Form 6-K

6-K 1 d365749d6k.htm FORM 6-K Form 6-K

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

of the Securities Exchange Act of 1934

For the month of December, 2016

Commission File Number 33-99720

ARAUCO AND CONSTITUTION PULP INC.

(Translation of registrant’s name into English)

El Golf 150

Fourteenth Floor

Santiago, Chile

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F ☒ Form 40-F ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): ☐

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

Yes ☐ No ☒

If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-

ARAUCO AND CONSTITUTION PULP INC

TABLE OF CONTENTS


Item		Page

1.	Ratio Analysis of the Consolidated Financial Statement		1
2.	Unaudited Consolidated Statement of Financial Position		7
3.	Unaudited Consolidated Income Statement		9
4.	Unaudited Consolidated Statement of Changes in Equity		11
5.	Unaudited Consolidated Statement of Cash Flow		12
6.	Unaudited Notes to the Consolidated Financial Statement		13
	Annex: Press Release

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

December 31, 2016

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

1. ANALYSIS OF FINANCIAL POSITION

Statement of Financial Position

The principal components of assets and liabilities at each period, as follows:


Assets	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Current assets		2,722,360		2,651,920
Non-current assets		11,283,821		11,018,471

Total assets		14,006,181		13,670,391


Liabilities	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Current liabilities		1,346,064		1,034,251
Non-current liabilities		5,660,834		5,989,695
Non–parent participation		44,032		37,735
Net equity attributable to parent company		6,955,251		6,608,710

Total net equity and liabilities		14,006,181		13,670,391

As of December 31, 2016, total assets increased U.S.$336 million compared to December 31, 2015, equivalent to a 2.46% variation. This deviation was driven mainly by increases in the balance of investments in connection with the purchase of a 50% interest in the joint venture SONAE ARAUCO, properties, plant and equipment and biological assets, partially offset by a decrease in trade and other accounts receivable and inventories.

In turn, total liabilities decreased by U.S.$17 million mainly due to a decrease in financial liabilities and non-financial liabilities for a lower register of provision for minimum dividend compared to December 31, 2015.

The main financial and operational indicators as of the dates and periods indicated below are as follows:


Liquidity ratios	12-31-2016		12-31-2015
Current Liquidity (current assets / current liabilities)		2.02		2.56
Acid ratio (( current assets-inventories, biological assets) / current liabilities )		1.16		1.42

Debt indicators	12-31-2016		12-31-2015
Debt to equity ratio (total liabilities / equity)		1.00		1.06
Short-term debt to total debt (current liabilities / total liabilities)		0.19		0.15
Long-term debt to total debt (non-current liabilities / total liabilities)		0.81		0.85

	12-31-2016		12-31-2015
Financial expenses coverage ratio (earnings before taxes + interest expense / interest expense)		2.02		2.89

Activity ratio	12-31-2016		12-31-2015
Inventory turnover-time (cost of sales / inventories + current biological assets)		2.99		2.95
Inventory turnover-time (excluding biological assets) (Cost of sales /inventory)		3.97		3.89
Inventory permanence-days ((inventories + biological assets) /cost of sales)		120.42		122.16
Inventory permanence-days (excluding biological assets) (inventory / cost of sales)		90.68		92.45

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

December 31, 2016

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

As of December 31, 2016, the short-term debt represented 19% of total liabilities (15% as of December 31, 2015).

Our financial expenses coverage ratio decreased from 2.89 to 2.02, mainly due to the lower earnings before taxes for the period ended December 31, 2016, compared to the same period of 2015.

Statements of income

Income before income tax

Income before income tax registered a profit of approximately U.S.$263 million compared to a profit of approximately U.S.$497 million in the same period of 2015. The negative variation of U.S.$234 million is explained by the factors described in the following table:


Item	MU.S.$
Gross margin		(373	)
Distribution and Administrative Expenses		109
Other income/ expenses per function		(9	)
Exchange differences		37
Others		2

Net change in income before income tax		(234	)

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


Revenues	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Pulp		2,146,079			2,363,973
Timber		2,494,750			2,633,211
Forestry		96,488			116,368
Other		24,068			33,188

Total revenues		4,761,385			5,146,740


Sales costs	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Wood		736,399			641,821
Forestry work		600,320			636,100
Depreciation and amortization		377,983			371,851
Other costs		1,784,203			1,861,653

Total sales costs		3,498,905			3,511,425


Profitability index	12-31-2016			12-31-2015
Profitability on equity		3,19			5.46
Profitability on assets		1.57			2.59
Return on operating assets		2.21			4.13

Profitability ratios	12-31-2016			12-31-2015
Income per share (U.S.$) (1)		1.89			3.21
Income after tax (ThU.S.$) (2)		217,577			367,711
Gross margin (ThU.S.$)		1,262,480			1,635,315
Financial costs (ThU.S.$)		(258,467	)		(262,962	)

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

(2)	Includes non-controlling interest.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

December 31, 2016

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


EBITDA	12-31-2016 MU.S.$			12-31-2015 MU.S.$
Gain (loss)		217.6			367.7
Finance costs		258.5			263.0
Financial income		(29.7	)		(50.3	)
Expenses for income tax		45.6			129.7
EBIT		492.0			710.1
Depreciation and amortization		409.4			400.1
EBITDA		901.4			1,110.2
Cost at fair value of the harvest		340.2			306.7
Gain from changes in fair value of biological assets		(208.6	)		(210.5	)
Exchange difference		3.9			41.2
Others*		15.2			34.9
Adjusted EBITDA		1,052.3			1,282.4

*	2016: Forest loss provision MU.S.$15.2

*	2015: Forest loss provision MU.S.$34.9

2. MAIN SOURCES OF FINANCING

Arauco’s financing needs are mainly covered through the capital markets, with bond issuances and credits obtained from banks and financial institutions serving as the main sources of financing. For short-term borrowing, Arauco follows a liquidity policy which indicates the amounts and institutions from which it can borrow according to several conditions defined in the policy. In the case of long-term debt, corporate bond issuances in the local market and also in international markets are used as sources of new resources. Another source of long-term financing corresponds to borrowings from banks and financial institutions around the world.

3. DIFFERENCE BETWEEN ECONOMIC VALUES AND BOOK ASSETS

Assets and liabilities are presented in the Financial Statements according to International Financial Reporting Standards and instructions issued by the Chilean Securities Commission. We believe that there are no material differences between the economic value of our assets and the value reflected in these Financial Statements.

4. MARKET SITUATION

Pulp Division

Uncertainty marked the fourth quarter of 2016, with speculation as to when and how supply coming in from new mills would affect prices. Asia Pulp and Paper addressed the market’s concerns about how much production of their 2.8 million ton short fiber pulp mill would impact 2017, which positively affected prices during the latter part of the quarter. The first line of this mill already started producing during November, while the second line is set to start up during April 2017. Estimations of new market pulp supply are between 1.1 and 1.3 million tons for 2017, an amount that the market should be able to absorb without any major setbacks. The Puma Project in Brazil, which started up during the first half of 2016, has aggressively entered the European and Asian market in softwood and fluff pulp markets. Short fiber supply is overall absorbed by the market at a higher rate than long fiber supply.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

December 31, 2016

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

producers had their productions sold off until February. Particularly in China, local prices rose by 10% in long fiber and 25% in short fiber, with the price gap decreasing from U.S.$ 90 to less than U.S.$ 10. Price surges have also been successfully passed to the final client, finally reflecting the depreciation the Chinese currency had suffered during the year. Older paper mills that do not use quality paper grade pulp have ceased production, while more modern paper mills have upped their production levels. Overall, paper supply is estimated to increase 700 thousand tons between the fourth quarter of 2016 and the coming year.

European markets have had a different dynamic, with demand restrained yet slightly above market supply, and exchange rates making imports more expensive. Short fiber prices remained stable while long fiber prices fell 3% during the quarter. Downward adjustments in long fiber prices were mainly due to Scandinavian producers who generally preferred to sell their supply in Europe rather than pay the increasing shipping tariffs, even with the decrease in long fiber prices. Principal European ports are packed with short fiber imports, primarily coming from Brazil that have also not helped matters. Price differentials between Europe and China may divert supply to the Chinese market in the future, which could increase prices in Europe in detriment of possible oversupply in China.

Latin America has been chiefly active except in Brazil. Supply coming in from the new Klabin pulp mill has placed pressure in long fiber and fluff pulp prices, while demand has also deteriorated along with the Brazilian economy.

Ultimately, the fourth quarter ended with the highest production and sales volume of the year in the market as a whole, while inventory levels at their lowest. Our production levels were normal, with maintenance stoppages at our Nueva Aldea Mill during October, our Alto Paraná Mill in Argentina during November, and our Valdivia Mill during the end of November.

Timber Division

Sawn timber markets predominantly increased sales volume and prices during this quarter. Demand in Asia and Oceania was strong despite more supply in the markets from Europe and Brazil. Product mix was crucial to remain ahead of our competitors, and Arauco was even able to increase prices in a few key products. In the Middle East, the construction market remained solid, but prices did decrease due to higher competition. For plywood in Europe, fourth quarter prices consolidated the price increases that occurred during the third quarter in plywood.

In North America, plywood markets remained stable, with sales volume augmenting slightly. Increasing prices in remanufactured products attracted volumes from China and Latin America, but was not enough to counteract the positive trend in pricing. Latin American sales were also healthy, and Chilean sales remained stable despite a strike in one of the bigger retailers.

Panels markets had a drop in sales volume, but results were optimistic at quarter end. North America had lower seasonal sales due to the winter season that brings harsher weather as well as the holidays. MDF panels started with uncertainty as to how the production of West Frazier would impact future prices. Rumors that Mexican producers would increase capacity pressured prices during the quarter. The MDF moldings market had an overall stable demand. In Mexico, the devaluating currency and the incoming capacity decreased sales compared to last quarter, but did not have as big an impact as expected. Clients were cautious in taking stock positions at the beginning of the quarter, and sales increased in November only to decrease in December due to seasonal effects. Particleboard had a positive quarter all around, especially in value-added products.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

December 31, 2016

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

The Brazilian market was complex and there was little clarity as to when the market would finally stabilize. Due to this situation exports increased during the quarter, boosted by the exchange rates that favored sales to international markets. Argentina’s market also shrunk, and had limited opportunities to export due to higher costs compared to Chile or Brazil. Sales in the rest of Latin America were as expected.

5. ANALYSIS OF CASH FLOW

The main components of net cash flow in each period are as follows:


	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Positive (negative) Cash flow

Cash flow from operating activities		773,584			853,650
Cash flow from (used in) financing activities:
Loan and bond obtention and payments		92,442			(668,320	)
Dividend payments		(130,624	)		(143,003	)

Others		(302	)		(853	)

Cash flow from (used in) investment activities:
Loans to related companies		—			(23,628	)
Incorporation and sale of property, plant and equipment		(338,468	)		(315,525	)
Incorporation and sale of biological assets		(139,063	)		(125,626	)
Incorporation and sale of intangible assets		(14,858	)		(10,296	)
Purchase of participation in joint ventures		(153,135	)		—
Purchase of participation in associates		—			(10,904	)
Sale of participation in associates		6,781			—
Dividends received		4,772			6,350
Others		(6,241	)		1,849

Positive Net cash flow (negative)		94,888			(436,306	)

The financing cash flow had a negative balance of U.S.$38 million in the current period compared to a negative balance of U.S.$812 million in the same period of 2015. Such decrease was mainly due to an increase in bank loans received and a decrease in loan payments.

In relation to the flow of investment at the end of the current period, there was a negative balance of U.S.$640 million compared to a negative balance of U.S.$478 million in the same period of 2015. Such increase was mainly due to greater disbursements for the purchase of the interest in the joint venture SONAE ARAUCO.

6. MARKET RISK ANALYSIS

In respect of the economic risks resulting from interest rate variations, the Company maintains, as of December 31, 2016, a ratio of fixed rate debt to total consolidated debt of approximately 87.1%, which it believes is consistent with industry standards. The Company does not participate in futures trading as to maintain one of the lowest cost structures in the industry, the risks for price fluctuations are bounded.

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

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Ratio Analysis of the Consolidated Financial Statements

December 31, 2016

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

In the report to the Consolidated Financial Statements as of December 31, 2016, a detailed analysis of the risks associated with the business of Arauco is available (See Note 23).

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

CLASSIFIED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


	Note		12-31-2016 ThU.S.$		12-31-2015 ThU.S.$

Assets
Current Assets
Cash and cash equivalents		5		592,253		500,025
Other current financial assets		23		5,201		32,195
Other current non-financial assets		25		144,915		133,956
Trade and other current receivables		23		701,610		733,322
Accounts receivable from related companies		13		12,505		3,124
Current Inventories		4		852,612		909,988
Current biological assets		20		306,117		306,529
Current tax assets				104,088		64,079
Total Current Assets other than assets or disposal groups classified as held for sale				2,719,301		2,683,218
Non-Current Assets or disposal groups classified as held for sale		22		3,059		3,194
Non-Current Assets or disposal groups classified as held for sale or as held for distribution to owners				3,059		3,194

Total Current Assets				2,722,360		2,686,412
Non-Current Assets
Other non-current financial assets		25		8,868		595
Other non-current non-financial assets		23		130,319		125,516
Trade and other non-current receivables				14,273		15,270
Related party receivables, non-current		13		957		—
Investments accounted for using equity method		15-16		446,548		264,812
Intangible assets other than goodwill		19		89,497		88,112
Goodwill		17		74,893		69,475
Property, plant and equipment		7		6,919,495		6,896,396
Non-current biological assets		20		3,592,874		3,520,068
Deferred tax assets				6,097		3,735
Total non-Current Assets				11,283,821		10,983,979
Total Assets				14,006,181		13,670,391

The accompanying notes are an integral part of these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

CLASSIFIED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)


	Note	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$

Equity and liabilities
Liabilities
Current Liabilities
Other current financial liabilities	23		697,452			296,038
Trade and other current payables	23		537,891			583,018
Accounts payable to related companies	13		3,831			7,141
Other current provisions	18		842			858
Current tax liabilities			1,641			10,976
Current provisions for employee benefits	10		5,244			4,497
Other current non-financial liabilities	25		99,163			131,723

Total current liabilities other than assets included in disposal groups classified as held for sale			1,346,064			1,034,251

Total Current Liabilities			1,346,064			1,034,251
Non-Current Liabilities
Other non-current financial liabilities	23		3,870,914			4,236,965
Other non-current provisions	18		38,138			34,541
Deferred tax liabilities	6		1,631,065			1,619,012
Non-current provisions for employee benefits	10		60,084			51,936
Other non-current non-financial liabilities	25		60,633			47,241
Total non - current liabilities			5,660,834			5,989,695
Total liabilities			7,006,898			7,023,946
Equity
Issued capital			353,618			353,618
Retained earnings			7,329,675			7,204,452
Other reserves			(728,042	)		(949,360	)
Equity attributable to parent company			6,955,251			6,608,710
Non-controlling interests			44,032			37,735
Total equity			6,999,283			6,646,445

Total equity and liabilities			14,006,181			13,670,391

The accompanying notes are an integral part of these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

CONSOLIDATED INCOME STATEMENTS BY FUNCTION


		January-December
		2016			2015
	Note	ThU.S.$			ThU.S.$
Income Statements

Revenue	9		4,761,385			5,146,740
Cost of sales	3		(3,498,905	)		(3,511,425	)
Gross profit			1,262,480			1,635,315
Other income	3		257,863			273,026
Distribution costs	3		(496,473	)		(528,470	)
Administrative expenses	3		(474,469	)		(551,977	)
Other expense	3		(77,415	)		(83,388	)
Profit (loss) from operating activities			471,986			744,506
Finance income	3		29,701			50,284
Finance costs	3		(258,467	)		(262,962	)

Share of profit (loss) of associates and joint ventures accounted for using equity method	15		23,939			6,748
Exchange rate differences			(3,935	)		(41,171	)
Income before income tax			263,224			497,405
Income Tax	6		(45,647	)		(129,694	)
Net Income			217,577			367,711

Net income attributable to

Net income attributable to parent company			213,801			362,689

Income attributable to non-controlling interests			3,776			5,022
Profit (loss)			217,577			367,711


Basic earnings per share

Basic earnings per share from continuing operations			0.0018894			0.0032051


Basic earnings per share			0.0018894			0.0032051


Earnings per diluted shares

Earnings per diluted share from continuing operations			0.0018894			0.0032051


Earnings per diluted share			0.0018894			0.0032051

The accompanying notes are an integral part of these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


			January-December
	Note		2016 ThU.S.$			2015 ThU.S.$
Net profit (loss)				217,577			367,711
Components of other comprehensive income that will not be reclassified to profit or loss before tax:
Other comprehensive income before tax actuarial gain (losses) on defined benefit plans				(5,593	)		(1,530	)
Share of other comprehensive income of associates and joint ventures accounted for using equity method that will not be reclassified to profit or loss before tax				132			(1,008	)
Other Comprehensive Income that will not be reclassified to profit or loss before tax				(5,461	)		(2,538	)
Components of other comprehensive income that will be reclassified to profit or loss before tax:
Exchange differences on translation
Gains (losses) on exchange differences on translation, before tax		11		173,754			(385,109	)
Other Comprehensive Income before tax exchange differences on translation				173,754			(385,109	)
Cash flow hedges
Gains (losses) on cash flow hedges, before tax				84,045			11,859
Recycle of cash flow hedges to profit or loss before tax				(10,198	)		(16,122	)
Other Comprehensive Income before tax Cash flow hedges				73,847			(4,263	)
Other Comprehensive income that will be reclassified to profit or loss before tax				247,601			(389,372	)
Income tax relating to components of other comprehensive Income that will not be reclassified to profit or loss before tax
Income tax relating to defined benefit plans of other comprehensive income				1,509			649
Income tax relating to share of other comprehensive income of associates and joint ventures accounted for using equity method that will not be reclassified to profit or loss.				(106	)		227
Income tax relating to components of other comprehensive Income that will be reclassified to profit or loss before tax
Income tax relating to cash flow hedges of other comprehensive income		6		(17,355	)		1,889
Income tax relating to components of other comprehensive income that will be reclassified to profit or loss				(17,355	)		1,889
Other comprehensive (loss) income				226,188			(389,145	)
Comprehensive (loss) income				443,765			(21,434	)

Comprehensive Income attributable to
Comprehensive (loss) income, attributable to owners of parent company				435,119			(15,619	)
Comprehensive (loss) income, attributable to non-controlling interests				8,646			(5,815	)
Total comprehensive (loss) income				443,765			(21,434	)

The accompanying notes are an integral part of these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


12-31-2016	Issued Capital ThU.S.$		Reserve of exchange differences on translation ThU.S.$			Reserve of cash flow hedges ThU.S.$			Reserve of actuarial losses on defined benefit plans ThU.S.$			Several Other Reserves ThU.S.$			Total other Reserves ThU.S.$			Retained Earnings ThU.S.$			Equity attributable to owners of parent T.hU.S.$			Non - controlling interests ThU.S.$			Total Equity ThU.S.$
Opening balance at 01-01-2016		353,618		(872,770	)		(55,396	)		(16,668	)		(4,526	)		(949,360	)		7,204,452			6,608,710			37,735			6,646,445
Changes in Equity:
Comprehensive income
Net profit																			213,801			213,801			3.776			217.577
Other comprehensive income, net of tax				168,884			56,492			(4,084	)		26			221,318						221,318			4.870			226.188
Comprehensive income		0		168,884			56,492			(4,084	)		26			221,318			213,801			435,119			8.646			443.765
Dividends																			(88,578	)		(88,578	)		(2,250	)		(90.828	)
Total increase (decrease) from transfers and other changes																			0			0			(99	)		(99	)
Changes in equity		0		168,884			56,492			(4,084	)		26			221,318			125,223			346,541			6,297			352.838
Closing balance at 12-31-2016		353,618		(703,886	)		1,096			(20,752	)		(4,500	)		(728,042	)		7,329,675			6,955,251			44,032			6,999,283


12-31-2015	Issued Capital ThU.S.$		Reserve of exchange differences on translation ThU.S.$			Reserve of cash flow hedges ThU.S.$			Reserve of actuarial losses on defined benefit plans ThU.S.$			Several Other Reserves ThU.S.$			Total other Reserves ThU.S.$			Retained Earnings ThU.S.$			Equity attributable to owners of parent T.hU.S.$			Non - controlling interests ThU.S.$			Total Equity ThU.S.$
Opening balance at 01-01-2015		353,618		(498,495	)		(53,022	)		(15,790	)		(3,745	)		(571,052	)		6,984,564			6,767,130			47,606			6,814,736
Changes in Equity:
Comprehensive income
Net profit																			362,689			362,689			5,022			367,711
Other comprehensive income, net of tax				(374,275	)		(2,374	)		(878	)		(781	)		(378,308	)					(378,308	)		(10,837	)		(389,145	)
Comprehensive income		0		(374,275	)		(2,374	)		(878	)		(781	)		(378,308	)		362,689			(15,619	)		(5,815	)		(21,434	)
Dividends																			(142,801	)		(142,801	)		(3,228	)		(146,029	)
Total increase (decrease) from transfers and other changes																			0			0			(828	)		(828	)
Changes in equity		0		(374,275	)		(2,374	)		(878	)		(781	)		(378,308	)		219,888			(158,420	)		(9,871	)		(168,291	)
Closing balance at 12-31-2015		353,618		(872,770	)		(55,396	)		(16,668	)		(4,526	)		(949,360	)		7,204,452			6,608,710			37,735			6,646,445

The accompanying notes are an integral part of these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

CONSOLIDATED STATEMENTS OF CASH FLOWS - DIRECT METHOD


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
STATEMENTS OF CASH FLOWS

Cash Flows from (used in) Operating Activities

Classes of cash receipts from operating activities

Receipts from sales of goods and rendering of services		5,020,551			5,733,693

Other cash receipts from operating activities		470,765			337,696
Classes of cash payments
Payments to suppliers for goods and services		(3,914,976	)		(4,260,587	)
Payments to and on behalf of employees		(320,738	)		(490,723	)
Other cash payments from operating activities		(212,230	)		(169,237	)
Interest paid		(211,614	)		(229,894	)
Interest received		29,380			17,720
Income taxes paid		(83,903	)		(87,784	)
Other inflows (outflows) of cash, net		(3,651	)		2,766
Net Cash flows from Operating Activities		773,584			853,650


Cash flows (used in) investing activities

Cash flow used in obtaining control of subsidiaries or other businesses		—			(10,090	)
Cash flow used in the purchase of non-controlling interest		—			(814	)
Other cash receipts from sales of equity or debt instruments in other entities		6,781			—
Other cash payments to acquire interests in joint ventures		(153,135	)		—
Loans to related parties		0			(23,628	)
Proceeds from sale of property, plant and equipment		17,685			5,860
Purchase of property, plant and equipment		(356,153	)		(321,385	)
Proceeds from sales of intangible assets		—			99
Purchase of intangible assets		(14,858	)		(10,395	)
Proceeds from sales of other long-term assets		1,644			506
Purchase of other non-current assets		(140,707	)		(126,132	)
Dividends received		4,772			6,350
Other inflows (outflows) of cash, net		(6,241	)		1,849
Cash flows used in Investing Activities		(640,212	)		(477,780	)


Cash flows from (used in) Financing Activities

Total proceeds from borrowings		737,653			280,863
Proceeds from long-term borrowing		187,845			890
Proceeds from short-term borrowing		549,808			279,973
Repayments of borrowings		(645,211	)		(949,183	)
Dividends paid by subsidiaries		(130,624	)		(143,003	)
Other outflows of cash, net		(302	)		(853	)
Cash flows from (used in) Financing Activities		(38,484	)		(812,176	)

Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes		94,888			(436,306	)
Effect of exchange rate changes on cash and cash equivalents		(2,660	)		(34,821	)

Net increase (decrease) of Cash and Cash equivalents		92,228			(471,127	)
Cash and cash equivalents, at the beginning of the period		500,025			971,152
Cash and cash equivalents, at the end of the period		592,253			500,025

The accompanying notes are an integral part of these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2016 AND 2015

NOTE 1. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

Entity Information

Celulosa Arauco y Constitución S.A. and subsidiaries, tax identification number 93,458,000-1, is a closely held corporation, that was registered in the Securities Registry (the “Registry”) of the Superintendence of Securities and Insurance (the “SVS”) as No. 042 on June 14, 1982. Additionally, the Company is registered as a non-accelerated filer with the Securities and Exchange Commission (SEC) of the United States of America.

