20-F 1 d341160d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 30, 2012

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

Commission File Number: 33-99720

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

(Exact name of Registrant as specified in its charter)

Arauco and Constitution Pulp Inc.

(Translation of Registrant’s name into English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

(Address of principal executive offices)

Gianfranco Truffello

Tel.: 56-2-4617221 • E-mail: gtruffello@arauco.cl

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

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

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

None

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

None

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

 

Title of each class:

5.125% Notes due 2013

5.625% Notes due 2015

7.50% Notes due 2017

7.25% Notes due 2019

5.00% Notes due 2021

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: Shares of Common Stock, without par value: 113,152,446.

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer  x

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

 

U.S. GAAP  ¨

 

International Financial Reporting Standards as issued

by the International Accounting Standards Board  x

  Other  ¨

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

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

 

 

 


Table of Contents

TABLE OF CONTENTS

 

          Page  
PART I         1   
    Item 1.    Identity of Directors, Senior Management and Advisers      1   
    Item 2.    Offer Statistics and Expected Timetable      1   
    Item 3.    Key Information      1   
    Item 4.    Information on the Company      20   
    Item 5.    Operating and Financial Review and Prospects      45   
    Item 6.    Directors, Senior Management and Employees      66   
    Item 7.    Major Shareholders and Related Party Transactions      71   
    Item 8.    Financial Information      73   
    Item 9.    The Offer and Listing      77   
    Item 10.    Additional Information      77   
    Item 11.    Quantitative and Qualitative Disclosures About Market Risk      86   
    Item 12.    Description of Securities Other than Equity Securities      87   
PART II         87   
    Item 13.    Defaults, Dividend Arrearages and Delinquencies      87   
    Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds      87   
    Item 15.    Controls and Procedures      87   
    Item 16A.    Audit Committee Financial Expert      88   
    Item 16B.    Code of Ethics      89   
    Item 16C.    Principal Accountant Fees and Services      89   
    Item 16D.    Exemptions from the Listing Standards for Audit Committees      90   
    Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers      90   
    Item 16F.    Change in Registrant’s Certifying Accountant      90   
    Item 16G.    Corporate Governance      90   
    Item 16H.    Mine Safety Disclosures      91   
PART III         92   
    Item 17.    Financial Statements      92   
    Item 18.    Financial Statements      92   
    Item 19.    Exhibits      92   

 

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CERTAIN TERMS AND CONVENTIONS

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

Unless otherwise specified, all references to “$”, “U.S.$”, “U.S. dollars” or “dollars” are to United States dollars; references to “Chilean pesos” or “Ch$” are to Chilean pesos; references to “Argentine pesos” or “AR$” are to Argentine pesos; references to “Brazilian reals” or “R$” are to Brazilian reals; references to “€” or “euro” are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; and references to “UF” are to Unidades de Fomento. The UF is a unit of account that is linked to, and adjusted daily to reflect changes in, the Chilean consumer price index reported by the Chilean National Institute of Statistics (Instituto Nacional de Estadísticas). At December 31, 2011, one UF equaled U.S.$45.61 and Ch$22,294.03.

PRESENTATION OF FINANCIAL DATA

This report includes the audited consolidated balance sheets of Arauco and our subsidiaries as of December 31, 2011 and 2010 and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2011, 2010 and 2009 (collectively, the “audited consolidated financial statements” or “financial statements”).

For your convenience, this annual report contains certain translations of Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the observed exchange rate reported by Banco Central de Chile, the Central Bank of Chile, which we refer to as the “Central Bank of Chile” or the “Central Bank.” The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. On December 31, 2011, the observed exchange rate for Chilean pesos was Ch$519.20 to U.S.$1.00, and on April 26, 2012, the observed exchange rate was Ch$484.88 to U.S.$1.00. You should not construe these translations as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate. See “Exchange Rates.” Unless otherwise specified, references to the devaluation or the appreciation of the Chilean peso against the U.S dollar are in nominal terms (without adjusting for inflation) based on the observed exchange rates published by the Central Bank of Chile for the relevant period.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial information as of December 31, 2009, 2010 and 2011 and for each of the years then ended is derived from, should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards or “IFRS”.

IFRS differs in certain significant respects from generally accepted accounting principles in the United States, or “U.S. GAAP”. As a result, our financial information presented under IFRS is not directly comparable to our financial information presented under U.S. GAAP for fiscal years prior to and including 2008, and readers should avoid such a comparison.

 

    As of and for the year ended December 31,  
    2009     2010     2011  
    (in thousands of U.S.$, except ratios and per share data)  

INCOME STATEMENT DATA

     

Revenue

  U.S.$ 3,097,448        3,767,384        4,374,495   

Cost of sales

    (2,152,535     (2,298,191     (2,908,463

Gross income

    944,913        1,496,193        1,466,032   

Other operating income

    181,383        378,480        475,014   

Distribution costs

    (374,641     (360,188     (451,620

Administrative expenses

    (249,340     (323,916     (415,521

Other operating expenses

    (57,978     (49,063     (90,313

Other income (loss)

    64,102        0        0   

Financial income

    19,313        15,761        24,589   

Financial costs

    (193,872     (207,519     (196,356

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

    6,621        (7,693     (11,897

Exchange rate differences

    17,632        (16,288     (26,643

Income before income tax

    358,133        898,767        773,285   

Income tax

    (53,537     (198,018     (152,499
 

 

 

   

 

 

   

 

 

 

Net income

    304,596        700,749        620,786   

BALANCE SHEET DATA

     

Current assets

    2,272,313        3,152,116        2,462,660   

Property, plant and equipment

    4,969,753        5,088,745        5,324,172   

Biological assets(1)

    3,757,528        3,790,958        3,744,584   

Total assets

    11,413,827        12,506,332        12,457,722   

Total current liabilities

    951,413        1,209,061        1,031,945   

Total non-current liabilities

    4,079,981        4,456,696        4,395,627   

Total equity

    6,382,433        6,840,575        7,030,150   

CASH FLOW DATA

     

Net cash flow from operating activities

    751,025        1,137,275        982,237   

Net cash flow from investing activities

    (717,291     (669,414     (1,208,857

Net cash flow from financing activities

    302,372        33,852        (481,184
 

 

 

   

 

 

   

 

 

 

Net change in cash

    336,106        501,713        (707,804

OTHER FINANCIAL DATA

     

Capital expenditures(2)

    362,690        595,520        717,340   

Depreciation and amortization

    207,415        233,655        230,737   

Fair value cost of timber harvested(3)

    198,675        271,515        335,142   

EBIT(4)

    532,692        1,090,525        945,052   

Adjusted EBITDA(4)

    765,618        1,390,482        1,307,685   

Adjusted EBITDA/total interest expense

    3.95        6.70        6.66   

Adjusted EBITDA/sales revenue

    24.7     36.9     29.9

Average debt(5)/EBITDA

    3.82        2.39        2.55   

Total debt(6)

    3,202,919        3,449,569        3,213,301   

Total debt(6)/ capitalization(7)

    33.4     33.5     31.4   

Total debt(6)/ shareholders’ equity

    51.1     51.2     46.3   

Ratio of earnings to fixed charges(8)

    2.7        5.1        4.8   

Working capital(9)

    1,320,900        1,943,055        1,430,715   

Number of shares

    113,152,446        113,152,446        113,152,446   

Net income per share

    2.66        6.14        5.41   

Dividends paid

    135,175        158,781        291,512   

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

    1.19        1.40        2.58   

 

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(1) Biological assets refer to our forests and long-standing trees.
(2) Accrued for the period.
(3) Denominated “Stumpage” in prior filings.
(4) Adjusted EBITDA is calculated by adding “fair value cost of timber harvested,” “exchange rate differences” and deducting “gain from changes in fair value of biological assets” to EBITDA. “Fair value cost of timber harvested” is a non-cash expense included in our cost of sales (as a component of raw materials) that represents the fair value of the wood harvested and sold from our own plantations, which is commonly excluded from the non-generally accepted accounting principles (non-GAAP) measures used by analysts to compare participants in our industry as it is a non-cash item (purchases of wood from third parties are cash expenses that are not included in “fair value cost of timber harvested”). “Gain from changes in fair value of biological assets” is a non-cash revenue. We believe that Adjusted EBITDA provides investors with a useful supplemental indicator of the performance of our core business because (i) it cancels out the effects of fair value that are independent of the cost efficiency of our operating facilities and (ii) it excludes the effect of exchange rate differences, which are mainly derived from our debt instruments, and the effect of local costs as our functional currency is the U.S. dollar.

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

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

The following table presents, for the periods indicated, the reconciliation of EBIT, EBITDA and Adjusted EBITDA to net income. Since the filing date of our annual report on Form 20-F for the year ended December 31, 2010, we have revised the methodology that we use to calculate our non-GAAP financial measures. Although we believe that the methodology used to calculate the non-GAAP financial measures included in our prior filings on Form 20-F was compliant with applicable law, including the requirements of Form 20-F, we believe that the revised methodology provides readers of this annual report with an improved understanding of our operational performance from a core business perspective. However, as a result of the modifications to our calculation methodology, the reconciliation table set forth below and certain amounts included therein are not directly comparable to those included in prior filings.

 

    As of and for the year ended December 31,  
    2009     2010     2011  
    (in thousands of U.S.$, except ratios and per share data)  

Net income

  U.S.$ 304,596        700,749        620,786   

(+) Financial costs

    193,872        207,519        196,356   

(-) Financial income

    (19,313     (15,761     (24,589

(+) Income Tax

    53,537        198,018        152,499   

EBIT

    532,692        1,090,525        945,052   

(+) Depreciation and amortization

    207,415        233,655        230,737   

EBITDA

    740,107        1,324,180        1,175,789   

(+) Fair value cost of timber harvested

    198,675        271,515        335,142   

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

    (155,532     (221,501     (229,889
 

 

 

   

 

 

   

 

 

 

(+) Exchange rate differences

    (17,632     16,288        26,643   
 

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    765,618        1,390,482        1,307,685   

(A) Denominated “Stumpage” in prior filings.

     

 

(5) Average debt is calculated as the average between the beginning and the end of the applicable year.
(6) Total debt is calculated as total financial debt, including accrued interest.
(7) Capitalization is calculated as total financial debt, including accrued interest, plus total shareholders’ equity.
(8) For purposes of computing the ratio of earnings to fixed charges, earnings consist of earnings before income taxes plus fixed charges. Fixed charges consist of interest expense (including capitalized interest) and amortization of any discount and issuance costs related to our offerings of debt securities.
(9) Working capital is calculated by subtracting current liabilities from current assets.

 

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EXCHANGE RATES

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

 

     Daily Observed Exchange Rate

Year Ended December 31,

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

2007

     548.67         493.14         521.06       496.89

2008

     676.75         431.22         521.79       636.45

2009

     643.87         491.09         559.67       507.10

2010

     549.17         468.01         510.22       468.01

2011

     533.74         455.91         483.57       519.20

Months (2011-2012)

           

November

     526.83         494.08         509.73       517.37

December

     522.62         508.67         517.26       519.2

January

     518.20         485.35         499.96       488.75

February

     487.73         475.29         480.89       476.27

March

     491.57         480.62         485.90       487.44

April (through April 26)

     489.64         482.17         486.05       484.88

 

Source: Central Bank of Chile

 

(1) 

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

On April 26, 2012, the observed exchange rate was Ch$484.88 to U.S.$1.00.

 

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FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains words such as “believe,” “expect,” “anticipate” and similar expressions that identify forward-looking statements, which reflect our views about future events and financial performance. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements.

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

 

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RISK FACTORS

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

Risks Relating to Us and the Forestry Industry

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

Prices for many of the products we sell can fluctuate significantly. The price of commodities such as pulp, panels and sawn timber has a high correlation with international prices. Consequently, the prices that we are able to charge for these products are highly dependent on prevailing international prices. Historically, such prices have been subject to substantial variation. For example, during the period from January 1, 2009 to December 31, 2011, the average price for Norscan bleached softwood kraft market pulp (pulp produced in Canada and Northern Europe sold to manufacturers of paper products delivered in Northern Europe, or NBSK), which is the benchmark for softwood bleached pulp, ranged from a low of U.S.$577.09 per metric ton in April 2009 to a high of U.S.$ 1,023.1 per metric ton in June 2011. During the last quarter of 2008 and the first quarter of 2009 there was a very rapid and significant reduction in the international prices of the products we sell and commodity prices in general as a result of the global financial crisis. In the second half of 2009, the international prices of the products we sell and commodity prices in general increased up to pre-financial crisis levels and continued at high levels in 2010 and the first half of 2011. In the second half of 2011, pulp prices started to decline. The continuation of severe global economic conditions may continue to exert downward pressure on commodity prices, including the international prices of the products we sell, which could result in material and adverse declines in our revenues, results of operations and financial condition. We have no control over the factors that cause prices to change which include, among others:

 

   

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

 

   

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

 

   

world production capacity;

 

   

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

 

   

the availability of substitutes.

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

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

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines. Several of our competitors are larger than we are and have greater financial and other resources, which they could use to take steps that could materially and adversely affect our financial and competitive position. The pulp industry is sensitive to changes in industry capacity and producer inventories, as well as to cyclical changes in the world’s economies, all of which may significantly affect selling prices and, thereby, our profitability. Increased competition could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

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

The global economy, and in particular global industrial production, is the primary driver of demand for pulp, paper and wood products. Global industrial production dropped during the second half of 2008 and first half of 2009 due to the financial crisis and global economic conditions, resulting in a significant and widespread contraction in demand for pulp, paper and wood products. A continued decrease in the level of activity in either the domestic or the international markets within which we operate could adversely affect the demand and the price of our products and thus our cash flows and operational and financial results. Due to this downturn in global industrial production, our pulp segment experienced significant price declines in the last quarter of 2008 and the first quarter of 2009, which severely affected our results. In addition, the significant downturn in the home-building industry in the United States and Europe has resulted in increased inventories of available new homes, significant declines in home prices, loss of home-equity values and loss of consumer confidence and demand. As a result of these events, our plywood and panel sales were adversely affected, continuing a downward trend both in volume and price across all markets. Our medium-density fiberboard molding sales also experienced a sharp decline in volume mainly due to the lower activity in the United States and Canadian construction markets. Our wood products segment, which is also highly dependent on the strength of the home-building industry, experienced decreases in its prices of and demand for its products. The decrease in demand of sawn timber products due primarily to the credit crisis and continued downturn in the real estate market in the United States and decrease in demand for sawn timber products resulted in our decision to close five sawmills in 2008 and 2009. Also, the same situation of deteriorated market conditions led us to close our Bossetti sawmill in Argentina in December 2010.

Since late 2009, high levels of sovereign debt and insufficient public sector revenues have resulted in a European sovereign debt crisis. As of the date of this annual report, credit rating agencies have downgraded the credit ratings of many of the Eurozone governments, including Greece, Spain, Italy, Portugal and France, among others. During 2011 and the first quarter of 2012, the deepening of this crisis has caused a general economic downturn in Europe, which has negatively affected the banking and credit systems, employment and production. As a result, demand and prices for pulp and wood products have declined in the European market.

Export sales of our wood products to Asia accounted for 38.6% of our sales revenue in 2011 compared to 36.3% in 2010 and 32.1% in 2009 and export sales to North America accounted for 36.7% of our sales revenue in 2011 compared to 39.7% in 2010 and 43.3% in 2009. Our business, financial condition, results of operations and cash flows could be materially and adversely affected if the economic conditions in Asia, Europe, the United States and elsewhere abroad continue to deteriorate, and if we are unable to reallocate our sawn timber and other products to other markets on equally beneficial terms, which could require us to recognize additional impairment charges.

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

In 2011, export sales, defined as sales out of the country where our goods were produced, accounted for 71.5% of our total sales revenues. During this period, 47.0% of our export sales were to customers in Asia, 19.0% to customers in North America, 17.7% to customers in Europe, 11.8% to customers in Central and South America and 4.5% to customers in other countries. As a result, our results of operations and cash flows depend, to a significant degree, on economic, political and regulatory conditions in our principal export markets. Our ability to compete effectively in our export markets could be materially and adversely affected by a number of factors beyond our control, including deterioration in macroeconomic conditions, exchange rate volatility, government subsidies, and the imposition of increased tariffs or other trade barriers. If our ability to sell our products competitively in one or more of our principal export markets were impaired by any of these developments, it might be difficult to re-allocate our products to other markets on equally favorable terms and our business, financial condition, results of operations and cash flows might be adversely affected.

 

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

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

On February 27, 2010, an earthquake measured at a magnitude of 8.8 on the Richter scale, followed by a tsunami that affected the coast, occurred in the South-Central Region of Chile, an area where we maintain a substantial portion of our Chilean industrial operations. Immediately after the earthquake, all of our production units applied their contingency plans, which involved shutting down operations and evaluating the damage caused to each facility by the earthquake. As a result of the earthquake and the subsequent tsunami, our Mutrún sawmill was destroyed. All of our operations have since reopened and are currently operating at full operational capacity, except for the Mutrún sawmill, which will not be reopened. The Mutrún sawmill represented 6% of our sawn timber production capacity in Chile.

The suspension of our operations in Chile resulted in significant asset impairment charges due to earthquake-related damage to property and inventories as well as a significant decrease in our sales volumes due to plant closures which had an adverse effect on our results of operations and cash flows. Our insurance policies provided coverage for damages to our property, plant, equipment and inventories and for business interruption caused by such damages up to an aggregate amount of U.S.$650 million, with a deductible of U.S.$3 million for property damage and a deductible of 21 days for business interruption. On July 1, 2010 we received an advance insurance payment of U.S.$100 million, which included compensation for losses caused by physical damage (U.S.$30 million) and downtime (U.S.$70 million). During November 2010, we received an advance insurance payment of U.S.$185 million, which included compensation for losses caused by physical damage (U.S.$75 million) and downtime (U.S.$110 million). On November 15, 2011, we and the insurers accepted the final report of the insurance adjusters. In accordance with such final report, as of December 31, 2011, we received a total recovery of U.S.$532 million, net of U.S.$278 million in advance payments that we had already received. We cannot assure you that we will not experience other suspensions or interruptions or unexpected damage to our property as a result of other earthquakes, aftershocks, tsunamis, any related repair and maintenance or other consequences associated with such events, any of which could have a material and adverse effect on our revenue, results of operations and financial condition.

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

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

 

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We have been subject to a number of environmental administrative and judicial proceedings in Chile, including proceedings related to the Valdivia Mill (2004-2005), the Arauco Mill (2004), the Nueva Aldea Complex (2004-2005) and the Licancel Mill (2007). As a result of these proceedings, we have been subject to monetary fines as well as sanctions, including orders to suspend or limit our operations. Additional proceedings, enforcement actions or claims related to compliance with environmental requirements or alleged environmental damages may also be brought against us in the future. Any such proceedings or claims may have an adverse effect on our business, financial condition, results of operations and cash flows. See “Risk factors—Risks Relating to Us and the forestry industry—Environmental concerns led us to temporarily suspend our operations at the Valdivia Mill in 2005 and the Licancel Mill in 2007, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows”.

Environmental concerns led to the temporary suspension of our operations at the Valdivia Mill in 2005 and at the Licancel Mill in 2007, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows.

Valdivia Mill

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

In June 2005, we again suspended operations at the Valdivia Mill until certain technical and legal conditions could be clarified with the applicable regulatory authorities. We estimate this suspension resulted in a loss of sales of approximately U.S.$1.0 million per day and a loss of profits of approximately U.S.$250,000 per day. Pursuant to the decision of our board of directors, based on certain clarifications provided by the Environmental Regional Commission (Comisión Regional del Medio Ambiente), or COREMA, of the Tenth Region of Chile, the mill resumed operations in August 2005, after 64 days of suspended operations, at 80% of its authorized production capacity. In order to achieve the full production capacity authorized by applicable permits, the mill had to fulfill certain new requirements established by the COREMA. In January 2008, the COREMA authorized the Valdivia Mill to return to its annual authorized production capacity of 550,000 metric tons. The mill gradually increased its production over a four-month period starting in March 2008 and reached full capacity in June 2008.

In June 2007, we were required to submit to the COREMA of the Tenth Region of Chile an environmental impact study for the implementation of substantial technological improvements on the quality of the effluents generated by the Valdivia Mill. In June 2008, the COREMA approved that environmental impact study subject to certain conditions that, in our opinion, adversely affected the feasibility of the project. For such reason, we filed an appeal before the Directive Council (Consejo Directivo) of the National Environmental Commission (Comisión Nacional del Medio Ambiente), or CONAMA, challenging the conditions imposed by the COREMA. This administrative appeal was partially accepted by the CONAMA, but some of the conditions that we believe adversely affect the feasibility of the project were maintained. As a result, in September 2009, we presented another appeal in the relevant court, and as of the date of this annual report such appeal remains pending.

Until October 2007, our Valdivia Mill was under the jurisdiction of the COREMA of the Tenth Region of Chile, but due to a change in legislation creating two new administrative regions in Chile, our Valdivia Mill became subject to the jurisdiction of the COREMA of the Fourteenth Region of Chile. In February 2009, as previously required by the COREMA of the Tenth Region of Chile, we submitted to the COREMA of the Fourteenth Region of Chile an environmental impact study for the construction of a pipeline to discharge the Valdivia Mill’s wastewater in the Pacific Ocean near Punta Maiquillahue, complying with the requirement that such wastewater be discharged in a body of water other than the Cruces River, the Carlos Anwandter Nature Sanctuary or their respective sources.

 

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This environmental impact study was approved by the COREMA in February 2010, but has been partially challenged by us before the Directive Council (Consejo Directivo) primarily because it included a future prohibition on the discharge of wastewater into the Cruces River under all circumstances, even in the case of certain emergencies. As of the date of this annual report, the Directive Council has not resolved the action presented by us.

Resolution of our proceeding with the CONAMA or the pending appeals before the Chilean courts regarding the resolutions that approved the environmental impact studies of the pipeline and the effluent quality improvement projects, as well as the construction and operation of the pipeline, are each subject to many environmental, regulatory, engineering and political uncertainties. As a result, we cannot provide any assurances that the projects will be finally approved as requested or completed. If either the request for the necessary permits for the construction of the pipeline is rejected, or the installation of the pipeline is delayed for reasons attributable to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mill’s environmental permit for operation. Alternatively, if any rejection or delays are attributable to reasons beyond our control, we believe that the environmental authorities should extend the applicable deadlines. However, we can provide no assurances that any deadline extensions would be granted, even if we comply with all the requirements that may be set forth by those authorities. See “Item 4. Information on the Company—Description of Business—Pulp—Pulp mills—Chile—Valdivia Mill” and “Item 8. Financial Information—Legal Proceedings.”

The suspension of operations at the Valdivia Mill in 2005 adversely affected our business, financial condition, results of operations and cash flows. Any future suspension of operations at the Valdivia Mill or at any other of our significant operating plants can be expected to have similar adverse effects. We offer no assurance that the Valdivia Mill, or our other mills, will be able to operate without further interruption. See “Item 8. Financial Information—Legal Proceedings.”

Licancel Mill

In June 2007, our operations at the Licancel Mill, a pulp mill located in the Seventh Region of Chile, became subject to environmental scrutiny by Chilean environmental regulators and the public due to the death of fish in the Mataquito River, approximately 15 kilometers downstream of the mill. As a result, in June 2007 Chilean authorities, including certain public health authorities and the Superintendencia de Servicios Sanitarios (Sanitary Services Superintendency), required that we suspend activities at the Licancel Mill and that we suspend any further discharges into the river. In 2007, we invested U.S.$8 million in a new effluent treatment system for the Licancel Mill, and the mill resumed operations during January 2008. On September 7, 2007, the National Defense Council instituted a civil lawsuit seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the Licancel Mill. The National Defense Council agreed to terminate this lawsuit pursuant to an agreement with Arauco dated January 29, 2010. Nevertheless, we can offer no assurance that the Licancel Mill will be able to operate without further interruptions. Any future suspension of operations at the Licancel Mill would adversely affect our business, financial condition, results of operations and cash flows. We estimate that the suspension of operations at the Licancel Mill resulted in a total loss of profits of U.S.$24 million.

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

In April, 2005, the National Defense Council (Consejo de Defensa del Estado), the Chilean national agency that institutes legal proceedings on behalf of the Chilean government, instituted a civil lawsuit seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the effluent discharges from our Valdivia Mill. The National Defense Council has not quantified the damages it is seeking in connection with the Valdivia Mill lawsuit.

