EX-99.1 2 d233643dex991.htm UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO Unaudited consolidated financial statements and notes thereto
Table of Contents

Exhibit 99.1

ARAUCO AND CONSTITUTION PULP INC

TABLE OF CONTENTS

 

Item         Page  

1.

   Ratio Analysis of the Consolidated Financial Statement      1   

2.

   Unaudited Consolidated Financial Statement      8   

3.

   Unaudited Consolidated Financial Income Statement      10   

4.

   Unaudited Consolidated Statement of Changes in Net Equity      12   

5.

   Unaudited Consolidated Statement of Cash Flow      13   

6.

   Unaudited Notes to the Consolidated Financial Statement      14   

7.

   Annex: Press Release   


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

1. VALUATION OF ASSETS AND LIABILITIES

The financial statements of Celulosa Arauco y Constitución S.A., a Chilean corporation (the “Company”) and its subsidiaries (the Company, together with its subsidiaries, “Arauco”) have been prepared on the basis of International Financial Reporting Standards (IFRS). In management’s opinion there is no material difference between the Company’s economic value and the valuation reflected in the Company’s financial statements.

 

2. ANALYSIS OF FINANCIAL POSITION

 

a) Analysis of the Financial Statement

The principal components of assets and liabilities as of June 30, 2011 and December 31, 2010 are as follows:

 

Assets

   06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Current assets

     3,187,099         3,152,116   

Non-current assets

     9,650,670         9,354,216   

Total assets

     12,837,769         12,506,332   

Liabilities and Shareholders’ Equity

   06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Current liabilities

     1,259,095         1,209,061   

Non-current liabilities

     4,462,564         4,456,696   

Non –parent participation

     104,912         108,381   

Net equity attributable to parent company Shareholders’ equity

     7,011,198         6,732,194   

Total net equity and liabilities

     12,837,769         12,506,332   

As of June 30, 2011, total assets increased by 2.65% or U.S.$ 331 million compared to December 31, 2010. This increase is mainly attributable to an increase in Trade and Account receivables and Property, Plant and Equipment.

Total liabilities increased by U.S.$ 56 million. This increase is mainly attributable to an increase in the category Commercial accounts and Other payables.

The main financial and operating ratios are as follows:

 

Liquidity ratios

   06/30/2011      12/31/2010  

Current ratio

     2.53         2.61   

Acid ratio

     1.62         1.72   

Debt indicators

   06/30/2011      12/31/2010  

Debt to equity ratio

     0.80         0.83   

Short-term debt to total debt

     0.22         0.21   

Long-term debt to total debt

     0.78         0.79   
     06/30/2011      06/30/2010  

Financial expenses covered

     5.35         3.76   

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

2. ANALYSIS OF FINANCIAL POSITION, continued

 

a) Analysis of the Balance Sheet, continued

 

Operational ratios

   06/30/2011      12/31/2010  

Inventory turnover

     2.49         2.30   

Inventory turnover (excluding biological assets)

     3.57         3.41   

Inventory permanence-days

     144.44         156,84   

Inventory permanence (excluding biological assets)

     100.86         105,55   

The liquidity ratio and the acid test for the current period has decreased compared to the period 2010. This is due to an increase in current liabilities compared to the proportional increase in the variation of current assets, which in turn is explained by a decrease of Cash and cash equivalents and an increase of Other Non-Financial liabilities.

As of June 30, 2011, the short-term debt represented 22% of total liabilities compared to 21% as of December 31, 2010.

The ratio of financial expenses covered increased from 3.76 to 5.35. This increase is attributable to higher profits in the current period.

 

b) Analysis of the Income Statement

Profit before Income Tax

Profit before Income Tax registers a profit of U.S.$453 million in 2011 compared to U.S.$297 million in 2010, an increase of U.S.$156 million. The change was attributable to the factors described in the following table:

 

Item

   Million
U.S.$
 

Gross margin

     183   

Other operating income

     41   

Administration cost

     (103

Financial costs

     (6

Foreign currency exchange rate

     44   

Others net

     (3

Net change in income before income tax

     156   

Gross Margin presents a profit of U.S.$853 million in 2011, an increase of U.S.$183 million compared to U.S.$670 million in 2010, caused by a proportional increase in revenues due to an increase in sales price and volume.

The profit in the exchange rate difference is principally due to a depreciation of the dollar against the Chilean peso and the Euro, currencies in which the Company owns financial investments, tax receivables and other accounts receivables.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

2. ANALYSIS OF FINANCIAL POSITION, continued

The main indicators related to result accounts and the details of revenues and operation costs are as follows:

 

Revenues

   06/30/2011
ThU.S$
    06/30/2010
ThU.S$
 

Pulp

     1,139,575        814,667   

Sawn timber

     363,085        274,661   

Panels

     641,310        528,323   

Forestry

     78,417        69,535   

Other

     12,433        11,083   

Total revenues

     2,234,820        1,698,269   

Sales costs

   06/30/2011
ThU.S$
    06/30/2010
ThU.S$
 

Wood

     367,054        264,763   

Forestry work

     283,354        199,917   

Depreciation

     107,432        84,112   

Other costs

     623,824        479,155   

Total sales costs

     1,381,664        1,027,947   

Profitability index

   06/30/2011     12/31/2010  

Profitability on equity

     10.31        10.60   

Profitability on assets

     5.68        5.86   

Return on operating assets

     7.29        7.04   

Profitability ratios

   06/30/2011     06/30/2010  

Income per share (U.S.$) (1)

     3.13        2.09   

EBITDA( MThU.S.$)

     669,415        599,542   

Income after tax (ThU.S.$) (2)

     359,599        237,277   

Gross margin (ThU.S.$)

     853,156        670,322   

Financial costs (ThU.S.$)

     (104,095     (107,563

 

(1) Earnings per share refer to the profit to net equity to parent company.
(2) Includes interest.

 

3. DIFFERENCE BETWEEN ECONOMIC VALUES AND BOOK ASSETS

Assets and liabilities are presented in the Financial Statements according to International Financial Reporting Standards and instructions issued by the Chilean Securities Commission.

We believe that there are no substantial differences between the economic value of our assets and the value reflected in these Financial Statements.

 

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Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

4. MARKET SITUATION

Pulp

The second quarter of 2011 showed fluctuations in the market trends; most of them were expected and obeyed to seasonal trends variations. April and May registered a strong demand and high prices. However, this stopped in June when price adjustments occurred across different markets, especially in the spot market. Additionally, producers began offering in non-active markets due to the downward tendency in prices and the lack of demand in their traditional markets. Another factor is that at current price levels, the world production capacity is operating at nearly 100%. Mills in North America and Europe that halted operations during 2008-2009 are nowadays producing back again. Generally, these are plants that do not have a stable or regular client portfolio, and are the first to suffer a low demand leading them to lower its price. This is particularly significant in North America where U.S. demand continues to stay low and with no signs of immediate future recovery. This has made Canadian pulp producers to concentrate its sales towards the Asian market, especially in China, Japan and Korea. Until June, 2011 Chinese pulp imports coming from Canada increased 100%.

The Chinese market began to show a lower demand as a consequence of the lower activity experienced during the summer. Further, the activity has been decreasing due to energy restrictions imposed to paper manufacturers in China . Although our demand and sales during the quarter in China were normal, we began to observe a downward adjustment in local pulp prices and sales at lower-than-market levels coming from some producers that during May-June had difficulties in closing their normal sales volumes in such market.

In the rest of Asia and Europe the situation was similar to that of China, however, in some of these markets the overcapacity in paper production continued to have an important impact over paper producer’s margins. In order to revert this situation, during this second quarter some important actions were undertaken, especially in Korea and Switzerland, such as the closure of paper mills which contributed to take out paper production from the market. In Europe the paper manufacturers anticipate a difficult scenario if production capacity does not adjust to demand, particularly in printing and writing paper markets. Likewise, Europe is facing slow activity, due to the summer season. Overall, positive results are expected but not until the last quarter of this year.

In line with the abovementioned, North America continues with rather low domestic demand and no major changes are expected in the near future.

Latin America continues with a very active and strong demand. In this market, prices remain stable and only a moderate adjustment is expected compared to other market. Such adjustment will result mainly as a consequence of world market trends and to avoid that spot pulp producers from North America make world prices fall significantly.

The plant production has been normal, however the billing quarter was affected by the strike in Lirquén port during the month of June. This strike affected the shipment capacity in containers and ship bulkers, having to postpone shipping and therefore invoicing. This situation will be normalized in the next few weeks.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Sawn Timber

The real estate and construction markets in the United States still remained at low levels during the second quarter of 2011. In June 2011, the Housing Starts index reached 629,000 units per year. The current levels of construction remain to be low when compared to the average of last ten years.

During the second quarter of this year, there was a recovery in sale prices of moldings and sawn timber when compared to the last. This was the result of a higher demand seen in the market.

Additionally, during this quarter wood products continued to have a favorable demand in most markets, especially in Asia. This caused sale prices to increase in China, Korea, Japan and Taiwan.

Since June, 2011, wood and log stocks in China had been increasing. This might negatively affect sawn timber sales prices during the third quarter of this year.

Panels

At the end of the second quarter of this year, consolidated sales of the panel division showed an increase of 19.5% compared to the same quarter of 2010. Sales volume increased in the same period by 6%. Overall, during this quarter has showed a recovery in market prices together with an increase in sales volume.

Plywood sales volume climbed 31% driven by an increase in the shipments to Europe and Asia that came with important price recoveries. The U.S. market also experienced a strong increase in sales volume but the price levels remained more stable.

Sales volume of MDF products fell nearly 5% mainly due to a drop in the Brazilian and Chilean markets. Particleboard sales volume increased 5% mainly due to a higher demand in Argentina.

Our MDF molding segment decreased its sales volume during this second quarter, however, the average price increased near 5%. The MDF molding market remains very slow given the weak demand in the North American construction sector.

Our Hard Board business experienced a drop in sales volume of 11% mainly explained by a decreased in supply, together with a strong price increase which was near 20% compared to the same period last year. Overall, demand for our Hard Board products has continued to increase driven by a lower world supply of this product from competitors.

Currently a board plant is under construction (Particle Board of Medium density) in Teno,

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Curicó Province, 7th Region of Maule. The plant will have a capacity of 985.0003 feet and an electric line of 154 Kv will be given to the plant from the electric station in Teno. Likewise, it will create additional value to its products through an impregnating paper plant and two rows of melamine which may cover up to 80% of the boards produced by the plant.

The project that already has all its environmental permits, will start operating the first quarter of 2012, and will imply an investment of US$120 million.