Forestal Cholguán S.A., a subsidiary of Celulosa Arauco y Constitución S.A., is also registered in the Securities Registry as No. 030.

The company’s head office address is El Golf Avenue 150, 14^thfloor, Las Condes, Santiago, Chile.

The main business activity of Celulosa Arauco y Constitución S.A. and its subsidiaries (henceforth “Arauco” or the “Company”) is the production and sale of products related to the forestry and wood industries. Its main operations are focused on business areas of pulp, timber and forestry.

Arauco is controlled by Empresas Copec S.A., which owns 99.9780% of Arauco, and is registered in the Securities Registry as No. 0028. Each of the above mentioned companies is subject to the oversight of the SVS.

The ultimate shareholders of Arauco are Mrs. Maria Noseda Zambra de Angelini, Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi through the entity Inversiones Angelini y Cia. Ltda., which owns 63.4015% of the shares of AntarChile S.A., the controlling shareholder of our parent company Empresas Copec S.A.

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

Presentation of Consolidated Financial Statements

The Financial Statements presented by Arauco are comprised by the following:

•

Classified Consolidated Statements of Financial Position as of December 31, 2016 and 2015.

•

Consolidated Income Statements by function for the years ended December 31, 2016 and 2015.

•

Consolidated Statements of Comprehensive Income for the years ended December 31, 2016 and 2015.

•

Consolidated Statements of Changes in Equity for the years ended December 31, 2016 and 2015.

•

Consolidated Statements of Cash Flows – Direct Method for the years ended December 31, 2016 and 2015.

•

Explanatory disclosures (notes).

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Period Covered by the Consolidated Financial Statements

Years ended December 31, 2016 and 2015.

Date of Approval of Consolidated Financial Statements

These consolidated financial statements were approved by the Board of Directors of the Company (the “Board”) at the Extraordinary Session N° 564 held on March 9, 2017

Abbreviations used in this report:

IFRS - International Financial Reporting Standards

IASB - International Accounting Standards Board

IAS - International Accounting Standards

IFRIC - International Financial Reporting Standards Interpretations Committee

MU.S.$ - Millions of U.S. dollars

ThU.S.$ - Thousands of U.S. dollars

U.F. – Inflation index-linked units of account

UTA – Annual Tax Unit

EBITDA – Earnings Before Interest, Taxes, Depreciation, and Amortization

ICMS – Tax movement of inventories and services (Brazil)

Functional and Presentation Currency

Arauco and most of its subsidiaries determined the United States (“U.S.”) Dollar as its functional currency since the majority of its revenues from sales of its products are derived from exports denominated in U.S. Dollars, while their costs of sales are to a large extent related or indexed to the U.S. Dollar.

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

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

In relation to the cost of sales, although labor and services costs are generally billed and paid in local currency, these costs are not as significant as the costs of raw materials, which are driven mainly by global markets and therefore, influenced mostly by the U.S. Dollar.

The presentation currency of the consolidated financial statements is the U.S. Dollar. Figures on these consolidated financial statements are presented in thousands of U.S. Dollar (ThU.S.$).

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Summary of significant accounting policies

a)	Basis for preparation of consolidated financial statements

These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”) and represent the full adoption, explicitly and unreserved of the mentioned international standards.

Retroactive application of IFRS

On October 17, 2014, the SVS issued Circular Letter No. 856, instructing audited companies to register in fiscal year 2014 against equity the differences in assets and liabilities as a result of deferred taxes arising from the direct effect of the increase in the first category tax rates introduced by Law No. 20,780. Such accounting treatment differs from IAS 12 and therefore, represented a change to the framework for the preparation and presentation of financial information adopted up to that date.

Considering what was explained in the preceding paragraph represented a specific and temporary deviation from IFRS, as from 2016 and according to paragraph 4A of IFRS 1, Arauco has decided to apply retroactively such rules (in accordance with IAS 8 “Accounting Policies, Changes in Accounting Estimates and Errors”), as if it had never stopped applying them.

Given that what was indicated in the preceding paragraph does not alter any of the accounts shown in the financial statements as of December 31, 2016 and 2015, nor the financial statements as of December 31, 2015 and 2014, in accordance with paragraph 40A of IAS 1 “Presentation of Financial Statements”, it is not necessary to present financial statements as of January 1, 2015 (third column).

The consolidated financial statements have been prepared on the historical cost basis, except for biological assets and certain derivative financial instruments which are measured at revalued amounts or fair value at the end of each period as explained in the following significant accounting policies.

Reclassifications made in the compared period

As of December 31, 2015, Arauco presented its Consolidated Statement of Financial Position without offsetting assets from deferred tax against liabilities from deferred tax, as applicable to entities legally entitled with the right to offset current assets from tax against current liabilities from tax and to entities whose assets and liabilities from deferred tax are derived from the income taxes corresponding to the same fiscal authority and levied on the same entity.

Arauco assessed the impact of such situation for the previous year and concluded that it did not have any material impact on the consolidated annual financial statements, and that pursuant to paragraph 40A of IAS 1 “Presentation of financial statements”, it is not necessary to include the financial situation statement as of January 1, 2015 (third column).

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

As of December 31, 2015, Arauco’s subsidiaries in Brazil did not classified as current assets the applicable portion of their biological assets, therefore all of its biological assets were presented as non-current assets.

The above mentioned differences in the classification have been reviewed in the Consolidated Statement of Financial Position for the years ended 2016 and 2015, and in their respective notes.

The following table reconciles the effects of the reclassifications made to the Consolidated Statement of Financial Position reported as of December 31, 2015:


	2015 Th.U.S$ (previously reported)		Reclassification Th.U.S$			2015 Th.U.S$ (Reviewed)
Current Biological Assets		272,037		34,492			306,529
Total Current Assets		2,651,920		34,492			2,686,412
Non-Current Biological Assets		3,554,560		(34,492	)		3,520,068
Deferred Tax Assets		140,251		(136,516	)		3,735
Total Non-Current Assets		11,154,987		(171,008	)		10,983,979

Total Assets		13,806,907		(136,516	)		13,670,391

Deferred Tax Liabilities		1,755,528		(136,516	)		1,619,012
Total Non-Current Liabilities		6,126,211		(136,516	)		5,989,695

Total Liabilities		7,160,462		(136,516	)		7,023,946

There was no impact to the Consolidated Financial Statements, Consolidated Income Statements, Consolidated Statements of Cash Flow nor to the Consolidated Statements of Changes in Equity. In addition, the corrections did not affect the Company’s service of its debt obligations.

b)	Critical accounting estimates and judgments

The preparation of these financial statements, in accordance with the International Financial Reporting Standard (IFRS), requires management to make estimates and assumptions that affect the carrying amounts reported. These estimates are based on historical experience and various other assumptions that are considered to be reasonable. Actual results may differ from these estimates. Management believes that the accounting policies below are the critical judgments that have the most significant effect on the amounts recognized in the consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

-Biological Assets

The recovery of forest plantations is based on discounted cash flow models which means that the fair value of biological assets is calculated using cash flows from continuing operations on a discounted basis, based on our sustainable forest management plans and the estimated growth of forests.

These discounted cash flows require estimates in growth, harvest, sales prices and costs; therefore it is important that management make appropriate estimates of future levels and trends for sales and costs, as well as conduct regular surveys of the forests to establish the volumes of wood available for harvesting and their current growth rates. The main considerations used to measure forest plantations are presented in Note 20, including a sensitivity analysis.

-Goodwill

Goodwill represents the excess of the acquisition cost over the fair value of the Group’s holding in the identifiable net assets of the acquired subsidiary at the date of acquisition. Said fair value is determined whether based on assessments and/or the discounted future flow method using hypotheses in their determination, such as sales prices and industry indexes, among others. See Note 17.

-Litigation and Contingencies

Arauco and its subsidiaries are subject to certain litigation proceedings. Future impact on Arauco’s financial condition derived from such litigations is estimated by management, in collaboration with its legal advisors. Arauco applies judgment when interpreting the reports of its legal advisors who provide updated estimates of the legal contingencies at each reporting period and/or at each time a modification is determined to be necessary. For a description of current litigations see Note 18.

c)	Consolidation

The consolidated financial statements include all entities over which Arauco has the power to direct the relevant financial and operating activities. Subsidiaries (including special purpose entities) are consolidated from the date on which control is obtained and up to the date that control ceases.

Specifically, a company controls an investee or subsidiary if, and only if, they have all of the following:

(a) power over the investee, i.e. the investor has existing rights which give it the ability to direct the relevant activities (the activities that significantly affect the investee’s returns)

(b) exposure or rights to variable returns from involvement with the investee; and

When Arauco holds less than the majority of voting rights in a company in which it participates, it nonetheless has the power over said company - when these voting rights are enough - to grant it in practice the ability to unilaterally direct said company’s relevant activities. Arauco takes into account all facts and circumstances in order to

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

assess if the voting rights in a company in which it participates are enough for granting it the power, including:

a) the size of the investor’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

b) potential voting rights held by the investor, other vote holders or other parties;

c) rights arising from other contractual arrangements; and

d) any additional facts and circumstances that indicate the investor has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings.

The Company will reevaluate whether or not it holds control of a company in which participates if the facts and circumstances indicate that changes have occurred in one or more of the three elements of control mentioned above.

Consolidation of an investee shall begin from the date the investor obtains control of the investee and cease when the investor loses control of the investee. An entity includes the income and expenses of an acquired or sold subsidiary in the consolidated financial statements from the date it gains control until the date when the entity ceases to control the subsidiary.

The profit or loss of each component of other comprehensive income is attributed to owners of the parent company and the non-controlling interest, as appropriate. Total comprehensive income is attributed to the owners of the parent company and non-controlling interests even if the results of the non-controlling interest have a deficit balance.

If a subsidiary uses accounting policies other than those adopted in the consolidated financial statements for transactions and other events in similar circumstances, appropriate adjustments are made to the consolidated financial statements of subsidiaries in order to ensure compliance with Arauco’s accounting policies.

All intercompany transactions and unrealized gains and losses from subsidiaries have been fully eliminated from consolidated financial statements and non-controlling interest is presented in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

The consolidated financial statements at the end of this period include the assets, liabilities, income and expenses of the subsidiaries shown in Note 13.

Certain consolidated subsidiaries have Brazilian Real and Chilean Pesos as their functional currencies. For consolidation purposes, the financial statements of those subsidiaries have been prepared in accordance with IFRS and translated into the presentation currency as indicated in Note 1 (e) (ii).

A parent company will present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

d)	Segments

Arauco has defined its operating segments according to its business areas, based on the products and services sold to its customers. This definition is consistent with the management, resource allocation and performance assessment made by key personnel responsible for making relevant decisions related to the Company’s operation. The Chief Operating Decision Maker (CODM) is the Chief Executive Officer who is responsible for making these decisions and it is supported by the Corporate Managing Directors of each segment.

Based on the aforementioned process, the Company has established operating segments according to the following business units:

•

Pulp

•

Timber

•

Forestry

Refer to Note 24 for detailed financial information by operating segment.

e)	Functional currency

(i)	Functional currency

All items in the financial statements of Arauco and each of its subsidiaries, associates and jointly controlled entities are measured using the currency of the primary economic environment in which each entity operates (the functional currency). The consolidated financial statements are presented in U.S. dollars, which is Arauco’s functional and presentation currency.

(ii)	Translation to the presentation currency of Arauco

For the purposes of presenting consolidated financial statements, assets and liabilities of Arauco’s operations in a functional currency different from Arauco´s are translated into U.S. dollars using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange rate differences are recognized in other comprehensive income and accumulated in “Other reserves” within–equity.

(iii)

Foreign Currency Transactions

Transactions in currencies other than the functional currency are recognized at the exchange rates prevailing at the dates of the transactions. Profit or loss on transactions in currencies other than the functional currency resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in the statement of income, except those which are recorded in other comprehensive income and accumulated in equity such as cash flows hedging derivatives.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

f)	Cash and cash equivalents

Cash and cash equivalents include cash-in-hand, deposits held on demand at banks and other short term highly liquid investments with an original maturity of three months or less and which are subject to an insignificant risk of changes in value.

g)	Financial Instruments

Financial assets

Financial assets are classified into the following specified categories: ‘loans and receivables’ and “derivative financial instruments”. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All purchases and sales of financial assets are recognized and derecognized on the trade date, which require delivery of assets within the same time frame established by regulation or convention in the marketplace.

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Loans and receivables are classified as current assets, except for those with maturities more than 12 months after the reporting period, which are classified as non-current assets. Loans and receivables include trade and other receivables.

Loans and receivables are initially recognized at fair value plus transaction costs that are directly attributable to the acquisition and are subsequently measured at amortized cost using the effective interest rate method, less any impairment.

Derivative financial instruments are explained in Note 1 h)

Financial liabilities

Financial liabilities (including borrowings and trade and other payables) are subsequently measured at amortized cost using the effective interest method.

The effective interest method is a method of calculating the amortized cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash payments (including all fees and amounts paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Financial obligations are classified as current liabilities, unless Arauco holds an unconditional right to defer their settlement during at least 12 months after the balance sheet’s date.

The estimate of the fair value of obligations with banks is determined using valuation techniques that include discounted cash flow analyses applying rates of similar loans. Bonds are appraised at market value.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

h)	Derivative financial instruments

(i) Derivative Financial Instruments - The Company enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts, interest rate swaps, currency swaps and zero cost collar contracts. The company’s policy is that derivative contracts are entered into for economic hedging purposes and that there be no instruments for speculation purposes.

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently re-measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss unless the derivative is designated as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

(ii) Embedded derivatives - The Company assesses the existence of embedded derivatives in financial instrument contracts. Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the definition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the contracts are not measured at FVTPL as a whole. Arauco has determined that no embedded derivatives currently exist.

(iii) Hedge accounting - The Company designates certain hedging instruments as either fair value hedges or cash flow hedges.

At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, Arauco documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

-Fair value hedging instruments - Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk.

-Cash flow hedges - The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the Finance costs line item in the consolidated statement of profit or loss. Amounts previously recognized in other comprehensive income are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognized hedged item.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognized in other comprehensive income and accumulated in equity at that time remains in equity and is recognized when the forecasted transaction is ultimately recognized in profit or loss. When a forecasted transaction is no longer expected to occur, the gain or loss accumulated in equity is recognized immediately in profit or loss.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

i)	Inventories

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

The cost of finished and in process products includes the cost of raw materials, direct labor, other direct costs and manufacturing overhead expenses.

Initial costs of harvested wood are determined at fair value less cost of sale at the point of harvest.

Biological assets are transferred to inventories when forests are harvested.

Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

When market conditions result in the production costs of a product exceeding its net realizable value, the inventories are written-down to their net realizable value. This write-down also includes obsolescence amounts resulting from slow moving inventories and technical obsolescence.

Spare parts that will be consumed in a period of less than twelve months are presented in inventories and recognized as an expense when they are consumed.

j)	Non-current assets held for sale

The Group classifies certain property, plant and equipment, intangible assets, investments in associates and disposal groups (groups of assets to be sold together with their directly associated liabilities) as non-current assets held for sale which as of the date of the statement of financial position are the subject of active sale efforts which are estimated to be highly probable. Non-current assets held for sale are presented separately from the other assets in the balance sheet.

These assets or disposal groups are measured at the lower of the carrying amount or the fair value less the costs to sell, and are no longer depreciated or amortized from the time they are classified as non-current assets held for sale.

k)	Business Combinations

Arauco applies the acquisition method to account for a business combination. This method requires the identification of the acquirer, determination of the acquisition date, recognition and measurement of the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree; and recognition and measurement of goodwill or a gain from a bargain purchase. Identifiable assets acquired and liabilities assumed and any contingent liabilities in a business combination are initially measured at fair value at the acquisition date, except:

-deferred tax assets or liabilities, and assets or liabilities related to employee benefit arrangements are recognized and measured in accordance with IAS 12 Income Taxes and IAS 19 respectively;

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

-liabilities or equity instruments related to share-based payment arrangements of the acquire or share-based payment arrangements of the Group entered into to replace share-based payment arrangements of the acquire are measured in accordance with IFRS 3 at the acquisition date; and

-assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with such standard.

Acquisition-related costs are accounted for as expenses when they are incurred, except for costs to issue debt or equity securities which are recognized in accordance with IAS 32 and IAS 39.

A parent will present non-controlling interests in the consolidated statement of financial position within equity, separately from the equity of the owners of the parent company.

Changes in the ownership interest of a parent in its subsidiary that do not result in a loss of control are treated as equity transactions. Any difference between the amount by which non-controlling interests are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to owners of the parent company. No adjustment is made to the carrying amount of goodwill, neither gains nor losses are recognized in the statement of profit or loss.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may initially be measured either at fair value or at the present ownership instruments’ proportionate share of non-controlling interests, in the recognized amounts of the acquirer’s identifiable net assets. The choice is made on a transaction-by-transaction basis.

For the phase-based business combinations, the reasonable value of the acquired company is measured at each opportunity, recognizing the effects of the changes in equity in the income statement corresponding to the period in which they are produced.

If the initial accounting for a business combination is not completed by the end of the reporting period in which the combination occurs, Arauco reports preliminary amounts for the items for which the accounting is incomplete. During the measurement period (no more than one year), these preliminary amounts are retrospectively adjusted, or additional assets or liabilities are recognized to reflect new information about facts and circumstances that existed at the acquisition date, if known, would have affected the amounts recognized at that date.

Business combinations that are under common control transactions are accounted using as a reference the pooling of interest. Under this method, assets and liabilities related to the transaction carry over the previous carrying values. Any difference between assets and liabilities included in the consolidation and the consideration transferred, is accounted in equity.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

l)	Investments in associates and joint arrangements

Associates are entities over which Arauco exercises significant influence, but not control. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

Joint arrangement is defined as an entity over which there is joint control, which exists only when the decisions about strategic of activities, both financial and operational, require the unanimous consent of the parties sharing control.

Investments in joint arrangements are classified as a joint venture or as a joint operation. A joint operation is a joint arrangement in which the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement in which the parties that have joint control of the arrangement (i.e., participants in a joint venture) have rights to the net assets of the arrangement.

Investments in associates and joint ventures are accounted for using the equity method and are initially recognized at cost. Their carrying amount is increased or decreased to recognize the portion corresponding to the income statement or to the statement of comprehensive income. Dividends received are recognized by deducting the amount received from the carrying amount of the investment. Arauco’s investment in associates includes goodwill (both net of any accumulated impairment loss).

The investments in joint operations are recognized through consolidation of assets, liabilities and results of operations in relation to Arauco’s ownership percentage.

If the cost of acquisition is lower than the fair value of the net assets of the associate acquired, the difference is recognized directly in the income statement and presented in the line Other Income (Loss).

Investments in associates and joint ventures are presented in the consolidated statement of financial position in the line item “Investments accounted for using equity method”.

Only if the investor has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture, it must recognize a liability, showing a zero investment until such time as it generates profits that reverse the generated negative equity previously generated as a result of accrued losses. Otherwise, a liability is not recognized but a zero investment is indicated regardless.

m)	Intangible assets other than goodwill

After initial recognition, intangible assets with finite useful lives are carried at cost less any accumulated amortization and impairment losses.

Amortization of an intangible asset with a finite useful life is allocated over the asset’s useful life. Amortization begins when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

(i)	Computer Software

Computer software licenses are capitalized in terms of the costs incurred to acquire and make them compatible with existing software. These costs are amortized over the estimated useful lives of the software.

(ii)	Water Rights, Easements and Other Rights

This item includes water rights, easements and other acquired rights recognized at historical cost which have indefinite useful lives as there is no foreseeable limit to the period over which these assets are expected to generate future cash flows. These rights are not amortized, but are tested for impairment at least annually, or when there is any indication that the assets might be impaired.

(iii)

Customers and trade relations with customers

Correspond to the valuation over the time of the established relationship with customers, from the sale of products and services through its sales team. These relations will materialize in sales orders, which generate revenue and cost of sales. The useful life has been determined to be 15 years.

n)	Goodwill

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquired company, and the fair value of the acquirer’s previously held equity interest in the acquired company (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the statement of income.

Goodwill is not amortized but tested for impairment on annual basis.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For purposes of impairment testing, goodwill in a business combination is allocated as of the acquisition date to the cash generating unit or a group of cash generating units expected to benefit from the synergies of the combination irrespective of whether other assets or liabilities of the acquired company are allocated to those units or group of units.

The goodwill generated on acquisitions of foreign companies, is expressed in the functional currency of such foreign company.

Goodwill recognized for the acquisition of the subsidiary Arauco do Brasil S.A. whose functional currency is the Brazilian Real, is translated into U.S. Dollars at the closing exchange rate. At the date of these consolidated financial statements, the change in the carrying amount of goodwill in Brazil is only related to the net exchange rate differences on translation.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

o)	Property, Plant and Equipment

Property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment. The cost includes expenditures that are directly attributable to the acquisition of the assets.

Subsequent costs, such as improvements and replacement of components, are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Arauco and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognized from property, plant and equipment. All other repairs and maintenance costs are expensed in the period in which they are incurred.

Arauco capitalizes borrowing costs that are directly attributable to the acquisition, construction or production of qualifying assets as part of the cost of those assets, until the assets are ready for their intended use (See Note 12).

Depreciation is calculated by components using the straight-line method.

The useful lives of the items of property, plant and equipment is estimated according to the expected use of the assets. The residual values and useful lives of assets are reviewed and adjusted, if appropriate, annually.

p)	Leases

Arauco applies IFRIC 4 to assess whether an arrangement is, or contains, a lease. Leases of assets in which Arauco substantially holds all the risks and rewards of ownership are classified as finance leases. All other leases are classified as operating leases.

Finance leases are initially recognized at the lower of the fair value at the inception of the lease of the leased property and the present value of the minimum lease payments.

When assets are leased under a finance lease, the present value of lease payments are recognized as financial account receivables. Finance income, which is the difference between the gross receivable and the present value of such amount, is recognized as the interest rate of return.

Leases in which substantially all risks and rewards are not transferred to the lessee are classified as operating leases. Payments under operating leases (net of any incentives received from the lessor) are recognized as an expense on a straight-line basis over the lease term.

Arauco evaluates the economic nature of the contracts that grant the right to use certain assets, for the purposes of determining the existence of implied leases. In these cases, the Company separates - at the beginning of the contract, and based on relative reasonable values - payments and considerations associated with the lease, from the rest of the elements incorporated to the contract.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

q)	Biological Assets

IAS 41 requires that biological assets, such as standing trees, are measured at fair value less cost to sell in the statement of financial position. Forestry plantations are accounted for at fair value less costs to sell, based on the presumption that fair values of these assets can be measured reliably.

The measurement of forestry plantations is based on discounted cash flow models whereby the fair value of the biological assets is determined using estimated future cash flows from continuing operations calculated using our sustainable forest management plans and including the estimated growth of the forests. This valuation is performed on the basis of each identifiable farm block and for each type of tree.

The measurement of new forestry plantations made during the current year is made at cost, which corresponds to the fair value at that date. After twelve months, the valuation methodology used is that explained in the preceding paragraph.

Forest plantations shown as current assets correspond to those forestry plantations that will be harvested in the short term.

Biological growth and changes in fair value of forestry plantations are recognized in the line item “Other income” in the consolidated statement of profit or loss.

r)	Income taxes and deferred taxes.

The tax liabilities are recognized in the consolidated financial statements based on the determination of taxable income for the year and calculated using the tax rates in force in the countries where Arauco operates.

Deferred income tax is recognized using liability method, on the temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated annual accounts. Deferred income tax is determined using tax rates contained in laws adopted as of the date of the financial statements and that are expected to be applicable when the related deferred tax asset is realized or the deferred income tax liability is settled.