The Valdivia Mill lawsuit remains under review by the court as of the date of this annual report. If the result of the Valdivia Mill lawsuit is unfavorable to us, we may be required to invest a significant amount of funds and/or take other actions to repair any environmental harm a court determines we have caused, which could materially and adversely affect our business, financial condition, results of operations and cash flows. We cannot predict the outcome or impact of this lawsuit or when it may be resolved.

 

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Since the end of 2004, we have been subject to various criminal proceedings relating to alleged violations of several environmental laws in Chile, each of which has been either terminated or abandoned by the prosecutor (decisión de no perseverar) as of the date of this annual report. See “Item 8. Financial Information—Legal Proceedings.” The commencement of similar criminal proceedings against Arauco at any time in the future could adversely affect some of our mills. We can neither predict the likelihood that we will face such similar proceedings in the future, nor the likely outcome or impact of any such proceedings.

We are also subject to certain other civil and administrative proceedings relating to our mills. We cannot assure you that, as a result of such proceedings, our mills will be able to operate without interruption. Any such interruption, or unexpected costs to resolve such proceedings, could have a material and adverse effect on our business, financial condition, results of operations and cash flows.

We are subject to a substantial tax claim in Argentina

On December 14, 2007, the Administración Federal de Ingresos Públicos (AFIP), Argentina’s internal revenue service, notified our Argentine subsidiary, Alto Paraná S.A. (“Alto Paraná”), of a claim for unpaid taxes for fiscal years 2002, 2003 and 2004 in the aggregate amount of AR$418 million (or approximately U.S.$105 million) (including principal, interest and penalties accrued through such date), arising from a dispute regarding certain income tax deductions (related to debt issued by Alto Paraná in 2001 and repaid in 2007) taken by Alto Paraná and rejected by the AFIP. On February 8, 2010, the Tribunal Fiscal de la Nación (Argentina’s tax court) issued an unfavorable administrative ruling requiring that Alto Paraná pay the AFIP’s claim in full.

Alto Paraná appealed this unfavorable administrative ruling to the Court of Appeals and also filed an injunctive action requesting that the court stay Alto Paraná’s payment obligation until resolution of its pending appeal. On May 13, 2010, the Court of Appeals granted an injunction of Alto Paraná’s payment obligation in exchange for the posting of a surety bond in the amount of AR$633.6 million (or approximately U.S.$159 million). We have not established any reserve in respect of this contingency and can offer no assurance that the Court of Appeals will issue a ruling favorable to us. If the Court of Appeals upholds the decision of the Tribunal Fiscal de la Nación, Alto Paraná will be required to satisfy the above-mentioned claim which would have an adverse effect on our financial condition and results of operations. For more information regarding this claim or any other substantial tax claim in Argentina, see “Item 8. Financial Information—Legal Proceedings—Tax Litigation in Argentina.”

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

As of December 31, 2011, we had approximately U.S.$3,213.3 million of outstanding indebtedness. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Contractual obligations.” In light of the current economic environment, we may be unable to access, or we may be restricted in accessing, credit and capital markets to satisfy our financing needs, or we may not be able to refinance our existing indebtedness on terms that are favorable to us or at all. If we are unable to refinance our indebtedness as it becomes due, or if we refinance such indebtedness on terms that are not favorable to us, our business, results of operations and financial condition could be materially and adversely affected.

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

A material disruption at any of our manufacturing, processing or remanufacturing facilities could prevent us from satisfying customer demand for our products, meeting our production targets and/or require us to make unplanned capital expenditures, resulting in lower sales, which would have a negative effect on our financial results. Our Chilean facilities are located in a region known for seismic activity that exposes our facilities in Chile to the risk of earthquakes and in some areas, to subsequent tsunamis. In addition, our facilities (or any of our machines within an otherwise operational facility) could cease operations unexpectedly due to a number of events, including:

 

   

unscheduled maintenance outages;

 

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prolonged power failures;

 

   

an equipment failure;

 

   

fires, floods, hurricanes or other adverse weather;

 

   

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

 

   

a chemical spill or release;

 

   

explosion of a boiler;

 

   

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

 

   

labor difficulties;

 

   

terrorism or threats of terrorism;

 

   

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

 

   

other operating problems.

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

Our operations are subject to various risks affecting our forests and manufacturing facilities, including disease and fire. Although to date certain pests and diseases afflicting radiata or taeda pine plantations in other parts of the world have not significantly affected the forestry industries in Chile, Argentina, Brazil and Uruguay, these pests or diseases do migrate and may appear in Chile, Argentina, Brazil or Uruguay in the future. Similarly, forest fires are always a risk, particularly during low rainfall conditions. We do not maintain insurance against pests, diseases or, in certain areas, fires that could affect our forests, and as a result our business, financial condition, results of operations and cash flows could be adversely affected if any of these risks were realized.

Commencing on December 31, 2011, wildfires, exacerbated by high temperatures and strong winds, broke out in the Eighth Region of Chile. As a result, the fires destroyed our Nueva Aldea plywood mill and approximately 8,200 hectares of our forest plantations. The affected forest plantations represent approximately 0.8% of our total forest plantations. Our Nueva Aldea plywood mill, which represented a cash investment of approximately U.S.$110 million, had an annual production capacity of 450,000 cubic meters, representing approximately 14.2% of our total panel production capacity. Although the plywood mill at Nueva Aldea and our forest plantations are insured, our insurance is subject to deductibles and caps, including a 15-day deductible relating to our business interruption insurance for the Nueva Aldea plywood mill. We believe that the interruption of our Nueva Aldea panel mill may result in a loss of profits of approximately U.S.$ 2.0 million during year 2012, net of the insurance coverage we may receive due to this event. We can provide no assurance that we will receive insurance proceeds to compensate us fully for the losses we have incurred.

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

A growing number of scientists, environmentalists, international organizations, regulators and other commentators maintain that global climate change has contributed, and will continue to contribute, to the increasing unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, droughts, tornadoes, freezes, other storms and fires) in certain parts of the world. As a result, a number of legal and regulatory measures as well as social initiatives have been introduced in numerous countries in an effort to reduce carbon dioxide and other greenhouse gas emissions, which some argue to be substantial contributors to global climate change.

 

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Such reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment. In addition, our plantations are located in regions which have ideal climatic conditions for a short growing cycle. Any climate changes that negatively affect such favorable climate conditions in central or southern Chile or in any region in which we benefit from favorable climate conditions could adversely affect the growth rate and quality of our plantations, or our production costs. Although we cannot predict the impact of changing global climate conditions, if any, nor can we predict the impact of legal, regulatory and social responses to concerns about global climate change, any such occurrences may negatively affect our business, financial condition, results of operations and cash flows.

Our operations could be adversely affected by labor disputes.

Approximately 22.7% of our employees in Chile, 49.2% of our employees in Argentina and 11.3% of our employees in Brazil were unionized at December 31, 2011. In the past, certain work slowdowns, stoppages and other labor-related disruptions have adversely affected our operations.

In Chile we experienced (i) a 10-day work stoppage in November 2009 at our Constitución, Arauco, Nueva Aldea, Horcones and Trupán-Cholguán complexes, (ii) a three-day work stoppage in September 2009 at our Constitución, Valdivia, Arauco, Nueva Aldea, Horcones and Trupán-Cholguán complexes and (iii) a six-day work stoppage in May 2007 at our Horcones complex (which includes the Arauco pulp mill, a panel plant and two sawmills), each of which was caused by the employees of our third party forestry contractors at each of the respective facilities.

In Argentina we experienced (i) a 3-day stoppage at Alto Paraná’s chemical mill in March 2011, as a result of a strike by the chemical union and (ii) a 4-day stoppage at Alto Paraná’s pulp mill in September 2010, as a result of a strike by the pulp union, but these strikes were limited to two hours per shift and did not materially affect operations. In January 2008, Alto Paraná’s chemical mill in Argentina experienced three days of work stoppage, but these strikes were limited to two hours per shift and did not materially affect operations. In addition, in January and February 2007, we experienced (i) a 12-day stoppage at our Zárate mill due to a dispute arising between the local chemical and timber unions with regard to the representation of their workers at the mill and (ii) a six-day suspension of operations at the Alto Paraná’s pulp mill as a result of a strike by a group of approximately 150 power saw operators.

Our principal collective-bargaining agreements in Chile are scheduled to expire in 2015. We cannot assure you that a work slowdown, or a work stoppage or strike, will not occur prior to or upon the expiration of our labor agreements, and we are unable to estimate the adverse effect of any such work slowdown, stoppage or strike on our sales.

In addition, we depend to a significant extent on employees of contractors to which we outsource a wide range of services including operation of certain of our manufacturing facilities and management of certain of our plantations. As of December 31, 2011, we had contracts with approximately 1,002 contractors, who employed approximately 25,456 employees. Contractors that are not affiliated with us or with each other operate our eight sawmills and five remanufacturing facilities in Chile. Under Chilean labor legislation, we are secondarily liable for the payment of labor and the social security obligations owed to employees of our contractors. In the event that we do not exercise the rights granted to us by the labor laws regarding the supervision of our contractors in their compliance of their labor and social security obligations, then our responsibility is elevated from secondary to joint and several, thus enabling an employee of a contractor to bring a claim relating to these obligations against both the contractor and to us, as the party hiring such contractor, although the contractor would remain primarily liable for such obligations. Furthermore, as a general rule, we are also responsible for the health and safety conditions of the contractors’ workers and are obligated to ensure that the contractors comply with all obligations related to such conditions while such workers are performing activities for us within our corporate purpose. As a result of the foregoing, we may be affected by future strikes, work slowdowns, stoppages or other labor-related developments in the various countries in which we operate, including such developments attributable to employees of contractors performing outsourced services, and such strikes, slowdowns, stoppages or other developments could have a material adverse effect on our business, financial condition, results of operations or prospects.

 

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Risks Relating to Chile

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

At December 31, 2011, 76.6% of our property, plant and equipment and forest assets were directly owned by the Company and our Chilean subsidiaries, and in 2011, 76.1% of our revenues were attributable to our Chilean operations. Accordingly, our business, financial condition, results of operations and cash flows depend, to a considerable extent, upon economic conditions in Chile. Future changes in the Chilean economy could adversely affect our business, financial condition, results of operations and cash flows and may impair our ability to proceed with our strategic plan of business. In addition, such changes may impact the market price of our securities.

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

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

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

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

Inflation in Chile may disrupt our business and have an adverse effect on our business, results of operations, financial condition and cash flows.

Chile has experienced high rates of inflation in the past. The annual rates of inflation (as measured by changes in the consumer price index and as reported by the Chilean National Institute of Statistics) in 2006, 2007, 2008, 2009, 2010 and 2011 were 2.6%, 7.8%, 7.1%, -1.4%, 3.0% and 4.4% respectively. High levels of inflation in Chile could adversely affect the Chilean economy and have a material adverse effect on our revenues, results of operations, financial condition and cash flows. Changes in the rate of inflation in Chile could continue in the future. Due to the competitive pressures we face in each of our product lines, we may not be able to increase prices in lock-step with inflation, which could materially and adversely affect our revenues, results of operations, financial and cash flows.

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

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

In addition, as an international company operating in Chile and several other countries, we transact a portion of our business and have assets and liabilities in Chilean pesos and other non-U.S. dollar currencies, such as the Argentine peso, the Uruguayan peso, the Brazilian real, the Colombian peso and the Mexican peso, among others.

 

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To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic sales revenues may be adversely affected when expressed in U.S. dollars. The same effects may occur for our domestic sales in Argentina and Brazil for products sold in each of the respective local currencies. As a result, fluctuations in the exchange rates of such foreign currencies to the U.S. dollar may have a material adverse effect on our business, results of operations, financial condition and cash flows.

Risks Relating to Argentina

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

At December 31, 2011, 10.6% of our property, plant and equipment and forest assets were owned by our Argentinean subsidiaries, and in 2011, 12.7% of our revenues were attributable to our Argentine operations. The financial condition and results of our Argentine operations, including the ability of our Argentine subsidiary Alto Paraná to raise capital, depend, to a certain extent, upon economic conditions prevailing in Argentina. See “Item 4. Information on the Company—Description of Business—History.”

From 1998 to 2002, the Argentine economy experienced an economic recession marked by reduced levels of consumption and investment and an elevated unemployment rate. The Argentine gross domestic product, or GDP, decreased by 0.8% in 2000, 4.0% in 2001 and 10.9% in 2002. Since 2003, the Argentine GDP increased by 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006, 8.7% in 2007 and 6.8% in 2008. Although in 2009, Argentina’s GDP growth slowed to 0.9% as a result of the global financial crisis, in 2010 it rose to 9.2% and in 2011 it slowed to 7.3%. Depending on the future development of the economy of Argentina, over which we have no control, our business, financial condition, results of operations and cash flows could be adversely affected.

In addition, there are many aspects of the Argentine economy that could adversely affect our operations, including, among others, inflation, interest rates, foreign exchange controls and taxes. We have no control over and cannot predict how the Argentine economy could affect our operations and revenues in Argentina.

Changes in Argentine economy may impair the ability of Alto Paraná, our Argentine subsidiary, to meet its obligations and transfer money abroad.

We guarantee a portion of Alto Paraná’s debt. We may be required to fulfill our obligation under our guarantees if Alto Paraná’s ability to transfer funds abroad to service such debt is restricted. For a description of Alto Paraná’s debt which we guarantee see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

Since 2001, the Argentine government has issued various regulations that have resulted a number of monetary and currency exchange control measures, which have included the obligation to repatriate foreign currency earned abroad and tight restrictions on transferring funds abroad, with certain exceptions for authorized transactions. Although current restrictions have not materially affected Alto Paraná’s business, financial condition, results of operations and cash flows, including its ability to service its debt, if in the future such payments are restricted, such restriction would be an obstacle to Alto Paraná’s ability to transfer money abroad, which may negatively affect its financial condition, results of operations and cash flows.

Risks Relating to Brazil

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

At December 31, 2011, 12.8% of our property, plant and equipment and forest assets were owned by our Brazilian subsidiaries, and in 2011, 11.2% of our revenues were attributable to our Brazilian operations.

 

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During the first quarter of 2005, we acquired all of the shares of capital stock of LD Forest Products S.A. and of Placas do Paraná S.A., or Placas do Paraná, in Brazil, as well as 50% of the shares of capital stock of Dynea Brasil S.A., or Dynea Brasil, in Brazil. In April 2010, our subsidiary Arauco do Brasil S.A. acquired the other 50% of the shares of Dynea Brasil. As a result of this acquisition, we own 100% of the shares of Dynea Brasil.

In September 2007, our subsidiaries Placas do Paraná S.A. and Arauco Florestal S.A. entered into an agreement for the joint ownership of land with Stora Enso Oyj, or Stora Enso, a Finnish-Swedish multinational corporation. Pursuant to the agreement, we acquired 80% of the shares in Stora Enso Arapoti Empreendimentos Agrícolas S.A., now Arauco Florestal Arapoti S.A., which owns 50,000 hectares of land, including 25,000 hectares of pine and 5,000 hectares of eucalyptus plantations; 20% of the shares in Stora Enso Arapoti Indústria de Papel S.A., which owns a paper mill with an annual production capacity of 205,000 tons of light weight coated paper; and 100% of the shares of Stora Enso Arapoti Serraria Ltda., which owns a sawmill with an annual production capacity of 150,000 cubic meters per year. In August 2009, we acquired, through our Brazilian subsidiary Placas do Paraná, Tafisa Brasil S.A., or Tafisa Brasil, which has a panel production facility located in the city of Pien, Brazil, with an annual total installed capacity of 725,000 cubic meters, and which includes two production lines producing medium density fiberboard (MDF) and one production line producing particleboard. The facility also has added-value lines to produce products for the construction and furniture industries.

On November 17, 2011, Centaurus Holdings S.A., a Brazilian company that is 51% owned by Klabin S.A. and 49% by our subsidiary Arauco Forest Brasil S.A., acquired the quotas of Florestal Vale do Corisco Ltda., which has 107,000 hectares of land in the Brazilian state of Paraná. The total purchase price for the proposed transaction was U.S.$473.5 million, of which we paid 49%. Antitrust approval of this transaction remains pending as of the date of this annual report.

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

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

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

 

   

currency fluctuations;

 

   

real estate ownership restrictions;

 

   

inflation;

 

   

social instability;

 

   

price instability;

 

   

interest rates;

 

   

liquidity of domestic capital and lending markets;

 

   

tax policy; and

 

   

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

 

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

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

Brazil has, in the past, experienced high rates of inflation. More recently, Brazil’s rates of inflation were 4.5% in 2007, 5.9% in 2008, 4.3% in 2009, 5.9% in 2010 and 6.5% in 2011, as measured by the Brazilian consumer price index (Índice de Preços ao Consumidor-Amplo). In the past, inflation, governmental measures to combat inflation and public speculation about possible future actions have had significant negative effects on the Brazilian economy. Certain future measures, if taken by the Brazilian government, including interest rate increases, intervention in the foreign exchange market and actions to adjust or fix the value of the real may trigger increases in inflation, and consequently, have adverse economic impacts on the business, financial condition, results of operations and cash flows of our Brazilian subsidiaries could suffer.

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

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

For example, the real appreciated by 4.8% against the U.S. dollar in 2010, and depreciated 11.6% during 2011. The exchange rate between the real and the U.S. dollar may continue to fluctuate and may rise or decline substantially from current levels.

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

Risks Relating to Uruguay

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

In September 2009, we executed a series of agreements, pursuant to which we and Stora Enso agreed to combine our respective assets in Uruguay in a 50%-50% joint venture. As a consequence of this transaction, we and Stora Enso equally own and control all assets that we and Stora Enso previously owned in Uruguay, which includes approximately 74,000 hectares previously owned by Stora Enso (including 17,300 hectares which are already planted with forests) and approximately 39,000 hectares previously owned by us (of which 27,400 are already planted with forests).

In addition, in October 2009, we and Stora Enso acquired in equal parts the Uruguayan subsidiaries of the Spanish company Grupo Empresarial ENCE, or “ENCE”. The principal assets of these companies consist of approximately 130,000 hectares of land, of which approximately 73,000 have forestry plantations, approximately 6,000 hecateres under agreements with third parties and one industrial site, certain environmental permits for the construction of a pulp mill, a river terminal and one nursery. We own and operate these acquired assets jointly with Stora Enso as part of our Montes del Plata joint venture. The aggregate value of the assets acquired as a result of this transaction was U.S.$335 million, of which we paid 50% (or approximately U.S.$167.5 million).

 

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On January 18, 2011, Arauco and Stora Enso agreed to carry out the construction of a state of the art pulp mill with an annual guaranteed capacity of 1.3 million tons, a port and a power producing unit based on renewable sources, all located in Punta Pereira, department of Colonia, Uruguay. The total estimated investment is U.S.$1,900 million. The project is being financed 40% by Arauco and Stora Enso on an equal basis, pursuant to their Montes del Plata joint venture, and 60% by long-term debt financing. The debt financing, incurred on September 29, 2011, includes a loan agreement among Celulosa y Energía Punta Pereira S.A., Zona Franca Punta Pereira S.A., each a Uruguayan affiliate of the Montes del Plata joint venture, and Banco Interamericano de Desarrollo, known as the “IDB Facility Agreement,” of up to U.S.$454,000,000, and an export credit agency agreement, known as the “Finnvera Guaranteed Facility Agreement” of up to U.S.$900,000,000. Arauco agreed to guarantee 50% of this debt.

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

Risks Relating to Other Markets

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

Our business, financial condition, results of operations and cash flows depend, to a large extent, on the level of economic activity, government and foreign exchange policies and political and economic developments in our principal export markets. 93.0% of our total pulp sales in 2010 and 94.4% in 2011, as well as 52.4% in 2010 and 54.9% in 2011 of our total sales of forestry, wood and panel products were attributable to exports, principally to customers in Asia, the Americas and Western Europe. Our business, earnings and prospects, as well as our financial condition, results of operations, cash flows and the market price of our securities, may be materially and adversely affected by developments in these export markets relating to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation, social instability or other political, economic or diplomatic developments. For example, certain target countries to which we export may impose buying restrictions in our industry, which may adversely affect our sales. We have no control over these conditions and developments which could adversely affect us and our business, financial condition, results of operations and cash flows or the price or market of our securities.

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

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

Since late 2009, high levels of sovereign debt and insufficient public sector revenues have resulted in a European sovereign debt crisis. As of the date of this annual report, credit rating agencies have downgraded the credit ratings of many of the Eurozone governments, including Greece, Spain, Italy, Portugal and France, among others. During 2011 and the first quarter of 2012, the deepening of this crisis has caused a general economic downturn in Europe, which has negatively affected the banking and credit systems, employment and production. As a result, we may face difficulties in obtaining loans or we may incur higher debt servicing costs in connection with loans obtained from European financial institutions.

 

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Risks Relating to Our Securities

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

Our cash flow and our ability to service debt is dependent, in part, on the cash flow and earnings of our subsidiaries and the payment of funds by those subsidiaries to us, in the form of loans, interest, dividends or otherwise. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due under the terms of our securities or to make any funds available for such purpose. Furthermore, claims of creditors of our subsidiaries, including trade creditors, will have priority over our creditors, including holders of our securities, with respect to the assets and cash flow of the subsidiaries. Our right to receive assets of any of our subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of our securities to participate in those assets) will be effectively subordinated to the claims of that subsidiary’s creditors.

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

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

 

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Item 4. Information on the Company

DESCRIPTION OF BUSINESS

We believe that, as of December 31, 2011, we were one of Latin America’s largest forest plantation owner, and that we are Chile’s largest exporter of forestry and wood products in terms of sales revenue. We have industrial operations in Chile, Argentina and Brazil. As of December 31, 2011, we had approximately 1.0 million hectares of plantations in Chile, Argentina, Brazil and Uruguay. During 2011, we harvested 18.6 million cubic meters of sawlogs and pulplogs and sold 5.8 million cubic meters of wood products, including sawn timber (green and kiln-dried lumber), remanufactured wood products and panels (plywood, medium density fiber board, or MDF, particle board, or PBO, and high density fiber board, or HB).

Based on information published by Resource Information Systems, Inc., an independent research company for the pulp and paper industry, at December 31, 2011, we were one of the world’s largest producers of bleached and unbleached softwood kraft market pulp in terms of production capacity, with an estimated 6.3% share of the total world production of bleached softwood kraft market pulp and a 14.4% share of the total world production of softwood kraft market unbleached pulp. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. “Kraft pulp” is pulp produced using a chemical process.

Based on information published by Resource Information Systems, Inc., we were also one of the world’s lowest-cost producers of softwood kraft market pulp. We believe that we are able to produce our products at a lower cost than our competitors because of the high growth rate and short harvest cycle of radiata and taeda pine compared to other commercial softwoods, the advanced genetic and silviculture techniques we apply in our forest management, our modern mill facilities and, in the case of Chile, the proximity of our operations to Pacific coast ports.

History

Celulosa Arauco y Constitución S.A. is a corporation (sociedad anónima) organized under the laws of Chile and subject to certain rules applicable to Chilean public corporations (sociedades anónimas abiertas). Our principal executive offices are located at Avenida El Golf 150, 14th Floor, Las Condes, Santiago, Chile, and our telephone number is +56-2-461-7200.

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

In 1996, we acquired Alto Paraná S.A., an Argentine company, which, at that time, owned plantations and other land in Argentina and manufactured and sold bleached softwood kraft pulp. With this acquisition, we expanded our market opportunities outside of Chile.

In 2000, we acquired 98% of the shares of Forestal Cholguán S.A., or Cholguán, and 50% of Trupán S.A., or Trupán, which permitted us to enter the MDF and HB markets, and in 2002, we began operations at two new MDF mills, one in Chile and one in Argentina.

 

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

On June 30, 2006, through our subsidiaries Aserraderos Arauco S.A., Forestal Celco S.A., Bosques Arauco S.A. and Forestal Valdivia S.A., we acquired the forestry assets of Cementos Bío-Bío S.A. The acquisition represented an investment of U.S.$133.3 million. The acquired assets consisted of 21,000 hectares of pine plantations, one sawmill with an annual production capacity of approximately 250,000 cubic meters per year and a remanufacturing facility.

On September 27, 2007 we entered into an agreement for the joint ownership of land in Brazil with Stora Enso Oyj, a Finnish-Swedish multinational corporation. Pursuant to the agreement, we acquired 80% of the shares in Stora Enso Arapoti Empreendimentos Agrícolas S.A., now Arauco Florestal Arapoti S.A., which owns 50,000 hectares of land, including 25,000 hectares of pine and 5,000 hectares of eucalyptus plantations; 20% of the shares in Stora Enso Arapoti Indústria de Papel S.A., which owns a paper mill with an annual production capacity of 205,000 tons of light weight coated paper; and 100% of the shares of Stora Enso Arapoti Serraria Ltda., which owns a sawmill with an annual production capacity of 150,000 cubic meters per year. This alliance required an investment of U.S.$208.4 million, which was financed with our resources and commercial bank loans.

