

Direct and indirect guarantees granted by Arauco:

 

DIRECT

                        

Subsidiary

  

Guarantee

  

Assets Pledged

  

Currency

  

ThU.S.$

  

Guarantor

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      Chilean Pesos    488    Directorate General of Maritime Territory and Merchant Marine

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      Chilean Pesos    313    Directorate General of Maritime Territory and Merchant Marine

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      Chilean Pesos    230    Directorate General of Maritime Territory and Merchant Marine

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      Chilean Pesos    209    Directorate General of Maritime Territory and Merchant Marine

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      Chilean Pesos    120    National Customs Service

Forestal Arauco S.A.

   Guarantee letter    —      Chilean Pesos    831    CODELCO S.A.

Arauco Forest Brasil S.A.

   Mortgage Industrial Plant of Jaguariaíva of Arauco do Brasil    —      U.S. Dollar    39,566    BNDES

Arauco Forest Brasil S.A.

   Endorsement of ADB + Guarantee Letter AISA    —      U.S. Dollar    3,022    Bank Votorantim S.A.

Arauco Forest Brasil S.A.

   Endorsement of Arauco do Brasil    —      U.S. Dollar    550    Bank Votorantim S.A.

Arauco Forest Brasil S.A.

   Equipment    Property plant and equipment    U.S. Dollar    115    Bank Santander S.A.

Arauco Forest Brasil S.A.

   Equipment    Property plant and equipment    U.S. Dollar    192    Bank Santander S.A.

Arauco Forest Brasil S.A.

   Equipment    Property plant and equipment    U.S. Dollar    97    Bank Bradesco S.A.

Arauco do Brasil S.A.

   Equipment    Property plant and equipment    U.S. Dollar    179    Bank Santander S.A.

Arauco do Brasil S.A.

   Equipment    Property plant and equipment    U.S. Dollar    176    Bank Alpha S.A.

Arauco Florestal Arapoti S.A.

   Endorsement of Arauco do Brasil    —      U.S. Dollar    621    Bank Votorantim S.A.

Arauco Florestal Arapoti S.A.

   Equipment    Property plant and equipment    U.S. Dollar    332    Bank Safra S.A.

Arauco Florestal Arapoti S.A.

   Equipment    Property plant and equipment    U.S. Dollar    198    Bank Santander S.A.

Arauco Florestal Arapoti S.A.

   Equipment    Property plant and equipment    U.S. Dollar    172    Bank Itaú BBA S.A.
      Total       47,411   
           

 

  
                           

INDIRECT

                        

Subsidiary

  

Guarantee

  

Assets Pledged

  

Currency

  

ThU.S.$

  

Guarantor

Celulosa Arauco y Constitución S.A.

   Suretyship not supportive and cumulative    —      U.S. Dollar    322,234    Joint Ventures (Uruguay)

Celulosa Arauco y Constitución S.A.

   Full Guarantee    —      U.S. Dollar    287,000    Arauco Forest Brasil y Mahal (Brasil)

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      U.S. Dollar    4,039    Arauco Forest Brasil y Mahal (Brasil)

Celulosa Arauco y Constitución S.A.

   Guarantee letter    —      Brazilian Real    11,115    Arauco Forest Brasil y Mahal (Brasil)
      Total       624,388   
     

 

     

 

  

23.10.3 Type of Risk: Market Risk – Exchange Rate

Description

Market risk arises from the probability of being affected by losses from fluctuations in currencies exchange rates in which assets and liabilities are denominated, in a functional currency other than the functional currency of Arauco.

 

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Table of Contents

Explanation of Currency Risk Exposure and How This Risk Arises

Arauco is exposed to the foreign currency risk from currency fluctuations arising from sales, purchases and obligations undertaken in foreign currencies, such as the Chilean Peso, Euro, Brazilian Real or other foreign currencies. In the case of significant exchange rate variations, the Chilean Peso is the currency that represents the main currency risk. See Note 11 for details assets and liabilities classified by currency.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

Arauco performs sensitivity analyses to measure the effect of this variable on equity and net result.

