20-F 1 d909855d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 29, 2015

 

 

 

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, 2014

Commission File Number: 33-99720

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

(Exact name of Registrant as specified in its charter)

Arauco and Constitution Pulp Inc.

(Translation of Registrant’s name into English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

(Address of principal executive offices)

Gianfranco Truffello

Tel.: 56-2-2461-7221

E-mail: gianfranco.truffello@arauco.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:

5.625% Notes due 2015

7.500% Notes due 2017

7.250% Notes due 2019

5.000% Notes due 2021

4.750% Notes due 2022

4.500% Notes due 2024

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes ¨  No 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      
    Item 1.   

Identity of Directors, Senior Management and Advisers

     1   
    Item 2.   

Offer Statistics and Expected Timetable

     1   
    Item 3.   

Key Information

     1   
    Item 4.   

Information on our Company

     18   
    Item 5.   

Operating and Financial Review and Prospects

     40   
    Item 6.   

Directors, Senior Management and Employees

     55   
    Item 7.   

Major Shareholders and Related Party Transactions

     60   
    Item 8.   

Financial Information

     61   
    Item 9.   

The Offer and Listing

     64   
    Item 10.   

Additional Information

     65   
    Item 11.   

Quantitative and Qualitative Disclosures About Market Risk

     72   
    Item 12.   

Description of Securities Other than Equity Securities

     74   
PART II      
    Item 13.   

Defaults, Dividend Arrearages and Delinquencies

     74   
    Item 14.   

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

     74   
    Item 15.   

Controls and Procedures

     74   
    Item 16A.   

Audit Committee Financial Expert

     75   
    Item 16B.   

Code of Ethics

     75   
    Item 16C.   

Principal Accountant Fees and Services

     75   
    Item 16D.   

Exemptions from the Listing Standards for Audit Committees

     76   
    Item 16E.   

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     76   
    Item 16F.   

Change in Registrant’s Certifying Accountant

     76   
    Item 16G.   

Corporate Governance

     76   
    Item 16H.   

Mine Safety Disclosures

     76   
PART III      
    Item 17.   

Financial Statements

     76   
    Item 18.   

Financial Statements

     76   
    Item 19.   

Exhibits

     76   

 

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CERTAIN TERMS AND CONVENTIONS

Celulosa Arauco y Constitución S.A. is a sociedad anónima (corporation) organized under the laws of the Republic of Chile, and subject to certain rules applicable to sociedades anónimas abiertas (Chilean public corporations). Except where otherwise specified or the context otherwise requires, when we refer to the “Company,” “Arauco” or “we,” in this annual report, we mean Celulosa Arauco y Constitución S.A. and its consolidated subsidiaries. When we refer to “Chile,” we mean the Republic of Chile; when we refer to “Argentina,” we mean the Argentine Republic; when we refer to “Brazil,” we mean the Federative Republic of Brazil; when we refer to “the U.S.,” “U.S.A.,” or “the United States,” we mean the United States of America; and when we refer to “Uruguay,” we mean the Oriental Republic of Uruguay. All references to “tonnes” are to metric tons (1,000 kilograms), which equal 2,204.7 pounds. One “hectare” equals 10,000 square meters or 2.471 acres. Discrepancies in any table between totals and the sums of the amounts listed 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 reais” “Brazilian reals” or “R$” are to Brazilian reais; references to “€” or “euro” are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; references to “Rubles” are to Russian rubles; and references to “UF” are to Unidades de Fomento. The UF is a unit of account that is linked to, and adjusted daily to reflect changes in, the Chilean consumer price index reported by the Instituto Nacional de Estadísticas (Chilean National Institute of Statistics). As of December 31, 2014, one UF equaled U.S.$40.59 and Ch$24,627.10.

PRESENTATION OF FINANCIAL DATA

This report includes the audited consolidated statement of financial position of Arauco and our subsidiaries as of December 31, 2014 and 2013 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, 2014 (collectively, the “audited consolidated financial statements” or “financial statements”). In addition, this report includes selected financial information for the periods ended December 31, 2010, 2011, 2012, 2013 and 2014.

For your convenience, this annual report contains certain translations of Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the observed exchange rate reported by Banco Central de Chile, which we refer to as the “Central Bank of Chile” or the “Central Bank.” The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. On December 30, 2014, the observed exchange rate for Chilean pesos, as published in the Diario Oficial de la Republica de Chile (Official Gazette) on January 2, 2015, was Ch$606.75 to U.S.$1.00, and on April 22, 2015, the observed exchange rate was Ch$618.02 to U.S.$1.00. See “Exchange Rates.” You should not construe these translations as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise specified, references to the devaluation or the appreciation of the Chilean peso against the U.S. dollar are in nominal terms (without adjusting for inflation) based on the observed exchange rates published by the Central Bank of Chile for the relevant period.

PART I

Item  1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial information as of December 31, 2010, 2011, 2012, 2013 and 2014 and for each of the five years then ended is derived from, should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

     As of and for the year ended December 31,(1)  
     2010     2011     2012     2013     2014  
     (in thousands of U.S. dollars, except ratios and share data)  

INCOME STATEMENT DATA

  

Revenue

     3,767,384        4,374,495        4,298,663        5,145,500        5,328,665   

Cost of sales

     (2,276,446     (2,882,455     (3,163,432     (3,557,210     (3,654,146

Gross profit

     1,490,938        1,492,040        1,135,231        1,588,290        1,674,519   

Other income

     378,480        475,014        408,251        385,055        368,924   

Distribution costs

     (381,933     (477,628     (452,760     (523,587     (542,859

Administrative expenses

     (323,916     (415,521     (479,625     (544,694     (550,809

Other expenses

     (49,063     (90,313     (105,325     (136,812     (138,769

Other gains (losses)

     0        0        16,133        0        0   

Finance income

     15,761        24,589        23,476        19,062        30,772   

Finance costs

     (207,519     (196,356     (236,741     (232,843     (246,473

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

     (7,693     (11,897     18,933        6,260        7,481   

Exchange rate differences

     (16,288     (26,643     (17,245     (11,797     (9,961

Income before income tax

     898,767        773,285        310,328        548,934        592,825   

Income tax

     (198,018     (152,499     (166,787     (130,357     (448,652
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     700,749        620,786        143,541        418,577        144,173   

BALANCE SHEET DATA

          

Current assets

     3,152,116        2,462,660        2,785,517        2,808,321        3,140,715   

Property, plant and equipment

     5,088,745        5,393,978        6,816,742        7,137,467        7,119,583   

Biological assets(2)

     3,790,958        3,744,584        3,873,070        3,892,203        3,846,353   

Total assets

     12,506,332        12,552,178        14,259,614        14,493,395        14,747,454   

Total current liabilities

     1,209,061        1,031,945        1,546,728        1,682,016        1,547,086   

Total non-current liabilities

     4,456,696        4,490,083        5,747,127        5,766,839        6,385,632   

Total equity

     6,840,575        7,030,150        6,965,759        7,044,540        6,814,736   

CASH FLOW DATA

          

Net cash flow from operating activities

     1,137,275        980,517        442,394        897,720        985,175   

Net cash flow from investing activities

     (669,414     (1,207,137     (1,345,849     (687,620     (655,158

Net cash flow from financing activities

     33,852        (481,184     1,055,482        (7,776     (7,885
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     501,713        (707,804     152,027        202,324        322,132   

OTHER FINANCIAL DATA

          

Capital expenditures(3)

     595,520        748,272        1,186,374        942,638        604,155   

Depreciation and amortization

     233,655        230,737        252,381        298,647        353,434   

Fair value cost of timber harvested(4)

     271,515        335,142        311,821        320,894        353,273   

EBIT(4)

     1,090,525        945,052        523,593        762,715        808,526   

Adjusted EBITDA(4)

     1,390,482        1,307,685        861,745        1,143,382        1,272,209   

Adjusted EBITDA(4)/total interest expense

     6.70        6.66        3.64        4.91        5.16   

Adjusted EBITDA(4)/revenue

     36.9     29.9     20.0     22.2     23.9

Average debt(5)/Adjusted EBITDA(4)

     2.39        2.55        4.80        4.37        3.97   

Total debt(6)

     3,449,569        3,283,107        4,962,116        5,026,494        5,078,430   

Total debt(6)/capitalization(7)

     33.5     31.8     41.6     41.6     42.7

Total debt(6)/equity attributable to parent company

     51.2     47.3     72.0     71.9     75.0

Working capital(8)

     1,943,055        1,430,715        1,238,789        1,126,305        1,593,629   

Number of shares

     113,152,446        113,152,446        113,152,446        113,159,655        113,159,655   

Net income per share

     6.14        5.41        1.2        3.4        1.2   

Dividends paid

     158,781        291,512        196,816        140,054        141,089   

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

     1.40        2.58        1.74        1.24        1.25   

 

(1) The years 2012, 2013 and 2014 include our 50% share of our joint operation with Stora Enso Oyj, Montes del Plata, in Uruguay.
(2) Biological assets refer to our forests and long-standing trees (current and non-current).
(3) Includes capital expenditures in respect of property, plant and equipment and biological assets accrued for the period. Excludes acquisitions of companies.
(4) We calculate EBIT as “net income” before “finance costs,” “finance income” and “income tax.” We calculate EBITDA as EBIT, plus “depreciation and amortization.”

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

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

 

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     As of and for the year ended December 31,  
     2010     2011     2012     2013     2014  
     (in thousands of U.S. dollars)  

Net income

     700,749        620,786        143,541        418,577        144,173   

(+) Finance costs

     207,519        196,356        236,741        232,843        246,473   

(-)  Finance income

     (15,761     (24,589     (23,476     (19,062     (30,772

(+) Income Tax

     198,018        152,499        166,787        130,357        448,652   

EBIT

     1,090,525        945,052        523,593        762,715        808,526   

(+) Depreciation and amortization

     233,655        230,737        252,381        298.647        353,434   

EBITDA

     1,324,180        1,175,789        775,974        1,061,362        1,161,960   

(+) Fair value cost of timber harvested

     271,515        335,142        311,821        320,894        353,273   

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

     (221,501     (229,889     (243,295     (269,671     (284,497
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(+) Exchange rate differences

     16,288        26,643        17,245        11,797        9,961   

(+) Others(9)

     0        0        0        19,000        31,512   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     1,390,482        1,307,685        861,745        1,143,382        1,272,209   

 

(5) Average debt is calculated as the average of total debt 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 total equity.
(8) Working capital is calculated by subtracting current liabilities from current assets.
(9) “Others” includes other non-cash expenses or gains.

 

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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.$

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

2013

     532.97         467.38         495.00       523.76

2014

     621.41         527.53         570.34       606.75

Months (2014-2015)

           

November

     605.46         580.62         593.91       605.46

December

     621.41         606.75         612.98       606.75

January

     632.03         612.47         622.11       632.03

February

     632.19         616.86         622.95       618.76

March

     642.18         617.38         628.86       626.58

April (through April 22)

     621.10         610.74         615.06       618.02

 

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 22, 2015, the observed exchange rate, as published in the Official Gazette on April 23, 2015, was Ch$618.02 to U.S.$1.00.

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 are highly correlated 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, 2012 to December 31, 2014, the average price for Norscan bleached softwood kraft market pulp (pulp produced in Canada and Northern Europe and 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 October 2012 to a high of U.S.$933.68 per tonne in December 2014. 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. During 2013 average prices of our products increased compared to those of 2012, due to an improvement of the U.S. real estate and construction market and higher demand of pulp in Asia. In 2014, the shortfiber pulp market had two new pulp mills entering the market with a combined annual production capacity of 2.8 million tonnes. The additional supply caused Bleached Eucalyptus Kraft Pulp (BEKP) prices to decline during the first nine months of the year, reaching its lowest price at U.S.$724.27 per tonne in September. For the last three months of 2014, BEKP prices began to increase and ended the year at U.S.$742.90 per tonne. On the other hand NBSK stood at high price levels throughout the year, reaching U.S.$932.06 per tonne at the end of December. All solid wood markets improved during 2014, with increased demand that permitted the sales mix and prices, to improve with respect to 2013. Asian markets, in particular, Japan, South Korea and China followed this positive trend. The North American market, despite an improvement in the Housing Starts index, did not show significant improvement, however prices rose in our solid wood moldings business. Notwithstanding these recent increases in our prices, global economic conditions may exert downward pressure on commodity prices, including the international prices of the products we sell, which could result in material and adverse declines in our revenues, results of operations and financial condition. We have no control over the factors that cause prices to change which include, among others:

 

   

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

 

   

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

 

   

world production capacity;

 

   

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

 

   

the availability of substitutes.

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

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

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines. Several of our competitors are larger than we are and have greater financial and other resources. 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 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 downturn in the real estate market in the United States resulted in our decision to close five sawmills in 2008 and 2009. In this context our Bossetti sawmill in Argentina was also closed in 2010.

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

Export sales of our sawn timber products to Asia accounted for 41.4% of our revenue in 2014 compared to 37.0% in 2013 and 32.8% in 2012, and export sales of our wood products to North America accounted for 33.7% of our revenue in 2014 compared to 26.8% in 2013 and 35.5% in 2012. 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 2014, export sales, defined as sales out of the country where our goods were produced, accounted for 62.0% of our total revenues. During this period, 52.0% of our export sales were to customers in Asia and Oceania, 20.0% to customers in North America, 10.7% to customers in Europe, 10.7% to customers in Central and South America and 6.6% 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.

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, or satisfy customer demand and could require us to make unplanned capital expenditures, resulting in lower sales and having a material adverse effect on our financial results.

On February 27, 2010, an earthquake measured at a magnitude of 8.8 on the Richter scale, followed by a tsunami that affected the coast, occurred in the South-Central Region of Chile, an area where we maintain a substantial portion of our Chilean industrial operations. Immediately after the earthquake, all of our production units 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 when it became inoperable.

 

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The suspension of our operations in Chile resulted in significant asset impairment charges due to earthquake-related damage to property and inventories as well as a significant decrease in our sales volumes due to plant closures, which had an adverse effect on our results of operations and cash flows. Our insurance policies provided coverage up to an aggregate amount of U.S.$650 million for damages to our property, plant, equipment and inventories, with a deductible of U.S.$3 million for property damage, and for losses due to business interruption caused by such damage after the first 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, 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 our waste disposal 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, the Arauco Mill, the Nueva Aldea complex and the Licancel Mill. As a result of these proceedings, we have been subject to monetary fines as well as sanctions, including orders to suspend or limit our operations. In the United States, our Moncure mill was subject to an administrative proceeding by the North Carolina Department of Environment and Natural Resources. We negotiated a settlement that included a monetary fine and an agreement to replace certain emissions control equipment. The equipment was successfully rebuilt rather than replaced, and following demonstrated compliance, the administrative proceeding was closed on February 27, 2015. Our Eugene, Oregon mill was subject to an administrative proceeding by the Lane Regional Air Protection Agency. We negotiated a settlement that included monetary fines and an agreement to implement improvements to certain emissions control equipment and processes. 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, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows.”

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

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

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 Comisión Regional del Medio Ambiente (the regional environmental authority, 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.

 

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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 Consejo Directivo (Directive Council) of the Comisión Nacional del Medio Ambiente (National Environmental Commission , 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. Then, 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 additional 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 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 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 recurso de participación ciudadana (reclamation action) before the COREMA of the Fourteenth Region of Chile, challenging Exempt Resolution No. 27/2010. On April 30, 2013, the Committee of Ministers passed Exempt Resolution No. 391, which upheld in part such reclamation action, modifying paragraph 4.8.3, and updating tables 8, 9.a and 9.b of the Exempt Resolution No. 27/2010 (thereby establishing effluent discharge limits for 13 parameters, including total chromium, total hydrocarbons, sulfur, oil and grease, suspended solids and phosphorus). According to Chilean law, the environmental permit shall expire five years after its issuance, provided that the execution of the respective project has not begun. However, on May 16, 2014 the regional environmental authority issued letter No. 165 in which it recognized that although we have not yet carried out physical works with respect to the project, we have carried out systematic, uninterrupted and permanent activities towards its execution.