On May 17, 2009, our subsidiary Inversiones Arauco Internacional Limitada (previously known as Arauco Internacional S.A.), or “Arauco Internacional”, and a subsidiary of Stora Enso Oyj agreed through a joint venture partnership to acquire the Uruguayan subsidiaries of ENCE, which acquisition was completed on October 16, 2009. The companies acquired by the joint venture partnership were Eufores S.A., Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A. The main assets of these subsidiaries included 130,000 hectares of land, of which 73,000 have forestry plantations, 6,000 hectares under agreements with third parties, an industrial site, the necessary environmental permits for the construction of a pulp mill, a river terminal, a chip producing mill and a nursery. The agreed value of these assets, pursuant to the aforementioned transaction, was U.S.$335 million, of which Arauco paid 50% (or U.S.$167.5 million). See “Item 5. Operating Financial Review and Prospects—Results of Operations”.

On August 26, 2009, our subsidiary Placas do Paraná S.A. acquired 100% of the shares of Tafisa Brasil, by means of a share purchase agreement executed among SCS Beheer, B.V., Tafiber – Tableros de Fibras Ibéricos, S.L. (each of which is a subsidiary of Sonae Indústria, SGPS, S.A.) and Placas do Paraná S.A. Pursuant to the transaction, we paid a purchase price of U.S.$227 million, of which U.S.$165.2 million was allocated to pay the value of the shares of Tafisa Brasil, with the balance corresponding to liabilities that the acquired company maintained. The primary asset of Tafisa Brasil (which has been renamed “Arauco do Brasil S.A.”) is a panel production facility located in the city of Pien, Brazil, which is in the state of Paraná. The facility has an annual total installed capacity of 640,000 cubic meters, which includes three production lines: two lines producing MDF and one line producing particleboard. The facility also has added-value lines to produce products for the construction and furniture industries.

On September 27, 2009, Arauco and its subsidiary Arauco Internacional, executed a series of joint venture agreements with Stora Enso, pursuant to which Stora Enso Amsterdam B.V. agreed to transfer ownership of 100% of the shares of Stora Enso Uruguay S.A. to Forestal Cono Sur. As a consequence of this transaction, Arauco and Stora Enso equally control all assets that both companies own in Uruguay, which includes 74,000 hectares owned by Stora Enso (including 17,300 hectares which are already planted with forests) and 39,000 hectares owned by Arauco (of which 27,400 are already planted with forests). These assets, and those that we acquired from ENCE in October of 2009, have helped to secure a strategic basis to consider the construction of a future pulp mill in Uruguay.

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

On January 18, 2011 Arauco and Stora Enso agreed to carry out the construction of a state of the art pulp mill with an annual guaranteed capacity of 1.3 million tons, a port and a power producing unit based on renewable sources, all located in Punta Pereira, department of Colonia, Uruguay. The total estimated investment is U.S.$1,900

 

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million. For more information regarding the ongoing construction of the pulp mill in Uruguay, see “Item 3. Key Information—Risk Factors—Risks Relating to Uruguay—Economic conditions in Uruguay may have a direct impact on our financial condition, results of operations and cash flows.”

On November 17, 2011, Centaurus Holdings S.A., a Brazilian company that is 51% owned by Klabin S.A. and 49% by our subsidiary Arauco Forest Brasil S.A., acquired the shares of Florestal Vale do Corisco Ltda., which has 107,000 hectares of land in the Brazilian state of Paraná. The total purchase price for the proposed transaction was U.S.$473.5 million, of which we paid 49%. Antitrust approval of this transaction remains pending as of the date of this annual report.

On December 27, 2011, Alto Paraná acquired 100% of the shares of Greenagro S.A. (“Greenagro”), a company duly incorporated under the laws of Argentina, for a total purchase price of U.S.$10.7 million. Greenagro is engaged in forestry activities in the area of Isla Victoria, province of Entre Ríos, Argentina. As of the date of this annual report, the closing of the acquisition remains subject to anti-trust review in Argentina by the National Commission for the Defense of Competition (Comisión Nacional de Defensa de la Competencia).

On December 29, 2011, Arauco Panels USA, one of our U.S. subsidiaries, entered into an asset purchase agreement to acquire an industrial facility in Moncure, North Carolina for U.S.$56 million plus approximately U.S.$6 million in respect of working capital, subject to adjustment based on actual working capital at closing. The facility includes medium-density fiberboard and high-density fiberboard (HDF) production lines with annual production capacity of up to 330,000 cubic meters, a particleboard production line with annual production capacity of up to 270,000 cubic meters and two melamine product production lines. This transaction was closed in January, 2012.

Corporate Structure

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

The following table sets forth our ownership interests in our subsidiaries as of December 31, 2011.

 

    

Country of
incorporation

   Total stock held  

Agenciamiento y Servicios Profesionales S.A. de C.V.

   Mexico      99.9990

Alto Paraná S.A.

   Argentina      99.9766   

Arauco Australia Pty Ltd.

   Australia      99.9990   

Arauco Bioenergía S.A.

   Chile      99.9985   

Arauco Colombia S.A.

   Colombia      99.9980   

Arauco Denmark ApS

   Denmark      99.9990   

Arauco Distribución S.A.

   Chile      99.9992   

Arauco do Brasil S.A.(ex-Placas do Paraná S.A.)

   Brazil      99.9990   

Arauco Ecuador S.A.

   Ecuador      99.9990   

Arauco Florestal Arapoti S.A.

   Brazil      79.9992   

Arauco Forest Brasil S.A.

   Brazil      99.9990   

Arauco Forest Products B.V.

   The Netherlands      99.9990   

Arauco Holanda Cooperatief U.A.

   The Netherlands      99.9990   

Arauco Panels USA LLC

   U.S.A.      99.9990   

Arauco Perú S.A.

   Peru      99.9990   

Arauco Pisos Laminados S.A.

   Brazil      99.9990   

Arauco Wood Products, Inc.

   U.S.A.      99.9990   

Araucomex S.A. de C.V.

   Mexico      99.9990   

Aserraderos Arauco S.A.

   Chile      99.9992   

Bosques Arauco S.A.

   Chile      99.9256   

Catan Empreendimentos e Participacoes S.A.

   Brazil      99.9925   

Controladora de Plagas Forestales S.A.

   Chile      59.6326   

 

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Country of
incorporation

   Total stock held  

Empreendimentos Florestais Santa Cruz Ltda. (ex-Lucchese
Empreendimentos e Participacoes Ltda.)

   Brazil      99.9754   

Forestal Arauco S.A.

   Chile      99.9248   

Forestal Celco S.A.

   Chile      99.9256   

Forestal Cholguán S.A.

   Chile      97.4281   

Forestal Los Lagos S.A.

   Chile      79.9405   

Forestal Nuestra Señora del Carmen S.A.

   Argentina      99.9766   

Forestal Talavera S.A.

   Argentina      99.9945   

Forestal Valdivia S.A.

   Chile      99.9256   

Greenagro S.A.

   Argentina      99.9766   

Industrias Forestales S.A.

   Argentina      99.9991   

Inversiones Arauco Internacional Ltda. (ex-Arauco Internacional S.A.)

   Chile      99.9990   

Inversiones Celco S.L.

   Spain      99.9990   

Investigaciones Forestales Bioforest S.A.

   Chile      99.9256   

Leasing Forestal S.A.

   Argentina      99.9971   

Mahal Empreendimentos e Participacoes S.A.

   Brazil      99.9923   

Paneles Arauco S.A.

   Chile      99.9992   

Savitar S.A.

   Argentina      99.9930   

Servicios Logísticos Arauco S.A.

   Chile      99.9995   

Business Strategy

Our business strategy is to maximize the value of our forest plantations by pursuing sustainable growth opportunities in our core businesses and expanding into new markets and products. We are implementing our business strategy through the following initiatives:

 

   

We are improving the growth rate and quality of our plantations through advanced forest management techniques;

 

   

We are executing a capital expenditure plan designed to reinforce our competitive advantages through economies of scale and scope, improving the efficiency and productivity of our industrial activities and optimizing the use of our forests through biomass energy generation;

 

   

We continue to develop our facilities, transportation, shipping, storage and product distribution network that allow us to reach over 70 countries worldwide; and

 

   

We are expanding internationally into new regions that we believe have comparative advantages in the forestry sector.

 

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Domestic and Export Sales

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

 

     Year ended December 31,  
     2009      2010      2011  
     (in millions of U.S.$)  

Export Sales

        

Bleached pulp

   $ 1,330       $ 1,448       $ 1,681   

Unbleached pulp

     191         217         264   

Sawn timber

     259         359         429   

Remanufactured wood products

     145         131         161   

Panels

     436         485         584   

Posts

     4         6         8   

Other

     1         1         1   
  

 

 

    

 

 

    

 

 

 

Total export sales revenue

   $ 2,365       $ 2,647       $ 3,128   
  

 

 

    

 

 

    

 

 

 

Domestic Sales

        

Bleached pulp

     63         94         78   

Unbleached pulp

     13         31         37   

Sawlogs

     46         98         75   

Pulplogs

     10         15         41   

Sawn timber

     79         105         98   

Remanufactured wood products

     11         19         37   

Chips

     17         29         29   

Electric power

     78         86         98   

Panels

     389         624         689   

Other

     27         40         63   
  

 

 

    

 

 

    

 

 

 

Total domestic sales revenue

   $ 732       $ 1,141       $ 1,247   
  

 

 

    

 

 

    

 

 

 

Total sales revenue

   $ 3,097       $ 3,788       $ 4,374   
  

 

 

    

 

 

    

 

 

 

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

 

     Year ended December 31,  
     2009      2010      2011  
     (in millions of U.S. dollars)  

North America

   $ 479       $ 505       $ 594   

Central and South America

     258         367         368   

Asia

     1,249         1,271         1,471   

Europe

     317         411         555   

Other

     63         85         140   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,366       $ 2,639       $ 3,128   
  

 

 

    

 

 

    

 

 

 

Forestry Activity

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

 

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

Throughout our history, we have demonstrated a continued commitment to the improvement of our forest management policies. In particular, we have adopted environmentally sensitive policies towards our holdings of native forests, which are protected and preserved in their entirety. Our products come from our established plantations only; we do not sell any products derived from our native forests. We conduct our forestry operations in accordance with current legislative and environmental sustainability standards. Certain of our subsidiaries have received various environmental certifications as of the date of this annual report, which include, but are not limited to the following:

 

   

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

 

   

Forest Stewardship Council (FSC) Certification: a forest management certification aimed at promoting forest management that is environmentally responsible, socially beneficial and economically viable for the world’s forests. FSC is a non-profit organization devoted to encouraging the responsible management of the world’s forests;

 

   

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

 

   

Chain of Custody and Controlled Wood Certification: a certification from FSC that is designed to ensure traceability of certified and uncertified wood from the forest to the finished product;

 

   

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

 

   

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

Forest Plantations

At December 31, 2011, our planted forests consisted of 76.8% radiata, taeda and elliottii pine and 23.2% mainly of eucalyptus. Radiata and taeda pine have a rapid growth rate and a short harvest cycle compared to other commercial softwoods. Radiata and taeda pine are sufficiently versatile for both the production of forestry and wood products and the production of long fiber pulp for sale to manufacturers of paper and packaging.

We seek to manage our forestry resources in a way that ensures that the annual growth of our forest is equal to or greater than the volume of resources harvested each year. In 2011, Arauco planted a total of 75,750 hectares and harvested a total of 49,340 hectares in Chile, Argentina, Brazil and Uruguay (these amounts include, with respect to Brazil, 80% of the plantations owned by Arauco do Brasil and with respect to Uruguay, 50% of the plantations owned in Uruguay by the Montes del Plata joint venture). We believe that our annual harvests and plantations long-term sustainable equilibrium are approximately 67.4 thousand hectares (including the Montes del Plata joint venture).

 

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Our planted radiata pine forests are located in central and southern Chile, and most are located in close proximity to our major production facilities and to port facilities. The majority of our radiata pine is less than 16 years old.

At December 31, 2011, our aggregate radiata pine holdings comprised 41% of all Chilean radiata pine plantations, making us the country’s largest radiata pine plantation owner according to the Chilean Forestry Institute. At December 31, 2011, we owned approximately 1,111,085 hectares of land in Chile, of which 743,273 hectares are forest plantations.

At December 31, 2011, we owned 257,720 hectares of forest and other land in Argentina, 173,079 hectares of forest and other land in Brazil and 132,663 hectares of forest and other land that the Montes del Plata joint venture owns in Uruguay. Of the total land we own in these three countries, approximately 175,829 hectares of land is planted with taeda pine and elliotti pine, a species of softwood that has a growth rate similar to that of radiata pine. The balance includes plantations of other species of trees, land to be planted, protected areas and natural forests.

The following table sets forth the number of hectares and types of uses of our land holdings and rights, as of December 31, 2011.

 

     At December 31, 2011  
     Total      Distribution  
     (in hectares)      (percentage)  

Pine plantations(1)

     

0-5 years

     198,433         11.9

6-10 years

     164,260         9.8   

11-15 years

     197,224         11.8   

16-20 years

     137,881         8.2   

21+ years

     89,138         5.3   

Subtotal

     786,936         47.0   

Eucalyptus plantations(2)

     221,808         13.3   

Plantation of other species

     15,690         0.9   

Subtotal

     237,498         14.2   

Land for plantations

     63,771         3.8   

Land for other uses(3)

     586,342         35.0   

Total(4)

     1,674,547         100.0
  

 

 

    

 

 

 

 

(1) 

All years are calculated from the date of planting.

(2) 

Approximately 73% of our eucalyptus plantations are less than 10 years old.

(3) 

Includes roads, firebreaks, native forests and yards.

(4) 

Includes 80% of plantations owned by Forestal los Lagos S.A., 50% of plantations owned by the Montes del Plata joint venture, 80% of plantations owned by Florestal Arapoti. Also includes 63,440 hectares for which we have the right to harvest but which we do not own, of which 58,838 hectares are in Chile, 9,298 hectares are in Uruguay and 304 hectares are in Argentina.

Land Acquisition and Afforestation

Our total land assets have increased from fewer than 170,000 hectares in 1980 to 1,674,547 hectares at December 31, 2011. That number does not include 4,251 hectares owned by third parties or the assets owned by Forestal Río Grande S.A. as to which we have harvesting rights. In the five years ending December 31, 2011, we purchased 264,746 hectares of land, of which 13,631 hectares were purchased in Chile, 21,186 in Argentina, 107,554 in Brazil and 123,366 in Uruguay. For more information regarding our material land acquisitions, see “—History” herein.

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

 

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We plan to continue our policy of supplementing our pulplog production with purchases from domestic third parties. We believe that this policy is economically efficient, given the significant quantities of pulplog available from third parties and our increasing proportion of sawlogs yielded from our plantations. We believe that the aggregate of our existing plantations, land currently held by us that we intend to afforest and the third-party purchases we make in the ordinary course of our business will be sufficient to satisfy our anticipated future demand for sawlogs and pulplogs.

Forest Management

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although some land is not suitable for the production of pruned logs, at December 31, 2011, over 64% of our pine forests in Chile were designed for clear wood production.

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

As of December 31, 2011, we had eight nurseries in Chile, Argentina, Brazil and Uruguay, in which we grow seedlings using seeds and using cuttings from genetically selected trees. To achieve higher quality trees and an increased growth rate, we apply strict selection criteria to the trees from which seedlings are produced. We then plant the seedlings manually. Depending upon the species of tree to be planted and the nutrient and physical characteristics of the soil, we may also undertake a certain amount of ground preparation before planting. Our other principal forest activities are thinning, pruning and harvesting.

Thinning, or culling inferior trees from the plantation, occurs in the following two stages:

 

   

Thinning to waste. Thinning to waste occurs after four to six years and results in an average reduction of the number of trees per hectare from 1,250 to approximately 700. Thinning to waste is conducted once or twice per year on up to 500 hectares of our plantations.

 

   

Commercial thinning. Thinned trees are used in pulp production or, depending on the quality of the particular land, as sawlogs. Commercial thinning occurs at eight to 12 years and results in an average reduction of the number of trees per hectare from 700 to approximately 450. Commercial thinning is conducted once or twice per year.

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

 

   

the cost of planting is relatively low,

 

   

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

 

   

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

Pruning involves removing branches, the source of knots, which are the main defect in sawn timber. Pruning results in a high-quality clearwood sawlog of 5.3 meters from each tree, and is conducted three times:

 

   

when trees are five to nine years old,

 

   

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

 

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

Our eucalyptus plantations are neither thinned nor pruned.

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

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

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

 

     Year ended December 31,  
     2009      2010      2011  
            (in hectares)         

Thinning

     19,246         11,570         12,992   

Pruning

     31,191         27,335         23,330   

Harvesting

     30,872         30,158         33,955   

We manage our forest activities, but we hire independent contractors to perform the bulk of our operations, including planting, maintenance, thinning, pruning, harvesting, transportation and access road construction. As of December 31, 2011, we had arrangements with more than 335 independent contractors that employed over 12,519 workers in Chile. Many of these contractors have long-standing relationships with us, but we award many contracts based on competitive bids. We believe that our arrangements with independent contractors provide greater flexibility and efficiency than performing these activities directly.

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

We operate an extensive fire control organization that interacts with the fire control organizations of other forestry companies to ensure that any fire damage to our forests is minimal. The operation primarily consists of a system of spotter towers, manned 24 hours a day during the summer months, from which spotters report the direction of any fire observed to a central command post, where the fire’s exact location is determined and an appropriate ground and/or aerial response is formulated. Over the last five years, this system has limited fire damage to our forests to an average of 0.3% of the plantations per year. Nevertheless, in January 2012, a fire affecting the Eighth Region of Chile destroyed approximately 8,200 hectares of our forest plantations and our Nueva Aldea plywood mill. See “Item 3. Key Information—Risk factors–Risks Relating to Us and the Forestry Industry— Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial conditions, results of operations and cash flows.”

 

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Forest Production

We harvested 18.6 million cubic meters of logs during the year ended December 31, 2011, consisting of 9.2 million cubic meters of sawlogs, 6.7 million cubic meters of radiata pine pulplogs and 2.7 million cubic meters of eucalyptus pulplogs and other logs. We did not export any pulplogs during 2011 because substantially all of the pulplogs from our forests were used in our pulp or panel mills. During 2011, our sawmills and panel mills used 6.15 million cubic meters of sawlogs, and no sawlogs were exported. We also sold 2.4 million cubic meters of sawlogs to unaffiliated domestic sawmills during 2011.

A log merchandising facility located at the same site as our Horcones I and Horcones II sawmills optimizes, cuts and classifies wood destined for our plywood facility, sawmills or pulp mills with an annual processing capacity of 1.7 million cubic meters of logs per year. The Nueva Aldea Complex also includes a log merchandising facility, with an annual processing capacity of 2.6 million cubic meters of logs per year.

Pulp

We believe that we were Chile’s largest producer of bleached and unbleached softwood market pulp in terms of production in 2011. For the year ended December 31, 2011, pulp sales were U.S.$2,060.8 million, representing 54.7% of our total sales revenue for the period.

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

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

Pulp Mills

At December 31, 2011, we owned and operated five pulp mills in Chile and one in Argentina, with an aggregate installed annual production capacity of approximately 3.2 million metric tons. Our six pulp mills produced 2.4 million metric tons of bleached pulp and 0.4 million metric tons of unbleached pulp in 2011.

All of our pulp mills in Chile except for the Nueva Aldea Mill and the Licancel Mill are certified under ISO 9001:2000 and ISO14001:2004. The Nueva Aldea Mill and the Licancel Mill were certified under ISO 9001:2008 and ISO 14001:2004 in February 2010. The Alto Paraná Mill in Argentina is certified under ISO 9001:2000 and ISO14001:2004. No seasonal factors affect plant utilization, and the pulp mills generally run at full capacity throughout the year, with eight to ten days of maintenance scheduled every 12 months.

 

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

 

     Year ended December 31,  
     2007      2008      2009      2010      2011  
     (in thousands of metric tons)  

Chile

              

Arauco Mill (bleached)

              

Arauco I

     279         281         286         231         279   

Arauco II

     475         507         505         84         469   

Valdivia Mill (bleached)

     436         488         540         493         513   

Constitución Mill (unbleached)

     331         320         333         253         324   

Nueva Aldea Mill (bleached)

     715         842         900         780         793   

Nueva Aldea Mill (unbleached)

              9         0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Licancel Mill (bleached) (1)

     53         117         51         28         50   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Licancel Mill (unbleached)(2)

     —           —           75         84         83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,289         2,555         2,690         1,962         2,511   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Argentina

              

Alto Paraná Mill (bleached)

     336         343         310         329         305   

Total

     2,625         2,898         3,000         2,291         2,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Operations at the Licancel Mill were temporarily suspended for approximately six months from June 2007 until January 2008.

(2) 

During 2009, the Licancel Mill produced unbleached pulp for a three-month period. During 2010, the Licancel Mill produced unbleached pulp for a nine–month period. During 2011, the Licancel Mill produced unbleached pulp for a seven–month period.

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

Chile

Arauco I. Arauco I, which was completed in 1972, is located at the Arauco Mill in the heart of a group of our radiata pine plantations in the Eighth Region of Chile. Arauco I produces elementary chlorine-free pulp, which does not use chlorine gas. Elementary chlorine-free pulp is also produced by a significant portion of our competitors in each of the world’s major pulp producing regions. The installed annual production capacity of Arauco I is approximately 290,000 metric tons of eucalyptus and pine bleached kraft pulp.

Arauco II. Also located at the Arauco Mill, Arauco II was completed in 1991. Arauco II’s pulping process is fundamentally the same as that of Arauco I, but it includes technological improvements in its production process and environmental design. Arauco II is also equipped to produce elementary chlorine-free pulp. The installed annual production capacity of Arauco II is approximately 500,000 metric tons of pine bleached kraft pulp.

As a consequence of the earthquake that occurred in Chile on February 27, 2010, the operations of Arauco II were temporarily suspended until February 2, 2011, when it resumed is operations.

Constitución Mill. The Constitución Mill is located in the heart of a group of our radiata pine forests in the Seventh Region of Chile. As of December 31, 2011, the Constitución Mill was the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of approximately 355,000 metric tons. In February 2006, the COREMA of the Seventh Region of Chile approved an environmental impact study for the construction of a new pipeline for the Constitución Mill, which commenced operations in February 2007. The Constitución Mill is equipped to produce elementary chlorine-free pulp.

Licancel Mill. We acquired the Licancel Mill in September 1999. It is located in Licantén, which is 250 kilometers south of Santiago. The mill has an installed annual production capacity of approximately 140,000 metric tons of eucalyptus kraft pulp and pine bleached and unbleached kraft pulp. The Licancel Mill is equipped to produce elementary chlorine-free pulp.

 

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In June 2007, our operations at the Licancel Mill became subject to environmental scrutiny by Chilean environmental regulators and the public, which arose in connection with the death of fish in the Mataquito River, approximately 15 kilometers downstream of the mill. As a result, Chilean authorities, including the health authorities and the Superintendencia de Servicios Sanitarios (Sanitary Services Superintendency), required that we suspend activities at the Licancel Mill and that we suspend any further discharges into the river. We estimate that the suspension of operations at the Licancel Mill resulted in a total loss of profits of U.S.$24 million. Any future suspension of operations at the Licancel Mill may adversely affect our business, financial condition, results of operations and cash flows. See “Item 3. Environmental concerns led us to suspend our operations at the Licancel Mill, which adversely affected our business, financial condition, results of operations and cash flows” and “Item 8. Financial Information-Legal Proceedings.”

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

The Valdivia Mill has been subject to legal and administrative proceedings by the Chilean environmental regulators. Primarily, it has been alleged that the Valdivia Mill’s operations impacted the nearby Carlos Anwandter Nature Sanctuary and contributed to the migration and death of black-neck swans in an area downstream from the mill on the Cruces River. For a discussion of the administrative and litigation proceedings in which we have been involved as a result of our operations at the Valdivia Mill, see “Item 8. Financial Information—Legal Proceedings.”