Sensitivity analysis considers a variation of +/- 10% of the exchange rate over the Chilean Peso. This fluctuation range is considered possible given current market conditions as of the date of these financial statements. With all other variables at a constant rate, a U.S. Dollar exchange rate variation of +/- 10% in relation to the Chilean Peso would mean a change in the net income year after tax +/- 2.14% (equivalent to ThU.S.$ -/+ 15,524), and +/- 0.13% of equity (equivalent to ThU.S.$ -/+ 9,314).

Additionally, a sensitivity analysis is carried out assuming a variation of +/- 10% in the closing exchange rate on the Brazilian Real, which is considered a possible range of fluctuation given the market conditions as of the date of these financial statements. With all the other variables constant, a variation of +/- 10% in the exchange rate of the dollar on the Brazilian Real would mean a variation on the net income after tax +/- 0.008% (equivalent to ThU.S.-/+$56) and a change on the equity of +/- 0.0008% (equivalent to ThU.S. -/+$56).

23.10.4 Type of Risk: Market Risk – Interest rate risk

Description

Interest rate risk refers to the sensitivity of the value of financial assets and liabilities in terms of interest rate fluctuations.

Explanation of Interest Rate Risk Exposure and How This Risk Arises

Arauco is exposed to risks due to interest rate fluctuations for bonds issued, bank borrowings and financial instruments that bear interest at a variable rate.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

Arauco completes its risk analysis by reviewing its exposure to changes in interest rates. As of December 31, 2018, 15.6% our financial debt accrues interest at variable rates. A change of +/- 10% in the interest rate is considered a possible range of fluctuation. Such market conditions would affect the income after tax at rate of +/- 0.25% (equivalent to ThU.S.$-/+ 1,823) and +/- 0.01% (equivalent to ThU.S.$-/+ 1,094) on equity.

 

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Table of Contents

Thousands of dollars

   December 2018
ThU.S.$
     Total  

Fixed rate

     3,807,932        84.4

Bonds issued

     3,501,654     

Bank borrowings (*)

     238,091     

Financial leasing

     68,187     

Variable rate

     702,344        15.6

Bonds issued

     —       

Loans with Banks

     702,344     

Total

     4,510,276        100.0

Thousands of dollars

   December 2017
ThU.S.$
     Total  

Fixed rate

     3,676,210        86.0

Bonds issued

     3,302,685     

Bank borrowings (*)

     261,149     

Financial leasing

     112,376     

Variable rate

     597,308        14.0

Bonds issued

     —       

Loans with Banks

     597,308     

Total

     4,273,518        100.0

 

(*)

Includes variable rate bank borrowings changed by fixed rate swaps.

23.10.5 Type of Risk: Market Risk – Price of Pulp Risks

Description

Pulp prices are determined by world and regional market conditions. Prices fluctuate based on demand, production capacity, commercial strategies adopted by large-scale forestry companies, pulp and paper producers and by the availability of substitutes.    

Explanation of Price Risk Exposure and How This Risk Arises

Pulp prices are reflected in revenue from sales and directly affect the net income for the period.

As of December 31, 2018, revenue due to pulp sales accounted for 51.1% of total sales. Pulp prices are fixed on a monthly basis in accordance with the market. Forward contracts or other financial instruments are not used for pulp sales.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

This risk is approached in different ways. Arauco has a team of specialists who perform periodic market and competition analyses, providing tools to analyze and evaluate trends and adjust forecasts. Similarly, Arauco performs price financial sensitivity analysis in order to take the necessary safeguards to confront different scenarios in the best possible manner.    

Sensitivity analysis considers a variation of +/- 10% in the average pulp price, a possible fluctuation range given current market conditions at the date of the closing balance. With all other variables constant, a variation of +/- 10% in the average pulp price would mean a variation of +/- 29.69% (equivalent to ThU.S.$-/+ 215,781) on the income for the year after tax and +/- 1.76% (equivalent to ThU.S.$129,468) on equity.