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

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

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

 

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The National Defense Council and Arauco have agreed upon the manner in which these measures will be implemented.Since the end of 2004, we have been subject to various criminal proceedings relating to alleged violations of several environmental laws in Chile, some of which have been either terminated or abandoned by the prosecutor (decisión de no perseverar) as of the date of this annual report. 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 administrative proceedings as a result of a pipe leakage in the Nueva Aldea Mill in 2013, and the death of fish in the Cruces River in January 2014, close to the Valdivia Mill effluent discharge, which are both currently under investigation by the competent authorities. 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 (Federal Administration of Public Revenues, or AFIP), Argentina’s internal revenue service, notified our Argentine subsidiary, Alto Paraná S.A., which effective January 1, 2015, changed its name to Arauco Argentina S.A., or Arauco Argentina, of a claim for alleged unpaid taxes for fiscal years 2002, 2003 and 2004 in the aggregate amount of AR$418 million (or approximately U.S.$105 million at the then-current exchange rate) including principal, interest and penalties accrued through such date, arising from a dispute regarding certain income tax deductions (related to debt issued by Arauco Argentina in 2001 and repaid in 2007) taken by Arauco Argentina and challenged by the AFIP. On February 8, 2010, Tribunal Fiscal de la Nación (Argentina’s Tax Court), issued an administrative ruling requiring that Arauco Argentina pay the AFIP’s claim in full.

Arauco Argentina appealed this administrative ruling to the Court of Appeals, in addition to filing an injunctive action requesting that the court stay Arauco Argentina’s payment obligation until resolution of its pending appeal. On May 13, 2010, the Court of Appeals granted an injunction of Arauco Argentina’s payment obligation in exchange for the posting of a surety bond in the amount of AR$633.6 million (or approximately U.S.$129 million at the then-current exchange rate). On December 28, 2012, the Court of Appeals dismissed Arauco Argentina’s appeal. Arauco Argentina appealed this decision before the Argentine Supreme Court of Justice, or the Argentine Supreme Court. The appeal has been under consideration by the Argentine Supreme Court since May 29, 2013. The injunction granted by the Court of Appeals is still in force.

We can offer no assurance that the Argentine Supreme Court will issue a ruling favorable to us. If the Argentine Supreme Court upholds the decision of the Court of Appeals, Arauco Argentina will be required to satisfy the above-mentioned claim (together with interest accrued), 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, 2014, we had approximately U.S.$5,078.4 million of outstanding indebtedness. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Contractual obligations.” The economic environment prevailing at any point in time may prevent us from accessing, or restrict our access to, credit and capital markets to satisfy our financing needs, or we may not be able to refinance our existing indebtedness on terms that are favorable to us or at all. If we are unable to refinance our indebtedness as it becomes due, or if we refinance such indebtedness on terms that are not favorable to us, our business, results of operations and financial condition could be materially and adversely affected.

 

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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 operation 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 or Uruguay, these pests or diseases do migrate and may significantly affect the forestry industries in Chile, Argentina, Brazil or Uruguay in the future. Similarly, forest fires are always a risk, particularly during 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 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 the time of the event. Although the plywood mill at Nueva Aldea and our forest plantations were insured, our insurance is subject to deductibles and caps, including a 15-day deductible relating to our business interruption insurance for the Nueva Aldea plywood mill. We received U.S.$143.1 million from these insurance policies. In December 2013, we finished reconstruction of the Nueva Aldea plywood mill and began the start-up and commissioning process. During 2014, we continued the start-up and commissioning process. We expect that our Nueva Aldea plywood mill will be in full production by the second half of 2015 and that it will have an annual production capacity of 360,000 cubic meters of plywood panels.

During the fourth quarter of 2014 and the first quarter of 2015, fires affected our forest plantations and destroyed 8,570 hectares.

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 are 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, or if legal, regulatory and social responses to concerns about global climate change, any such occurrences may negatively affect our business, financial condition, results of operations and cash flows.

 

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Our operations could be adversely affected by labor disputes.

Approximately 30% of our employees in Chile, 47% of our employees in Argentina, almost 100% of our employees in Brazil and none of our employees in the United States or Canada were unionized as of December 31, 2014. In the past, certain work slowdowns, stoppages and other labor-related disruptions have adversely affected our operations.

During 2014, there were two events of transportation contractors blocking the entrance to our Validivia mill. The first event was on June 12, 2014 and lasted one day. The second was between August 29 and September 5, 2014. Also, there were four separate occasions of transportation contractors blocking the entrances of our Horcones complex (timber, panels, forestry and pulp)on February 24 and 25, September 3, October 22 and 23, and November 20, 2014.

In January 2013, we experienced a four-day stoppage in Chile at the Arauco plywood mill in January 2013, caused by employees of third-party contractors.

In Chile, we also experienced (i) a four-day work stoppage in July 2012 at our Arauco plywood mill located in Arauco, during which production resumed partially after the second day; (ii) a ten 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, each of which was caused by the employees of our third-party forestry contractors at each of the respective facilities.

In Argentina, we experienced a five-day stoppage at Arauco Argentina’s mills in Misiones in January 2015, as a result of a road blockage lead by the truckers union, and we also experienced a four-day stoppage at Arauco Argentina’s pulp mill in December 2014 as a result of a strike by the pulp union.

In Argentina, during 2011 and 2010, we experienced (i) a three-day stoppage at Arauco Argentina’s chemical mill in March 2011, as a result of a strike by the chemical union and (ii) a four-day stoppage at Arauco Argentina’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. During 2013, we experienced (i) a 27-day stoppage at Arauco Argentina’s Zarate mill in April 2013, as a result of a strike by the construction union; (ii) a two-day stoppage at Arauco Argentina’s chemical mill in May 2013, as a result of a strike by the Santa Fe Federation of Labour; and (iii) a one-day stoppage at Arauco Argentina’s pulp mill in June 2013 and a three-day stoppage at Arauco Argentina’s pulp mill in October 2013, both as a result of a strike by the pulp union.

Our Brazilian operations have not experienced any work stoppages in the last five years.

In September 2011, we experienced a 21-day work stoppage of construction at the Montes del Plata joint operation in Uruguay. In 2012, we experienced approximately 17 days of work stoppages and in 2013, approximately 33 days of work stoppages during the construction at Montes del Plata. These stoppages were caused by national and local strikes related to various labor conflicts.

Our Canadian and U.S. operations did not experience any work stoppages in 2012, 2013 or 2014.

We renewed all of the collective-bargaining agreements that expired during 2014 in Chile. We cannot assure you that a work slowdown, or a work stoppage or strike, will not occur prior to or upon the expiration of our labor agreements, and we are unable to estimate the adverse effect of any such work slowdown, stoppage or strike on our sales.

In addition, we depend to a significant extent on employees of contractors to which we outsource a wide range of services including 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, 2014, we had contracts with approximately 1,426 contractors, who employed approximately 26,934 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 us, as the party hiring such contractor, although the contractor would remain primarily liable for such obligations. Generally, we are also responsible for the health and safety conditions of the contractors’ workers and are obligated to ensure that the contractors comply with all obligations related to such conditions while such workers are performing activities for us within our corporate purpose.

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

 

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

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, 2014, 64.2% of our property, plant and equipment and forest assets were directly owned by Celulosa Arauco y Constitución S.A., and our Chilean subsidiaries, and in 2014, 65.2% 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’s actions have had and may continue to have a material effect on private sector entities. We have no control over and cannot predict how government intervention and policies will affect the Chilean economy or, directly and indirectly, our operations and revenues.

The Chilean government has exercised and continues to exercise substantial influence over many aspects of the economy. In this context, in September 2014, the Chilean Congress approved a tax reform bill that has a significant impact on Chilean companies. See “A tax reform bill with significant changes for companies was approved in September 2014 and the Chilean Superintendency of Securities and Insurance, or SVS, modified accounting reporting standards for companies under its supervision in October 2014.” 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.

A tax reform bill with significant changes for companies was approved in September 2014 and the Chilean Superintendency of Securities and Insurance, or SVS, modified accounting reporting standards for companies under its supervision in October 2014.

On September 29, 2014, Law No. 20,780, or the Tax Reform, was published in the Official Gazette, introducing significant changes to the Chilean taxation system and strengthening the powers of the Servicio de Impuestos Internos (Chilean IRS) to control and prevent tax avoidance. The Tax Reform contemplates, among other matters, changes to the corporate tax regime to create two tax regimes. Starting on January 1, 2017, Chilean companies will be able to opt between two tax regimes: (i) the sistema parcialmente integrado (the partially integrated regime); or (ii) the sistema de renta atribuida (the deemed taxation regime). Under both regimes, the corporate tax rate will be gradually increased to 24% by 2016 (21% in 2014, 22.5% in 2015 and 24% in 2016). Depending on the tax regime chosen by a company, tax rates will gradually be increased to a maximum rate of 25% in 2017, in the case of the deemed taxation regime or 27% in 2018, in the case of the partially integrated regime.

Under the amended regulations as a sociedad anónima, the default regime that applies to us is the partially integrated regime, unless a subsequent shareholders meeting of the Company elects to apply the deemed taxation regime.

The Superintendency of Securities and Insurance issued Oficio Circular No. 856 on October 17, 2014 which instructs regulated entities to record as a charge to shareholders’ equity in their statutory financial statements the difference in deferred tax assets and liabilities that results from the increase in the tax rate set forth in Law No. 20,780. The impact of this circular has been incorporated in the statutory financial statements which are used to determine the distributable income. This circular differs from International Financial Reporting Standards (IFRS) which requires the impact to be recorded as part of the income statement. However, the financial statements that we prepared and filed with the SVS as of and for the periods ended September 30 and December 31, 2014, account for deferred taxes in accordance with Oficio Circular No. 856.

In the attached financial statements prepared in accordance with IFRS, the effect of the change in the tax rate of first category in assets and liabilities relating to deferred taxes results in an expense of U.S.$292,717,000 (U.S.$292,155,000 attributable to owners of parent) reclassified to the income statement.

Further amendments could affect our income tax rates. We have no control and cannot predict how such amendments will affect, directly or indirectly, the Chilean economy or 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. Furthermore, the change imposed by SVS by Oficio Circular 856 dated October 17, 2014, obliging companies under its supervision not to follow IFRS could lead investors to improperly determine Arauco’s results with respect to the effect of the tax reform on Arauco’s deferred taxes.

 

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

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

In addition, although Chilean law imposes restrictions on insider trading and price manipulation, applicable Chilean securities laws and regulations are different from those in the United States, and some investor 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 highest of which occurred more than 20 years ago. 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 2010, 2011, 2012, 2013 and 2014 were 3.0%, 4.4%, 1.5%, 3.0% and 4.6% 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 condition 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 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 Euro, the Argentine peso, the Uruguayan peso, the Brazilian real, the Colombian peso, the Mexican peso and the Canadian dollar, among others. To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic revenues may be adversely affected when expressed in U.S. dollars. The same effects may occur for our domestic sales in Argentina, Brazil and Canada, or other countries where we have operations for revenues related to products sold in each of the respective local currencies. As a result, fluctuations in the exchange rates of such foreign currencies 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, 2014, 9.5% of our property, plant and equipment and forest assets were owned by our Argentine subsidiaries, and in 2014, 9.6% of our revenues were attributable to our Argentine operations. The financial condition and results of our Argentine operations, including the ability of our Argentine subsidiary Arauco Argentina to raise capital, depend, among other factors, upon economic conditions prevailing in Argentina. See “Item 4. Information on our Company—Description of Business—History.”

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

 

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

We guarantee a portion of Arauco Argentina’s debt. We may be required to fulfill our obligation under our guarantees if Arauco Argentina’s ability to transfer funds abroad to service such debt is restricted. For a description of Arauco Argentina’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 Arauco Argentina’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 Arauco Argentina’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, 2014, 8.0% of our property, plant and equipment and forest assets were owned by our Brazilian subsidiaries, and in 2014, 8.5% of our revenues were attributable to our Brazilian operations. See “Item 4. Information on our Company—Description of Business.” As a result of the foregoing, to a certain extent, our business, financial condition, results of operations and cash flows will be dependent on economic conditions in Brazil.

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

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

 

   

currency fluctuations;

 

   

inflation;

 

   

social instability;

 

   

price instability;

 

   

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 2010, 6.5% in 2011, 5.8% in 2012, 5.9% in 2013 and 6.4% in 2014, as measured by the Índice de Preços ao Consumidor-Amplo (Brazilian Consumer Price Index). In the past, inflation, governmental measures to combat inflation and public speculation about possible future actions have had significant effects on the Brazilian economy. Certain future measures, if taken by the Brazilian government, including interest rate increases, tax increases, intervention in the foreign exchange market and actions to adjust or fix the value of the Brazilian 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.

 

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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 Brazilian 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 Brazilian real and the U.S. dollar and other currencies.

For example, the Brazilian real depreciated by 12.8% against the U.S. dollar in 2013, and depreciated by 11.8% in 2014. The exchange rate between the Brazilian real and the U.S. dollar may continue to fluctuate and may rise or decline substantially from current levels. From January 1 to March 31, 2015 the Brazilian real lost 20.4% of its value with respect to the U.S. dollar.

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

As of December 31, 2014, 15.7% of our property, plant and equipment and forest assets were owned by Montes del Plata and its affiliates in Uruguay, and in 2014, 2.0% of our revenues were attributable to the Uruguayan operations of Montes del Plata. See “Item 4. Information on our Company—Description of Business.”

We have made significant investments in Uruguay and we may make additional investments in Uruguay in the future. See “Item 4. Information on our Company—Description of Business.” As a result, our financial condition and results of operations may consequently depend, to a certain extent, on political and economic conditions in Uruguay. Certain future actions by the Uruguayan government, including, among others, actions with respect to inflation, interest rates, foreign exchange controls and taxes, could have a material adverse effect on our operations in Uruguay.

Risks Relating to the United States and Canada

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

As of December 31, 2014, 2.0% of our property, plant and equipment and forest assets were owned by our U.S. subsidiaries, and in 2014, 10.8% of our revenues were attributable to our U.S. subsidiaries. See “Item 4. Information on our Company—Description of Business.”

As of December 31, 2014, 0.5% of our property, plant and equipment and forest assets were owned by our Canadian subsidiaries, and in 2014, 3.9% of our revenues were attributable to our consolidated Canadian subsidiaries, which includes our Canadian subsidiaries’ operations in the United States. See “Item 4. Information on our Company—Description of Business.”

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

Risks Relating to Other Markets

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

Our business, financial condition, results of operations and cash flows depend, 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. In 2012, 2013 and 2014, 93.3%, 92.8% and 92.2%, respectively, of our total pulp sales, and 49.0%, 41.3% and 44.0%, respectively, of our total sales of forestry, wood and panel products, were attributable to exports, principally to customers in Asia, the Americas and Western Europe, collectively. Our business, earnings and prospects, as well as our financial condition, results of operations, cash flows and the market price of our securities, may be materially and adversely affected by developments in these export markets relating to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation, social instability or other political, economic or diplomatic developments. For example, certain target countries to which we export may impose buying restrictions in our industry, which may adversely affect our sales. We have no control over these conditions and developments which could adversely affect us and our business, financial condition, results of operations and cash flows or the price or market of our securities.

 

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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.

In late 2009, high levels of sovereign debt and insufficient public sector revenues resulted in a European sovereign debt crisis. During this crisis, credit rating agencies downgraded the credit ratings of many of the Eurozone governments, including Greece, Spain, Italy, Portugal and France, among others. During 2012, 2013 and the first quarter of 2014, the deepening of this crisis caused a general economic downturn in Europe, and 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 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 our subsidiaries. Our right to receive assets of any of our subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of our securities to participate in those assets) will be effectively subordinated to the claims of 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 the Montes del Plata pulp plant in Uruguay, Fitch Ratings, or Fitch, downgraded our foreign and local currency Issuer Default Ratings (IDR) 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 Arauco Argentina, to “BBB” from “BBB+.” The unsecured debt issued by Arauco Argentina 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 Standard & Poor’s Ratings Services, or 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.