Nueva Aldea Mill. Located in the Eighth Region of Chile, this mill was completed in 2006 and currently has a production capacity of 1,027,000 metric tons per year, half of which is for the production of pine bleached kraft pulp and the other half of which is for the production of eucalyptus bleached kraft pulp. The Nueva Aldea Mill is equipped to produce elementary chlorine-free pulp.

On February 20, 2006, the COREMA of the Eighth Region of Chile approved the environmental impact study for the construction and operation of the Nueva Aldea Mill Pipeline, which permits the mill to discharge certain liquid effluents into the ocean. The Nueva Aldea Mill pipeline’s startup and commissioning period (of 6 months) commenced in the first quarter of 2010. However, as result of damages to the pipeline caused by the earthquake that occurred in Chile on February 27, 2010, we needed to temporarily suspend our use of the pipeline and discharge the effluents of the Nueva Aldea Mill in the same place in which the mill’s wastewaters were discharged prior to our use of the pipeline. On July 31, 2010, our repairs to the damaged pipeline were completed and the startup and commissioning period was restarted. Since January 31, 2011, the pipeline has been fully operational.

On February 9, 2009, COREMA approved our request to increase the Nueva Aldea Mill’s production to 20% above the previously authorized level, which was 856,000 metric tons per year. The COREMA determined that it was not necessary for us to present an environmental impact study in connection with our request for increased production. On October 7, 2009 we presented an environmental impact declaration requesting an additional increase in the production capacity of the Nueva Aldea Mill from 1,030,000 metric tons to 1,200,000 metric tons per year. The COREMA approved this request on February 4, 2010. As of the date of this annual report, plans to carry out this increase in production capacity are underway.

Argentina

Alto Paraná Mill. Alto Paraná’s softwood pulp mill is located in the Province of Misiones, a region whose soil and climate are favorable for the rapid growth of pine trees. The Alto Paraná Mill is the only bleached softwood kraft market pulp facility in Argentina. The mill has an installed annual production capacity of 350,000 tons of pulp, of which 50% is bleached softwood pulp, currently representing almost all of the total bleached softwood pulp production capacity in Argentina, and 50% is fluff pulp.

 

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Uruguay

Montes del Plata Joint Venture. In January 2011, we and Stora Enso agreed to commence construction of a new pulp mill with an annual capacity of approximately 1.3 million tons, a port and a power generation facility based on renewable sources, all located in Punta Pereira, department of Colonia, Uruguay. The total estimated investment is U.S.$1,900 million. After securing the necessary permits, we broke ground in May 2011 to begin construction. In September 2011, our Uruguayan joint venture companies entered into two credit facilities to finance construction of the proposed project. For more information regarding these credit facilities, see “Item 3. Key Information—Risk Factors—Risks Relating to Uruguay—Economic conditions in Uruguay may have a direct impact on our financial condition and results of operations.”

As of December 2011, we were approximately 24.9% complete with construction. We currently anticipate initiating operations in 2013.

Production Costs

Based on information published by Resource Information Systems, Inc., our cash costs for softwood pulp production are significantly lower than the average costs of market pulp producers in Canada, the United States and Scandinavia, particularly with respect to timber and energy costs. While our modern facilities result in depreciation exceeding some of such Northern Hemisphere producers, our costs are still significantly lower than the average costs of our Northern Hemisphere competitors, on a total delivered cost basis. The following table compares our costs for the production of bleached softwood kraft market pulp to the average costs of market pulp producers in selected regions in the Northern Hemisphere for the year ended December 31, 2011.

 

     Bleached Softwood Kraft Pulp Producers’ Cost  
     Arauco(1)      British
Columbia
Coast
     British
Columbia
Interior
     United
States
South
     Sweden      Finland  
     (in U.S.$ per metric ton for the year ended December 31, 2011)  

Wood

     176         380         290         171         335         308   

Total chemicals

     80         84         92         80         62         57   

Labor

     40         86         79         40         46         51   

Others(2)

     94         227         193         138         82         67   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash cost

     390         777         654         429         525         483   

Depreciation

     43         45         43         66         68         86   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mill cost

     433         822         697         495         593         569   

Transportation(3)

     93         76         116         73         37         44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total delivered cost

     526         898         813         568         630         613   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

For comparitive purposes, includes only Arauco’s operations in Chile.

(2) 

Includes energy, materials and other production costs.

(3) 

Delivered in Northern Europe.

Source: Resource Information Systems, Inc. World Pulp Annual Historical Data, December 2011, except Arauco information, which is furnished by Arauco.

Sales

The total production of bleached kraft market pulp in the global market during the year ended December 31, 2011 was 53.3 million metric tons. Based on information published by Resource Information Systems, Inc., we believe that our production represented 5.4% of this market in 2011. During the year ended December 31, 2011, we sold 94.4% of our bleached pulp in our export markets, principally to customers in Asia and Western Europe.

 

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Integrated manufacturers dominate the world production of unbleached softwood pulp, which leaves non-integrated companies that sell market pulp, like us, with only a small percentage of total production. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. With a total world production of unbleached softwood kraft pulp of 2.5 million metric tons for 2011, according to Resource Information Systems, Inc., our Company was the world’s largest single producer of unbleached softwood market pulp, with 14.4% of the total market in 2011. During the year ended December 31, 2011, 88.7% of our total unbleached market pulp sales consisted of export sales. While for the last five years Asia has been our principal export market for unbleached market pulp, we continually seek niche markets for our products in Western Europe and the United States.

The following table sets forth, by region, the sales volumes of bleached and unbleached pulp for the years indicated.

 

     Year ended December 31,  
     2009      2010      2011  
     (in metric tons)  

Bleached Pulp

        

North and South America

     333,781         349,058         307,341   

Europe

     484,406         456,922         641,031   

Asia

     1,865,318         1,169,398         1,355,592   

Other

     23,962         23,496         71,374   
  

 

 

    

 

 

    

 

 

 

Total

     2,707,467         1,998,874         2,375,338   
  

 

 

    

 

 

    

 

 

 

Unbleached Pulp

        

North and South America

     51,012         67,858         87,700   

Europe

     13,931         13,441         15,930   

Asia

     344,941         263,145         295,370   

Other

     —           —           1,010   
  

 

 

    

 

 

    

 

 

 

Total

     409,884         344,444         400,010   
  

 

 

    

 

 

    

 

 

 

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

Prices for bleached softwood kraft market pulp produced from radiata pine generally fluctuate depending on prevailing world prices, which historically have been cyclical. The fluctuations generally depend on worldwide demand, world production capacity, business strategies adopted by major forestry, pulp and paper producers and the availability of substitutes. See “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Conditions, Results of Operations and Cash Flows—Overview” and “—Pulp Prices.”

 

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The following table sets forth our average bleached and unbleached pine pulp prices per metric ton at the indicated dates, for the years indicated.

 

     2009      2010      2011  
     (U.S.$ per metric ton)  

Bleached Pulp

        

March 31

     446         724         794   

June 30

     486         840         831   

September 30

     556         782         729   

December 31

     637         767         606   

Unbleached Pulp

        

March 31

     392         678         737   

June 30

     416         775         751   

September 30

     552         735         712   

December 31

     598         748         599   

In accordance with customary pulp market practice, we do not have long-term sales contracts with our customers (except for in a few limited cases); rather we maintain long-standing relationships with our customers with whom we periodically reach agreements on specific volumes and prices. We have a diversified customer base located throughout the world and totaling, as of December 31, 2011, more than 424 clients. As of December 31, 2011, we employed 14 sales agents to represent us in more than 40 countries. We manage this worldwide sales network from our headquarters in Chile.

Panels

Our panel products consist of plywood and fiberboard panels. For the year ended December 31, 2011, sales of panels were U.S.$1,273.7 million, representing 29.1% of our total sales revenues.

Exports, which include sales to countries other than the countries in which the goods are produced, accounted for 45.9% of our total sales revenues of panels for the year ended December 31, 2011. We sell panels primarily to customers in North America, Europe, Brazil, Chile, Argentina and other countries in Latin America.

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

 

     Year ended December 31,  
     2007      2008      2009      2010      2011  
     (in thousands of cubic meters)  

Total Panels

     2,455         2,353         2,630         3,032         3,222   

At December 31, 2011, we owned the following panel mills:

Chile

Trupán-Cholguán Mill. This mill has an installed annual production capacity of approximately 575,000 cubic meters of panels. It has three production lines, one produces hardboard with a capacity of 60,000 cubic meters and the other two lines produce MDF with a production capacity of 165,000 and 350,000 cubic meters, respectively.

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

Nueva Aldea Mill (destroyed by fire in 2012). This mill was destroyed as a result of the wildfires that commenced on December 31, 2011 in the Eighth Region of Chile. This mill had an installed annual production capacity of approximately 450,000 cubic meters of plywood panels distributed between two lines, each with a production capacity of 225,000 cubic meters.

 

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Argentina

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

Zárate Mill. This mill has an installed annual production capacity of approximately 260,000 cubic meters of panels and produces PBO.

Brazil

Jaguariaiva Mill. This mill has an installed annual production capacity of approximately 315,000 cubic meters of panels and produces MDF. In April 2011, a project to expand the Jaguariaiva Plant was approved. This project will include the construction of a productive line that will manufacture panels and MDF boards with an estimated installed capacity of 500,000 cubic meters of finished product per year, as well as the construction of a decorative paper impregnation line and a melamine press.

Curitiba Mill (permanently closed in December 2011). This mill had an installed annual production capacity of approximately 260,000 cubic meters of panels and produced PBO.

Pien Mill. This mill has an installed annual production capacity of approximately 670,000 cubic meters of panels distributed in two production lines with a production capacity of 400,000 cubic meters of MDF and 270,000 cubic meters of PBO.

U.S.A.

Moncure Mill. In December 2011, Arauco Panels USA, one of our U.S. subsidiaries, entered into an asset purchase agreement to acquire an industrial facility in Moncure, North Carolina for U.S.$56 million plus approximately U.S.$6 million in working capital, subject to adjustment based on actual working capital at closing. The facility includes MDF and HDF production lines with annual production capacity of up to 330,000 cubic meters, a PBO production line with annual production capacity of up to 270,000 cubic meters and two melamine product production lines. In January 2012 we completed the acquisition.

Wood Products

Our wood products consist of sawn timber (green, kiln-dried lumber and flitches) and remanufactured wood products. For the year ended December 31, 2011, revenue from sales of wood products was U.S.$731.6 million, representing 16.7% of our total sales revenues for the period.

The following table sets forth, by category, our wood products sales to unaffiliated third parties for each of the periods indicated:

 

     Year ended December 31,  
     2007      2008      2009      2010      2011  
     (in thousands of cubic meters)  

Sawn timber

     2,650         2,522         1,952         2,098         2,181   

Remanufactured wood products

     389         348         279         316         363   

Aserraderos Arauco S.A. was established in 1993 to centralize management and control production in our sawmill and remanufacturing operations. Our sawmills and remanufacturing facilities in Chile are currently operated by independent contractors that are paid sawing service fees calculated on a fixed and variable basis depending on productivity, with price renegotiations in the event of material changes in costs or productivity. Each of our 12 independent contractors operates exclusively for us and only with respect to one sawmill or remanufacturing facility.

 

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We believe that our arrangements with independent contractors have provided us with greater flexibility and efficiency than performing such activities on our own. We operate our sawmill and remanufacturing facilities in Argentina.

As of December 31, 2011, we had nine sawmills in operation, eight in Chile and one in Argentina, with an aggregate installed annual production capacity of approximately 2.8 million cubic meters of lumber. Contractors that are not related to us or to each other operate our eight sawmills in Chile. We operate our sawmills in coordination with our forestry and sales operations, since our sawn timber is generally produced in accordance with customer specifications. All of our sawmills are located near our pine plantations.

As of December 31, 2011, we also own six remanufacturing facilities, five in Chile and one in Argentina, that reprocess sawn timber into remanufactured wood products, such as moldings, jams and pre-cut pieces that end users require for doors, furniture and door and window frames. These facilities produced 367 cubic meters of remanufactured wood products in 2011.

During 2008, the decrease in demand of sawn timber products, due primarily to the credit crisis and the continued downturn in the real estate market in the United States, resulted in our decision to close the following facilities (indicating the date of closure and the annual lumber production capacity of each facility):

 

   

the Arapoti sawmill (closed on March 31, 2008 with an annual production capacity of 250,000 cubic meters),

 

   

the Lomas Coloradas sawmill (closed on August 9, 2008 with an annual production capacity of 250,000 cubic meters),

 

   

the Coronel sawmill (closed on November 17, 2008 with an annual production capacity of 150,000 cubic meters, which was sold in June, 2010), and

 

   

the Coelemu sawmill (closed on December 30, 2008 with an annual production capacity of 80,000 cubic meters).

In November 2009 production at the Horcones II sawmill was suspended. However, due to favorable market conditions and in order to restore jobs in a region that was seriously affected by the earthquake that occurred in Chile on February 27, 2010, Horcones II sawmill resumed operations in June 2010 with an annual production capacity of 225,000 cubic meters.

The following is a brief description of our sawmills and remanufacturing facilities and their production capacity, as of December 31, 2011.

Chile

Cholguán Sawmill and Remanufacturing Facilities 1 and 2. This sawmill has installed annual production capacity of approximately 330,000 cubic meters of lumber, as well as drying kiln facilities and two remanufacturing facilities with installed annual production capacity of approximately 70,000 cubic meters of remanufactured wood products. The Cholguán sawmill also has a special facility for making laminating beams with installed annual production capacity of approximately 11,200 cubic meters and drying facilities with installed annual production capacity of approximately 252,000 cubic meters.

Colorado Sawmill. This sawmill has installed annual production capacity of approximately 320,000 cubic meters of lumber and produces “green” sawn timber (or sawn timber that is not kiln dried) for the Chilean, Japanese and Middle Eastern markets. It also has drying facilities with installed annual production capacity of approximately 181,000 cubic meters.

 

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El Cruce Sawmill. This sawmill has installed annual production capacity of approximately 85,000 cubic meters of lumber.

Horcones I Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 360,000 cubic meters of lumber. It also has drying kilns with installed annual production capacity of approximately 412,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 136,000 cubic meters of remanufactured wood products.

Horcones II Sawmill (reopened in 2010). This sawmill was closed in November 2009 due to unfavorable market conditions, however it resumed operations in June 2010 with an annual production capacity of approximately 225,000 cubic meters of lumber.

Nueva Aldea Sawmill. This mill has installed annual production capacity of approximately 430,000 cubic meters of sawn timber and is equipped with drying kilns with installed annual production capacity of approximately 355,000 cubic meters.

Valdivia Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 340,000 cubic meters of lumber. It also has drying facilities with installed annual production capacity of approximately 345,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 72,000 cubic meters of remanufactured wood products.

Viñales Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 360,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 231,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 120,000 cubic meters of remanufactured wood products.

Argentina

Piray Sawmill and Remanufacturing Facility. This sawmill, previously known as the Misiones Sawmill, has installed annual production capacity of approximately 320,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 320,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 65,000 cubic meters of remanufactured wood products.

Forestry Products

Our forestry products are sawlogs, pulplogs, posts and chips. As a result of our forest management policies and the increasing maturity of our plantations, our plantations are yielding increasing volumes of forestry products, particularly clear wood. As the volume of clear wood has grown, we have broadened our range of forestry products. For the year ended December 31, 2011, sales of forestry products were U.S.$157.5 million, representing 3.6% of our sales revenues for such year.

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

 

     Year ended December 31,  
     2007      2008      2009      2010      2011  
     (in thousands of cubic meters)  

Sawlogs

     1,562         1,745         1,196         1,923         2,123   

Pulplogs

     149         457         309         612         443   

Posts

     4         15         19         24         24   

Chips

     150         96         293         501         398   

 

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Sustainable Development

As part of our efforts to reduce greenhouse gas emissions, we utilize renewable fuels such as our forest biomass for the power plants that cogenerate the steam and electricity required for our manufacturing operations. Biomass co-generation allows for a high thermal efficiency, approaching 80% in some cases. In addition to meeting our own energy needs, we generate a significant amount of surplus energy, which we deliver to the Chilean power grid (Sistema Interconectado Central), or SIC, which distributes electrical power throughout the Central and Southern Regions of Chile.

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

In connection with the CDM, we have sold 1,070,787 Certificate of Emission Reductions (CERs or “carbon credits”) to date. With this issuance, we became the first Chilean forestry company to issue CERs through the CDM of the Kyoto Protocol. The following table presents the total amount of CERs sold by Arauco for each of the years indicated:

 

     Year ended December 31,  
     2007      2008      2009      2010      2011  

CERs sold

     482,129         255,592         333,067         0         0   

During the second half of 2010, we began operations in the Horcones complex of a new biomass co-generation power plant unit, which consists of a power boiler with capacity to produce 210 tons of steam per hour and a 31 Megawatt co-generating steam turbine. We expect the expanded power plant in the Horcones Complex to provide approximately 24 Megawatts of surplus power to the SIC. This new biomass power plant unit was successfully registered as a CDM project in January 2011.

In early 2010, we began construction of the Viñales biomass power plant, which is located alongside the Viñales sawmill in the Seventh Region of Chile. The new plant will include a biomass-fueled power boiler with capacity to produce 210 tons of steam per hour and a 40 Megawatt steam turbine. We expect to complete construction and begin operations by the first half of 2012.

During the second half of 2011, we completed the second Carbon Footprint calculation for the Arauco Group’s 2010 greenhouse emissions. This excercise responds to Arauco’s strategy of assessing the impact of its industrial operations and, in particular, to Climate Change. The Company believes these calculations will be a valuable input in the process for setting a carbon management policy in the future.

Competition

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

Pulp

In general, our competitors in the pulp market vary depending on the geographical region and variety of pulp involved. CMPC Celulosa S.A. and Fibria Cellulose S.A. are our main competitors in most geographical regions.

 

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While Fibria produces hardwood pulp only, CMPC produces both softwood and hardwood pulp. In Asia, we also face competition from Canadian, Brazilian, Russian and Indonesian producers. In Europe, we also face competition from Brazilian, Scandinavian and American producers. Our main competitors with respect to unbleached softwood pulp are from Canada and Russia.

Panels

Arauco’s principal competitors in the plywood markets are located in the United States, Finland and Russia. In some regions, Arauco also competes with hardwood plywood produced in China, Africa and other regions of the world.

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

For sales of PBO, we focus on the Latin American market, where we compete with Duratex S.A., Masisa S.A., Berneck S.A. and Fibraplac S.A.

Wood Products

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

Transportation, Storage and Distribution

To remain competitive worldwide, we ship our products to various distribution centers around the world from which final delivery to the customer is made. Historically, we and other Chilean forestry products producers have coordinated our transportation requirements to achieve larger lots to fill specially designed forestry products ships and thus obtain competitive freight rates.

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

 

   

Coronel. A private port located between Concepción and the Arauco Mill, which we constructed as a member of a consortium with five other companies and in which we have an equity interest of 50%. We shipped 30.7% of our aggregate export volume through this port in 2011;

 

   

Lirquén. A private port in Concepción in which we have an equity interest of 20.2% and through which we shipped 39.9% of our aggregate export volume during 2011; and

 

   

San Vicente. State-owned port near the city of Concepción through which we shipped 29.2% of our aggregate export volume during 2011.

The ports we use in Chile are approximately 60 kilometers from the Arauco Mill, 310 kilometers from the Constitución Mill, 370 kilometers from the Licancel Mill, 70 kilometers from the Nueva Aldea Mill, and 430 kilometers from the Valdivia Mill. We do not own pulp storage warehouses in any of these ports.

We ship pulp to various ports in Europe, North and South America and Asia and, as is customary in the pulp industry, we store some stock in those ports. We use 12 foreign ports that have warehouse facilities available, and standard storage terms provide that we are entitled to a certain period of storage free of charge. We seek to ensure that we do not exceed the free storage period for each shipment. At December 31, 2011, we had 121,596 air dry metric tons of pulp in storage in warehouses at foreign ports.

 

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

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

In Brazil, our efficient distribution system, which delivers finished products to almost two thousand customers in over 450 cities, many of which are separated by long distances, is a key component to our competitiveness.

Description of Property

Our principal properties consist of land and production plants and facilities, the majority of which are located in Chile. At December 31, 2011, we owned 1,111,085 hectares of land in Chile, over 743,273 hectares of which consist of forest plantations, and 563,463 hectares of land in Argentina, Brazil and Uruguay, of which 281,162 consist of forest plantations. In addition, at December 31, 2011, we owned various plants and facilities, including five pulp mills, three panel mills, eight sawmills and five remanufacturing facilities in Chile; one pulp mill, one sawmill, one MDF mill, one PBO mill, one chemical plant and one remanufacturing facility in Argentina; and one MDF mill and one MDF-PBO mill in Brazil.

Insurance

Consistent with industry practice, we maintain fire insurance coverage for all our Chilean forest holdings and nurseries but do not insure against pests or disease. Depending on the age of the trees affected, our insurance covers timber loss, either at replacement cost or commercial value. In Argentina we maintain fire insurance for 7,441 hectares of timber assets located in Delta del Paraná, near Buenos Aires. For the rest of our Argentine operations we do not maintain fire insurance for our timber assets because we believe that the risk of damage from fire is low because Argentina receives significant amounts of rainfall, particularly during the summer months. We do not carry fire insurance for our forests in Brazil because the risk of damage from fire does not justify the costs of carrying insurance.

We also carry insurance, consistent with industry practice, covering our production plants, facilities and equipment. This insurance provides coverage, in the event of fire, explosion, machinery breakdown or natural disaster, which includes earthquakes and tsunamis. The insurance covers up to an amount of U.S.$650 million per loss, which includes physical damage and business interruption of up to 12 months (or 18 months in the case of a boiler explosion in our pulp mills). The deductibles for physical damage are U.S.$3 million for damages caused by earthquakes, boiler explosions and machinery breakdowns and U.S.$1 million for damages arising from all other contingencies. Deductibles for business interruption are 30 days for boiler explosions, 21 days for earthquakes and 15 days for interruptions caused by all other contingencies. All of our insurance policies covering our production plants, facilities and equipment in Chile and Argentina are carried by the RSA group, Mapfre S.A. and Ace Group.

As described in more detail in “Risk Factors—We are located in a seismic area that exposes our property in Chile to the risk of earthquakes, and we experienced significant business disruption and losses as a result of the February 27, 2010 earthquake,” we suffered significant earthquake-related damage to property and inventories as well as a significant decrease in our sales volumes due to the February 27, 2010 earthquake in Chile. On November 15, 2011, we and the insurers accepted the final report of the insurance adjusters. In accordance with such final report, as of December 31, 2011, we received a total recovery of U.S.$532 million, net of U.S.$278 million in advance payments that we had already received.

 

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As described in more detail in “Risk factors–Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial conditions, results of operations and cash flows,” our Nueva Aldea Complex suffered significant fire related damage to our plywood mill and forests due to wildfires that affected the Eighth Region of Chile. Although the plywood mill at Nueva Aldea and our forest plantations are insured, our insurance is subject to deductibles and caps, including a 15-day deductible for our business interruption insurance relating to the Nueva Aldea plywood mill.

The forestry insurance for plantations located in Chile is carried by the RSA Group and Penta Security Compañía de Seguros S.A. Our insurance policies for some plantations located in Delta del Paraná, Argentina, are carried by Federación Patronal. Our MDF and particleboard mills in Brazil are insured by Itaú XL Seguros Corporativos and Allianz Seguros S.A., and these policies cover fire, explosions, electrical damage, equipment damage and loss of profit. For more information regarding the risks for which we insure our property, see “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry.”

CAPITAL EXPENDITURES

To utilize our increasing volume of forest production, we have added to, expanded and modernized our processing facilities. For the year ending December 31, 2012, we have planned capital expenditures of U.S.$782 million, which principally include U.S.$263 million in maintenance of our existing mills, U.S.$303 million in our new panel mill projects and capital contributions for the Montes del Plata joint venture in Uruguay and U.S.$216 million in maintenance of biological assets.

On January 18, 2011 Arauco and Stora Enso agreed to carry out the construction of a state of the art pulp mill with an annual guaranteed capacity of 1.3 million tons, a port and a power producing unit based on renewable sources, all located in Punta Pereira, department of Colonia, Uruguay. The total estimated investment is U.S.$1,900 million. For more information regarding the ongoing construction of the pulp mill in Uruguay, see “Item 3. Key Information—Risk Factors—Risks Relating to Uruguay—Risks relating to Uruguay—Economic conditions in Uruguay may have a direct impact on our financial condition and results of operations.” For the year ended December 31, 2011, our aggregate capital expenditures were U.S.$717.3 million, consisting primarily of U.S.$571.5 million in internal projects and U.S.$145.9 million in acquisition of biological assets.