Deferred income taxes are registered according to rules established in IAS 12 “Income Taxes”.

The goodwill arising on business combinations does not give rise to deferred tax.

The deferred tax assets and tax credits are generally recognized for all deductible temporary differences to the extent that it is probable that future taxable profit will be available against which those deductible temporary differences can be utilized.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

s)	Provisions

Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period.

t)	Revenue recognition

Revenues are recognized when Arauco has transferred the risks and rewards of ownership to the buyer and Arauco has no right to dispose of the assets, nor effective control of such good.

(i)	Revenue recognition from the Sale of Goods

Revenue from the sale of goods is recognized when Arauco has transferred to the buyer the significant risks and rewards of ownership of the goods, when the amount of revenue can be reliably measured, when Arauco does not retain any managerial involvement over the goods sold and when it is probable that the economic benefits associated with the transaction will flow to Arauco and the costs incurred in respect of the transaction can be measured reliably.

Sales are recognized in terms of the price agreed to in the sales contract, less any volume discounts and estimated product returns at the date of the sale. Volume discounts are evaluated in terms of estimated annual purchases. There is no significant financing component given that receivables from sales are collected within a short period, which is in line with market practices.

The structure for recognizing revenue from export sales is based on the 2010 Incoterms, which are the official rules for the interpretation of commercial terms issued by the International Chamber of Commerce.

The main Incoterms used by Arauco are the following:

“CFR (Cost and freight)”, where the company bears all costs including main transportation, until the products arrives at its port of destination. The risk is transferred to the purchaser once the products have been loaded onto the vessel, in the country of origin.

“CIF (Cost Insurance & Freight)”, where the Company organizes and pays for external freight services and some other expenses. Arauco is no longer responsible for the products once they have been delivered to the ocean carrier company. The point of sale is the delivery of the products to the carrier chartered by the seller.

(ii)	Revenue recognition from Rendering of Services

When the outcome of a transaction involving the rendering of services can be reliably estimated, revenue is recognized by reference to the stage of completion of the transaction at the date of the reporting period, and when it is probable that the economic benefits associated with the transaction will flow to the Arauco.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Arauco mainly provides power supply services which are transacted principally in the spot market of the Sistema Interconectado Central (“Central Interconnected System”). According to current regulations, the prices on that market called “Marginal Costs” are calculated by the Centro de Despacho Económico de Carga del Sistema Interconectado Central (CDEC–SIC) (“Economic Load Dispatch Center of the Central Interconnected System”) and are generally recognized in the period in which the services are rendered.

Electrical power is generated as a by-product of the pulp and wood process and is a complementary business to it, which is initially supplied to the group’s subsidiaries and any surplus is sold to the CDEC-SIC.

Arauco provides other non-core services such as port services and pest control whose revenues are derived from fixed price service contracts, generally recognized during the period of the service contract on a straight-line basis over the term of the contract.

Revenues from operating segments mentioned in Note 24 are measured in accordance with the policies indicated in the preceding paragraphs.

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

u)	Minimum dividend

Article No. 79 of the Chilean Corporations Law states that, unless otherwise unanimously agreed by the shareholders, corporations must distribute annually at least 30% of net income for the current year as cash dividend to shareholders determined in proportion to their shares or in the proportion established in the by-laws for preferred shares, if any, except where necessary to absorb accumulated losses from prior years.

The General Shareholders’ Meeting of Arauco agreed to distribute annual dividends at 40% of net distributable income, including an interim dividend to be distributed at year end. Dividends payable are recognized as a liability in the financial statements in the period when they are declared and approved by the Arauco’s shareholders or when arises the corresponding present obligation based on existing legislation or distribution policies established by the Shareholders’ Meeting.

The dividends payable provision is registered for 40% of the liquid distributable profit and against a lower equity, based on the yearly resolution of the Shareholders’ Meeting.

Dividends payable are presented in the line item “Other current non-financial liabilities” in the consolidated statement of financial position.

v)	Earning per share

Basic earnings per share are calculated by dividing the net profit for the period attributable to the parent company by the weighted average number of ordinary shares outstanding during the period, excluding the average number of shares in the Company held by a subsidiary, if such circumstance exists. Arauco has not performed any type of transaction with a potential dilutive effect that would cause diluted earnings per share to be different from basic earnings per share.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

w)	Impairment

Non-financial Assets

The recoverable amount of property, plant and equipment and other long-term assets with finite useful lives are measured whenever there are any circumstances indicating that the assets have to recognize an impairment loss. Among the circumstances to consider as evidence of impairment are significant declines in the assets’ market value, significant adverse changes in the technological environment, obsolescence or physical damages of assets and changes in the manner in which the asset is used or expected to be used). Arauco evaluates at the end of each reporting period whether there is any evidence of the indications above mentioned.

A previously recognized impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount, however the reversal is limited to the amount recognized in previous years.

For the purposes of assessing impairment losses, assets are grouped at the lowest level for which there is identifiable cash flows separately for each cash-generating unit. Non-financial assets, other than goodwill, which had recognized an impairment loss, are reviewed at the end of each reporting period whether there are any circumstances indicating that an impairment loss previously recognized may no longer exists or has decreased.

“Cash-generating units” are the smallest identifiable groups of those cash inflows that are largely independent of the cash inflow from other assets or groups of assets.

Goodwill

Goodwill and intangible assets with indefinite useful life are tested annually for impairment or whenever circumstances indicate it. The recoverable amount of an intangible asset is the higher of its fair value less costs to sell and its value in use. An impairment loss is recognized whenever the carrying amount exceeds the recoverable amount.

A cash-generating unit, for which goodwill has been allocated, is tested for impairment annually or more frequently when there are circumstances indicating that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets pro rata based on the carrying amount of each asset in the unit. Any impairment loss of goodwill is recognized directly in profit or loss. An impairment loss recognized for goodwill is not reversed in subsequent periods.

Goodwill is allocated to cash-generating units for impairment testing purposes. The allocation is made between cash-generating units or groups of cash generating units expected to benefit from the synergies of the combination.

Financial Assets

At the end of each reporting period, an assessment is performed in order to identify whether there is any objective evidence that a financial asset or a group of financial assets may have been impaired. Financial assets are impaired only when there is objective evidence that, as a result of one or more loss events that occurred after the initial recognition of a financial asset, the estimated future cash flows of the financial asset have been affected. Impairment losses are recognized in the consolidated statement of profit or loss.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

An allowance for doubtful accounts is established based on an analysis of the maturity of the portfolio and considering the insurance coverage on accounts receivable. Other conditions are assessed, for example, when there is objective evidence of default or delinquency in payments under the original sale terms and when the customer enters into bankruptcy or financial reorganization, and is written-off when Arauco has exhausted all levels of recovery of the receivable in a reasonable time.

The allowance for doubtful accounts is measured as the difference between the carrying amount of receivables and the present value of estimated future cash flows. The carrying amount of the receivable is reduced through the use of the allowance. If the impairment loss decreases in later periods, it is reversed either directly or by adjusting the provision for doubtful accounts, with effect in profit or loss.

x) Employee Benefits

Arauco constitutes labor obligations for severance payable in all circumstances for certain of its employees with at least 5 years of work in the Company, based on the terms of the staff’s collective and individual bargaining agreements.

The related provision is an estimate of the years of service to be recognized as a future labor obligation liability, in accordance with contracts between Arauco and its employees and pursuant to actuarial valuation criteria for this type of liability. This post-employment benefit is considered a defined benefit plan.

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

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

These obligations are related to post-employee benefits in accordance with current standards.

y) Employee Vacations

Arauco recognizes the expense for employee vacation according to labor legislation in each country on an accrual basis.

This obligation is presented in the line item “Trade and Other current payables” and “Trade and Other non-current payables” depending on their respective maturities in the consolidated statement of financial position.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

z) Recent accounting pronouncements

Standards, interpretations and amendments that are mandatory for the first time for annual periods beginning on January 1, 2016:

Standards and

interpretations

Content

Mandatory application

for annual periods

beginning on or after

IFRS 14

Deferred regulatory accounts.

Temporary rule regarding the accounting of certain outstanding balances arising from regulated-tariff activities (“deferred regulatory accounts”). This rule is only applicable to entities applying IFRS 1 as first time adopters of IFRS.

January 1, 2016


Amendments and improvements	Content	Mandatory application for annual periods beginning on or after
IFRS 11-Amendments	Establishes how to account for the acquisition of an interest in a joint venture operation that qualifies as a business.	January 1, 2016

IAS 16 and IAS 38 – Amendments	This amendment clarifies that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate. It also clarifies that revenue is generally presumed to be an inappropriate basis for measuring the consumption of the economic benefits embodied in an intangible asset.	January 1, 2016

IAS 16 and IAS 41 – Amendments	These amendments change the reporting for bearer plants, which should be accounted for in the same way as property, plant and equipment. The amendments include them in the scope of IAS 16 rather than IAS 41.	January 1, 2016

IAS 27-Amendments	Allows entities to use the equity method to account for investments in subsidiaries, join ventures and associates in their separate financial statements.	January 1, 2016

IAS 1-Amendments	The amendments aim at clarifying IAS 1 to address perceived impediments to preparers exercising their judgment in presenting their financial reports.	January 1, 2016

IFRS 10, and IAS 28-Amendments	Amendments address issues that have arisen in the context of applying the consolidation exception for investment entities.	January 1, 2016

Annual Improvements 2012-2014 Cycle	IFRS 5, IFRS 7, IAS 19, IAS 34.	January 1, 2016

The adoption of the standards, amendments and interpretations described above will not have a significant impact on the Consolidated Financial Statements of Arauco.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Standards, interpretations and amendments, the application of which is not yet mandatory, which have not been adopted in advance:


Standards and interpretations	Content	Mandatory application for annual periods beginning on or after
IFRS 9	Financial Instruments The complete version of IFRS 9 replaces most of the guidance in IAS 39. IFRS 9 retains but simplifies the mixed measurement model and establishes three primary measurement categories for financial assets. There is now a new expected credit losses model that replaces the incurred loss impairment model used in IAS 39.	January 1, 2018

IFRS 15	This standard defines a new model to recognized revenue from contracts with costumers.	January 1, 2018

IFRS 16	Leases Specifies guidelines to recognize, measure, present and disclose leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless the lease term is 12 months or less or the underlying asset has a low value.	January 1, 2019

IFRS 22	Transactions in Foreign Currency and Anticipated Considerations Applies to a transaction in foreign currency (or partially in foreign currency) when an entity recognizes a non-financial asset or a non-financial liability arising from the payment or collection of an anticipated consideration, before recognizing the related asset, expense, or income.	January 1, 2018
Amendments and improvements	Content	Mandatory application for annual periods beginning on or after
IAS 7	Statement of Cash Flows Introduces additional disclosure that enable users of financial statements to evaluate changes in liabilities arising from financial activities.	January 1, 2017

IAS 12	Income taxes Clarifies the accounting for deferred tax assets relating to debt instruments measured at fair value.	January 1, 2017

IFRS 2	Share-based payment Clarifies the measurement of cash settled share-based payment transactions and the accounting for amendments that change such payments to equity instruments.	January 1, 2018

IFRS 15	Revenue from contracts with customers. Introduces clarifications to the guidelines and examples related to the transition towards the new rule.	January 1, 2018

IFRS 4	Insurance contracts Introduces two approaches: overlap and temporary exemption of IFRS 9.	January 1, 2018

IAS 40	Investment properties Clarifies the requirements needed to transfer to, or from, investment properties.	January 1, 2018

IFRS 1	First-Time adoption of the IFRS Suspension of short-term exceptions.	January 1, 2018

IFRS 12	Disclosure of Interests in Other Entities. Clarifies the scope of this rule.	January 1, 2018

IAS 28	Investments in Associates and Joint Ventures.	January 1, 2018

IFRS 10 y IAS 28- Amendments	Sale or Contribution of assets among an Investor and its Associates or Joint Ventures.	Undetermined.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

IFRS - 9 Financial Instruments.

IFRS 9 addresses the classification, measurement and discarding of financial assets and financial liabilities. The provision includes new rules applicable to coverage accounting and a new impairment model for financial assets. The financial assets held by the Group mainly include: Mutual Fund Holdings, (coverage) Derivatives, and highly-liquid financial instruments.

Consequently, Arauco does not expect the new standard to have a significant impact in the classification and measurement of its financial assets. There will be no impact over the accounting of the group’s financial liabilities, because the new requirements only affect the accounting of financial liabilities identified at a reasonable value per results, and the group does not have such liabilities. Arauco does not intend to adopt IFRS 9 prior to its date of mandatory applicability.

IFRS 15 – Ordinary Activities’ Income from Contracts with Clients.

The new provision specifies how and when income will be recognized and increases the disclosures. The provision provides a single five-step model based on principles applicable to all contracts with clients. The provision will be in full force and effect as of January 1, 2018.

Arauco is a pulp and wood supplier in the global markets. Arauco’s contracts with clients can be clearly identified on the basis of purchase orders placed by such clients. Performance obligations are regularly explicitly defined as the products are delivered in accordance with the client’s contracts.

The main contracts with clients do not include additional separate performance obligations that would substantially change the moment of income recognition in accordance to IFRS 15, compared to current income recognition practices.

IFRS 16 - Leases

IFRS 16 was issued in January, 2016. The new provision will result in recognizing practically all leases in the balance sheet, because the distinction between operational and financial leases was eliminated. Under the new provision an asset (the right to use the leased property) as well as a financial liability is recognized for lease payments. Short-term and low-value leases are an exception to this rule. This provision will be in full force and effect as of January 1, 2019.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

According to the carried out evaluations, the adoption of the other standards, amendments and interpretations described above will not have a significant impact on Arauco’s Consolidated Financial Statements during its initial application period.

NOTE 2. CHANGES IN POLICIES AND ACCOUNTING ESTIMATES

There have been no changes in the treatment of estimates, amendments and accounting policies with respect to same period of last year.

NOTE 3. DISCLOSURE OF OTHER INFORMATION

a)	Issued Capital

At the date of these consolidated financial statements the share capital of Arauco is ThU.S.$353,618.

100% of Capital corresponds to ordinary shares


	12-31-2016	12-31-2015
Description of Ordinary Capital Share Types	100% of Capital corresponds to ordinary shares
Number of Authorized Shares by Type of Capital in Ordinary Shares	113,159,655
Nominal Value of Shares by Type of Capital in Ordinary Shares	ThU.S.$0.0031210 per share
Amount of Capital in Shares by Type of Ordinary Shares that Constitute Capital	ThU.S.$353,618

	12-31-2016	12-31-2015
Number of Shares Issued and Fully Paid by Type of Capital in Ordinary Shares	113,159,655

b)	Dividends paid to ordinary shares

The interim dividend paid in December 2016 was equivalent to 20% of the distributable net income calculated as of the end of September 2016 and was considered as a decrease in the statement of changes in equity.

The final dividend paid each year corresponds to the difference between the 40% of the prior year distributable net profit and the amount of the interim dividend paid.

The ThU.S.$88,578 (ThU.S.$142,801 as of December 31, 2015) presented in the statement of changes in equity correspond to the minimum dividend provision recorded for the period 2016.

On the Cash Flow Statement on Dividends Paid an amount of Th.U.S.$ 130,624 at December 31, 2016 (ThU.S.$143,003 at December 31, 2015) of which ThU.S.$128,793 (ThU.S.$141,652 at December 31, 2015) correspond to the payment of dividends of parental company.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The following are the dividends paid and per share amounts during the periods 2016 and 2015:


Detail of Dividend Paid, Ordinary Shares
Dividend Paid			Interim Dividend
Type of Shares for which there is a Dividend Paid			Ordinary Shares
Date of Dividend Paid			12-14-2016
Amount of Dividend			ThU.S.$29,572
Number of Shares for which Dividends are Paid			113,159,655
Dividend per Share, Ordinary Shares			U.S.$0.26133


Detail of Dividend Paid, Ordinary Shares
Dividend Paid			Final Dividend
Type of Shares for which there is a Dividend Paid			Ordinary Shares
Date of Dividend Paid			05-11-2016
Amount of Dividend			ThU.S.$99,221
Number of Shares for which Dividends are Paid			113,159,655
Dividend per Share, Ordinary Shares			U.S.$0.87683


Detail of Dividend Paid, Ordinary Shares
Dividend Paid			Interim Dividend
Type of Shares for which there is a Dividend Paid			Ordinary Shares
Date of Dividend Paid			12-16-2015
Amount of Dividend			ThU.S.$43,580
Number of Shares for which Dividends are Paid			113,159,655
Dividend per Share, Ordinary Shares			U.S.$0.38512


Detail of Dividend Paid, Ordinary Shares
Dividend Paid		Final Dividend
Type of Shares for which there is a Dividend Paid		Ordinary Shares
Date of Dividend Paid		05-12-2015
Amount of Dividend		ThU.S.$98,072
Number of Shares for which Dividends are Paid		113,159,655
Dividend per Share		U.S.$0.86667

c)	Disclosure of Information on Reserves

Other reserves comprise reserves of exchange differences on translation, reserves of cash flow hedges and other reserves. Arauco does not have any restrictions associated with these reserves.

Reserves of exchange differences on translation

Reserves of exchange differences on translation correspond to exchange differences relating to the translation of the results and net assets of Arauco’s subsidiaries whose functional currency is other than Arauco’s presentation currency.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Reserves of cash flow hedges

Reserves of cash flow hedges correspond to the portion of net gain or loss of derivative financial instruments that complies with the requirements of hedge accounting at the end of each period.

Reserve of Actuarial Losses in Defined Benefit Plans

This corresponds to changes in the present value of the obligation for defined benefits resulting from experience adjustments (the effect of the differences between the previous actuarial assumptions and the events that occurred within the context of the plan) and the effects of the changes in the actuarial assumptions.

Other reserves

This mainly corresponds to the share of other comprehensive income of investments in associates and joint ventures.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Other items in the Statement of Income by Function

The table below sets forth other income, other expenses, finance income, finance costs and share of profit (loss) of associates and joint ventures as of December 31, 2016 and 2015:


	January - December
	2016			2015
	ThU.S.$			ThU.S.$
Classes of Other Income
Other Income, Total		257,863			273,026
Gain from changes in fair value of biological assets (See note 20)		208,562			210,479
Net income from insurance compensation		3,222			1,522
Revenue from export promotion		2,350			2,692
Leases received		4,687			2,654
Gain on sales of assets		17,485			11,849
Gain on business combination achieved in stages		—			8,744
Access easement		3,756			8,160
Recovery of tax credits		2,033			8,081
Other operating results		15,768			18,845

Classes of Other Expenses by activity
Total of other expenses by activity		(77,415	)		(83,388	)
Depreciation		(562	)		(1,407	)
Legal payments		(879	)		(3,334	)
Impairment provision properties, plants and equipment and others		(14,979	)		(12,321	)
Plants stoppage operating expenses		(3,926	)		(3,917	)
Expenses projects		(1,620	)		(532	)
Loss of asset sales		(2,283	)		(2,475	)
Loss and repair of assets		(1,307	)		(316	)
Loss of forest due to fires		(15,193	)		(34,850	)
Other Taxes		(8,261	)		(8,981	)
Research and development expenses		(2,684	)		(2,604	)
Compensation and eviction		(4,208	)		(1,748	)
Fines, readjustments and interest		(1,004	)		(1,139	)
Loss on disposal of associates		(10,369	)		—
Other expenses		(10,140	)		(9,764	)

Classes of financing income
Financing income, total		29,701			50,284
Financial income from mutual funds - deposits		11,439			15,128
Financial income resulting from swap - forward		7,226			4,439
Financial income resulting from loans with related companies		—			17,629
Other financial income		11,036			13,088

Classes of financing costs
Financing costs, Total		(258,467	)		(262,962	)
Interest expense, Banks loans		(33,224	)		(40,690	)
Interest expense, Bonds		(183,203	)		(189,526	)
Interest expense, financial instruments		(17,221	)		(7,260	)
Other financial costs		(24,819	)		(25,486	)

Share of profit (loss) of associates and joint ventures accounted for using equity method
Total		23,939			6,748
Investments in associates		16,348			5,573
Joint ventures		7,591			1,175

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The analysis of expenses by nature contained in these consolidated financial statements is presented below:


	January - December
Cost of sales	2016 ThU.S.$		2015 ThU.S.$
Timber		736,399		641,821
Forestry labor costs		600,320		636,100
Depreciation and amortization		377,983		371,851
Maintenance costs		313,500		305,701
Chemical costs		479,335		539,856
Sawmill Services		117,340		128,801
Other Raw Materials		221,950		226,342
Other Indirect costs		143,074		138,900
Energy and fuel		139,527		172,077
Cost of electricity		39,960		41,674
Wage and salaries		329,517		308,302
Total		3,498,905		3,511,425


	January - December
Distribution cost	2016 ThU.S.$		2015 ThU.S.$
Selling costs		33,557		48,160
Commissions		13,880		15,801
Insurance		3,216		4,601
Provision for doubtful accounts		910		3,137
Other selling costs		15,551		24,621
Shipping and freight costs		462,916		480,310
Port services		28,028		26,216
Freights		357,442		387,081
Other shipping and freight costs		77,446		67,013
Total		496,473		528,470


	January - December
Administrative expenses	2016 ThU.S.$		2015 ThU.S.$
Wage and salaries		198,129		227,407
Marketing, advertising, promotion and publications expenses		9,937		10,422
Insurance		21,526		28,216
Depreciation and amortization		29,285		24,587
Computer services		36,285		31,897
Lease rentals (offices, other property and vehicles)		14,209		13,527
Donations, contributions, scholarships		10,396		11,172
Fees (legal and technical advisors)		43,899		49,556
Property taxes, patents and municipality rights		16,275		19,196
Other administration expenses (travel within and outside the country, cleaning services, security, basic services)		94,528		135,997
Total		474,469		551,977


		January-December
Expenses for	Note	2016 ThU.S.$		2015 ThU.S.$
Depreciations	7		394,835		388,192
Employee benefits	10		532,957		537,629
Amortization	19		14,552		11,953

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

e)	Auditor Fees and Number of Employees (Not audited)


Auditors fees	12-31-2016 ThU.S.$
Audit services		2,083
Other services
Tax services		769
Others		469
TOTAL		3,321

Number of employees		No.
		15,737

NOTE 4. INVENTORIES


	12-31-2016		12-31-2015
Components of Inventory	ThU.S.$		ThU.S.$
Raw materials		61,252		85,999
Production supplies		102,760		97,755
Products in progress		59,332		62,475
Finished goods		468,544		503,059
Spare Parts		160,724		160,700
Total Inventories		852,612		909,988

Inventories recognized as cost of sales at December 31, 2016 were ThU.S.$3,423,439 (ThU.S.$3,416,235 at December 31, 2015).

In order to have the inventories recorded at net realizable value at December 31, 2016, a net decrease of inventories was recognized associated with a higher provision of obsolescence of ThU.S.$8,397 (ThU.S.$6,909 at December 31, 2015). As of December 31, 2016, the amount of obsolescence provision is ThU.S.$28,499 (ThU.S.$20,102 at December 31, 2015).

At December 31, 2016 there were inventory write-offs of ThU.S.$1,332 (ThU.S.$4,215 at December 31, 2015)

The inventory obsolescence provision is calculated based on the sales conditions of products and age of inventory (inventory turnover).

As of the date of these consolidated financial statements, there are no inventories pledged as security to report.

Agricultural Products

Agricultural Products are mainly forestry products that are intended for sale in the normal course of our operations and are measured at fair value less costs to sell at the point of harvest at the end of each reporting period Agricultural products are classified as raw materials within the line item inventories.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 5. CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash on hand, bank checking account balances, time deposits, repurchase agreements and mutual funds. These are short-term highly liquid investments that are readily convertible to known amounts of cash, and are subject to an insignificant risk of changes in value.

The investment objective of time deposits and repurchase agreements is to maximize the amounts of cash surpluses in the short-term. These instruments are permitted under Arauco’s Investment Policy which allows investing in fixed income securities. These instruments have a maturity of less than three months from the date of acquisition.