 

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NOTE 24. REPORTABLE SEGMENTS

The main products that generate revenue for each reportable segment are described as follows:

 

   

Pulp: The main products sold by this reportable segment are long fiber bleached pulp (BSKP), short fiber bleached pulp (BHKP), long fiber raw pulp (UKP), and pulp fluff.

 

   

Wood products: The range of products sold by this reportable segment are plywood panels, MDF panels (medium density fiberboard), Hardboard Panels, PB Panels (agglomerated) different sizes of sawn wood and remanufactured products such as moldings, precut pieces and finger joints.

 

   

Forestry: This reportable segment produces and sells sawn logs, pulpable logs, posts and chips made from owned forests of Radiata and Taeda pine, eucalyptus globulus and nitens forests. Additionally, purchases logs and woodchip from third parties, which it sells to its other reportable segment.

Pulp

The Pulp reportable segment uses wood exclusively from pine and eucalyptus plantations for the production of different classes of wood cellulose or pulp. Bleached pulp is mainly used as raw material for producing printing and writing paper, as well as toilet paper and high quality wrapping paper. Unbleached pulp is used to produce packing paper, filters, fiber cement products, dielectric paper and others. On the other hand, fluff pulp is mainly used in the production of diapers and female hygiene products.

Arauco has seven plants, five in Chile, one in Argentina and one in Uruguay (50% property of Arauco) and they have a total production capacity of approximately 4 million tons per year. Pulp is sold in more than 33 countries, mainly in Asia and Europe.

 

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Table of Contents

Wood products

The Panels area produces a wide range of panel products and several kinds of moldings aimed at the furniture, decoration and construction industries. It consists of 19 industrial plants: 5 in Chile, 2 in Argentina, 4 in Brazil, and 8 plants around USA and Canada. The Company has a total annual production capacity of 7.4 million cubic meters of PBO, MDF, Hardboards, plywood and moldings.

Through the joint venture Sonae Arauco (see note 16), Arauco produces and sells wood panels, of the type of MDF, PB and OSB, and sawn timber, through the operation of 2 panel plants and one sawmill in Spain; 2 panel plants and one resin plant in Portugal; 4 panel plants in Germany and 2 panel plants in South Africa. In total, Sonae Arauco’s production capacity is approximately 1.5 million m3 of MDF, 2.3 million m3 of PB, 516,000 m3 of OSB and 50,000 m3 of sawn lumber.

Including Sonae Arauco at 50%, Arauco totalize a capacity of 4.6 million m3 of MDF, 4 million m3 of PB and 258,000 m3 of OSB in its plants.

The Sawn Timber area produces a wide range of wood and remanufactured products with different kinds of uses and appearances, which include a wide variety of uses in the furniture, packing, construction and refurbishing industries.

With 8 saw mills in operation (7 in Chile and 1 in Argentina), the Company has a production capacity of 2.9 million m3 of sawn wood.

Furthermore, the Company has 5 remanufacturing plants, 4 in Chile and 1 in Argentina. These plants reprocess sawn wood and produce high quality remanufactured products, such as finger joint and solid moldings as well as precut pieces.

Forestry

The Forestry reportable segment is Arauco’s core business. It provides raw materials for all products manufactured and sold by the Company. By directly controlling the growth of the forests to be processed, Arauco guarantees itself quality wood for each of its products.

Arauco holds forestry assets distributed throughout Chile, Argentina, Brazil and Uruguay, reaching 1.77 million hectares as of December 31, 2018, of which 1.02 million hectares are used for plantations, 441 thousand hectares for native forests, 199 thousand hectares for other uses and 111 thousand hectares are to be planted.

Arauco’s principal plantations consist of radiata and taeda pine and eucalyptus to a lesser degree. These are species that have fast growth rates and short harvest cycles compared with other long fiber commercial woods.    

Arauco has no customers representing 10% or more of its revenues.