GOVERNMENT REGULATION

Environmental Regulation

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

Chile

The Chilean legislation to which we are subject includes the Chilean Environmental Law (Ley Sobre Bases Generales del Medio Ambiente) and related regulations. The Chilean Environmental Law created the National Environmental Commission (Comisión Nacional del Medio Ambiente), or CONAMA, which includes under its organization the various Regional Environmental Commissions (the COREMAs). As discussed below, these institutions were replaced in 2010 by the Ministry of Environment, the Service of Environmental Evaluation and the Evaluation Commissions (Comisiones de Evaluación) and a new Superintendency of Environment.

The Ministry of the Environment is under the direct supervision of the President of Chile and it is responsible for, among other things, creating and/or proposing environmental public policies and environmental regulations.

 

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The Service of Environmental Evaluation and the Evaluation Commissions administer the Environmental Impact Evaluation System (“SEIA”) and evaluate environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law, we are required to conduct environmental impact studies or declarations of environmental impact of any future projects or activities (or their significant modifications) that may affect the environment. These and other regulations also establish procedures for private citizens to object to the plans or studies submitted by project owners.

The Evaluation Commissions and other governmental agencies may also participate in the oversight of the implementation of projects in accordance with their environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law and other regulations, affected private citizens, public agencies and local authorities can sue to enforce environmental compliance. Enforcement remedies include temporary or permanent closure of facilities and fines. The application of these environmental laws and remedies may adversely affect the manner in which we seek to implement our business strategy and our ability to realize our strategy.

On January 26, 2010, Law No. 20,417 was published in the Official Gazette. This new law replaced the former CONAMA and COREMA with a new set of public institutions: the Ministry of the Environment (aimed at developing national environmental policy), the Service of Environmental Evaluation (in charge of administering the environmental assessment system) and the Superintendency of Environment (in charge of supervising and auditing environmental compliance). While the Ministry of the Environment and the Service of Environmental Evaluation and the Evaluation Commissions have been operating since October 1, 2010, the authority to begin operations at the Superintendency of Environment is still pending the passage of certain legislation by the Chilean Congress, currently being reviewed by the Constitutional Court prior to its publication in the Official Gazette. As a result, the supervision and auditing of Chile’s environmental laws is currently the responsibility of the Evaluation Commissions and some other public authorities. Although certain provisions of the Law N°20,417 are already in force, including minor procedural modifications to the SEIA, others are still subject to the publication of an administrative decree by the President of Chile. This decree is expected to be published and to become effective during 2012.

We recently faced, and continue to face, certain environmental proceedings in connection with certain of our pulp mills. For a description of these proceedings, see “Item 8. Financial Information Legal Proceedings.”

Argentina

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

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

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

Brazil

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

 

   

fines,

 

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partial or total suspension of activities,

 

   

forfeiture or restriction of tax incentives or benefits, or

 

   

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

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

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

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

Uruguay

The activities of the Montes del Plata joint venture in Uruguay are subject to Uruguayan national and municipal environmental regulations. The principal environmental authorization required to carry out such project’s current activities is the environmental authorization, or AAP, regulated by the Environmental Impact Assessment Act, Law Nº 16.466, and its regulatory decree Nº 349/005. The AAP is granted by the National Environmental Bureau, or DINAMA, which pertains to Ministry of Housing, Land Use Management and Environment, or MVOTMA. In order to obtain this authorization, an applicant must submit a complete report regarding all aspects of the proposed works including a classification of the same by a competent professional in one of the three categories, A, B or C. If the proposed project is classified as B or C, a comprehensive environmental impact assessment (which includes all aspects of the project, including water and noise, among others) is required and in some cases a public hearing may be required. Once the AAP is granted, the interested party is required to perform the project in accordance with the terms and conditions of such authorization.

For certain activities (including construction of an industrial plant) listed in Article 2 of Decree 349/005, a Viability Location Report, or “VAL”, is required. This report must include a notification to the municipal government where the project is to be located (“Intendencia”) and the delivery of information similar to that required for the AAP. This process contemplates a period for the public of summary information that is available. The Intendencia involved in any such project may submit its findings to the DINAMA for consideration. The VAL, if needed, must be obtained prior to the AAP. The relevant companies that comprise our Montes del Plata joint venture have already obtained the AAP and the VAL. We believe that the Montes del Plata project is currently in material compliance with applicable local and national environmental regulations in Uruguay.

Forestry, Land-Use and Land Ownership Regulations

Chile

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

 

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

Argentina

The management and exploitation of forests in Argentina is regulated by National Law 13,273, National Law 25,080, and National Law 26,432, National Decree 710, Provincial Law No. 854, Provincial Law No. 3,426 and other regulations promulgated thereunder, which collectively constitute the regulatory framework. The regulatory framework imposes a variety of restrictions on the management and exploitation of forests in Argentina. The regulatory framework regulates the replanting of land after harvesting.

On December 22, 2011, National Law 26,737 was enacted, which established limitations on the ability of foreigners to purchase rural land in Argentina. This law provides that foreigners cannot acquire more than 15% of all rural land in the country, and that no foreigner can, individually, hold more than 30% of said 15%. For the purposes of the National Law 26,737, rural land is all land located outside the urban area.

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

Brazil

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

There are currently certain Brazilian legal restrictions on the acquisition of rural properties by foreign companies or by Brazilian companies controlled by foreign persons. Those restrictions are contained in Federal Law No. 5,709/1971 and in the recent Opinion issued by the Office of the General Counsel to the Federal Government in August, 2010.

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

Uruguay

The management and exploitation of forests in Uruguay is regulated primarily by Law 15,939, which has declared forestry activity as an area of national interest. This law classifies forests into three categories: protectors, yield and general, and provides certain tax and financial benefits related to forests classified as protectors and yield. In order to obtain such classification, interested parties have to submit a forestry plan report before the General Forestry Bureau. This law also establishes certain conservation restrictions and controls for each category of forest.

Additionally, forest activity is subject to environmental and soil care regulations. According to Law 16.466 and decree 349/005, plantations of more than 100 hectares need prior environmental authorization. Law Nº 15.239 also provides certain measures that must be adopted to reduce erosion and degradation of the soil or to restore soil when necessary.

 

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

Item 5. Operating and Financial Review and Prospects

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS

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

Overview

We derive our sales revenue from the sale of bleached and unbleached pulp, panels, wood products such as sawn timber and remanufactured wood products, and forestry products such as sawlogs and pulplogs. Export sales constituted 69.9% of our total sales revenue for the year ended December 31, 2010, and 71.5% of our total sales revenue for the year ended December 31, 2011. Sales of pulp constitute the single largest component of our sales revenue. As with many commodities, pulp is subject to significant cyclical price fluctuations determined by global supply and demand. Accordingly, our sales revenue is subject to cyclical fluctuations. World prices for panels, wood products and forestry products, which are generally viewed as commodities, also fluctuate significantly. Although prices tend to have the most significant effect on our results of operations, sales volume and product mix, production costs and exchange rate fluctuations also can have a substantial impact on our results.

Our business, results of operations and cash flows depend, to a large extent, on the level of economic activity, on government and foreign exchange policies and on political and economic developments in our principal export markets. In 2011, we exported our products to Asia, to North, Central and South America, to Europe and, to a lesser extent, to Africa and the Middle East. In 2010 and 2011, 93.0% and 94.4%, respectively, of our total pulp sales were attributable to exports, and 52.4% and 54.9%, respectively, of our total panels, wood products and forestry product sales were attributable to exports. Our business, earnings and prospects may be materially and adversely affected by developments in these export markets with respect to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation or social instability, as well as by political, economic or diplomatic developments.

At December 31, 2011, 76.6% of our property, plant, equipment and forest assets were directly owned by the Company and our Chilean subsidiaries, 10.6% by our Argentinean subsidiaries and 12.8% by our Brazilian subsidiaries. In 2011, 76.1% of our consolidated sales revenue was derived from our operations in Chile, 12.7% of our consolidated sales revenue was derived from our operations in Argentina and 11.2% of our consolidated sales revenue was derived from our operations in Brazil. Accordingly, our financial condition, results of operations and cash flows depend, to a significant degree, upon economic conditions in Chile, Argentina and Brazil.

Effects of February 27, 2010 Earthquake in Chile

On February 27, 2010, an earthquake measured at a magnitude of 8.8 on the Richter scale, followed by a tsunami, occurred off the coast of the South-Central Region of Chile, an area where we maintain a substantial portion of our industrial operations in Chile. Immediately after the earthquake, all of our production units applied their contingency plans which involved shutting down operations and evaluating the damage caused to each facility by the earthquake. Our operations that had been affected by the earthquake and tsunami reopened gradually in connection with our repair efforts and the improvement of external factors, such as infrastructure conditions, road connectivity, power supply and public safety concerns. As of December 31, 2011, all of our operations have reopened and were operating at full operational capacity except for our Mutrún Sawmill, which was destroyed and will not be reopened. The Mutrún sawmill represented approximately 6% of our sawn timber production capacity in Chile.

 

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The following table sets forth the number of days that each of our facilities in Chile was closed due to the earthquake in Chile.

 

Plant

   Number of days closed      Production capacity
as of February 27,
2010
     Operating
at full capacity as

of December 31, 2011
 

Pulp

        

Arauco I

     58         290,000         Yes   

Arauco II

     339         500,000         Yes   

Constitución

     85         355,000         Yes   

Licancel

     58         140,000         Yes   

Valdivia

     22         550,000         Yes   

Nueva Aldea (BKP)

     51         513,500         Yes   

Nueva Aldea (EKP)

     58         513,500         Yes   

Panels

        

Arauco (Plywood)

     45         110,000         Yes   

Trupán (HB)

     13         59,000         Yes   

Trupán (MDF)

     14         168,000         Yes   

Trupán (MDF2)

     34         308,000         Yes   

Nueva Aldea (Plywood)

     16         405,000         Yes   

Sawmills

        

Valdivia (Remanufacturing)

     1         72,000         Yes   

El Colorado

     12         320,000         Yes   

Horcones I

     27         360,000         Yes   

Horcones (Remanufacturing)

     25         136,000         Yes   

Cholguán

     13         330,000         Yes   

Cholguán (Remanufacturing)

     12         70,000         Yes   

El Cruce

     9         85,000         Yes   

Viñales

     10         360,000         Yes   

Viñales (Remanufacturing)

     9         120,000         Yes   

Nueva Aldea

     2         430,000         Yes   

The suspension of our operations in Chile resulted in significant asset impairment charges due to earthquake-related damage to property and inventories as well as a significant decrease in our sales volumes due to plant closures, which had an adverse effect on our results of operations and cash flows. Our insurance policies provide coverage for damages to our property, plant, equipment and inventories and for business interruption caused by such damages up to an aggregate amount of U.S.$650 million, with a deductible of U.S.$3 million for property damage and a deductible of 21 days for business interruption. On November 15, 2011, we and the insurers accepted the final report of the insurance adjusters. In accordance with such final report, as of December 31, 2011, we received a total recovery of U.S.$532 million, net of U.S.$278 million in advance payments that we had already received. See “Item 4. Information on the Company—Description of our Business—Insurance.”

Effects of January 2012 Wildfires

Commencing on December 31, 2011, wildfires, exacerbated by high temperatures and strong winds, broke out in the Eighth Region of Chile. As a result, the fires destroyed our Nueva Aldea plywood mill and approximately 8,200 hectares of our forest plantations. The affected forest plantations represent approximately 0.8% of our total forest plantations. Our Nueva Aldea plywood mill, which represented a cash investment of approximately U.S.$110 million, had an annual production capacity of 450,000 cubic meters, representing approximately 14.2% of our total panel production capacity. Although the plywood mill at Nueva Aldea and our forest plantations are insured, our insurance is subject to deductibles and caps, including a 15-day deductible relating to our business interruption insurance for the Nueva Aldea plywood mill. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial condition, results of operations and cash flows.”

 

 

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Economic Indicators in Chile, Argentina and Brazil

Chile

In 2009, the Chilean GDP contracted 1.0%, mainly due to the global financial crisis. In 2010 and 2011, Chilean GDP returned to growth rates of 6.1% and 6.0%, respectively. See “Risk factors—Risks relating to Chile.”

Argentina

From late 1998 to 2002, the Argentine economy went through an economic recession marked by reduced levels of consumption and investment and an elevated unemployment rate. Argentine GDP decreased by 0.8% in 2000, 4.0% in 2001 and 10.9% in 2002. In December 2001, amid public demonstrations and the resignation of the Argentine president, Argentina declared a suspension on payment of its foreign debt. In early 2002, the government released the Argentine peso from its one-to-one peg to the U.S. dollar and allowed the exchange rate to float, resulting in a 49.6% devaluation of the Argentine peso from January 1, 2002 to December 31, 2002. From 2003 to 2008, economic indicators showed signs of recovery, and the Argentine GDP increased by 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006, 8.7% in 2007 and 6.8% in 2008. Due to the global financial crisis, Argentina’s GDP grew by only 0.9% in 2009. In 2010, Argentina’s GDP growth rose to 9.2% and in 2011 Argentina’s GDP growth rose to 7.3%. The future economic, social and political developments in Argentina, over which we have no control, could impair our and Alto Paraná’s business, financial condition or results of operations. See “Risk factors—Risks relating to Argentina.”

Brazil

Brazil’s GDP increased by 2.8% in real terms during 2011, compared to a growth rate of 7.5% in 2010 and a negative growth rate of 0.2% in 2009. In 2009, the real depreciated against the dollar by 25.5%, in 2010, the real appreciated against the dollar by 4.8% and in 2011, the real depreciated against the dollar by 11.6%. See “Risk factors—Risks relating to Brazil.”

Exchange Rate Fluctuations

The Chilean peso has been subject to devaluation in the past and could be subject to significant fluctuations in the future. During 2011, the value of the Chilean peso relative to the U.S. dollar decreased 9.9% in nominal terms and 8.6% in real terms, based on the observed exchange rates on December 31, 2010 and December 31, 2011. The observed exchange rate on April 26, 2012 was Ch$484.88 to U.S.$1.00. For information regarding historical rates of exchange in Chile from January 1, 2007, see “Item 3. Key Information—Exchange Rates.”

Prices

We generally price our exports in U.S. dollars, whereas our domestic sales in Chile are priced in Chilean pesos; domestic sales in Brazil are priced in reals and domestic sales in Argentina are priced in Argentine pesos except for pulp sales, which are priced in U.S. dollars. To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic sales revenues may be adversely affected when expressed in U.S. dollars. The same effects may occur for our domestic sales in Argentina and Brazil for products sold in each of the respective local currencies. The effect of exchange rate fluctuations is partially offset by the fact that certain of our operating expenses are denominated in U.S. dollars (such as our freight costs and selling expenses in the form of commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2011, our U.S. dollar-denominated indebtedness was U.S.$2,559.6 billion. In addition, as the U.S. dollar appreciates against the local currency in any of our export markets, we must from time to time price our sales in that local currency to compete effectively.

 

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During the last quarter of 2008, the prices of our products decreased substantially as a result of the global financial crisis. Prices began to show a slight recovery during the second quarter of 2009. The recovery in the pulp market was confirmed during the fourth quarter of 2009 and the year 2010, during which time pulp prices grew strongly, reaching near pre-crisis levels and continued at high levels during the first half of 2011. In the second half of 2011, pulp prices started to decline. For additional discussion regarding recent movements in the price of pulp, see “—Trend Information.”

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

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

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

 

     Year ended December 31,(1)

Product(2)

   2010    2011
     (U.S.$ per metric ton)(3)

Pulp

     

Bleached pulp

   765.4    740.8

Unbleached pulp

   717.7    753.4
   (U.S.$ per cubic meter)(3)

Wood Products

     

Sawn timber

   221.1    241.6

Remanufactured wood products

   474.4    545.9

Panels

     

Plywood and fiberboard panels

   363.2    395.2

Forestry Products

     

Sawlogs

   47.1    35.4

Pulplogs

   37.1    93.6

Posts

   267.1    323.3

 

(1) 

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

(2) 

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

(3) 

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

Pulp Prices

Overview

Historically, world pulp prices have been subject to significant fluctuations over relatively short periods of time. Pulp prices mainly depend on worldwide demand, world production capacity, worldwide pulp and paper inventory levels and availability of substitutes, and in general terms, are directly related to global economic growth. All of these factors are beyond our control.

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

 

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Prices for unbleached softwood market pulp also follow cyclical patterns related to worldwide demand, stock levels and supply. Unbleached softwood market pulp represents about 3.5% of the total wood pulp market. The majority of such pulp is sold in Asia, and its price does not necessarily follow the cycle of prices for NBSK or Bleached Eucalyptus Kraft Pulp (“BEKP”).

During 2011, pulp prices for all grades decreased with respect to 2010, which was mainly explained by lower demand from Asia and Europe, and increased supply, especially from integrated European producers that added their own pulp production to the spot market. For additional discussion regarding recent movements in the price of pulp, see “—Trend Information.”

Price of NBSK

The market price for NBSK was U.S.$869.30 at December 31, 2007, which represented an increase of 19.1% as compared to December 31, 2006. The market price for NBSK was U.S.$641.51 at December 31, 2008, a 26.2% decrease as compared to December 31, 2007. The market price of U.S.$798.77 per ton recorded at December 31, 2009 represented an increase of 24.5% as compared to December 31, 2008. The market price for NBSK was U.S.$948.92 per ton at December 31, 2010, an 18.8% increase as compared to December 31, 2009. The market price for NBSK was U.S.$833.71 per ton at December 31, 2011, a 12.1% decrease as compared to December 31, 2010.

Price of BEKP

The market price for BEKP at December 31, 2007 reached U.S.$775.20, which represented a 15.4% increase over the price at December 31, 2006. At December 31, 2008, the market price for BEKP was U.S.$584.54, which represented a 24.6% decrease as compared to December 31, 2007. The market price for BEKP at December 31, 2009 reached U.S.$700.00, which represented a 19.8% increase of over the price at December 31, 2008. The market price for BEKP was U.S.$849.21 per ton at December 31, 2010, a 21.3% increase as compared to December 31, 2009. The market price for BEKP was U.S.$651.86 per ton at December 31, 2011, a 23.2% decrease as compared to December 31, 2010.

Price of UKP

The market price for unbleached kraftwood pulp, or UKP, reached U.S.$586.9 per ton at December 31, 2007 reached U.S.$598.5, which represented a 19.8% increase over the price at December 31, 2006. The market price for UKP at December 31, 2008 dropped to U.S.$455.76, which represented a decrease of 23.8% as compared to December 31, 2007. The market price for UKP at December 31, 2009 was U.S.$603.65, which represented a 32.4% increase over the price at December 31, 2008. The market price for UKP was U.S.$751.85 per ton at December 31, 2010, a 24.6% increase as compared to December 31, 2009. The market price for UKP was U.S.$603.65 per ton at December 31, 2011, a 18.9% decrease as compared to December 31, 2010.

Forestry, Wood Product and Panels Prices

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

In 2007, the health of the construction sector was affected by a significant stock of unsold houses, which caused the amount of construction to fall 30% in the United States as compared to 2006. This negatively affected the sales volume of wood. Prices of moldings and wood continued to decrease. In Europe, consumer trends favoring products with a sustainable forestry management certification increased demand for the entire range of Arauco’s panels. In the United States, the strong contraction of the real estate sector adversely affected the sale of MDF moldings. This was offset, however, by the strong increase in the demand for MDF boards in Latin America. In the case of Arauco’s plywood panels, demand increased as a result of a decrease in the supply from other manufacturers and by the highly diversified applications of these products unrelated to the construction sector.

The slowdown in the global growth markets during 2008 continued to affect the demand for timber in all markets. The construction sector continued to decline in the United States. In particular, the construction of houses declined to a rate of approximately 550,000 houses per year by December 2008, which negatively compares with the 2 million homes built in the United States during 2006.

 

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This decline negatively affected the sales volume and prices of wood and moldings, which reached their lowest levels during the last quarter of 2008. During most of 2008, there was a consistent demand for panels, which resulted in an increase in price in most of the products produced by Arauco. During the latter part of 2008, however, demand lowered, which negatively affected sales volume and prices of plywood and MDF in most markets, especially in the United States and Europe.

The fiscal year 2009 was challenging for the panels business due to low demand and a weak dollar. However, Arauco was able to sell all panels production without any plant shutdown despite the decline in demand. This was due to Arauco’s geographic diversification, with sales in over forty countries, and to Arauco’s broad product portfolio.

During 2010, average sales prices in our sawn timber segment increased as compared with 2009, mainly due to higher average sales prices of green sawn timber in the Asian market and remanufactured products in United States. Regarding our panel segment, in 2010 our sales in U.S. dollars increased in 33.5%, representing an increase of 15.3% in our average sales as compared to 2009. Average sales prices of Plywood, which was the most negatively impacted product line in terms of margin erosion during 2009, increased during 2010, especially in Latin America, Europe and United States. Average sales prices of MDF, HB and MDF moldings also increased during 2010.

Although the construction and real estate market in the U.S. continued to underperform historical averages during 2011, there has been a slight trend of recovery as compared with 2009 and 2010. This recovery has been reflected in increased demand for wood products and price increases. In Latin America the demand for our sawn timber and panels products remained positive, which resulted in increases in sales revenue of 18.0% and 15.6%, respectively. Our sawn timber products increased in sales volume and average price by 3.9% and 9.3%, respectively. Sales revenue from our remanufactured products increased 32.4% as a consequence of a 15.1% increase in sales volume and a 15.1% in average prices. Average prices of our panels products increased 8.8%, and total sales volume increased 6.3%.

Prices for our pulp, panel, forestry and wood products may decline in the future. Our results of operations may be materially adversely affected if the prices of our products were to decline from current levels.

Costs

Our major costs of sales are the following:

 

   

the cost of timber,

 

   

costs related to harvesting (forestry works),

 

   

maintenance costs,

 

   

chemical costs,

 

   

the cost of sawmill processing,

 

   

depreciation, and

 

   

energy and fuel costs.

Our major administrative and selling expenses are wages and salaries, traffic, shipping and freight costs, insurance expenses and commissions.

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

 

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Selling expenses consist primarily of per ton fees we paid to our selling agents. Traffic, shipping and freight costs are the costs of carrying the product to the destination.

During 2009, cost of sales decreased by 7.7% as a result of lower sawn timber sales volume as well as lower unit costs of wood, chemicals and energy, reflecting Arauco’s stringent cost management and favorable market conditions for raw materials.

Cost of sales increased 6.8% during 2010, mainly due to higher cost of sales of our forestry operations and an increase in other raw materials and indirect costs, partially offset by lower maintenance costs.

During 2011, cost of sales increased 26.6% as a result of increased sales volumes among all of our business segments and increases in the unitary costs of our main products. In particular, our costs of sale per ton of our bleached softwood pulp, bleached hardwood pulp and unbleached softwood pulp increased 10.7%, 21.7% and 15.5%, respectively, as compared to 2010. In 2011, our cost of sales measured as a percentage of total revenues represented 66.5%, as compared to 61.0% in 2010.

Critical Accounting Policies

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

Property, Plant and Equipment

Property, plant and equipment are stated at cost and are depreciated using the straight-line method based on the estimated useful lives of the assets. The amount of such depreciation that related to our fixed production assets, such as pulp mills and sawmills, is allocated to finished goods held as inventories and accumulates until charged to cost of sales when the finished goods are sold. Forests and lands are not depreciated.

In estimating the useful lives we have primarily relied upon actual experience with the same or similar types of equipment and recommendations from the manufacturers. Useful lives are based on the estimated amount of years an asset will be productive and are revised periodically to recognize potential impacts caused by new technologies, changes to maintenance procedures, changes in utilization of the equipment, and changing market prices of new and used equipment of the same or similar types.

Property, plant and equipment assets are evaluated for possible impairment. Factors that would indicate potential impairment may include, but are not limited to, significant decreases in the market value of a long-lived asset, a significant change in a long-lived asset’s physical condition and operating or cash flow losses associated with the use of a long-lived asset. This process requires our estimate of future cash flows generated by each asset or group of assets. For any instance where this evaluation process indicates impairment, the appropriate asset’s carrying values are written down to net realizable value and the amount of the write-down is charged against the results of continuing operations.

Expenditures that substantially improve and/or increase the useful life of facilities and equipment are capitalized. Other maintenance or repair costs are charged to income as they are incurred.