 

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On March 7, 2013, Moody’s Investors Service, or Moody’s, downgraded our senior unsecured ratings to “Baa3” from “Baa2” with a negative outlook, citing deterioration in our performance coupled with a significant increase in debt that resulted in a significant increase in leverage. Additionally, Moody’s downgraded the rated notes of Arauco Argentina to “Baa3” from “Baa2”. On March 27, 2013, 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.

On April 5, 2013, S&P lowered its corporate credit rating foreign currency on Arauco Argentina from “B+” to “B,” due to worsening business conditions in Argentina and our recent downgrade, as Arauco Argentina’s parent company, from “BBB” to “BBB-” on March 27, 2013. Then on September 13, 2013, the rating was downgraded again from “B” to “B-” following similar action on the Republic of Argentina which was lowered from “B-” to “CCC+.” On December 20, 2013, the foreign currency global scale rating on Arauco Argentina suffered its third downgrade from “B-” to “CCC+” to reflect the same transfer and convertibility risk assessment for Argentina, due to restrictions on access to foreign currency and/or restrictions on transferring money abroad.

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

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 our Company

DESCRIPTION OF BUSINESS

We believe that, as of December 31, 2014, we were one of Latin America’s largest forest plantation owners, and that we are Chile’s largest exporter of forestry and wood products in terms of revenue. We have industrial operations in Chile, Argentina, Brazil, the United States, Canada and Uruguay (via our 50% share in Montes del Plata). As of December 31, 2014, we had more than 1.0 million hectares of plantations in Chile, Argentina, Brazil and Uruguay combined. During 2014, we harvested 21.9 million cubic meters of sawlogs and pulplogs and sold 8.1 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, particleboard, or PBO, and high density fiber board, or HB). During 2014, we sold 3.3 million tonnes of pulp in the form of hardwood beached pulp, softwood bleached pulp, softwood unbleached pulp and fluff.

Based on information published by Hawkins Wright Ltd., an independent research company for the pulp and paper industry, as of December 31, 2014, 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 7.1% share of the total world production capacity of bleached softwood kraft market pulp and a 25.2% share of the total world production capacity of unbleached softwood kraft market 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 Hawkins Wright Ltd., 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 sociedad anónima (corporation) organized under the laws of Chile and subject to certain rules applicable to sociedades anónimas abiertas (Chilean public corporations). 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 effective January 1, 2015, changed its name to Arauco Argentina S.A., which, at the time of the acquisition, owned plantations and other land in Argentina and manufactured and sold bleached softwood kraft pulp. With this acquisition, we expanded our market opportunities outside of Chile.

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

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

On August 26, 2009, our subsidiary Placas do Paraná S.A. (now, Arauco do Brasil S.A.) acquired 100% of the shares of Tafisa Brasil, by means of a share purchase agreement executed among SCS Beheer, B.V., Tafiber—Tableros de Fibras Ibéricos, S.L. (each of which is a subsidiary of Sonae Indústria, SGPS, S.A.) and Placas do Paraná S.A. Pursuant to the transaction, we paid a purchase price of U.S.$227 million, of which U.S.$165.2 million was allocated to pay the value of the shares of Tafisa Brasil, with the balance corresponding to liabilities that the acquired company maintained.

 

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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 750,000 cubic meters, which includes three production lines: two lines producing MDF and one line producing PBO. The facility also has added-value lines to produce products for the construction and furniture industries.

On September 27, 2009, Arauco and its subsidiary Arauco Internacional, executed a series of joint operation agreements with Stora Enso, pursuant to which Stora Enso Amsterdam B.V. agreed to transfer the ownership of 100% of the shares of Stora Enso Uruguay S.A. to Forestal Cono Sur. As a consequence of this transaction, Arauco and Stora Enso equally control all assets that both companies own in Uruguay, 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, helped to secure a strategic base for 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 became the owner of 100% of the shares of Dynea Brasil S.A., which was absorbed by Arauco do Brasil S.A. in May 2010.

On January 18, 2011, 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 tonnes, a port and a power producing unit based on renewable sources, all located in Punta Pereira, department of Colonia, Uruguay. The total investment was approximately U.S.$2.5 billion. The pulp mill entered the production phase in June 2014.

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 transaction was U.S.$473.5 million, of which we paid 49%.

On December 20, 2011, Arauco Argentina acquired 100% of the shares of Greenagro S.A. or Greenagro, a company duly incorporated under the laws of Argentina, for a total purchase price of U.S.$10.7 million. Greenagro is engaged in forestry activities in the area of Isla Victoria, province of Entre Ríos, Argentina. As stipulated by Argentine competition rules, the acquisition was subject to approval by the National Commission for the Defense of Competition (CNDC). On October 29, 2013, the Secretary of Commerce authorized the acquisition.

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 MDF and high-density fiberboard, or HDF, production lines with annual production capacity of up to 330,000 cubic meters, a PBO production line with annual production capacity of up to 270,000 cubic meters and two melamine product production lines. This transaction closed in January 2012.

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

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

 

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Corporate Structure

We are substantially wholly owned by Empresas Copec S.A., a public company listed on the Santiago Stock Exchange, 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, 2014.

 

     Country of
incorporation
   Total stock held  

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

   Mexico      99.9990

Alto Paraná S.A. (1)

   Argentina      99.9801   

Arauco Australia Pty Ltd.

   Australia      99.9990   

Arauco Bioenergía S.A.

   Chile      99.9999   

Arauco Colombia S.A.

   Colombia      99.9983   

Arauco Distribución S.A.

   Chile      99.9996   

Arauco do Brasil S.A

   Brazil      99.9990   

Arauco Florestal Arapoti S.A.

   Brazil      79,9992   

Arauco Forest Brasil S.A.

   Brazil      99.9990   

Arauco Forest Products B.V. (2)

   The Netherlands      99.9990   

Arauco Holanda Cooperatief U.A. (3)

   The Netherlands      99.9990   

Arauco Panels USA LLC

   U.S.A.      99.9990   

Arauco Perú S.A.

   Peru      99.9990   

Arauco Wood Products, Inc.

   U.S.A.      99.9990   

Araucomex S.A. de C.V.

   Mexico      99.9990   

Aserraderos Arauco S.A.

   Chile      99.9995   

Consorcio Protección Fitosanitaria Forestal S.A. (Ex-Controladora de Plagas Forestales S.A.)

   Chile      57.7503   

Empreendimentos Florestais Santa Cruz Ltda.

   Brazil      99.9789   

Flakeboard America Limited

   U.S.A.      99.9990   

Flakeboard Company Limited

   Canada      99.9990   

Forestal Arauco S.A.(Ex-Forestal Celco S.A).

   Chile      99.9484   

Forestal Concepción S.A.

   Panama      99.9990   

Forestal Cholguán S.A.

   Chile      98.1796   

Forestal Los Lagos S.A.

   Chile      79.9587   

Forestal Nuestra Señora del Carmen S.A.

   Argentina      99.9805   

Forestal Talavera S.A.

   Argentina      99.9942   

Greenagro S.A.

   Argentina      97.9805   

Inversiones Arauco Internacional Ltda.

   Chile      99.9990   

Investigaciones Forestales Bioforest S.A.

   Chile      99.9489   

Leasing Forestal S.A.

   Argentina      99.9801   

Mahal Empreendimentos e Participacoes S.A.

   Brazil      99.9934   

Paneles Arauco S.A.

   Chile      99.9995   

Savitar S.A.

   Argentina      99.9841   

Servicios Aéreos Forestales Ltda.

   Chile      99.9990   

Servicios Logísticos Arauco S.A.

   Chile      99.9997   

 

(1) Effective January 1, 2015, Alto Paraná S.A. changed its name to Arauco Argentina S.A.
(2) Effective January 1, 2015, Arauco Forest Products B.V. was merged into Arauco Holanda Cooperatief U.A.
(3) Effective January 1, 2015, Arauco Holanda Cooperatief U.A. changed its name to Arauco Europe Cooperatief U.A.

 

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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.

Domestic and Export Sales

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

 

     Year ended December 31,  
     2012      2013      2014  
     (in millions of U.S. dollars)  

Export Sales

        

Bleached pulp

   $ 1,481       $ 1,591       $ 1,714   

Unbleached pulp

     250         293         302   

Sawn timber

     430         479         538   

Remanufactured wood products

     182         207         204   

Panels

     476         507         547   

Other

     15         5         1   
  

 

 

    

 

 

    

 

 

 

Total export revenue

   $ 2,834       $ 3,082       $ 3,306   
  

 

 

    

 

 

    

 

 

 

Domestic Sales

        

Bleached pulp

   $ 88       $ 139       $ 163   

Unbleached pulp

     36         7         9   

Logs

     115         118         121   

Sawn timber

     111         105         99   

Remanufactured wood products

     42         38         121   

Chips

     25         21         20   

Electric power

     137         146         160   

Panels

     844         1,420         1,281   

Other

     67         70         49   
  

 

 

    

 

 

    

 

 

 

Total domestic revenue

   $ 1,465       $ 2,064       $ 2,023   
  

 

 

    

 

 

    

 

 

 

Revenue

   $ 4,299       $ 5,146       $ 5,329   
  

 

 

    

 

 

    

 

 

 

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

 

     Year ended December 31  
     2012      2013      2014  
     (in millions of U.S. dollars)  

Asia and Oceania

   $ 1,351       $ 1,564       $ 1,720   

North America

     615         618         661   

Europe

     432         417         354   

Central and South America

     283         330         353   

Other

     152         154         218   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,834       $ 3,082       $ 3,306   
  

 

 

    

 

 

    

 

 

 

 

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Forestry Activity

Radiata pine grows at the fastest rates within a narrow band of latitude and under certain climatic conditions. One of Chile’s main advantages in the forestry 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.

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® Certification: a forest management certification aimed at promoting forest management that is environmentally responsible, socially beneficial and economically viable for the world’s forests. FSC® is a non-profit organization devoted to encouraging the responsible management of the world’s forests; (Forestal Arauco license code: FSC – C108276)

 

   

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

 

   

FSC® Chain of Custody 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; (Forestal Arauco Zona Norte license code: FSC – C013026)

 

   

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.

 

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Forest Plantations

As of December 31, 2014, our planted forests consisted of 71.9% radiata, taeda and elliottii pine and 26.1% 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 2014, Arauco planted a total of 54,875 hectares and harvested a total of 55,824 hectares in Chile, Argentina, Brazil and Uruguay (these amounts include, with respect to Brazil, 100% of the plantations of Arauco Forest Brasil and Mahal Empreendimentos e Participacoes and 80% of Arauco Florestal Arapoti; and with respect to Uruguay, 50% of the plantations owned in Uruguay by us through the Montes del Plata joint operation). We believe that our annual harvests and plantations, long-term sustainable equilibrium is approximately 68.0 thousand hectares (including 100% of the plantations owned by Montes del Plata, and, with respect to plantations owned by our Brazilian subsidiaries, 80% of Arauco Florestal Arapotí, 100% of Arauco Forest Brasil and 100% of Mahal Empreendimentos e Participacoes-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, 2014, 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, 2014, we owned approximately 1.1 million hectares of land in Chile, of which 725 thousand hectares are forest plantations.

As of December 31, 2014, we owned approximately 263,386 hectares of forest and other land in Argentina, approximately 144,392 hectares of forest and other land in Brazil and approximately 114,886 hectares of forest and other land that Montes del Plata owns in Uruguay. Of the total land we own in Uruguay through Montes del Plata, 62% is planted with eucalyptus, mainly dunnii (69%), globulus (13%) and grandis (8%). The remaining 38% is planted with pine or other species, is native forest, or is land used for other purposes.

Of the total land we own in these four countries, approximately 148,859 hectares of land is planted with taeda pine and elliottii 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 native forests. This land includes, with respect to Brazil, 100% of the plantations of Arauco Forest Brasil and Mahal Empreendimentos e Participacoes, and 80% of the plantations of Arauco Florestal Arapoti; and with respect to Uruguay, 50% of the plantations owned by us through Montes del Plata.

The following table sets forth the number of hectares and types of uses of our land holdings and rights, as of December 31, 2014.

 

     As of December 31, 2014  
     Total      Distribution  
     (in hectares)      (percentage)  

Pine plantations(1)

     

0-5 years

     178,561         10.9

6-10 years

     162,215         9.9   

11-15 years

     151,925         9.3   

16-20 years

     138,341         8.5   

21+ years

     89,455         5.5   

Subtotal

     720,497         44.1   

Eucalyptus plantations(2)

     261,133         16.0   

Plantations of other species

     20,758         1.3   

Subtotal of Plantations

     1,002,388         61.4   

Land for plantations

     53,128         3.3   

Land for other uses(3)

     577,717         35.4   
  

 

 

    

 

 

 

Total(4)

     1,633,233         100.0
  

 

 

    

 

 

 

 

(1) All years are calculated from the date of planting.
(2) Approximately 70.4% 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 Montes del Plata, 100% of plantations owned by Arauco Forest Brasil, 80% of plantations owned by Arauco Florestal Arapoti and 100% of plantations owned by Mahal Empreendimentos e Participacoes S.A. Also includes 57,882 hectares for which we have the right to harvest but do not own, of which 43,579 hectares are in Chile, 13,998 hectares are in Uruguay and 305 hectares are in Argentina.

 

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Table of Contents

Land Acquisition and Afforestation

Our total land assets have increased from fewer than 170,000 hectares in 1980 to 1,633,233 hectares as of December 31, 2014. In the five years ending December 31, 2014, we purchased 145,546 hectares of land, of which 41,242 hectares were purchased in Chile, 5,506 in Argentina, 83,039 in Brazil and 15,759 in Uruguay. For more information regarding our material 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 a desired price or in a desired location.

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

Forest Management

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although some land is not suitable for the production of pruned logs, as of December 31, 2014, over 64% of our pine forests in Chile were conducive to clear wood production.

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

As of December 31, 2014, we had 15 nurseries in Chile, Argentina, Brazil and Uruguay, in which we grow seedlings using seeds and cuttings from genetically selected trees. To achieve higher quality trees and an increased growth rate, we apply strict selection criteria to the trees from which seedlings are produced. We then plant the seedlings manually. 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 when necessary in the following two stages:

 

   

Thinning to waste. Thinning to waste occurs when trees are four to six years old 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 when trees are eight to 12 years old 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-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, or MDP, production.

 

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Table of Contents

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

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

 

     2012      2013      2014  
     (in hectares)  

Thinning

     12,097         13,156         12,574   

Pruning

     19,298         26,086         28,195   

Harvesting

     36,781         35,852         35,653   

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, 2014, we had arrangements with more than 277 independent contractors that employed over 13,369 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 3.5% 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. During the end of 2014 and during the first quarter of 2015, fires affected our forest plantations and destroyed 8,570 hectares. 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.”

Forest Production

We harvested 21.9 million cubic meters of logs during the year ended December 31, 2014, consisting of 11.4 million cubic meters of sawlogs, 6.4 million cubic meters of pine pulplogs and 4.0 million cubic meters of eucalyptus pulplogs and other logs. We did not export any pulplogs during 2014 because substantially all of the pulplogs from our forests were used in our pulp or panel mills. During 2014, our sawmills and panel mills used 7.0 million cubic meters of sawlogs. We also sold 2.3 million cubic meters of sawlogs to unaffiliated domestic sawmills during 2014.

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.