Below, please find summarized information concerning the assets, liabilities and profits and losses at the end of each period, by segments. The profit (loss) of each segment informed takes into consideration that taxes and income and financial costs have not been allocated to the various segments, and are shown as part of the Corporate’s segment:

 

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Table of Contents

Year ended December 31, 2018

   Pulp
ThU.S.$
     Forestry
ThU.S.$
    Panels
ThU.S.$
     Others
ThU.S.$
     Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Revenues from goods sale

     2,956,863        105,170       2,761,878        33,673        —         5,857,584         5,857,584  

Revenues from services sale

     87,643        8,811       —          795        —         97,249         97,249  

Revenues from external customers

     3,044,506        113,981       2,761,878        34,468        —         5,954,833         5,954,833  

Revenues from transactions with other operating segments

     42,434        1,038,624       9,058        37,568        —         1,127,684       (1,127,684     —    
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

     —          —         —          —          20,895       20,895         20,895  

Finance costs

     —          —         —          —          (214,779     (214,779       (214,779

Net finance costs

     —          —         —          —          (193,884     (193,884       (193,884
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortizations

     232,275        19,448       145,299        3,313        7,087       407,422         407,422  

Sum of significant income accounts

     1,888        86,763       3,195        —          —         91,846         91,846  

Sum of significant expense accounts

     19,619        3,885       4,555        —          —         28,059         28,059  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) of each reportable segment

     1,173,249        (146,538     232,914        7,506        (540,372     726,759         726,759  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit (loss) of associates and joint ventures accounted for using equity method

                   

Associates

     —          —         —          —          3,043       3,043         3,043  

Joint ventures

     —          —         12,549        —          1,654       14,203         14,203  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     —          —         —          —          (226,765     (226,765       (226,765

Geographical information on revenues

                   

Revenue – Chilean entities

     2,303,086        55,579       1,319,766        795        —         3,679,226         3,679,226  

Revenue – Foreign entities

     741,420        58,402       1,442,112        33,673        —         2,275,607         2,275,607  

Total Ordinary Income

     3,044,506        113,981       2,761,878        34,468        —         5,954,833         5,954,833  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2018

   Pulp
ThU.S.$
     Forestry
ThU.S.$
    Panels
ThU.S.$
     Others
ThU.S.$
     Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Amounts of additions to non-current assets

                   

Acquisition of property, plant and equipment and biological assets

     324,482        251,574       323,675        645        293       900,669       —         900,669  

Acquisition and contribution of investments in associates and joint venture

                19,627       19,627       —         19,627  
             

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2018

   Pulp
ThU.S.$
     Forestry
ThU.S.$
    Panels
ThU.S.$
     Others
ThU.S.$
     Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Segment assets

     5,252,765        5,114,163       2,905,670        49,588        1,317,041       14,639,227       (45,479     14,593,748  

Segments assets (excluding deferred tax assets)

     5,252,765        5,114,163       2,905,670        49,588        1,312,406       14,634,592       (45,479     14,589,113  

Deferred tax assets

     —          —         —          —          4,635       4,635         4,635  

Investments accounted through equity method

                   

Associates

     —          38,497       —          —          117,112       155,609         155,609  

Joint Ventures

     —          —         181,103        —          21,341       202,444         202,444  

Segment liabilities

     396,332        180,259       405,551        13,727        6,258,908       7,254,777         7,254,777  

Segments liabilities (excluding deferred tax liabilities)

     396,332        180,259       405,551        13,727        4,841,250       5,837,119         5,837,119  

Deferred tax liabilities

     —          —         —          —          1,417,658       1,417,658         1,417,658  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Geographical information on non-current assets

                   

Chile

     2,667,179        3,259,801       806,253        20,382        120,231       6,873,846       (3,842     6,870,004  

Foreign countries

     1,657,532        1,304,390       1,247,008        19,507        54,147       4,282,584       —         4,282,584  

Non-current assets, Total

     4,324,711        4,564,191       2,053,261        39,889        174,378       11,156,430       (3,842     11,152,588  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

109


Table of Contents

Year ended December 31, 2017

   Pulp
ThU.S.$
     Forestry
ThU.S.$
    Wood products
ThU.S.$
     Others
ThU.S.$
     Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Revenues from goods sale

     2,356,782        104,392       2,633,773        38,391        —         5,133,338         5,133,338  

Revenues from services sale

     94,581        9,730       —          692        —         105,003         105,003  