 

5. ANALYSIS OF CASH FLOW

The main components of net cash flow as of June 30, 2011 and 2010 are as follows:

 

     06/30/2011
MUS$
    06/30/2010
MUS$
 

Positive (negative) Cash flow

    

Cash flow from operating activities

     347,069        387,615   

Cash flow from financing activities:

    

Loan and bond payments

     (18,679     (170,869

Dividend payments

     (196,354     (63,821

Others

     819        873   

Cash flow from investment activities:

    

Purchase and sales of permanent investments

     (35,738     (37,536

Incorporation and sale of property, plant and equipment

     (261,756     (218,238

Incorporation and sale of biological assets

     (62,884     (59,610

Loan to related companies

     (91,630     0   

Other

     (5,531     (1,104

Net cash flow for the period

     (324,683     (162,690

We had a positive operating cash flow of U.S.$357 million in the current period compared to a positive balance of U.S.$388 million in 2010. This drop is mainly due to the payment of higher income taxes during the 2011 period.

Cash flow from financing activities as of June 30,2011 had a negative balance of U.S.$214 million compared to a negative balance of U.S.$234 million for the same period in 2010. This change resulted from less loan payments made in the year 2011, offset by higher dividend payments in 2011.

The investment cash flow decreased U.S. $468 million (U.S.$316 million in period 2010) at the end of the current period mainly due to an increase in capital contributions loans made to affiliated companies and payments for acquisition of property, plant and equipment.

 

6. MARKET RISK ANALYSIS

In respect of the economic risks resulting from interest rate variations, the Company maintains, as of June 30, 2011, a ratio of fixed rate debt to total consolidated debt of approximately 92.9%, which it believes is consistent with industry standards. The Company does not engage in futures against variations in the selling prices of pulp and forest products because it believes that risks resulting from price variations are limited, in large part because

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

the Company maintains one of the lowest cost structures in the industry.

The Company and most of its subsidiaries maintain their accounting records and prepare their financial statements in U.S. dollars. Both the accounts receivable and most financial liabilities are denominated in U.S. dollars or are covered by an exchange rate swap, as well as most of their revenues. As a result, exposure to changes in the exchange rate has decreased significantly.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

CONSOLIDATED BALANCE SHEETS

 

     Note      06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Assets

        

Current Assets

        

Cash and cash equivalents

     4         721,218         1,043,834   

Other financial current assets

     23         1,458         2,909   

Other current non-financial assets

        216,325         177,140   

Trade and Other receivables-net

     23         947,980         774,289   

Related party receivables

     13         99,721         18,074   

Inventories

     3         820,842         727,535   

Biological assets, current

     20         324,900         344,096   

Tax receivables

        40,547         50,131   

Total Current Assets other than assets or disposal groups classified as held for sale or as held for distribution to owners

        3,172,991         3,138,008   

Non-Current Assets or disposal groups classified as held for sale

     22         14,108         14,108   

Non-Current Assets or disposal groups classified as held for sale or as held for distribution to owners

        14,108         14,108   

Total Current Assets

        3,187,099         3,152,116   

Other non-current financial assets

     23         60,288         53,407   

Other non-current and non-financial assets

        64,456         52,352   

Trade receivables, non current

     23         10,164         11,965   

Investment in associates accounted for using equity method

     15         528,210         498,204   

Intangible assets

     19         17,756         11,127   

Goodwill

        70,461         66,231   

Property, plant and equipment

     7         5,265,912         5,088,745   

Biological assets, non-current

     20         3,505,380         3,446,862   

Deferred tax assets

     6         128,043         125,323   

Total non-current assets

        9,650,670         9,354,216   

Total Assets

        12,837,769         12,506,332   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

CONSOLIDATED BALANCE SHEETS (continued)

 

     Note      06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Liabilities

        

Current Liabilities

        

Other financial liabilities, current

     23         577,338         554,673   

Trade and Other payables

     23         413,617         362,182   

Related party payables

     13         14,448         9,209   

Other provisions, current

     18         7,479         5,842   

Tax liabilities

        45,001         62,887   

Current provision for employee benefits

     10         3,478         3,312   

Other current financial liabilities

     25         197,734         210,956   

Total current liabilities other than liabilities included in disposal groups classified as held for sale

        1,259,095         1,209,061   

Total Current Liabilities

        1,259,095         1,209,061   

Non-Current Liabilities

        

Other non-current financial liabilities

     23         2,882,770         2,909,429   

Other non-current provisions

     18         9,385         7,609   

Deferred tax liabilities

     6         1,387,381         1,369,489   

Non-current provision for employee benefits

     10         37,887         35,964   

Other non-current financial liabilities

        145,141         134,205   

Total non-current liabilities

        4,462,564         4,456,696   

Total liabilities

        5,721,659         5,665,757   

Net Equity

        

Issued capital stock

        353,176         353,176   

Accumulated earnings

        6,532,928         6,320,264   

Other reserves

        125,094         58,754   

Net equity attributable to parent company

        7,011,198         6,732,194   

Non-controlling interest

        104,912         108,381   

Total net equity

        7,116,110         6,840,575   

Total net equity and liabilities

        12,837,769         12,506,332   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Income Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

CONSOLIDATED STATEMENTS OF INCOME

 

     Note      January-June     April - June  
      2011
ThU.S.$
    2010
ThU.S.$
    2011
ThU.S.$
    2010
ThU.S.$
 

Income Statement

           

Revenue

     9         2,234,820        1,698,269        1,187,771        913,389   

Cost of sales

        (1,381,664     (1,027,947     (738,035     (536,126

Gross Income

        853,156        670,322        449,736        377,263   

Other operating income

     2         137,524        96,518        72.949        61.207   

Distribution costs

     2         (229,783     (167,806     (118,551     (89,939

Administrative expenses

     2         (192,815     (152,071     (107,778     (75,796

Other operating expenses

     2         (31,521     (25,683     (18,546     12,776   

Other income (loss)

        (1     275        68        367   

Financial income

        11,406        10,728        4,120        2,144   

Financial costs

     2         (104,095     (107,563     (52,520     (57,628

Participation in (loss) income in associates and joint ventures accounted through equity method

     15         (8,277     (2,119     (4,381     (615

Exchange rate differences

        17,656        (25,990     4,490        (8,407

Income before income tax

        453,250        296,611        229,587        221,372   

Income tax

     6         (93,651     (59,334     (46,491     (46,623

Income from continuing operations

        359,599        237,277        183,096        174.749   

Net Income

        359,599        237,277        183,096        174,749   

Income attributable to equity holders

           

Income attributable to parent company

        354,065        236,529        181,578        174,073   

Income attributable to non-parent company

        5,534        748        1,518        676   

Net Income

        359,599        237,277        183,096        174,749   

Basic earnings per share

           

Earnings per share from continuing operations

        0.0031291        0.0020904        0.0016047        0.0015384   
        0.0031291        0.0020904        0.0016047        0.0015384   

Earnings per diluted shares

           

Earnings per diluted share from continuing operations

        0.0031291        0.0020904        0.0016047        0.0015384   

Basic earnings per diluted share

        0.0031219        0.0020904        0.0016047        0.0015384   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Income Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

COMPREHENSIVE INCOME STATEMENTS

 

     Note      January-June     April- June  
      2011
ThU.S.$
    2010
ThU.S.$
    2011
ThU.S.$
     2010
ThU.S.$
 

Net Income

        359,599        237,277        183,096         174,749   

Other comprehensive income, net of tax

            

Exchange difference on conversion

            

Gain (loss) for exchange differences, before tax

     11         73,162        (30,719     48,827         (11,251

Cash flow hedges

            

Gain (loss) for cash flow hedges, before tax

        (4,183     (1,896     110         (8,405

Participation in Other comprehensive income in associates and joint ventures accounted for using equity method

        (334     41        380         137   

Other comprehensive income, net of tax

        68,645        (32,574     49,317         (19,519

Comprehensive income statement

            

Income tax related to Other comprehensive income

            

Income tax related to Cash flow hedges on Other comprehensive income

        1,043        322        588         1,428   

Other comprehensive income

        69,688        (32,252     49,905         (18,091

Total comprehensive income

        429,287        205,025        233,001         156,658   

Comprehensive Income Statement attributable to:

            

Comprehensive income statement attributable to parent company

        420,405        206,057        229,274         156,616   

Comprehensive income statement attributable to controlling interest

        8,882        (1,032     3,727         42   

Total comprehensive income

        429,287        205,025        233,001         156,658   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Statement of Changes in Net Equity

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN NET EQUITY

 

    

06/30/2011

   Share
Capital
ThU.S.$
     Conversion
Reserves
ThU.S.$
    Hedge
Reserves
ThU.S.$
    Other
Reserves
ThU.S.$
    Other
Reserves

Total
ThU.S.$
    Accumulated
Earnings
ThU.S.$
    Equity
attributable
to Parent
Company
ThU.S.$
    Non-controlling
interest
ThU.S.$
    Equity
Total
ThU.S.$
 
 

Opening balance at 01/01/2011

     353,176         72,699        (14,079     134        58,754        6,320,264        6,732,194        108,381        6,840,575   
 

Changes in equity

                   
 

Comprehensive income statement

                   
 

Net income

     0         0        0        0        0        354,065        354,065        5,534        359,599   
 

Other comprehensive income, net of tax

     0         69,814        (3,140     (334     66,340        0        66,340        3,348        69,688   
 

Comprehensive income

     0         69,814        (3,140     (334     66.340        354,065        420,405        8,882        429,287   
 

Dividends

     0         0        0        0        0        (141,401     (141,401     0        (141,401
 

Increase (decrease) for transfer and other changes

     0         0        0        0        0        0        0        (12,351     (12,351
 

Total Changes in equity

     0         69,814        (3,140     (334     66,340        212,664        279,004        (3,469     275,535   

Closing balance at 06/30/2011

     353,176         142,513        (17,219     (200     125,094        6,532,928        7,011,198        104,912        7,116,110   
    

06/30/2011

   Share
Capital
ThU.S.$
     Conversion
Reserves
ThU.S.$
    Hedge
Reserves
ThU.S.$
    Other
Reserves
ThU.S.$
    Other
Reserves

Total
ThU.S.$
    Accumulated
Earnings
ThU.S.$
    Equity
attributable
to Parent
Company
ThU.S.$
    Non-controlling
interest
ThU.S.$
    Equity
Total
ThU.S.$
 
 

Opening balance at 01/01/2011

     353,176         27,551        (4,820     (1,113     21,618        5,893,799        6,268,593        113,840        6,382,433   
 

Changes in equity

                   
 