 

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Table of Contents

Pulp

We believe that we were Chile’s largest producer of bleached and unbleached softwood market pulp in terms of production in 2014. For the year ended December 31, 2014, pulp sales were U.S.$2,187.0 million, representing 41.0% of our total 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 subject 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, 2014, we owned and operated five pulp mills in Chile, one in Argentina, and jointly owned and operated one in Uruguay with Stora Enso, with an aggregate installed annual production capacity of approximately 3.88 million tonnes. This figure includes 50% of our Montes del Plata joint operation. Our six pulp mills, together with the 50% volume we include from our interest in the Montes del Plata mill, produced 2.81 million tonnes of bleached pulp and 0.46 million tonnes of unbleached pulp in 2014.

All of our pulp mills in Chile, except for the Nueva Aldea Mill and the Licancel Mill, are certified under ISO 9001:2000 and ISO 14001:2004. 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, ISO 14001:2004, OHSAS 18001 and FSC®-CoC (FSC-C121377).

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

 

     Year ended December 31,  
     2010      2011      2012      2013      2014  
     (in thousands of tonnes)  

Chile

              

Arauco Mill (bleached)

              

Arauco I

     231         279         282         284         269   

Arauco II

     84         469         505         510         483   

Valdivia Mill (bleached)

     493         513         550         550         550   

Constitución Mill (unbleached)

     253         324         307         311         310   

Nueva Aldea Mill (bleached)

     780         793         882         944         985   

Nueva Aldea Mill (unbleached)

     9         —          —          3         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Licancel Mill (bleached)

     28         50         —          —          —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Licancel Mill (unbleached)(1)

     84         83         137         147         150   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Subtotal

     1,962         2,511         2,663         2,749         2,747   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Argentina

              

Alto Paraná Mill (bleached)

     329         305         307         331         282   

Uruguay

              

Montes del Plata (50%)

                 240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,291         2,816         2,970         3,080         3,269   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 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. During 2012, 2013 and 2014, the Licancel Mill produced unbleached pulp for the entire period.

 

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

Chile

Arauco I. Arauco I, which began operations in 1972, is located at the Arauco Mill in the heart of a group of our radiata pine plantations in the Eighth Region of Chile. Arauco I produces elementary chlorine-free pulp, which does not use chlorine gas. Elementary chlorine-free pulp is also produced by most of our competitors in each of the world’s major pulp producing regions. The installed annual production capacity of Arauco I is approximately 290,000 tonnes of 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 510,000 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, 2014, the Constitución Mill was the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of approximately 355,000 tonnes. The unbleached pulp produced in this mill does not use any chlorine in its production process.

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 150,000 tonnes of eucalyptus kraft pulp and pine bleached and unbleached kraft pulp. The Licancel Mill is equipped to produce elementary chlorine-free pulp.

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

In February 2015, the Environmental Assessment Service (SEA) unanimously approved the Environmental Impact Statement submitted by Arauco in order to move forward with the dissolving pulp project being developed at Valdivia Pulp Mill. This initiative, which requires a U.S.$185 million investment, will allow Arauco to be the first company in Chile to produce this type of pulp, in addition to creating a value added product and diversifying its offer in the market. Dissolving pulp is mainly used in the manufacture of viscose, which is known for its softness, shine, purity and high water absorption, making it suitable for use in the production of fabric medical items and, personal care items, specifically clothing. Unlike synthetic fibers that are mostly produced from oil based sources, dissolving pulp is natural and renewable. In addition, this project will increase the facility’s power generation by 15 MW. The construction and operation of this project is subject to many environmental, regulatory, engineering and political uncertainties. As a result, we cannot provide any assurances that the project will be completed.

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.

Argentina

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

 

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Uruguay

Montes del Plata. In January 2011, we and Stora Enso agreed to commence construction on a new pulp mill with an annual capacity of approximately 1.3 million air-dry tonnes, or Adt, a port and a power generation facility based on renewable resources, all located in Punta Pereira, department of Colonia, Uruguay. The total investment was approximately U.S.$2.5 billion. After securing the necessary permits, we began construction in May 2011. In September 2011, two of our Uruguayan joint operation companies entered into two credit facilities, respectively, to finance the construction of the 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.”

The Montes del Plata mill began operations on June 6, 2014 and the mill produced 480.7 thousand tonnes of bleached pulp in 2014.

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 the market pulp producers in those countries, 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.

 

     Bleached Softwood Kraft Pulp Producers’ Cost  
     Arauco(1)(4)      British
Columbia
Coast
     British
Columbia
Interior
     United
States
South(4)
     Sweden(4)      Finland(4)  
     (in U.S.$ per tonne)  

Wood

     205         233         187         180         312         313   

Total chemicals

     61         82         89         86         67         57   

Labor and Others(2)

     102         193         165         138         95         79   

Total cash cost

     368         508         441         404         474         449   

Depreciation

     49         40         40         71         73         84   

Total mill cost

     417         548         481         475         547         533   

Transportation(3)

     62         71         114         69         36         41   

Total delivered cost

     479         619         595         544         583         574   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) For comparative purposes, includes only Arauco’s operations in Chile.
(2) Includes labor, energy, materials and other production costs; excludes overhead and interest.
(3) Delivered in Northern Europe.
(4) Resource Information Systems, Inc. and Arauco takes into account a byproduct credit, which is not included in the total delivered cost shown in the table above.

Source: Resource Information Systems, Inc. World Pulp & Recovered Paper Forecast – 15 year, September 2014 (8 months of actual data, 4 months of projected). Arauco data is provided by Arauco.

Sales

Total shipments of bleached kraft market pulp in the global market during the year ended December 31, 2014 equaled 53.7 million tonnes. Based on information published by Pulp and Paper Production Council, we believe that our production represented 6.1% of this market in 2014. During the year ended December 31, 2014, we exported 91.3% of our bleached pulp, principally to customers in Asia and Western Europe.

Integrated manufacturers dominate the world production of unbleached softwood pulp, as opposed to non-integrated companies that sell market pulp, like us. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. With a total world production of unbleached softwood kraft pulp of 1.83 million tonnes for 2014, according to Pulp and Paper Production Council, we are the world’s largest single producer of unbleached softwood market pulp, based on sales, with 24.1% of the total market in 2014. During the year ended December 31, 2014, 97.2% 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.

 

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

 

     For the Year Ended December 31,  
     2012      2013      2014  
     (in tonnes)  

Bleached Pulp

        

Asia and Oceania

     1,506,681         1,623,377         1,874,346   

Europe

     626,799         609,825         527,839   

North and South America

     326,940         356,538         416,539   

Other

     30,325         8,379         9,077   
  

 

 

    

 

 

    

 

 

 

Total

     2,490,744         2,598,119         2,827,801   
  

 

 

    

 

 

    

 

 

 

Unbleached Pulp

        

Asia and Oceania

     361,090         382,390         332,964   

North and South America

     64,583         80,518         100,352   

Europe

     12,196         12,149         11,270   

Other

     223         6,799         6,920   
  

 

 

    

 

 

    

 

 

 

Total

     438,091         481,856         451,505   
  

 

 

    

 

 

    

 

 

 

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 “Arauco Argentina” and our unbleached pulp is marketed under the brand name “Celco.” The 50% share of the pulp produced from Montes del Plata will be marketed under the brand name “Arauco.”

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” and “Item 3. Risk Factors-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.”

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

 

     2012      2013      2014  
     (U.S.$ per tonne)  

Bleached Pulp

        

March 31

     641         656         687   

June 30

     632         663         673   

September 30

     609         648         658   

December 31

     629         698         642   

Unbleached Pulp

        

March 31

     622         617         704   

June 30

     627         628         705   

September 30

     564         659         678   

December 31

     583         733         664   

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, 2014, more than 280 customers. As of December 31, 2014, we employed 15 sales agents to represent us in more than 47 countries. We manage this worldwide sales network from our headquarters in Chile.

 

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Panels

Our panel products consist of plywood and fiberboard panels. For the year ended December 31, 2014, sales of panels were equal to U.S.$1,828.4 million, representing 34.3% of our total revenues.

Exports, which include sales to countries other than the countries in which the goods are produced, accounted for 29.9% of our total revenues of panels for the year ended December 31, 2014. We sell panels primarily to customers in North America, 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,  
     2010      2011      2012      2013      2014  
     (in thousands of cubic meters)  

Total Panels

     3,032         3,222         3,555         5,163         5,284   

As of December 31, 2014, we owned and operated four 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 6.6 million cubic meters. Two acquisitions, in particular, 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. In June 2012, we entered into a share purchase agreement to acquire five panel mills in the United States, one of which was located in Albany, Oregon; two in Bennettsville, South Carolina; one in Eugene, Oregon; and one in Malvern, Arkansas and two panel mills in Canada, located in St. Stephen, New Brunswick and Sault Ste. Marie, Ontario for a total purchase price of U.S.$242.5 million.

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. This mill was constructed 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 Bio-Bio Region of Chile. The production of the first plywood panel marked the start-up of the new Nueva Aldea plywood mill on December 18, 2013. It has an annual production capacity of 360,000 cubic meters of plywood panels.

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

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 panels. It has three production lines, one of which produces HB with an annual capacity of 60,000 cubic meters and the other two of which produce MDF with an annual production capacity of 165,000 and 350,000 cubic meters, respectively.

Argentina

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

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

Brazil

Jaguariaiva Mill. This mill produces MDF and has an installed annual production capacity of approximately 815,000 cubic meters of MDF panels and 540,000 cubic meters of melamine lamination. In April 2011, a project to expand the Jaguariaiva mill was approved. In May 2013, the second production line manufacturing MDF boards was started with an estimated installed capacity of 500,000 cubic meters of finished product per year. In the same month, a decorative paper impregnation line and a melamine lamination press were constructed.

 

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Table of Contents

Pien Mill. This mill has an installed annual production capacity of approximately 750,000 cubic meters of panels distributed among two production lines with a production capacity of 440,000 cubic meters of MDF, 310,000 cubic meters of PBO and 150,000 cubic meters of melamine lamination.

United States

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

Bennettsville MDF Mill. This mill has an installed annual production capacity of approximately 251,000 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.

Carolina PBO Mill. This mill has an installed annual production capacity of approximately 496,000 cubic meters of PBO and 132,000 cubic meters of melamine lamination.

Moncure Mill. This facility includes an MDF production line with an annual production capacity of up to 285,000 cubic meters, a PBO production line with an annual production capacity of up to 262,000 cubic meters and two melamine lamination production lines with a combined annual production capacity 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 capacity of 255,000 cubic meters, paint/print and décor paper lines and 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, 2014, revenue from sales of wood products was U.S.$962.1 million, representing 18.1% of our total revenues for the period.

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

 

     Year ended December 31,  
     2010      2011      2012      2013      2014  
     (in thousands of cubic meters)  

Sawn timber

     2,098         2,181         2,100         2,284         2,362   

Remanufactured wood products

     316         363         413         411         429   

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

As of December 31, 2014, we had nine sawmills in operation, eight in Chile and one in Argentina, with an aggregate installed annual production capacity of approximately 2.9 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, 2014, we also owned five remanufacturing facilities—four in Chile and one in Argentina—that reprocess sawn timber into remanufactured wood products, such as moldings, jams and pre-cut pieces that end users require for doors, furniture and door and window frames. These facilities produced 383,713 cubic meters of remanufactured wood products in 2014.

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 our workforce.

 

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Table of Contents

The following is a brief description of our sawmills and remanufacturing facilities and their production capacity, as of December 31, 2014.

Chile

Cholguán Sawmill and Remanufacturing Facilities. This sawmill has installed annual production capacity of approximately 319,000 cubic meters of lumber, as well as drying kiln facilities with installed annual production capacity of approximately 202,000 cubic meters and two remanufacturing facilities with installed annual production capacity of approximately 92,000 cubic meters of remanufactured wood products. The Cholguán sawmill also has a special facility for making laminating beams with installed annual production capacity of approximately 12,500 cubic meters.

Colorado Sawmill. This sawmill has installed annual production capacity of approximately 274,000 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 132,000 cubic meters.

El Cruce Sawmill. This sawmill has installed annual production capacity of approximately 117,000 cubic meters of lumber.

Horcones I Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 397,000 cubic meters of lumber. It also has drying kilns with installed annual production capacity of approximately 297,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 130,000 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. The annual production capacity of this mill is approximately 249,000 cubic meters of lumber. It also has drying facilities with installed annual production capacity of approximately 141,000 cubic meters.

Nueva Aldea Sawmill. This mill has installed annual production capacity of approximately 423,000 cubic meters of sawn timber and is equipped with drying kilns with installed annual production capacity of approximately 282,000 cubic meters.

Valdivia Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 443,000 cubic meters of lumber. It also has drying facilities with installed annual production capacity of approximately 283,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 85,000 cubic meters of remanufactured wood products.

Viñales Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 382,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 277,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 101,000 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 344,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 334,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 67,000 cubic meters of remanufactured wood products.

 

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Forestry Products

Our forestry products are sawlogs, pulplogs, posts and chips. As a result of our forest management policies and the increasing maturity of our plantations, our plantations are yielding increasing volumes of forestry products, particularly clear wood. As the volume of clear wood has grown, we have broadened our range of forestry products. For the year ended December 31, 2014, sales of forestry products were U.S.$142.8 million, representing 2.7% of our revenues for such year.

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

 

     Year ended December 31,  
     2010      2011      2012      2013      2014  
     (in thousands of cubic meters)  

Sawlogs

     1,923         2,123         2,250         2,149         2,262   

Pulplogs

     612         443         274         546         499   

Posts

     24         24         22         13         2   

Chips

     501         398         365         305         303   

Sustainable Development

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

As of December 31, 2014, we had registered five electricity co-generation power plants in Chile as greenhouse emission reduction project activities under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Three of them were registered during 2006—Trupán, Nueva Aldea (first phase) and Nueva Aldea (second phase), a fourth 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 (forestry and wood industrial sub-products, including the woodpulp by-product called “black liquor”), which is a renewable carbon-neutral fuel that allows the facilities to decrease their reliance on the fossil-fuel intensive grid electricity.

Arauco was the first Chilean forestry company to issue Certificates of Emission Reductions (CERs or carbon credits) through the CDM of the Kyoto Protocol. As of December 31, 2014, we had issued a total amount of 2,594,776 CERs in connection with our CDM projects. As of the date of this annual report we have sold 1,116,384 CERs, mainly to European companies subject to compliance obligations under the European Trading Scheme (ETS). The following table presents the total amount of CERs issued and sold by Arauco for each of the years indicated:

 

     Year ended December 31,  
     2010      2011      2012      2013      2014  

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

     0         0         632,197         488,475         403,317   

Other CERs sold

     0         0         0         0         42,567   

In May 2008, our Board of Directors decided to approve the construction of the Viñales biomass power plant, located alongside the Viñales sawmill in the Seventh Region of Chile. The plant includes a biomass-fueled power boiler with capacity to produce 210 tonnes of steam per hour and a 41 Megawatt extraction-condensing turbogenerator. The plant began operations on May 17, 2012, attaining its maximum production capacity on August 29, 2012. This power plant was also developed as an emission reduction project initiative by Arauco. On January 27, 2013, the Viñales emission reduction project activity was successfully registered as a greenhouse gas emission reduction project activity under the voluntary carbon standard: Verified Carbon Standard (VCS). It is expected that this project will issue its first verified emission reductions (VERs) towards the end of 2015.

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 was the eleventh CDM project activity registered in Uruguay at the project’s registration date. Once in operation, this project activity is expected to generate an average of 124,000 CERs per year, during its first 7-year crediting period.

 

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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., or CMPC and Fibria Cellulose S.A., or Fibria, 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 face competition from Brazilian, Scandinavian and U.S. 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, Chile 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.

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 Inc., Kaycan Ltd. and Sonae Indústria, SGPS, SA.

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 38 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.

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

 

   

Coronel. A private port located between Concepción and the Arauco Mill, which we constructed as a member of a consortium with five other companies and in which we have an equity interest of 50%. We shipped 48.47% of our aggregate export volume through this port in 2014;

 

   

Lirquén. A private port in Concepción in which we have an equity interest of 20.2% and through which we shipped 28.75% of our aggregate export volume during 2014; and

 

   

San Vicente. A state-owned port near the city of Concepción through which we shipped 22.78% of our aggregate export volume during 2014.