Revenues from external customers

     2,451,363        114,122       2,633,773        39,083        —         5,238,341       —         5,238,341  

Revenues from transactions with other operating segments

     43,829        970,384       6,297        35,659        —         1,056,169       (1,056,169     —    
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
                   

Finance income

     —          —         —          —          19,640       19,640       —         19,640  

Finance costs

     —          —         —          —          (287,958     (287,958     —         (287,958)  

Net finance costs

     —          —         —          —          (268,318     (268,318     —         (268,318)  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortizations

     246,382        22,011       142,504        3,568        7,086       421,551       —         421,551  

Sum of significant income accounts

     581        91,089       1,304        —          —         92,974       —         92,974  

Sum of significant expense accounts

     —          138,139       3,333        —          —         141,472       —         141,472  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) of each reportable segment

     589,934        (210,566     225,317        6,668        (341,001     270,352       —         270,352  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit (loss) of associates and joint ventures accounted for using equity method

                   

Associates

     —          —         —          —          4,855       4,855       —         4,855  

Joint ventures

     —          —         10,378        —          1,784       12,162       —         12,162  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     —          —         —          —          30,992       30,992       —         30,992  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Geographical information on revenues

                   

Revenue – Chilean entities

     1,781,769        55,946       1,265,161        692        —         3,103,568       —         3,103,568  

Revenue – Foreign entities

     669,594        58,176       1,368,612        38,391        —         2,134,773       —         2,134,773  

Total Ordinary Income

     2,451,363        114,122       2,633,773        39,083        —         5,238,341       —         5,238,341  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2017

   Pulp
ThtgU.S.$
     Forestry
ThU.S.$
    Wood products
ThU.S.$
     Others
ThU.S.$
     Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Amounts of additions to non-current assets

                   

Acquisition of property, plant and equipment and biological assets

     191,771        211,245       230,395        428        4,127       637,966       —         637,966  

Acquisition and contribution of investments in associates and joint venture

     —          —         —          —          15,918       15,918       —         15,918  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2017

   Pulp
ThU.S.$
     Forestry
ThU.S.$
    Wood products
ThU.S.$
     Others
ThU.S.$
     Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Segment assets

     5,035,105        5,040,500       3,024,120        52,640        881,000       14,033,365       (38,765     13,994,600  

Segments assets (excluding deferred tax assets)

     5,035,105        5,040,500       3,024,120        52,640        872,734       14,025,099       (38,765     13,986,334  

Deferred tax assets

     —          —         —          —          8,266       8,266       —         8,266  

Investments accounted through equity method

                   

Associates

     —          48,921       —          —          110,046       158,967       —         158,967  

Joint Ventures

     —          —         189,568        —          20,237       209,805       —         209,805  

Segment liabilities

     325,598        184,721       489,022        16,100        5,862,266       6,877,707       —         6,877,707  

Segment liabilities (excluding deferred tax liabilities)

     325,598        184,721       489,022        16,100        4,376,902       5,392,343       —         5,392,343  

Deferred tax liabilities

     —          —         —          —          1,485,364       1,485,364       —         1,485,364  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Geographical information on non-current assets

                   

Chile

     2,537,947        3,221,911       666,234        22,220        187,639       6,635,951       (4,635     6,631,316  

Foreign countries

     1,700,240        1,648,557       1,191,895        21,571        30,658       4,592,921       —         4,592,921  

Non-current assets, Total

     4,238,187        4,870,468       1,858,129        43,791        218,297       11,228,872       (4,635     11,224,237  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

110


Table of Contents

Year ended December 31, 2016

   Pulp
ThU.S.$
     Forestry
ThU.S.$
     Wood products
ThU.S.$
     Others
ThU.S.$
    Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Revenues from goods sale

     2,041,897        89,750        2,494,750        23,183         4,649,580         4,649,580  

Revenues from services sale

     104,182        6,738        —          885         111,805         111,805  

Revenues from external customers

     2,146,079        96,488        2,494,750        24,068       —         4,761,385       —         4,761,385  