Comprehensive income statement

                   
 

Net income

     0         0        0        0        0        236,529        236,529        748        237,277   
 

Other comprehensive income, net of tax

     0         (28,939     (1,574     41        (30,472     0        (30,472     (1,780     (32,252
 

Comprehensive income

     0         (28,939     (1,574     41        (30,472     236,529        206,057        (1,032     205,025   
 

Dividends

     0         0        0        0        0        (97,218     (97,218     0        (97,218
 

Increase (decrease) for transfer and other changes

     0         0        0        0        0        0        0        (10,622     (10,622
 

Total Changes in equity

     0         (28,939     (1,574     41        (30,472     139,311        108,839        (11,654     97,185   

Closing balance at 06/30/2010

     353,176         (1,388     (6,394     (1,072     (8,854     6,033,110        6,377,432        102,186        6,479,618   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Statement of Cash Flows-Direct Method

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS-DIRECT METHOD

 

      06/30/2011
ThU.S.$
    06/30/2010
ThU.S.$
 

Cash Flows from (used in) Operating Activities

    

Classes of cash receipts from operating activities

    

Receipts from sales of goods and rendering of services

     2,274,344        1,793,038   
     2,048        0   

Other cash receipts from operating activities

     126,606        73,254   

Classes of cash payments

    

Payments to suppliers for goods and services

     (1,743,628     (1,317,839

Payments to and behalf of employees

     (152,130     (103,219

Other cash payments from operating activities

     (3,878     (5,069
     1,753        6,353   

Interest paid

     (92,230     (94,348

Interest received

     9,146        5,564   

Income taxes refund (paid)

     (74,623     28,225   

Other (outflows) inflows of cash, net

     (339     1,656   

Net Cash flows from Operating Activities

     347,069        387,615   

Cash flows from (used in) Investing Activities

    

Cash flows used to obtain control of subsidiaries or other businesses

     0        (6,977
     (779     0   

Other cash payments to acquire interests in joint ventures

     (34,959     (30,559

Capital contributions to joint ventures

     (91,630     0   

Proceeds from sale of property, plant and equipment

     7,326        1,069   

Purchase of property, plant and equipment

     (269,082     (219,307

Purchase of intangible assets

     (6,639     (150

Proceeds from other long-term assets

     3,073        490   

Purchase of other long-term assets

     (65,957     (60,100

Cash receipts from repayment of advances and loans made to other parties

     0        118   

Other outflows of cash, net

     1,108        (1,072

Cash flows used in Investing Activities

     (457,539     (316,488

Cash flows from (used in) Financing Activities

    
     0        26,640   

Proceeds from short-term borrowings

     62,622        0   

Repayments of borrowings

     (81,300     (197,509

Dividends paid

     (196,354     (63,821

Other inflows of cash, net

     819        873   

Cash flows from (used in) Financing Activities

     (214,213     (233,817

Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes

     (324,683     (162,690

Effect of exchange rate changes on cash and cash equivalents

     2,067        (13,188

Net increase (decrease) of Cash and Cash equivalents

     (322,616     (175,878

Cash and cash equivalents, at the beginning of the period

     1,043,834        534,199   

Cash and cash equivalents, at the end of the period

     721,218        358,321   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 1. PRESENTATION OF FINANCIAL STATEMENTS (IAS 1)

Entity Information

Name of Reporting Entity

Celulosa Arauco y Constitución S.A. (Arauco), Tax No. 93,458,000-1, Closed Company, was registered in the Securities Registry (the “Registry”) of the Superintendency of Securities and Insurance (the “Superintendency”) as No. 042 on June 14, 1982. Forestal Cholguán S.A., a subsidiary of Arauco, is also registered on the Registry as No. 030. Arauco is controlled by Empresas Copec S.A., which owns 99.9779% of Arauco, and is registered in the Registry as No. 0028. Each of the above companies is subject to audit by the Superintendency.

The Company’s head office address is El Golf Avenue 150, floor 14, Las Condes, Santiago, Chile.

Celulosa Arauco y Constitución S.A. and subsidiaries (hereinafter “Arauco”) is principally engaged in the production and sale of forestry and wood products. Its main operations are focused on the following business areas: Pulp, Plywood and Fiberboard Panels, Sawn Timber and Forestry.

The current controllers of the Company are Mrs. Maria Noseda Zambra of Angelini, Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi through Inversiones Angelini y Cia. Ltda., which owns 63.4015% of the shares of AntarChile S.A., the controller of our parent company Empresas Copec S.A.

Arauco’s Interim Consolidated Financial Statements were prepared on a going concern basis.

Presentation of Financial Statements

The Financial Statements presented by Arauco cover the following periods:

 

   

Consolidated Balance Sheet as of June 30, 2011.

 

   

Consolidated Statement of Income for the period ended June 30, 2011.

 

   

Comprehensive Income Statement for the period ended June 30, 2011.

 

   

Consolidated Statement of Changes in Net Equity for the period ended June 30, 2011.

 

   

Consolidated Statement of Cash Flows – Direct Method for the period ended June 30, 2011.

 

   

Disclosure of Explanatory Information (notes).

Date of Approval of Financial Statements

The issuance of these interim consolidated financial statements for the period between January 1, 2011 and June 30, 2011 was approved by the Board of Directors of the Company (the “Board”) in Extraordinary Session No. 452 of August 23, 2011.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Functional and Reporting Currency

Arauco has defined the U.S. Dollar as its functional currency, as most of the Company’s operations are a result of exports, and its costs to a large extent are related to or index-linked to the U.S. Dollar.

For the pulp segment, most of the sales operations are exports, and the costs are related mainly to plantation costs, which are settled in U.S. Dollars.

For the sawmill and panel segments, although total sales include a mix of domestic sales and exports, the prices for the products are established in U.S. Dollars, as is also the case for the cost structure of the related raw materials.

Although the costs of labor and services are generally billed and paid in local currency, these costs are not as significant as the costs of raw materials and depreciation of equipment, which are driven mainly by global conditions and therefore, influenced mostly by the U.S. Dollar.

The financial information included herein is presented in thousands of U.S. Dollars without decimals.

Additional Information Relevant to the Understanding of the Financial Statements

The company Fondo de Inversión Bío Bío and its subsidiary Forestal Río Grande S.A. qualify as Special Purpose Entities. These entities are considered to be controlled by Arauco, which is determined, by the fact that they maintain exclusive contracts with Arauco for wood provision, forward purchase of land and forest administration. Consequently, the financial information of these companies is consolidated with the financial information of the Company and is included in these consolidated financial statements of Arauco.

Compliance and Adoption of IFRS

The accompanying consolidated financial statements of Arauco include the balance sheet, statements of income from operations and cash flows in accordance with IFRS.

This presentation is required to give a faithful representation of the effects of transactions, as well as other events and conditions, according to the definitions and criteria established within the conceptual framework of IFRS for the recognition of assets, liabilities, income and expenses.

IFRS Compliance Declaration

These interim consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standard Board (“IASB”), which have been adopted in Chile under the title “Financial Reporting Standards in Chile” (NIFCH) and represent the wholesale adoption, explicitly and without reservation, of IFRS.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco’s policies on capital management have the objective of:

 

  a) Guaranteeing business continuity and normal operations in the long term;

 

  b) Providing all financing needs for new investments to achieve sustainable growth over time;

 

  c) Maintenance of an adequate capital structure considering all economic cycles that impact the business and the nature of the industry; and

 

  d) Maximizing the Company’s value, as well as providing an adequate return to shareholders.

Qualitative Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco determines and manages its capital structure based on its equity at book value plus its financial liabilities (bank borrowings and bonds).

Quantitative Information on Capital Management

Financial guarantees of the Company are as follows:

 

Instrument

   Amount at
06/30/2011
(ThU.S. $)
     Amount at
12/31/2010
(ThU.S. $)
     Interest
Coverage
>= 2.0x
    Debt
Level(1)
<= 1.2x
     Debt
Level(2)
<= 0.75x
 

Local Bonds

     691,828         677,362         N/A      ü           N/A   

Forestal Río Grande S.A. Loan

     86,788         104,144       ü (3 )       N/A       ü (3 )  

Bilateral Bank Loan

     240,234         240,260       ü        ü           N/A   

Other Loans

     53,396         53,152         No Financial Covenants Required   

Foreign Bonds

     2,379,599         2,374,258         No Financial Covenants Required   

N/A: Not applicable for the instrument

(1) Debt Level (financial debt divided by: equity plus minority interest)

(2) Debt Level (financial debt divided by: total assets)

(3) Financial guarantees on credits taken by Forestal Río Grande S.A. only apply to financial statements of that company

As of June 30, 2011, Arauco has complied with all financial covenants.

Debt instruments ratings as of June 30, 2011 are as follows:

 

Instrument

   Standard
& Poor’s
     Fitch
Ratings
     Moody’s      Feller
Rate
 

Local Bonds

     —           AA         —           AA   

Foreign Bonds

     BBB         BBB+         Baa2         —     

Capital requirements are established based on the Company’s financial needs and on maintaining an adequate liquidity level and complying with financial guarantees established in current debt contracts. 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.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Capital (in Thousands of U.S. Dollars) as of June 30 2011, and December 31, 2010, are as follow:

 

In ThU.S.$

   06/30/2011      12/31/2010  

Equity

     7,116,110         6,840,575   

Bank Loans

     380,418         397,556   

Financial Leases

     200         393   

Bonds

     3,071,427         3,051,620   

Capital

     10,568,155         10,290,144   

The nature of external capital requirements is determined by the obligation to maintain certain financial ratios that ensure compliance with either bank loans or bond payments, which provide guidelines on the capital ranges required for compliance with these requirements. Arauco has fulfilled all its external requirements.

Arauco considers it unlikely that future uncertainty risks will result in any significant adjustment to the book value of assets and liabilities within the current financial period. In the case of the fair value of biological assets, no risks are foreseen in which the value of forests will change significantly. Notably, the data used to make the foregoing determination contemplates the long-term realization of such risks, and therefore the estimates provided are also relevant for the long term.

Summary of significant accounting policies

The accompanying interim consolidated financial statements as of June 30, 2011 were prepared in accordance with current IFRS accounting policies, uniformly applied to all items in these interim consolidated financial statements.

a) Basis for Presentation of financial statements

These interim consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standard Board (“IASB”), and represent the wholesale adoption, explicitly and without reservation of the mentioned international standards.

The interim consolidated financial statements have been prepared under the historic cost convention, as modified for the revaluation of biological assets, financial assets and financial liabilities (including derivative instruments) at fair value.