Arauco invests in local and international mutual funds in order to maximize the returns of cash surpluses denominated in Chilean Pesos or in foreign currencies such as U.S. Dollars or Euros. These instruments are permitted under Arauco’s Investment Policy.

As of the date of these consolidated financial statements, there are no amounts of cash and cash equivalents with restrictions on use.


	12-31-2016		12-31-2015
Components of Cash and Cash Equivalents	ThU.S.$		ThU.S.$
Cash on hand		3,156		201
Bank checking account balances		146,290		143,123
Time deposits		247,391		159,912
Mutual funds		195,416		196,789
Total		592,253		500,025

The risk classification of the mutual funds in effect as of December 31, 2016 and December 31, 2015 is shown below.


	December 2016 ThU.S.$		December 2015 ThU.S.$
AAAfm		192,895		196,749
AAfm		2,521		40
Total Mutual Funds		195,416		196,789

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 6. INCOME TAXES

The tax rates applicable in the countries in which Arauco operates are 24% in Chile, 35% in Argentina, 34% in Brazil, 25% in Uruguay and 34% in the United States (federal tax).

On September 29, 2014, the Official Gazette published Law No. 20,780, which introduced various amendments to the current income tax system, as well as to other taxes in Chile. The main amendment was the establishment of an option between two tax regimes: attributed income system and the partially integrated system. One of the effects of the regime selection is that it attaches a progressive increase in the First Category Tax for the fiscal years of 2014, 2015, 2016 and 2017 onwards, increasing to 21%, 22,5%, 24% y 25%, respectively, if the Company chooses the application of an attributed income system, or an increase to 21%, 22.5%, 24%, 25.5% y 27% for the fiscal years 2014, 2015, 2016, 2017 and thereafter, if the Company chooses the application of the partially integrated system.

Subsequently, on February 29, 2016, the Official Gazette publishes Law No. 20,899, which introduced amendments to Law No. 20,780. Among the main amendments is the incorporation of certain limitations for applying to the attributed income system, and therefore Arauco’s Chilean companies must apply the general rule, that is, the partially integrated system.

Deferred Tax Assets

The following table sets forth the deferred tax assets as of the dates indicated:


	12-31-2016			12-31-2015
Deferred Tax Assets	ThU.S.$			ThU.S.$
Deferred tax Assets relating to Provisions		5,771			13,498
Deferred tax Assets relating to Accrued Liabilities		11,716			8,535
Deferred tax Assets relating to Post-Employment benefits		17,618			15,480
Deferred tax Assets relating to Property, Plant and equipment		9,806			7,730
Deferred tax Assets relating to Financial Instruments		12,699			21,805
Deferred tax Assets relating to Tax Loss Carry forwards		50,917			35,751
Deferred tax Assets relating to Inventories		7,158			4,240
Deferred tax Assets relating to Provisions for Income		7,069			3,997
Deferred tax Assets relating to Allowance for Doubtful Accounts		4,886			4,572
Intangible revaluation differences		10			56
Deferred tax Assets relating to Other Deductible Temporary Differences		30,216			24,587
Total Deferred Tax Assets		157,866			140,251

Netting presentation		(151,769	)		(136.516	)

Net Effect		6,097			3,735

Certain subsidiaries of Arauco, as of the date of these consolidated financial statements, present tax losses for which we estimate that, given the projection of future profits, will allow the recovery of these assets. The total amount of these tax losses is ThU.S.$157,403 (ThU.S.$112,383 at December 31, 2015), which are mainly originated by operational and financial losses.

In addition, as of the closing of these consolidated financial statements there are ThU.S.$ 76,280 (ThU.S.$ 114,507 at December 31, 2015) of non-recoverable tax losses from companies in Uruguay as joint operations based on the participation of Arauco, for which deferred tax assets have not been recognized. The estimated recovery period exceeds the expiry date of such tax losses.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Deferred Tax Liabilities

The following table sets forth the deferred tax liabilities as of the dates indicated:


	12-31-2016			12-31-2015
Deferred Tax Liabilities	ThU.S.$			ThU.S.$
Deferred tax Liabilities relating to Property, plant and equipment		934,892			930,608
Deferred tax Liabilities relating to Financial Instruments		7,186			6,376
Deferred tax Liabilities relating to Biological Assets		719,577			693,103
Deferred tax Liabilities relating to Inventory		31,072			31,912
Deferred tax Liabilities due to Prepaid Expenses		42,881			40,907
Deferred tax Liabilities due to Intangible		27,222			26,419
Deferred tax Liabilities relating to Other Taxable Temporary Differences		20,004			26,203
Total Deferred Tax Liabilities		1,782,834			1,755,528

Netting presentation		(151,769	)		(136,516	)

Net Effect		1,631,065			1,619,012

The effect of the current and deferred tax exercise related to financial hedging instruments corresponds to a credit of ThU.S.$17,355 as of December 31, 2016 (credit of ThU.S.$1,889 as of December 31, 2015), which is presented net in Reserves of hedges in the statement of changes in equity.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Reconciliation of deferred tax assets and liabilities


	Opening Balance 01-01-2016		Deferred tax Expenses (Income)			Deferred tax of items charged to other comprehensive income			Increase (decrease) Net exchange differences			Closing balance 12-31-2016
Deferred Tax Assets	ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Deferred tax Assets relating to Provisions		13,498		(8,019	)		—			292			5,771
Deferred tax Assets relating to accrued liabilities		8,535		3,181			—			—			11,716
Deferred tax Assets relating to Post-Employment benefits		15,480		579			1,509			50			17,618
Deferred tax Assets relating to Property, Plant and equipment		7,730		2,076			—			—			9,806
Deferred tax Assets relating to Financial Instruments		21,805		1,500			(10,606	)		—			12,699
Deferred tax Assets relating to tax losses carry forwards		35,751		11,498			—			3,668			50,917
Deferred tax Assets relating to Inventories		4,240		2,918			—			—			7,158
Deferred tax Assets relating to Provisions for Income		3,997		3,050			—			22			7,069
Deferred tax Assets relating to Allowance for Doubtful Accounts		4,572		261			—			53			4,886
Intangible revaluation differences		56		(46	)		—			—			10
Deferred tax assets relating to other deductible temporary differences		24,587		3,593			—			2,036			30,216
Total deferred tax assets		140,251		20,591			(9,097	)		6,121			157,866


	Opening Balance 01-01-2016		Deferred tax Expenses (Income)			Deferred tax of items charged to other comprehensive income			Increase (decrease) Net exchange differences			Closing balance 12-31-2016
Deferred Tax Liabilities	ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Deferred tax liabilities relating to property, Plant and equipment		930,608		(1,065	)		—			5,349			934,892
Deferred tax liabilities relating to financial instruments		6,376		810			—			—			7,186
Deferred tax liabilities relating to biological assets		693,103		12,642			—			13,832			719,577
Deferred tax liabilities relating to inventory		31,912		(840	)		—			—			31,072
Deferred tax liabilities due to prepaid expenses		40,907		2,078			—			(104	)		42,881
Deferred tax liabilities due to intangible		26,419		(528	)		—			1,331			27,222
Deferred tax liabilities relating to other taxable temporary differences		26,203		(9,229	)		—			3,030			20,004
Total deferred tax liabilities		1,755,528		3,868			—			23,438			1,782,834

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


	Opening Balance 01-01-2015		Deferred tax Expenses (Income)			Deferred tax of items charged to other comprehensive income		Increase (decrease) from business combinations		Increase (decrease) Net exchange differences			Closing balance 12-31-2015
Deferred Tax Assets	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$
Deferred tax Assets relating to Provisions		14,923		(813	)		—		—		(612	)		13,498
Deferred tax Assets relating to accrued liabilities		11,120		(2,561	)		—		—		(24	)		8,535
Deferred tax Assets relating to Post-Employment benefits		13,859		971			692		—		(42	)		15,480
Deferred tax Assets relating to Property, Plant and equipment		11,199		(3,469	)		—		—		—			7,730
Deferred tax Assets relating to Financial Instruments		14,129		23			7,653		—		—			21,805
Deferred tax Assets relating to tax loss carryforwards		44,832		(959	)		—		—		(8,122	)		35,751
Deferred tax Assets relating to tax losses carry forwards		3,157		1,487			—		—		(404	)		4,240
Deferred tax Assets relating to Inventories		5,827		(1,825	)		—		—		(5	)		3,997
Deferred tax Assets relating to Provisions for Income		3,855		797			—		—		(80	)		4,572
Intangible revaluation differences		1,080		(1,024	)		—		—		—			56
Deferred tax assets relating to other deductible temporary differences		34,302		(8,892	)		—		—		(823	)		24,587
Total deferred tax assets		158,283		(16,265	)		8,345		—		(10,112	)		140,251


	Opening Balance 01-01-2015		Deferred tax Expenses (Income)			Deferred tax of items charged to other comprehensive income		Increase (decrease) from business combination		Increase (decrease) Net exchange differences			Closing balance 12-31-2015
Deferred Tax Liabilities	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$
Deferred tax liabilities relating to property, Plant and equipment		941,666		5,221			—		—		(16,279	)		930,608
Deferred tax liabilities relating to financial instruments		4,906		1,470			—		—		—			6,376
Deferred tax liabilities relating to biological assets		681,505		18,823			—		16,051		(23,276	)		693,103
Deferred tax liabilities relating to inventory		25,688		6,224			—		—		—			31,912
Deferred tax liabilities relating to prepaid expenses		40,888		(184	)		—		—		203			40,907
Deferred tax liabilities relating to intangible		32,990		2,666			—		—		(9,237	)		26,419
Deferred tax liabilities relating to other taxable temporary differences		29,506		(7,961	)		—		—		4,658			26,203
Total deferred tax liabilities		1,757,149		26,259			—		16,051		(43,931	)		1,755,528

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Temporary Differences

The following tables summarize the deductible and taxable temporary differences:

12-31-2016

12-31-2015

Detail of classes of Deferred Tax Temporary Differences

Deductible
Difference
ThU.S.$

Taxable
Difference
ThU.S.$

Deductible
Difference
ThU.S.$

Taxable
Difference
ThU.S.$

Deferred Tax Assets

106,949

104,500

Deferred Tax Assets - Tax loss carry forwards

50,917

35,751

Deferred Tax Liabilities

1,782,834

1,755,528

Total

157,866

1,782,834

140,251

1,755,528


	January - December
Detail of Temporary Difference Income and Loss Amounts	2016 ThU.S.$			2015 ThU.S.$
Deferred Tax Assets		9,093			(15,306	)
Deferred Tax Assets - Tax losses		11,498			(959	)
Deferred Tax Liabilities		(3,868	)		(26,259	)
Total		16,723			(42,524	)

Income Tax Expense

Income tax expense consists of the following:


	January - December
Income Tax composition	2016 ThU.S.$			2015 ThU.S.$
Current income tax expense		(58,831	)		(87,908	)
Prior period current income tax adjustments		(6,899	)		4,033
Other current tax benefit (expenses)		3,360			(3,295	)
Current Tax Expense, Net		(62.370	)		(87,170	)

Deferred tax benefit (expense) relating to origination and reversal of temporary differences		5,225			(41,565	)
Tax benefit arising from previously unrecognized tax assets used to reduce deferred expense from taxes		11,498			(959	)
Total deferred Tax Expense, Net		16,723			(42,524	)
Income Tax Expense, Total		(45,647	)		(129,694	)

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The following table sets forth the current income tax expense detailed by foreign and domestic (Chile) companies at December 31, 2016 and 2015:


	January - December
	2016			2015
	ThU.S.$			ThU.S.$
Foreign current income tax expense		(27,931	)		(33,129	)
Domestic current income tax expense		(34,439	)		(54,041	)
Total current income tax expense		(62,370	)		(87,170	)

Foreign deferred tax expense		7,794			(17,240	)
Domestic deferred tax expense		8,929			(25,284	)
Total deferred tax expense		16,723			(42,524	)
Total tax expense		(45,647	)		(129,694	)

Reconciliation of income tax expense from statutory tax rate to the effective tax rate.

The reconciliation of income tax expense is as follows:


	January - December
	2016			2015
Reconciliation of Income tax from Statutory Rate to Effective Tax Rate	ThU.S.$			ThU.S.$
Statutory domestic (Chile) income tax rate		24	%		22.5	%
Tax Expense at statutory tax rate		(64,174	)		(111,916	)
Tax effect of foreign tax rates		(13,368	)		(16,099	)
Tax effect of revenues exempt from taxation		33,834			41,268
Tax effect of non-tax-deductible expenses		(10,987	)		(40,866	)
Tax rate effect of tax loss carry forwards		—			14
Tax effect of Previously Unrecognized Tax Benefit in the Income Statement		—			(857	)
Tax effect of a new evaluation of assets for deferred not recognized taxes		17,157			307
Tax rate effect from change in tax rate (opening balances)		(3,681	)		(3,445	)
Tax rate effect of adjustments for current tax of prior periods		(6,899	)		4,033
Other tax rate effects		1,471			(2,128	)
Total adjustments to tax expense at applicable tax rate		17,527			(17,778	)
Tax expense at effective tax rate		(45,647	)		(129,694	)

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 7. PROPERTY, PLANT AND EQUIPMENT


	12-31-2016			12-31-2015
Property, Plant and Equipment, Net	ThU.S.$			ThU.S.$
Construction in progress		321,031			251,519
Land		991,450			951,638
Buildings		2,169,731			2,182,643
Plant and equipment		3,256,348			3,346,675
Information technology equipment		24,154			26,210
Fixtures and fittings		9,880			11,860
Motor vehicles		16,858			16,721
Other property, plant and equipment		130,043			109,130
Total Net		6,919,495			6,896,396


Property, Plant and Equipment, Gross
Construction in progress		321,031			251,519
Land		991,450			951,638
Buildings		3,825,259			3,698,351
Plant and equipment		6,128,494			5,927,789
Information technology equipment		76,421			73,573
Fixtures and fittings		33,613			35,283
Motor vehicles		48,534			45,503
Other property, plant and equipment		153,838			131,894
Total Gross		11,578,640			11,115,550


Accumulated depreciation and impairment
Buildings		(1,655,528	)		(1,515,708	)
Plant and equipment		(2,872,146	)		(2,581,114	)
Information technology equipment		(52,267	)		(47,363	)
Fixtures and fittings		(23,733	)		(23,423	)
Motor vehicles		(31,676	)		(28,782	)
Other property, plant and equipment		(23,795	)		(22,764	)
Total		(4,659,145	)		(4,219,154	)

Description of Property, Plant and Equipment Pledged as Security for Liabilities

To date there are no significant assets pledged as collateral for these consolidated financial statements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Disbursements commitments for the acquisition of property, plant and equipment and disbursements for property, plant and equipment under construction.


	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Amount committed for the acquisition of property, plant and equipment		122,757		109,713

	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Disbursements for property, plant and equipment under construction		317,159		215,035

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Movement on Property, Plant and Equipment

The following tables set forth the reconciliation of the carrying amount of property, plant and equipment as of December 31, 2016 and December 31, 2015:


Movement of Property, Plant and Equipment	Construction in progress ThU.S.$			Land ThU.S.$			Buildings ThU.S.$			Plant and equipment ThU.S.$			IT Equipment ThU.S.$			Fixtures and fittings ThU.S.$			Motor vehicles ThU.S.$			Other Property, Plant and Equipment ThU.S.$			TOTAL ThU.S.$
Opening Balance 01-01-2016		251,519			951,638			2,182,643			3,346,675			26,210			11,860			16,721			109,130			6,896,396
Changes
Additions		317,159			6,350			7,966			59,997			554			269			1,281			25,618			419,194
Disposals		(44	)		(1,107	)		(443	)		(2,382	)		(105	)		—			(199	)		(1,607	)		(5,887	)
Retirements		(1,754	)		(295	)		(926	)		(2,209	)		(24	)		(8	)		(30	)		(2,811	)		(8,057	)
Depreciation		—			—			(122,257	)		(330,876	)		(5,352	)		(1,970	)		(3,969	)		(4,729	)		(469,153	)
Impairment loss recognized in profit or loss		—			—			9			(1,254	)		(7	)		(1	)		—			(1,553	)		(2,806	)
Increase (decrease) through net exchange differences		6,610			30,514			(2,388	)		51,224			134			116			112			3,145			89,467
Reclassification of assets held for sale		—			—			—			341			—			—			—			—			341
Increase (decrease) through transfers from construction in progress		(252,459	)		4,350			105,127			134,832			2,744			(386	)		2,942			2,850			—
Total changes		69,512			39,812			(12,912	)		(90,327	)		(2,056	)		(1,980	)		137			20,913			23,099
Closing balance 12-31-2016		321,031			991,450			2,169,731			3,256,348			24,154			9,880			16,858			130,043			6,919,495


Movement of Property, Plant and Equipment	Construction in progress ThU.S.$			Land ThU.S.$			Buildings ThU.S.$			Plant and equipment ThU.S.$			IT Equipment ThU.S.$			Fixtures and fittings ThU.S.$			Motor vehicles ThU.S.$			Other Property, Plant and Equipment ThU.S.$			TOTAL ThU.S.$
Opening Balance 01-01-2015		265,440			949,531			2,172,177			3,565,502			28,521			11,654			17,346			109,412			7,119,583
Changes
Additions		215,035			50,504			17,360			139,749			2,178			2,234			1,829			9,774			438,663
Acquisitions through business combinations		—			—			1,474			7			—			15			—			—			1,496
Disposals		(20	)		(591	)		(456	)		(583	)		(78	)		(5	)		(432	)		(10	)		(2,175	)
Retirements		(4,596	)		(44	)		(1,389	)		(1,942	)		(5	)		(7	)		(101	)		(481	)		(8,565	)
Depreciation		—			—			(117,337	)		(320,135	)		(5,302	)		(2,980	)		(4,110	)		(5,915	)		(455,779	)
Impairment loss recognized in profit or loss		—			—			—			(4,065	)		—			—			0			—			(4,065	)
Increase (decrease) through net exchange differences		(4,432	)		(52,284	)		(30,258	)		(103,972	)		(290	)		(519	)		(300	)		(6,025	)		(198,080	)
Reclassification of assets held for sale		—			2,759			2,676			(117	)		—			—			—			—			5,318
Increase (decrease) through transfers from construction in progress		(219,908	)		1,763			138,396			72,231			1,186			1,468			2,489			2,375			—
Total changes		(13,921	)		2,107			10,466			(218,827	)		(2,311	)		206			(625	)		(282	)		(223,187	)
Closing balance 12-31-2015		251,519			951,638			2,182,643			3,346,675			26,210			11,860			16,721			109,130			6,896,396

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The depreciation expense for the period ending December 31, 2016 and 2015 is as follows:


	January-December
Depreciation for the year	2016 ThU.S.$		2015 ThU.S.$
Cost of sales		371,170		365,401
Administrative expenses		21,546		19,084
Other expenses		2,119		3,707
Total		394,835		388,192

The useful lives of property, plant and equipment are estimated based on the expected use of the assets. The average useful lives by asset class are as follow:


	Useful Life (Average)
Buildings		58
Plant and equipment		30
Information technology equipment		8
Fixtures and fittings		28
Motor vehicles		7
Other property, plant and equipment		14

See Note 12 for details of capitalized borrowing costs.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 8. LEASES

Lessee


	12-31-2016		12-31-2015
	ThU.S.$		ThU.S.$
Property, Plant and Equipment under finance leases		117,206		132,836
Plant and equipment		117,206		132,836

Reconciliation of Financial Lease Minimum Payments:


	12-31-2016
Periods	Present Value ThU.S.$
Less than one year		40,400
Between one and five years		73,586
More than five years		—
Total		113,986


	12-31-2015
	Present Value
Periods	ThU.S.$
Less than one year		36,862
Between one and five years		90,697
More than five years		—
Total		127,559

Lease obligations are presented in the consolidated statement of financial position in line items “Other current financial liabilities” and “Other non-current financial liabilities” depending on their respective maturities as stated above.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Lessor

Reconciliation of Financial Lease Minimum Payments:


	12-31-2016
Periods	Gross ThU.S.$		Interest ThU.S.$		Present Value ThU.S.$
Less than one year		512		—		512
Between one and five years		353		—		353
More than five years		—		—		—
Total		865		—		865


	12-31-2015
Periods	Gross ThU.S.$		Interest ThU.S.$		Present Value ThU.S.$
Less than one year		10		1		9
Between one and five years		6		—		6
More than five years		—		—		—
Total		16		1		15

Finance lease receivables are presented in the consolidated statement of financial position in line items “Trade and other current receivable” and “Trade and other non-current receivable” depending on their maturities stated above.

Arauco accounts for its lease contracts as finance leases. These lease contracts are for a term of less than five-years at market interest rates and leased assets are forestry machinery and equipment. They also include an early termination option, under general and special conditions stipulated in each contract.

Arauco holds leases as lessee and lessor, described in the previous tables, for which there are no impairment contingent payments or restrictions to report.

NOTE 9. REVENUE


	January – December
Classes of revenue	2016 ThU.S.$		2015 ThU.S.$
Revenue from sales of goods		4,649,581		5,018,138
Revenue from rendering of services		111,804		128,602
Total		4,761,385		5,146,740

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 10. EMPLOYEE BENEFITS

Classes of Benefits and Expenses by Employee


	2016 ThU.S.$		2015 ThU.S.$
Employee expenses		532,957		537,629
Wages and salaries		506,993		519,066
Severance indemnities		25,964		18,563


	2016	2015
Discount rate	4.52%	4.91%
Inflation	2.79%	2.95%
Annual rate of wage growth	5.22%	5.22%
Mortality rate	RV-2009	RV-2009


Sensitivities to assumptions	Th.U.S.$
Discount rate
Increase in 100 bps		(9,052	)
Decrease in 100 bps		10,572
Wage growth rates
Increase in 100 bps		5,596
Decrease in 100 bps		(4,875	)

The following tables set forth the balances and the reconciliation of the present value of severance indemnities obligations as of December 31, 2016 and December 31, 2015:


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Current		5,244			4,497
Non-current		60,084			51,936
Total		65,328			56,433


Reconciliation of the present value of severance indemnities obligations	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Opening balance		56,433			52,172
Current service cost		5,334			13,032
Interest cost		2,957			2,257
(Gains) losses from changes in actuarial assumptions		2,083			(5,723	)
Actuarial gains and losses arising from experience		3,503			6,980
Benefits paid		(7,871	)		(3,482	)
Increase (decrease) for foreign currency exchange rates changes		2,889			(8,803	)
Closing balance		65,328			56,433

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 11. BALANCES IN FOREIGN CURRENCY AND EFFECT OF FOREIGN EXCHANGE DIFFERENCES.


