20-F 1 d521374d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 30, 2013

 

 

 

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, 2012

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.: 56-2-24617221 • 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

4.75% Notes due 2022

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

     22   
    Item 5.   

Operating and Financial Review and Prospects

     48   
    Item 6.   

Directors, Senior Management and Employees

     71   
    Item 7.   

Major Shareholders and Related Party Transactions

     77   
    Item 8.   

Financial Information

     79   
    Item 9.   

The Offer and Listing

     82   
    Item 10.   

Additional Information

     83   
    Item 11.   

Quantitative and Qualitative Disclosures About Market Risk

     91   
    Item 12.   

Description of Securities Other than Equity Securities

     92   
PART II         93   
    Item 13.   

Defaults, Dividend Arrearages and Delinquencies

     93   
    Item 14.   

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

     93   
    Item 15.   

Controls and Procedures

     93   
    Item 16A.   

Audit Committee Financial Expert

     94   
    Item 16B.   

Code of Ethics

     94   
    Item 16C.   

Principal Accountant Fees and Services

     94   
    Item 16D.   

Exemptions from the Listing Standards for Audit Committees

     95   
    Item 16E.   

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     95   
    Item 16F.   

Change in Registrant’s Certifying Accountant

     95   
    Item 16G.   

Corporate Governance

     96   
    Item 16H.   

Mine Safety Disclosures

     96   
PART III         97   
    Item 17.   

Financial Statements

     97   
    Item 18.   

Financial Statements

     97   
    Item 19.   

Exhibits

     97   

 

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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; when we refer to “the U.S.,” “U.S.A.,” or “the United States,” we mean the United States of America; and when we refer to “Uruguay,” we mean the Oriental Republic of Uruguay. All references to “tons” or “tonnes” are to metric tons (1,000 kilograms), which equal 2,204.7 pounds. One “hectare” equals 10,000 square meters or 2.471 acres. Discrepancies in any table between totals and the sums of the amounts listed 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). As of December 31, 2012, one UF equaled U.S.$47.59 and Ch$22,840.75.

PRESENTATION OF FINANCIAL DATA

This report includes the audited consolidated financial statements of Arauco and our subsidiaries as of December 31, 2012 and 2011 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2012, 2011 and 2010 (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, 2012, the observed exchange rate for Chilean pesos was Ch$479.96 to U.S.$1.00, and on April 29, 2013, the observed exchange rate was Ch$472.05 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, 2008, 2009, 2010, 2011 and 2012 and for each of the five years then ended is derived from, should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards or “IFRS”, as issued by the International Accounting Standards Board (“IASB”).

 

     As of and for the year ended December 31,(1)  
     2008     2009     2010     2011     2012  
     (in thousands of U.S.$, except ratios and per share data)  

INCOME STATEMENT DATA

          

Revenue

     3,713,893        3,097,448        3,767,384        4,374,495        4,280,302   

Cost of sales

     (2,331,854     (2,152,535     (2,276,446     (2,882,455     (3,148,518

Gross profit

     1,382,039        944,913        1,490,938        1,492,040        1,131,784   

Other income

     104,270        181,383        378,480        475,014        390,506   

Distribution costs

     (455,197     (374,641     (381,933     (477,628     (451,846

Administrative expenses

     (259,025     (249,340     (323,916     (415,521     (474,025

Other expenses

     (50,782     (57,978     (49,063     (90,313     (80,401 )) 

Other gains (losses)

     (444     64,102        0        0        16,133   

Finance income

     19,408        19,313        15,761        24,589        17,778   

Finance costs

     (175,241     (193,872     (207,519     (196,356     (233,703

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

     5,839        6,621        (7,693     (11,897     14,253   

Exchange rate differences

     (67,778     17,632        (16,288     (26,643     (18,858

Income before income tax

     503,089        358,133        898,767        773,285        311,621   

Income tax

     (98,044     (53,537     (198,018     (152,499     (171,150
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     405,045        304,596        700,749        620,786        140,471   

BALANCE SHEET DATA

          

Current assets

     1,995,990        2,272,313        3,152,116        2,462,660        2,698,968   

Property, plant and equipment

     4,615,971        4,969,753        5,088,745        5,393,978        5,889,137   

Biological assets(2)

     3,652,433        3,757,528        3,790,958        3,744,584        3,726,186   

Total assets

     10,239,840        11,413,827        12,506,332        12,552,178        13,551,186   

Total current liabilities

     812,915        951,413        1,209,061        1,031,945        1,425,287   

Total non-current liabilities

     3,419,689        4,079,981        4,456,696        4,490,083        5,160,140   

Total equity

     6,007,236        6,382,433        6,840,575        7,030,150        6,965,759   

CASH FLOW DATA

          

Net cash flow from operating activities

     769,736        751,025        1,137,275        982,237        458,492   

Net cash flow from investing activities

     (466,731     (717,291     (669,414     (1,208,857     (1,027,039

Net cash flow from financing activities

     (378,484     302,372        33,852        (481,184     648,084   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash

     (75,479     336,106        501,713        (707,804     79,537   

OTHER FINANCIAL DATA

          

Capital expenditures(3)

     432,398        362,690        595,520        748,272        628,563   

Depreciation and amortization

     189,256        207,415        233,655        230,737        252,381   

Fair value cost of timber harvested

     311,950        198,675        271,515        335,142        311,821   

EBIT(4)

     658,922        532,692        1,090,525        945,052        527,546   

Adjusted EBITDA(4)

     1,162,705        765,618        1,390,482        1,307,685        878,843   

Adjusted EBITDA/total interest expense

     6.63        3.95        6.70        6.66        3.76   

Adjusted EBITDA/sales revenue

     31.3     24.7     36.9     29.9     20.5

Average debt(5)/EBITDA

     —          3.82        2.39        2.55        4.33   

Total debt(6)

     2,651,943        3,202,919        3,449,569        3,213,301        4,400,515   

Total debt(6)/ capitalization(7)

     30.6     33.4     33.5     31.4     38.7

Total debt(6)/ equity attributable to parent company

     44.1     51.1     51.2     46.3     63.9

Ratio of earnings to fixed charges(8)

     3.6        2.7        5.1        4.8        2.1   

Working capital(9)

     1,183,075        1,320,900        1,943,055        1,430,715        1,273,681   

Number of shares

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

Net income per share

     3.58        2.66        6.14        5.41        1.20   

Dividends paid

     317,588        135,175        158,781        291,512        196,816   

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

     2.81        1.19        1.40        2.58        1.74   

 

(1) See Note 5 to our audited financial statements for information on changes to accounting estimates and corrections to our financial statements.

 

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(2) Biological assets refer to our forests and long-standing trees.
(3) Includes capital expenditures in respect of property, plant and equipment and biological assets accrued for the period. Excludes acquisition of companies.
(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 gain that does not represent a cash flow. We believe that Adjusted EBITDA provides investors with a useful supplemental indicator of the performance of our core business because (i) it cancels out the effects of fair value that are independent of the cost efficiency of our operating facilities and (ii) it excludes the effect of exchange rate differences, which are mainly derived from our debt instruments, 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 filings on Form 20-F prior to April 30, 2012 was compliant with the requirements of Form 20-F, we believe that the revised methodology provides readers of our 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 filings prior to April 30, 2012.

 

     As of and for the year ended December 31,  
     2008     2009     2010     2011     2012  
     (in thousands of U.S.$, except ratios and per share data)  

Net income

     405,045        304,596        700,749        620,786        140,471   

(+) Financial costs

     175,241        193,872        207,519        196,356        233,703   

(-) Financial income

     (19,408     (19,313     (15,761     (24,589     (17,778

(+)Income Tax

     98,044        53,537        198,018        152,499        171,150   

EBIT

     658,922        532,692        1,090,525        945,052        527,546   

(+) Depreciation and amortization

     189,256        207,415        233,655        230,737        252,381   

EBITDA

     848,178        740,107        1,324,180        1,175,789        779,927   

(+) Fair value cost of timber harvested

     311,950        198,675        271,515        335,142        311,821   

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

     (65,201     (155,532     (221,501     (229,889     (231,763
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(+) Exchange rate differences

     67,778        (17,632     16,288        26,643        18,858   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     1,162,705        765,618        1,390,482        1,307,685        878,843   

 

(5) Average debt is calculated as the average between the beginning and the end of the applicable year.
(6) Total debt is calculated as the sum of other current financial liabilities and other non-current financial liabilities, less hedging instruments.
(7) Capitalization is calculated as total debt, including accrued interest, plus equity attributable to the parent company.

 

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(8) For purposes of computing the ratio of earnings to fixed charges, earnings consist of income 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.$

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

2012

     519.69         469.65         486.59       479.96

Months (2012-2013)

           

November

     484.48         476.20         480.56       480.39

December

     481.28         474.36         477.11       479.96

January

     475.47         470.67         472.28       471.44

February

     473.60         470.67         472.42       472.96

March

     474.82         471.1         472.48       472.03

April (through April 29)

     477.74         466.50         472.17       472.05

 

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 29, 2013, the observed exchange rate was Ch$472.05 to U.S.$1.00.

 

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FORWARD-LOOKING STATEMENTS

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

Forward-looking statements involve inherent risks and uncertainties. These forward-looking statements are based on current plans, estimates and projections; therefore, readers should not place undue reliance on them. Actual results could differ materially from those projected in such forward-looking statements because of various factors that may be beyond our control, including but not limited to our ability to service our debt, fund our working capital requirements, comply with financial covenants in certain of our debt instruments, fund and implement our capital expenditure programs and maintain our relationships with customers, as well as a change in control, the effects on us from competition, future demand for forestry, panels and wood products in the Chilean, Argentine, Brazilian, Uruguayan, and North American 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, 2010 to December 31, 2012, 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.$762.18 per tonne in September 2012 to a high of U.S.$1,023.1 per tonne 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. During 2012, prices for bleached hardwood kraft pulp increased steadily, but did not reach the 2011 average price. In 2012, the average price for NBSK continued to decline until September, increasing during the fourth quarter. 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. One or more of these factors 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 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 resulted in our decision to close five sawmills in 2008 and 2009. These deteriorated market conditions also led us to close our Bossetti sawmill in Argentina in 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 sawn timber products to Asia accounted for 35.8% of our sales revenue in 2012 compared to 38.6% in 2011 and 36.3% in 2010 and export sales of our wood products to North America accounted for 38.8% of our sales revenue in 2012 compared to 36.7% in 2011 and 39.7% in 2010. 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 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 2012, export sales, defined as sales out of the country where our goods were produced, accounted for 66.1% of our total sales revenues. During this period, 47.8% of our export sales were to customers in Asia, 21.7% to customers in North America, 15.3% to customers in Europe, 9.9% to customers in Central and South America and 5.4% to customers in other countries. As a result, our results of operations and cash flows depend, to a significant degree, on economic, political and regulatory conditions in our principal export markets. Our ability to compete effectively in our export markets could be materially and adversely affected by a number of factors beyond our control, including deterioration in macroeconomic conditions, exchange rate volatility, government subsidies, and the imposition of increased tariffs or other trade barriers. If our ability to sell our products competitively in one or more of our principal export markets were impaired by any of these developments, it might be difficult to 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. 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 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, 2012, we received a total recovery of U.S.$532.0 million. We cannot assure you that we will not experience other suspensions or interruptions or unexpected damage to our property as a result of other earthquakes, aftershocks, tsunamis, any related repair and maintenance or other consequences associated with such events, 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.