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

We ship pulp to various ports in Europe, North and South America and Asia and, as is customary in the pulp industry, we store some stock in those ports. We use 12 foreign ports that have warehouse facilities available, and standard storage terms provide that we are entitled to a certain period of storage free of charge. We seek to ensure that we do not exceed the free storage period for each shipment. As of December 31, 2014, we had approximately 81,595Adt 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.

 

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In Brazil, our efficient distribution system, which delivers finished products to almost 850 customers in over 330 cities, many of which are separated by long distances, is a key component to our competitiveness.

In North America, products sourced from our South American operations are shipped into 17 major ports of entry and are dispatched to more than 3,500 locations in the United States and Canada. Arauco’s eight composite panel plants in North America service over 580 customers throughout the region, 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, 2014, we owned 1.1 million hectares of land in Chile, of which 725 thousand hectares were forest plantations, and 523 thousand hectares of land in Argentina, Brazil and Uruguay, of which 277 thousand consisted of forest plantations. In addition, as of December 31, 2014, we owned and operated various plants and facilities, including five pulp mills, four 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 sawmill and 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. 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. In Argentina, we maintain fire insurance for 14,111 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. For our forests in Brazil we maintain fire insurance for 26,000 hectares of timber assets located in Mato Grosso do Sul. For the rest of our forests in Brazil, we do not maintain fire insurance because we believe the risk of damage from fire does not justify the costs of carrying insurance.

The forestry insurance for plantations located in Chile is carried by the RSA Group and Penta Security Compañía de Seguros S.A. The insurance policies for plantations located in Delta del Paraná, Argentina, are carried by Sancor Seguros. Our insurance policies for some of our plantations located in Mato Grosso do Sul, Brazil, are carried by Mapfre. Our insurance policies in all the countries where we operate are consistent with industry practice.

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 breakdowns or natural disasters, including earthquakes and tsunamis. Our insurance covers up to U.S.$650 million per loss in Chile and U.S.$300 million per loss in Argentina, including physical damage and business interruption for up to 12 months (or 18 months in the case of a recovery boiler explosion in our pulp mills). The general deductible for physical damage is 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 breakdowns and 60 days for machinery breakdowns 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.

Our MDF and PBO mills in Brazil are insured by Itaú XL Seguros Corporativos, and our MDF and PBO mills in the United States and Canada are insured by Zurich. Our policies cover fire, explosions, electrical damage, equipment damage and loss of profit, up to a limit of U.S.$220 million in Brazil and U.S.$300 million in the United States and Canada. 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.”

As described in more detail in “Item 3—Key Information—Risk factors Disease of 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 Eight Region of Chile. Our insurance covered the losses related to our forest plantations. We had a U.S.$1.0 million deductible for property damage and U.S.$1.97 million deductible for business interruption 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, 2013, we received a total recovery of U.S.$33 million, net of U.S.$110 million in advance payments that we had already received. With respect to our inventory, which was covered under a different policy, we received during 2013 a total recovery of U.S. $20.8 million.

 

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CAPITAL EXPENDITURES

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

For the year ended December 31, 2012, our aggregate capital expenditures were U.S.$1,186.4 million, consisting primarily of U.S.$1,038.3 million for addition of property, plant and equipment and U.S.$148.0 million for the addition of biological assets.

For the year ended December 31, 2013, our aggregate capital expenditures were U.S.$942.6 million, consisting primarily of U.S.$781.2 million for addition of property, plant and equipment and U.S.$161.5 million for the addition of biological assets.

For the year ended December 31, 2014, our aggregate capital expenditures were U.S.$604.2 million, consisting primarily of U.S.$471.2 million for addition of property, plant and equipment and U.S.$133.0 million for the addition of biological assets.

For the year ending December 31, 2015, we have planned capital expenditures of U.S.$578.5 million, which principally include U.S.$389.7 million in maintenance of our existing mills and U.S.$163.9 million in maintenance and 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 Ley Sobre Bases Generales del Medio Ambiente (Chilean Environmental Law) and related regulations. The Chilean Environmental Law created the Comisión Nacional del Medio Ambiente (National Environmental Commission), or CONAMA, which included under its organization the various COREMAs. As discussed below, these institutions were replaced in 2010 by the Ministry of Environment, the Service of Environmental Evaluation and the Comisiones de Evaluación (Evaluation Commissions) and a Superintendency of Environment.

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

Governmental agencies may participate in the oversight of the implementation of projects in accordance with their environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law and other regulations, affected private citizens, public agencies and local authorities can sue to enforce compliance with environmental regulations. Enforcement remedies include temporary or permanent closure of facilities and fines. The 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 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), the Evaluation Commissions (in charge of evaluating projects and activities within the Environmental Impact Evaluation System), and the Superintendency of Environment (in charge of supervising and auditing environmental compliance).

 

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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 date upon which the provisions of Law No. 20,417 entered into full force, allowing the Superintendency of Environment to exercise its full legal powers. The Third Environmental Tribunal, which has jurisdiction to resolve environmental conflicts that occur in the Eighth through Twelfth Regions (where most of our operations are located), became operational on December 9, 2013. The Superintendency has issued numerous resolutions, instructions and requirements to various companies, officials and supervised parties, including our Company. As of the date of this report, we have been subject to certain inspections, and the Superintendency has issued several information requests to us.

We recently faced, and continue to face, certain environmental proceedings in connection with certain of our 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 the enforcement of environmental standards and licensing requirements for activities that are damaging or potentially damaging to the environment. A violation of environmental laws and regulations may result in:

 

   

fines,

 

   

partial or total suspension of activities,

 

   

forfeiture or restriction of tax incentives or benefits, or

 

   

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

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

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.

 

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Uruguay

Our activities at Montes del Plata are subject to Uruguayan national and municipal environmental regulations. The principal environmental authorization required to carry out such project’s current construction 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. AAPs are granted by the National Environmental Bureau, or DINAMA, which pertains to the Ministry of Housing, Land Use Management and Environment, or MVOTMA. In order to obtain this authorization, an applicant must submit a complete report regarding all aspects of any proposed works including a classification of the same by a competent professional in one of the three categories, A, B or C. If the proposed project is classified as B or C, a comprehensive environmental impact assessment (which includes all aspects of the project, including water and noise, among others) is required and in some cases a public hearing may be required. Once the AAP is granted, the interested party is required to perform the project in accordance with the terms and conditions of such authorization.

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

Once construction is completed according to the approved project and the AAP conditions, and prior to starting operations, a company needs to obtain the environmental authorization for operation, or AAO, which is regulated by the same decree. Montes del Plata obtained this authorization from the National Environmental Bureau, DINAMA, in June 2014.

United States and Canada

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

 

   

civil penalties;

 

   

supplemental environmental projects;

 

   

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

 

   

loss of operating permits;

 

   

required installation of pollution control equipment; or

 

   

remedial actions.

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

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

Forestry, Land-Use and Land Ownership Regulations

Chile

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

 

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

Argentina

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

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

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

Brazil

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

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 Opinion issued by the Office of the General Counsel to the Federal Government in August 2010. However, recent judgments of several tribunals and administrative agencies have determined that the Federal Law No. 5,709/1971 is not applicable to Brazilian companies with foreign shareholders, for being contrary to the Brazilian constitution. In consideration of the above, our legal advisors have advised us that these restrictions are not applicable to the transactions that our Brazilian subsidiaries may consider in the future.

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

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

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

 

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Item 5. Operating and Financial Review and Prospects

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS

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

Overview

We derive our revenue from the sale of bleached and unbleached pulp, panels such as plywood, MDF, PBO and HB, wood products such as sawn timber and remanufactured wood products, forestry products, such as sawlogs and pulplogs, and sales of electricity to the grid. Export sales constituted 59.9% of our total revenue for the year ended December 31, 2013, and 62.0% of our total revenue for the year ended December 31, 2014. Sales of pulp constitute the single largest component of our revenue. As with many commodities, pulp is subject to significant cyclical price fluctuations determined by global supply and demand. Accordingly, our revenue is subject to cyclical fluctuations. Prices for panels, wood products and forestry products, also fluctuate significantly among markets. Although prices tend to have the most significant effect on our results of operations, sales volume and product mix, production costs and exchange rate fluctuations also can have a substantial impact on our results.

Our business, results of operations and cash flows depend, to a large extent, on the level of economic activity, on government and foreign exchange policies and on political and economic developments in our principal export markets. In 2014, we exported our products to Asia, North, Central and South America, Europe and, to a lesser extent, Africa and the Middle East. In 2013 and 2014, 92.8% and 92.2%, respectively, of total pulp revenues were export sales, and 41.3% and 44.0%, respectively, of total panels, wood products and forestry product revenues were export sales. Our business, earnings and prospects may be materially and adversely affected by developments in our export markets with respect to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation or social instability, as well as by political, economic or diplomatic developments.

As of December 31, 2014, 64.2% of our property, plant, equipment and forest assets were directly owned by Arauco and our Chilean subsidiaries, 9.5% by our Argentine subsidiaries, 8.0% by our Brazilian subsidiaries, 2.5% by our U.S. and Canadian subsidiaries and 15.7% by our joint operation in Uruguay. In 2014, 65.2% of our consolidated revenue was derived from our operations in Chile, 9.6% of our consolidated revenue was derived from our operations in Argentina, 8.5% of our consolidated revenue was derived from our operations in Brazil, 14.7% of our consolidated revenue was derived from our operations in the United States and Canada and 2.0% of our revenue was derived from our operations in Uruguay. Accordingly, our financial condition, results of operations and cash flows are affected by, to a significant degree, economic conditions in Chile, Argentina, Brazil, Uruguay, the United States and Canada.

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

Chile

According to the Central Bank of Chile, Chile’s GDP increased by 5.5% in real terms during 2012, and in 2013 and 2014 it grew at rates of 4.2% and 1.9%, respectively. See “Item 3. Key Information—Risk Factors—Risks relating to Chile.”

 

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Argentina

According to the Instituto Nacional de Estadística y Censos (the Argentine National Statistics and Census Institute, or the INDEC), Argentina’s GDP increased by 0.8% in real terms during 2012, and in 2013, it grew at a rate of 2.9%. For 2014, the INDEC has reported a 0.5% growth in real GDP. In 2012, the Argentine peso depreciated against the dollar by 14.3% and in 2013 and 2014, the Argentine peso depreciated against the dollar by 32.6% and 31.1%, respectively. Future economic, social and political developments in Argentina, over which we have no control, could impair our and Arauco Argentina’s business, financial condition or results of operations. See “Item 3. Key Information—Risk Factors—Risks relating to Argentina.”

Brazil

According to the Instituto Brasileiro de Geografia e Estatística (the Brazilian Institute of Geography and Statistics), Brazil’s GDP increased in real terms by 0.9% during 2012, by 2.3% in 2013 and by 0.1% in 2014. In 2012, the Brazilian real depreciated against the dollar by 8.2% and in 2013 and 2014, the Brazilian real depreciated against the dollar by 12.8% and 11.8%, respectively. See “Item 3. Key Information—Risk Factors—Risks relating to Brazil.”

Uruguay

According to the Banco Central del Uruguay (the Central Bank of Uruguay), Uruguay’s GDP increased by 3.7% in real terms during 2012, and in 2013 and 2014 it grew at rates of 4.4% and 3.5%, respectively. In 2012, the Uruguayan peso depreciated against the dollar by 3.9%, in 2013 the Uruguayan peso appreciated against the dollar by 21.1% and in 2014 the Uruguayan peso depreciated against the dollar by 12.8%. See “Item 3. Key Information—Risk Factors—Risks Relating to Uruguay.”

United States

According to the U.S. Bureau of Economic Analysis, the United States GDP increased by 2.3% in real terms during 2012, and in 2013 and 2014 it grew at rates of 2.2% and 2.4%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

Canada

According to the Bank of Canada, Canada’s GDP increased by 1.7% in real terms during 2012, and in 2013 and 2014 it grew at rates of 2.0% and 2.5%, respectively. In 2012, the Canadian dollar appreciated against the U.S. dollar by 2.5%, in 2013 the Canadian dollar depreciated against the U.S. dollar by 7.1% and in 2014 the Canadian dollar depreciated against the U.S. dollar by 9.0%. See “Item 3. Key Information—Risk Factors—Risks relating to the United States and Canada.”

Exchange Rate Fluctuations

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

The Chilean peso has been subject to devaluation in the past and could be subject to significant fluctuations in the future. During 2014, the value of the Chilean peso relative to the U.S. dollar decreased 15.7% in nominal terms and 11.1% in real terms, based on the observed exchange rates on December 31, 2013 and December 31, 2014. The observed exchange rate on April 22, 2014, as published in the Official Gazette on April 23, 2015, was Ch$618.02 to U.S.$1.00. For information regarding historical rates of exchange in Chile from January 1, 2010, see “Item 3. Key Information—Exchange Rates.”

The effect of exchange rate fluctuations is partially offset by the fact that certain of our operating expenses are denominated in U.S. dollars (such as our freight costs and selling expenses in the form of commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2014, our U.S. dollar denominated indebtedness was U.S. $3,911.3 million. In addition, as the U.S. dollar appreciates against the legal currency in any of our export markets, we must from time to time price our sales in that local currency to compete effectively.

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

In recent years, our 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.

 

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

 

     Year ended
December 31,(1)
 

Product(2)

   2012      2013      2014  
     (U.S.$ per tonne)(3)  

Pulp

        

Bleached pulp

     630.2         665.8         663.7   

Unbleached pulp

     654.4         623.4         687.0   
     (U.S.$ per cubic meter)(3)  

Wood Products

        

Sawn timber

     257.8         256.0         269,7   

Remanufactured wood products

     544.2         596.7         757,8   

Panels

        

Plywood and fiberboard panels

     371.9         374.0         346.2   

Forestry Products

        

Logs

     45.6         43.9         43.9   

 

(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 reais, as applicable for domestic sales.

Pulp Prices

Overview

Historically, world pulp prices have been subject to significant fluctuations over relatively short periods of time. Pulp prices mainly depend on worldwide demand, world production capacity, worldwide pulp and paper inventory levels and availability of substitutes, and in general terms, are directly related to global economic growth. All of these factors are beyond our control. See “Item 3. Risk Factors—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 bleached grades of hardwood pulp, including eucalyptus, generally follow the same cyclical pattern as prices for 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% of the total wood pulp market. The majority of such pulp is sold in Asia, and its price does not necessarily follow the cycle of prices for NBSK or BEKP.

In 2014, the shortfiber pulp market had two new pulp mills entering the market with a combined annual production capacity of 2.8 million tonnes. The additional supply caused BEKP prices to decline during the first nine months of the year, reaching its lowest price at U.S.$724.27 per tonne in September. For the last three months of 2014, BEKP prices began to increase and ended the year at U.S.$742.90 per tonne. On the other hand NBSK stood at high price levels throughout the year, reaching U.S.$932.06 per tonne at the end of December. Our results of operations may be materially adversely affected if the prices of our products decline from current levels. For additional discussion regarding recent movements in the price of pulp, see “—Trend Information.”

 

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Price of NBSK

The market price for NBSK was U.S.$948.92 per tonne 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 tonne 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 tonne as of December 31, 2012, a 2.9% decrease as compared to December 31, 2011. The market price for NBSK was U.S.$906.48 as of December 31, 2013, a 12.0% increase as compared to December 31, 2012. The market price for NBSK was U.S.$932.06 as of December 31, 2014, a 2.8% increase as compared to December 31, 2013.

Price of BEKP

The market price for BEKP was U.S.$849.21 per tonne 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 tonne 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 tonne as of December 31, 2012, a 19% increase as compared to December 31, 2011. As of December 31, 2013, the market price for BEKP was U.S.$769.73, which represented a 0.8% decrease as compared to December 31, 2012. As of December 31, 2014, the market price for BEKP was U.S.$742.90, which represented a 3.5% decrease as compared to December 31, 2013.