There have been some minor reclassifications to prior period financial statements, for presentation purposes.

b) Critical accounting estimates and judgments

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.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

 

Property, Plant and Equipment

Management prepared the corresponding valuations based on a report issued by a third party expert.

The carrying amounts of fixed assets are reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. The recoverable amount of an asset is estimated as the higher of fair value less the cost to sell and the value in use, with an impairment charge being recognized whenever the carrying amount exceeds the recoverable amount. The value in use is calculated using a discounted cash flow model, which is most sensitive to the discount rate as well as the expected future cash inflows.

 

 

Fair Value of Financial Instruments

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. Arauco uses its judgment to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date.

 

 

Biological Assets

The recovery of forest plantations is based on discounted cash flow models which mean that the fair value of biological assets is calculated using cash flows from continuing operations on a discounted basis, on our sustainable forest management plans and the estimated growth of forests. This recovery is performed on the basis of each 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 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 calculate the valuation of forest plantations are presented in Note 20.

 

 

Lawsuits and Contingencies

Arauco and its subsidiaries are subject to certain ongoing lawsuits. Future effects on Arauco’s financial condition resulting from these lawsuits are estimated by the management of the Company, in collaboration with its legal advisors. Arauco reserves appropriate contingency estimates on each balance sheet and/or upon each substantial modification to an underlying cause of any such litigation, which decisions are based on the reports of its legal advisors. Detailed lawsuits information is presented in Note 18.

c) Consolidation

The interim consolidated financial statements include all entities over which Arauco has the power to govern the financial and operating policies, which usually requires holding shares with more than one half of the voting rights. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Unrealized earnings from subsidiary operations have been eliminated from the interim consolidated financial statements and minority shareholder equity is recognized in the equity balance.

Interim consolidated financial statements for the period ended June 30, 2011 and 2010, include subsidiary balances shown in Note 13 and balances of the Fondo de Inversión Bío Bío, and its subsidiary Forestal Río Grande S.A., both of which qualify as Special Purpose Entities.

Certain consolidated subsidiaries report statutory financial statements in Brazilian Reales and Chilean Pesos, their main functional currencies. For consolidation purposes, they have been translated as indicated in Note 1 (e) (ii).

d) Segments

Arauco has defined its operating segments according to its business areas, which are defined by products and services sold to customers. This 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 Chief Executive Officer and Corporate Managing Directors of each segment are responsible for these decisions.

Detailed financial information by segment is presented in Note 24.

e) Functional currency

(i) Functional currency

Arauco’s entities are measured using the currency of the primary economic environment in which the Company operates (the functional currency). The interim consolidated financial statements are presented in U.S. Dollars, which is Arauco’s functional and presentation currency.

(ii) Foreign Currency Translations other than the Arauco’s functional currency – Subsidiaries and Associates

The income statements of subsidiaries, whose functional and presentational currencies are not the U.S. Dollar, are translated into the Arauco reporting currency (U.S. Dollars) using the average monthly exchange rates, whereas the balance sheets of such subsidiaries are translated using the exchange rates at the reporting date. Exchange differences arising from the translation of net investments in foreign entities are recorded directly in shareholders’ equity as Conversion reserves, as shown in the statement of changes in equity. The cumulative translation differences of divestments and liquidations are combined with their gain or loss on disposal.

(iii) Foreign Currency Transactions

Transactions in foreign currencies are recorded at the rate of exchange prevailing on the transaction date. Gains and losses on foreign currency resulting from the settlement of such transactions and from the conversion at the closing exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, except those that match with the deferral in net equity, such as gains and losses derived from cash flow hedges.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

f) Cash and cash equivalents

Cash and cash equivalents include cash-in-hand, deposits held on call at banks and other liquid investments with an original maturity of less than three months.

g) Financial Instruments

(i) Financial assets-liabilities at fair value through profit or loss

Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if it was acquired principally for the purpose of selling in the short term.

Derivatives are also classified as acquired for trading unless they are designated as hedges. Assets in this category are classified as current assets and the obligation for these instruments is presented under Other Financial Liabilities within the Financial Statement.

Regular purchases and sales of financial assets are recognized on the trade-date, which is the date on which the Company commits to purchase or sell the asset.

The financial assets and liabilities carried at fair value through profit or loss are initially recognized at fair value and transaction costs are expensed in the income statement. They are subsequently recorded at fair value with the effect of the change in value recorded in income.

(ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for maturities greater than 12 months from the balance sheet date, which are classified as non-current assets. Loans and receivables include trade receivables and other receivables.

Loans and receivables are initially recorded at fair value and subsequently at amortized cost according to the effective interest rate method. A provision of bad debts is recorded to reflect uncollectable amounts.

(iii) Financial liabilities valued at amortized cost

Loans, bond obligations and liabilities of a similar nature are recognized initially at fair value, net of transaction costs incurred. In subsequent periods, they are stated at amortized cost and any difference between proceeds (net of transaction costs), and redemption value is recognized in the income statement over the life of the debt according to the effective interest rate method.

Financial obligations are classified as current liabilities unless the Company has an unconditional right to defer settlement for at least 12 months after the balance sheet date.

(iv) Creditors and other payables

These instruments are initially recorded at fair value and subsequently at amortized cost using the effective interest rate method.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

(v) Hedging instruments

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in the Comprehensive Income Statement. The gain or loss relating to the ineffective portion is recognized immediately in the Income Statement within Other Operating Income by activity or Operating Expenses by activity, respectively.

When a hedging instrument expires or is sold, or when it ceases to meet the criteria to be recognized through the hedge accounting treatment, any cumulative gain or loss in equity at that time recognized in the Income Statement. When a possible transaction is no longer expected to occur, the cumulative gain or loss in equity is immediately transferred to the Income Statement.

h) Inventories

Inventories are reported at the lower of cost or net realizable value. Cost is determined using the weighted average cost method.

The cost of finished goods and work in progress includes the cost of raw materials, direct labor, other direct costs and general manufacturing expenses, excluding interest 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 manufacturing costs of a product exceeding its net realizable value, a valuation allowance is made. This provision also includes obsolescence amounts resulting from slow moving inventories and technical obsolescence.

i) Assets held for sale

Non-current assets held for sale are measured at the lower of book and fair value, less costs for sale. Assets are classified in this line when the book value may be recovered through a sale transaction that is highly likely to be carried out. Management must be committed to a plan to sell the asset and should have initiated an active program to find a buyer and complete the plan. Likewise, management must also expect that the sale will be qualified for full recognition within one year following the date of its classification.

Non-current assets classified as held for sale are not depreciated.

j) Business Combinations

Business combinations are recognized using the purchase method. This involves recognizing identifiable assets (including previously unrecognized intangible assets) and liabilities (including contingent liabilities and excluding future restructuring) of the acquired business at fair value.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

The goodwill acquired in a business combination is initially measured at the cost of the business combination less the interest of the company in the net fair value of identifiable assets, liabilities and contingent liabilities of the acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of impairment testing, goodwill acquired in a business combination is allocated as of the acquisition date to the cash generating unit of the group or groups of cash generating units expected to benefit from the synergies of the combination without prejudice to whether other assets or liabilities of Arauco are assigned to those units or groups of units.

If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement as Other income (loss).

Arauco measures the fair value of the acquired company in the business combination on a step by step basis, recognizing the effects of variation in the income statement or comprehensive income statement in the period in which they occur, depending where the investment was classified.

Accounting policies for subsidiaries will be adjusted if necessary to ensure consistency with the policies adopted by Arauco. Non-controlling interest is presented as a separate component of equity.

k) Investments in associates

Associates are entities over which Arauco exercises significant influence but not control, generally holding between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method and are initially recognized at cost. Their book net equity is increased or decreased proportionately in the profit or loss and comprehensive income statement of the period as a result of adjustments of conversion arising from the financial statement conversion into other currencies. Arauco’s investment in associates includes goodwill (net of any accumulated impairment loss).

If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement as Other income (loss).

l) Intangible assets

(i) Computer Software

Computer software programs are capitalized in terms of the costs incurred to make them compatible with specific programs. These costs are amortized over the estimated useful lives.

(ii) Rights

This item includes water-rights, right of way and other acquired rights recognized at historical cost and have an unlimited useful life as the expected cash flow generating period is unpredictable. These rights are not amortized as they are perpetual and will not require renewal, but are subject to annual impairment tests.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

m) Goodwill

The excess of the cost of acquisition over the fair value of the group’s share of the identifiable net assets acquired is recorded as goodwill. Goodwill is not amortized but is tested for impairment on annual basis.

n) Property, Plant and Equipment

Property, plant and equipment are stated at historical cost less depreciation and accumulated impairment losses. Historical cost includes expenditures that are directly attributable to the acquisition.

Subsequent costs 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 the group and the cost of the item can be measured reliably.

Asset depreciation is calculated by components using the straight-line method, considering any adjustments for impairment.

The useful life of property, plant and equipment is determined according to expected use of the assets.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, on an annual basis.

o) Leases

Fixed asset leases in which Arauco substantially holds all ownership risks and advantages are classified as Financial Leases. Financial leases are capitalized at the lease’s commencement at the lower of the fair value of the leased property and the present value of the minimum lease payments.

Leases in which significant 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 charged to the income statement on a straight-line basis over the period of the lease.

p) Biological Assets

IAS 41 requires that biological assets, such as standing trees, are presented in the Balance Sheet at fair value. The forests are thus accounted for at fair value less estimated point-of sale costs at harvest, assuming that the fair value of these assets can be measured reliably.

The valuation of forest plantation assets is based on discounted cash flow models whereby the fair value of the biological assets is calculated using cash flows from continuous operations, which are discounted based on our sustainable forest management plans and the estimated growth of the forests. This valuation is performed on the basis of each identifiable farm block basis and for each type of tree.

Forest plantations shown as current assets are those that will be harvested and sold in the short term.

 

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AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Biological growth and changes in fair value are recognized in the income statement within Other income by activity.

q) Deferred income tax

Deferred income tax is recognized using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not recognized if it arises from the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable income. Deferred income tax is determined using tax rates (and laws) that have been enacted as of the balance sheet date that are expected to apply when the related deferred income tax asset or the deferred income tax liability is settled.

The deferred income tax assets are recognized to the extent that it is probable that future taxable benefits will be available.

r) Provisions

Provisions are recognized when the Company has a current legal or constructive obligation as a result of past events; it is probable that an outflow will be required to settle the obligation; and the amount has been reliably estimated. This amount is quantified and recognized with the best possible estimate at the end of each period.

s) Revenue recognition

Revenues are recognized after Arauco has transferred the risks and rewards of ownership to the buyer and Arauco retains neither a continuing right to dispose of the goods, nor effective control of those goods; this means that generally revenues are recorded upon delivery of goods to customers in accordance with agreed terms of delivery.