 

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Fair Value of Financial Instruments

The Company recognizes financial assets and liabilities on its balance sheet at fair value, which is the value that the Company estimates would be attributable to such asset or liability in an arms-length transaction. As of the date of the initial recognition, the management of the Company classifies its financial assets at fair value through (i) income or (ii) collectible credits and accounts, depending on the purpose for which the financial assets were acquired.

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.

The doubtful provision of trade receivables is established when there is 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, or when Arauco has exhausted all levels of recovery of debt in a reasonable time. See Note 23 to our consolidated financial statements.

Biological Assets

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

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

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

Lawsuits and Contingencies

Arauco and its subsidiaries are subject to certain ongoing lawsuits, the future effects of which need to be estimated by the management of the Company in collaboration with its legal advisors. Arauco evaluates the reports of its legal advisors and make appropriate contingency estimates in each balance sheet based on such reports. Arauco also makes contingency estimates and/or adjustments to prior contingency estimates upon the occurrence of material changes to the nature or underlying facts of such lawsuits. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—We are subject to legal proceedings related to our mills which could adversely affect our business, financial condition, results of operations and cash flows.” and “Item 8. Financial Information—Legal Proceedings.”

Results of Operations

The following table provides a breakdown of our financial results of operations and sales volumes as of and for the years ended December 31, 2009, 2010 and 2011. Both the table and the discussion that follows are based on and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, as of December 31, 2009, 2010 and 2011 included elsewhere herein. The audited consolidated financial statements included herein are prepared in U.S. dollars and in accordance with IFRS.

 

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     For the year ended December 31,  
     2009     2010     2011  
    Sales     %     Volume     Sales     %     Volume     Sales     %     Volume  
    (in millions of U.S.$, except where indicated)  

Revenue

                 

Pulp

                 

Bleached pulp(1)

  U.S. $ 1,392.5        45.0     2,707      U.S.$  1,529.9        40.6     1,999      U.S.$  1,759.5        40.2     2,410   

Unbleached pulp(1)

    204.0        6.6        410        247.2        6.6        344        301.4        6.9        406   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,596.5        51.6        3,117        1,777.1        47.2        2,343        2,060.8        47.1        2,816.0   

Panels

                 

Plywood and Fiberboard panels

    824.8        26.6        2,630        1,101.3        29.2        3,032        1,273.2        29.1        3,222   

Other

          0.3        0.0          0.5        0.0     

Total

    824.8        26.6        2,630        1,101.6        29.2        3,032        1,273.7        29.1        3,222   

Wood Products

                 

Sawn timber(2)

    337.7        10.9        1,952        463.8        12.3        2,098        526.8        12.0        2,181   

Remanufactured wood products(2)

    155.5        5.0        279        149.7        4.0        316        198.3        4.5        363   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

          6.6        0.2          6.5        0.1     
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total

    493.2        15.9        2,231        620.1        16.5        2,414        731.6        16.7        2,544   

Forestry Products

                 

Sawlogs (net)(2)

    46.2        1.5        1,117        90.5        2.4        1,923        75.2        1.7        2,123   

Pulplogs(2)

    10.3        0.3        309        22.7        0.6        612        41.5        0.9        443   

Posts

    3.8        0.1        19        6.3        0.2        24        7.6        0.2        24   

Chips

    16.7        0.5        293        29.3        0.8        501        28.5        0.7        398   

Other

    4.6        0.1        148        1.3        0.0        7        4.6        0.1        16   
 

 

 

       

 

 

   

 

 

     

 

 

   

 

 

   

Total

    81.6        2.6        1,886        150.2        4.0        3,068        157.5        3.6        3,003   

Energy

    77.9        2.5          86.0        4.3          98.2        2.2     

Other

    23.9        0.8          32.4        0.9          52.6        1.2     
 

 

 

       

 

 

   

 

 

     

 

 

   

 

 

   

Total revenue

    3,097.4        100       3,767.4        100.0       4,374.5        100.0  

Cost of sales, exclusive of depreciation

                 

Timber

    (630.2         (613.5         (707.4    

Forestry labor costs

    (353.2         (470.3         (588.8    

Maintenance costs

    (284.3         (207.2         (275.6    

Chemical costs

    (261.4         (240.9         (334.5    

Depreciation

    (190.9         (187.2         (217.0    

Other costs of sales

    (432.5         (579.1         (784.7    
 

 

 

       

 

 

       

 

 

     

Total cost of sales

    (2,152.5         (2,298.2         (2,908.0    

Gross income

    944.9        30.5       1,469.2        39.0       1,466.5        33.5  

Other operating income

    181.4            378.5            475.0       

Distribution costs

    (374.6         (360.2         (451.6    

Administrative expenses

    (249,3         (323.9         (415.6    

Other operating expenses

    (58.0         (49.1         (90.4    

Other income (loss)

    64.1            0.0            0.0       

Financial income

    19.3            15.8            24.6       

Financial costs

    (193.9         (207.6         (196.3    

Participation in profit (loss) in affiliates and joint ventures through equity method

    6.6            (7.7         (11.8    

Exchange rate differences

    17.6            (16.3         (26.6    
 

 

 

       

 

 

       

 

 

     

Income before income taxes

    358.1            898.8            773.3       

Income tax

    (53.5         (198.0         (152.5    
 

 

 

                 

Net income

    304.6            700.7            620.8       
 

 

 

       

 

 

       

 

 

     

 

(1) Volumes measured in thousands of metric tons.
(2) Volumes measured in thousands of cubic meters.

 

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Year Ended December 31, 2010 Compared to Year Ended December 31, 2011

Revenue

Revenue increased 16.1% from U.S.$3,767.4 million in 2010 to U.S.$4,374.5 million in 2011, primarily as a result of:

 

   

a 15.6% increase in revenue from panels;

 

   

a 16.0% increase in revenue from pulp;

 

   

a 18.0% increase in revenue from wood products; and

 

   

a 4.9% increase in revenue from forestry products.

Pulp

Revenue from bleached and unbleached pulp increased 16.0% from U.S.$1,777.1 million in 2010 to U.S.$2,060.8 million in 2011, reflecting a 18.4% increase in sales volume, partially offset by a 2.1% decrease in average prices. Sales of bleached pulp increased 15.0% due to a 18.8% increase in sales volume, partially offset by a 3.2% decrease in average prices. Revenue from unbleached pulp increased 21.9% due to a 16.3% increase in sales volume and a 5.0% increase in average prices.

When comparing to 2010, the increase in revenues in 2011 was primarily driven by increased sales volume as a result of the interruption of operations at our Chilean pulp mills in March, April and May, 2010 as a result of the earthquake that hit the South-Central Region of Chile on February 27, 2010.

Panels

Revenue from panels increased 15.6% from U.S.$1,101.6 million in 2010 to U.S.$1,273.7 million in 2011. This increase in revenues was primarily due to an 8.8% increase in average prices and a 6.3% increase in sales volume.

Our plywood sales volume increased in 2011 primarily because our plants were running at full capacity as compared to 2010, during which we experienced the interruption of our operations in Chile as a result of the earthquake of February 27, 2010. In addition, we experienced an increase in sales volume in Europe and Asia, primarily as a result of increased demand in those markets, which increase contributed to substantial price recoveries.

On the other hand, the U.S. market also experienced a strong increase in sales volume; however, price levels remained stable. In 2011, our average prices increased primarily as a result of higher demand for our products during 2011 compared to 2010, when prices for plywood, medium-density fiberboard, particleboard and hardboard deteriorated due to a decrease in global demand for these products.

Wood products

Revenue from sawn timber and remanufactured wood products increased 18.0% from U.S.$620.1 million in 2010 to U.S.$731.6 million in 2011, primarily as a result of a 11.9% increase in average prices and a 5.4% increase in sales volume. Sawn timber sales revenue increased 13.6% from U.S.$463.8 million to U.S.$526.8 million due to a 9.3% increase in average prices and a 3.9% increase in sales volume. Remanufactured products sales revenue increased 32.5% from U.S.$149.7 million to U.S.$198.3 million due to a 15.1% increase in average prices and a 14.9% increase in sales volume. During 2011, we continued to experience strong demand for our wood products in most markets, especially in Asia. Consequently, sales prices increased in China, Korea, Japan and Taiwan.

 

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Forestry products

Revenue from forestry products increased 4.9% from U.S.$150.2 million in 2010 to U.S.$157.5 million in 2011. This increase was primarily the result of an 82.7% increase in the sales revenue of pulplogs, mainly due to higher sales volume, when compared with 2010.

Demand for our forestry products increased in 2011 as a result of the recovery from the global financial crisis and an increase in worldwide construction, which triggered a significant increase in demand for pulplogs, sawlogs, chips and posts.

Other revenue

Revenue from other sources, consisting principally of sales of energy and chemicals, increased 27.4% from U.S.$118.4 million in 2010 to U.S.$150.9 million in 2011. This increase is explained by higher sales of energy of U.S.$12.2 million and an increase in sales of chemicals by U.S.$13.3 million.

Cost of sales

Cost of sales increased 26.6% from U.S.$2,298.8 million in 2010 to U.S.$2,908.5 million in 2011, primarily as a result of an increase in the sales volumes of each of our business segments and increased unitary costs of our main products. In particular, our costs of sale per ton of BKPR, EKPR and UKPR have increased 10.7%, 21.7% and 15.5%, respectively, as compared to 2010. These increases have been driven primarily by increases in the cost of wood (which increased by 15.3% during 2011 as compared to 2010) and chemicals (which increased by 38.9% during 2011 as compared to 2010) and a 10.9% increase in the average Chilean peso/U.S. dollar exchange rate from Ch$468.01 per U.S.$1.00 during 2010 to Ch$519.20 per U.S.$1,00 in 2011.

Gross margin

Our gross margin decreased from 39.0% for 2010 to 33.5% for 2011 primarily as a result of a 26.6% increase in cost of sales, partially offset by a 16.1% increase in sales revenue.

Other operating income

Other operating income increased 25.5% from U.S.$378.5 million in 2010 to U.S.$475.0 million in 2011, mainly as a result of a net gain of U.S.$192.9 million attributable to the business interruption insurance claims related to the February 27, 2010 earthquake net of asset write-offs and operational expenses of stopped mill and a U.S.$8.4 million increase in the fair value of our biological assets, which was primarily the result of increases in the market prices of our products.

Distribution costs

Distribution costs for all markets increased 25.4% from U.S.$360.2 million in 2010 to U.S.$451.6 million in 2011, primarily as a result of an increase in shipping and freight total costs. The increase in shipping and freight costs was mainly explained by an 18.4% increase in the sales volume of pulp, a 6.3% increase in the sales volume of panels and a 5.4% increase in the sales volume sawn timber.

Administrative expenses

Administrative expenses increased 28.3% from U.S.$323.9 million in 2010 to U.S.$415.5 million in 2011, primarily as a result of an increase in wages and salaries, insurance and other administrative expenses of U.S.$14.3 million, U.S.$10.9 million and U.S.$26.4 million respectively. As a percentage of revenue, administrative expenses increased from 8.6% in 2010 to 9.5% in 2011.

 

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Financial costs

Interest expenses decreased 5.4% from U.S.$207.5 million in 2010 to U.S.$196.4 million in 2011. This decrease is explained primarily by a decrease in the average interest rate applicable to our long-term debt.

Exchange rate differences

We recorded an increase in exchange rate difference losses of 63.2% from U.S.$16.3 million in 2010 U.S.$26.6 million in 2011, primarily as a result of foreign exchange losses attributable to money market investments, deposits and accounts receivables denominated in currencies which depreciated against the U.S. dollar, partially offset by foreign exchange gains attributable to our financial debt denominated in currencies that depreciated against the U.S. dollar, including the Chilean peso, real and euro, among others.

Income tax expenses

We had tax expenses of U.S.$198.0 million in 2010 compared to tax expenses of U.S.$152.5 million in 2011. This decrease was principally attributable to lower income before taxes in 2011 compared to 2010. Our effective tax rate decreased from 22.0% in 2010 to 19.7% in 2011, mainly due to an increase in the proportion of profits earned by our Chilean subsidiaries, which have a lower tax rate than each of our foreign subsidiaries.

Net profit

Net consolidated profit in 2011 decreased 11.4% from U.S.$700.7 million in 2010 to U.S.$620.8 million in 2011, primarily as a result of the increases in our cost of sales, administrative expenses and distribution costs as discussed above.

Year Ended December 31, 2009 Compared to Year Ended December 31, 2010

Revenue

Revenue increased 21.6% from U.S.$3,097.4 million in 2009 to U.S.$3,767.4 million in 2010, primarily as a result of:

 

   

a 33.6% increase in revenue from panels;

 

   

a 11.3% increase in revenue from pulp;

 

   

a 25.7% increase in revenue from wood products; and

 

   

a 84.1% increase in revenue from forestry products.

Pulp

Revenue from bleached and unbleached pulp increased 11.3% from U.S.$1,596.5 million in 2009 to U.S.$1,777.1 million in 2010, reflecting a 48.1% increase in average prices, partially offset by a 24.8% decrease in sales volume. Sales of bleached pulp increased 9.9% due to a 48.8% increase in average prices, partially offset by a 26.2% decrease in sales volume. Revenue from unbleached pulp increased 21.2% due to a 44.2% increase in average prices, partially offset by a 16.1% decrease in sales volume.

When comparing to 2009, the increase in revenues in 2010 was primarily driven by higher average pulp prices which reflected a recovery in global demand for pulp and paper after the global financial crisis that led to a substantial decrease in the prices of our products during the last quarter of 2008 and the first quarter of 2009.

 

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The decrease in pulp sales volume was primarily a result of the interruption of operations at our Chilean pulp mills in March, April and May, 2010 as a result of the earthquake that hit the South-Central Region of Chile on February 27, 2010.

Panels

Revenue from panels increased 33.6% from U.S.$824.8 million in 2009 to U.S.$1,101.6 million in 2010. This increase in revenues was primarily due to a 15.9% increase in average prices and a 15.3% increase in sales volume.

Our sales volume increased in 2010 primarily as a result of our acquisition of Tafisa Brasil in August 2009, which added 640,000 cubic meters of annual production capacity to our panels business, partially offset by the loss in production caused by the interruption of our operations in Chile due to the February 27, 2010 earthquake.

Our average prices increased in 2010 primarily as a result of higher demand for our products during the year compared to 2009, when prices for plywood, medium-density fiberboard, particleboard and hardboard deteriorated due to a decrease in global demand for these products.

Wood products

Revenue from sawn timber and remanufactured wood products increased 25.7% from U.S.$493.2 million in 2009 to U.S.$620.1 million in 2010, primarily as a result of a 16.2% increase in average prices and an 8.2% increase in sales volume. During 2010, our offer for sawn timber products increased largely due to reconstruction efforts in Chile after the February 27, 2010 earthquake. Also, the real estate and construction markets in the United States showed signs of modest improvement during the year 2010, but still remain at their lowest levels in 50 years. Homebuilding levels in the United States improved in 2010 reaching approximately an average of 588,000 units per year, compared to an average of 554,000 units per year during 2009. All of these factors described favored demand for our sawn timber and remanufactured wood products, increasing sales volume, partially offset by the interruption of our sawmills and the permanent closure of our Mutrún mill, after the February 27, 2010 earthquake.

Forestry products

Revenue from forestry products increased 84.1% from U.S.$81.6 million in 2009 to U.S.$150.2 million in 2010. This increase was primarily the result of increased demand for our pulplogs and chips, revenues of which increased 120.4% and 75.5% respectively, in 2010.

Demand for our forestry products increased in 2010 as a result of the recovery from the global financial crisis, which triggered a significant increase in demand for pulplogs, sawlogs, chips and posts.

Other revenue

Revenue from other sources, consisting principally of sales of energy and chemicals, increased 16.9% from U.S.$101.3 million in 2009 to U.S.$118.4 million in 2010. This increase was primarily the result of an U.S.$8.1 million increase in our sales of energy.

Cost of sales

Cost of sales increased 6.8% from U.S.$2,152.5 million in 2009 to U.S.$2,298.2 million in 2010, primarily as a result of higher forestry production costs by 33.2%, from U.S.$353.2 million in 2009 to U.S.$470.3 million in 2010 and an increase in raw materials costs, which increased 74.4%, from U.S.$146.7 million in 2009 to U.S.$255.8 million in 2010, partially offset by lower maintenance costs which decreased 27.1 %, from U.S.$284.3 in 2009 to U.S.$207.2 in 2010. As of December 31, 2010, average costs of pulp have increased as compared to December 31, 2009. BSKP or bleached softwood kraft pulp unitary costs increased by 10.5%, BHKP or bleached hardwood kraft pulp unitary costs slightly increased by 1.0% and UKP or unbleached kraft pulp unitary costs were 10.1% higher.

 

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Gross margin

Our gross margin increased from 30.5% for 2009 to 39.0% for 2010, primarily as a result of a 21.6% increase in sales revenue mainly as a result of higher average prices of almost all our products, partially offset by a 6.8% increase in cost of sales.

Other operating income

Other operating income increased 108.7% from U.S.$181.4 million in 2009 to U.S.$378.5 million in 2010, mainly as a result of a U.S.$66.0 million increase in the fair value of our biological assets due to higher sales margin in 2010 compared to 2009 and a net gain of U.S.$107.7 million attributable to insurance claims related to the February 27, 2010 earthquake.

Distribution costs

Distribution costs for all markets decreased 3.9% from U.S.$374.6 million in 2009 to U.S.$360.2 million in 2010, primarily as a result of a 9.5% decrease in shipping and freight costs due to a 24.8% reduction in pulp sales volume.

Administrative expenses

Administrative expenses increased 29.9% from U.S.$249.3 million in 2009 to U.S.$323.9 million in 2010, primarily as a result of a U.S.$50.2 million increase in administrative expenses attributable to our consolidation of the labor costs of Tafisa Brasil, which we acquired and began to consolidate in August 2009. As a percentage of revenue, administrative expenses increased from 8.0% in 2009 to 8.6% in 2010.

Financial costs

Interest expenses increased 7.0% from U.S.$193.9 million in 2009 to U.S.$207.5 million in 2010. This increase is explained primarily by higher accrued interests of U.S.$15.0 million, of which U.S.$8.0 million came from our two bond offerings made in September 2010 and a higher negative impact of change in fair value of derivatives of U.S.$5.0 million.

Exchange rate differences

We recorded exchange rate difference gains of U.S.$17.6 million in 2009 compared to exchange rate difference losses of U.S.$16.3 million in 2010, primarily as a result of foreign exchange losses attributable to our financial debt denominated in currencies that appreciated against the U.S. dollar, partially offset by foreign exchange gains attributable to money market investments, deposits and accounts receivables denominated in such currencies which appreciated against the U.S. dollar. The exchange rate losses can be explained largely by the depreciation of the U.S. dollar against the Euro and the depreciation of the U.S. dollar against the Chilean peso, which caused a loss of U.S.$28.4 million in total liabilities, partially offset by a gain of U.S.$12.1 million in total assets.

Income tax expenses

We had tax expenses of U.S.$53.5 million in 2009 compared to tax expenses of U.S.$198.0 million in 2010. This increase was principally attributable to a higher income before taxes as a result of our 55.1% increase in gross profit in 2010 compared to 2009. Our effective tax rate increased from 14.9% in 2009 to 22.0% in 2010, mainly due to higher profits coming from our subsidiaries in Argentina and Brazil, which have higher tax rate than our local subsidiaries, and the tax effect of income received from insurance related to the earthquake of February 27, 2010.

 

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On July 31, 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.

Net profit

Net consolidated profit in 2010 increased 130.0% from U.S.$304.6 million in 2009 to U.S.$700.7 million in 2010, primarily as a result of higher gross profits in almost all of our business segments due to improved market conditions, partially offset by exchange rate difference losses and higher income tax expenses.

Liquidity and Capital Resources

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

Cash Flow from Operating Activities

Our net cash flow provided by operating activities was U.S.$982.2 million in 2011 and U.S.$1,137.3 million in 2010. The decrease of net cash provided by operating activities in 2011 as compared to 2010 was principally due to a U.S.$656.5 million increase in payments for goods and services, partially offset by an increase of U.S.$ 622.4 million in our collection of sales revenue and a U.S.$149.6 million increase in income tax paid. The increase in both payments for goods and services and collection of sales revenue is mainly explained by higher sales volume during year 2011 as a consequence of the earthquake of February 27, 2010 that interrupted most of our operations in Chile during that year.

Our net cash flow provided by operating activities was U.S.$1,137.3 million in 2010 and U.S.$751.0 million in 2009. The increase of net cash provided by operating activities in 2010 as compared to 2009 was principally due to an increase of U.S.$308.4 million in the collection of trade accounts receivable as a result of increasing sales of our products, and an increase of U.S.$292.4 million received from insurance claims mostly related to the earthquake of February 27, 2010. This result was partially offset by higher payments to suppliers for goods and services by U.S.$91.4 million and an increase of U.S.$72.3 million of payments to and on behalf of employees.

Our net cash flow provided by operating activities was U.S.$751.0 million during the year ended December 31, 2009 and U.S.$769.7 million during the year ended December 31, 2008. The decrease in net cash provided from operating activities in 2009 as compared to 2008 was principally due to a lower collection of accounts receivable as a result of decreasing sales of our products. The decrease in income was explained by the global financial crisis.

Cash Flow Used in Investing Activities

Our net cash used in investing activities was U.S.$1,208.9 million in 2011 and U.S.$669.4 million in 2010. This increase was principally due to capital contributions in the amount of U.S.$242.4 million that we made to the Montes del Plata joint venture and the acquisition of Florestal Vale do Corisco Ltda. by Centaurus Holdings S.A. (a Brazilian company in which we own 49% of the capital stock), for which we paid U.S.$232 million of the purchase price.

Our net cash used in investing activities was U.S.$669.4 million in 2010 and U.S.$717.3 million in 2009. This decrease was principally due to lower amounts used in business combinations by U.S.$286.5 million, partially offset by higher capital expenditures for property, plant and equipment by U.S.$240.9 million.

Our net cash used in investing activities increased from U.S.$466.7 million during the year ended December 31, 2008 to U.S.$717.3 million during the same period of 2009. This increase is primarily explained by the acquisition of Tafisa Brasil for U.S.$167.0 million in August 2009 and the acquisition of forest assets through a joint venture with Stora Enso for U.S.$167.5 million in October 2009.

 

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Cash Flow from Financing Activities

Our net cash used in financing activities was U.S.$481.2 million in 2011 compared to U.S.$33.9 million obtained from financing activities in 2010. This variation is mainly due to a U.S.$267.2 million increase in payments of principal and interest on our debt and a U.S.$132.7 million increase in the payment of dividends.

Our net cash used in financing activities was U.S.$33.9 million in 2010 compared to U.S.$302.4 million obtained from financing activities in 2009. This decrease was mainly due to lower funds obtained by debt financing of U.S.$356.7 million, partially offset by a lower amount used to repay loan obligations by U.S.$112.4 million.

Our net cash related to financing activities increased from U.S.$378.5 million used in financing activities during the year ended December 31, 2008 to U.S.$302.4 million provided by financing activities during the year ended December 31, 2009. This increase is mainly due to an increase in our levels of debt. In March 2009, we issued two bond series for approximately U.S.$142.0 million in the local market and in July 2009 we issued U.S.$500 million in the U.S. market.

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

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

Contractual Obligations

The following table sets forth certain contractual obligations as of December 31, 2011, and the period in which the contractual obligations come due.

 

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

Debt obligations(1)

     209.2         706.9         443.5         1,784.2         3,143.8   

Forestal Río Grande debt obligations(2)

     35.2         34.3         —           —           69.5   

Purchase obligations(3)

     29.1         —           —           —           29.1   

Capital (finance) lease obligations

     —           —           —           —           —     

Operating lease obligations

     —           —           —           —           —     

Other contractual obligations(4)

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     273.5         741.2         443.5         1,784.2         3,242.4   

 

(1) Includes estimated interest payments related to long-term debt obligations.
(2) Forestal Río Grande S.A. is a special purpose entity, which we control but do not own. As a result, we include the financial information of Forestal Río Grande S.A. in our financial statements, including its long term debt obligations.
(3) Excludes contracts entered into with independent contractors to perform operations on our behalf. Our payment obligations under such contracts are not pre-determined, but rather depend on the performance of certain variables. Accordingly, we cannot quantify our contractual obligations under such contracts.
(4) Excludes our obligations to purchase wood, plantations and land from Forestal Río Grande S.A. because those obligations are already included in our consolidated financial statements as part of our indebtedness.