Price of UKP

The market price for unbleached kraftwood pulp, or 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. The market price for UKP as of December 31, 2013 was U.S.$721.5 per tonne which represented an increase of 23.8% as compared to December 31, 2012. The market price for UKP as of December 31, 2014 was U.S.$650.4, per tonne which represented a 9.9% decrease as compared to December 31, 2013.

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.

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 the 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 the United States. Average sales prices of MDF, HB and MDF moldings also increased during 2010.

Although the construction and real estate market in the United States 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 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. Revenue from our remanufactured products increased 32.4% as a consequence of a 15.1% increase in sales volume and a 15.1% increase 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 was mainly due to a 10.4% increase in sales volume, which was partially explained by the acquisition of the Moncure mill and Flakeboard in 2012.

During 2013, the average prices in our wood products segment increased 1.0%. The average price of panels increased 0.5%.

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

 

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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 decline from current levels.

Costs

Our major costs of sales are the following:

 

   

the cost of timber,

 

   

costs related to harvesting (forestry works),

 

   

maintenance costs,

 

   

chemical costs,

 

   

the cost of sawmill processing,

 

   

depreciation, and

 

   

energy and fuel costs.

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

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

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

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 unit costs of our main products. In particular, our costs of sale per tonne 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 unit costs of our main products. Compared to 2011, our costs of sales per tonne 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.

Cost of sales increased 12.4% during 2013, when compared with 2012. This was mainly the result of an increase in the sales volumes of our panels, pulp and wood products business segments by 45.2%, 5.2% and 7.3%, respectively. In 2013, we were able to achieve lower unit costs of pulp. Our cost of sales per tonne of BKPR and EKPR decreased 4.7% and 6.0%, respectively. This was largely due to an improvement in production rates at our pulp mills as compared to 2012. In 2013, our cost of sales measured as a percentage of total revenues was 69.1%, as compared to 73.6% in 2012.

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

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.

 

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Property, Plant and Equipment

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

In estimating 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 number of years an asset is estimated to be productive. Estimates 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 appraised 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 incurred.

Fair Value of Financial Instruments

We recognize certain financial assets and liabilities on our statement of financial position at fair value, which is the value that we estimate would be attributable to such asset or liability in an arms-length disposition. As of the date of the initial recognition, our management 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 administer regular surveys of the forests to establish the volumes of wood available for harvesting and their current growth rates. The principal considerations used to calculate the valuation of forest plantations are presented in Note 20 to our audited consolidated financial statements.

Impairment of goodwill

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

Employee benefits

The cost of defined employee benefits for the termination of employment, as well as the present value of the obligation is determined using actuarial valuations. The actuarial valuations involve making assumptions about discount rates, staff turnover, future salary increases and mortality rates.

 

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Litigation and Contingencies

Arauco, its subsidiaries and our Uruguayan joint venture Montes del Plata are subject to certain ongoing lawsuits, the future effects of which need to be estimated by our management in collaboration with our legal advisors. See “Item 3. Key Information—Risk Factors—Risks Relating to 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.”

Recently Issued Accounting Standards

Note 1 to our audited consolidated financial statements discusses new accounting pronouncements under IFRS that apply to annual periods beginning on or after January 1, 2014. There are no additional pronouncements, amendments or interpretations that could have a material impact on our financial statements.

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, 2012, 2013 and 2014. The table and the discussion that follows are based on and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, as of and for the years ended December 31, 2012, 2013 and 2014 included elsewhere herein. The audited consolidated financial statements included herein are prepared in U.S. dollars and in accordance with IFRS.

 

     For the year ended December 31,  
     2012      2013      2014  
     Sales     %     Volume      Sales     %     Volume      Sales     %     Volume  
     (in millions of U.S. dollars, except where indicated)  

Revenue

                    

Pulp

                    

Bleached pulp(1)

   U.S.$ 1,569.8        36.7     2,490.7       U.S.$ 1,729.8        33.6     2,598.1         1,876.9        35.2     2,827.8   

Unbleached pulp(1)

     286.7        6.7        438.1         300.4        5.8        481.9         310.2        5.8        451.5   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     1,856.5        43.4        2,928.8         2,030.2        39.5        3,080.0         2,187.0        41.0        3,279.3   

Panels

                    

Plywood and fiberboard panels

     1,319.8        30.8        3,548.6         1,927.0        37.4        5,152.1         1,828.2        34.3        5,280.4   

Other

     0.7        0.0        6.9         0.3        0.0        11.1         0.2        0.0        3.6   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     1,320.5        30.8        3,555.5         1,927.3        37.5        5,163.2         1,828.4        34.3        5,284.0   

Wood Products

                    

Sawn timber(2)

     541.2        12.6        2,099.5         584.7        11.4        2,283.8         636.9        11.9        2,361.5   

Remanufactured wood products(2)

     224.5        5.2        412,5         245.3        4,8        411.0         325.2        6.1        429.2   

Other

     0.6        0.0        0.1         0.0        0.0        0.1         0.0        0.0        0.1   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     766.2        17.9        2,512.1         829.9        16.1        2,694.9         962.1        18.1        2,790.7   

Forestry Products

                    

Logs, net(2)

     115.1        2.7        2,524.3         118.2        2.3        2,694.4         121.2        2.3        2,760.9   

Chips

     25.4        0.6        365.1         21.2        0,4        304.8         19.5        0.4        302.5   

Other

     19.0        0.2        71.8         6.2        0,1        18.3         2.1        0.0        44.0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total

     159.5        3.5        2,961.2         145.6        2.8        3,017.5         142.8        2.7        3,107.4   

Energy

     136.7        3.2           146.3        2.8           159.9        3.0     

Other

     50.5        1.2           66.2        1.3           48.5        0.9     
  

 

 

   

 

 

      

 

 

        

 

 

     

Total revenue

     4,298.7        100        5,145.5        100        5,328.7        100  

Cost of sales

                    

Timber

     (816.4          (869.0          (809.0    

Forestry labor costs

     (589.0          (631.7          (655.3    

Maintenance costs

     (220.5          (210.0          (278.3    

Chemical costs

     (381.2          (485.8          (541.3    

Depreciation

     (236.7          (271.7          (323.3    

Other costs of sales

     (874.7          (1,088.9          (1,047.0    
  

 

 

        

 

 

        

 

 

     

Total cost of sales

     (3,163.4          (3,557.2          (3,654.1    

Gross profit

     1,135.2        26.4        1,588.3        30.9        1,674.5        31.4  

Other income

     408.3             385.1             368.9       

Distribution costs

     (452.8          (523.6          (542.9    

Administrative expenses

     (479.6          (544,7          (550.8    

Other expenses

     (105.3          (136.8          (138.8    

Other gains (losses)

     16.1             0             0.0       

Finance income

     23.5             19.1             30.8       

 

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     For the year ended December 31,
     2012    2013    2014
     Sales     %    Volume    Sales     %    Volume    Sales     %    Volume
     (in millions of U.S. dollars, except where indicated)

Finance costs

     (236.7           (232.8           (246.5     

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

     18.9              6.3              7.5        

Exchange rate differences

     (17.2           (11.8           (10.0     
  

 

 

         

 

 

         

 

 

      

Income before income tax

     310.3              548.9              592.8        

Income tax

     (166.8           (130.4           (448.7     

Net income

     143.5              418.6              144.2        
  

 

 

         

 

 

         

 

 

      

 

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

Year Ended December 31, 2013 Compared to Year Ended December 31, 2014

Revenue

Revenue increased 3.6% from U.S.$5,146 million in 2013 to U.S.$5,329 million in 2014, primarily as a result of:

 

   

a 7.7%, or U.S.$156.8 million, increase in revenue from pulp; and

 

   

a 15.9%, or U.S.$132.2 million, increase in revenue from wood products; which was partially offset by

 

   

a 5.1%, or U.S.$98.9 million, decrease in revenue from panels; and

 

   

a 1.9%, or U.S.$2.8 million, decrease in revenue from forestry products.

 

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Pulp. Revenue from bleached and unbleached pulp increased 7.7% from U.S.$2,030.2 million in 2013 to U.S.$2,187.0 million in 2014, reflecting a 1.2% increase in average prices, and a 6.5% increase in sales volume. Sales of bleached pulp increased 8.5% due to a 0.3% decrease in average prices and an 8.8% increase in sales volume. Our increase in sales volume partially reflects new sales from the Montes del Plata mill. Also, during 2014 we experienced higher demand, mostly from Asia, of shortfiber pulp, which resulted in price increases during the second half of the year. Prices of softwood, on the other hand, decreased during the last quarter of the year driven by large discounts made by Russian producers, who benefited from the depreciation of the Ruble. Also, European producers have benefited from a weaker Euro and this has resulted in market pressure to lower softwood prices. Revenue from unbleached pulp increased 3.2% due to a 10.2% increase in average prices, which was partially offset by a 6.3% decrease in sales volume.

Panels. Revenue from panels decreased 5.1% from U.S.$1,927.3 million in 2013 to U.S.$1,828.4 million in 2014. This decrease in revenues was primarily due to a 7.3% decrease in average prices due to the economic situation in Argentina and Brazil, and in particular the effect of currency devaluation over domestic sales in local currency. This was partially offset by a 2.3% increase in sales volume. See “Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada.” In 2014, we increased the plywood output at our Nueva Aldea mill, which explains the higher volume produced and sold as compared to 2013.

Wood products. Revenue from sawn timber and remanufactured wood products increased 15.9% from U.S.$829.9 million in 2013 to U.S.$ 962.1 million in 2014, primarily as a result of a 12.0% increase in average prices, and a 3.6% increase in sales volume. Sawn timber revenue increased 8.9% from U.S.$584.7 million to U.S.$636.9 million due to a 3.4% increase in sales volume and a 5.4% increase in average prices. Remanufactured products revenue increased 32.6% from U.S.$245.3 million in 2013 to U.S.$325.2 million due to a 27.0% increase in average prices and a 4.4% increase in sales volume. All solid wood markets improved during 2014, with increased demand that permitted the sales mix and prices, to improve with respect to 2013. Asian markets, in particular, Japan, South Korea and China followed this positive trend. In the North American market, despite the Housing Starts index not showing a significant improvement, our solid wood moldings business grew both in volume and prices.

Forestry products. Revenue from forestry products decreased 1.9% from U.S.$145.6 million in 2013 to U.S.$142.8 million in 2014. This decrease was primarily the result of an aggregate U.S.$4.1 million decrease in the revenue of other forestry products.

Other revenue. Revenue from other sources, consisting principally of sales of energy and chemicals, decreased 2.0% from U.S.$212.5 million in 2013 to U.S.$208.3 million in 2014. This was primarily the result of a U.S.$17.7 million decrease in our chemical sales and other sales, partially offset by a U.S.$13.5 million increase in our energy sales.

Cost of sales

Cost of sales increased 2.7% from U.S.$3,557.2 million in 2013 to U.S.$3,654.1 million in 2014, primarily as a result of a volume increase in our sales of pulp, panels and wood products business segments by 6.5%, 2.3% and 3.6%, respectively. In particular, as compared to 2014, our maintenance costs increased by 32.5%, or U.S.$68.3 million, and our chemical cost increased 11.4%, or U.S.$ 55.5 million, and in each case, these increases are mainly explained by the costs added by our new Montes del Plata mill which began its ramp-up process in June 2014. We have also experienced an increase in unit costs of pulp. In particular, our cost of sales per tonne of BKP, EKP and UKP increased 1.3%, 5.7% and 0.3%, respectively as compared to 2013. The cost of sales was partially offset because the cost of timber decreased 6.9%, or U.S.$60.0 million, and the indirect cost of production decreased 26.5%, or U.S.$45.6 million.

Gross Profit

As a percent of total revenue, our gross profit increased from 30.9% in 2013 to 31.4% in 2014, primarily as a result of a 3.6% increase in revenue, which was partially offset by an 2.7% increase in cost of sales.

Other income

Other income decreased 4.2% from U.S.$385.1 million in 2013 to U.S.$368.9 million in 2014. Other income in 2013 included a gain of U.S.$17.7 million from sales of assets.

Distribution costs

Distribution costs increased 3.7% from U.S.$523.6 million in 2013 to U.S.$542.9 million in 2014, primarily due to a 3.6%, or U.S.$17.8 million, increase in total shipping and freight costs. This is explained by higher sales volume of our pulp, panels and wood products business segments by 6.5%, 2.3%and 3.6%, respectively. As a percentage of revenue, distribution costs remained stable, at 10.2% in 2013 and 2014.

 

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Administrative expenses

Administrative expenses increased 1.1% from U.S.$544.7 million in 2013 to U.S.$550.8 million in 2014, primarily as a result of an increase in wages and salaries, other administrative expenses, IT services and professional fees of U.S.$3.3 million, U.S.$11.8 million, U.S.$5.4 million and U.S.$5.7 million, respectively. As a percentage of revenue, however, administrative expenses decreased from 10.6% in 2013 to 10.3% in 2014.

Finance costs

Finance costs increased 5.9% from U.S.$232.8 million in 2013 to U.S.$246.5 million in 2014. This increase was mainly due to an increase of U.S$16.4 million in interest expenses on our outstanding bonds, which reflects an increase in the amount of our outstanding bonds in 2014.

Exchange rate differences

Losses from exchange rate differences decreased U.S.$1.8 million from U.S.$11.8 million in 2013 to U.S.$10.0 million in 2014. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada—Argentina.”

Income tax

We recorded an income tax expense of U.S.$130.4 million in 2013 compared to U.S.$448.7 million in 2014. This increase is mainly explained by a direct charge in 2014 of approximately U.S.$292 million explained by the impact of a net increase in deferred liabilities attributable to the increase of the tax rate in accordance with Law No.20,780, in force since 2014.

Net income

Net income in 2014 decreased 65.6% from U.S.$418.6 million in 2013 to U.S.$144.2 million in 2014, due to the impact of the non-recurring charge on income taxes.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2013

Revenue

Revenue increased 19.7% from U.S.$4,299 million in 2012 to U.S.$5,146 million in 2013, primarily as a result of:

 

   

a 46.0%, or U.S.$606.8 million, increase in revenue from panels;

 

   

a 9.4%, or U.S.$173.7 million, increase in revenue from pulp; and

 

   

an 8.3%, or U.S.$63.7 million, increase in revenue from wood products; which was partially offset by

 

   

an 8.7%, or U.S.$13.9 million, decrease in revenue from forestry products.

Pulp

Revenue from bleached and unbleached pulp increased 9.4% from U.S.$1,856.5 million in 2012 to U.S.$2,030.2 million in 2013, reflecting a 4.0% increase in average prices, and a 5.2% increase in sales volume. Sales of bleached pulp increased 10.2% due to a 5.6% increase in average prices and a 4.3% increase in sales volume. Our increase in sales volume partially reflects higher production rates from our pulp mills, which in 2013 produced 3.08 million Adt compared to 2.97 million Adt in 2012. Also, during 2013 we experienced higher demand, mostly from Asia, which resulted in price increases in both hardwood pulp and softwood pulp. Revenue from unbleached pulp increased 4.8% due to a 10.0% increase in sales volume partially offset by a 4.7% decrease in average prices.

Panels

Revenue from panels increased 46.0% from U.S.$1,320.5 million in 2012 to U.S.$1,927.3 million in 2013. This increase in revenues was primarily due to a 45.2% increase in sales volume and a 0.5% increase in average prices. In 2013, we had a full year of operations with Flakeboard, the Moncure mill, the Jaguariaiva MDF line and the Teno MDP mill, which explains the higher volume produced and sold as compared to 2012. Along with these additional operations, the improvement of the U.S. construction market during 2013 allowed us to increase volume sales and average prices.