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. In the United States, our Moncure mill is

 

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subject to an administrative proceeding by the North Carolina Department of Environment and Natural Resources. As of the date of this annual report, we are negotiating a settlement that may include a monetary fine and a requirement to replace certain emissions control equipment. Additional proceedings, enforcement actions or claims related to compliance with environmental requirements or alleged environmental damages may also be brought against us in the future. Any such proceedings or claims may have an adverse effect on our business, financial condition, results of operations and cash flows. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—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”.

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 tonnes. 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. Our administrative appeal was partially accepted by the CONAMA, which upheld some of the conditions that we believed would adversely affect the feasibility of the project. Consequently, in September 2009, we presented another appeal in the relevant court. On December 5, 2012, the Environmental Evaluation Service of the Tenth Region of Chile authorized certain changes to the project based on the implementation of certain technological improvements. On November 9, 2012, we withdrew our appeal. The court approved the withdrawal on November 29, 2012.

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. In February 2010, through Exempt Resolution No. 27/2010, the COREMA approved this environmental impact

 

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study subject to additional conditions, certain of which we challenged before the Directive Council primarily because they would have prohibited the discharge of wastewater into the Cruces River under any circumstance, including emergencies. On October 23, 2012, the Committee of Ministers passed Exempt Resolution No. 1052, which upheld in part our appeal in permitting the discharge into the Cruces River upon the occurrence of certain contingencies that may affect the normal functioning of the conduction system and/or outfall, including bombings or sabotage, natural disasters, or accidents caused by third parties. On March 29, 2010, two Chilean individuals filed a reclamation action (recurso de participación ciudadana) before the COREMA of the Fourteenth Region of Chile, challenging Exempt Resolution No. 27/2010. As of the date of this annual report, the Committee of Ministers has not issued a resolution concerning this action.

Resolution of our proceeding with the CONAMA regarding the resolutions that approved the environmental impact study of the pipeline, 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 project 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 administrative ruling requiring that Alto Paraná pay the AFIP’s claim in full.

Alto Paraná appealed this administrative ruling to the Court of Appeals, in addition to filing 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.$129 million). On December 28, 2012, the Court of Appeals dismissed Alto Paraná’s appeal. Alto Paraná appealed this decision before the Argentine Supreme Court of Justice (“Supreme Court”). The appeal, once conceded, will suspend the execution of the decision ruled by the Court of Appeals.

We have not established any reserve in respect of this contingency and can offer no assurance that the Supreme Court will issue a ruling favorable to us. If the Supreme Court upholds the decision of the Court of Appeals, Alto Paraná will be required to satisfy the above-mentioned claim, an outcome that 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, 2012, we had approximately U.S.$4,400.5 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.

 

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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;

 

   

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 significantly affect the forestries industries 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.

 

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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. 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 19.3% of our employees in Chile, 46.9% of our employees in Argentina, 10.7% of our employees in Brazil and none of our employees in the United States or Canada were unionized as of December 31, 2012. In the past, certain work slowdowns, stoppages and other labor-related disruptions have adversely affected our operations.

In Chile we experienced (i) a four-day work stoppage in July 2012 at our Horcones Panel Mill located in Arauco, during which production resumed partially after the second day, (ii) a 10-day work stoppage in November 2009 at our Constitución, Arauco, Nueva Aldea, Horcones and Trupán-Cholguán complexes, (iii) a three-day work stoppage in September 2009 at our Constitución, Valdivia, Arauco, Nueva Aldea, Horcones and Trupán-Cholguán complexes and (iv) 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.

Our Argentinean operations did not experience any work stoppages in 2012. However in 2011 and 2010 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 Brazilian operations have not experienced any work stoppages in the last five years.

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

Our Canadian and American operations have not experienced any work stoppages in 2012.

Our principal collective-bargaining agreements in Chile are scheduled to expire during 2013, 2014 and 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.

 

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In addition, we depend to a significant extent on employees of contractors to which we outsource a wide range of services including management of certain of our plantations and transportation of raw materials and products. On July 1, 2012, we commenced the process of insourcing the operation of 13 sawn timber industrial facilities, which had previously been managed by third-party companies. In the process, we hired 2,900 employees of these third-party companies. As of December 31, 2012, we had contracts with approximately 1,087 contractors, who employed approximately 27,031 employees. Under Chilean and Brazilian labor legislation, we are secondarily liable for the payment of labor and the social security obligations owed to employees of our contractors. In Chile, in the event that we do not exercise the rights granted to us by the labor laws regarding the supervision of our contractors in their compliance of their labor and social security obligations, then our responsibility is elevated from secondary to joint and several, thus enabling an employee of a contractor to bring a claim relating to these obligations against both the contractor and to us, as the party hiring such contractor, although the contractor would remain primarily liable for such obligations. Generally, we are also responsible for the health and safety conditions of the contractors’ workers and are obligated to ensure that the contractors comply with all obligations related to such conditions while such workers are performing activities for us within our corporate purpose.

In Argentina, substantially similar joint liability rules apply to a principal and its contractors. In addition, a new national rural labor law, Law 26,727, promulgated on December 28, 2011 but which became fully operational after publication of certain relevant regulations, permits contractor employees under forestry contracts to bring actions directly against the principal to whom the employees’ services are being provided, instead of requiring them to bring actions against the contractor. For work or services related to the ordinary production process of a principal, the law provides that an employment relationship exists between the principal and the employee of the contractor. 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.

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.

As of December 31, 2012, 73.6% of our property, plant and equipment and forest assets were directly owned by the Company and our Chilean subsidiaries, and in 2012, 73.3% 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.

 

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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 2008, 2009, 2010, 2011 and 2012 were 7.1%, -1.4%, 3.0%, 4.4% and 1.5% 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, Mexican peso and the Canadian dollar, among others. 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, Brazil and Canada for revenues related to products sold in each of the respective local currencies. As a result, fluctuations in the exchange rates of such foreign currencies to the U.S. dollar may have a material adverse effect on our business, results of operations, financial condition and cash flows.

Risks Relating to Argentina

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

As of December 31, 2012, 10.4% of our property, plant and equipment and forest assets were owned by our Argentinean subsidiaries, and in 2012, 11.1% of our revenues were attributable to our Argentine operations. The financial condition and results of our Argentine operations, including the ability of our Argentine subsidiary 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 increased to 9.2%, in 2011 it decreased to 8.9%, and in 2012 it decreased to 1.9%. 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.

 

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Changes in the 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, there have been a number of monetary and currency exchange control measures implemented in Argentina, 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.

As of December 31, 2012, 11.8% of our property, plant and equipment and forest assets were owned by our Brazilian subsidiaries, and in 2012, 9.8% of our revenues were attributable to our Brazilian operations.

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 remain 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%. We received antitrust approval of this transaction from Brazilian authorities on July 18, 2012.

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 in 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

 

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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.

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 5.9% in 2008, 4.3% in 2009, 5.9% in 2010, 6.5% in 2011 and 5.8% in 2012, 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 depreciated by 11.2% against the U.S. dollar in 2011, and depreciated by 8.2% in 2012. The exchange rate between the real and the U.S. dollar may continue to fluctuate and may rise or decline substantially from current levels.

 

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

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

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 hectares 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).

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.$2,000.0 million.

The project is being financed approximately 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. and Zona Franca Punta Pereira S.A., each an 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 of December 31, 2012, U.S.$1,111.9 million of an aggregate maximum available amount of U.S.$1,354.0 million was outstanding under both facilities. If Celulosa y Energía Punta Pereira or Zona Franca Punta Pereira default under any or both of these facilities, we may be required to make a payment on their behalf or to assume on our balance sheet the portion of their debt that we guarantee, an outcome that may materially adversely affect us. For more information regarding these guarantees, see “Item 5. Operating and Financial Review and Prospects—Off-Balance Sheet Arrangements.”

Risks Relating to the United States

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

As of December 31, 2012, 0.9% of our property, plant and equipment and forest assets were owned by our U.S. subsidiaries, and in 2012, 2.7% of our revenues were attributable to our U.S. operations.

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. The facility includes medium-density fiberboard (MDF) 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. On June 7, 2012, we entered into a share purchase agreement to acquire 100% of the shares of Flakeboard Company Limited (“Flakeboard”), a Canadian company, for a total purchase price of U.S.$242.5 million. In addition to two panel mills in Canada, Flakeboard owns and operates five

 

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panel mills in the U.S. with an aggregate annual production capacity of MDF panels of 699,000 cubic meters, an annual production capacity of 938,000 cubic meters of PB, and an annual production capacity of 264,000 cubic meters of melamine. The acquisition of Flakeboard was completed in September 2012.

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

Risks Relating to Canada

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

As of December 31, 2012, 3.3% of our property, plant and equipment and forest assets were owned by our Canadian subsidiaries, and in 2012, 3.1% of our revenues were attributable to our Canadian operations.

As a result of our acquisition of Flakeboard, in addition to the abovementioned five panel mills in the U.S., we own and operate two panel mills in Canada with an aggregate annual production capacity 470,000 cubic meters of MDF panels, an annual production capacity of 216,000 cubic meters of PB, and an annual production capacity of 370,000 cubic meters of melamine.

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 Canada.

Risks Relating to Other Markets

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

Our business, financial condition, results of operations and cash flows depend, 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. 94.4% of our total pulp sales in 2011 and 93.3% in 2012, as well as 54.9% in 2011 and 49.2% in 2012 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

 

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others. During 2012 and the first quarter of 2013, 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.

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.

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

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

In October 2012, citing soft pulp prices and our increased leverage due to the Flakeboard acquisition and the construction of our Montes del Plata pulp plant in Uruguay, Fitch Ratings (“Fitch”) downgraded our foreign and local currency Issuer Default Ratings (IDF) to “BBB” from “BBB+”, in addition to downgrading our national scale rating from “AA (cl)” to “AA- (cl)”. Fitch also downgraded the foreign currency IDR of Alto Paraná S.A., one of our Argentine subsidiaries, to “BBB” from “BBB+”. The unsecured debt issued by Alto Paraná and us was also downgraded to “BBB” and “AA- (cl)”, respectively, from “BBB+” and “AA”. On February 6, 2013, Feller Rate, a Chilean subsidiary of S&P, lowered our national scale rating to AA- from AA, citing the adoption of an aggressive financial policy combined with a cycle of low prices and increased costs of raw materials. On March 7, 2013, Moody’s Investors Service (“Moody’s”) downgraded our senior unsecured ratings to Baa3 from Baa2 with a negative outlook, citing deterioration in our performance coupled with significant increase in debt that resulted in significant increase in leverage. Additionally, Moody’s downgraded the rated notes of Alto Paraná S.A. to Baa3 from Baa2. On March 27, 2013, Standard & Poor’s Ratings Services (“S&P”) lowered its rating on us from “BBB” to “BBB-”, citing high debt, our recent acquisitions, and soft pulp prices and rising operating costs. It considered our financial risk profile to be “intermediate” due to expectations of improved leverage. We cannot assure you that we will not be subject to further credit rating downgrades. Credit rating downgrades below investment grade could have a material and adverse effect on our business, financial condition, results of operations and ability to service our debt, including our securities.