	12-31-2016		12-31-2015
	ThU.S.$		ThU.S.$
Total Current Assets		2,722,360		2,686,412

Cash and Cash Equivalents		592,253		500,025
U.S Dollar		524,426		388,818
Euro		2,357		2,501
Brazilian Real		47,696		21,676
Argentine Pesos		4,046		40,573
Other currencies		3,327		2,979
Chilean Pesos		10,401		43,478

Other current financial assets		5,201		32,195
U.S Dollar		4,879		29,367
Argentine Pesos		315		2,828
Other currencies		7		—

Other current non-financial assets		144,915		133,956
U.S Dollar		62,246		55,365
Euros		71		82
Brazilian Real		22,537		16,505
Argentine Pesos		12,261		3,705
Other currencies		3,500		4,801
Chilean Pesos		44,300		53,280
U.F.		—		218

Trade and other current receivables		701,610		733,322
U.S Dollar		489,056		507,032
Euro		26,544		27,595
Brazilian Real		46,150		37,975
Argentine Pesos		15,137		23,016
Other currencies		16,620		14,091
Chilean Pesos		106,681		123,056
U.F.		1,422		557

Accounts receivable from related companies		12,505		3,124
U.S Dollar		274		21
Brazilian Real		726		995
Chilean Pesos		10,548		2,108
U.F.		957		—

Current Inventories		852,612		909,988
U.S Dollar		812,748		871,629
Brazilian Real		39,864		38,359

Current biological assets		306,117		306,529
U.S Dollar		271,551		272,037
Brazilian Real		34,566		34,492

Current tax assets		104,088		64,079
U.S Dollar		6,199		5,464
Brazilian Real		5,798		5,243
Argentine Pesos		39		2,000
Other currencies		2,696		850
Chilean Pesos		89,356		50,522

Non-current assets or disposal groups classified as held for sale or as held for distribution to owners		3,059		3,194
U.S Dollar		3,059		3,194

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


	12-31-2016		12-31-2015
	ThU.S.$		ThU.S.$
Total Non-Current Assets		11,283,821		10,983,979

Other non-current financial assets		8,868		595
U.S Dollar		8,868		212
Argentine Pesos		—		383

Other non-current non-financial assets		130,319		125,516
U.S Dollar		95,658		114,164
Brazilian Real		4,042		2,987
Argentine Pesos		9,900		7,138
Other currencies		636		706
Chilean Pesos		20,083		521

Trade and other non-current receivables		14,273		15,270
U.S Dollar		6,895		9,976
Other currencies		527		729
Chilean Pesos		5,753		3,145
U.F.		1,098		1,420

Related party receivables, non-current		957		—
U.F.		957		—

Investments accounted for using equity method		446.548		264.812
U.S Dollar		124.324		122.416
Euro		156.990		—
Brazilian Real		165.203		142.329
Chilean Pesos		31		67

Intangible assets other than goodwill		89,497		88,112
U.S Dollar		88,394		87,154
Brazilian Real		1,026		876
Chilean Pesos		77		82

Goodwill		74,893		69,475
U.S Dollar		42,508		42,445
Brazilian Real		32,385		27,030

Property, plant and equipment		6,919,495		6,896,396
U.S Dollar		6,394,105		6,448,616
Brazilian Real		520,448		442,959
Chilean Pesos		4,942		4,821

Non-current biological assets		3,592,874		3,520,068
U.S Dollar		3,185,872		3,297,710
Brazilian Real		407,002		222,358

Deferred tax assets		6,097		3,735
U.S Dollar		4,134		3,735
Brazilian Real		1,697		—
Other currencies		52		—
Chilean Pesos		214		—

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


	Up to 90 days ThU.S.$		12-31-2016 From 91 days to 1 year ThU.S.$		Total ThU.S.$		Up to 90 days ThU.S.$		12-31-2015 From 91 days to 1 year ThU.S.$		Total ThU.S.$
Total Liabilities, current		806,280		539,784		1,346,064		910,436		123,815		1,034,251

Other current financial liabilities		196,001		501,451		697,452		189,693		106,345		296,038
U.S Dollar		178,442		455,908		634,350		153,361		71,330		224,691
Brazilian Real		3,558		1,282		4,840		25,092		2,266		27,358
Argentine Pesos		11		29		40		—		356		356
Chilean Pesos		1,132		3,387		4,519		902		2,622		3,524
U.F.		12,858		40,845		53,703		10,338		29,771		40,109

Bank Loans		134,140		61,483		195,623		126,795		72,948		199,743
U.S Dollar		130,571		60,172		190,743		101,703		70,326		172,029
Brazilian Real		3,558		1,282		4,840		25,092		2,266		27,358
Argentine Pesos		11		29		40		—		356		356

Financial Leases		9,534		30,866		40,400		9,301		27,561		36,862
Chilean Pesos		1,132		3,387		4,519		902		2,622		3,524
U.F.		8,402		27,479		35,881		8,399		24,939		33,338

Other Loans		52,327		409,102		461,429		53,597		5,836		59,433
U.S Dollar		47,871		395,736		443,607		51,658		1,004		52,662
U.F.		4,456		13,366		17,822		1,939		4,832		6,771

Trade and other current payables		511,371		26,520		537,891		583,018		—		583,018
U.S Dollar		146,652		3,510		150,162		174,469		—		174,469
Euros		12,006		1,028		13,034		8,808		—		8,808
Brazilian Real		4,849		21,982		26,831		25,616		—		25,616
Argentine Pesos		31,661		—		31,661		27,068		—		27,068
Other currencies		12,244		—		12,244		17,619		—		17,619
Chilean Pesos		285,359		—		285,359		324,361		—		324,361
U.F.		18,600		—		18,600		5,077		—		5,077

Accounts payable to related companies		3,831		—		3,831		7,141		—		7,141
U.S Dollar		1,969		—		1,969		962		—		962
Chilean Pesos		1,862		—		1,862		6,179		—		6,179

Other current provisions		842		—		842		858		—		858
U.S Dollar		842		—		842		858		—		858

Current tax liabilities		1,641		—		1,641		10,030		946		10,976
U.S Dollar		448		—		448		6,380		—		6,380
Euros		7		—		7		1,093		—		1,093
Brazilian Real		—		—		—		530		—		530
Argentine Pesos		133		—		133		24		—		24
Other currencies		574		—		574		1,716		—		1,716
Chilean Pesos		479		—		479		287		946		1,233

Current provisions for employee benefits		5,214		30		5,244		1,751		2,746		4,497
Chilean Pesos		5,214		30		5,244		1,751		2,746		4,497

Other current non-financial liabilities		87,380		11,783		99,163		117,945		13,778		131,723
U.S Dollar		62,974		163		63,137		79,673		13,633		93,306
Euros		53		—		53		44		—		44
Brazilian Real		9,426		11,616		21,042		22,251		—		22,251
Argentine Pesos		3,474		—		3,474		4,428		139		4,567
Other currencies		3,202		—		3,202		3,704		—		3,704
Chilean Pesos		8,183		4		8,187		7,823		6		7,829
U.F.		68		—		68		22		—		22

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


	From 13 months to 5 years ThU.S.$		12-31-2016 More than 5 years ThU.S.$		Total ThU.S.$		From 13 months to 5 years ThU.S.$		12-31-2015 More than 5 years ThU.S.$		Total ThU.S.$
Total non-current liabilities		3,599,291		2,061,543		5,660,834		3,732,206		2,257,489		5,989,695

Other non-current financial liabilities		2,020,484		1,850,430		3,870,914		2,141,600		2,095,365		4,236,965
U.S Dollar		1,591,127		1,075,204		2,666,331		1,748,723		1,525,269		3,273,992
Brazilian Real		17,098		1,042		18,140		13,953		1,929		15,882
Argentine Pesos		—		—		—		48		—		48
Chilean Pesos		11,151		—		11,151		10,455		—		10,455
U.F.		401,108		774,184		1,175,292		368,421		568,167		936,588

Bank Loans		626,384		92,351		718,735		648,017		149,782		797,799
U.S Dollar		609,286		91,309		700,595		634,016		147,853		781,869
Brazilian Real		17,098		1,042		18,140		13,953		1,929		15,882
Argentine Pesos		—		—		—		48		—		48

Financial Leases		73,586		—		73,586		90,697		—		90,697
Chilean Pesos		11,151		—		11,151		10,455		—		10,455
U.F.		62,435		—		62,435		80,242		—		80,242

Other Loans		1,320,514		1,758,079		3,078,593		1,402,886		1,945,583		3,348,469
U.S Dollar		981,841		983,895		1,965,736		1,114,707		1,377,416		2,492,123
U.F.		338,673		774,184		1,112,857		288,179		568,167		856,346

Other non-current provisions		38,138		—		38,138		34,541		—		34,541
U.S Dollar		1		—		1		4		—		4
Brazilian Real		5,425		—		5,425		4,410		—		4,410
Argentine Pesos		32,712		—		32,712		30,127		—		30,127

Deferred tax liabilities		1,479,596		151,469		1,631,065		1,456,888		162,124		1,619,012
U.S Dollar		1,412,506		131,406		1,543,912		1,373,597		162,124		1,535,721
Brazilian Real		67,090		20,063		87,153		83,291		—		83,291

Non-current provisions for employee benefits		60,084		—		60,084		51,936		—		51,936
Other currencies		144		—		144		149		—		149
Chilean Pesos		59,940		—		59,940		51,787		—		51,787

Other non-current non-financial liabilities		989		59,644		60,633		47,241		—		47,241
U.S Dollar		430		—		430		392		—		392
Brazilian Real		—		59,644		59,644		46,043		—		46,043
Argentine Pesos		349		—		349		608		—		608
Chilean Pesos		206		—		206		195		—		195
U.F.		4		—		4		3		—		3

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The table below sets forth the subsidiaries that have determined a functional currency other than the U.S. Dollar as follows:


Subsidiary	Country	Functional Currency
Arauco do Brasil S.A.	Brazil	Brazilian Real
Arauco Forest Brasil S.A.	Brazil	Brazilian Real
Arauco Florestal Arapoti S.A.	Brazil	Brazilian Real
Empreendimentos Florestais Santa Cruz Ltda.	Brazil	Brazilian Real
Mahal Empreendimentos e Participacoes S.A.	Brazil	Brazilian Real
Investigaciones Forestales Bioforest S.A.	Chile	Chilean Pesos
Consorcio Protección Fitosanitaria Forestal S.A.	Chile	Chilean Pesos
Forestal Nuestra Señora del Carmen S.A.	Argentina	Argentine Pesos
Forestal Talavera S.A.	Argentina	Argentine Pesos
Greeneagro S.A.	Argentina	Argentine Pesos
Leasing Forestal S.A.	Argentina	Argentine Pesos
Savitar S.A.	Argentina	Argentine Pesos
Flakeboard Company Limited	Canada	Canadian Dollar

The table below shows a detail per company of the effect in the period of the Reserve of Exchange Differences resulting from the conversion of the controlling participation:


	January - December
	2016			2015
	ThU.S.$			ThU.S.$
Arauco Do Brasil S.A.		73,087			(155,390	)
Arauco Forest Brasil S.A.		68,314			(140,992	)
Arauco Florestal Arapoti S.A.		19,523			(43,189	)
Arauco Distribución S.A.		—			(4,180	)
Arauco Argentina S.A.		4,989			(13,308	)
Flakeboard Company Limited		2,984			(16,915	)
Others		(13	)		(301	)

Total reserve of exchange differences on translation		168,884			(374,275	)

Effect of changes in foreign exchange rates


	January-December
	2016			2015
	ThU.S.$			ThU.S.$
Exchange differences recognized in profit or loss, except for those arising on financial instruments measured at fair value through profit or loss		(3,935	)		(40,827	)
Reserve of exchange differences on translation (with Non-controlling interests)		173,754			(385,109	)

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 12. BORROWING COSTS

Arauco capitalizes the cost of borrowing on current investment projects at effective interest rate.


	January – December
	2016			2015
	ThU.S.$			ThU.S.$
Property, plant and equipment capitalized cost
Property, plant and equipment capitalized interest cost rate		5.11	%		4.87	%
Amount of the capitalized interest cost, property, plant and equipment		2,177			1,893

NOTE 13. RELATED PARTIES

Related Party Disclosures

Related parties are those entities defined in IAS 24 and under the rules of the Chilean SVS and the Chilean Corporations Law.

The receivable and payable amounts among related parties at the end of each period correspond to commercial and financing transactions denominated in Chilean Pesos, U.S. dollars and Brazilian Real, where collection or payment deadlines are shown in the following tables and in general do not bear interest, except for financing transactions.

As of the date of these consolidated financial statements, the main transactions with related parties are related to fuel purchases with Compañía de Petróleos de Chile S.A. and sodium chlorate purchases at EKA Chile S.A.

As of the date of these consolidated financial statements, there are neither provisions for doubtful accounts nor any guarantees granted or received related to the balances with related parties.

Name of Group’s Main Shareholders

The ultimate shareholders of Arauco are Mrs. Maria Noseda Zambra de Angelini, Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi through Inversiones Angelini y Cia. Ltda.

Name of the Intermediate Controlling Entity that Produces Consolidated Financial Statements for Public Use

Empresas Copec S.A.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Compensation to Key Management Personnel

Compensation to key management personnel, including directors, managers and deputy managers, consist of a fixed monthly salary and an annual bonus subject to the results of the Company and the fulfillment of goals of the business as well as individual performance.

Pricing Strategy Terms and Conditions Corresponding to Transactions with Related Parties

Related party transactions are equitable in relation to other transactions regularly performed at market conditions, with mutual independence of the parties.

The table below sets forth information about the Relationship between the Parent Company and its Subsidiaries


ID N°	Company Name	Country	Functional Currency	% Ownership interest 12-31-2016						% Ownership interest 12-31-2015
ID N°	Company Name	Country	Functional Currency	Direct		Indirect		Total		Direct		Indirect		Total
-	Agenciamiento y Servicios Profesionales S.A.	Mexico	U.S. Dollar		0.0020		99.9970		99.9990		0.0020		99.9970		99.9990
-	Arauco Argentina S.A.	Argentina	U.S. Dollar		9.9753		90.0048		99.9801		9.9753		90.0048		99.9801
-	Arauco Australia Pty Ltd.	Australia	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
96547510-9	Arauco Bioenergía S.A.	Chile	U.S. Dollar		98.0000		1.9999		99.9999		98.0000		1.9999		99.9999
-	Arauco Colombia S.A.	Colombia	U.S. Dollar		1.4778		98.5204		99.9982		1.4778		98.5204		99.9982
-	Arauco do Brasil S.A.	Brazil	Brazilian Real		1.1624		98.8366		99.9990		1.2485		98.7505		99.9990
-	Arauco Europe Cooperatief U.A.	Netherland	U.S. Dollar		0.4614		99.5376		99.9990		0.4843		99.5147		99.9990
-	Arauco Florestal Arapoti S.A.	Brazil	Brazilian Real		—		79.9992		79.9992		—		79.9992		79.9992
-	Arauco Forest Brasil S.A.	Brazil	Brazilian Real		10.1297		89.8694		99.9991		10.1297		89.8694		99.9991
-	Arauco Middle East DMCC	Dubai	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
-	Arauco Panels USA, LLC	USA	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
-	Arauco Perú S.A.	Peru	U.S. Dollar		0.0013		99.9977		99.9990		0.0013		99.9977		99.9990
-	Arauco Wood Products, Inc.	USA	U.S. Dollar		0.0004		99.9986		99.9990		0.0004		99.9986		99.9990
-	Araucomex S.A. de C.V.	Mexico	U.S. Dollar		0.0005		99.9985		99.9990		0.0005		99.9985		99.9990
96657900-5	Consorcio Protección Fitosanitaria Forestal S.A.	Chile	Chilean Pesos		—		57.5404		57.5404		—		57.5404		57.5404
-	Empreendimentos Florestais Santa Cruz Ltda.	Brazil	Brazilian Real		—		99.9789		99.9789		—		99.9789		99.9789
-	Flakeboard America Limited	USA	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
-	Flakeboard Company Ltd.	Canada	Canadian Dollar		—		99.9990		99.9990		—		99.9990		99.9990
85805200-9	Forestal Arauco S.A.	Chile	U.S. Dollar		99.9484		—		99.9484		99.9484		—		99.9484
93838000-7	Forestal Cholguán S.A.	Chile	U.S. Dollar		—		98.4744		98.4744		—		98.4478		98.4478
-	Forestal Concepción S.A.	Panama	U.S. Dollar		—		—		—		0.0050		99.9940		99.9990
78049140-K	Forestal Los Lagos S.A.	Chile	U.S. Dollar		—		79.9587		79.9587		—		79.9587		79.9587
-	Forestal Nuestra Señora del Carmen S.A.	Argentina	Argentine pesos		—		99.9805		99.9805		—		99.9805		99.9805
-	Forestal Talavera S.A.	Argentina	Argentine pesos		—		99.9942		99.9942		—		99.9942		99.9942
-	Greenagro S.A.	Argentina	Argentine pesos		—		97.9805		97.9805		—		97.9805		97.9805
96563550-5	Inversiones Arauco Internacional Ltda.	Chile	U.S. Dollar		98.0186		1.9804		99.9990		98.0186		1.9804		99.9990
79990550-7	Investigaciones Forestales Bioforest S.A.	Chile	Chilean Pesos		1.0000		98.9489		99.9489		1.0000		98.9489		99.9489
-	Leasing Forestal S.A.	Argentina	Argentine pesos		—		99.9801		99.9801		—		99.9801		99.9801
96510970-6	Maderas Arauco S.A. (ex Paneles Arauco S.A.)	Chile	U.S. Dollar		99.0000		0.9995		99.9995		99.0000		0.9995		99.9995
-	Mahal Empreendimentos e Participacoes S.A.	Brazil	Brazilian Real		—		99.9934		99.9934		—		99.9934		99.9934
-	Novo Oeste Gestao de Ativos Florestais S.A.	Brazil	Brazilian Real		—		99.9990		99.9990		—		99.9990		99.9990
-	Savitar S.A.	Argentina	Argentine pesos		—		99.9841		99.9841		—		99.9841		99.9841
76375371-9	Servicios Aéreos Forestales Ltda.	Chile	U.S. Dollar		99.0000		0.9995		99.9995		99.0000		0.9995		99.9995
96637330-K	Servicios Logísticos Arauco S.A.	Chile	U.S. Dollar		—		99.9934		99.9934		—		99.9934		99.9934

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The companies in the table below are classified as joint operations in accordance with IFRS 11. The assets, liabilities, income and expenses are recorded in relation to the Company’s ownership percentage in accordance with accounting standards applicable in each case.


ID N°	Company Name	Country	Functional Currency
-	Eufores S.A.	Uruguay	U.S. Dollar
-	Celulosa y Energía Punta Pereira S.A.	Uruguay	U.S. Dollar
-	Zona Franca Punta Pereira S.A.	Uruguay	U.S. Dollar
-	Forestal Cono Sur S.A.	Uruguay	U.S. Dollar
-	Stora Enso Uruguay S.A.	Uruguay	U.S. Dollar
-	El Esparragal Asociación Agraria de R.L.	Uruguay	U.S. Dollar
-	Ongar S.A.	Uruguay	U.S. Dollar
-	Terminal Logística e Industrial M’Bopicua S.A.	Uruguay	U.S. Dollar

There are no significant restrictions on the ability of subsidiaries to transfer funds to Arauco, in the form of cash dividends or repayment of loans and/or advances.

Employee Benefits for Key Management Personnel


	January - December
	2016		2015
	ThU.S.$		ThU.S.$
Salaries and bonuses		84,699		65,760
Per diem compensation to members of the Board of Directors		1,783		1,097
Termination benefits		6,339		2,250
Total		92,821		69,107

Related Party Receivables, Current

Name of Related Party

Tax ID No.

Nature of Relationship

Country

Currency

Maturity

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Forestal Mininco S.A

91.440.000-7

Common Stockholder

Chile

Chilean pesos

30 days

Eka Chile S.A

99.500.140-3

Joint Venture

Chile

Chilean pesos

30 days

1,701

1,646

Forestal del Sur S.A

79.825.060-4

Common director

Chile

Chilean pesos

30 days

7,618

—

Stora Enso Arapoti Industria del Papel S.A

—

Associate

Brazil

Brazilian Real

—

472

Unilin Arauco Pisos Ltda.

—

Joint Venture

Brazil

Brazilian Real

30 days

726

523

Abastible S.A.

91.806.000-6

Controlling Parent’s
Subsidiary

Chile

Chilean pesos

—

142

CMPC Celulosa S.A.

96.532.330-9

Common Stockholder

Chile

Chilean pesos

30 days

—

Fundación Educacional Arauco

71.625.000-8

Common director

Chile

Chilean pesos

30 days

1,188

276

Fundación Acerca Redes

65.097.218-K

Parent company is
founder and
contributor

Chile

U.S. Dollar

30 days

274

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the
Associate

Chile

Jan-17

478

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the
Associate

Chile

Sep-17

479

TOTAL

12,505

3,124

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Related Party Receivables, Non-Current

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Maturity

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the
Associate

Chile

Sep-18

478

—

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the
Associate

Chile

Sep-19

478

—

TOTAL

957

—

Related Party Payables, Current

Name of Related party

Tax ID No.

Nature of Relationship

Country

Currency

Maturity

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Compañía de Petróleos de Chile S.A.

99.520.000-7

Controlling Parent’s
Subsidiary

Chile

Chilean pesos

30 days

1,758

6,057

Abastible S.A.

91.806.000-6

Controlling Parent’s
Subsidiary

Chile

Chilean pesos

30 days

—

Portaluppi, Guzman y Bezanilla Abogados

78.096.080-9

Common director

Chile

Chilean pesos

—

Puerto Lirquén S.A.

96.959.030-1

Subsidiary of the
Associate

Chile

U.S. Dollar

30 days

1,246

851

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the
Associate

Chile

U.S. Dollar

30 days

723

111

Empresas Copec S.A.

90.690.000-9

Controlling Parent

Chile

Chilean pesos

—

Adm. de ventas al detalle Arco Prime Ltda.

77.215.640-5

Controlling Parent’s
Subsidiary

Chile

Chilean pesos

30 days

—

Empresa Distrib. Papeles y Cartones S.A.

88.566.900-k

Common
Stockholder

Chile

Chilean pesos

30 days

—

TOTAL

3,831

7,141

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Related Party Transactions

Purchases

Name of Related Party

Tax ID No.

Nature of Relationship

Country

Currency

Transaction
Descriptions

12-31- 2016
ThU.S.$

12-31- 2015
ThU.S.$

Abastible S.A.

91.806.000-6

Controlling Parent’s
Subsidiary

Chile

Chilean pesos

Fuel

2,199

2,503

Empresas Copec S.A

90.690.000-9

Controlling Parent

Chile

Chilean pesos

Management
service

356

233

Compañía de Petróleos de Chile S.A.

99.520.000-7

Controlling Parent’s
Subsidiary

Chile

Chilean pesos

Fuel and other

39,732

61,245

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the
Associate

Chile

U.S. Dollar

Transport and
stowage

8,633

10,917

Puerto Lirquén S.A.

96.959.030-1

Subsidiary of the
Associate

Chile

U.S. Dollar

Port services

7,311

7,694

EKA Chile S.A.

99.500.140-3

Joint Venture

Chile

Chilean pesos

Sodium chlorate

47,236

39,362

Forestal del Sur S.A.

79.825.060-4

Common director

Chile

Chilean pesos

Wood and ships

2,093

2,018

Portaluppi, Guzman y Bezanilla Abogados

78.096.080-9

Common director

Chile

Chilean pesos

Legal services

1,295

1,312

Empresa Nacional de Telecomunicaciones S.A.

92.580.000-7

Common Stockholder

Chile

Chilean pesos

Telephone services

512

552

CMPC Maderas S.A.

95.304.000-K

Common Stockholder

Chile

Chilean pesos

Wood and logs

511

267

Forestal Mininco S.A.

91.440.000-7

Common Stockholder

Chile

Chilean pesos

Wood and logs

180

204

Red to Green S.A.(Ex-Sigma Servicios Informáticos S.A.)

86.370.800-1

Common director

Chile

Chilean pesos

Computer Services

249

Empresa de Residuos Resiter Ltda

89.696.400-3

Common director

Chile

Chilean pesos

Industrial Cleaning
Services

—

-285

Empresas de Residuos Industriales Resiter Ltda

76.329.072-7

Common director

Chile

Chilean pesos

Industrial Cleaning
Services

—

5,027

Resiter Uruguay S.A

—

Common director

Uruguay

U.S. Dollar

Service to collect
solid waste

—

774

Colbún Transmisión S.A.

76.218.856-2

Common director

Chile

Chilean pesos

Electrical Power

383

447

CMPC Celulosa S.A.

96.532.330-9

Common Stockholder

Chile

Chilean pesos

Others purchases

2,217

Sales

Name of Related Party

Tax ID No.

Nature of Relationship

Country

Currency

Transaction
Descriptions

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Colbún S.A.

96.505.760-9

Common director

Chile

Chilean pesos

Electrical Power

5,999

1,083

EKA Chile S.A.

99.500.140-3

Joint venture

Chile

Chilean pesos

Electrical Power

16,326

17,543

Stora Enso Arapoti Industria de Papel S.A.

—

Associate

Brazil

Brazilian Real

Wood

1,149

5,617

Forestal del Sur S.A.