Wood products

Revenue from sawn timber and remanufactured wood products increased 8.3% from U.S.$766.2 million in 2012 to U.S.$829.9 million in 2013, primarily as a result of a 1.0% increase in average prices, and a 7.3% increase in sales volume. Sawn timber revenue increased 8.0% from U.S.$541.2 million to U.S.$584.7 million due to an 8.8% increase in sales volume, partially offset by a 0.7% decrease in average prices. Remanufactured products revenue increased 9.3% from U.S.$224.5 million in 2012 to U.S.$245.3 million

 

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due to a 9.6% increase in average prices, partially offset by a 0.4% decrease in sales volume. The North American markets in particular experienced strong demand for value-added wood products, in line with a higher number of housing starts in 2013 as compared to those of the past three years.

Forestry products

Revenue from forestry products decreased 8.7% from U.S.$159.5 million in 2012 to U.S.$145.6 million in 2013. This decrease was primarily the result of a 16.5% decrease in the revenue of chips, partially offset by a 3.9% increase in the revenue of sawlogs.

Other revenue

Revenue from other sources, consisting principally of sales of energy and chemicals, increased 19.7% from U.S.$196.0 million in 2012 to U.S.$212.5 million in 2013. This was primarily the result of a U.S.$9.6 million increase in our energy sales and U.S.$5.9 million in our sale of chemicals.

Cost of sales

Cost of sales increased 12.4% from U.S.$3,163.4 million in 2012 to U.S.$3,557.2 million in 2013, primarily as a result of an increase in the sales volumes of our panels, pulp and wood products business segments by 45.2%, 5.2% and 7.3%, respectively. In particular, as compared to 2012, the cost of chemicals increased by 27%, or U.S.$104.6 million, and the cost of labor increased 54%, or U.S.$104.6 million, is in each case, mainly explained by having a full year with our North American operations and the MDF Jaguariaiva line. The cost of other raw materials increased 54%, or U.S.$71.6 million, and the cost of energy and other fuels increased 45%, or U.S.$62.3 million. We have also experienced a decrease in unit costs of pulp. In particular, our cost of sales per tonne of BKPR and EKPR decreased 4.7% and 6.0%, respectively, and our cost of sales per tonne of UKPR increased 1.0%, as compared to 2012.

Gross profit

As a percent of total revenues, our gross profit increased from 26.4% in 2012 to 30.9% in 2013, primarily as a result of a 19.7% increase in revenue and was partially offset by a 12.4% increase in cost of sales.

Other income

Other income decreased 5.7% from U.S.$408.3 million in 2012 to U.S.$385.1 million in 2013, mainly as a result of lower net proceeds from insurance payments. These decreases in other income were partially offset by a gain of U.S.$44.3 million from proceeds from sales of land assets in 2013. 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.

Distribution costs

Distribution costs increased 15.6% from U.S.$452.8 million in 2012 to U.S.$523.6 million in 2013, primarily due to a 15.8%, or U.S.$66.8 million, increase in shipping and freight total costs. This is explained by higher sales volume of our panels, pulp and wood products business segments by 45.2%, 5.2% and 7.3%, respectively. As a percentage of revenues, distribution costs remained stable, with a small decrease from 10.5% to 10.2% in 2013.

Administrative expenses

Administrative expenses increased 13.6% from U.S.$479.6 million in 2012 to U.S.$544.7 million in 2013, primarily as a result of an increase in wages and salaries, other administrative expenses, depreciations and amortization and property taxes of U.S.$19.9 million, U.S.$14.8 million, U.S.$11.2 million and U.S.$10.1 million respectively. As a percentage of revenues, administrative expenses decreased from 11.2% in 2012 to 10.6% in 2013.

Finance costs

Finance costs decreased 1.6% from U.S.$236.7 million in 2012 to U.S.$232.8 million in 2013. This decrease was mainly due to the absence in 2013 of the one-time charge of U.S.$22.1 million recorded in 2012 for the refinancing of our debt prepayment accounting charges incurred by Flakeboard, a decrease of U.S.$10.4 million of expenses in other financial instruments, mainly forwards and swaps. This was partially offset by an increase of U.S.$28.3 million in interest expense.

 

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Exchange rate differences

We recorded a 31.6% decrease in exchange rate difference losses from U.S.$17.2 million in 2012 to U.S.$11.8 million in 2013, primarily as a result of accounts payable and financial debt denominated in Argentine pesos, the aggregate value of which depreciated during 2013 by U.S.$50.7 million as compared to 2012, and partially offset by a loss in value in other current assets denominated in Argentine pesos, which decreased in value by U.S.$23.4 million from 2012 to 2013. The Argentine peso suffered a devaluation in 2013, starting the year at AR$4.9225 per U.S. dollar, and ending at AR$6.5177 per U.S. dollar. See “Item5. Operating and Financial Review and Prospects—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada—Argentina.”

Income tax

We recorded an income tax expense of U.S.$166.8 million in 2012 compared to U.S.$130.4 million in 2013. This decrease is mainly explained by a charge in 2012 of approximately U.S.$124.4 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 17%, effective for taxes payable during fiscal year 2013, including income earned during 2012.

Net income

Net income in 2013 increased 191.6% from U.S.$143.5 million in 2012 to U.S.$418.6 million in 2013, primarily as a result of a 19.7% increase in our revenue, the absence during 2013 of a charge in income tax expense of U.S.$124.4 million incurred in 2012, partially offset by a 12.4% increase in our cost of sales, a 13.6% increase in our administrative expenses and distribution costs, a decrease in net proceeds from insurance payments from U.S.$89.0 million in 2012 to U.S.$1.3 million in 2013, in each case, 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, which 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, which total U.S.$320 million. The first line has an available amount of UF 2,885,000, or approximately U.S.$120.0 million. The second line has a maximum available amount of U.S.$200.0 million.

Cash Flow from Operating Activities

Our net cash flow provided by operating activities was U.S.$897.7 million in 2013 and U.S.$985.2 million in 2014. This increase was principally due to a U.S.$74.7 million decrease in other payments from our operating activities and a U.S.$ 74.2 million decrease in payments to employees, partially offset by an increase of U.S.$72.4 million in payments to suppliers.

Our net cash flow provided by operating activities was U.S.$442.4 million in 2012 and U.S.$897.7 million in 2013. This increase was principally due to a U.S.$873.7 million increase in receipts from sales of goods and rendering of services, partially offset by an increase of U.S.$387.3 million in payments to suppliers and employees, and by a decrease of U.S.$147.9 million in income taxes paid.

Cash Flow Used in Investing Activities

Our net cash used in investing activities was U.S.$687.6 million in 2013 and U.S.$655.2 million in 2014. This decrease was principally due to a 28.8%, or U.S.$ 185.6 million, decrease in our purchases of property, plant and equipment, partially offset by an increase of U.S.$158.8 million used during 2014 for a loan to related parties.

Our net cash used in investing activities was U.S.$1,345.8 million in 2012 and U.S.$687.6 million in 2013. This decrease was principally due to a 32.7% or U.S.$313.6 million decrease in our purchase of property, plant and equipment and U.S.$253.8 million used during 2012 to obtain control of subsidiaries or other businesses, which includes the acquisition of Flakeboard and Moncure mill, partially offset by an increase in proceeds from sale of property, plant and equipment in the amount of U.S.$104.3 as a result of sales of land assets.

 

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Cash Flow Used in Financing Activities

Our net cash used in financing activities was U.S.$7.9 million in 2014, compared to the U.S.$7.8 million used in 2013. During 2014 we received U.S.$1,035.6 million, and we paid U.S.$900.6 million of principal of and interest on our debt. In addition, we paid U.S.$141.1 million in dividends.

Our net cash obtained from financing activities was U.S.$7.8 million in 2013 compared to the U.S.$1,055.5 million used in 2012. The difference between proceeds from short-term borrowings and repayment of borrowing in 2012 was U.S.$1,253.8 million, while the same difference in 2013 was U.S.$134.8 million, which explains most of the variation between 2012 and 2013. In addition, in 2013 we experienced a U.S.$56.8 million decrease 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 our Company—Capital Expenditures.”

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, 2014, 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)

     707,809         1,438,164         1,064,195         3,005,483         6,215,651   

Purchase obligations(2)

     21,425                  21,425   

Capital (finance) lease obligations

     31,706         45,043         20,246         —           96,995   

Total

     760,940         1,483,207         1,084,441         3,005,483         6,334,071   

 

(1) Includes estimated interest payments related to debt obligations based on market values as of December 31, 2014.
(2) Excludes contracts entered into with independent contractors to perform operations on our behalf. Our payment obligations under such contracts are not pre-determined, but rather depend on the performance of certain variables. Accordingly, we cannot quantify our contractual obligations under such contracts.

Investment Activities

During 2014, our principal investment activities were our continued investment in the construction of our Montes del Plata complex in the amount of U.S.$151.8 million and our investment in the maintenance and acquisition of biological assets for a total of U.S.$142.1 million.

Financing Activities

During 2014, our principal financing activities were as follows:

 

   

On April 10, 2014, we issued UF2 million 2.65% bonds due 2021 and UF5 million 3.60% bonds due 2035 in the Chilean market, which generated proceeds of approximately U.S.$302 million in the aggregate.

 

   

On July 22, 2014, we issued U.S.$500 million aggregate principal amount of 4.50% notes due 2024 in the international capital markets. On October 24, 2014, we initiated an offer to exchange those outstanding bonds for an equal principal amount of 4.50% 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 July 29, 2014, we prepaid in full a U.S.$200 million bank loan with a due date of December 6, 2014.

 

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As of December 31, 2014, our short-term bank debt was U.S.$273.5 million of which 83.5% was U.S. dollar-denominated. As of December 31, 2014, our total long-term bank debt (including the current portion of such debt) was U.S.$1,182.4 million of which 95.5% was U.S. dollar-denominated. In addition, as of December 31, 2014, we guaranteed obligations of U.S.$624.4 million related to Montes del Plata, U.S.$270.0 million related to Arauco Argentina, U.S.$150.0 million related to Flakeboard and U.S.$22.0 million related to Arauco Forest Brasil y Mahal. As of December 31, 2014, we also had total capital markets borrowings (including the current portion of such debt) of U.S.$3,658.3 million, 73.4% of which was U.S. dollar-denominated. As of December 31, 2014, the weighted average maturity of our non-current debt was 6.6 years. The interest rate on our floating rate debt is determined principally by reference to the London inter-bank offered rate (LIBOR), and as of December 31, 2014, the average interest rate for our U.S. dollar floating rate debt over six-month LIBOR was 1.50%. As of December 31, 2014, the average interest rate for our U.S. dollar fixed rate debt was 5.31%. These average rates do not reflect the effect of swap agreements.

The instruments and agreements governing our bank loans and local bonds set limits on our incurrence of debt and liabilities through the use of financial covenants. The principal financial covenants contained in the bank loan agreements in effect on December 31, 3014 are as follows:

 

   

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

 

   

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

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

 

   

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

We were in compliance with all bank loan and bond covenants as of December 31, 2014.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have any off-balance sheet arrangements.

TREASURY MANAGEMENT

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

 

   

investments must be in fixed income instruments;

 

   

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, and subject to compliance with local regulations, including foreign exchange controls.

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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Cross Currency Swap Agreements

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

 

Bank

   U.F. notional
amount
     Interest rate
we receive
    U.S.$ notional
amount (in
millions)
     Interest rate
we pay
    Maturity

Deutsche Bank

     1,000,000         4.25     43.62         5.29   October 2021

JPMorgan Chase Bank

     1,000,000         4.25     43.62         5.23   October 2021

Corpbanca

     1,000,000         3.25     42.86         5.20   September 2020

BBVA

     1,000,000         3.25     42.86         5.20   September 2020

Deutsche Bank

     1,000,000         3.25     42.86         5.25   September 2020

Banco Santander

     1,000,000         3.25     42.87         5.17   September 2020

BBVA

     1,000,000         3.25     42.86         5.09   September 2020

Corpbanca

     1,000,000         3.96     46.47         4.39   November 2021

JPMorgan Chase Bank

     1,000,000         3.96     47.16         3.97   November 2021

BBVA

     1,000,000         4.25     38.38         5.61   April 2023

BBVA

     1,000,000         4.25     38.43         5.75   April 2023

BCI

     1,000,000         4.25     37.62         5.54   April 2023

Deutsche Bank

     1,000,000         4.25     37.98         4.69   April 2019

Banco Santander

     1,000,000         4.25     37.98         5.59   April 2023

BBVA

     1,000,000         3.96     42.41         5.00   November 2023

Banco Santander

     1,000,000         3.96     41.75         4.93   November 2023

Deutsche Bank

     1,000,000         3.96     41.75         4.92   November 2023

Banco Santander

     3,000,000         3.60     128.61         5.15   April 2024

JPMorgan Chase Bank

     1,000,000         3.60     43.19         4.84   April 2024

Corpbanca

     1,000,000         3.60     43.28         4.80   April 2024

BCI

     1,000,000         3.00     43.19         3.48   April 2021

BCI

     1,000,000         3.00     43,20         3.40   April 2021

The aggregate fair value of our currency swap agreements as of December 31, 2014 represented a liability of U.S.$110.0 million as compared to December 31, 2013 when they represented an asset of U.S.$22 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.

Zero Cost Collar Agreements

We have also analyzed our exposure to risks associated with fluctuations in the prices of commodities, including pulp and fuel oil. On December 23, 2014, we entered into a zero cost collar agreement to mitigate the impact of increases in the price of fuel oil over our results. The fair value of this agreement as of December 31, 2014 represented a liability of U.S.$0.9 million.

RESEARCH AND DEVELOPMENT

We spent U.S.$2.2 million in 2012, U.S.$2.6 million in 2013 and U.S.$3.1 million in 2014 on research and development. We conduct our principal research and development programs through our subsidiary, Bioforest, which concentrates its efforts on applying and implementing advanced technologies to the specific characteristics of our forests and mills.

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

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

 

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TREND INFORMATION

From December 31, 2014 to March 31, 2015, prices for softwood decreased by 5.6%, reaching U.S.$880.03 per tonne, while prices for hardwood increased by 2.2% reaching U.S.$759.29 per tonne. Softwood, decreased at the end of the last quarter of 2014 and continued decreasing in the first quarter of 2015, driven by large discounts by Russian producers, who benefited from the depreciation of the Ruble. Also, European producers have benefited from a weaker Euro and this has resulted in market pressure to lower softwood prices. On the contrary, hardwood prices increased during the first quarter of 2015, driven by strong demand from China.

In the upcoming months, we expect a steady market for long fiber pulp, with opportunities to increase prices. Short fiber pulp should also benefit from new price increases in the second quarter of 2015.

For the panel business, we expect a stable market in North America in MDF. Our PBO products in this region performed better than MDF in the first quarter of 2015, and we expect this situation to continue through the upcoming months. In Brazil, MDF sales volume has been at solid levels, and we expect the panels market in this country to show signs of recovery during the second half of 2015. In Argentina, despite the current economic situation, sales of MDF and PBO have been stable.

Volume and prices have remained stable in Chile and the rest of South America. In Central America, the demand for wood remains stable. The demand expectation in Asia and Oceania are positive for the first quarter of 2015, but the price in these markets could be affected by high competition from countries whose currencies have been devalued.

For more information regarding trends in our business, see “Item 5. Operating and Financial Review and Prospects—Overview” and “—Exchange Rate Fluctuations.” For risks affecting our business, see “Item 3. Key Information—Risk Factors.”

Item 6. Directors, Senior Management and Employees

DIRECTORS AND EXECUTIVE OFFICERS

Directors

A Board of Directors manages our business. Our estatutos (by-laws) require that the Board of Directors consist of nine directors. Our directors cannot also be our executives. The entire board is elected every three years and can be re-elected for any number of periods. The current board was elected in April 2015, and their terms will be renewed in April 2018. The board may appoint replacements to fill any vacancies that occur during periods between elections; however, at the annual shareholders’ meeting following any such replacement, an election of the entire board must take place. Scheduled meetings of the Board of Directors are, generally, held once a month. Extraordinary board meetings are called when summoned by the Chairman or when requested by at least two directors. We have not entered into any contracts with our current directors to provide any benefits upon the termination of their relationship with us. We do not have a compensation committee.