 

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Item 4. Information on the Company

DESCRIPTION OF BUSINESS

We believe that, as of December 31, 2012, 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, Brazil, the United States and Canada. As of December 31, 2012, we had approximately 1.0 million hectares of plantations in Chile, Argentina, Brazil and Uruguay. During 2012, we harvested 49,939 million cubic meters of sawlogs and pulplogs and sold 8.7 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). During 2012, we sold 2,928.8 thousand tonnes of pulp in the form of hardwood beached pulp, softwood bleached pulp, softwood unbleached pulp and fluff.

Based on information published by Resource Information Systems, Inc., an independent research company for the pulp and paper industry, as of December 31, 2012, 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 7.6% share of the total world production capacity of bleached softwood kraft market pulp and a 19.1% share of the total world production capacity 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 +56-2-2461-7200.

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 and 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 the Montes del Plata 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

 

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U.S.$2,000.0 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%. We received antitrust approval for this project from Brazilian authorities on July 18, 2012.

On December 20, 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 antitrust 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 (MDF) 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.

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

 

    

Country of
incorporation

   Total stock held  

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

   Mexico      99.9990

Alto Paraná S.A.

   Argentina      99.9801   

Arauco Australia Pty Ltd.

   Australia      99.9990   

Arauco Bioenergía S.A.

   Chile      99.9985   

Arauco Canada Panels ULC

   Canada      99.9990   

Arauco Colombia S.A.

   Colombia      99.9980   

Arauco Distribución S.A.

   Chile      99.9992   

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

   Brazil      99.9985   

Arauco Florestal Arapoti S.A.

   Brazil      79,9992   

Arauco Forest Brasil S.A.

   Brazil      99.9999   

Arauco Forest Products B.V.

   The Netherlands      99.9990   

Arauco Holanda Cooperatief U.A.

   The Netherlands      99.9990   

 

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Table of Contents
    

Country of
incorporation

   Total stock held  

Arauco Panels USA LLC

   U.S.A.      99.9990   

Arauco Perú S.A.

   Peru      99.9990   

Arauco Wood Products, Inc.

   U.S.A.      99.9985   

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      99.9934   

Controladora de Plagas Forestales S.A.

   Chile      59.6326   

Empreendimentos Florestais Santa Cruz Ltda.

   Brazil      99.9789   

Flakeboard America Limited

   U.S.A.      99.9990   

Flakeboard Company Limited

   U.S.A.      99.9990   

Forestal Arauco S.A.

   Chile      99.9248   

Forestal Celco S.A.

   Chile      99.9256   

Forestal Concepción S.A.

   Panama      99.9986   

Forestal Cholguán S.A.

   Chile      97.4281   

Forestal Los Lagos S.A.

   Chile      79.9405   

Forestal Nuestra Señora del Carmen S.A.

   Argentina      99.9805   

Forestal Talavera S.A.

   Argentina      99.9942   

Forestal Valdivia S.A.

   Chile      99.9256   

Greenagro S.A.

   Argentina      97.9805   

Inversiones Arauco Internacional Ltda.

   Chile      99.9990   

Investigaciones Forestales Bioforest S.A.

   Chile      99.9256   

Leasing Forestal S.A.

   Argentina      99.9801   

Mahal Empreendimentos e Participacoes S.A.

   Brazil      99.9932   

Paneles Arauco S.A.

   Chile      99.9992   

Savitar S.A.

   Argentina      99.9931   

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,  
     2010      2011      2012  
     (in millions of U.S.$)  

Export Sales

        

Bleached pulp

     1,446         1,681         1,482   

Unbleached pulp

     217         264         250   

Sawn timber

     359         429         430   

Remanufactured wood products

     131         161         183   

Panels

     479         584         476   

Other

     7         9         9   
  

 

 

    

 

 

    

 

 

 

Total export revenue

     2,639         3,128         2,830   
  

 

 

    

 

 

    

 

 

 

Domestic Sales

        

Bleached pulp

     83         78         88   

Unbleached pulp

     30         37         36   

Sawlogs

     91         75         86   

Pulplogs

     23         41         29   

Sawn timber

     105         98         111   

Remanufactured wood products

     18         37         42   

Chips

     29         29         26   

Electric power

     86         98         137   

Panels

     623         689         844   

Other

     40         63         51   
  

 

 

    

 

 

    

 

 

 

Total domestic revenue

     1,128         1,247         1,450   
  

 

 

    

 

 

    

 

 

 

Revenue

     3,767         4,374         4,280   
  

 

 

    

 

 

    

 

 

 

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

 

     Year ended December 31,  
     2010      2011      2012  
     (in millions of U.S. dollars)  

North America

   $ 508       $ 594       $ 615   

Central and South America

     368         368         279   

Asia

     1,273         1,471         1,351   

Europe

     412         555         432   

Other

     85         140         152   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,647       $ 3,128       $ 2,830   
  

 

 

    

 

 

    

 

 

 

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.

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.

 

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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 the 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

As of December 31, 2012, our planted forests consisted of 75.8% radiata, taeda and elliottii pine and 22.4% of mainly 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 2012, Arauco planted a total of 77,021 hectares and harvested a total of 49,939 hectares in Chile, Argentina, Brazil and Uruguay (these amounts include, with respect to Brazil, 100% of the plantations owned by companies controlled by Arauco, and with respect to Uruguay, 50% of the plantations owned in Uruguay by us through the Montes del Plata joint venture). We believe that our annual harvests and plantations long-term sustainable equilibrium are approximately 67.2 thousand hectares (including 100% of the plantations owned by the Montes del Plata joint venture, and, with respect to plantations owned by Brazil, 100% of Forestal Arapotí, 100% of Arauco Forest Brasil and 100% of Mahal-owned plantations).

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. As of December 31, 2012, 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. As of December 31, 2012, we owned approximately 1.1 million hectares of land in Chile, of which 736.6 thousand hectares are forest plantations.

 

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As of December 31, 2012, we owned approximately 263,400 hectares of forest and other land in Argentina, approximately 145,100 hectares of forest and other land in Brazil and approximately 135,000 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 171,100 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, 2012.

 

     As of December 31, 2012  
     Total      Distribution  
     (in hectares)      (percentage)  

Pine plantations(1)

     

0-5 years

     188,229         11.3

6-10 years

     165,777         10.0   

11-15 years

     185,184         11.2   

16-20 years

     140,815         8.5   

21+ years

     92,602         5.6   

Subtotal

     772,607         46.6   

Eucalyptus plantations(2)

     228,377         13.8   

Plantation of other species

     18,655         1.1   

Subtotal

     247,033         14.9   

Land for plantations

     60,188         3.6   

Land for other uses(3)

     578,924         34.9   

Total(4)

     1,658,751         100.0
  

 

 

    

 

 

 

 

(1) 

All years are calculated from the date of planting.

(2) 

Approximately 72% 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, 100% of plantations owned by Arauco Forest Brasil, 80% of plantations owned by Florestal Arapoti and 100% of Mahal plantations. Also includes 54,945 hectares for which we have the right to harvest but do not own, of which 42,763 hectares are in Chile, 11,877 hectares are in Uruguay and 305 hectares are in Argentina.

Land Acquisition and Afforestation

Our total land assets have increased from fewer than 170,000 hectares in 1980 to 1,658,751 hectares as of December 31, 2012. That number does not include 15,752 hectares of land owned by Forestal Río Grande S.A., of which 2,564 hectares consists of plantations. In the five years ending December 31, 2012, we purchased 208,787 hectares of land, of which 45,076 hectares were purchased in Chile, 5,553 in Argentina, 74,778 in Brazil and 83,381 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.

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.

 

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Table of Contents

Forest Management

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although some land is not suitable for the production of pruned logs, as of December 31, 2012, 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, 2012, we had 16 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

 

   

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-

 

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Table of Contents

section of the radiata pine, comprising, on average, the next 8 to 13 meters, in either sawmills or pulp mills, depending on the diameter and quality of the pine. We use the top section of the tree for pulp, MDF and medium-density particleboard (MDP) production.

We monitor product demand and our current inventory levels, and we match harvests from sections of our plantations that will provide the optimal yield given our product requirements. This process involves the use of sophisticated 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,  
     2010      2011      2012  
            (in hectares)         

Thinning

     11,570         12,992         12,097   

Pruning

     27,335         23,330         19,298   

Harvesting

     30,158         33,955         36,781   

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, 2012, we had arrangements with more than 308 independent contractors that employed over 13,870 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 a genetic program to make our trees more tolerant to this disease and has also begun dispersing in our forests a fertilizer that further promotes resistance. For more information regarding certain risks to our forests presented by disease, see “Item 3. Key Information—Risk Factors—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 consists primarily 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. The focus of this operation is to detect and control fires in less than 10 minutes in order to prevent fires from spreading. 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 18.9 million cubic meters of logs during the year ended December 31, 2012, consisting of 9.4 million cubic meters of sawlogs, 6.6 million cubic meters of pine pulplogs and 2.9 million cubic meters of eucalyptus pulplogs and other logs. We did not export any pulplogs during 2012 because substantially all of the pulplogs from our forests were used in our pulp or panel mills. During 2012, our sawmills and panel mills used 6.0 million cubic meters of sawlogs, and no sawlogs were exported. We also sold 2.3 million cubic meters of sawlogs to unaffiliated domestic sawmills during 2012.

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 2012. For the year ended December 31, 2012, pulp sales were U.S.$1,856.5 million, representing 43.4% of our total sales revenue for the period.

Pulp obtained from wood fibers is mainly used in the manufacture of printing and writing paper, hygienic and sanitary paper, board and packaging. Whether a specific kind of pulp is suitable for a particular end use depends not only on the type of wood but also on the process used to transform the wood into pulp. Pulp made from softwoods, such as radiata pine, has long fibers and is used to provide strength to paper products. Hardwood 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 used in the production process to produce pulp. The pulplogs are first debarked and chipped. The chips are then screened, mixed and cooked with chemicals to separate the bulk of the lignin from the wood fibers. After the material is screened and washed, it is then passed to high-density tanks. For bleached pulp, the next step is a 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 a sheet is formed and subsequently dried and baled for transport to customers. The lignin and bark produced during this process is used as fuel in the boilers to produce steam, providing heat and generating electricity for the mill. Our bleached pulp is bleached to a 90+ brightness level, as measured by the ISO test procedure, which is one of the industry’s measurement methods.

Pulp Mills

As of December 31, 2012, 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 tonnes. Our six pulp mills produced 2.5 million tonnes of bleached pulp and 0.4 million tonnes of unbleached pulp in 2012.