 

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Investment Activities

During 2011, our principal investment activities were as follows:

 

   

On November 17, 2011, Centaurus Holdings S.A., a Brazilian company that is 51% owned by Klabin S.A. and 49% by our subsidiary Arauco Forest Brasil S.A., acquired Florestal Vale do Corisco Ltda., which has 107,000 hectares of land in the Brazilian state of Paraná. The total purchase price for the proposed transaction was U.S.$473.5 million, of which we paid 49%.

 

   

On December 29, 2011, we entered into an asset purchase agreement to acquire a panel industrial facility in Moncure, North Carolina. This transaction closed in January 2012 for a purchase price of US$56.0 million plus working capital.

 

   

During 2011, we made capital contributions in the amount of U.S.$242.4 million to the Montes del Plata joint venture.

Financing Activities

During 2011, our principal financing activities were as follows:

 

   

On September 13, 2011, we paid at maturity U.S.$387.0 million of the balance of our 7.75% notes due 2011.

 

   

On September 29, 2011, Celulosa y Energía Punta Pereira and Zona Franca Punta Pereira (of which we own 50% of each) closed a U.S.$1,354.0 million loan agreement to finance the construction of a pulp mill and port terminal in Punta Pereira, Uruguay. Arauco agreed to guarantee 50% of this loan. The loan is composed by a U.S.$900.0 million ECA financing due 2023, a U.S.$200.0 million A Loan with the Interamerican Development Bank due 2023 and a U.S.$254.0 million B Loan due 2020 with commercial banks.

 

   

On December 6, 2011, we entered into a U.S.$200 million unsecured loan agreement. The loan under such agreement bears interest at a LIBOR-based rate and matures in December 2014.

As of December 31, 2011, our short-term bank debt was U.S.$185.8 million of which 93.6% was U.S. dollar-denominated. As of December 31, 2011, our total long-term bank, export credit agency and multilateral lending agency debt (including the current portion of such debt) was U.S.$407.5 million of which 98.2% was U.S. dollar-denominated. As of December 31, 2011, we also had total capital markets borrowings (including the current portion of such debt) of U.S.$2,619.9 million, 75.8% of which was U.S. dollar-denominated. As of December 31, 2011, the weighted average maturity of our long-term debt was 6.7 years. The interest rate on our variable rate debt is determined principally by reference to the London inter-bank offered rate (LIBOR), and as of December 30, 2011, the average interest rate for our U.S. dollar floating rate debt over nine-month LIBOR was 1.27%. As of December 30, 2011, the average interest rate for our U.S. dollar fixed rate debt was 5.70%. These average rates do not reflect the effect of swap agreements and subsequent unwinds effective as of December 30, 2011.

On January 11, 2012, we issued U.S.$500 million aggregate principal amount of 4.75% bonds due in 10 years in the international capital markets.

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

 

   

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

 

   

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

On April 26, 2012 we issued UF 5 million aggregate principal amount of bonds in the Chilean local market. The series of bonds was issued at 3.88% with a maturity of 21 years and a grace period of 10 years.

 

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

 

   

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

We were in compliance with all bank loans and bonds covenants as of December 31, 2011.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any material off-balance sheet arrangements.

TREASURY MANAGEMENT

We manage the treasury activities of all of our Chilean subsidiaries on a centralized basis. Our Chilean subsidiaries borrow from or lend money to us in accordance with their daily cash requirements or surplus, maintaining their cash balance close to zero. Our policy is not to allow our Chilean subsidiaries to invest in financial instruments and other transactions. We make decisions regarding short-term loans, short-term investments, currency transactions and other transactions on a consolidated basis. Treasury activities are governed by our cash and deposits policy, which is approved by the board of directors. The main principles of our cash and deposits policy are as follows:

 

   

investments must be in fixed income instruments;

 

   

we do not invest in stocks;

 

   

investments must be in instruments from the Central Bank of Chile or from internationally recognized financial institutions; and

 

   

transactions must be carried out only with banks or bank subsidiaries.

Our Argentine and Brazilian subsidiaries manage their treasury activities independently from us. Their activities are governed by cash and deposit policies that are approved by their chief executive officers. These policies are based on the same principles underlying our cash and deposits policy.

HEDGING

We periodically review our exposure to risks arising from fluctuations in foreign exchange rates and interest rates and make a determination, on a case-by-case basis, at our senior management level whether or not to hedge such risks. As a result, from time to time we enter into currency and interest rate swaps with respect to a portion of our borrowings. See Note 23 to our audited consolidated financial statements.

Interest Rate Swap Agreements

The Bío Bío Investment Fund, with which we entered into certain agreements pursuant to which we became the administrator and exclusive buyer of the forestry assets acquired from Forestal Bío Bío S.A., entered into an interest rate swap agreement, in an initial notional amount of U.S.$240 million with amortizations during the life of the swap in the same amount and dates of the amortizations of the credit agreement the Bío Bío Investment Fund obtained on October 6, 2006, with interest rate settled quarterly and with a final maturity in October 2013. The net effect of this interest rate swap agreement is that the Bío Bío Investment Fund pays fixed interest rate at a rate of 5.256% and receives a floating rate at 3 months LIBOR. In January 2007, the Bío Bío Investment Fund transferred all of its assets and financial debt to Forestal Río Grande S.A.

Cross Currency Swap Agreements

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

 

   

A cross currency swap agreement with Banco de Chile for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 2.25% and pays semi-annual interest based on the notional amount of U.S.$35,700,986.39, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 4.99%. This swap matures in March 2014.

 

 

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A cross currency swap agreement with JPMorgan Chase Bank for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 2.25% and it pays semi-annual interest based on the notional amount of U.S.$35,281,193.28, which is the equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 4.94%. This swap agreement matures in March 2014.

 

   

A cross currency swap agreement with Barclays Bank PLC for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.25% and it pays semi-annual interest based on the notional amount of U.S.$38.38 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.86%. This swap agreement matures in October 2014.

 

   

A cross currency swap agreement with Banco de Chile for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.25% and it pays semi-annual interest based on the notional amount of U.S.$37.98 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.79%. This swap agreement matures in April 2014.

 

   

A cross currency swap agreement with Deutsche Bank for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.25% and it pays semi-annual interest based on the notional amount of U.S.$37.98 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.8%. This swap agreement matures in October 2014.

 

   

A cross currency swap agreement with Deutsche Bank for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.25% and it pays semi-annual interest based on the notional amount of U.S.$37.62 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.79%. This swap agreement matures in October 2014.

 

   

A cross currency swap agreement with Barclays Bank PLC for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.25% and it pays semi-annual interest based on the notional amount of U.S.$38.42 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.62%. This swap agreement matures in October 2014.

 

   

A cross currency swap agreement with Deutsche Bank for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 3.96% and it pays semi-annual interest based on the notional amount of U.S.$43.62 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.29%. This swap agreement matures in October 2021.

 

   

A cross currency swap agreement with JPMorgan Chase Bank for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.21% and it pays semi-annual interest based on the notional amount of U.S.$43.62 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.23%. This swap agreement matures in September 2020.

 

   

A cross currency swap agreement with Corpbanca for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 3.25% and it pays semiannual interest based on the notional amount of U.S.$42.86 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.20%. This swap agreement matures in September 2020.

 

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A cross currency swap agreement with BBVA for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 3.25% and it pays semiannual interest based on the notional amount of U.S.$42.86 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.20%. This swap agreement matures in September 2020.

 

   

A cross currency swap agreement with Deutsche Bank for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 3.25% and it pays semi-annual interest based on the notional amount of U.S.$42.86 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.25%. This swap agreement matures in September 2020.

 

   

A cross currency swap agreement with Banco Santander for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 3.25% and it pays semi-annual interest based on the notional amount of U.S.$42.87 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.17%. This swap agreement matures in September 2020.

 

   

A cross currency swap agreement with BBVA for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 3.25% and it pays semi-annual interest based on the notional amount of U.S.$42.86 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 5.09%. This swap agreement matures in September 2020.

 

   

A cross currency swap agreement with Corpbanca for UF 1,000,000. Under this agreement, we receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.21% and it pays semi-annual interest based on the notional amount of U.S.$43.28 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 3.36%. This swap agreement matures in October 2014.

The aggregate fair value of our currency swap agreements as of December 31, 2011 represented a liability of U.S.$0.2 million and as of December 31, 2010 represented an asset of U.S.$53.4 million.

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

We have also analyzed our exposure to risks associated with fluctuations in the prices of commodities, including pulp, but have, thus far, not entered into any material hedging transactions with respect to such risks.

RESEARCH AND DEVELOPMENT

We spent U.S.$3.5 million for the year ended December 31, 2011 on research and development. We conduct our principal research and development programs through our subsidiary, Investigaciones Forestales Bioforest S.A., which concentrates its efforts on applying and implementing advanced technologies to the specific characteristics of our forests and mills.

We are continuously researching and attempting to develop different strains of long-fiber pine trees to improve their quality and to shorten their average harvest cycle. Additionally, we maintain close relations with certain international research institutes, equipment suppliers and the scientific and engineering community involved with our industry.

 

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TREND INFORMATION

During the last quarter of 2011, world pulp prices reached its lowest level of the year. The main reasons behind this decline were lower demand in Europe, oversupply in Asia, credit restrictions in China and general uncertainty in the financial market.

During October and November of 2011, the Chinese government implemented credit restrictions that had an adverse effect on pulp purchasing activity in China and resulted in rising pulp inventories. In December, the credit restrictions were eased, and as a result of the improved credit market, and in part driven by an expectation in the market that prices would rise in 2012, Chinese paper producers commenced buying pulp at normal levels. In an effort to unload excess inventory, certain European integrated paper producers offered large volumes at a discount, and even shifted pulp volumes from Europe to China to satisfy the increasing demand. Prices of such offers were approximately U.S.$20 to U.S.$40 under market price, which was already at a low price level compared to the annual average. By the end of the year, paper inventories declined and downward pressure over pulp prices eased. Although paper demand was not active, paper producers had a relatively positive quarter due to a decline in cost of raw materials, especially pulp, which depending on the paper grade, may comprise up to 70% of the total cost of sales. Other Asian countries such as Korea, Taiwan and Japan had stable demand for pulp and paper, and taking advantage of low pulp prices, producers in these markets recorded increases in margins during the fourth quarter of 2011.

As of the date of this annual report, the European pulp market continues to be depressed, largely as a result of the European sovereign debt crisis. Unstable financial markets have translated into a lack of paper demand; and lower paper productions levels have reduced demand for pulp. Furthermore, certain European integrated paper producers have cut paper production while continuing to produce pulp, mainly long-fiber pine pulp (the most commonly used pulp grade in Europe), which has increased pulp supply in European and Asian markets and crowded out foreign producers.

The real estate and construction sectors in the United States did not show significant improvement during the fourth quarter of 2011. The housing starts index reached 657,000 units in December 2011, which is still lower than the 10-year historical average. During the fourth quarter of 2011, prices for our molding and timber products did not vary significantly as compared to the previous quarter.

During the first quarter of 2012, there have been signs of recovery in international pulp prices. During this period, we saw increases in two major pulp indexes: the bleached hardwood kraft pulp index increased 16.0%, reaching U.S.$752.61 per ton, and the northern bleached softwood kraft pulp index increased 1.79%, reaching U.S.$843.85 per ton. This was mainly the result of an increase in demand in Asia, especially in China, and an active market in Latin America.

 

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Item 6. Directors, Senior Management and Employees

DIRECTORS AND EXECUTIVE OFFICERS

Directors

A board of directors manages our business. Our by-laws (estatutos) require that the board of directors consist of nine directors. Our directors cannot also be our executives. The entire board is elected every three years and can be re-elected for any number of periods. The current board was elected in April 2010, and their terms will expire in 2013. The board may appoint replacements to fill any vacancies that occur during periods between elections; however, at the annual shareholders’ meeting following any such replacement, an election of the entire board must take place. Scheduled meetings of the board of directors are, generally, held once a month. Extraordinary board meetings are called when summoned by the Chairman or when requested by at least two directors. We do not have an audit committee or compensation committee.

Our current directors are listed below.

 

Name

  

Years as Director

  

Position

  

Age

José Tomás Guzmán

   26    Chairman    82

Roberto Angelini

   26    First Vice-Chairman    63

Manuel Bezanilla

   26    Second Vice-Chairman    67

Jorge Andueza

   18    Director    63

José Rafael Campino

   2    Director    59

Carlos Croxatto

   26    Director    97

Alberto Etchegaray

   18    Director    66

Eduardo Navarro

   4    Director    46

Timothy C. Purcell

   7    Director    52

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

José Tomás Guzmán became a Director on April 30, 1986 and became Chairman of the board of directors on May 4, 2007. He served as Chairman of the board of directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as First Vice-Chairman of the board of directors from January 27, 2005 to May 4, 2007. He is a partner of the law firm Portaluppi, Guzmán y Bezanilla, is a Vice-Chairman of COPEC, Empresas Copec and AntarChile, is Chairman of the board of directors of Forestal Arauco, Industrias Forestales S.A., Inversiones Siemel S.A. and Compañía de Seguros de Vida Cruz del Sur S.A., and serves as a member of the boards of directors of Sigma S.A., Servicios Corporativos Sercor S.A., Corpesca S.A. and Astilleros Arica S.A. Mr. Guzmán holds a law degree from the Catholic University of Chile.

Roberto Angelini became a Director on April 30, 1986 and became First Vice-Chairman of the board of directors on May 4, 2007. He served as Vice-Chairman of the board of directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as Second Vice-Chairman of the board of directors from January 27, 2005 to May 4, 2007. He serves as Chairman of the board of directors of Empresas Copec, COPEC, AntarChile, Corpesca S.A., Pesquera Iquique-Guanaye S.A., Astilleros Arica S.A., Industrias Forestales S.A., Compañía Minera Can Can S.A. and Servicios Corporativos Sercor S.A. He also serves as a member of the boards of directors of Forestal Arauco, Empresa Pesquera Eperva S.A., Orizon S.A., Compañía de Seguros de Vida Cruz del Sur S.A., Inversiones Siemel S.A. and Sigma S.A. Mr. Angelini holds a degree in civil engineering from the Catholic University of Chile.

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

 

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Jorge Andueza became a Director on April 11, 1994. He is also the Chief Executive Officer of AntarChile and serves as a member of the boards of directors of COPEC, Empresas Copec, Forestal Arauco, Empresa Pesquera Eperva S.A., Corpesca S.A., Compañía de Seguros de Vida Cruz del Sur S.A., Inversiones Siemel S.A., Astilleros Arica S.A., Pesquera Iquique-Guanaye S.A., Orizon S.A., Organización Terpel S.A., Servicios Corporativos Sercor S.A. and Sigma S.A. Mr. Andueza holds a degree in electronic civil engineering from Federico Santa María Technical University.

José Rafael Campino became a Director on March 23, 2010. He is currently Chairman of the board of directors and Chief Executive Officer of Forestal del Sur S.A., a member of the boards of directors of Forestal Los Lagos S.A. and Forestales Regionales S.A., Managing Partner of Forestal Atlántico Sur S.A.R.L. in Montevideo, Uruguay and former President of the Corporación Chilena de la Madera (Chilean Forestry Association). Mr. Campino holds a degree in civil engineering from the Catholic University of Chile and Master of Science degree in management from Stanford University.

Carlos Croxatto became a Director on April 30, 1986. Mr. Croxatto holds a degree in civil engineering from the University of Chile.

Alberto Etchegaray became a Director on April 11, 1994 and served as Chairman of the board of directors from January 4, 2005 to May 4, 2007, when he voluntarily resigned. He is also a partner of Domet Ltda., the Chairman of the board of directors of Invesco Internacional S.A., Salfacorp S.A., Red Salud S.A and Habitaria S.A. He served as the Chilean Minister of Housing for four years. Mr. Etchegaray holds a degree in civil engineering from the Catholic University of Chile.

Eduardo Navarro became a Director on September 25, 2007. He is also the Chief Executive Officer of Empresas Copec S.A., the Chief Executive Officer of Pesquera Iquique-Guanaye S.A., and serves as a member of the boards of directors of COPEC, Abastecedora de Combustibles S.A., Sociedad Nacional de Oleoductos S.A., Empresa Eléctrica Guacolda S.A., Corpesca S.A., Orizon S.A., Compañía Minera Can Can S.A., Sociedad Minera Isla Riesco S.A., Inversiones del Nordeste S.A., Metrogas S.A. and Colbún S.A. Mr. Navarro holds degrees in commercial engineering and economics, and a master’s degree in economics, all from the Catholic University of Chile.

Timothy C. Purcell became a director on April 26, 2005. He is also Managing Partner of Linzor Capital Partners, LP. Mr. Purcell currently serves as a member of the boards of directors of Compañía de Seguros de Vida Cruz del Sur S.A., Cruz del Sur Administradora General de Fondos S.A., Isapre Cruz Blanca S.A., Parque Arauco S.A. and Corporación Santo Tomás. He is also a Trustee of International House in New York and a Trustee of the Chilean chapter of The Nature Conservancy. Mr. Purcell received an undergraduate degree with distinction in Economics from Cornell University, as well as a Masters Degree in International Studies from the University of Pennsylvania and a master’s degree in business (MBA) from Wharton Business School.

 

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Executive Officers

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

 

Name

  

Years with

Arauco

  

Position

  

    Age    

Matías Domeyko(1)    23    Chief Executive Officer    50
Cristián Infante(2)    16    President and Chief Operating Officer    45
Gianfranco Truffello    17    Chief Financial Officer    44
Robinson Tajmuch    21    Comptroller Director    55
Camila Merino    1    Human Resources Officer    44
Franco Bozzalla    22    Wood Pulp Area Managing Director    49
Charles Kimber    26    Corporate Affairs & Marketing Director    50
Antonio Luque    20    Sawn Timber Area Managing Director    55
Alvaro Saavedra    20    Forestry Area Managing Director    56
Gonzalo Zegers    4    Panels Area Managing Director    51
Felipe Guzman    3    General Counsel    42

 

(1) 

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

(2) 

As of September 30, 2011.

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

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

Cristián Infante is the President and Chief Operating Officer of Arauco, a position that was created by Arauco in July 2011. Previously, he has served as the Corporate Management & Development Director and the Atlantic Region Managing Director. He joined Arauco in 1996 as a woodpulp sales representative, where he worked for two years. In 1998, Mr. Infante was appointed sales manager for industrial lumber and remanufactured products of Forestal Arauco, where he worked until 1999, at which time he moved to Centromaderas S.A., where he worked for two years. Mr. Infante holds a degree in civil engineering from the Catholic University of Chile.

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

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

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

Franco Bozzalla is the Woodpulp Area Managing Director. He joined Arauco in 1990. He was formerly a sales representative of Forestal Arauco and the Panels Area Managing Director. Mr. Bozzalla holds a degree in civil engineering from the Catholic University of Chile.

 

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

Antonio Luque is the Sawn Timber Area Managing Director of Arauco and has held that position since 1993. Before joining Arauco, he was the General Manager of Cabildo S.A. and a research engineer at Compañía Industrial. Mr. Luque holds a degree in civil engineering from the University of Chile.

Alvaro Saavedra is the Forestry Area Managing Director of Arauco. He joined Arauco in 1991. Previously, he was the Director of Development of Forestal Arauco. He holds a degree in civil engineering from the University of Chile and a master’s degree in science from the University of London.

Gonzalo Zegers is the Panels Area Managing Director of Arauco. He joined Arauco in 2008. Before joining the Company, he was the general manager of Agrofruta S.A. from 1991 to 1995, Chief Financial Officer (1995-1996) and Chief Executive Officer (1996-2005) of MASISA, and Chief Executive Officer of ATC Panels Inc. (USA) until 2008. Mr. Zegers holds a degree in commercial engineering from the Santiago University of Chile.

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

Compensation

For 2011, the aggregate compensation of all our directors and executive officers and senior managers paid or accrued in that year for services in all capacities, including salaries and compensation for their service to those executive officers who serve as directors, was U.S.$47.1 million. We do not maintain any pension or retirement programs or incentive compensation plans for our directors or executive officers. We also do not maintain any plans providing for benefits upon termination of employment. The following table sets out the compensation of our directors for their services as directors in the years provided.

 

     2010      2011  

Roberto Angelini

   U.S.$ 200,701         213,354   

José Tomás Guzmán

     229,893         259,868   

Carlos Croxatto

     251,530         269,354   

Manuel Bezanilla

     141,030         179,804   

Jorge Andueza

     60,019         113,753   

Jorge Bunster

     14,651         0   

José Rafael Campino

     45,368         64,949   

Alberto Etchegaray

     60,019         64,949   

Eduardo Navarro

     60,018         64,949   

Juan Cambiaso

     36,000         48,000   

Antonio Luque

     30,952         43,156   

Matías Domeyko

     141,630         154,591   

René Katz

     12,462         13,564   

Manfred Mayer

     12,462         13,564   

Jorge Garnham

     24,952         6,707   

Eduardo Zañartu

     12,490         13,591   

Alvaro Saavedra

     30,952         43,156   

Franco Bozzalla

     24,952         33,822   

Cristián Infante

     18,462         84,448   

Gonzalo Zegers

     18,489         29,591   

Robinson Tajmuch

     24,952         27,156   

Charles Kimber

     24,951         27,156   

 

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     2010      2011  

Timothy C. Purcell

     60,018         64,949   

Gianfranco Truffello

     0         9,026   
  

 

 

    

 

 

 

Total Compensation

   U.S.$ 1,536,952         1,843,457   
  

 

 

    

 

 

 

Employees

The following table provides a breakdown of our employees by main category of activity as of the end of each year in the three-year period ended December 31, 2011.

 

     As of December 31,  
     2009      2010      2011  

Pulp mill employees

     2,286         2,327         2,348   

Other industrial employees

     3,398         3,446         3,583   

Forestry employees

     1,347         1,670         1,803   

Administrative employees

     873         1,591         1,954   
  

 

 

    

 

 

    

 

 

 

Total

     7,904         9,034         9,688   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2011, we had contracts with 1,002 contractors, who employed 25,456 employees. Contractors that are not affiliated with us or with each other operate our eight sawmills and five remanufacturing facilities in Chile. The 12 independent contractors that operate our Chilean sawmills had 2,652 employees at December 31, 2011. The independent contractors that operate our Chilean remanufacturing facilities had 1,950 employees at December 31, 2011 and the independent contractor that operates the laminating beams line employed 140 employees at December 31, 2011.

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

22.7% of our employees in Chile, 49.2% of our employees in Argentina and 11.3% of our employees in Brazil were unionized at December 31, 2011. We negotiate collective bargaining agreements of two or three years’ duration with unionized employees.

We have stable employee relations in Chile, Argentina and Brazil. Our Chilean operations have not experienced any work stoppages in the last five years other than (i) a ten-day work stoppage in November 2009 at our Constitución pulp mill, our Trupán-Cholguán panel mill, and our Nueva Aldea and Horcones complexes, (ii) a three-day work stoppage in September 2009 at our Constitución and Valdivia pulp mills, our Trupán-Cholguán panel mill, and our Nueva Aldea and Horcones complexes; and (iii) a six-day work stoppage in May 2007 at our Horcones complex (which includes the Arauco pulp mill, a panel plant and two sawmills), each of which was caused by the employees of our third party forestry contractors at each of the respective facilities.

In Argentina we experienced (i) a 3-day stoppage at Alto Paraná’s chemical mill in March 2011, as a result of a strike by the chemical union and (ii) a 4-day stoppage at Alto Paraná’s pulp mill in September 2010, as a result of a strike by the pulp union, but these strikes were limited to two hours per shift and did not materially affect operations. In January 2008, Alto Paraná’s chemical mill in Argentina experienced three days of work stoppage, but these strikes were limited to two hours per shift and did not materially affect operations. In addition, in January and February 2007, we experienced (i) a 12-day stoppage at our Zárate mill due to a dispute arising between the local chemical and timber unions with regard to the representation of their workers at the mill and (ii) a six-day suspension of operations at the Alto Paraná’s pulp mill as a result of a strike by a group of approximately 150 power saw operators.

 

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On December 27, 2011, the Agricultural Labor Regime Law 26,727 was enacted in Argentina. This Law replaces Law 22,248 and its amendments, introducing significant changes in the regulatory framework, such as the creation of the National Registry of Agricultural Workers and Employers (RENATEA) which replaced the former registry known as “RENATRE”. Further, this Law provides that the Labor Contract Law (Law 20,744) may also still apply, if consistent with Law 26,727. This new law reinforces the principle of joint responsibility for the payment of labor and the social security obligations owed to our contractor’s employees.