Revenues from transactions with other reportable segments

     41,586        1,105,220        6,938        34,085       —         1,187,829       (1,187,829     —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

     —          —          —          —         29,701       29,701       —         29,701  

Finance costs

     —          —          —          —         (258,467     (258,467     —         (258,467

Net finance costs

     —          —          —          —         (228,766     (228,766     —         (228,766
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation and amortizations

     240,699        19,996        139,844        2,529       6,319       409,387       —         409,387  

Sum of significant income accounts

     212        227,776        269        —         —         228,257       —         228,257  

Sum of significant expense accounts

     —          15,193        12,565        —         —         27,758       —         27,758  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) of each reportable segment

     308,536        98,955        165,887        (2,559     (353,242     217,577       —         217,577  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share of profit (loss) of associates and joint ventures accounted for using equity method

                   

Associates

     —          —          —          —         16,348       16,348       —         16,348  

Joint ventures

     —          —          5,475        —         2,116       7,591       —         7,591  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax expense

     —          —          —          —         (45,647     (45,647     —         (45,647
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Geographical information on revenues

                   

Revenue – Chilean entities

     1,521,453        52,161        1,275,937        885       —         2,850,436       —         2,850,436  

Revenue – Foreign entities

     624,626        44,327        1,218,813        23,183       —         1,910,949       —         1,910,949  

Total Ordinary Income

     2,146,079        96,488        2,494,750        24,068       —         4,761,385       —         4,761,385  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2016

   Pulp
ThU.S.$
     Forestry
ThU.S.$
     Wood products
ThU.S.$
     Others
ThU.S.$
    Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Amounts of additions to non-current assets

                   

Acquisition of property, plant and equipment and biological assets

     205,205        182,743        118,408        1,479       3,883       511,718       —         511,718  

Acquisition and contribution of investments in associates and joint venture

     —          —          153,135        —         —         153,135       —         153,135  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year ended December 31, 2016

   Pulp
ThU.S.$
     Forestry
ThU.S.$
     Wood products
ThU.S.$
     Others
ThU.S.$
    Corporate
ThU.S.$
    Sub Total
ThU.S.$
    Elimination
ThU.S.$
    Total
ThU.S.$
 

Segment assets

     5,077,300        5,492,364        2,515,092        30,970       932,059       14,047,785       (41,604     14,006,181  

Segments assets (excluding deferred tax assets)

     5,077,300        5,492,364        2,515,092        30,970       925,962       14,041,688       (41,604     14,000,084  

Deferred tax assets

     —          —          —          —         6,097       6,097       —         6,097  

Investments accounted through equity method Associates

     —          160,490        —          —         105,285       265,775       —         265,775  

Joint Ventures

     —          —          161,703        —         19,070       180,773       —         180,773  

Segment liabilities

     277,474        161,091        311,667        11,836       6,244,830       7,006,898       —         7,006,898  

Segment liabilities (excluding deferred tax liabilities)

     277,474        161,091        311,667        11,836       4,613,765       5,375,833       —         5,375,833  

Deferred tax liabilities

     —          —          —          —         1,631,065       1,631,065       —         1,631,065  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Geographical information on non-current assets Chile

     2,572,702        3,509,727        721,418        27       135,808       6,939,682       (3,575     6,936,107  

Foreign countries

     1,740,559        1,525,190        1,016,633        23,040       42,292       4,347,714       —         4,347,714  

Non-current assets, Total

     4,313,261        5,034,917        1,738,051        23,067       178,100       11,287,396       (3,575     11,283,821  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

F-111


Table of Contents

Information required by geographic area:

 

     Geographical area  
2018    Local
country
     Foreign country  
      Chile      Argentina      Brazil      USA/Canada      Uruguay      Total  

Disclosure of geographical areas

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Revenues from sales of goods

     3,608,017        479,698        504,589        815,668        449,612        5,857,584  

Revenues from sales of services

     71,209        —          —          —          26,040        97,249  

Revenues at 12-31-2018

     3,679,226        479,698        504,589        815,668        475,652        5,954,833  