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 normally 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,  
     2008      2009      2010      2011      2012  
     (in thousands of tonnes)  

Chile

              

Arauco Mill (bleached)

              

Arauco I

     281         286         231         279         282   

Arauco II

     507         505         84         469         505   

Valdivia Mill (bleached)

     488         540         493         513         550   

Constitución Mill (unbleached)

     320         333         253         324         307   

Nueva Aldea Mill (bleached)

     842         900         780         793         882   

Nueva Aldea Mill (unbleached)

     —           —           9         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Licancel Mill (bleached) (1)

     117         51         28         50         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Licancel Mill (unbleached)(2)

     —           75         84         83         137   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     2,555         2,690         1,962         2,511         2,663   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Argentina

              

Alto Paraná Mill (bleached)

     343         310         329         305         307   

Total

     2,898         3,000         2,291         2,816         2,970   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 started-up in 1972, is located at the Arauco Mill in the heart of a group of our radiata pine plantations in the Eighth Region of Chile. Arauco I produces elementary chlorine-free pulp, which does not use chlorine gas. Elementary chlorine-free pulp is also produced by most of our competitors in each of the world’s major pulp producing regions. The installed annual production capacity of Arauco I is approximately 290,000 tonnes of 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 generally the same as that of Arauco I, but it includes technological improvements in its production process and environmental design. Arauco II is also equipped to produce elementary chlorine-free pulp. The installed annual production capacity of Arauco II is approximately 500,000 tonnes 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 its 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, 2012, the Constitución Mill was the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of approximately 355,000 tonnes. 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 unbleached pulp produced in this mill does not use any chlorine in its production process.

 

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Licancel Mill. We acquired the Licancel Mill in September 1999. It is located in Licantén, which is 250 kilometers south of Santiago. The mill has an installed annual production capacity of approximately 145,000 tonnes of eucalyptus kraft pulp and pine bleached and unbleached kraft pulp. The Licancel Mill is equipped to produce elementary chlorine-free pulp.

In June 2007, our operations at the Licancel Mill became subject to an environmental review by Chilean environmental regulators and the public 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 discharge 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. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—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 and “Item 8. Financial Information- Legal Proceedings.”

Valdivia Mill. The Valdivia Mill 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 tonnes 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 tonnes 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 wastewater was discharged prior to the opening 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 tonnes 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 1,027,000 tonnes to 1,200,000 tonnes 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

 

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kraft market pulp facility in Argentina. The mill has an installed annual production capacity of 350,000 tonnes of pulp, of which 50% is bleached softwood pulp for paper use, currently representing almost all of the total bleached softwood pulp production capacity in Argentina, and 50% is fluff pulp.

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 tonnes, a port and a power generation facility based on renewable resources, all located in Punta Pereira, department of Colonia, Uruguay. The total estimated investment is U.S.$2,000.0 million. After securing the necessary permits, we broke ground in May 2011 to begin construction. In September 2011, two of our Uruguayan joint venture companies entered into two credit facilities to finance the 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 2012, we were approximately 78.4% complete with construction. We currently anticipate initiating operations in the third quarter of 2013.

Production Costs

Based on information published by Resource Information Systems, Inc., our cash costs for softwood pulp production are lower than the average costs of market pulp producers in Canada, the United States and Scandinavia, particularly with respect to timber and energy costs. While our modern facilities result in depreciation exceeding some of such Northern Hemisphere producers, our costs are still 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 cost of market pulp producers in selected regions in the Northern Hemisphere for the year ended December 31, 2012.

 

     Bleached Softwood Kraft Pulp Producers’ Cost  
     Arauco(1)      British
Columbia
Coast
     British
Columbia
Interior
     United
States
South
     Sweden      Finland  
     (in U.S.$ per tonne for the year ended December 31, 2012)  

Wood

     198         302         259         168         337         287   

Total chemicals

     79         88         96         90         66         54   

Labor

     63         86         80         40         48         47   

Others(2)

     51         134         111         98         45         27   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total cash cost

     391         610         546         396         496         415   

Depreciation

     49         43         42         67         71         79   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total mill cost

     440         653         588         463         567         494   

Transportation(3)

     77         73         117         71         37         41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total delivered cost

     516         726         705         534         604         535   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

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

(2)

Includes energy, materials and other production costs;excludes overhead and interest.

(3)

Delivered in Northern Europe.

Source: Resource Information Systems, Inc. World Pulp & Recovered Paper Forecast – 15 year, September 2012 (7 months actual data, 5 months projected). Arauco data is provided by Arauco.

Sales

The total production of bleached kraft market pulp in the global market during the year ended December 31, 2012 was 55.7 million tonnes. Based on information published by Resource Information Systems, Inc., we believe that our production represented 5.5% of this market in 2012. During the year ended December 31, 2012, 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 tonnes for 2012, according to Resource Information Systems, Inc., our Company was the world’s largest single producer of unbleached softwood market pulp, with 14.2% of the total market in 2012. During the year ended December 31, 2012, 87.3% 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,  
     2010      2011      2012  
     (in tonnes)  

Bleached Pulp

        

North and South America

     349,058         307,341         326,940   

Europe

     456,922         641,031         626,799   

Asia

     1,169,398         1,355,592         1,506,681   

Other

     23,496         71,374         30,325   
  

 

 

    

 

 

    

 

 

 

Total

     1,998,874         2,375,338         2,490,744   
  

 

 

    

 

 

    

 

 

 

Unbleached Pulp

        

North and South America

     67,858         87,700         64,583   

Europe

     13,441         15,930         12,196   

Asia

     263,145         295,370         361,090   

Other

     —           1,010         223   
  

 

 

    

 

 

    

 

 

 

Total

     344,444         400,010         438,091   
  

 

 

    

 

 

    

 

 

 

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 quality of our pulp derives from the high standards of production that we maintain at our mills and our use of a single species of tree, in contrast to pulp producers in some of the world’s major softwood pulp producing regions that mix different species, depending on availability and seasonality. Our bleached pulp is marketed under the brand names “Arauco” and “Alto Paraná,” and our unbleached pulp is marketed under the brand name “Celco.”

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

 

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

 

     2010      2011      2012  
     (U.S.$ per tonne)  

Bleached Pulp

        

March 31

     724         794         641   

June 30

     840         831         632   

September 30

     782         729         609   

December 31

     767         606         629   

Unbleached Pulp

        

March 31

     678         737         622   

June 30

     775         751         627   

September 30

     735         712         564   

December 31

     748         599         583   

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, 2012, more than 424 customers. As of December 31, 2012, 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, 2012, sales of panels were U.S.$1,320.5 million, representing 30.8% of our total sales revenues.

Exports, which include sales to countries other than the countries in which the goods are produced, accounted for 36.0% of our total sales revenues of panels for the year ended December 31, 2012. 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,  
     2008      2009      2010      2011      2012  
     (in thousands of cubic meters)  

Total Panels

     2,353         2,630         3,032         3,222         3,555   

As of December 31, 2012, we owned and operated three panel mills in Chile, two in Argentina, two in Brazil, six in the United States and two in Canada, with an aggregate installed annual production capacity of approximately 5,743,000 cubic meters. Two recent acquisitions expanded our North American manufacturing presence. 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. In June 2012, we entered into a share purchase agreement to acquire five panel mills in the United States, located in Albany, Oregon; two in Bennettsville, South Carolina; Eugene, Oregon; and Malvern, Arkansas, and two panel mills in Canada, located in St. Stephen, New Brunswick and Sault Ste. Marie, Ontario for a total purchase price of U.S.$242.5 million.

 

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The following is a description of each of our panel mills:

Chile

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 (under reconstruction). This mill is currently under reconstruction on the same site as the original mill, which was destroyed as a result of the wildfires that commenced on December 31, 2011 in the Eighth Region of Chile. It has an expected annual production capacity of 350,000 cubic meters of plywood panels. As of December 2012, we were approximately 35% complete with construction. We currently anticipate initiating operations in the fourth quarter of 2013.

Teno Mill. This mill, which began production on July 4, 2012, has an installed annual production capacity of 300,000 cubic meters of MDP and 240,000 cubic meters of melamine laminate panels. The complex has a continuous MDP panel production line, two laminated panel production lines and a melamine sheet treatment line

Trupán-Cholguán Mill. This mill has an installed annual production capacity of approximately 575,000 cubic meters of panels and 35,000 cubic meters of melamine. 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.

Argentina

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

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

Brazil

Jaguariaiva Mill. This mill produces MDF and has an installed annual production capacity of approximately 315,000 cubic meters of panels and 280,000 cubic meters of melamine. In April 2011, a project to expand the Jaguariaiva Plant was approved. This project included the construction of a productive line to manufacture 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 lamination press. The expansion line commenced operations in March 2013.

Pien Mill. This mill has an installed annual production capacity of approximately 720,000 cubic meters of panels distributed among two production lines with a production capacity of 420,000 cubic meters of MDF, 300,000 cubic meters of PBO and 150,000 cubic meters of melamine lamination.

Curitiba Mill. This mill, which had an annual production capacity of 260,000 cubic meters of PBO, was permanently closed in December 2011.

U.S.A.

Albany Mill. This mill has an installed annual production capacity of approximately 430,000 cubic meters of PBO and 132,000 cubic meters of melamine lamination.

 

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Bennettsville MDF Mill. This mill has an installed annual production capacity of approximately 235,000 cubic meters of MDF.

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

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

Bennettsville PBO Mill. This mill has an installed annual production capacity of approximately 508,000 cubic meters of PBO and 132,000 cubic meters of melamine lamination.

Moncure Mill. This 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 lamination production lines of 150,000 cubic meters.

Canada

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

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

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, 2012, revenue from sales of wood products was U.S.$766.2 million, representing 17.9% 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,  
     2008      2009      2010      2011      2012  
     (in thousands of cubic meters)  

Sawn timber

     2,522         1,952         2,098         2,181         2,100   

Remanufactured wood products

     348         279         316         363         413   

Aserraderos Arauco S.A. was established in 1993 to centralize management and control production in our sawmill and remanufacturing operations.

As of December 31, 2012, 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. 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, 2012, we also own five remanufacturing facilities, four in Chile and one in Argentina, that reprocess sawn timber into remanufactured wood products, such as moldings, jams and pre-cut pieces that end users require for doors, furniture and door and window frames. These facilities produced 347,910 cubic meters of remanufactured wood products in 2012.

 

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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.

On July 1, 2012, we commenced the process of insourcing the operation of 13 sawn timber industrial facilities, which had previously been managed by third-party companies. In the process, we incorporated 2,900 people into the Arauco workforce.

The following is a brief description of our sawmills and remanufacturing facilities and their production capacity, as of December 31, 2012.

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.

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.