79.825.060-4

Common director

Chile

Chilean pesos

Harvesting
services, Wood
and chips

21,657

19,328

Forestal Mininco S.A.

91.440.000-7

Common Stockholder

Chile

Chilean pesos

Wood

311

Compañía Puerto de Coronel S.A.

79.895.330-3

Associate

Chile

Sale Land

1,914

—

Unilin Arauco Pisos Ltda.

—

Joint venture

Brazil

Brazilian Real

Wood

5,263

2,666

Other Transactions

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Transaction
Descriptions

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Novo Oeste Gestao de Ativo Florestais S.A.

Associate

Brazil

Brazilian Real

Loans (Capital
and interest)

—

41,091

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 14. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

On August 2, 2016, our subsidiary Forestal Arauco S.A. incorporated the company Arauco Nutrientes Naturales SPA, with a capital contribution of ThU.S.$5,000 of which, as of December 31, 2016, Th.U.S.$3,000 had been paid. The corporate purpose of the company is the manufacture and sale of products made from extracts, fruits, and others.

Company mergers

On December 1, 2015 there was a merger among the affiliates Paneles Arauco S.A. (successor), Aserraderos Arauco S.A. and Arauco Distribución S.A. This transaction had no effect on results and was performed with a view to generate greater synergies, share best practices and achieve better results for our clients. There will be a progressive integration of the activities of sawmills, remanufacturing, plywood, panels and distribution under the same view, with products oriented to the furniture, construction, fitting and packaging industries.

Investments in Subsidiaries

In October 2015, the company acquired the remaining 51% of the interest ownership in Novo Oeste Gestao de Ativos Florestais S.A., in which it held, on December 31, 2015, a stake of 100% through Arauco’s subsidiaries in Brazil. Tables below show the acquired assets and liabilities at fair value, consideration paid and effects generated through the transaction.


Novo Oeste Gestao de Ativos Florestais	10-27-2015 Th.U.S.$
Cash and cash equivalents		427
Inventories		3,747
Accounts receivable from related companies, Current		39,917
Other Assets, Current		154
Current Assets, Total		44,245

Accounts receivable from related companies, Non-current		12,439
Other Assets, Non-Current		—
Property, plant and equipment		1,496
Biological assets, Non-current		87,580
Non-Current Assets, Total		101,515
Assets, Total		145,760

Trade and other current payables, Current		238
Current tax liabilities		3,449
Accounts payable to related companies, current		10
Current Liabilities, Total		3,697

Accounts payable to related companies, Non-current		137,193
Deferred tax liabilities		16,051
Non-Current Liabilities, Total		153,244
Liabilities, Total		156,941

The interest previously held by Novo Oeste Gestao de Ativos Florestais S.A. was measured at fair value, recognizing a gain in the other income line of ThU.S.$15,268. The price paid for the 51% interest was ThU.S.$995, generating a goodwill of ThU.S.$6,697, for which Arauco decided to recognize in the results because of the Company’s accumulated losses. The impairment loss is presented net from the above mentioned gain.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

On August 13, 2015, the company Arauco Middle East DMCC was incorporated with a single contribution from Inversiones Arauco Internacional Limitada of 3,673,000 Dirham (ThU.S.$1,000). The corporate purpose of this company is the promotion of products and the management of Arauco’s customer relations in the Middle East.

On January 26, 2015 Arauco, through its subsidiaries in North America, acquired a melamine-based paper treatment plant located in Biscoe, North Carolina. The price paid was ThU.S.$9,522. The attached table displays the acquired assets at fair value and the price paid under the transaction:


	ThU.S$
Inventories		372
Lands		597
Buildings		1,723
Plant and equipment		6,830

Value Paid, Total		9,522

The details of the subsidiaries included in the consolidation of Arauco are disclosed in Note 13.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 15. INVESTMENTS IN ASSOCIATES

At December 31, 2016 and December 31, 2015 there are no new investments in associates to report.

On March 31, 2016, our subsidiary Arauco do Brasil S.A. sold its stake at Stora Enso Arapoti Industria de Papel S.A. for ThU.S.$4,141. This transaction generated a loss of ThU.S.$10,369, as reflected in the Consolidated Statement of Income by Function, in line item “Other Expenses”.

The following tables set forth information about Investments in associates.


Name	Puertos y Logística S.A.
Country	Chile
Functional Currency	U.S. Dollar
Corporate purpose	Docking and warehousing operations for proprietary and third party use, cargo of all classes of goods, as well, as warehousing and transport operations.
Ownership interest (%)	20.2767%
	12-31-2016	12-31-2015
Carrying amount	ThU.S.$61,505	ThU.S.$58,922

Name	Inversiones Puerto Coronel S.A.
Country	Chile
Functional Currency	U.S. Dollar
Corporate purpose	Investments in movables and real estate, acquisition of companies, securities and investment instruments, investment management and development and/or participation in all kind of businesses and companies related to industrial, shipping, forestry and commercial activities.
Ownership interest (%)	50.0000%
	12-31-2016	12-31-2015
Carrying amount	ThU.S.$43,559	ThU.S.$43,200

Name	Servicios Corporativos Sercor S.A.
Country	Chile
Functional Currency	Chilean Pesos
Corporate purpose	Consulting services related to business management to Boards of Directors and Senior Management of all Arauco’s entities.
Ownership interest (%)	20.0000%
	12-31-2016	12-31-2015
Carrying amount	ThU.S.$190	ThU.S.$179

Name	Stora Enso Arapoti Industria de Papel S.A.
Country	Brazil
Functional Currency	Brazilian Real
Corporate purpose	Industrialization and commercialization of paper and cellulose, raw materials and by-products
Ownership interest (%)	20.0000%
	12-31-2016	12-31-2015
Carrying amount	—	ThU.S.$17,397

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


Name	Genómica Forestal S.A.
Country	Chile
Functional Currency	Chilean Pesos
Corporate purpose	Developing forestry genomics, through the use of biotechnological, molecular and bioinformatics tools with the purpose of strengthening genetic programs so as to improve the competitive position of the Chilean forestry industry for priority tree species.
Ownership interest (%)	25.0000%
	12-31-2016	12-31-2015
Carrying amount	ThU.S.$(1)	ThU.S.$16


Name	Consorcio Tecnológico Bioenercel S.A.
Country	Chile
Functional Currency	Chilean Pesos
Corporate purpose	Developing of technologies which will promote the development of a biofuels industry in Chile, obtained from lingo-cellulosic materials. The future execution of this sustainable project is financed by the Innova Chile Committee.
Ownership interest (%)	20.0000%
	12-31-2016	12-31-2015
Carrying amount	ThU.S.$31	ThU.S.$67


Name	Vale do Corisco S.A.
Country	Brazil
Functional Currency	Brazilian Real
Corporate purpose	Management of forestry activities.
Ownership interest (%)	49.0000%
	12-31-2015	12-31-2015
Carrying amount	ThU.S.$160,490	ThU.S.$121,360

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Summarized Financial Information of Associates


	Assets
12-31-2016	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$		Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		76,021			29		4,608			0			24,972			6			26			105,662
Non-current		572,831			88,936		668			0			415,083			152			63			1,077,733
Total		648,852			88,965		5,276			0			440,055			158			89			1,183,395


	Liabilities
	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$		Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		44,457			82		3,412			0			3,446			0			9			51,406
Non-current		301,065			—		912			0			109,079			6			85			411,147
Equity		303,330			88,883		952			0			327,530			153			(5	)		720,843
Total		648,852			88,965		5,276			0			440,055			159			89			1,183,396

Revenues		107,722			3,072		4,591			492			44,822			33			94			160,826
Expenses		(98,642	)		—		(4,587	)		(6,320	)		(15,238	)		(147	)		(100	)		(125,034	)
Profit or loss		9,080			3,072		4			(5,828	)		29,584			(114	)		(6	)		35,792


	Assets
12-31-2015	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$		Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		90,896			29		4,174			59,594			14,736			1			44			169,474
Non-current		472,638			86,453		664			33,284			322,598			345			146			916,128
Total		563,534			86,482		4,838			92,878			337,334			346			190			1,085,602


	Liabilities
	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$		Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		41,784			82		3,136			13,648			9,098			7			7			67,762
Non-current		231,160			0		808			7,094			80,563			5			118			319,748
Equity		290,590			86,400		894			72,136			247,673			334			65			698,092
Total		563,534			86,482		4,838			92,878			337,334			346			190			1,085,602

Revenues		88,689			4,629		16,007			9,574			36,270			983			121			156,273
Expenses		(89,719	)		0		(5,163	)		(3,579	)		(19,674	)		(105	)		(1,229	)		(119,469	)
Profit or loss		(1,030	)		4,629		10,844			5,995			16,596			878			(1,108	)		36,804

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Reconciliation of Investment in Associates and Joint Ventures


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Opening balance as of January 1, 2016		264,812			326,045
Changes
Investments in associates, Additions		—			1,808
Investment in joint ventures, Additions		153,135			—
Disposals, Investments in associates		(14,510	)		—
Share of profit (loss) in investment in associates		16,349			5,573
Share of profit (loss) in investment in joint ventures		7,590			1,175
Dividends Received, Investments in Associates		(5,320	)		(18,396	)
Increase (Decrease) in foreign exchange currency on translation of Associates and Joint Ventures		20,634			(55,207	)
Other increase (decrease) in investment and associates and joint ventures		3,858			3,814
Total changes		181,736			(61,233	)
Ending balance		446,548			264,812


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Carrying amount of associates accounted for using equity method		265,775			241,140
Carrying amount of joint ventures accounted for using equity method		180,773			23,672
Total investment accounted for using equity method		446,548			264,812

NOTE 16. INTERESTS IN JOINT ARRANGEMENTS

Investments and contributions made

On May 31, 2016, Inversiones Arauco Internacional Limitada, Arauco’s subsidiary, acquired 50% of the shares of Tableros de Fibras S.A, a Spanish subsidiary of SONAE INDUSTRIA, SGPS, S.A. (“Sonae”), which as of such date changed its name to “Sonae Arauco S.A.”. The price paid by Arauco for the acquisition of 50% of the shares of Sonae Arauco was the amount of €137,500,000 (equivalent to ThU.S.$153,135 at the acquisition date). This transaction generated a surplus of ThU.S 36,190, as shown in the Consolidated Statement of Financial Position as part of the investment. As of December 31, 2016, the investment has appraised by the participation method, notwithstanding that for the final determination of its reasonable value is still ongoing.

Sonae Arauco produces and sales wood panels, of the type of MDF, PB and OSB, and sawn timber, through the operation of 2 panel plants and one sawmill in Spain; 2 panel plants and one resin plant in Portugal; 4 panel plants in Germany and 2 panel plants in South Africa.

In the aggregate, the production capacity of Sonae Arauco is of approximately 1.45 million m3 of MDF, 2.27 million m3 of particle boards, 460,000 m3 of OSB and 100,000 m3 of sawn timber.

As of December 31, 2016, Arauco has not carried out any contributions to Uruguayan companies Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A. (ThU.S.$82,943 as of December 31, 2015), with Arauco still holding 50% of control under a joint agreement.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The contributions made were invested in the construction of a last generation cellulose production plant, with a guaranteed annual capacity of 1.3 million tons, a port and an energy generation unit based on renewable resources, which is located in the town of Puerto Pereira, Province of Colonia, Uruguay.

The investments in Uruguay qualify as a joint operation. In relation to “other rights and contractual conditions”, the joint operation has the primary objective of providing the parties an output. As established in the “Pulp Supply Agreement”, both Arauco and its partner have the obligation to acquire 100% of the yearly pulp produced by the joint operation. Arauco has recognized the assets, liabilities, income and expenses associated with its interest ownership, as of January 1, 2013, pursuant to IFRS 11.

Furthermore, Arauco holds a 50% ownership interest in Unilin Arauco Pisos Laminados Ltda., a Brazilian company, and in Eka Chile S.A. (“Eka”), a company that sells sodium chlorate to cellulose plants in Chile. There is a contractual agreement with these companies whereby Arauco has engaged in an economic activity subject to common control, which is classified as a joint venture.

The following tables set forth summarized financial information of the more significant interests in joint arrangements, which qualify as joint operations:

12-31-2016

12-31-2015

Celulosa y Energía Punta Pereira S.A.

(Uruguay)

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

173,258

182,834

173,499

167,067

Non-current

2,131,266

735,679

2,192,148

885,723

Equity

1,386,011

1,312,857

Total Joint Arrangement

2,304,524

2,365,647

Investment

693,006

656,429


	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Income		680,819			720,499
Expenses		(618,387	)		(612,101	)
Joint Arrangement Net Income (Loss)		62,432			108,398


	12-31-2016				12-31-2015
Forestal Cono Sur S.A.(consolidated) (Uruguay)	Assets ThU.S.$		Liabilities ThU.S.$		Assets ThU.S.$		Liabilities ThU.S.$
Current		23,745		21,039		23,267		21,495
Non-current		178,236		1,381		176,876		4,654
Equity		—		179,561		—		173,994
Total Joint Arrangement		201,981		201,981		200,143		200,143

Investment		89,781				86,997


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Income		8,443			10,821
Expenses		(2,876	)		(12,000	)
Joint Arrangement Net Income (Loss)		5,567			(1,179	)


	12-31-2016				12-31-2015
Eufores S.A.(consolidated) (Uruguay)	Assets ThU.S.$		Liabilities ThU.S.$		Assets ThU.S.$		Liabilities ThU.S.$
Current		178,644		200,525		158,735		187,311
Non-current		604,736		23,052		611,500		39,994
Equity		—		559,803		—		542,930
Total Joint Arrangement		783,380		783,380		770,235		770,235

Investment		279,902				271,465

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Income		296,927			292,534
Expenses		(280,054	)		(297,291	)
Joint Arrangement Net Income (Loss)		16,873			(4,757	)


	12-31-2016				12-31-2015
Zona Franca Punta Pereira S.A. (Uruguay)	Assets ThU.S.$		Liabilities ThU.S.$		Assets ThU.S.$		Liabilities ThU.S.$
Current		4,397		82,331		11,582		71,202
Non-current		492,815		63,021		494,585		88,182
Equity		—		351,860		—		346,783
Total Joint Arrangement		497,212		497,212		506,167		506,167

Investment		175,930				173,392


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Income		31,042			19,079
Expenses		(25,966	)		(41,988	)
Joint Arrangement Net Income (Loss)		5,076			(22,909	)

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The following tables set forth summarized financial information of the more significant interests in joint ventures:

12-31-2016

12-31-2015

Unilin Arauco Pisos Ltda.

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

7,900

3,549

5,943

2,304

Non-current

5,094

3,544

Equity

9,427

7,146

Total Joint Arrangement

12,994

9,487

Investment

4,714

3,573


	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Income		1,305			112
Expenses		(1,974	)		(2,462	)
Joint Arrangement Net Income (Loss)		(669	)		(2,350	)

12-31-2016

12-31-2015

Eka Chile S.A.

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

15,817

4,348

23,457

8,365

Non-current

31,690

5,021

30,203

5,097

Equity

31,138

40,198

Total Joint Arrangement

47,507

53,660

Investment

19,069

20,099


	12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Income		48,276			39,646
Expenses		(44,045	)		(36,355	)
Joint Arrangement Net Income (Loss)		4,231			3,291


	12-31-2016
	Assets		Liabilities
Sonae Arauco S.A.	ThU.S.$		ThU.S.$
Current		223,145		213,228
Non-current		544,087		312,404
Equity				241,600
Total Joint Arrangement		767,232		767,232

Net Assets		120,800
Adjustment to Net Assets (Goodwill)		36,190
Investment		156,990


	12-31-2016
	ThU.S.$
Income		507,179
Expenses		(495,560	)
Joint Arrangement Net Income (Loss)		11,619

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 17. IMPAIRMENT OF ASSETS

In 2015, a provision for the impairment of the Arapoti Sawmill in an amount of ThU.S.$2,428, was registered reducing the recoverable value for these assets to zero.

Disclosure of Impairment Losses of Assets

Provisions for impairment of property, plant and equipment due to technical obsolescence have been recorded as of December 31, 2016 and December 31, 2015 respectively, as shown below:


Disclosure of Asset Impairment
Principal classes of Assets affected by Impairment and Reversal of Losses	Machinery and Equipment
Principal Facts and Circumstances that lead to Recognizing Impairment and Reversal of losses	Technical Obsolescence and Claim

	12-31-2016	12-31-2015
Information relevant to the sum of all impairment	ThU.S.$7,464	ThU.S.$4,658

This impairment provision is being analyzed to determine the definitive write-off corresponding to the related assets.

Goodwill

Goodwill is allocated to the groups of cash-generating units that are expected to benefit from the synergies of the combination.

At the date of these consolidated financial statements, the balance of goodwill is ThU.S.$74,893 (ThU.S.$69,475, at December 31, 2015)

Of the total of goodwill, ThU.S.$39,694 (ThU.S.$39,631 as of December 31, 2015) are generated by the acquisition of “Flakeboard”, a company that, directly and/or through its subsidiaries, possesses and operates 7 panel plants, for which Arauco acquired and paid, on September 24, 2012, the price of ThU.S.$242,502 for the 100% interest ownership.

The recoverable amount for Flakeboard’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections covering a 5-year term, applying a real discount rate of 7.8% which reflects current market assessments for the Panels segment in North America.

The investment in the panel plant in Pien, Brazil generated a goodwill of ThU.S.$32,385 (ThU.S.$27,030 as of December 31, 2015).

The recoverable amount for the Pien plant’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections based on the operational plan approved by the Administration, covering a 5-year term, applying a 9% real discount rate that reflects current evaluations for the panel segment in Brazil.

As a result of the annual impairment test, the carrying value of the goodwill does not exceed their recoverable value, and therefore there is no need to recognize impairment losses.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

As of December 31, 2016 and December 31, 2015, the variation of the balance in goodwill is only due to the translation adjustments as explained in the accounting policies.

NOTE 18. PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES

The contingent liabilities for outstanding litigations are as follows:

Celulosa Arauco y Constitución S.A.

1. On August 25, 2005, the Chilean Servicio de Impuestos Internos (the “Chilean IRS”) issued tax resolutions No. 184 and No. 185 of 2005, and objected certain income tax returns made by Arauco on April 16, 2001 and October 31, 2001, and furthermore, requested the reimbursement of the amounts returned in connection to tax losses, along with the amendment of the FUT (Tax Profits Fund) Registry balance. In consideration to the foregoing, the above mentioned tax resolutions ordered the restitution of the historical amount of $4,571,664,617 (equal to ThU.S.$ 6,829 as of December 31, 2016). On November 7, 2005, the Company requested a Review of the Supervision Action (Revisión de la Actuación Fiscalizadora, or “RAF”), which is an administrative review of the tax action brought by the Chilean IRS, and filed a claim disputing the above mentioned tax resolutions No. 184 and 185 of 2005. The RAF was resolved on January 9, 2009 by the Chilean IRS, partially sustaining the Company’s request, granting a discount to the total amount of $1,209,399,164 (equal to ThU.S.$ 1,807, as of December 31, 2016), resulting in a total disputed amount of $3,362,265,453 (equal to ThU.S.$ 5,022, as of December 31, 2016); consequently, on this date the claim corresponding to the sums not granted during the enforcement stage was filed. On February 19, 2010, the Court acknowledged receipt of the Company’s request. Subsequently, the tax authority issued a report and the Company commented on such report.

On September 26, 2014, Arauco requested the submission of this claim to the competent jurisdiction of the new Tax and Customs Courts. On October 10, 2014, Arauco’s request was granted. Currently the action is being considered by these new Courts under the Docket No. RUC 14-9-0002087-3. On March 20, 2015, the SII responded to the allegations submitted by Arauco against Liquidations No. 184 and 185 of 2005. Currently, the case’s evidentiary stage is due to begin.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore as of December 31, 2016, Arauco has not made any provision whatsoever in connection to this contingency.

2. In connection with Licancel Plant, on June 22, 2011, the Company was notified of a civil claim for compensation of prejudice for an alleged tort liability, filed by twelve fishermen of the Mataquito River before the Court of First Instance, Guarantee and Family of Licantén under Docket number 73-2011. The case arose out of dead fish allegedly found in the Mataquito River on June 5, 2007 caused by the Licancel Plant. The plaintiffs seek to be compensated for alleged damages that they had from the aforementioned event, including loss of profits, pain and suffering and an alleged contractual liability, for a total of $2,695,560,000 (equal to ThU.S.$ 4,026, as of December 31, 2016).

On October 21, 2015 the Court issued a definitive first instance decision partially admitting the claim, sentencing Celulosa Arauco y Constitución S.A. to pay each claimant – as non-monetary

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

damages – the sum of $5,000,000 plus adjustments, as per the variation of the CPI, calculated as from May 2007 until the month of the actual payment. On November 16, 2015, the defendant challenged the definitive decision through the submission of a cassation appeal based on formal aspects and an ordinary appeal. In turn, the plaintiff adhered to the appeal, seeking to have the amount of the non-monetary damages recognized by the first instance decision increased. Pending. (Court of Appeals Docket No. 60-2016).

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2016, Arauco has not made any provision whatsoever in connection to this contingency.

3. Through Res. Ex. N° 1 issued by the Superintendence of the Environment (“SMA”) on January 8, 2016, notified on January 14, 2016, the SMA formulated 11 charges against the Company, due to alleged breaches of certain Environmental Qualification Resolutions for the Valdivia Plant and of DS No. 90/2000. The 11 charges were classified as follows by the SMA: 1 critical, 5 severe, 5 minor.

On February 12, 2016, the Company submitted its defenses. The SMA shall analyze and rule on the defenses, and it may request new information or open a term for providing evidence. Once these proceedings have been discharged, the SMA will issue a resolution that either absolves or sanctions the Company. The resolutions issued by the SMA may be appealed before the Environmental Court.

The maximum fine that the SMA could apply against the Company, for the above mentioned charges, is up to 36,000 UTA (equivalent to ThU.S.$ 29,801, as of December 31, 2016).

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company, and therefore as of December 31, 2016, Arauco has not made any provision whatsoever in connection to this contingency.

4. Through Res. Ex. N° 1 of the SMA, dated February 17, 2016 notified on February 23, 2016, the SMA formulated 8 charges against the company due to alleged breaches of certain Environmental Qualification Resolutions for the Nueva Aldea Plant. The 8 charges were qualified by the SMA as follows: 7 severe and 1 minor.

On March 15, 2016, the company submitted - within the established term - a compliance program which contains 30 actions and goals, related to each one of the 8 alleged infringements. On July 15, 2016, the Exempted Resolution No. 11 of the SMA was notified, which approved the compliance program and suspended the punitive proceedings. If the program is satisfactorily implemented, it would be possible to conclude the proceedings without applying any sanctions.

On August 3, 2016, third-party complainants in the administrative proceeding filed a complaint appeal against Exempted Resolution No. 11 issued by the SMA, which approved the compliance program. On December 24, 2016, the Third Environmental Court rejected such complaint filed against Ex. Res. No. 11 SMA, which approved the compliance program. The petitioners did not file a cassation remedy.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

5. Through Exempted Resolution No. 1/File F-020-2016, dated May 6, 2016, the SMA formulated four charges against the company due to certain alleged breaches of the Environmental Qualification Resolutions of the Licancel Plant. The SMA classified the four charges as follows: 1 severe and 3 minor.

The company filed its defenses on June 8, 2016. On October 21, 2016, the SMA requested additional information from the company, which will be submitted in due time. On January 12, 2017, the SMA served its resolution concluding the investigation. The SMA has to issue a new resolution either absolving or sanctioning the Company. The SMA’s resolutions may be challenged before the Environmental Court.

On February 1, 2017, the Environment Superintendent issued Exempted Resolution No. 71, imposing a fine against the Company for the amount of 239 Annual Tax Units (UTA) (equivalent to ThU.S.$ 198, as of December 31, 2016).

•

Regarding Charge No. 1, related to the disposal of solid industrial waste, particularly ashes in excess of the thresholds authorized by RCA No. 75/2004, a fine amounting to 3 UTA was applied (equivalent to ThU.S.$ 2, as of December 31, 2016).