Non-current Assets at 12-31-2018 other than deferred tax

     6,865,406        825,915        984,746        810,461        1,661,425        11,147,953  
     Geographical area  
2017    Local
country
     Foreign country  
      Chile      Argentina      Brazil      USA/Canada      Uruguay      Total  

Disclosure of geographical areas

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Revenues from sales of goods

     3,028,025        494,479        395,416        801,092        414,326        5,133,338  

Revenues from sales of services

     75,543        —          —             29,460        105,003  

Revenues at 12-31-2017

     3,103,568        494,479        395,416        801,092        443,786        5,238,341  

Non-current Assets at 12-31-2017 other than deferred tax

     6,624,381        956,511        1,274,536        575,231        1,785,312        11,215,971  
     Geographical area  
2016    Local
country
     Foreign country  
     Chile      Argentina      Brazil      USA/Canada      Uruguay      Total  

Disclosure of geographical areas

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Revenues from sales of goods

     2,765,975        414,084        350,352        801,821        317,348        4,649,580  

Revenues from sales of services

     84,461        —          —          —          27,344        111,805  

Revenues at 12-31-2016

     2,850,436        414,084        350,352        801,821        344,692        4,761,385  

Non-current Assets at 12-31-2016 other than deferred tax

     6,931,755        960,596        1,186,538        397,924        1,800,911        11,277,724  

 

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NOTE 25.

OTHER NON-FINANCIAL ASSETS AND NON-FINANCIAL LIABILITIES

 

Current non-financial assets

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Roads to amortize current

     41,456        43,301  

Prepayment to amortize (insurance and others)

     14,020        21,257  

Recoverable taxes (GST and others)

     67,778        60,823  

Other current non-financial assets

     6,600        4,456  

Total

     129,854        129,837  

Non-current non-financial assets

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Roads to amortize, non-current

     78,418        112,937  

Guarantee values

     3,295        2,893  

Recoverable taxes

     1,519        1,835  

Other non-current non-financial assets

     3,716        3,856  

Total

     86,948        121,521  

Current non-financial liabilities

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

Provision of minimum dividend (1)

     182,890        116,123  

ICMS tax payable

     9,109        12,593  

Other tax payable

     14,034        23,040  

Other Current non-financial liablities

     6,577        2,194  

Total

     212,610        153,950  
     

 

(1)

Provision includes a minimum dividend of subsidiary minority.

 

Non-current non-financial liabilities

   12-31-2018
ThU.S.$
     12-31-2017
ThU.S.$
 

ICMS tax payable

     111,134        110,532  

Other non-current non-financial liablities

     933        1,808  

Total

     112,067        112,340  

 

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NOTE 26.

DISTRIBUTABLE NET PROFIT AND EARNINGS PER SHARE

Distributable net profit

As a general policy, the Board of Directors of Arauco agreed that the net profit to be distributed as dividend is determined based on realized net gains/(losses) of any relevant variations in the value of unrealized assets and liabilities, which are excluded from the calculation of net profit during the period such changes are made.

As a result of the foregoing, for purposes of determining the distributable net profit of the Company, which is the same considered for calculating the minimum dividend required and additional dividend, the following unrealized gains/losses are excluded from the net profit for the year:

 

1)

Unrealized gains/losses relating to the fair value recorded for forestry assets under IAS 41, adding them back to distributable net profit when they are realized through sale or disposed of by other means.

 

2)

Those generated through the acquisition of entities. These results will be added back to net profit when they are realized through sale.

The deferred taxes associated with the amounts described in 1) and 2) above are also excluded.