 

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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 84,000 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 310,000 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, 2012, sales of forestry products were U.S.$149.9 million, representing 3.5% 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,  
     2008      2009      2010      2011      2012  
     (in thousands of cubic meters)  

Sawlogs

     1,745         1,196         1,923         2,123         2,250   

Pulplogs

     457         309         612         443         274   

Posts

     15         19         24         24         22   

Chips

     96         293         501         398         365   

Sustainable Development

We utilize renewable fuels such as forest biomass residue in power plants that cogenerate the steam and electricity required for our manufacturing operations, thus contributing to reduce greenhouse emissions. 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 power, 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, 2012, 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

 

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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 issued to date a total (net) amount of 1,702,984 Certificates Emission Reductions (CERs or “carbon credits”) over the last 6 years, and we were the first Chilean forestry company to issue CERs through the CDM of the Kyoto Protocol. Of the total amount issued, we have sold 1,070,787 CERs. The following table presents the total amount of CERs issued and sold by Arauco for each of the years indicated:

 

     Year ended December 31,  
     2007      2008      2009      2010      2011      2012  

CERs issued (net, after commission paid to United Nations Framework Convention on Climate Change)

     482,129         255,592         333,067         0         0         632,197   

CERs sold

     482,129         255,592         333,067         0         0         0   

During the first half of 2012, we started the Viñales biomass power plant, which is located alongside the Viñales sawmill in the Seventh Region of Chile. The plant includes a biomass-fueled power boiler with capacity to produce 210 tons of steam per hour and a 41 Megawatt co-generating steam turbine. The plant began operations on May 17, 2012, attaining its maximum production capacity of 41 Megawatts on August 29, 2012.

During January 2013, the biomass cogeneration power plant associated with the Punta Pereira pulp mill facility in Uruguay was successfully registered as a CDM project activity. This constitutes the eleventh CDM project activity to be registered in Uruguay to date. Once in operation, this facility will generate an average of 124,000 CERs throughout its first 7-year crediting period.

During the second half of 2011, we completed the second Carbon Footprint calculation for Arauco’s 2010 greenhouse emissions. This excercise corresponds to Arauco’s strategy of assessing the impact of its industrial operations, in particular with respect to climate change. The Company believes these calculations will be a valuable input in the process of establishing 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. 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 Roseburg Forest Products Co.; in Asia, producers from Malaysia and China, and in the Middle East, European producers.

 

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For sales of PBO, in the Latin American market we compete with Duratex S.A., Masisa S.A., Berneck S.A. and Fibraplac S.A. In North America we mainly compete with Roseburg Forest Products Co. Temple Inland, Kaycan and Sonae.

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 31% of our aggregate export volume through this port in 2012;

 

   

Lirquén. A private port in Concepción in which we have an equity interest of 20.2% and through which we shipped 29% of our aggregate export volume during 2012; and

 

   

San Vicente. State-owned port near the city of Concepción through which we shipped 40% of our aggregate export volume during 2012.

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. As of December 31, 2012, we had approximately 74,000 air dry tonnes of pulp in storage in warehouses at foreign ports.

We believe that our shipping costs are comparable to those of our international competitors, notwithstanding Chile’s 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.

 

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In North America, products sourced from our Chilean operations are shipped into 12 major ports of entry and are dispatched to more than 2,800 locations in the U.S. and Canada. Flakeboard’s seven plants service over 450 customers throughout North America, in addition to exporting products to the Caribbean, Central America and the Middle East.

Description of Property

Our principal properties consist of land and production plants and facilities, the majority of which are located in Chile. As of December 31, 2012, we owned 1,115,237 hectares of land in Chile, of which 736,637 hectares are forest plantations, and 580,485 hectares of land in Argentina, Brazil and Uruguay, of which 302,565 consist of forest plantations. In addition, as of December 31, 2012, we owned and operated various plants and facilities, including five pulp mills, three panel mills, eight sawmills and four remanufacturing facilities in Chile; one pulp mill, one sawmill, one MDF mill, one PBO mill, one chemical plant and one remanufacturing facility in Argentina; one MDF mill and one MDF-PBO mill in Brazil; two PBO mills, three MDF mills and one MDF-PBO mill in the United States; and one MDF mill and one PBO-MDF mill in Canada. Future expansion plans will depend on global market conditions. Arauco does not currently have near-term expansion plans. For information regarding environmental risks associated with our use of our properties, see “Item 3. Key Information—Risk Factors—Risks Relating to US and the Forestry Industry.”

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 11,983 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 disasters, including 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 and tsunamis, with a deductible of 2% of the insured amount for each location subject to a cap of U.S.$25 million. Deductibles for business interruption are 30 days for all losses, 45 days for machinery breakdown and 60 days for machinery breakdown of turbines. We also have an annual self-insurance retention of U.S.$20 million, with a U.S.$10 million maximum per event. 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 “Item 3. Key Information—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, 2012, we received a total recovery of U.S.$532 million.

As described in more detail in “Item 3. Key Information—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. Our insurance covered the losses related to our forest plantations. We paid a U.S.$1.0 million deductible for business interruption and property damage at our Nueva Aldea plywood mill. On December 11, 2012, we and the insurers accepted the final report of the insurance adjusters. In accordance with such final report, as of December 31, 2012, we received a total recovery of U.S.$143.0 million, net of U.S.$110.0 million in advance payments that we had already received. With respect to our inventory, which was covered under a different policy, and we received during 2012 a total recovery of U.S.$22.0 million.

 

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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, 2013, we have planned capital expenditures of U.S.$498.5 million, which principally include U.S.$309.2 million in maintenance of our existing mills, U.S.$72.0 million in capital contributions to the Montes del Plata joint venture in Uruguay and U.S.$117.3 million in maintenance and acquisition 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.$2,000.0 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, 2012, our aggregate capital expenditures were U.S.$628.6 million, consisting primarily of U.S.$506.0 million in internal projects and U.S.$122.6 million in acquisition of biological assets.

For the year ended December 31, 2011, our aggregate capital expenditures were U.S.$748.3 million, consisting primarily of U.S.$602.4 million in internal projects and U.S.$145.9 million in acquisition of biological assets.

For the year ended December 31, 2010, our aggregate capital expenditures were U.S.$595.5 million, consisting primarily of U.S.$483.2 million in internal projects and U.S.$112.3 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.

 

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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. 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.

Governmental agencies may participate in the oversight of the implementation of projects in accordance with their environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law and other regulations, affected private citizens, public agencies and local authorities can sue to enforce 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). On October 1, 2010, the Ministry of the Environment, the Service of Environmental Evaluation and the Evaluation Commissions began operating under their full legal authority. In addition, on June 28, 2012, Law No. 20,600 was published in the Official Gazette. This law established three environmental tribunals whose purpose is to resolve environmental conflicts. Each tribunal presides over a defined territorial jurisdiction. The Second Environmental Tribunal became operational on December 28, 2012. The First and Third Environmental Tribunals will become operational 12 months after the date on which Law No. 20,600 was published. When the Second Tribunal became operational, the provisions of Law No. 20,417 entered into full force, allowing the Superintendency of Environment to exercise its full legal powers. The Superintendency has issued numerous resolutions, instructions and requirements with respect to officials and supervised parties.

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.

United States and Canada

Our North American operations are subject to U.S. and Canadian environmental legislation, including federal, provincial, state and local laws and regulations. Such laws and regulations govern the use, storage, handling, generation, treatment, emission, release, discharge and disposal of certain hazardous materials and wastes,

 

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the remediation of contaminated soil and groundwater, plant and wildlife protection, landfill sites and the health and safety of employees. For example, under the Clean Air Act, the United States Environmental Protection Agency (“EPA”) has established Maximum Achievable Control Technology (“MACT”) environmental regulations that establish emission standards for point sources of pollution, such as process vents and equipment leaks. In addition, some of our operations require environmental permits and controls to prevent and reduce air and water pollution. Our failure to comply with applicable environmental, health and safety requirements, including permits related thereto, may result in:

 

   

fines,

 

   

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

 

   

loss of operating permits,

 

   

required installation of pollution control equipment, or

 

   

remedial actions.

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

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

Forestry, Land-Use and Land Ownership Regulations

Chile

The management and exploitation of forests in Chile is regulated by the Forests Law of 1931, as amended, and Decree-Law No. 701 of 1974, as amended. The Forests Law and Decree-Law No. 701 impose a variety of restrictions on the management and exploitation of forests. Forestry activities, including thinning, on land that is designated as preferably suited for forests or that has 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.

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.”

 

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

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.

 

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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 71.5% of our total sales revenue for the year ended December 31, 2011, and 66.1% of our total sales revenue for the year ended December 31, 2012. 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 2012, 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 2011 and 2012, 94.4% and 93.3%, respectively, of our total pulp sales were attributable to exports, and 54.9% and 49.1%, 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.

As of December 31, 2012, 73.6% of our property, plant, equipment and forest assets were directly owned by the Company and our Chilean subsidiaries, 10.4% by our Argentinean subsidiaries, 11.8% by our Brazilian subsidiaries, 4.2% by our U.S. and Canadian subsidiaries. In 2012, 73.3% of our consolidated sales revenue was derived from our operations in Chile, 11.1% of our consolidated sales revenue was derived from our operations in Argentina, 9.8% of our consolidated sales revenue was derived from our operations in Brazil, and 5.8% of our consolidated sales revenue was derived from our operations in the United States and Canada. Accordingly, our financial condition, results of operations and cash flows depend, to a significant degree, upon economic conditions in Chile, Argentina, Brazil, the United States and Canada.

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, 2012, 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.

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
 
            (in thousands of tonnes)  

Pulp

     

Arauco I

     58         290,000   

Arauco II

     339         500,000   

Constitución

     85         355,000   

 

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Plant

   Number of days closed      Production capacity
as of February 27,
2010
 

Licancel

     58         140,000   

Valdivia

     22         550,000   

Nueva Aldea (BKP)

     51         513,500   

Nueva Aldea (EKP)

     58         513,500   
             (in thousands of cubic meters)  

Panels

     

Arauco (Plywood)

     45         110,000   

Trupán (HB)

     13         59,000   

Trupán (MDF)

     14         168,000   

Trupán (MDF2)

     34         308,000   

Nueva Aldea (Plywood)

     16         405,000   
             (in thousands of cubic meters)  

Sawmills

     

Valdivia (Remanufacturing)

     1         72,000   

El Colorado

     12         320,000   

Horcones I

     27         360,000   

Horcones (Remanufacturing)

     25         136,000   

Cholguán

     13         330,000   

Cholguán (Remanufacturing)

     12         70,000   

El Cruce

     9         85,000   

Viñales

     10         360,000   

Viñales (Remanufacturing)

     9         120,000   

Nueva Aldea

     2         430,000   

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, 2012, we received a total recovery of U.S.$532.0 million. 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 represented 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 at that time. Although the plywood mill at Nueva Aldea and our forest plantations were insured, our insurance was 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.”

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

Chile

The Chilean GDP increased by 5.6% in real terms during 2012, compared to a growth rate of 5.9% in 2011 and 5.8% in 2010. See “Item 3. Key Information—Risk factors—Risks relating to Chile.”

 

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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 2011and 2012 it grew at rates of 8.9% and 1.9%, respectively. 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 “Item 3. Key Information—Risk factors—Risks relating to Argentina.”

Brazil

Brazil’s GDP increased by 0.9% in real terms during 2012, compared to growth rates of 2.7% in 2011 and 7.5% in 2010. In 2010, the real appreciated against the dollar by 4.5% and in 2011 and 2012 the real depreciated against the dollar by 11.2% and 8.2%, respectively. See “Item 3. Key Information—Risk factors—Risks relating to Brazil.”