Our current directors are listed below.

 

Name

  

Years as Director

  

Position

  

Age

Manuel Bezanilla

   29    Chairman    70

Roberto Angelini

   29    First Vice-Chairman    66

Jorge Andueza

   21    Second Vice-Chairman    66

José Tomás Guzmán

   29    Director    85

José Rafael Campino

   5    Director    62

Alberto Etchegaray

   21    Director    69

Eduardo Navarro

   7    Director    50

Timothy C. Purcell

   9    Director    55

Franco Mellafe

   —      Director    39

 

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

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

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

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, and serves as a member of the boards of directors of Inversiones Siemel S.A., Forestal Arauco, Servicios Corporativos Sercor S.A. and Corpesca 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 board 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 Inversiones La Construcción S.A. and Red Salud S.A., and the Vice Chairman of the Board of Directors of Salfacorp 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 board of directors of COPEC, Abastible S.A., Sociedad Nacional de Oleoductos S.A., Corpesca S.A., Orizon S.A., Compañía Minera Can Can S.A., Mina Invierno S.A., Inversiones del Nordeste 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 board of directors of Komax, S.A., Tip de México, S.A. de C.V., and Corporación Santo Tomás. He is also a director of Enseña Chile, 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 Master’s Degree in International Studies from the University of Pennsylvania and a master’s degree in business (MBA) from Wharton Business School.

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

 

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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)

  26    Chief Executive Officer    53

Cristián Infante

  19    President and Chief Operating Officer    48

Gianfranco Truffello

  20    Chief Financial Officer    47

Robinson Tajmuch

  24    Senior Vice-President Comptroller    58

Camila Merino

  4    Senior Vice-President Human Resources and EHS    47

Franco Bozzalla

  25    Senior Vice-President Wood Pulp and Energy    52

Charles Kimber

  29    Senior Vice-President Commercial & Corporate Affairs    53

Antonio Luque

  23    Senior Vice-President Timber and Panels    58

Alvaro Saavedra

  23    Senior Vice-President Forestry    59

Gonzalo Zegers

  7    Senior Vice-President International and Business Development    54

Felipe Guzmán

  6    General Counsel    45

 

(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 Arauco Argentina S.A. Mr. Truffello holds a degree in civil engineering from the Catholic University of Chile and a master’s degree in business administration from the Massachusetts Institute of Technology.

Robinson Tajmuch is the Senior Vice-President Comptroller of Arauco. He joined Arauco in 1991 and was previously our Comptroller. Before joining Arauco, he served as Auditing Manager at 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 and EHS of Arauco. Prior to joining Arauco, Ms. Merino served as the Labor Minister of the Chilean government. She also served as Chief Executive Officer at Metro de Santiago and Corporate Vice President at SQM. Ms. Merino holds a degree in civil engineering from the Catholic University of Chile and a master’s degree in business administration from the Massachusetts Institute of Technology.

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

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

Antonio Luque is the Senior Vice-President Timber and Panels 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.

 

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

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

Compensation

For 2014, 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.$1.4 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.

 

Name

   2013      2014  

Manuel Bezanilla

   U.S.$ 187,797       U.S.$ 198,191   

Roberto Angelini

     153,076         136,881   

Jorge Andueza

     138,570         136,881   

José Tomás Guzmán

     158,049         121,639   

Cristián Infante

     105,720         99,913   

Matías Domeyko

     91,754         87,274   

José Rafael Campino

     67,142         61,126   

Eduardo Navarro

     67,142         61,126   

Timothy C. Purcell

     67,142         61,126   

Nicolás Majluf Sapag

     67,142         61,126   

Alberto Etchegaray

     67,142         60,969   

Jorge Garnham Mezzano

     61,896         60,669   

Alvaro Saavedra

     43,824         39,244   

Charles Kimber

     45,157         29,848   

Franco Bozzalla

     30,676         29,514   

Antonio Luque

     39,310         26,605   

Robinson Tajmuch

     27,824         23,244   

Gonzalo Zegers

     25,452         16,000   

Pablo Ruival

     28,481         12,900   

Sergio Gantuz

     28,481         12,900   

Gianfranco Truffello

     23,310         10,605   

Jorge Serón

     0         4,063   

René Katz

     9,376         0   

Manfred Mayer

     9,376         0   
  

 

 

    

 

 

 

Total Compensation

     1,557,804         1,364,483   
  

 

 

    

 

 

 

 

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Board Practices

In 2013, we created an audit committee, which is composed of two directors, Jorge Andueza and Timothy C. Purcell, as well as the Chief Executive Officer of Arauco, the Chief Operating Officer of Arauco, the Senior Vice-President Comptroller of Arauco and the General Counsel of Arauco. Our securities are not listed on any U.S. national securities exchange and, therefore, we are not subject to the rules relating to audit committees imposed by the Sarbanes-Oxley Act of 2002, as amended.

We also have an ethics committee that ensures compliance with our ethics code, which defines, promotes and regulates behavior of professional and personal excellence consistent with our philosophy and values to be followed by all our staff.

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, 2014.

 

     As of December 31,  
     2012      2013      2014  

Executives

     354         371         391   

Professionals and Technicians

     5,046         4,152         4,257   

Workers

     7,827         8,801         8,928   
  

 

 

    

 

 

    

 

 

 

Total

     13,227         13,324         13,576   
  

 

 

    

 

 

    

 

 

 

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

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

Approximately 30% of our employees in Chile, 47% of our employees in Argentina, almost 100% of our employees in Brazil and none of our employees in the United States or Canada were unionized as of December 31, 2014. We negotiate collective bargaining agreements of two, three or four years’ duration with unionized employees.

We have stable employee relations in Chile, Argentina, Brazil, the United States and Canada. Our Chilean operations have not experienced any work stoppages in the last five years other than (i) a one-day stoppage at the Valdivia Pulp Mill in June and an eight-day stoppage in September 2014, caused by employees of third party service providers, (ii) four separate occasions of transportation contractors blocking the entrances of our Horcones complex on February 24 and 25, September 3, October 22 and 23, and November 20, 2014, (iii) a four-day stoppage at the Arauco plywood mill in January 2013, caused by employees of third-party contractors and (iv) a four-day work stoppage in July 2012 at our Arauco plywood mill located in Arauco, during which production resumed partially after the second day; which was caused by the employees of our third-party forestry contractors at each of the respective facilities.

Our Argentine operations have not experienced any work stoppages in the last five years other than (i) a three-day stoppage at Arauco Argentina’s chemical mill in March 2011, as a result of a strike by the chemical union; (ii) a four-day stoppage at Arauco Argentina’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; (iii) a 27-day stoppage at Arauco Argentina’s Zarate mill in April 2013, as a result of a strike by the construction union; (iv) a two-day stoppage at Arauco Argentina’s chemical mill in May 2013, as a result of a strike by the Santa Fe Federation of Labour; (v) a one-day stoppage at Arauco Argentina’s pulp mill in June 2013 and a three-day stoppage at Arauco Argentina’s pulp mill in October 2013, both as a result of a strike by the pulp union; (vi) a four-day stoppage at Arauco Argentina’s pulp mill in December 2014, as a result of a strike by the pulp union; and (vii) a five-day stoppage at Arauco Argentina’s mill in Misiones in January 2015, as a result of a road blockage lead by the truckers union.

Our Brazilian operations have not experienced any work stoppages in the last five years.

 

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In September 2011, we experienced a 21-day work stoppage of construction at the Montes del Plata joint operation in Uruguay. In 2012, we experienced approximately 17 days of work stoppages and in 2013, approximately 33 days of work stoppages during the construction at Montes del Plata. These stoppages were caused by national and local strikes, related to various labor conflicts.

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

SHARE OWNERSHIP

Our First Vice-Chairman, Roberto Angelini, owns directly and indirectly 22.4% of Inversiones Angelini y Compañía Limitada, or Inversiones Angelini, which is the principal shareholder of AntarChile. He directly owns 0.2% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Roberto Angelini beneficially owns 8.8% of our shares. Our Director, José Tomás Guzmán, owns 1.0% of Inversiones Angelini. Directly and indirectly through Agroforestal e Inversiones Maihue Limitada and Inversiones Maihue Limitada, he owns 2.9% of AntarChile and 0.14% of Empresas Copec. Through his interests in Inversiones Angelini, AntarChile and Empresas Copec, José Tomás Guzmán beneficially owns 1.0% of our shares.

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

Item 7. Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

Our only outstanding voting securities are shares of common stock of a single series, without nominal (par) value. The following table sets forth certain information concerning ownership of our common stock, as of April 23, 2015, with respect to each shareholder known by us to own more than 5% of the outstanding shares of our common stock and all of our directors and executive officers, as a group.

 

     Number of Shares
Owned
     Percentage
Ownership
 

Empresas Copec

     113,134,814         99.98   

Directors and executive officers of our Company, as a group

     —          —    

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

Empresas Copec is a Chilean public company listed on the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Chilean Electronic Stock Exchange. It is a holding company, the principal interests of which are in Arauco, gasoline distribution, electricity, gas distribution, fishing and mining. Before October 1, 2003, Empresas Copec’s legal name was Compañía de Petróleos de Chile S.A. As of that date, Compañía de Petróleos de Chile S.A. transferred all its gasoline- and fuel-related business assets to a new subsidiary, Compañía de Petróleos de Chile COPEC S.A., or COPEC, and changed its legal name to Empresas Copec S.A. As of December 31, 2014, AntarChile owned 60.8% of Empresas Copec.

Through its ownership in Empresas Copec, AntarChile beneficially owned 60.8% of our shares as of December 31, 2014. As of April 23, 2015, AntarChile beneficially owns 60.8% of our shares. Inversiones Angelini y Compañía Limitada, or Inversiones Angelini, in turn owns 63.4% of AntarChile’s shares, and certain other related investors own an additional 10.96% of AntarChile. Inversiones Angelini and such other investors are defined herein as the “Angelini Group.”

The principal equity owners of interest in Inversiones Angelini are Mrs. María Noseda Zambra with 10.9%, Mr. Roberto Angelini Rossi directly and indirectly with 22.4%, and Mrs. Patricia Angelini Rossi directly and indirectly with 18.8%.

As of December 31, 2014 and April 23, 2015, the Angelini Group controlled Arauco through the ownership structure described above.

RELATED PARTY TRANSACTIONS

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

 

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

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

 

   

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

 

   

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

 

   

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

 

   

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

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

Our transactions with affiliates include the following:

 

   

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

 

   

We purchase port services from our 20.2% affiliates Puertos y Logística S.A. (formerly Puerto de Lirquén S.A.) and Puerto Lirquén S.A. (formerly Portuaria Sur de Chile S.A.), and our 50% affiliate Compañía Puerto de Coronel S.A.;

 

   

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

 

   

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

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

Item 8. Financial Information

See “Item 17—Financial Statements.”

EXPORT SALES

Export sales constituted 62.0% of our revenue for the year ended December 31, 2014. Our total export revenue for 2014 was U.S.$3,305.7 million. Our principal overseas markets are Asia, North America and Western Europe. See “Item 4. Information on our Company—Description of Business—Domestic and Export Sales.”

LEGAL PROCEEDINGS

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

 

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

Valdivia Mill

Our operations at the Valdivia Mill have been subject to continued environmental scrutiny by Chilean environmental regulators and the Chilean public since the mill began its operations in 2004. There were allegations of a causal connection between the migration and death of black-neck swans and the operations at the Valdivia mill, and in a study dated April 18, 2005, researchers at the Austral University in Valdivia concluded that wastewater discharges from the Valdivia Mill had significantly altered the quality of the Cruces River. The study also concluded that the effluent discharges were a significant contributing factor in the death or migration of a large population of the black-necked swans in the Carlos Anwandter Nature Sanctuary downstream from the Valdivia Mill. In April 2005, the National Defense Council instituted a civil lawsuit seeking reparations, damages and indemnification from us for environmental harm allegedly caused by the discharges from the Valdivia Mill. In response, we argued to the court that this action should be rejected, as several studies have demonstrated that there is no relationship between the alleged damages and the operation of the Valdivia Mill. The National Defense Council did not quantify the damages it was seeking in connection with the Valdivia Mill lawsuit. On July 27, 2013, a civil court of Valdivia ruled that the alleged environmental events were mainly caused by the Valdivia Mill. We decided not to appeal this ruling, in order to create the conditions to shortly begin an effective implementation of measures in favor of that Nature Sanctuary, without the delay of further legal deadlines. In April 2014, we agreed with and paid the National Defense Council an indemnification amount of approximately U.S.$5,000,000. This is in addition to another amount of U.S.$5,000,000, which will be designated for social programs for the benefit of the community of Valdivia.

There are four additional measures ordered by the ruling (though not included in the agreement with the National Defense Council), which are being discussed by the members of the Social Council, which includes representatives from Arauco, the National Defense Council, academic institutions, NGOs and public authorities. These measures are: (i) conducting a study, within one year, undertaken by an interdisciplinary committee of experts, about the current status of the wetland; (ii) creating an artificial sentinel wetland for representative species, upriver from the discharge of effluents; (iii) implementation of a monitoring program of environmental impact, within a five-year period; and (iv) creating a new research center focused on wetlands (Centro de Investigación de Humedales).

In June 2005, we suspended operations at the Valdivia Mill until certain technical and legal conditions could be clarified with the applicable regulatory authorities. We estimate this suspension resulted in a loss of sales of approximately U.S.$1.0 million per day 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 Regional Environmental Commission, 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. On January 18, 2008, the COREMA authorized the Valdivia Mill to return to its annual authorized production capacity of 550,000 metric tonnes. The mill gradually increased its production over a four-month period starting in March 2008 and reached full capacity in June 2008. The suspension of operations at the Valdivia Mill 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 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 4. Information on our Company—Description of Business—Pulp—Pulp mills—Chile—Valdivia Mill.”

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. On June 30, 2008, the COREMA approved that environmental impact study. However, the approval was subject to certain conditions that, in our opinion, adversely affected the feasibility of the project. For such reason, we filed a recurso de reclamación (appeal) before the Board of Directors of 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, on September 17, 2009, we presented another appeal before the relevant courts. 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.

 

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In February 2009, as previously required by the environmental authority, 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, the environmental authority approved this environmental impact study subject to additional conditions, certain of which we challenged before the Board of Directors 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 recurso de participación ciudadana (reclamation action) before the environmental authority, challenging Exempt Resolution No. 27/2010. On April 30, 2013, the Committee of Ministers passed Exempt Resolution No. 391, which upheld in part such reclamation action, modifying paragraph 4.8.3 and updating tables 8, 9.a and 9.b, all of the Exempt Resolution No. 27/2010 (thereby establishing effluent discharge limits for 13 parameters, including total chromium, total hydrocarbons, sulfur, oil and grease, suspended solids and phosphorus).

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

The construction and operation of the pipeline remain subject to many environmental, regulatory, engineering and political uncertainties. As a result, we cannot provide any assurances that the project will be finally completed. If the installation of the pipeline is delayed for reasons attributable to us, we may face sanctions that include warnings, fines or the revocation of the Valdivia Mill’s environmental permit for operation. Alternatively, if any delays are attributable to reasons beyond our control, we believe that the environmental authorities should extend the applicable deadlines. However, we can provide no assurances that any deadline extensions would be granted, even if we comply with all the requirements that may be set forth by those authorities. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—Environmental concerns led 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 4. Information on our Company—Description of Business—Pulp—Pulp mills—Chile—Valdivia Mill.”

Tax Litigation in Argentina

On December 14, 2007, the AFIP, Argentina’s internal revenue service, notified our Argentine subsidiary, Alto Paran&aac