•

Regarding Charge No. 2, related to the failure to withdraw from the former treatment pond “pursuant to RCA No. 308/2006,” in the environmental inspections dated May of 2013 and February of 2015, a fine amounting to 234 UTA was applied (equivalent to ThU.S.$194, as of December 31, 2016).

•

Regarding Charge No. 3, relaeted to exceeding the humidity percentages of the mud disposed of in the solid waste deposit, a fine amounting to 2 UTA was applied (equivalent to ThU.S.$ 2, as of December 31, 2016).

•

Regarding Charge No. 4, related to the fact that the discharge point of the effluent was not built at the approved location, the Company was acquitted.

On February 13, 2017, the Company filed a motion for reconsideration, requesting the annulment of the fine or substantially decreasing it. This remedy is currently pending.

Since the Company’s position is grounded in solid legal arguments, and there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2016, Arauco has not made any provision whatsoever in connection to this contingency.

6. Through Exempted Resolution No. 1/File F-031-2016, dated September 15, 2016, the SMA formulated three charges against the company due to certain alleged breaches of certain Environmental Qualification Resolutions of the Constitución Plant, and an alleged contravention of Law 19,300 resulting from a purported circumvention of the Environmental Assessment System. The SMA classified the three charges as follows: 1 severe and 2 minor.

On October 17, 2016, the company filed a Compliance Program containing 7 actions and objectives. On January 3, 2017 the SMA served its resolution approving the compliance program submitted by the Company. If the compliance program is executed satisfactorily, the proceedings would conclude without the application of any sanctions.

Since the Company’s position is grounded in solid legal arguments, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2016, Arauco has not made any provision whatsoever in connection to this contingency.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Arauco Argentina S.A.

1. On December 14, 2007 the Federal Administration of Internal Revenue (Administración Federal de Ingresos Públicos)(“AFIP”) requested a determination, challenging the deductibility, as against Income Tax, of certain expenses, interests and exchange differences generated by Private Negotiable Obligations issued by the Company in 2001 and cancelled in 2007, for an amount of US$ 250,000,000.

This determination reached $417,908,207 Argentine Pesos (equivalent to ThU.S.$26,300 as of December 31, 2016) for principal, compensatory interest and fines.

On February 11, 2008, the Company appealed before the National Tax Court (Tribunal Fiscal de la Nación) (“TFN”), which upheld the State’s determination on February 2010. The Company appealed this decision before the National Chamber of Appeals for Federal Administrative Disputes.

Likewise, the Company requested an interim measure of relief before the Chamber of Appeals, so that the Chamber may order the suspension of the determination’s enforceability while the final judgment is pending. On May 13, 2010, Chamber I of the National Chamber of Appeals for Federal Administrative Disputes approved the request, subject to the pledge of collateral, which collateral was furnished by the Company by means of Insurance Policy No. 86058, issued by Zurich Argentina Cia. de Seguros S.A. for $633,616,741 Argentine Pesos (equivalent to ThU.S.$ 39,875 as of December 31, 2016).

The judgment of the Chamber of Appeals, issued in December 2012, was contrary to the company’s interests. The Company filed an Ordinary Appeal before the Supreme Court of Justice, which was authorized by the Chamber of Appeals, and an Extraordinary Appeal, which was duly noted by the Chamber for the relevant procedural phase.

During this entire process, the Company’s external advisors maintained their opinion that the Company had behaved within the limits of the law in its deduction of the interests, expenses and exchange differences that was challenged by the State, and that there were good changes that this determination issued by the AFIP would be rendered without effect.

On July 22, 2016, Congress passed law No. 27,260, whose Title II, Book II establishes an Exceptional Regularization Regime for Tax, Social Security and Customs Obligations, for obligations that have been the subject matter of judicial proceedings (henceforth, the “Regularization Regime”).

The introduction of the Regularization Regime entails an exemption from the applicable fines as well as a portion of the interests. In order to enjoy these benefits, the taxpayer must unconditionally accept its counterparty’s claim in relation to the regularized obligations, as well as desist from and withdraw any action and right, including restitution actions, bearing the expense of litigation costs and expenses.

The legal counselors that have been intervening in the different stages of litigation have highlighted the very important economic advantages offered by the Regularization Regime in light of the contingency inherent to any judicial case.

On September 7, 2016, the Company materialized its application to the Regularization Regime before the AFIP, in connection to the obligations claimed in consideration to the adjustment conducted by the State regarding the Income Tax Statements filed between the years 2001 and 2004 and reported this situation to the Nation’s Supreme Court, consequently abandoning the Ordinary Appeal that had been promptly lodged.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

As of this date, the updated amount for the contingency amounted to approximately $ 891,758,132 Argentine Pesos (equal to ThU.S.$ 56,121 as of December 31, 2016), corresponding to principal, interest and fines. The Company decided to pay in cash, and the balance that was finally paid amounted to $ 248,503,504 Argentine Pesos (equal to ThU.S.$ 15,639 as of December 31, 2016). Additionally, the Company shall assume the payment of all litigation costs and trial expenses, the sum of which was undetermined as of the date of these financial statements. On November 1, 2016, the Nation’s Supreme Court of Justice declared the above mentioned remedy’s abandonment and returned the file to the court of origin. On November 30, 2016, the First Chamber of the National Appeals Court declared that the case file as returned.

2. Pursuant to law No. 25,080, the former Secretary of Agriculture, Livestock, Fishing and Foodstuffs, the enforcement agency referred to in the law approved, by Res. No. 952/2000, the forestry and industrial-forestry projects submitted by Arauco Argentina S.A. In the context of these projects, the Company afforested: 1) 4,777 hectares during 2000, in observance of its committed yearly plan; and 2) 23,012 hectares between 2000 and 2006 as a part of the multi-year afforestation plan. Likewise, a sawmill was built with installed capacity to produce 250,000 m3 of sawn timber per year.

On January 11, 2001, Arauco Argentina S.A. submitted an expansion for the approved industrial-forestry project. The expansion was approved via Res. No. 84/03 issued by the former Secretary of Agriculture, Livestock, Fishing and Foodstuffs. In accordance with the assumed obligations, the Company built a MDF board (panels) plant and afforested 8,089 hectares between 2001 and 2006.

Additionally, the Company filed yearly forestry plans between years 2007 and 2015 for its local operations in the Provinces of Misiones and Buenos Aires.

In March, 2005, Note No. 145/05 of the Undersecretary of Agriculture, Livestock and Afforestation suspended the benefit that exempted Arauco Argentina S.A. from paying export duties under Law No. 25,080. This measure is currently under discussion by the Company. On November 8, 2006, the V Chamber of the National Appeals Court for Adversarial Administrative and Federal Matters issued a ruling ordering Arauco Argentina S.A. to continue to enjoy an exemption from paying the exportation duties, in the same manner and scope it had prior to the suspension ordered by Note No. 145/05, if the clearance of merchandise is performed pursuant to the guarantee regime established in article 453, subsection a) of the Customs Code, for the exempted tax obligation. The judicial measure became effective beginning on March of 2007 by collateralization through the granting of bond (caución) policies for each shipment permits exempted from payment of export duty. The company maintains an assignment of funds equivalent to $372,478,000 Argentine Pesos (ThU.S.$ 23,441 as December 31, 2016) for guaranteed export duties, which appears under not current provisions. Additionally, the Company filed a restitution claim for a total amount of US$6,555,207, plus interests accrued from the service of the claim, corresponding to export duties between March 2005 and March 2007, as a result of the application of Note 145/05 issued by the Undersecretary of Agriculture, Livestock and Afforestation. Both the underlying issue and the restitution claim have yet to be resolved.

In turn, during April of year 2005, the Secretary for Agriculture, Ranching, Fishing and Foods issued Resolution No. 260/2005, requiring that holders of any firms that had received

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

the fiscal benefits granted under Law No. 25,080 should establish collateral to cover the total amount of any such benefits, considering for such purposes all benefits that had been enjoyed until the date of their establishment. In January 2006, the Company furnished, in protest, the requested collateral, which amount to, as of the date of these financial statements, $245,359,796 Argentine pesos (ThU.S.$ 15,441 as of December 31, 2016). On April 29, 2016, the corresponding authority issued Resolution 154 – E/2016 that repealed Resolution 260/2005 and established a minimum and maximum amount for the collateral. The Company shall apply the new Resolution upon the expiration of the next collateral policy (May 2017).

Arauco Argentina S.A. believes that it has complied with all of the obligations imposed upon it by the system set forth under Law No. 25,080.

3. On December 6, 2013, Arauco Argentina S.A. was served upon Resolution 803 issued by the Central Bank of the Republic of Argentina (BCRA) on November 22, 2013. By means of such resolution, the BCRA initiated Investigation No. 5581, whereby it is sought to determine the absence of currency inflow and liquidation, and the delayed inflow of currency arising from export operations.

On March 6, 2014, the BCRA notified Arauco Argentina S.A. that it had received the APSA’s response and was beginning the trial period. On June 18, 2014 the BCRA notified the company of the closure of the trial period. On June 26, 2014 APSA presented its answer. On October 6, 2014, the company was served with the ruling dated September 30, 2014, issued by the National Criminal and Economic Court No. 8, Secretary No. 16, through which it was notified that the court would analyze the case under Case File No. 1330/2014.

The resolution through which the Intervening Court declared the expiration of the criminal action based on the statute of limitations and acquitted the Company was issued on August 23, 2016.

Arauco do Brasil S.A.

On November 8, 2012, the Brazilian tax authorities issued an Infringement Notice against one of our Brazilian subsidiaries, Arauco do Brasil S.A., for allegedly unpaid taxed owed by said company during the period from 2006 to 2010. Specifically, the tax authorities (i) objected to the deductibility of certain payments made, and expenses incurred (including the amortization of premiums, interest and litigation costs) by Arauco do Brasil between 2005 and 2010, and, (ii) argued that Arauco do Brasil made certain insufficient payments regarding the Brazilian Corporate Tax (“IRPJ”) and the Corporate Contribution over Net Profits (“CSLL”) during 2010.

On July 20, 2015, Arauco do Brasil was notified of the first-level administrative ruling which partially upheld the Infringement. Against this ruling, a Voluntary Appeal was filed seeking to revoke the Infringement Notice before the Brazilian Administrative Tax Council (Conselho Administrativo de Recursos Fiscais de Brasil or “CARF”), which is the second administrative level. As of the date of this report, the trial pertaining to this objection is still pending. With the first level administrative decision, the main amount is R$164,159,000 (ThU.S.$ 50,648 as of December 31,2016)

The company believes that its challenge against the Infringement Notice is based on sound legal grounds and that a reasonable possibility exists that this matter will be resolved in favor of the company and therefore, as of December 31, 2016, Arauco has not made any provision whatsoever in connection to this contingency.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Forestal Arauco S.A.

1. On October 8, 2013, Bosques Arauco S.A., now Forestal Arauco S.A. was notified of a civil claim filed by Mr. Manuel Antonio Fren Casanova, requesting the court to declare the properties known as Cuyinco and Cuyinco Alto as two different properties and, therefore, to order the cancellation of the ownership registration in the name of Bosques Arauco S.A. found on N° 290 of page 266 of the Registry of Property kept by the Real Estate Registrar of Cuyinco Alto, on the grounds that, Bosques Arauco S.A. erroneously understood that its property, Cuyinco Alto of 4,600 hectares, would also encompass the land known as Cuyinco, which allegedly belongs to the claimant.

The claim was filed before the Civil Court of Lebu (Case File No. C-269-2013).

On October 27, 2015, the Court passed a first instance definitive judgment, dismissing the claim in its entirety. On November 16, 2015, the plaintiff challenged the first instance judgment by means of a cassation appeal based on substantial and procedural grounds. (Case Docket Court of Appeals No. 1956-2015).

On January 13, 2017, the Court of Appeals of Concepción upheld the lower court ruling.

The plaintiff did not appealed the Court of Appeals of Concepción ruling, whereby the lower court ruling – which dismissed the claim – was confirmed. Consequently, the decision is final and not subject to any further appeal. Trial concluded.

2. Maquinarias y Equipos Klenner Limitada filed a civil damages claim before the First Civil Court of Valdivia, Case File number C-375-2015, against Forestal Arauco S.A. The claim seeks compensation for alleged damages brought as a result of the termination of a service provision contract that took place on February 9, 2010. The plaintiff valued the damages in the amount of $4,203,216,164 (equivalent to ThU.S.$ 6,278, as of December 31, 2016).

On November 14, 2016, the lower court issued a ruling partially upholding the claim, convicting Forestal Arauco S.A. to pay the sum of $115,026,673 (equivalent to ThU.S.$ 172 as of December 31, 2016) as general damage, and the sum of $607,849,413 (equivalent to ThU.S.$ 908 as of December 31, 2016) for loss profit, rejecting the claim for alleged moral damage, all without ordering the payment of litigation expenses.

Forestal Arauco S.A. challenged the ruling filing a cassation remedy based on procedural violations as well as an appeal. The plaintiff also challenged the ruling through an appeal. All remedies are currently pending for discussion and ruling by the Court of Appeals of Valdivia. Since January 12, 2017, the remedies are awaiting their presentation (Court entry Case File No. 779-2016).

3. On April 28, 2015, the company was notified of and answered the action for recovery submitted in ordinary proceedings by Mr. Rodrigo Huanquimilla Arcos and Mr. Mario

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Andrades Rojas, attorneys at law, on behalf of 24 members of the Arcos succession, who claiming to be owners of the estate that they identify as Hacienda Quivolgo, of 5,202 hectares, request that Forestal Celco S.A., currently Forestal Arauco S.A., be sentenced to return the above mentioned real property plus civil and natural fruits or revenues as well as any estates adhered to it, along with any damages that the real property may have suffered, with litigation costs. The company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

The Court ordered that this trial be joined with those entertained under Case File C-54-2015, suspending the proceeding and ordering the parties to appoint a joint representative to act on behalf of both parties. The attorneys for both claimant parties conferred reciprocal powers to each other, and thus the Court deemed they had fulfilled the legal requirement.

On December 9, 2016, the Court summoned the parties to a ruling hearing. The issuance of the ruling is pending (Case file C-334-2014 of the Civil Court of Constitución).

On February 24, 2017, the final ruling of the lower court was notified, completely dismissing the claim, with litigation costs. The filing of potential remedies is currently available.

4. On April 6, 2015, the company was notified through a rogatory letter regarding the claim submitted by Mr. Gustavo Andrés Ochagavía Urrutia, attorney at law, acting on behalf of 23 members of the Arcos succession, who claim to be the owners of the estate that they identify as Hacienda Quivolgo, of 5,202 hectares, requesting that Forestal Celco S.A., currently Forestal Arauco S.A., be ordered to return the above mentioned real property plus civil and natural fruits or revenues as well as any estates adhered to it, along with any damages that the real property may have suffered, with litigation costs. They base their claim in that Forestal Celco S.A., currently Forestal Arauco S.A., is allegedly in possession but does not own the real property in question. On April 28, 2014, the company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

On January 8, 2016, the defendant requested a consolidation of the proceedings with Case file 334-2014, as well as the suspension of the proceedings until this request is decided upon. The Court ordered this case file to be joined with the proceedings of case file No. C-334-2014 of the Civil Court of Constitución.

On February 24, 2017, the final ruling of the lower court was notified, completely dismissing the claim, with litigation costs. The filing of potential remedies is currently available.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

At the end of each reporting period there are no other contingencies that might significantly affect the Company’s financial, position or results of operations.

Provisions recorded as of December 31, 2016 and December 31, 2015 are as follows:


	12-31-2016		12-31-2015
Classes of Provisions	ThU.S.$		ThU.S.$
Provisions, Current		842		858
Provisions for litigations		427		404
Other provisions		415		454
Provisions, non-Current		38,138		34,541
Provisions for litigations		14,696		10,996
Other provisions		23,442		23,545

Total Provisions		38,980		35,399


	12-31-2016
Movements in Provisions	Litigations ThU.S.$(*)			Other Provisions ThU.S.$			Total ThU.S.$
Opening balance		11,400			23,999			35,399
Changes in provisions
Increase in existing provisions		5,363			1			5,364
Used provisions		(998	)		(39	)		(1,037	)
Increase (decrease) in foreign currency exchange		(609	)		—			(609	)
Other Increases (Decreases)		(33	)		(104	)		(137	)
Total Changes		3,723			(142	)		3,581
Closing balance		15,123			23,857			38,980

(*)	The increase in legal claims is composed mainly of ThU.S.$863 and ThU.S$2,255 (Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsits, and ThU.S.$1,490 from Arauco Argentina in connection of fees in lawsuits.


	12-31-2015
Movements in Provisions	Litigations (*) ThU.S.$			Other Provisions (**) ThU.S.$			Total ThU.S.$
Opening balance		16,038			51,026			67,064
Changes in provisions
Increase in existing provisions		2,555			1,429			3,984
Used provisions		(2,990	)		—			(2,990	)
Increase (decrease) in foreign currency exchange		(5,163	)		—			(5,163	)
Other Increases (Decreases)		960			(28,456	)		(27,496	)
Total Changes		(4,638	)		(27,027	)		(31,665	)
Closing balance		11,400			23,999			35,399

(*)	The increase in legal claims is composed mainly of ThU.S.$1,558 from Brazilian subsidiaries in connection with civil and labor lawsuits, being the latter the most important. In addition there are ThU.S.$840 from Arauco Argentina in connection with labor lawsuits .

(**)

The increase of Other Provisions comprises mainly an increase of ThU.S.$1,429 from Arauco Argentina for export duties. While in the Other Increases (Decreases), line item, the reverse of Negative Equity to Arauco Forest Brasil over Novo Oeste by ThU.S.$ 25,290 and Forestal Cholguán over Sercor is reflected by ThU.S.$2,850.

Provisions for litigations are related to labor and tax claims whose payment period is uncertain. Other provisions mainly include the recognition of a liability related to investments in associates and joint ventures accounted under the equity method with net asset deficiency at the end of the reporting period.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 19. INTANGIBLE ASSETS


	12-31-2016			12-31-2015
Classes of Intangible Assets, Net	ThU.S.$			ThU.S.$
Intangible assets, net		89,497			88,112
Computer software		26,370			21,251
Water rights		5,689			5,485
Customer		50,982			55,265
Other identifiable intangible assets		6,456			6,111

Classes of intangible Assets, Gross		159,025			142,704
Computer software		72,008			58,275
Water rights		5,689			5,485
Customer		71,275			70,676
Other identifiable intangible assets		10,053			8,268

Classes of accumulated amortization and impairment
Total accumulated amortization and impairment		(69,528	)		(54,592	)
Accumulated amortization and impairment, intangible assets		(69,528	)		(54,592	)
Computer software		(45,638	)		(37,024	)
Customer		(20,293	)		(15,411	)
Other identifiable intangible assets		(3,597	)		(2,157	)

Reconciliation of the carrying amount of intangible assets at the beginning and end of each reporting period balances


	12-31-2016
Reconciliation of intangible assets	Computer Software ThU.S.$			Water Rights ThU.S.$			Customer ThU.S.$			Others ThU.S.$			TOTAL ThU.S.$
Opening Balance		21,251			5,485			55,265			6,111			88,112
Changes
Additions		12,935			204			—			1,718			14,857
Disposals		(1	)		—			—			—			(1	)
Amortization		(8,368	)		—			(4,770	)		(1,414	)		(14,552	)
Increase (Decrease) related to foreign currency translation		178			—			487			41			706
Other Increases (Decreases)		375			—			—			—			375
Changes Total		5,119			204			(4,283	)		345			1,385
Closing Balance		26,370			5,689			50,982			6,456			89,497


	12-31-2015
Reconciliation of intangible assets	Computer Software ThU.S.$			Water Rights ThU.S.$			Customer ThU.S.$			Others ThU.S.$			TOTAL ThU.S.$
Opening Balance		18,224			5,442			63,164			6,428			93,258
Changes
Additions		9,638			66			—			690			10,394
Disposals		(73	)		—			—			(70	)		(143	)
Amortization		(6,448	)		(2	)		(4,819	)		(684	)		(11,953	)
Increase (Decrease) related to foreign currency translation		(84	)		(21	)		(3,080	)		(253	)		(3,438	)
Other Increases (Decreases)		(6	)		—			—			—			(6	)
Changes Total		3,027			43			(7,899	)		(317	)		(5,146	)
Closing Balance		21,251			5,485			55,265			6,111			88,112


	Years of Useful life (Average)
Computer Software		5
Customer		15
Brands		7

The amortization of customer and computer software is presented in the Consolidated Income Statements by Function under the line item “Administrative Expenses”.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 20. BIOLOGICAL ASSETS

Biological assets comprise forestry plantations, mainly radiata and taeda pine, and to a lesser extent eucalyptus. The plantations are located in Chile, Argentina, Brazil and Uruguay, with a total surface of 1.7 million hectares as of December 31, 2016 out of which 1 million hectares are used for forestry planting, 409 thousand hectares are native forest, 191 thousand hectares are used for other purposes and 52 thousand hectares not yet planted.

As of December 31, 2016, the production volume of logs totaled 18.7 million cubic meters (19.4 million cubic meters as of December 31, 2015).

Measurements of fair value of Arauco’s biological assets are classified as Level 3, due to the fact that inputs are not observable. However, this information reflects the assumptions that market participants would use in pricing the asset, including assumptions about risk.

These unobservable inputs were developed using the best information available and includes internal data from Arauco. These unobservable inputs can be adjusted if the available information indicates that other market participants would use different information or there is something specific in Arauco that is not available to other market participants.

The main considerations in determining the fair value of biological assets include the following:

•

Arauco uses discounted expected future cash flows of its forest plantations, which are based on a harvest projection date for all existing plantations.

•

Current forestry plantations are projected based on a net volume that will not decrease, with a minimum growth equivalent to the current supply demand.

•

Future plantations are not considered.

•

The harvest of forestry plantations supplies raw materials for all other products that Arauco produces and trades. By directly controlling the development of forests that will be processed, Arauco ensures high quality timber for each of its products.

•

Expected cash flows are determined in terms of harvest and expected sale of forestry products, associated with the demand from the Company’s own industrial centers and sales to third parties at market prices. Sales margin of the different products that are harvested in the forest is also considered in the valuation. The changes in the value of the plantations pursuant to the criteria defined above are accounted for in the results for the fiscal year, as established in IAS 41. These changes are presented in the Consolidated Income Statements under the line item Other income per function, which as of December 31, 2016 amounted to ThU.S.$208,562 (ThU.S.$210,479 as of December 31, 2015). The appraisal of biological assets resulted in a greater cost of the lumber sold in comparison to the real incurred cost, which is presented included in the cost of sales which as of December 31, 2016 amounted to ThU.S.$204,971 (ThU.S.$185,737 as of December 31, 2015).

•

Forestry plantations are harvested according to the needs of Arauco’s production plants.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

•

The discount rates used are 8% in Chile, Brazil and Uruguay, and 12% in Argentina.

•

It is expected that prices of harvested timber are constant in real terms based on market prices.

•

Cost expectations with respect to the lifetime of the forests are constant based on estimated costs included in the projections made by Arauco.

•

The average crop age by species and country is:


	Chile		Argentina		Brazil		Uruguay
Pine		24		15		15		—
Eucalyptus		12		10		7		10

The following table sets forth changes in fair value of biological assets considering variations in significant assumptions considered in calculating the fair value of the assets:


		ThU.S.$
Discount rate	0,5		(107,133	)
	-0,5		113,385
Margins (%)	10		383,069
	-10		(383,069	)

The adjustment to commercial value of biological assets is recorded in the Consolidated Income Statements by Function, under the line item Other Income or Other Expenses, depending on whether it corresponds to profits or losses.

Forestry plantations classified as current Biological assets are those to be harvested and sold within twelve months after the reporting period.

Insurances policies are currently in force and effect against fires that may occur in forest plantations, which in conjunction with the Company’s own resources, allows to minimize the risks associated to any such losses.

Detail of Biological Assets Pledged as Security

As of December 31, 2016, there are no forestry plantations pledged as security.

Detail of Biological Assets with Restricted Ownership

As of the date of these consolidated financial statements, there are no biological assets with restricted ownership.