Uruguay

Uruguay GDP increased by 3.9% in real terms during 2012, compared to growth rates of 5.7% in 2011 and 8.9% in 2010. In 2010 and 2011, the Uruguayan peso depreciated against the dollar by 1.8% and 1.3%, respectively, and in 2012 the Uruguayan peso appreciated against the dollar by 3.8%. See “Item 3. Key Information—Risk factors—Risks Relating to Uruguay.”

United States

The United States GDP increased by 2.2% in real terms during 2012, compared to growth rates of 1.8% in 2011 and 2.6% in 2010. See “Item 3. Key Information—Risk factors—Risks Relating to the United States.”

Canada

Canada’s GDP increased by 3.0% in real terms during 2012, compared to a growth rates of 5.5% in 2011 and 6.0% in 2010. In 2010, the Canadian dollar appreciated against the U.S. dollar by 5.2%, in 2011 the Canadian dollar depreciated against the U.S. dollar by 2.1% and in 2012 the Canadian dollar appreciated against the U.S. dollar by 2.0%. See “Item 3. Key Information—Risk factors—Risks relating to Canada.”

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 2012, the value of the Chilean peso relative to the U.S. dollar increased 7.6% in nominal terms and 6.0% in real terms, based on the observed exchange rates on December 31, 2011 and December 31, 2012. The observed exchange rate on April 29, 2013 was Ch$472.05 to U.S.$1.00. For information regarding historical rates of exchange in Chile from January 1, 2008, 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

 

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commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2012, our U.S. dollar-denominated indebtedness was U.S.$3,322.7 million. 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.

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, reaching their lowest point at the end of the year. During the first half of 2012, pulp prices increased slightly, remaining generally stable during the second half of 2012. For additional discussion regarding recent movements in the price of pulp, see “Item 5. Operating and Financial Review and Prospects—Trend Information.”

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

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      2012  
     (U.S.$ per tonne)(3)  

Pulp

        

Bleached pulp

     765.4         740.8         630.2   

Unbleached pulp

     717.7         753.4         654.4   
     (U.S.$ per cubic meter)(3)  

Wood Products

        

Sawn timber

     221.1         241.6         257.8   

Remanufactured wood products

     474.4         545.9         544.2   

Panels

        

Plywood and fiberboard panels

     363.2         395.2         371.9   

Forestry Products

        

Sawlogs

     47.1         35.4         38.3   

Pulplogs

     37.1         93.6         105.8   

 

(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.

 

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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.

Prices for unbleached softwood market pulp also follow cyclical patterns related to worldwide demand, stock levels and supply. Unbleached softwood market pulp represents about 3.9% 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 2012, annual average pulp prices for all grades decreased with respect to 2011, which was mainly explained by lower demand from developed countries, 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 “Item 5. Operating and Financial Review and Prospects—Trend Information.”

Price of NBSK

The market price for NBSK was U.S.$641.51 as of December 31, 2008, a 26.2% decrease as compared to December 31, 2007. The market price of U.S.$798.77 per ton recorded as of 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 as of 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 as of December 31, 2011, a 12.1% decrease as compared to December 31, 2010. The market price for NBSK was U.S.$809.6 per ton as of December 31, 2012, a 2.9% decrease as compared to December 31, 2011.

Price of BEKP

As of 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 as of December 31, 2009 reached U.S.$700.00, which represented a 19.8% increase of over the price as of December 31, 2008. The market price for BEKP was U.S.$849.21 per ton as of 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 as of December 31, 2011, a 23.2% decrease as compared to December 31, 2010. The market price for BEKP was U.S.$775.94 per ton as of December 31, 2012, a 19% increase as compared to December 31, 2011.

Price of UKP

The market price for unbleached kraftwood pulp, or UKP, as of December 31, 2008 was U.S.$455.76, per tonne which represented a decrease of 23.8% as compared to December 31, 2007. The market price for UKP as of December 31, 2009 was U.S.$603.65 per tonne, which represented a 32.4% increase over the price as of December 31, 2008. The market price for UKP was U.S.$751.85 per tonne as of December 31, 2010, a 24.6% increase as compared to December 31, 2009. The market price for UKP was U.S.$603.65 per tonne as of December 31, 2011, a 18.9% decrease as compared to December 31, 2010. The market price for UKP was U.S.$600.3 per tonne as of December 31, 2012, a 1.6% decrease as compared to December 31, 2011.

 

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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.

The slowdown in the global growth markets during 2008 negatively affected the demand for timber in all markets. The construction sector declined 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. 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 wood products 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 by 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 was a slight trend of recovery as compared with 2009 and 2010. This recovery was 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%.

During 2012, average sales prices in our wood products segment increased as compared to 2011, mainly due to a 6.7% increase in average sales prices of sawn timber. In 2012, sales in our panel segment increased by 3.7% as compared to 2011. This increase is mainly due to a 10.4% increase in sales volume, which is partially explained by the acquisition of the Moncure mill and Flakeboard in 2012.

Prices for our 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,

 

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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 additional information relating to the accounting treatement of our biological assets, see “—Critical Accounting Policies—Biological Assets.”

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

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 5.8% 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 65.9%, as compared to 60.4% in 2010.

Cost of sales increased 9.2% during 2012 as a result of increased sales volume in all of our business segments and increases in the unitary costs of our main products. Compared to 2011, our costs of sales per ton increased 8.7% for bleached softwood pulp, increased 7.2% for bleached hardwood pulp, and increased 19.1% for unbleached softwood pulp. In 2012, our cost of sales measured as a percentage of total revenues was 73.6%, as compared to 65.9% in 2011.

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.

 

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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.

Fair Value of Financial Instruments

The Company recognizes certain financial assets and liabilities on its statement of financial position 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 statement of financial position 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.

 

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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 statement of financial position 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, 2010, 2011 and 2012. 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, 2010, 2011 and 2012 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,  
    2010     2011     2012  
    Sales     %     Volume     Sales     %     Volume     Sales     %     Volume  
    (in millions of U.S.$, except otherwise indicated)  

Revenue

                 

Pulp

                 

Bleached pulp(1)

  U.S.$ 1,529.9        40.6     1,999      U.S.$ 1,759.5        40.2     2,375      U.S.$ 1,569.8        36.7     2,490.7   

Unbleached pulp(1)

    247.2        6.6        344        301.4        6.9        400        286.7        6.7        438.1   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,777.1        47.2        2,343        2,060.8        47.1        2,775.0        1,856.5        43.4        2,928.8   

Panels

                 

Plywood and Fiberboard panels

    1,101.3        29.2        3,032        1,273.2        29.1        3,222        1,319.8        30.8        3,548.6   

Other

    0.3        0.0          0.5        0.0          0.7        0.0        6.9   

Total

    1,101.6        29.2        3,032        1,273.7        29.1        3,222        1,320.5        30.8        3,555.5   

Wood Products

                 

Sawn timber(2)

    463.8        12.3        2,098        526.8        12.0        2,181        541.2        12.6        2,099.5   

Remanufactured wood products(2)

    149.7        4.0        316        198.3        4.5        363        224.5        5.2        412,5   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other

    6.6        0.2          6.5        0.1          0.6        0.0        0.1   
 

 

 

     

 

 

   

 

 

     

 

 

   

 

 

     

 

 

 

Total

    620.1        16.5        2,414        731.6        16.7        2,544        766.2        17.9        2,512.1   

Forestry Products

                 

Sawlogs (net)(2)

    90.5        2.4        1,923        75.2        1.7        2,123        86.1        2.0        2,250.1   

Pulplogs(2)

    22.7        0.6        612        41.5        0.9        443        29.0        0.7        274.2   

Chips

    29.3        0.8        501        28.5        0.7        398        25.4        0.6        365.1   

Other

    7.6        0.2        32        12.3        0.3        39        9.4        0.2        71.8   
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total

    150.2        4.0        3,068        157.5        3.6        3,003        149.9        3.5        2,961.2   

Energy

    86.0        4.3          98.2        2.2          136.7        3.2     

Other

    32.4        0.9          52.6        1.2          50.5        1.2     
 

 

 

   

 

 

     

 

 

   

 

 

     

 

 

   

 

 

   

Total revenue

    3,767.4        100.0       4,374.5        100.0       4,280.3        100  

Cost of sales

                 

Timber

    (613.5         (639.6         (719.4    

Forestry labor costs

    (470.3         (588.8         (583.0    

Maintenance costs

    (94.7         (211.7         (220.5    

Chemical costs

    (240.9         (334.5         (381.2    

Depreciation

    (187.2         (217.0         (236.7    

Other costs of sales

    (669.8         (890.9         (1,007.7    
 

 

 

       

 

 

       

 

 

     

Total cost of sales

    (2,276.4         (2,882.5         (3,148.5    

Gross profit

    1,490.9        39.6       1,492.0        34.1       1,131.8        26.4  

Other income

    378.5            475.0            390.5       

Distribution costs

    (381.9         (477.6         (451.8    

Administrative expenses

    (323.9         (415.5         (474.0    

Other expenses

    (49.1         (90.3         (80.4    

Other income (loss)

    0.0            0.0            16.1       

Finance income

    15.8            24.6            17.8       

Finance costs

    (207.6         (196.4         (233.7    

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

    (7.7         (11.9         (14.3    

Exchange rate differences

    (16.3         (26.6         (18.9    
 

 

 

       

 

 

           

Income before income tax

    898.8            773.3            311.6       

Income tax

    (198.0         (152.5         (171.2    

Net income

    700.7            620.8            140.5       
 

 

 

       

 

 

       

 

 

     

 

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

 

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Year Ended December 31, 2011 Compared to Year Ended December 31, 2012

Revenue

Revenue decreased 2.2% from U.S.$4,374 million in 2011 to U.S.$4,280 million in 2012, primarily as a result of:

 

   

a 9.9% decrease in revenue from pulp; and

 

   

a 4.8% decrease in revenue from forestry products; partially offset by

 

   

a 4.7% increase in revenue from wood products; and

 

   

a 3.7% increase in revenue from panels.

Pulp

Revenue from bleached and unbleached pulp decreased 9.9% from U.S.$2,060.8 million in 2011 to U.S.$1,856.5 million in 2012, reflecting a 14.6% decrease in average prices, partially offset by a 5.5% increase in sales volume. Sales of bleached pulp decreased 10.8% due to a 14.9% decrease in average prices, partially offset by a 4.9% increase in sales volume. Revenue from unbleached pulp decreased 4.9% due to a 13.1% decrease in average prices, partially offset by a 9.5% increase in sales volume.

Panels

Revenue from panels increased 3.7% from U.S.$1,273.7 million in 2011 to U.S.$1,320.5 million in 2012. This increase in revenues was primarily due to a 10.4% increase in sales volume, partially offset by a 6.1% decrease in average prices. During 2012, we experienced an increase in sales volume due to the acquisition of the Moncure mill and Flakeboard.