Segment revenues mentioned in Note 24 comply with the conditions indicated above.

Revenues from inter-segment sales (which are made at prices that approximate market prices) are eliminated in the consolidated financial statements.

t) Minimum dividend

Article No. 79 of the Private Limited Companies Law of Chile provides that, unless otherwise unanimously agreed or adopted by the shareholders, a dividend must be distributed annually in cash to shareholders in proportion to their shares or in the proportion established by the statutes for preferred shares, if any, in the amount of at least 30% of net income for the current year, except where necessary to absorb accumulated losses from prior years.

The General Shareholders’ Meeting of Arauco resolved to maintain annual dividends at 40% of net distributable income, including a provisional dividend share distribution at year-end. Dividends payable are recognized as a liability in the financial statements in the period they are declared and approved by the Company’s shareholders or when configuring the corresponding obligation on the basis of existing legislation or distribution policies established by the Shareholders’ Meeting.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

The interim and final dividends are recorded in equity upon their approval by the relevant groups, which include the Company’s Board and the shareholders.

The amount of these dividends is presented in this interim consolidated financial statement under Other non-current Financial Liabilities.

u) Impairment

Non-financial Assets

The carrying amounts of tangible and intangible assets are subject to impairment tests whenever some event or change in business circumstances indicates that the book value of assets may not be recoverable, whereas goodwill is tested annually. The recoverable amount of an asset is estimated as the higher of net selling price and value in use. An impairment loss is recognized whenever the carrying amount exceeds the recoverable amount.

A previously recognized impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, however, not to an extent higher than the carrying amount that would have been determined and recognized in prior years. For goodwill, however, a recognized impairment loss is not reversed.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

“Cash-generating units” are the smallest identifiable groups of assets whose use generates continuous funds largely independent of those produced by the use of other assets or groups of assets.

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The distribution is made between cash-generating units or groups of cash generating units expected to benefit from the business combination that resulted in the goodwill.

Financial Assets

At the end of each period, an evaluation is performed in order to measure the existence of any objective evidence that assets or a group of financial assets have been adversely affected. Impairment effects will be recognized in the Consolidated Income Statement only if there is objective evidence that one or more events will occur after initial recognition of financial asset impairment and if these events will affect associated future cash flows.

The provision for doubtful trade receivables is established when there is objective evidence that Arauco will not receive payments under the original terms of sale. Provisions are made when the client is a party to a bankruptcy court agreement or cessation of payments, and are written-off when Arauco has exhausted all levels of recovery of debt in a reasonable time.

The impairment loss is measured as the difference between the book value of assets and the current value of estimated future cash flows. The asset value will be presented net of the loss recognized directly in income. If the impairment loss decreases in later periods, it is reversed either directly or by adjusting the provision for doubtful accounts, with effect in income.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

v) Employee Benefit Costs

The Company has severance payment obligations for voluntary cessation services. These are paid to certain workers that have more than 5 years seniority within the Company in accordance with conditions established within collective or individual contracts.

Actuarial gains and losses are recognized in income in the year they are incurred.

These obligations are treated as post-employment benefits in accordance with current standards.

w) Employee Vacations

Arauco recognizes the expense for employee vacation on an accrual basis and it is recorded at nominal value.

This obligation is presented in the Consolidated Balance Sheet in the line Trade and Other payables.

x) Joint Venture Equity

Joint venture equity is recognized using the equity method.

y) Recent accounting pronouncements

At the date of issuance of these interim consolidated financial statements, the following accounting pronouncements were issued by the IASB .

a) New standards, interpretations, amendments and improvements mandatory since January 1, 2011 which currently are not applicable or relevant to the Company.

 

Rules and interpretations

  

Content

   Mandatory application
date

IAS 24 (reviewed)

   Disclosure of related parties    January 1, 2011

IFRIC 19

   Extinguishing financial liabilities with equity instruments    January 1, 2010

Rules and amendments

  

Content

   Mandatory application
date

IAS 32

   Classification for issuance rights    February 1, 2010

IFRIC 14

   Pre-payments of minimum funding requirement    January 1, 2011

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

b) New issued standards, interpretations and amendments not in effect for year 2011, for which there has been not been made any decision in advance.

 

Rules and interpretations

  

Content

   Mandatory application
date

IAS 19

   Benefits to empleyees    January 1, 2013

IFRS 9

   Financial instruments    January 1. 2013

IFRS 10

   Consolidated financial statements    January 1,2013

IFRS 11

   Joint Agreement    January 1,2013

IFRS 12

   Disclosure of shareholdings in other entities    January 1,2013

IFRS 13

   Fair value measurement    January 1,2013

Rules and amendments

  

Content

   Mandatory application
date

IAS 12

   Income tax    January 1, 2012

IFRS 7

   Disclosure of financial instruments    July 1, 2011

IAS 1

   Filing of financial statements   

Arauco believes that the adoption of standards, amendments and interpretations described above will have no significant impact on the financial statements of the Company in the period of initial application.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

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Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 2. DISCLOSURE OF OTHER INFORMATION

 

a) Disclosure of Information on Capital Issued

Subscribed and paid-in Capital amounts to ThU.S. $353,176.

100% of capital corresponds to ordinary shares.

      06/30/2011    12/31/2010
Description of Ordinary Capital Share Types    100% of Capital corresponds to ordinary shares
Number of Authorized Shares by Type of Capital in Ordinary Shares    113,152,446

Nominal Value of Shares by Type of Capital in Ordinary Shares

   ThU.S.$ 0.0031211 per share

Amount of Capital in Shares by Type of Ordinary Shares that Constitute Capital

   ThU.S.$353,176

Rights, Privileges and Restrictions by Type of Capital in Ordinary Shares

Liabilities presented under Other Financial Liabilities current and non-current, have certain financial restrictions the Parent Company must comply with; otherwise, debt under these contracts can become payable.

Financial restrictions are the following:

 

i) Debt ratio must not exceed 1.2

 

ii) Interest hedging index cannot be less than 2.0

At closing date Arauco complied with the totality of these restrictions.

 

      06/30/2011    12/31/2010

Number of Shares Issued and Completely Paid by Type of Capital in Ordinary Shares

   113,152,446

 

b) Disclosure of information on Dividends paid to Ordinary Shares

The interim dividend paid each year is equivalent to 20% of the distributable net income calculated as of the end of September of each year and presented in the Consolidated Statement of Changes in Net Equity.

Dividend paid each year corresponds to the spread between the 40% of net income distributable at the end of last year and the amount of interim dividend paid at the end of last fiscal year.

The ThUS$141,401 (ThUS$97,218 as of June, 2010) presented in Consolidated Statement of Changes in Net Equity corresponds to the provision of minimum dividend registered (see Note 25).

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Dividends paid during years 2011 and 2010 and the corresponding amount per share

 

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid, Ordinary Shares

   Final Dividend

Type of Shares for which there is a Dividend Paid, Ordinary Shares

   Unlisted Ordinary Shares

Date of Dividend Paid, Ordinary Shares

   05-10-2011

Amount of Dividend, Ordinary Shares, Gross

   ThU.S.$ 182,770

Number of Shares for which Dividends are Paid, Ordinary Shares

   113,152,446

Dividend per Share, Ordinary Share

   U.S.$ 1.61525

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid, Ordinary Shares

   Provisional Dividend

Type of Shares for which there is a Dividend Paid, Ordinary Shares

   Unlisted Ordinary Shares

Date of Dividend Paid, Ordinary Shares

   12-15-2010

Amount of Dividend, Ordinary Shares, Gross

   ThU.S.$ 182,770

Number of Shares for which Dividends are Paid, Ordinary Shares

   113,152,446

Dividend per Share, Ordinary Share

   U.S.$ 0.7557

Detail of Dividend Paid, Ordinary Shares

  

Dividend Paid, Ordinary Shares

   Final Dividend

Type of Shares for which there is a Dividend Paid, Ordinary Shares

   Unlisted Ordinary Shares

Date of Dividend Paid, Ordinary Shares

   05-10-2010

Amount of Dividend, Ordinary Shares, Gross

   ThU.S.$ 56,758

Number of Shares for which Dividends are Paid, Ordinary Shares

   113,152,446

Dividend per Share, Ordinary Share

   U.S.$ 0.50161

 

c) Disclosure of Information on Reserves

Other Reserves

Other reserves consist of Conversion Reserves, Hedge Reserves and Other Reserves.

Arauco does not have restrictions associated with these reserves.

Conversion Reserves

This corresponds to foreign currency translation of those Arauco’s subsidiaries that do not use the U.S. Dollar as their functional currency.

Hedge Reserves

This corresponds to Arauco’s portion of gains or swap net losses resulting from hedging as of the end of each fiscal year.

Other Reserves

This mainly corresponds to the value in Other comprehensive income of investment in associates.

 

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AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

d) Disclosures of other Information

Below are balances of Other Income by activity, Other Expenses by activity, Financing Costs and Participation in income (loss) of associates and joint venture as of June 30, 2011 and 2010, respectively.