For information regarding strikes and work stoppages occurred in the last five years at our Argentinean subsidiary, see “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—Our operations could be adversely affected by labor disputes.”

During the last five years, there have been no strikes or other material work stoppages at our Brazilian subsidiaries.

In September 2011, we experienced a 12-day work stoppage of construction at our Montes del Plata joint venture in Uruguay.

SHARE OWNERSHIP

Our former director, Anacleto Angelini, who passed away on August 28, 2007, owned 20.8% of the partnership rights in Inversiones Angelini y Compañía Limitada, or Inversiones Angelini, which is the principal shareholder of AntarChile. He directly owned 0.9% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Anacleto Angelini beneficially owned 8.3% of our shares. Mr. Angelini’s estate was divided among his heirs through a public deed in January 2010, and as a result Mr. Angelini’s ownership of partnership rights in Inversiones Angelini was distributed among his widow, Mrs. María Noseda Zambra, who received 15.3%, his nephew Mr. Roberto Angelini, who received 3.1%, and his niece Mrs. Patricia Angelini Rossi, who received 2.3%.

Our First Vice-Chairman, Roberto Angelini, owns directly and indirectly 22.4% of Inversiones Angelini. He directly owns 0.2% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Roberto Angelini beneficially owns 6% of our shares.

Our Chairman, José Tomás Guzmán, owns 1.9% of Inversiones Angelini. Directly and indirectly through Agroforestal e Inversiones Maihue Limitada and Inversiones Maihue Limitada, he owns 3% of AntarChile and 0.14% of Empresas Copec. Through his interests in Inversiones Angelini, AntarChile and Empresas Copec, José Tomás Guzmán beneficially owns 0.8% of our shares.

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

Item 7. Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

Our only outstanding voting securities are shares of common stock of a single series, without nominal (par) value. The following table sets forth certain information concerning ownership of our common stock, as of April 30, 2012, with respect to each shareholder known by us to own more than 5% of the outstanding shares of our common stock and all of our directors and executive officers, as a group.

 

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     Number of Shares
Owned
     Percentage
Ownership
 

Empresas Copec

     113,127,605         99.98   

Directors and executive officers of the Company, as a group

     —           —     

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

Empresas Copec is a Chilean public company listed on the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Chilean Electronic Stock Exchange. It is a holding company, the principal interests of which are in Arauco, gasoline distribution, electricity, gas distribution and fishing. Before October 1, 2003, Empresas Copec’s legal name was Compañía de Petróleos de Chile S.A. As of that date, Compañía de Petróleos de Chile S.A. transferred all its gasoline- and fuel-related business assets to a new subsidiary, Compañía de Petróleos de Chile COPEC S.A., which we call COPEC, and changed its legal name to Empresas Copec S.A. In May 2005, AntarChile purchased 3.1 million shares of COPEC, increasing its ownership to 60.4% of Empresas Copec. At December 31, 2011, AntarChile owned 60.8% of Empresas Copec.

Through its ownership in Empresas Copec, AntarChile beneficially owned 60.8% of our shares at December 31, 2011. As of April 30, 2012, AntarChile beneficially owns 60.8% of our shares. Inversiones Angelini y Compañía Limitada (“Inversiones Angelini”) in turn owns 63.4% of AntarChile’s shares, and certain other related investors own an additional 10.96% of AntarChile. Inversiones Angelini and such other investors are defined herein as the “Angelini Group.”

The principal equity owners of interest in Inversiones Angelini are Mrs. María Noseda Zambra with 10.94%, Mr. Roberto Angelini Rossi directly and indirectly with 22.37%, and Mrs. Patricia Angelini Rossi directly and indirectly with 18.80%.

As of December 31, 2011 and April 30, 2012, the Angelini Group controlled Arauco through the ownership structure described above.

RELATED PARTY TRANSACTIONS

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

Notwithstanding the above, in accordance with Article 147 of the Chilean Companies Act, our Board has resolved that the following transactions with related parties do not need to follow the procedure set forth in the previous paragraph: (i) transactions which do not involve material amounts; (ii) transactions with affiliates in which we control 95% or more of the equity; and (iii) transactions that are considered by our Board to be performed in the ordinary course of our business in accordance with our general policy of customary dealings, which was approved by our Board on December 29, 2009 and is available to shareholders at our main office and is published on our website, at www.arauco.cl.

 

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

 

   

directors or officers of a corporation (or their respective spouses and certain other relatives) acting on their own;

 

   

directors or officers of a corporation who have a direct or indirect ownership interest of at least 10% of the equity shares of the other company or are also directors or officers of such other company;

 

   

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

 

   

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

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

Our transactions with affiliates include the following:

 

   

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

 

   

We purchase port services from our 20.1% affiliate Puerto de Lirquén S.A. and our 50.0% affiliate Compañía Puerto de Coronel S.A.;

 

   

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

 

   

We obtain legal services from Portaluppi, Guzmán y Bezanilla, a law firm of which two of our directors, José Tomás Guzmán and Manuel Bezanilla, are partners.

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

Item 8. Financial Information

See “Item 17—Financial Statements.”

EXPORT SALES

Export sales constituted 71.5% of our sales revenue for the year ended December 31, 2011. Our total export sales revenue for 2011 was U.S.$3,127.7 million. Our principal overseas markets are Asia, North America and Western Europe. See “Item 4. Information on the Company—Description of Business—Domestic and Export Sales.”

 

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LEGAL PROCEEDINGS

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

Since the end of 2004, we have been subject to various criminal proceedings relating to alleged violations of several environmental laws in Chile, each of which has been either terminated or abandoned by the prosecutor (decisión de no perseverar) as of the date of this annual report. For instance, on October 18, 2010, in a public hearing held before the San José de la Mariquina’s Criminal Court, the prosecutor in charge of the investigation announced its decision to terminate the investigation due to a lack of information or evidence that could support any theory of criminal liability. Such decision has not been challenged.

While Chilean law in general provides that only individuals can be convicted in criminal actions, Chilean Law Nº 20,393, which was published in the Official Gazette on December 2, 2009, provides an exception to this general rule, under which criminal responsibility of legal entities can be established for criminal offenses related to the financing of terrorism, asset laundering or bribery. We do not have knowledge of any fact that could result in such criminal responsibility for the Company.

Valdivia Mill

Our operations at the Valdivia Mill have been subject to continued environmental scrutiny by Chilean environmental regulators and the Chilean public since the mill began its operations in 2004. There have been allegations of a causal connection between the migration and death of black-neck swans and the operations at the Valdivia mill, and in a study dated April 18, 2005, researchers at the Austral University in Valdivia concluded that wastewater discharges from the Valdivia Mill had significantly altered the quality of the Cruces River. The study also concluded that the effluent discharges were a significant contributing factor in the death or migration of a large population of the black-necked swans in the Carlos Anwandter Nature Sanctuary downstream from the Valdivia Mill. In April, 2005, the National Defense Council instituted an action seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the discharges from the Valdivia Mill. In response, we have argued to the court that this action should be rejected, as several studies have demonstrated that there is no relationship between the alleged damages and the operation of the Valdivia Mill. The Valdivia Mill lawsuit remains under review by the court as of the date of this annual report. If the result of the Valdivia Mill lawsuit is unfavorable to us, we may be required to invest a significant amount of funds and/or take other actions to repair any environmental harm a court determines we have caused, which could materially and adversely affect our business, financial condition, results of operations and cash flows. We cannot predict the outcome or impact of this lawsuit or when it may be resolved.

In June 2005, we suspended operations at the Valdivia Mill until certain technical and legal conditions could be clarified with the applicable regulatory authorities. We estimate this suspension resulted in a loss of sales of approximately U.S.$1.0 million per day. The mill resumed operations in August 2005 at 80% of its authorized production capacity after 64 days of suspended operations. In order to achieve the full production capacity authorized by applicable permits, the mill had to fulfill certain new requirements established by the COREMA. On January 18, 2008, the COREMA authorized the Valdivia Mill to return to its annual authorized production capacity of 550,000 metric tons. The mill gradually increased its production over a four-month period starting in March 2008 and reached full capacity in June 2008. The suspension of operations at the Valdivia Mill adversely affected our business, financial condition, results of operations and cash flows. Any future suspension of operations at the Valdivia Mill or at any other of our significant operating plants can be expected to have similar adverse effects. We offer no assurance that the Valdivia Mill will be able to operate without further interruption. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—Environmental concerns led us to temporarily suspend our operations at the Valdivia Mill, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows” and “Item 4. Information on the Company—Description of Business—Pulp—Pulp mills—Chile—Valdivia Mill.”

 

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In June 2007, we submitted to the COREMA of the Tenth Region of Chile an environmental impact study for the implementation of substantial technological improvements on the quality of the effluents generated by the Valdivia Mill. On June 30, 2008, the COREMA approved that environmental impact study. However, the approval was subject to certain conditions that, in the opinion of Arauco, affected the feasibility of the project. For such reason, Arauco filed an appeal (recurso de reclamación) before the Directive Council (Consejo Directivo) of the Environmental National Commission (Comisión Nacional del Medio Ambiente), or CONAMA, challenging the conditions. Such appeal (recurso de reclamación) was partially accepted by the CONAMA. However, some of the conditions that affect the feasibility of the project were maintained. As a consequence, on September 17, 2009, we presented another appeal (recurso de reclamación) before the ordinary courts of justice, which appeal has not been resolved as of the date of this annual report.

On February 19, 2009, we submitted to the COREMA of the Fourteenth Region of Chile an environmental impact study for the construction of a pipeline to discharge the Valdivia Mill’s wastewater in the Pacific Ocean near Punta Maiquillahue, that is, in a body of water other than the Cruces River, the Carlos Anwandter Nature Sanctuary or their sources. The pipeline would transport the wastewaters of the Valdivia mill through an extension of 37 kilometers from the Valdivia mill to Punta Maiquillahue and would finally discharge the wastewater two kilometers inside the Pacific Ocean. Such environmental impact study was approved with certain conditions by the COREMA by resolution dated February 24, 2010. We have challenged some of these conditions before the Directive Council (Consejo Directivo) of the CONAMA. As of the date of this annual report, the Directive Council of the CONAMA has not resolved the action presented by us. On March 26, 2010, certain indigenous communities located in San José de la Mariquina filed a constitutional action (recurso de protección) against the COREMA of the Fourteenth Region of Chile, challenging the resolution that approved our environmental impact study in February 2010. Such action was rejected by the Court of Appeals of Valdivia. The indigenous communities appealed before the Supreme Court of Chile, which appeal was rejected by such court on October 14, 2010.

As stated in the environmental impact study, the construction of this pipeline will commence once (i) the COREMA (or the relevant environmental authority under the Chilean Environmental Law) approves the environmental impact study in its final form, and (ii) all necessary permits for the construction of the pipeline have been issued by the competent authorities. In the environmental impact study, we estimated that the construction of the pipeline will take 24 months. Once the construction of the pipeline has been completed, we will conduct a 6-month trial phase of the pipeline and will then begin normal operations.

Resolution of our proceeding with the CONAMA or the pending appeals before the Chilean courts regarding the resolutions that approved the environmental impact studies of the pipeline and the effluent quality improvement projects, as well as the construction and operation of the pipeline, are each subject to many environmental, regulatory, engineering and political uncertainties. As a result, we cannot provide any assurances that the projects will be finally approved as requested or completed. If either the request for the necessary permits for the construction of the pipeline is rejected, or the installation of the pipeline is delayed for reasons attributable to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mill’s environmental permit for operation. Alternatively, if any rejection or delays are attributable to reasons beyond our control, we believe that the environmental authorities should extend the applicable deadlines. However, we can provide no assurances that any deadline extensions would be granted, even if we comply with all the requirements that may be set forth by those authorities. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—Environmental concerns led us to temporarily suspend our operations at the Valdivia Mill, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows” and “Item 4. Information on the Company—Description of Business—Pulp—Pulp mills—Chile—Valdivia Mill.”

Licancel Mill

In June 2007, our operations at the Licancel Mill, a pulp mill located in the Seventh Region of Chile, became subject to environmental scrutiny by Chilean environmental regulators and the public. On June 5, 2007, in connection with the death of fish in the Mataquito River, approximately 15 kilometers downstream of the mill, we suspended our operations in the Licancel Mill as a preventive measure. In addition, Chilean authorities, including the health authorities and the Superintendencia de Servicios Sanitarios (Sanitary Services Superintendency), required that we suspend activities at the Licancel Mill and that we suspend any further discharges into the river. On June 18, 2007, as a result of a pipe leakage in the effluent treatment system currently in place at the Licancel Mill, an estimated 50 cubic meters of effluents reached the Mataquito River.

 

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On that same date, we decided to close the mill indefinitely and informed the Sanitary Services Superintendency of the incident. On October 3, 2007, we requested to the health authority (Autoridad Sanitaria) of the Seventh Region of Chile that it remove the suspension of activities at the Licancel Mill. On October 22, 2007, the health authority of the Seventh Region of Chile removed the suspension and imposed certain conditions relating to our activities in the mill consisting primarily of the implementation of certain emergency detection and control programs and systems, with which we have complied. Furthermore, on November 12, 2007 the Sanitary Services Superintendency removed the suspension regarding the release of discharges by the Licancel Mill. The mill resumed operations during January 2008, using the new effluent treatment system in which we invested U.S.$8 million during 2007.

On September 7, 2007, the National Defense Council instituted a civil lawsuit seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the Licancel Mill. Although the National Defense Council agreed to terminate this lawsuit pursuant to an agreement with us dated January 29, 2010, several other proceedings have been commenced as a result of the event at the Licancel Mill, including for loss of income arising from the death of fish at the Mataquito River.

Tax Litigation in Argentina

On December 14, 2007, the Administración Federal de Ingresos Públicos (AFIP), Argentina’s internal revenue service, notified our Argentine subsidiary, Alto Paraná S.A., of a claim for unpaid taxes for fiscal years 2002, 2003 and 2004 in the aggregate amount of AR$418 million (or approximately U.S.$105 million) (including principal, interest and penalties accrued through such date), arising from a dispute regarding certain income tax deductions (related to debt issued by Alto Paraná in 2001 and repaid in 2007) taken by Alto Paraná and rejected by the AFIP. On February 8, 2010, the Tribunal Fiscal de la Nación (Argentina’s tax court) issued an unfavorable administrative ruling requiring that Alto Paraná pay the AFIP’s claim in full.

Alto Paraná appealed this unfavorable administrative ruling to the Court of Appeals and also filed an injunctive action requesting that the court stay Alto Paraná’s payment obligation until resolution of its pending appeal. On May 13, 2010, the Court of Appeals granted an injunction of Alto Paraná’s payment obligation in exchange for the posting of a surety bond in the amount of AR$633.6 million (or approximately U.S.$159 million). We have not established any reserve in respect of this contingency and can offer no assurance that the Court of Appeals will issue a ruling favorable to us. If the Court of Appeals upholds the decision of the Tribunal Fiscal de la Nación, Alto Paraná will be required to satisfy the above-mentioned claim which would have an adverse effect on our financial condition and results of operations.

Tax Litigation in Chile

On August 25, 2005, the Chilean Servicio de Impuestos Internos (the “Chilean IRS”) issued tax calculations No. 184 and No. 185 of 2005 objecting to certain capital reduction transactions effected by Arauco on April 16, 2001 and October 31, 2001, and furthermore, requested reimbursement from the Company for amounts returned to it in respect of certain claimed tax losses. On November 7, 2005, the Company requested a Review of the Supervision Action (Revisión de la Actuación Fiscalizadora, or “RAF”), which is an administrative review of the tax action brought by the Chilean IRS, and subsidiarily, a claim was filed against the above-mentioned tax calculations No. 184 and 185 of 2005. The RAF was resolved on January 9, 2009 by the Chilean IRS, which resolution, however, only partially sustained the Company’s request. In response, the Company filed an additional complaint with regard to the portion of the RAF that was not granted by the administrative review. As of the date of this annual report, the investigation in respect of this complaint is pending.

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

 

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DIVIDEND POLICY

Chilean law currently requires that, unless otherwise decided by the unanimous vote of our issued and subscribed shares eligible to vote, public corporations distribute a cash dividend in an amount equal to at least 30% of the corporation’s consolidated net income for each year on the basis of IFRS, unless and except to the extent the corporation has unabsorbed losses from prior years. In April 2002, our shareholders approved the current dividend policy, setting the cash dividend at 40% of our consolidated net income for each year which was determined on a Chilean GAAP basis through the year ended December 31, 2008, and as of January 1, 2009, is now determined on an IFRS basis. In accordance with IFRS, the determination of the dividend amount is based on the effective realized profit net of any relevant variations in the value of unrealized assets and liabilities. For information regarding the differences between Chilean GAAP and IFRS, see note 2 to our audited consolidated financial statements.

On November 27, 2007, our board of directors approved a provisory dividend for U.S.$0.95 per share, which was distributed on December 12, 2007 and charged to net income. On April 22, 2008, our shareholders approved a final dividend for 2007, which was distributed on May 7, 2008. On November 25, 2008, our board of directors approved a provisory dividend for U.D.$0.89 per share, which was distributed on December 10, 2008 and charged to net income. On April 23, 2009, our shareholders approved a final dividend for 2008, which was distributed on May 7, 2009. In the aggregate, dividends distributed equaled 40% of our consolidated net income for 2008, on a Chilean GAAP basis. On November 24, 2009, our board of directors approved an interim dividend of U.S.$0.2294 per share, which was distributed on December 11, 2009 and charged to net income. On April 27, 2010, our shareholders approved a final dividend of U.S.$0.5016 per share for 2009, which was distributed on May 11, 2010. In the aggregate, dividends distributed equaled 40% of our consolidated net income for 2009 as determined on an IFRS basis. On November 23, 2010, our board of directors approved an interim dividend of U.S.$0.7557 per share, which was distributed on December 15, 2010 and charged to net income. On April 26, 2011 our shareholders approved a final dividend of U.S.$1.6152 per share for 2010, which was distributed on May 11, 2011. Dividends distributed equaled 40% of our consolidated net income for 2010 as determined on an IFRS basis. On November 22, 2011, our board of directors approved an interim dividend of U.S.$0.78 (rounded) per share, which was distributed on December 14, 2011 and charged to net income. On April 24, 2012 our shareholders approved a final dividend of U.S.$1.4278819 per share for 2011, which will be distributed on May 9, 2012. Dividends distributed equaled 40% of our consolidated net income for 2011 as determined on an IFRS basis.

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

Item 9. The Offer and Listing

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

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

Item 10. Additional Information

ARTICLES OF INCORPORATION AND BY-LAWS

When we refer to the “Company,” “Arauco” or “we,” in this description of the articles of incorporation and by-laws, we mean Celulosa Arauco y Constitución S.A.

Organization and Registration

We are a corporation (sociedad anónima) organized in Chile under the laws of Chile, subject to certain rules applicable to Chilean public corporations (sociedades anónima abiertas) and registered on August 18, 1971, by resolution 300-S of the Chilean Securities Commission and recorded in the Santiago Commercial Register of 1971 on page 6433 under entry number 2994 and on page 6431 under entry number 2993. Notice was published in the Official Gazette on September 4, 1971.

 

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Objects and Purposes

Our purpose, as stated in our by-laws (estatutos), includes the manufacture of forestry products, the management of forestry lands and other activities.

Capital

In 2002, our by-laws were amended such that our capital is denominated in U.S. dollars. In 2002, we and two of our subsidiaries, Aserraderos Arauco and Paneles Arauco, received authorization from the Chilean IRS to prepare our audited consolidated financial statements in U.S. dollars, beginning January 1, 2002. In January 1, 2003, our subsidiaries Forestal Arauco, Bosques Arauco, Forestal Valdivia, Forestal Celco and Cholguán obtained the same permission from the Chilean IRS. The same permission from the Chilean IRS was obtained by our subsidiary Inversiones Arauco Internacional Ltda. in January 2003, by our subsidiary Forestal Los Lagos in January 2005 and by our subsidiaries Arauco Bioernergía S.A. and Servicios Logísticos Arauco S.A. in January 2008.

Directors

Pursuant to our by-laws, our board of directors is composed of nine members elected by a general meeting of our shareholders. Our directors are not required to be shareholders. Our by-laws state that the amount of compensation to be received by the directors for their directorial services shall be fixed by the general shareholders’ meeting. Directors may be compensated for any non-directorial services rendered to us at levels of compensation comparable with compensation commonly paid for these services, compensation which is compatible with the directors’ compensation fixed by the general shareholders’ meeting. The by-laws also state that our board of directors has all of the authorities of administration and disposal that Chilean law or the by-laws do not confer upon the general shareholders’ meeting. The board of directors has the right to act on our behalf without the need for a special power of attorney, even in cases where a power of attorney is required by law. In particular, the by-laws provide that the board of directors is empowered to encumber our assets, real and personal property with mortgages, easements or pledges regardless of the value of such property or the amount of the respective encumbrances and to borrow money paying interest, with or without a guaranty for the loan.

Our by-laws provide that we may enter into acts or contracts in which one or more directors are interested only if the interested director’s interest is made known to the board, the acts or contracts are approved by the board and the terms of the act or contract conform to those prevailing in the market. In addition, board resolutions approving interested director transactions must be reported by the chair of the meeting at the first general shareholders’ meeting following the approval of the interested director transaction.

See “Item 6. Directors, Senior Management and Employees” for further information about our board of directors.

Shareholders

Our share capital consists of ordinary shares of no par value issued in registered form. Record holders of shares are registered in our share register. Any transfer of shares must be noted in our share register.

Voting Rights

Each share of our stock entitles the holder to one vote at any meeting of shareholders. Resolutions may be taken upon a vote of an absolute majority of the voting shares present or represented. Any resolution relating to amendments to our by-laws must be approved by an absolute majority of the voting shares issued. Resolutions with regard to the following matters, among others, require the affirmative vote of two-thirds of the voting shares issued:

 

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transformation, including division or merger with another company;

 

   

advanced dissolution;

 

   

change of corporate domicile;

 

   

reduction in our equity capital;

 

   

approval and appraisal of non-cash capital contributions;

 

   

reduction in the number of members of the board of directors;

 

   

the disposal of 50% or more of our assets, whether or not such disposal also includes any of our liabilities; the disposal of 50% or more of the assets of one our subsidiaries, provided that such subsidiary represents at least 20% of our assets; and any disposal of shares by the company that causes us to lose control of a subsidiary that represents at least 20% of our assets; and

 

   

changes to the way in which corporate benefits will be distributed.

According to our by-laws, holders of our shares also have the right to vote at the general shareholders’ meeting for the election of directors. Shareholders or their representatives may accumulate their votes in favor of one candidate or distribute them among various candidates. A vote on the election of directors may be omitted if an election is proposed by acclamation and none of the shareholders present or represented opposes the motion. The board of directors may also be dismissed by a regular or special general shareholders’ meeting, though the shareholders may only vote to dismiss the board as a whole.

Changes to Shareholders’ Rights

To change the rights of holders of our shares or create a new series of our shares, we must amend our by-laws. Any reduction in the number of our shares requires a two-thirds majority vote of all holders of our shares under Chilean law. Chilean law also requires that public corporations distribute a cash dividend in an amount equal to at least 30% of the corporation’s consolidated net income for each year (on an IFRS basis), unless otherwise decided by a unanimous vote of the corporation’s issued and subscribed shares eligible to vote. Any changes to the way in which corporate benefits are distributed must be approved by a two-thirds majority of all holders of the corporation’s shares.

Shareholders’ Meetings

Our by-laws provide that the board of directors shall call general shareholders’ meetings. Notice of general shareholders’ meetings must be made by a prominent notice published at least three times, on different days, in the newspaper of one of our corporate domiciles, as determined by a general shareholders’ meeting, or in the absence of a determination, in the Official Gazette.

A shareholder must be registered in our share register as of the meeting date to be entitled to participate and vote at any shareholders’ meeting. In addition, other persons may represent shareholders at general meetings. Powers of attorney must be given in writing and must be granted with respect to all of the shares the shareholder is entitled to vote as of the date five days before the general shareholders’ meeting.

General shareholders’ meetings may be regular or special meetings. Regular shareholders’ meetings are held once a year within the first four months of the year. Among other things, the regular general shareholders’ meeting appoints independent external auditors to examine our accounts, inventory, balance sheet and other financial results. The by-laws provide that the following matters are to be considered at regular shareholders’ meetings:

 

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the review of our results of operations and external auditors’ reports and the approval or rejection of our annual report, our balance sheet and financial statements;

 

   

the distribution of profits of each financial period and the distribution of our dividends;