Wood products

Revenue from sawn timber and remanufactured wood products increased 4.7% from U.S.$731.6 million in 2011 to U.S.$766.2 million in 2012, primarily as a result of a 6.1% increase in average prices, partially offset by a 1.2% decrease in sales volume. Sawn timber sales revenue increased 2.7% from U.S.$526.8 million to U.S.$541.2 million due to a 6.7% increase in average prices, partially offset by a a 3.7% decrease in sales volume. Remanufactured products sales revenue increased 13.2% from U.S.$198.3 million to U.S.$224.5 million due to a 13.6% increase in sales volume, partially offset by a 0.3% decrease in average prices. The North American markets in particular experienced a strong demand for value-added wood products.

Forestry products

Revenue from forestry products decreased 4.8% from U.S.$157.5 million in 2011 to U.S.$149.9 million in 2012. This decrease was primarily the result of a 30.0% decrease in the sales revenue of pulplogs, partially offset by a 14.5% increase in the sales revenue of sawlogs.

Other revenue

Revenue from other sources, consisting principally of sales of energy and chemicals, increased 24.1% from U.S.$150.9 million in 2011 to U.S.$187.2 million in 2012. This was primarily the result of a U.S.$38.5 million increase in our energy sales.

 

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Cost of sales

Cost of sales increased 9.2% from U.S.$2,882.5 million in 2011 to U.S.$3,148.5 million in 2012, primarily as a result of an increase in the sales volumes of our pulp and panels business segments and an increase in unitary costs of our forestry and wood products. In particular, as compared to 2011 the cost of timber increased by 12.5%, or U.S.$79.8 million, our indirect costs increased by 69.8% or US.$67.2 million and our chemical costs increased by 13.9% or U.S.$46.6 million. We have also experienced an increase in costs in our pulp business. In particular, our cost of sales per ton of BKPR and EKPR increased 9.3% and 7.2%, respectively, and our cost of sales per ton of UKPR increased 19.1%, as compared to 2011.

Gross profit

Our gross profit decreased from 34.1% for 2011 to 26.4% for 2012, primarily as a result of a 9.2% increase in cost of sales, and a 2.2% decrease in sales revenue.

Other income

Other income decreased 17.8% from U.S.$475.0 million in 2011 to U.S.$390.5 million in 2012, mainly as a result of lower net proceeds from insurance payments. In 2011 we recorded a gain of U.S.$194.0 million due to the insurance payments related to the February 2010 earthquake. In 2012 we recorded a gain of U.S.$89.0 million in insurance payments mainly related to the Nueva Aldea fire in January 2012 and the turbo generator stoppage in the Valdivia mill. The decrease in other income was partially offset by a net increase of U.S.$20.1 million in gains of non-core real estate assets in 2012.

Distribution costs

Distribution costs decreased 5.4% from U.S.$477.6 million in 2011 to U.S.$451.8 million in 2012, primarily due to a 3.6% or U.S.$15.7 million decrease in shipping and freight total costs and partially offset by a 5.5% increase in volume sales of pulp and a 10.4% increase in volume sales of panels. As a percentage of revenue, distribution costs decreased from 10.9% to 10.6% in 2012.

Administrative expenses

Administrative expenses increased 14.1% from U.S.$415.5 million in 2011 to U.S.$474.0 million in 2012, primarily as a result of an increase in wages and salaries, insurance and other administrative expenses of U.S.$34.1 million, U.S.$13.9 million and U.S.$25.4 million respectively. This increase is mainly attributable to an increase in our rate of hiring. As a percentage of revenue, administrative expenses increased from 9.5% in 2011 to 11.1% in 2012.

Finance costs

Finance costs increased 19.0% from U.S.$196.4 million in 2011 to U.S.$233.7 million in 2012. This increase was mainly due to prepayment accounting charges of U.S.$22.1 million incurred by Flakeboard and an increase of interest expenses of U.S.$9.9 million related to our other financial instruments, mainly forwards and swaps.

Exchange rate differences

We recorded a 29.2% decrease in exchange rate difference losses from U.S.$26.6 million in 2011 to U.S.$18.9 million in 2012, primarily as a result of foreign exchange losses attributable to money market investments, deposits and accounts receivables denominated in currencies which appreciated against the U.S. dollar, partially offset by payables liabilities denominated in currencies that appreciated against the U.S. dollar, including the Chilean peso, real and euro, among others.

 

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Income tax

We recorded an income tax expense of U.S.$152.5 million in 2011 compared to U.S.$171.2 million in 2012. This increase is mainly explained by an extraordinary charge of approximately U.S.$129.0 million explained by a net increase in deferred tax liabilities as a consequence of Law No. 20,630, which was published on September 27, 2012. Among various changes to the Chilean tax code, the application of this law increased the corporate tax rate for Chilean corporations to 20% from 18.5%, effective for taxes payable during fiscal year 2013, including income earned during 2012. In addition, we had a lower deferred tax income relating to origination and reversal of temporary differences of U.S.$0.7 million in 2012 compared to U.S.$45.6 million in 2011. This decrease was partially offset by a lower current income tax expense of U.S.$65.6 million in 2012 compared to U.S.$242.9 million in 2011.

Net income

Net income in 2012 decreased 77.4% from U.S.$620.8 million in 2011 to U.S.$140.5 million in 2012, primarily as a result of a 2.2% decrease in our revenue, a 9.2% increase in our cost of sales, a 14.1% increase in our administrative expenses and distribution costs, as discussed above, an extraordinary charge in income tax expenses of U.S.$129.0 million and a decrease in net proceeds from insurance payments from U.S.$194.0 million in 2011 to U.S.$89.0 million in 2012, as discussed above.

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 16.13% 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.

 

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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.

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.$2,276.4 million in 2010 to U.S.$2,882.5 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 profit

Our gross profit decreased from 39.6% for 2010 to 34.1% 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 income

Other 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.

 

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Distribution costs

Distribution costs for all markets increased 25.1% from U.S.$381.9 million in 2010 to U.S.$477.6 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.

Finance costs

Finance costs 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 63.6% 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

We recorded an income tax expense 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 income

Net income 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.

Liquidity and Capital Resources

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

Arauco has a liquidity policy, approved by the board of directors, that maintains conservative criteria regarding Arauco’s liquidity management. Using a combination of different variables, we define scenarios, each of which has independent criteria for defining a minimum liquidity level.

We also have access to two committed credit facility lines amounting to an aggregate of approximately U.S.$320 million. The first line has an available amount of UF 1,700,000, or approximately U.S.$ 80.9 million. The second line has a maximum available amount of U.S.$ 240.0 million.

 

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Cash Flow from Operating Activities

Our net cash flow provided by operating activities was U.S.$458.5 million in 2012 and U.S.$982.2 million in 2011. This decrease was principally due to a U.S.$329.7 million increase in payments for goods and services, a decrease of U.S.$137.7 million in receipts from premiums and claims, annuities and other policy benefits and a U.S.$91.7 million increase in payments to and on behalf of employees, partially offset by an increase of U.S.$98.2 million in receipts from sales of goods and rendering of services.

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 and a U.S.$149.6 million increase in income tax paid, partially offset by an increase of U.S.$622.4 million in our collection of sales revenue. 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.

Cash Flow Used in Investing Activities

Our net cash used in investing activities was U.S.$1,027.0 million in 2012 and U.S.$1,208.9 million in 2011. This decrease was principally due to a 94.4% or U.S.$228.8 million decrease in capital contributions to non-controlling entities (primarily due to our 2011 acquisition of Florestal Vale do Corisco Ltda.) and a 69.7% or U.S.$139.2 million decrease in loans to related companies (primarily Montes del Plata), partially offset by an increase in capital contributions to subsidiaries or other business in the amount of U.S.$190.9 million mainly due to the Moncure mill and Flakeboard acquisitions.

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.

Cash Flow from Financing Activities

Our net cash obtained from financing activities was U.S.$648.1 million in 2012 compared to the U.S.$481.2 million used in 2011. This variation is mainly due to a U.S.$1,122.8 million increase in proceeds from loans, primarily related to our 2012 issuance of U.S.$942.8 million in long term financing. In addition, in 2012 we experienced a U.S.$94.7 million decrease in the payment of dividends.

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.

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.”

 

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Contractual Obligations

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

The following table sets forth certain contractual obligations as of December 31, 2012, and the period in which the contractual obligations come due.

 

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

Debt obligations(1)

     751,685         1,111,309         843,663         2,676,231         5,382,888   

Forestal Río Grande debt obligations(2)

     34,725         —           —           —           34,725   

Purchase obligations(3)

     12,390         —           —           —           12,390   

Capital (finance) lease obligations

     20,489         26,495         9.068         —           56,052   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     819,289         1,137,804         852,731         2,676,231         5,486,055   

 

(1) Includes estimated interest payments related to long-term debt obligations based on market values as of December 31, 2012.
(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.

Investment Activities

During 2012, our principal investment activities were as follows:

 

   

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 U.S.$62.7 million.

 

   

On June 7, 2012, we entered into a share purchase agreement to acquire 100% of the shares of Flakeboard Company Limited, a Canadian company that operates seven panel production facilities in Canada and the United States. This transaction closed in September 2012 for a total purchase price of U.S.$242.5 million.

 

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Financing Activities

During 2012, our principal financing activities were as follows:

 

   

On January 11, 2012, we issued U.S.$500 million aggregate principal amount of 4.75% bonds due in 2022 in the international capital markets. On June 13, 2012, we initiated an offer to exchange those outstanding bonds for an equal principal amount of 4.75% SEC-registered notes. The exchange notes had terms substantially identical to the outstanding notes, except with respect to transfer restrictions, registration rights and certain rights to additional interest that were applicable only to the unregistered bonds.

 

   

On April 26, 2012 we issued UF5 million aggregate principal amount of bonds in the Chilean market, which was the equivalent of approximately U.S.$238 million. The bonds were issued with a yield of 3.88%, with a maturity of 21 years and a grace period of 10 years.

 

   

In October 2012, we entered into a three-year revolving committed liquidity facility with Corpbanca S.A. that has a maximum available amount of UF 1,700,000, or approximately U.S.$80.9 million. As of April 2013, this line has not been used.

 

   

On November 1, 2012, Flakeboard Company Limited, one of our U.S. subsidiaries, entered into a U.S.$150 million unsecured loan agreement with Export Development Canada, J.P. Morgan Securities LLC and Mizuho Corporate Bank, LTD. The loan is guaranteed by Arauco and has a five-year term with a three-year grace period.

 

   

In November 2012, we entered into a three-year revolving committed facility with J.P. Morgan Securities LLC, Banco Estado de Chile, New York Branch, Deutsche Bank Securities Inc. and HSBC Securities Inc. USA that has a maximum available amount of U.S.$240 million. As of April 2013, this line has not been used.