 

     January - June     April - June  
     2011     2010     2011     2010  
     ThU.S.$     ThU.S.$     ThU.S.$     ThU.S.$  

Classes of Other Income by activity

        

Other Operating Income, Total

     137,524        96,518        72,949        61,207   

Gain from changes in fair value of biological assets

     114,969        72,627        57,785        41,346   

Revenue from export promotion

     3,232        3,013        1,651        1,657   

Earthquake insurance net effect

     1,920        9,650        1,512        9,650   

Leases received

     1,695        1,228        884        557   

Gain on sales of fixed assets

     3,242        458        3,032        81   

Other operating results

     12,466        9,542        8,085        7,916   

Classes of Other Expenses by activity

        

Total of other expenses by activity

     (31,521     (25,683     (18,546     12,776   

Depreciations

     (498     (1,294     (347     (550

Contingent provision

     (2,977     (1,205     (2,137     (1,172

Assets provision

     (616     (129     18        (13

Expenses due to downtime of processing plants

     (3,804     (1,406     (2,849     (1,372

Fines, readjustments and interests

     (503     (2,308     (396     (1,654

Loss of forest

     (3,745     (6,514     (189     (6,514

Other taxes

     (2,374     (2,392     (1,278     (1,153

Earthquake expenses

     0        0        0        27,328   

Research and development expenses

     (1,588     (1,212 ))      (924     (561

Compensation and eviction

     (1,816     (539     (1,213     (539

Other expenses

     (13,600     (8.684     (9,231     (1,024

Classes of Financing Costs

        

Financing Costs, Total

     (104,095     (107,563     (52,520     (57,628

Interest costs

     (91,728     (97,902     (47,307     (51,516

Bank loans and interest bearing bonds issued

     (91,728     (97,902     (47,307     (51,516

Other financing costs

     (12,367     (9,661     (5,213     (6,112

Classes of Participation in Income (Loss) of associates and joint venture accounted through Equity Method

        

Total

     (8,277     (2,199     (4,381     (615

Investments in associates

     (940     283        (1,109     118   

Joint ventures

     (7,337     (2,402     (3,272     (733
Balance of Expenses by nature:         
      January - June     April - June  
     2011     2010     2011     2010  

Distribution expenses

   ThU.S.$     ThU.S.$     ThU.S.$     ThU.S.$  

Sale costs

     28,523        22,679        12,889        11,653   

Commissions

     7,873        4,567        4,414        1,731   

Insurances

     1,648        1,147        1,019        594   

Other sales expenses

     19,002        16,965        7,456        9,328   

Shipping and freight costs

     201,260        145,127        105,662        78,286   

Port services

     1,671        2,258        1,218        1,215   

Freights

     188,429        135,331        98,694        73,015   

Other shipping and freight costs

     11,160        7,538        5,750        4,056   

Total

     229,783        167,806        118,551        89,939   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

     January - June      April - June  
     2011      2010      2011      2010  

Administration expenses

   ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Wage and salaries

     79,640         64,917         43,698         34,571   

Marketing, advertising, promotion and publications expenses

     2,808         3,390         1,306         1,380   

Insurances

     7,084         4,303         4,887         2,108   

Depreciations and amortization not paid

     4,739         4,930         2,407         2,542   

Computer services

     5,003         5,090         1,361         3,465   

Office, warehouse and machinery leases

     5,879         4,002         3,344         1,633   

External audits

     1,527         2,351         742         1,099   

Donations, contributions, grants

     5,414         7,638         3,591         1,517   

Fees (advices technical, legal)

     17,320         13,318         7,183         4,816   

Property taxes, patents and municipal rights

     9,007         7,740         5,675         5,553   

Other administration expenses

     54,394         34,392         33,584         17,112   

Total

     192,815         152,071         107,778         75,796   

 

            2011      2010      2011      2010  

Expenses for

   Note      ThU.S.$      ThU.S.$      ThU.S.$      ThU.S.$  

Depreciations

     7         113,992         109,312         57,279         65,015   

Employee benefits

     10         158,138         104,277         80,175         49,651   

Amortization

     19         627         883         291         461   

 

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Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 3. INVENTORIES (IAS 2)

 

Components of Inventory

   06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Raw Materials

     103,929         86,617   

Production Supplies

     68,759         65,154   

Work in progress

     48,972         62,612   

Finished goods

     488,188         426,447   

Parts

     110,854         86,532   

Other Inventories

     140         173   

Total Inventories

     820,842         727,535   

As of June 30, 2011, a cost of sales of inventories amounted to ThU.S.$ 1,374,583 (ThU.S.$1,006,890 as of June 30, 2010).

As of June 30, 2011, a net increase in the provision for obsolescence effects of ThU.S.$1,086 was recognized (ThU.S.$324 as of December 31, 2010); therefore, the provision balance as of June 30, 2011 amounted to ThU.S.$8,286 (ThU.S.$7,200 as of December 31, 2010).

The inventories write-off amounted to ThU.S.$601 as of June 30, 2011.

As of the date of the issuance of these financial statements, no inventories have been pledged as collateral or guarantees.

 

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Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 4. CASH FLOW STATEMENT (IAS 7)

Cash and cash equivalents includes cash flow, bank account balances, fixed term deposits, repurchase agreements and mutual funds. They are short-term investments that are readily convertible into cash, and are subject to an immaterial change in value.

The objective of fixed term deposits is to maximize earnings on short-term cash flow surpluses. This instrument is authorized by Arauco’s Investment Policy, which establishes a mandate that allows investments in fixed income securities. In general, these instruments have a maturity period of less than ninety days.

Arauco invests in local mutual funds to maximize the profitability of cash flow surpluses in Chilean Pesos, or in international mutual funds in foreign currencies such as U.S. Dollars or Euros. These instruments are acceptable under Arauco’s Investment Policy.

As of the date of these consolidated financial statements, there are no significant amounts of cash or cash equivalents that are freely available.

 

     06/30/2011      12/31/2010  

Components of Cash and Cash Equivalents

   ThU.S.$      ThU.S.$  

Cash on hand

     409         263   

Banks

     25,015         69,692   

Short term deposit

     366,554         705,694   

Mutual funds

     329,237         267,811   

Other cash and cash equivalents

     3         374   

Total

     721,218         1,043,834   

The following tables detail the value of the cost of the investment in Dynea Brasil S.A. dated March 15, 2010, Savitar (see Note 14), and the net value of assets and liabilities of each acquired entity, discounting both the amount of cash and cash equivalents acquired in order to distinguish those cash flows from those that arise from other operating, investing or financing activities.

 

2010

Purchase of Investments

   ThU.S.$  

Acquisition: Dynea Brasil S.A.

  

Cash paid for acquisitions and cash equivalents

     15,000   

Cash and cash equivalents held by acquired entities

     (8,023

Net cash paid to acquire entities

     6,977   

 

      ThU.S.$  

Net Assets less Cash and Cash equivalents of acquired entity

     22,613   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

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Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 5. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES (IAS 8)

Changes in Accounting Policies

These policies have been designed in accordance with IFRS in effect as of June 30, 2011 and applied uniformly to all items presented in these interim consolidated financial statements.

Changes in the Treatment of Accounting Policy

The financial statements as of June 30, 2011 do not show changes in accounting policies compared to the same period last year.

The consolidated financial statements of Arauco as of December 31, 2009 are the Group’s first annual financial statements prepared under International Financial Reporting Standards (IFRS). The Group’s previous financial statements were prepared according to Generally Accepted Accounting Principles in Chile.

 

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Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 6. TAXES (IAS 12)

The tax rate applicable to the major companies in which Arauco participates is 17% in Chile, 35% in Argentina and 34% in Brazil.

Deferred Tax Assets

The following table details deferred tax assets:

 

Deferred Tax Assets

   06/30/2011
ThU.S. $
     12/31/2010
ThU.S. $
 

Deferred Tax Assets related to Provisions

     5,468         4,658   

Deferred Tax Assets related to accrued liabilities

     4,359         4,601   

Deferred Tax Assets related to Post-Employment obligations

     6,993         6,616   

Deferred Tax Assets related to Revaluation of Property, Plant and equipment

     1,095         2,339   

Deferred Tax Assets related to Financial Instruments Restatements

     991         1,370   

Deferred Tax Assets related to tax losses

     64,582         56,724   

Valuation of biological assets

     7,221         8,805   

Valuation of inventory

     4,453         9,034   

Income provision

     3,274         2,765   

Trade debtors and receivables

     3,221         3,940   

Intangible revaluation differences

     26,194         24,370   

Deferred Tax Assets related to Others

     192         101   

Deferred Tax Assets Total

     128,043         125,323   

As of the date of the present financial statement some of Arauco’s subsidiaries present tax losses of ThU.S.$240,050 (ThU.S.$260,701 as of March 31, 2010) which are mainly due to operational and financial losses.

Arauco believes that the projections of future earnings in subsidiaries that have generated tax losses will allow the recovery of these assets.

Deferred Tax Liability

Deferred tax liability corresponds to income tax amounts payable in future periods related to taxable temporary differences.

The following table details deferred tax liabilities:

 

Deferred Tax Liabilities

   06/30/2011
ThU.S. $
     12/31/2010
ThU.S. $
 

Deferred Tax Liabilities related to Revaluated Property, Plant and equipment

     703,375         686,408   

Deferred Tax Liabilities related to Financial Instrument restatement

     14,229         13,751   

Valuation of biological asset

     524,288         511,401   

Valuation of inventory

     15,957         12,450   

Valuation of prepaid expenses

Differences in valuation of deferred expenditures

    

 

74,929

41,532

  

  

    

 

76,539

35,130

  

  

Deferred Tax Liabilities related to Others

     13,071         33,810   

Deferred Tax Liabilities Total

     1,387,381         1,369,489   

From the deferred tax assets and deferred tax liabilities listed in the above tables, approximately ThU.S.$15,235 and ThU.S.$158,787 respectively, will be used in a period of 12 months.

 

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Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Arauco does not offset deferred tax assets and deferred tax liabilities since there is no legal right to offset amounts recognized in these items that correspond to different fiscal jurisdictions.

Temporary Differences

The following tables summarize current asset and liability timing differences:

 

     06/30/2011      12/31/2010  

Detail of Classes of Deferred Tax Temporary Differences

   Deductible
Difference

ThU.S.$
     Taxable
Difference
ThU.S.$
     Deductible
Difference

ThU.S.$
     Taxable
Difference
ThU.S.$
 

Deferred Tax Assets

     63,461         0         68,599         0   

Tax Loss

     64,582         0         56,724         0   

Deferred Tax Liabilities

     0         1,387,381         0         1,369,489   

Total

     128,043         1,387,381         125,323         1,369,489   

 

Detail of Temporary Difference Income and Loss Amounts

   January-June     April-June  
   2011
ThU.S.$
    2010
ThU.S.$
    2011
ThU.S.$
    2010
ThU.S.$
 

Deferred Tax Assets

     (12,305     1,170        (2,964     1,730   

Tax Loss

     12,250        4,625        519        (457

Deferred Tax Liabilities

     (1,544     (43,233     9,717        (14,686

Total

     (1,599     (37,438     7,272        (13,413

Income Tax Expense (Income)

Income Tax consists of the following:

 

Income tax composition

   January-June     April-June  
   2011
ThU.S.$
    2010
ThU.S.$
    2011
ThU.S.$
    2010
ThU.S.$
 

Current income tax expense

     (94,871     (27,164     (55,712     (34,470

Tax benefit arising from unrecognized tax assets previously used to reduce tax expense

     53        5,681        53        1,472   

Previous period current tax adjustments

     2,316        (269     1,367        (86

Other current tax expenses

     450        (144     529        (126

Current Tax Expense, Net

     (92,052     (21,896     (53,763     (33,210

Deferred expense from taxes relative to the creation and reversion of temporary differences

     (19,110     (42,063     3,497        (12,956

Deferred income from taxes relative to tax rate changes or new fees

     5,261        0        3,256        0   

Tax benefit arising from unrecognized tax assets previously used to reduce expenses due to deferred taxes