The following table details the adjustments made for the determination of distributable net profit as December 31, 2018, 2017 and 2016 in order to determine the provision of 40% of the distributable net profit for each year:

 

     Distributable Net  Profit
ThU.S.$
 

Net profit attributable to owners of parent at 12-31-2018

     725,482  

Adjustments:

  

Biological Assets

  

Unrealized gains/losses

     (83,243

Realized gains/losses

     208,362  

Deferred income taxes

     (30,482

Total Biological assets

     94,637  

Profit due bargain adquisition (net)

     (9,381

Total adjustments

     85,256  

Distributable Net Profit at 12-31-2018

     810,738  

 

     Distributable Net  Profit
ThU.S.$
 

Net profit attributable to owners of parent at 12-31-2017

     269,724  

Adjustments:

  

Biological Assets

  

Unrealized gains/losses

     (82,782

Realized gains/losses

     303,668  

Deferred income taxes

     (54,944

Total adjustments

     165,942  

Distributable Net Profit at 12-31-2017

     435,666  

 

     Distributable Net  Profit
ThU.S.$
 

Net profit attributable to owners of parent at 12-31-2016

     213,801  

Adjustments:

  

Biological Assets

  

Unrealized gains/losses

     (204,671

Realized gains/losses

     210,223  

Deferred income taxes

     2,089  

Total adjustments

     7,641  

Distributable Net Profit at 12-31-2016

     221,442  

 

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The Company expects to maintain its policy of distributing 40% of its net distributable profit as dividends for all future fiscal years, but will also consider the alternative of distributing a provisional dividend at year end.

As of December 31, 2018, in the Statements of Financial Position, under the line item Other current non-financial liabilities ThU.S.$182,040 correspond to a provision for the minimum dividend for the 2018 period, corresponding to the Parent Company, after discounting the provisional dividend distribution of ThU.S.$142,256, paid to the shareholders in December 2018.

Basic and diluted earnings per share

Basic and diluted earnings per share are calculated by dividing the profit or loss attributable to ordinary equity holders of parent by the weighted average number of ordinary shares outstanding. Arauco does not have any shares with potential dilutive effect.

 

     January-December  
     2018
ThU.S.$
     2017
ThU.S.$
     2016
ThU.S.$
 

Profit or loss attributable to ordinary equity holder of parent

     725,482        269,724        213,801  

Weighted average of number of shares

     113,159,655        113,159,655        113,159,655  

Basic and diluted earnings per share (in U.S.$ per share)

     6.4111        2.3836        1.8894  

 

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NOTE 27.

SUBSEQUENT EVENTS

1) On January 31, 2019, Arauco’s subsidiaries Inversiones Arauco Internacional Limitada (“Arauco Internacional”) and AraucoMex, S.A. de C.V. (“AraucoMex”), closed the purchase of all of the shares of Masisa’s Mexican subsidiaries, namely Maderas y Sintéticos de México, S.A. de C.V. (“Masisa México”), Maderas y Sintéticos Servicios, S.A. de C.V., Masisa Manufactura, S.A. de C.V., Placacentro Masisa México, S.A. de C.V. and Masnova Química, S.A. de C.V.

The price of the transaction, in the amount of US$160 million, was paid on that day.

The main assets to be acquired, consist of two industrial complexes located in Durango and Zitácuaro, that jointly have three Particleboard (PB) lines with an annual installed capacity of 339,000 m3;; a MDF line of with an annual installed capacity of 220,000 m3; melamine (or TFL) lines with an annual total installed capacity of 309,000 m3 ; a chemical plant with an installed capacity of 60,000 tons of resins and 60,600 tons of formaldehyde; and impregnation lines with an aggregate annual installed capacity of 28.9 million of m2. Further, Masisa México is the lessee of a chemical plant in Lerma, with an installed capacity of 43,200 tons of resins and 21,600 tons of formaldehyde.

With this transaction, Arauco reaches an installed capacity of wood based panel of more tha 10 million m3, consolidating its position as the second manufacturer on a worldwide scale in such industry.

Arauco estimates that this transaction will bring about positive effects in the Company’s results, although, at this time, it is not possible to quantify those effects.

The transaction has been approved by the Mexican antitrust authority (Comisión Federal de Competencia Económica or “COFECE”), which was one of the conditions precedent established in the purchase agreement executed in December 2017.

2) The authorization for the issuance and publication of these consolidated financial statements for the period ended December 31, 2018 was approved by the Board of Directors of Arauco on April 17, 2019.

Subsequent to December 31, 2018 and until the date of issuance of these consolidated financial statements, there have been no events, other than those discussed above, that could materially affect the presentation of these financial statements.

 

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