As of December 31, 2012, our short-term bank debt was U.S.$413.3 million of which 88.1% was U.S. dollar-denominated. As of December 31, 2012, our total long-term bank debt (including the current portion of such debt) was U.S.$508.4 million of which 92.7% was U.S. dollar-denominated. In addition, as of December 31, 2012, we guarantee obligations of U.S.$555.9 million related to Montes del Plata, U.S.$270.0 million related to Alto Paraná and U.S.$150 million related to Flakeboard. As of December 31, 2012, we also had total capital markets borrowings (including the current portion of such debt) of U.S.$3,417.8 million, 72.8% of which was U.S. dollar-denominated. As of December 31, 2012, the weighted average maturity of our long-term debt was 6.3 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 31, 2012, the average interest rate for our U.S. dollar floating rate debt over nine-month LIBOR was 1.45%. As of December 31, 2012, the average interest rate for our U.S. dollar fixed rate debt was 5.21%. These average rates do not reflect the effect of swap agreements and subsequent unwinds effective as of December 31, 2012.

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.

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, 2012.

 

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OFF-BALANCE SHEET ARRANGEMENTS

In addition to the debt that is reflected on our balance sheet, we guarantee 50% of the following debt of Celulosa y Energía Punta Pereira and Zona Franca Punta Pereira, each a Uruguayan affiliate of our Montes del Plata joint venture:

 

   

the IDB Facility Agreement, which has a maximum available amount of U.S.$454,000,000; and

 

   

the Finnvera Guaranteed Facility Agreement which has a maximum available amount of up to U.S.$900,000,000.

For more information, 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” and Note 23 to our audited consolidated financial statements.

As of December 31, 2012, U.S.$1,111.9 million of an aggregate maximum available amount of U.S.$ 1,354.0 million was outstanding under both facilities, of which outstanding amount we guarantee 50%. The guarantees were issued to enhance the credit worthiness of the borrowing entities in order to allow such entities to obtain, under more favorable conditions, the financing necessary for the construction of a pulp mill and port terminal in Punta Pereira, Uruguay, which we expect to positively contribute to the financial condition and results of operations of our Montes del Plata joint venture. For more information regarding the status of the construction of the mill, see “Item 4. Information on the Company—Pulp—Pulp mills—Uruguay”. If Celulosa y Energía Punta Pereira or Zona Franca Punta Pereira default under any or both of these facilities, we may be required to make a payment on their behalf or to assume on our balance sheet the portion of their debt that we guarantee, an outcome that could materially adversely affect our financial expenses, net income, ability to raise additional debt and credit ratings.

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 reputable financial institutions; and

 

   

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

Our Argentine, Brazilian, Canadian and U.S. subsidiaries manage their treasury activities independently from us. Their activities are governed by cash and deposit policies that are approved by our Chief Financial Officer. 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.

 

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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 we pay semi-annual interest based on the notional amount of U.S.$35.7 million , 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.

 

   

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 we pay semi-annual interest based on the notional amount of U.S.$35.3 million, 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 we pay 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 we pay 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 we pay 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 we pay 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 we pay 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

 

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receive semi-annual interest based on the notional amount of UF 1,000,000 at a rate of 4.25% and we pay 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 4.25% and we pay 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 October 2021.

 

   

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 we pay 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 5.20%. 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 we pay 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 we pay 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 we pay 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 we pay 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 4.00% and we pay 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.

 

   

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 3.96% and we pay semi-annual interest based on the notional amount of U.S.$46.47 million, which is equivalent to UF 1,000,000 at the currency exchange rate at the date of the agreement, at a rate of 4.39%. This swap agreement matures in November 2021.

 

   

A cross currency swap agreement with JPMorgan 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 we pay semi-annual interest based on the notional amount of U.S.$47.16 million, which is equivalent to UF 1,000,000 at the currency exchange rate of 3.97% as of the date of the agreement. This swap agreement matures in November 2021.

 

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The aggregate fair value of our currency swap agreements as of December 31, 2012 represented an asset of U.S.$47.6 million and as of December 31, 2011 represented a liability of U.S.$0.2 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 our outstanding 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.$2.2 million in 2012, U.S.$3.5 million in 2011 and U.S.$3.1 million in 2010 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 communities that participate in our industry.

TREND INFORMATION

World pulp prices for hardwood and softwood increased during the first quarter of 2013. As of March 31, 2013, the northern bleached softwood kraft pulp index has increased 3.8% as compared to December 31, 2012, reaching U.S.$840.75 per tonne, and the bleached hardwood kraft pulp index has increased 3.6% as compared to December 31, 2012, reaching U.S.$803.50 per tonne. New hardwood pulp capacity has entered the market, but this influx of supply has had little impact on price. The main driver of the first quarter price increase was strong demand from Asia, particularly from China.

The European pulp market has not yet recovered from 2012’s depressed market. 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 have shown significant improvement during the fourth quarter of 2012 and the opening months of 2013. The housing starts index reached 917,000 units in February 2013, a 39.6% increase as compared to the 657,000 unit per year reached in December 2011. During the first few months of 2013, we have experienced strong demand and price increases for MDF and MDF moldings in the North American market. In Latin America, we have experienced increasing demand and prices for our panel products, and we expect demand and prices to continue to rise for the remainder of 2013.

For more information regarding trends in our business, see “Item5. Operating and Financial Review and Prospects—Overview” and “—Exchange Rate Fluctuations.” For risks affecting our business, see “Item 3. Key Information —Risk Factors.”

 

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Item 6. Directors, Senior Management and Employees

DIRECTORS AND EXECUTIVE OFFICERS

Directors

A board of directors manages our business. Our 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 2013, and their terms will be renewed in April 2016. 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. There are no contracts under which the current directors of the Company would receive from us any benefits upon the termination of their employment by the Company. We do not have an audit committee or compensation committee.

Our current directors are listed below.

 

Name

  

Years as Director

  

Position

  

Age

Manuel Bezanilla

   27    Chairman    68

Roberto Angelini

   27    First Vice-Chairman    64

Jorge Andueza

   19    Second Vice-Chairman    64

José Tomás Guzmán

   27    Director    83

José Rafael Campino

   3    Director    60

Alberto Etchegaray

   19    Director    68

Eduardo Navarro

   5    Director    48

Timothy C. Purcell

   8    Director    53

Nicolás Majluf (1)

   1    Director    67

Carlos Corxatto(1)

   27    Director    98

 

(1) 

Mr. Carlos Croxatto resigned in August 2012, and Mr Nicolas Majluf was appointed to replace him in August 2012.

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

Manuel Bezanilla became a Director on April 30, 1986 and became Chairman of the board of directors on April 23, 2013. He served as Second Vice-Chairman of the board of directors from May 4, 2007 to April 23, 2013. He is also a partner of the law firm Portaluppi, Guzmán y Bezanilla 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.

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., 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.

 

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Jorge Andueza became a Director on April 11, 1994 and was appointed Second Vice-Chairman of the board of directors on April 23, 2013. He is also the 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 Tomás Guzmán became a Director on April 30, 1986. He served as Chairman of the board of directors from May 4, 2007 to April 23, 2013 and from April 18, 1991 to January 4, 2005, when he voluntarily resigned. He also served 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, 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.

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.

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.

Nicolás Majluf became a director on August 28, 2012. He is a professor at the School of Engineering of the Catholic University of Chile, a member of the boards of directors of Sodimac S.A., Euroamerica Seguros de Vida S.A., and Carnes Ñuble S.A., and consultant to the board of directors of Inchalam S.A. (Industrias Chilenas de Alambre Sociedad Anónima), and its related companies (Prodalam S.A.; Acma S.A.; Acmanet S.A.; Prodac (Perú) Productos de Acero Cassado S.A.; Prodinsa: Productos de Acero S.A. Prodinsa; Wire Rope Industries; and Procables S.A.). He formerly served on the boards of directors of Corporación Nacional del Cobre de Chile (Codelco), Empresas Copec S.A., S.A.C.I. Falabella, Telefónica S.A., Electroandina S.A., EDELNOR S.A.A., Colbún S.A., Empresas Pizarreño S.A. and Bazuca.com. Mr. Majluf holds a degree in civil engineering from the Catholic University of Chile, a MSc in Operations Research from Stanford University, and a PhD in Management from the Massachusetts Institute of Technology.

 

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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)

   24    Chief Executive Officer    51

Cristián Infante

   17    President and Chief Operating Officer    46

Gianfranco Truffello

   18    Chief Financial Officer    45

Robinson Tajmuch

   22    Senior Vice-President Comptroller    56

Camila Merino

   2    Senior Vice-President Human Resources    45

Franco Bozzalla

   23    Senior Vice-President Wood Pulp    50

Charles Kimber

   27    Senior Vice-President Commercial & Corporate Affairs    51

Antonio Luque

   21    Senior Vice-President Sawn Timber    56

Alvaro Saavedra

   21    Senior Vice-President Forestry    57

Gonzalo Zegers

   5    Senior Vice-President Panels    52

Felipe Guzmán

   4    General Counsel    43

 

(1) 

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

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

Matías Domeyko is the Chief Executive Officer of Arauco. Mr. Domeyko worked at Arauco from 1987 to 1994, and then rejoined in 1997 as our Chief Financial Officer. In 2005, Mr. Domeyko assumed the position of Chief Executive Officer of Arauco. 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 Senior Vice-President Comptroller of Arauco. He joined Arauco in 1991 and was previously our Comptroller. Before joining Arauco, he served as Auditing Manager at Price Waterhouse. Mr. Tajmuch holds a degree in accounting and auditing from the Santiago University of Chile.

Camila Merino is the Senior Vice-President Human Resources 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.

 

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

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

Antonio Luque is the Senior Vice-President Sawn Timber 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 Senior Vice-President Forestry 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 Senior Vice-President Panels 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 2012, 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.$1,721 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.

 

     2011      2012  

Roberto Angelini

   U.S.$ 213,354         167,395   

José Tomás Guzmán

     259,868         200,875   

Carlos Croxatto

     269,354         171,462   

Manuel Bezanilla

     179,804         166,658   

Jorge Andueza

     113,753         134,101   

José Rafael Campino

     64,949         66,965   

Alberto Etchegaray

     64,949         66,965   

Eduardo Navarro

     64,949         66,965   

Juan Cambiaso

     48,000         —     

Antonio Luque

     43,156         44,199   

Matías Domeyko

     154,591         96,875   

René Katz

     13,564         13,923   

Manfred Mayer

     13,564         13,923   

Jorge Garnham Mezzano

     6,707         22,963   

Eduardo Zañartu

     13,591         14,276   

Alvaro Saavedra

     43,156         44,199   

 

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     2011      2012  

Franco Bozzalla

     33,822         61,408   

Cristián Infante

     84,448         111,335   

Gonzalo Zegers

     29,591         30,276   

Robinson Tajmuch

     27,156         28,199   

Charles Kimber

     27,156         28,199   

Timothy C. Purcell

     64,949         66,965   

Gianfranco Truffello

     9,026         23,441   

Pablo Mainardi

     —           18,867   

Pablo Ruival

     —           18,867   

Sergio Gantuz

     —           18,867   

Nicolás Majluf Sapag

     —           22,918   
  

 

 

    

 

 

 

Total Compensation

     1,843,457         1,721,086   
  

 

 

    

 

 

 

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, 2012.

 

     As of December 31,  
     2010      2011      2012  

Pulp mill employees

     2,327         2,348         2,619   

Other industrial employees

     3,446         3,583         7,277   

Forestry employees