     12,250        4,625        519        (457

Total Deferred Tax Expense, Net

     (1,599     (37,438     7,272        (13,413

Income Tax Expense, Total

     (93,651     (59,334     (46,491     (46,623

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

The following table details the income tax for foreign and national companies as of June 30, 2011 and 2010 respectively:

 

     January-June     April-June  
   2011
ThU.S.$
    2010
ThU.S.$
    2011
ThU.S.$
    2010
ThU.S.$
 

Foreign current tax

     (28,414     (22,584     (15,435     (15,299

National current tax

     (63,638     688        (38,328     (17,911

Current tax, Total

     (92,052     (21,896     (53,763     (33,210

Foreign deferred tax

     9,002        8,935        6,427        4,259   

National deferred tax

     (10,601     (46,373     845        (17,672

Deferred tax, Total

     (1,599     (37,438     7,272        (13,413

Income (expense) due to Income Tax, Total

     (93,651     (59,334     (46,491     (46,623

Income Tax Expense Reconciliation using the Effective Rate method

Income tax expenditure reconciliation is as follows:

 

Reconciliation of Income tax from Statutory Rate to Effective Tax Rate

   January-June     April- June  
   2011
ThU.S.$
    2010
ThU.S.$
    2011
ThU.S.$
    2010
ThU.S.$
 

Tax Expense Using Statutory Rate

     (90,650     (50,424     (45,917     (37,484

Tax effect of rates in other jurisdictions

     (6,172     (4,495     (695     (690

Tax effect of non taxable ordinary income

     6,649        6,954        2,267        6,365   

Tax effect of non tax deductible expenses

     (8,090     (7,864     84        (7,122

Tax effect of tax loses unrecognized for previous periods

     (314     0        (1,048     0   

Tax effect of tax rates changes

     5,234        0        2,723        0   

Tax effect of excess tax for previous periods

     2,316        (269     1,367        (86

Other Increases (Decreases) Legal Taxes

     (2,624     (3,236     (5,272     (7,606

Adjustment to Tax Expense using the Statutory Rate, Total

     (3,001     (8,910     (574     (9,139

Tax Expenses Using the Effective Rate

     (93,651     (59,334     (46,491     (46,623

The effect of deferred taxes related to financial hedging instruments corresponds to a credit (subscription) of ThU.S.$ 1,043 as of June 30, 2011 (ThU.S.$322 as of June 30, 2010), which presents net in Hedge reserves in the Statement of Changes in Net Equity.

On July 30, 2010 Law N. 20.455 for national reconstruction financing was published in the Chilean Official Gazette (Diario Oficial de Chile). One of the most important changes such law introduced was the increase in the First Category Taxes for revenues received and /or accrued during commercial years 2011 and 2012, with rates of 20% and 18.5%, respectively.

The effect on the change in tax rates caused an adjustment to the assets and liabilities accounts for deferred taxes, according to the profile projected for temporary reverse differences, in tax losses benefits and in other events that create differences between book and tax basis of assets and liabilities.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 7. PROPERTY, PLANT AND EQUIPMENT (IAS 16)

 

Properties, Plant and Equipment, Net    06/30/2011
ThU.S.$
    12/31/2010
ThU.S.$
 

Construction in progress

     568,427        562,309   

Land

     840,195        821,288   

Buildings

     1,446,437        1,417,684   

Plant and equipment

     2,315,319        2,188,323   

Information technology equipment

     16,411        16,963   

Fixed facilities and accessories

     3,673        3,657   

Motorized vehicles

     9,137        10,057   

Others

     66,313        68,464   

Total Net

     5,265,912        5,088,745   

Properties, Plant and Equipment, Gross

    

Constructions in progress

     568,427        562,309   

Land

     840,195        821,288   

Buildings

     2,582,885        2,523,397   

Plant and equipment

     4,323,094        4,180,142   

Information technology equipment

     43,555        43,614   

Fixed facilities and accessories

     17,602        17,339   

Motorized vehicles

     31,596        32,328   

Others

     105,247        110,076   

Total Gross

     8,512,601        8,290,493   

Accumulated depreciation and impairment

    

Buildings

     (1,136,448     (1,105,713

Plant and equipment

     (2,007,775     (1,991,819

Information technology equipment

     (27,144     (26,651

Fixed facilities and accessories

     (13,929     (13,682

Motorized vehicles

     (22,459     (22,271

Others

     (38,934     (41,612

Total

     (3,246,689     (3,201,748

Description of Property, Plant and Equipment Pledged as Guarantee

Regarding Forestal Río Grande S.A, an affiliate of Fondo de Inversión Bío Bío, a special purpose entity, we note that in October 2006, first and second degree mortgages were executed in favor of JPMorgan Chase Bank N.A. and Arauco, respectively, which prohibited the sale of any property currently belonging to the aforementioned special purpose entity, in order to ensure fulfillment of payments to Fondo de Inversión Bío Bío.

In September 2007, Forestal Río Grande S.A acquired real estate in Yungay, located in Chile’s Region VIII, for which the company executed a first mortgage with prohibition to sell and encumber in favor of, among others, JPMorgan. Similarly, a second mortgage with prohibition to sell and encumber was executed in favor of Arauco.

 

      06/30/2011
ThU.S$
     12/31/2010
ThU.S$
 

Collateral amount of property, plant and equipment

     56,813         56,272   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Commitments for project disbursements or for the acquisition of property, plant and equipment

 

      06/30/2011
ThU.S$
     12/31/2010
ThU.S$
 

Amount committed for the acquisition of property, plant and equipment

     137,310         268,391   

 

      06/30/2011
ThU.S$
     12/31/2010
ThU.S$
 

Disbursements for property, plant and equipment under construction

     198,525         361,598   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Movement on Property, Plant and Equipment

The following tables detail the movement of Property, Plant and Equipment as of June 30, 2011 and December 31, 2010:

 

Movement of Fixed Assets

   Construction
in Progress

ThU.S.$
    Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipments

ThU.S.$
    IT
Equipment

ThU.S.$
    Fixed
Facilities

and
Accessories

ThU.S.$
    Motorized
Vehicles

ThU.S.$
    Other
Property,
Plant and
Equipment

ThU.S.$
    Total
ThU.S.$
 

Opening balance 01/01/2011

     562,309        821,288        1,417,684        2,188,323        16,963        3,657        10,057        68,464        5,088,745   

Changes

                  

Additions

     259,734        1,654        1,708        2,674        12        102        307        5,384        271,575   

Dispositions

     0        (151     (485     (114     0        (9     (46     (1,665     (2,470

Withdrawals

     (8,190     (39     (63     (1,084     (2     0        0        (6,478     (15,856

Depreciation costs

     0        0        (36,042     (84,457     (977     (344     (1,271     (679     (123,770

Net movement of earthquake assets

     (61,209     0        (1,254     62,557        252        (2     (344     0        0   

Exchange rate increase (decrease) of foreign currency

     3,397        16,764        5,611        20,533        0        1        250        1,132        47,688   

Other increase/decrease

     (187,614     679        59,278        126,887        163        268        184        155        0   

Total Changes

     6,118        18,907        (28,753     (126,996     (552     16        (920     (2,151     177,167   

Closing balance 06/30/2011

     568,427        840,195        1,446,437        2,315,319        16,411        3,673        9,137        66,313        5,265,912   

 

Movement of Fixed Assets

   Construction
in Progress

ThU.S.$
    Land
ThU.S.$
    Buildings
ThU.S.$
    Plant and
equipments

ThU.S.$
    IT
Equipment

ThU.S.$
    Fixed
Facilities

and
Accessories

ThU.S.$
    Motorized
Vehicles

ThU.S.$
    Other
Property,
Plant and
Equipment

ThU.S.$
    Total
ThU.S.$
 

Opening balance 01/01/2010

     433,269        743,950        1,353,461        2,328,457        18,178        5,207        9,791        77,440        4,969,753   

Changes

                  

Additions

     361,598        81,610        18,463        14,086        186        234        2,265        4,758        483,200   

Acquisitions of business

     216        660        4,244        21,420        0        0        14        1,137        27,691   

Dispositions

     (142     (14,107     (3,499     (3,132     (3     (1     (215     (4,375     (25,474

Withdrawals

     (1,024     (6     (1,020     (4,315     (11     (39     (2     (408     (6,825

Depreciation costs

     0        0        (68,237     (160,894     (1,966     (810     (1,892     (1,708     (235,507

Impairment loss recognized in the Income Statement

     0        0        (24,198     (110,408     (63     0        (102     (9,341     (144,112

Exchange rate increase (decrease) of foreign currency

     1,394        9,350        3,902        19,986        2        (1,395     64        824        34,127   

Reclassification of assets held for sale

     0        (5,003     (5,877     (3,228     0        0        0        0        (14,108

Other increase/decrease

     (233,002     4,834        140,445        86,351        640        461        134        137        0   

Total Changes

     129,040        77,338        64,223        (140,134     (1,215     (1,550     266        (8,976     118,992   

Closing balance 12/31/2010

     562,309        821,288        1,417,684        2,188,323        16,963        3,657        10,057        68,464        5,088,745   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

The depreciation charged to income as of June 30, 2011 and 2010 is as follows:

 

Depreciation for the period

   2011
ThU.S.$
     2010
ThU.S.$
     2011
ThU.S.$
     2010
ThU.S.$
 

Cost of sale

     107,432         84,112         54,846         42,525   

Administration expenses

     4,082         4,841         2,086         2,875   

Other operating expenses(*)

     2,478         20,359         347         19,615   

Total

     113,992         109,312         57,279         65,015   

 

(*) The balance of 2010, refers to the cost of depreciation of plants detained product of the earthquake.

The useful lives of property, plant and equipment according to expected use of the assets are as follows:

 

            Minimum      Maximum      Average  

Buildings

     Useful Life in Years         16         89         39   

Plant and equipment

     Useful Life in Years         8         67         29   

Information technology equipment

     Useful Life in Years         6         18         5   

Fixed facilities and accessories

     Useful Life in Years         6         12         10   

Motorized vehicles

     Useful Life in Years         6         26         13   

Others properties, plants and equipment

     Useful Life in Years         5         27         16   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 8. LEASES (IAS 17)

When assets are leased under a financial lease, the current value of lease payments is treated as a receivable. The difference between the gross payment to be charged and the current value of said payment is shown as capital return.

Disclosure of Financial Leases Classified by Type of Asset, Leases

 

     06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Property, Plant & Equipment Financial Leasing

     0         440   

Plant and Equipment

     0         440   

Reconciliation of Financial Lease Minimum Payments, Lessee

 

     06/30/2011  

Minimum lease payments, lease payment obligations

   Gross
ThU.S.$
     Interest
ThU.S.$
     Present
Value
ThU.S.$
 

Due within one year

     191         4         187   

Due within one and five years

     13         0         13   

Due beyond five years

     0         0         0   

Total

     204         4         200   

 

     12/31/2010  

Financial Lease

   Gross
ThU.S.$
     Gross
ThU.S.$
     Gross
ThU.S.$
 

Due within one year

     354         10         344   

Due within one and five years

     50         1         49   

Due beyond five years

     0         0         0   

Total

     404         11         393   

Leasing obligations that accrue interest are presented in the Consolidated Balance Sheet under Other Financial Liabilities Current and Non-current depending on the maturities stated above.

Reconciliation of Financial Lease Minimum Payments, Lessor

 

     06/30/2011  

Minimum Financial Lease Payments Receivable, Financial Lease

   Gross
ThU.S.$
     Interest
ThU.S.$
     Present
Value
ThU.S.$
 

Due within one year

     4,145         349         3,796   

Due within one and five years

     4,426         275         4,151   

Due beyond five years

     0         0         0   

Total

     8,571         624         7,947   

 

     12/31/2010  

Minimum Financial Lease Payments Receivable, Financial Lease

   Gross
ThU.S.$
     Interest
ThU.S.$
     Present
Value
ThU.S.$
 

Due within one year

     4,767         450         4,317   

Due within one and five years

     5,957         358         5,599   

Due beyond five years

     0         0         0   

Total

     10,724         808         9,916   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Accounts receivable in leasing are presented in the Consolidated Balance Sheet under Trade and Other Receivables current and non-current depending on the maturities stated above.

Significant Financial Lease Agreements

Arauco holds financial leases as a lessor and lessee detailed within the previous tables, and therefore, there are no contingent payments or restrictions to note.

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 9. ORDINARY REVENUE (IAS 18)

 

(a) Policy on Revenue recognition from the Sale of Goods

Revenue from the sale of goods is recognized when an Arauco entity has transferred to the buyer the significant risks and rewards of ownership, when the amount of revenue can be reliably measured, when Arauco cannot influence the management of the sold goods and when it is probable that the economic benefits associated with the transaction will flow to the entity.

Sales are recognized in terms of the arranged price stated in the sales contract, net of volume discounts and estimated refunds at the date of the sale. Volume discounts are evaluated in terms of estimated annual purchases. There is no significant financing component given that receivables for sales are collected within a low average time period, which is in line with market practices.

 

(b) Policy on Revenue recognition from Rendering of Services

Arauco mainly has electric power, port and pest control services whose incomes are derived from fixed price service contracts, generally recognized during the period of the service contract on a straight-line basis throughout the duration of the contract.

 

Classes of Ordinary Revenue

   January-June      April-June  
   2011
ThU.S.$
     2010
ThU.S.$
     2011
ThU.S.$
     2010
ThU.S.$
 

Sale of goods

     2,167,255         1,659,257         1,150,029         888,038   

Service Contracts

     67,565         39,012         37,742         25,351   

Total

     2,234,820         1,698,269         1,187,771         913,389   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 10. EMPLOYEE BENEFITS (IAS 19)

This refers to severance payment obligations for years of service due to termination of service contracts that arise from benefits stated in work contracts and/or as severance payments stated in the Labor Law.

This is an estimate of the years of service-based severance payments to be recognized as a future termination payment liability, in accordance with in force work contracts held with workers and pursuant to actuarial valuation criteria for this type of liability.

The main factors considered for calculating the actuarial value of severance payments for years of service are employee turnover, salary increases and life expectancy of the workers included in this benefit.

Classes of Benefits and Expenses by Employee

 

Classes of Benefits Expenses by Employee

   January-June      April-June  
   2011
ThU.S.$
     2010
ThU.S.$
     2011
ThU.S.$
     2010
ThU.S.$
 

Personnel Expenses

     158.138         104,277         80,175         49.651   

Wages and salaries

     152,130         98,782         76,309         45,780   

Compensation for years of service

     6,008         5,495         3,866         3,871   

The following tables detail the balances and the movement of payments for years of service provisioned as of June 30, 2011 and December 31, 2010:

 

     06/30/2011
ThU.S.$
     12/31/2010
ThU.S.$
 

Current

     3,478         3,312   

Non-current

     37,887         35,964   

Total

     41,365         39,276   

 

Roll-forward

   06/30/2011
ThU.S.$
    12/31/2010
ThU.S.$
 

Opening balance

     39,276        27,667   

Current service cost

     958        1,851   

Interest cost

     1,256        1,798   

Actuarial gains

     3,603        11,256   

Benefits paid

     (3,644     (5,537

Increase for currency exchange

     (84     2,241   

Closing balance

     41,365        39,276   

 

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CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

NOTE 11. EFFECT OF FOREIGN CURRENCY RATE VARIATIONS (IAS 21)

Local and foreign currency

Currency assets and liabilities as of June 30, 2011 and December 31, 2010 are as follows:

 

     06-30-2011
ThU.S.$
     12-31-2010
ThU.S.$
 

Liquid Assets

     722,676         1,046,743   

US Dollar

     116,875         516,201   

Euro

     729         73,573   

Other currencies

     78,175         48,511   

$ not adjustable

     428,359         408,458   

U.F.

     98,538         0   

Cash and Cash Equivalents

     721,218         1,043,834   

US Dollar

     115,417         513,292   

Euro

     729         73,573   

Other currencies

     78,175         48,511   

$ not adjustable

     428,359         408,458   

U.F.

     98,538         0   

Other Financial Assets

     1,458         2,909   

US Dollar

     1,458         2,909   

Accounts Receivable in short and long term

     

Accounts Receivable in short and long term

     1,057,865         804,328   

US Dollar

     592,922         533,046   

Euro

     80,028         31,651   

Other currencies

     139,040         94,392   

$ not adjustable

     236,648         136,889   

U.F.

     9,227         8,350   

Trades and Current Accounts Receivable

     947,980         774,289   

US Dollar

     546,380         528,657   

Euro

     30,749         31,651   

Other currencies

     137,888         93,075   

$ not adjustable

     228,996         115,338   

U.F.

     3,967         5,568   

Trades and Non-Current Accounts Receivable

     10,164         11,965   

US Dollar

     1,148         4,389   

Euro

     0         0   

Other currencies

     117         205   

$ not adjustable

     3,639         4,589   

U.F.

     5,260         2,782   

Accounts Receivable from related parties, current

     99,721         18,074   

US Dollar

     45,394         0   

Euro

     49,279         0   

Other currencies

     1,035         1,112   

$ not adjustable

     4,013         16,962   

Other Assets

     11,057,228         10,655,261   

US Dollar

     10,793,372         10,276,275   

Euro

     1,463         458   

Other currencies

     101,452         142,569   

$ not adjustable

     125,428         214,370   

U.F.

     35,513         21,589   

Total Assets

     12,837,769         12,506,332   

US Dollar

     115,503,169         11,325,522   

Euro

     82,220         105,682   

Other currencies

     318,667         285,472   

$ not adjustable

     790,435         759,717   

U.F.

     143,278         29,939   

 

46


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated

 

 

Local and foreign currency, continued

 

     06-30-2011      12-31-2010  
   Up to 90  days
ThU.S.$
     From 91 days
to 1 year

ThU.S.$
     Up to 90  days
ThU.S.$
     From 91 days
to 1 year
ThU.S.$
 

Total Liabilities, current

     1,181,233         77,862         763,439         445,622   

US Dollar

     718,831         75,026         654,148         440,318   

Euro

     5,071         0         5,105         0   

Other currencies

     182.156         119         48,019         2,501   

$ not adjustable

     268,963         0         49,809         0   

U.F.

     6,212         2,717         6,358         2,803   

Other Financial Liabilities, current

     499,476         77,862         109,051         445,622   

US Dollar

     480,095         75,026         95,871         440,318   

Other currencies

     16,098         119         9,980         2,501   

U.F.

     3,283         2,717         3,200         2,803   

Bank loans

     58,149         70,094         50,602         52,214   

US Dollar

     42,051         69,975         40,622         49,713   

Other currencies

     16,098         119         9,980         2,501   

Financial leases

     74         113         94         250   

U.F.

     74         113         94         250   

Other loans

     441,253         7,655         58,355         393,158   

US Dollar

     438,044         5,051         55,249         390,605   

U.F.

     3,209         2,604         3,106         2,553   

Other Financial Liabilities, current

     681.757         0         654,388         0   

US Dollar

     238,736         0         558,277         0   

Euro

     5,071         0         5,105         0   

Other currencies

     166,058         0         38,039         0   

$ not adjustable

     268,963         0         49,809         0   

U.F.

     2,929         0         3,158         0   

 

     06-30-2011      12-31-2010  
   From 13 months
to 5 years

ThU.S.$
     More than  5
years

ThU.S.$
     From 13 months
to 5 years

ThU.S.$
     More than  5
years

ThU.S.$
 

Total Liabilities, non-current

     2,900,507         1,562,057         2,640,189         1,816,507   

US Dollars

     2,054,114         1,011,223         1,518,182         1,277,116   

Other currencies

     6,110         0         —           0   

$ not adjustable

     663,279         3,674         301,667         3,578   

U.F.

     38,109         0         684,401         0   
     138,895         547,160         135,939         535,813   

Other Financial Liabilities, non-current

     1,320,713         1,562,057         1,092,922         1,816,507   

US Dollars

     1,177,175         1,011,223         950,795         1,277,116   

Other currencies

     4,669         3,674         6,188         3,578   

U.F.

     138,869         547,160         135,939         535,813   

Bank loans

     248,154         4,021         290,815         3,925   

US Dollars

     243,485         347         284,627         347   

Other currencies

     4,669         3,674         6,188         3,578   

Financial leases

     13         0         49         0   

U.F.

     13         0         49         0   

Other loans

     1,072,546         1,558,036         802,058         1,812,582   

US Dollars

     933,690         1,010,876         666,168         1,276,769   

U.F.

     138,856         547,160         135,890         535,813   

Other Financial Liabilities, non-current

     1,579,794         0         1,547,267         0   

US Dollars

     876,939         0         567,387         0   

Euro

     6,110         0         0         0   

Other currencies

     658,610         0         295,479         0   

$ not adjustable

     38,109         0         684,401         0   

U.F.

     26         0         0         0   

 

47


Table of Contents

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Notes to the Consolidated Financial Statement

June 30, 2011

Amounts in thousands of U.S. dollars, except as indicated