No significant government grants have been received.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Current and Non-Current Biological Assets

As of the date of these consolidated financial statements, the Current and Non-current biological assets are as follows:


	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Current		306,117		306,529
Non-current		3,592,874		3,520,068
Total		3,898,991		3,826,597

Reconciliation of carrying amount of biological assets


Movement	12-31-2016 ThU.S.$
Opening Balance		3,826,597
Changes in Biological Assets
Additions through acquisition and costs of new plantations		137,439
Decreases due to Sales		(1,351	)
Decreases due to Harvest		(326,494	)
Gain (losses) arising from changes in fair value less costs to sale		208,562
Increases (decreases) in Foreign Currency Translation		69,068
Loss of forest due to fires		(15,193	)
Other Increases (decreases)		363
Total Changes		72,394
Closing Balance		3,898,991


Movement	12-31-2015 ThU.S.$
Opening Balance		3,846,353
Changes in Biological Assets
Additions through acquisition and costs of new plantations		215,557
Decreases due to Sales		(1,028	)
Decreases due to Harvest		(299,501	)
Gain (losses) arising from changes in fair value less costs to sale		210,479
Increases (decreases) in Foreign Currency Translation		(111,502	)
Loss of forest due to fires		(34,850	)
Other Increases (decreases)		1,089
Total Changes		(19,756	)
Closing Balance		3,826,597

As of the date of these consolidated financial statements, there are no disbursements related to the acquisition of biological assets.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 21. ENVIRONMENTAL MATTERS

Environment Management

For Arauco, sustainability means management strategy. This strategy incorporates values, commitments and standards, that together with the adoption of best practices as well as the use of the latest available technologies, seek to continuously improve the Company’s environmental management. It is the environmental department and each of its specialists that ensure these guidelines are met and are put in to practice in everyday company operations.

All of Arauco’s production units have certified environmental management systems, which reinforce the Company’s commitment to environmental performance and ensure the traceability of all raw materials used.

Arauco uses several supplies in its productive processes such as wood, chemical products, and water, etc., which in turn produce liquid and gas emissions. As a way to make the Company’s environmental management more efficient, significant progress has been made to reduce consumption and emissions.

Environmental investments have been made related to the control of atmospheric emissions, process improvements, water and waste management, as well as effluent treatment, in order to improve the environmental performance of all of Arauco’s business units.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Detail information of disbursements related to the environment

As of December 31, 2016 and December 31, 2015 Arauco has made and / or has committed the following disbursements by major environmental projects:

12/31/2016

Disbursements undertaken 2016

Committed
Disbursements

Company

Name of project

State

of project

Amount
ThU.S.$

Asset

Expense

Asset/expense

destination item

Amount
ThU.S.$

Estimated
date

Arauco Do Brasil S.A.

Environmental improvement studies

In process

285

Assets

Property, plant and equipment

417

2017

Arauco Do Brasil S.A.

Environmental improvement studies

In process

385

Expense

Administration expenses

1,231

2017

Celulosa Arauco Y Constitucion S.A.

Investment projects for the control and management of gas emissions from industrial process

In process

1,585

Assets

Property, plant and equipment

1,396

2017

Celulosa Arauco Y Constitucion S.A.

Investment projects for the control and management of gas emissions from industrial process

In process

476

Assets

Property, plant and equipment

8,085

2018

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

611

Assets

Property, plant and equipment

20,658

2017

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

Finished

1,271

Assets

Property, plant and equipment

—

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

1,218

Assets

Property, plant and equipment

14,736

2018

Celulosa Arauco Y Constitucion S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

In process

51,703

Assets

Property, plant and equipment

64,450

2017

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

26,990

Expense

Operating cost

4,180

2018

Celulosa Arauco Y Constitucion S.A.

Expansion of solid industrial waste dumpsite for management of these in the future

Finished

144

Assets

Property, plant and equipment

—

Arauco Argentina S.A

Construction emisario

In process

Assets

Property, plant and equipment

824

2017

Arauco Argentina S.A

Expansion of solid industrial waste dumpsite for management of these in the future

In process

187

Assets

Property, plant and equipment

124

2017

Arauco Argentina S.A

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

In process

183

Assets

Property, plant and equipment

6,112

2017

Paneles Arauco S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

Finished

1,332

Expense

Operating cost

—

Paneles Arauco S.A.

Expansion of solid industrial waste dumpsite for management of these in the future

Finished

465

Expense

Administration expenses

—

Paneles Arauco S.A.

Environmental improvement studies

In process

1,217

Assets

Property, plant and equipment

304

2017

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

Environmental improvement studies

In process

643

Expense

Administration expenses

946

2017

Forestal Los Lagos S.A

Environmental improvement studies

In process

225

Expense

Operating cost

2017

TOTAL

88,928

123,481

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

12/31/2015

Disbursements undertaken 2015

Committed
Disbursements

Company

Name of project

State
of project

Amount
ThU.S.$

Asset
Expense

Asset/expense
destination item

Amount
ThU.S.$

Estimated
date

Arauco Do Brasil S.A.

Environmental improvement studies

In process

Assets

Property, plant
and equipment

220

2016

Arauco Do Brasil S.A.

Environmental improvement studies

In process

220

Expense

Administration
expenses

699

2016

Celulosa Arauco Y Constitucion S.A.

Investment projects for the control and management of gas emissions from industrial process

In process

2,720

Assets

Property, plant
and equipment

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

2,688

Assets

Property, plant
and equipment

1,057

2016

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

Finished

4,818

Assets

Property, plant
and equipment

Celulosa Arauco Y Constitucion S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

Finished

244

Assets

Property, plant
and equipment

Celulosa Arauco Y Constitucion S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

In process

6,668

Assets

Property, plant
and equipment

113,321

2017

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

Finished

27,868

Expense

Operating cost

Celulosa Arauco Y Constitucion S.A.

Expansion of solid industrial waste dumpsite for management of these in the future

In process

2,122

Assets

Property, plant
and equipment

1,420

2016

Arauco Argentina S.A

Construction emisario

In process

—

Assets

Property, plant
and equipment

805

2016

Arauco Argentina S.A

Expansion of solid industrial waste dumpsite for management of these in the future

In process

165

Assets

Property, plant
and equipment

3,952

2016

Arauco Argentina S.A

Environmental improvement studies

Finished

117

Assets

Property, plant
and equipment

Arauco Argentina S.A

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

In process

Assets

Property, plant
and equipment

6,268

2016

Paneles Arauco S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

In process

1,627

Expense

Operating cost

109

2016

Paneles Arauco S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

In process

555

Assets

Property, plant
and equipment

366

2016

Paneles Arauco S.A.

Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants

Finished

720

Assets

Property, plant
and equipment

—

Paneles Arauco S.A.

Expansion of solid industrial waste dumpsite for management of these in the future

In process

355

Expense

Administration
expenses

355

2016

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

Environmental improvement studies

In process

613

Expense

Administration
expenses

783

2016

Forestal Los Lagos S.A

Environmental improvement studies

In process

206

Expense

Operating cost

208

2016

TOTAL

51,776

129,563

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 22. NON-CURRENT ASSETS HELD FOR SALE

Arauco decided to sell assets in previous years corresponding mainly to sawmills in Chile and remains committed to its sales plan.

By the end of fiscal year 2015, Paneles Arauco S.A. decided to reclassify to Properties, plant and equipment an amount of ThU.S.$5,429, since the Escuadron, La Araucana and Remanufactura Lomas Coloradas plants were used as warehouses for finished products. These assets consisted of buildings and saw mill equipment, which were shut down in preceding years.

The following table sets forth information on the main types of non-current assets held for sale:


	12-31-2016		12-31-2015
	ThU.S.$		ThU.S.$
Land		160		217
Buildings		1,122		1,122
Property, plant and equipment		1,777		1,855
Total		3,059		3,194

As of December 31, 2016 and December 31, 2015, there were no significant effects on results related to the sale of assets held for sale.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 23. FINANCIAL INSTRUMENTS

23.1 Classification

Arauco’s financial instruments as of December 31, 2016 and December 31, 2015, are displayed in the table below. Regarding those instruments valued at an amortized cost, as estimation of their reasonable value is displayed for informational purposes.


	December 2016				December 2015
Financial Instruments *Thousands of dollars*	Carrying amount		Fair Value		Carrying amount		Fair Value

Fair value through profit or loss (held for trading)		198,582		198,582		200,034		200,034
Forward		3,166		3,166		3,245		3,245
Mutual funds (2)		195,416		195,416		196,789		196,789
Loans and Accounts Receivables		1,126,182		1,126,182		1,054,952		1,054,952
Cash and cash equivalents		396,837		396,837		303,236		303,236
Cash		149,446		149,446		143,324		143,324
Time deposits		247,391		247,391		159,912		159,912
Accounts Receivables (net)		715,883		715,883		748,592		748,592
Trades and other receivables		600,589		600,589		614,655		614,655
Lease receivable		764		764		15		15
Other receivables		114,530		114,530		133,922		133,922
Accounts receivable from related parties		13,462		13,462		3,124		3,124
Other Financial Assets (5)		10,903		10,903		29,545		29,545

Financial Liabilities at amortized cost (3)		5,022,725		5,158,789		4,895,594		5,095,197
Bonds issued denominated in U.S. dollars		2,321,980		5,158,789		4,895,594		5,095,197
Bonds issued denominated in U.F. (4)		1,130,679		2,480,063		2,317,216		2,409,538
Bank Loans in Dollars		891,338		926,070		953,898		1,004,792
Bank borrowing denominated in U.S. dollars		23,020		23,020		43,644		43,644
Financial Leasing		113,986		108,980		127,559		123,289
Trades and other Payables		537,891		537,891		583,018		583,018
Accounts payable to related parties		3,831		3,831		7,141		7,141
Financial liabilities at fair value through profit or loss		336		336		1,429		1,429
Hedging Liabilities		87,027		87,027		226,139		226,139

(1)	Assets measured at fair value through profit or loss other than mutual funds classified as cash equivalents, are presented in the line item “other financial assets” in the consolidated statement of financial position.

(2)	Although mutual funds are measured at fair value through profit or loss for purposes of the consolidated statement of financial position mutual funds are classified as “Cash and cash equivalents” due to the are highly liquid short term investment.

(3)	Financial liabilities measured at amortized cost, other than “Trade and other payables” and derivatives are presented in the consolidated statement of financial position in the line item “Other financial liabilities” as current and non-current based on their maturity.

(4)	The Unidad de Fomento (“UF”) is a unit of account that is linked to, and is adjusted daily to reflect changes in the Chilean consumer price index.

(5)	Includes guarantee fund for derivatives which correspond to the collateral under swap agreements.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

23.2 Fair Value Hierarchy of Financial Assets and Liabilities

The assets and liabilities measured at fair value in the consolidated statements of financial position as of December 31, 2016, have been measured based on the valuation methodologies provided in IAS 39. The methodologies applied for each financial instrument are classified according to their hierarchy as follows:

•

Level 1: Securities or quoted prices in active markets for identical assets and liabilities

•

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

•

Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs).


	Fair Value December 2016 ThU.S.$		Level 1 ThU.S.$		Fair value		Level 3 ThU.S.$
Financial Instruments Thousands of dollars	Fair Value December 2016 ThU.S.$		Level 1 ThU.S.$		Level 2 ThU.S.$		Level 3 ThU.S.$

Financial assets measured at fair value
Derivatives		3,166				3,166
Mutual Funds (2)		195,416		195,416

Other financial assets		10,903		2,245		8,657

Financial liabilities measured at fair value
Bonds issued denominated in U.S. dollars		2,480,063		2,480,063
Bonds issued denominated in U.F. (4)		1,078,934		1,078,934
Bank Loans in Dollars		926,070				926,070
Bank borrowing denominated in U.S. dollars		23,020				23,020
Financial Leasing		108,980				108,980

Hedging Liabilities		336				336
Financial liabilities at fair value through profit or loss		87,027				87,027

23.3 Explanation of the valuation of Financial Instruments.

Cash and cash equivalent and accounts receivable

The carrying amount of accounts receivable flows, cash and cash equivalents (including mutual funds), and other financial assets and liabilities approximate their fair value due to the short-term nature of such instruments.

Derivative financial instruments

Interest rate and currency swaps are valued under the cash flow discount method at the rate applicable according to the transaction’s risk, using an internal methodology based on the information obtained from Bloomberg. In this particular case, given that cross currency swaps correspond to future flows in UF and future flows in Dollars, Arauco calculates the current value of such flows by using 2 discount curves: the UF zero coupon curve and the Dollar zero coupon.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The fair value of the interest rate swap contracts is calculated by reference to the rate differential between the agreed upon rate and the market rate as of the end date of these financial statements.

The fair value of the currency forward contracts is calculated by reference to the current forward exchange rates of contracts with similar maturity profiles.

Financial Liabilities

The fair value of bonds issued was determined with reference to quoted market prices as they have standard terms and conditions.

The fair value of bank borrowings were determined based on discounted cash flow analysis, applying the corresponding discount yield curves to the remaining term to maturity.

Disclosures of the fair value of financial liabilities at amortized cost are determined via the use of discounted cash flows, calculated over variables of the observable markets as of the date of informing the consolidated financial statements, and correspond to Level 2 of the fair value hierarchy.

The following table shows the compliance with the financial covenants (level of indebtedness, detailed in section 23.9.3), for the bonds issued prior to the year 2015, as required by domestic indentures (Chile):


	December 2016 ThU.S.$		December 2015 ThU.S.$
Interest bearing loans, current (a)		697,000		291,798
Other financial liabilities, current		697,452		296,038
Hedging liabilities current + Financial liabilities at fair value through profit or loss current		452		4,240
Interest bearing loans, non-current (b)		3,784,003		4,013,637
Other financial liabilities, non-current		3,870,914		4,236,965
Hedging liabilities non-current + Financial liabilities at fair value through profit or loss non-current		86,911		223,328

Financial debt total (c)		4,481,003		4,305,435

Cash and cash equivalents		592,253		500,025
Other financial assets current		5,201		32,195
Total Cash (d)		597,454		532,220

Net Financial Debt (e)		3,883,549		3,773,215

Equity attributable to owners of controlling parent		6,955,251		6,608,710
Non-controlling interests		44,032		37,735
Total equity (f)		6,999,283		6,646,445

Debt to equity ratio (g)		0.55		0.57

(a)	Other Current Financial Liabilities – (Current Hedge Liabilities + Financial Liabilities with changes in current results)

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

(b)	Other Non-current Financial Liabilities – (Non-current Hedge Liabilities + Financial Liabilities with changes in non-current results)

(c)	Interest bearing loans, current + Interest bearing loans, non-current

(d)	Cash and Cash Equivalents + Other Current Financial Assets

(e)	Total Financial Debt – Total Cash

(f)	Equity attributable to owners of controlling parent + Non-controlling interests

(g)	Net Financial Debt / Total Equity

Note: The Hedge Liabilities include Currency Swaps, Forwards, and Options. As of 31-12-2016 the amount for the financial Liabilities with changes in non-current profits and losses is zero, the Liabilities of current hedges amount to ThU.S.$ 115, and financial liabilities with a change in current profits and losses amount to ThU.S.$ 336

The following table shows the compliance with the financial covenants (level of indebtedness, detailed in section 23.9.3), for the bonds issued after year 2015, as required by domestic indentures (Chile):


	December 2016 ThU.S.$		December 2015 ThU.S.$
Other financial liabilities (a)		4,568,366		4,533,003
Other financial liabilities, current		697,452		296,038
Other financial liabilities, non-current		3,870,914		4,236,965
Financial liabilities at fair value through profit or loss		336		1,429
Hedging liabilities (b)		87,027		226,139
Swaps		86,895		205,618
Forward		132		3,677
Options		0		16,844
Financial debt total (c)		4,481,003		4,305,435

Cash and cash equivalents		592,253		500,025
Total Cash (d)		592,253		500,025

Net Financial Debt (e)		3,888,750		3,805,410

Equity attributable to owners of controlling parent		6,955,251		6,608,710
Non-controlling interests		44,032		37,735
Total equity (f)		6,955,251		6,646,445
Debt to equity ratio (g)		0.56		0.57

(a)	Other Financial Liabilities current + Other Financial Liabilities non-current

(b)	Swaps + Forwards + Options

(c)	Other financial liabilities +Financial liabilities at fair value through profit or loss + Hedging liabilities

(d)	Cash and Cash Equivalents + Other Current Financial Assets

(e)	Total Financial Debt – Total Cash

(f)	Equity attributable to owners of controlling parent + Non-controlling interests

(g)	Net Financial Debt / Total Equity

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The following table sets forth a reconciliation between the financial liabilities and the statement of financial position as of December 31, 2016 and 2015:


Thousands of dollars	December 2016
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Other current financial liabilities, Total		From 13 months to 5 years		More than 5 years		Other non-current financial liabilities, Total		Total
Bonds obligations		51.874		5,836		55,193		1,179,558		1,945,583		3,125,141		3,180,334
Bank borrowing		134.140		72,948		199,743		648,017		149,782		797,799		997,542
Financial Leasing		9.534		27,561		36,862		90,697		—		90,697		127,559
Government loans		—		—		—		—		—		—		—
Swap and Forward		453		—		4,240		223,328		—		223,328		227,568

Other Financial Liabilities, Total (a)		196.001		106,345		296,038		2,141,600		2,095,365		4,236,965		4,533,003


Thousands of dollars	December 2016
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Total Current		From 13 months to 5 years		More than 5 years		Total non-current		Total
Trades and other payables		511.371		—		583,018		—		—		—		583,018
Related party payables		3.831		—		7,141		—		—		—		7,141

Accounts Payable, Total (b)		515.202		—		590,159		—		—		—		590,159

Total Financial Liabilities (a) + (b)		711.203		106,345		886,197		2,141,600		2,095,365		4,236,965		5,123,162


Thousands of dollars	December 2015
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Other current financial liabilities, Total		From 13 months to 5 years		More than 5 years		Other non-current financial liabilities, Total		Total
Bonds obligations		49.357		377,871		430,446		966,131		2,261,750		3,227,881		3,658,327
Bank borrowings		126.795		133,554		273,470		797,628		248,117		1,045,745		1,319,215
Financial leasing		9.301		23,855		31,706		65,289		—		65,289		96,995
Government loans		—		3,893		3,893		—		—		—		3,893
Swap and Forward		4.240		—		2,828		114,904		—		114,904		117,732

Other Financial Liabilities, Total (a)		189.693		539,173		742,343		1,943,952		2,509,867		4,453,819		5,196,162


Thousands of dollars	December 2015
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Total Current		From 13 months to 5 years		More than 5 years		Total non-current		Total
Trades and other payables		583.018		2,434		630,406		—		—		—		630,406
Related party payables		7.141		—		6,036		—		—		—		6,036

Accounts Payable, Total (b)		590.159		2,434		636,442		—		—		—		636,442

Financial Liabilities, Total (a) + (b)		779.852		541,607		1,378,785		1,943,952		2,509,867		4,453,819		5,832,604

23.4 Derivative Financial Instruments

Hedging instruments recorded as of December 31, 2016 are cash flow hedges. Arauco uses derivatives for hedging purposes, such as cross currency swaps, currency and commodity forwards, interest rate swaps, and options. Depending on the fair value of each instrument, the position could be either an asset or a liability, and they are listed in the Statement of Financial Position under Other Non-current Financial Assets or Other Non-current Financial Liabilities, respectively. The effects for the period are presented under Equity as Other Comprehensive Income or the Statement of Comprehensive Income as Finance Income or Finance Costs, net of differences in exchange rate of the hedged items and the deferred tax.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

A summary of the hedging instruments included in the Financial Position Statement as of the end of this period, is presented below:


Financial Instruments	Fair Value ThU.S.$
Assets at fair value through profit or loss (held for trading)		3,166
Derivative-Uruguay (1)		3,159
Forward-Colombia		7

Hedging Assets		8,658
Derivative-Uruguay (1)		2,029
Cross Currency Swaps		6,629

Financial liabilities at fair value through profit or loss		(336	)
Forward-Colombia		(267	)
Derivative-Uruguay (1)		(69	)

Hedging Liabilities		(87,027	)
Cross Currency Swaps		(86,895	)
Derivative-Uruguay (1)		(132	)

(1)

Include Swap and Forward from Uruguay tables.

23.4.1. Chile

Cross currency swaps

Arauco has exposure to cash flow variability in the exchange rate risk factor. This occurs mainly because of holding assets or liabilities in currencies other than the operational currency, creating variations that could affect the operation’s results.

Below are the cross currency swaps that Arauco has as of December 31, 2016 to cover the exposure to the exchange rate risk generated from bonds denominated in UF:


Bond	Institution	Amount ThU.S.$		Amount UF		Starting date		Ending date		Market Value ThU.S.$
F	Deutsche - England		43,618,307		1,000,000		10/30/2011		10/30/2021		(4,703	)
F	JP Morgan - N.A.		43,618,307		1,000,000		10/30/2011		10/30/2021		(4,584	)
F	Deutsche - England		37,977,065		1,000,000		04/30/2014		04/30/2019		1,782
F	BBVA - Chile		38,426,435		1,000,000		10/30/2014		04/30/2023		558
F	BBVA - Chile		38,378,440		1,000,000		10/30/2014		04/30/2023		908
F	Santander - Chile		37,977,065		1,000,000		10/30/2014		04/30/2023		1,427
F	BCI - Chile		37,621,562		1,000,000		10/30/2014		04/30/2023		1,952
J	Corpbanca - Chile		42,864,859		1,000,000		09/01/2010		09/01/2020		(5,505	)
J	BBVA - Chile		42,864,859		1,000,000		09/01/2010		09/01/2020		(5,505	)
J	Deutsche - England		42,864,859		1,000,000		09/01/2010		09/01/2020		(5,590	)
J	Santander - Spain		42,873,112		1,000,000		09/01/2010		09/01/2020		(5,463	)
J	BBVA - Chile		42,864,257		1,000,000		09/01/2010		09/01/2020		(5,318	)
P	Corpbanca - Chile		46,474,122		1,000,000		05/15/2012		11/15/2021		(6,355	)
P	JP Morgan - N.A.		47,163,640		1,000,000		11/15/2012		11/15/2021		(6,157	)
P	BBVA - Chile		42,412,852		1,000,000		11/15/2013		11/15/2023		(2,548	)
P	Santander - Chile		41,752,718		1,000,000		11/15/2013		11/15/2023		(1,591	)
P	Deutsche - England		41,752,718		1,000,000		11/15/2013		11/15/2023		(1,564	)
R	Santander - Chile		128,611,183		3,000,000		10/01/2014		04/01/2024		(13,815	)
R	JP Morgan - England		43,185,224		1,000,000		10/01/2014		04/01/2024		(4,039	)
R	Corpbanca - Chile		43,277,070		1,000,000		10/01/2014		04/01/2024		(4,026	)
Q	BCI - Chile		43,185,224		1,000,000		10/01/2014		04/01/2021		(3,524	)
Q	BCI - Chile		43,196,695		1,000,000		10/01/2014		04/01/2021		(3,443	)
S	Santander - Chile		201,340,031		5,000,000		11/15/2016		11/15/2026		(3,165	)

											(80,266	)

Arauco needs to minimize the risk of exchange rate as it holds adjustable obligations in Chilean Pesos. The objective of this position in the swap is to eliminate the uncertainty of the exchange rate, exchanging the flows derived from obligations expressed in adjustable pesos of the bonds described above, with flows in U.S. dollars (Arauco’s functional currency), at a fixed and determined exchange rate as of the agreement’s execution date.

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Through an effectiveness test, and pursuant to IFRS 39, we were able to validate that the aforementioned hedging instruments are highly effective within an acceptable range for Arauco, for the purposes of eliminating the uncertainty of the exchange rate in the commitments derived from the hedged object.

23.4.2. Colombia

Forward contracts that are in force and effect, executed by Arauco Colombia as of December 31, 2016, are detailed in the following table:

Exchange rate

Institution

Amount ThU.S.$

Starting date

Ending date

Market Value ThU.S.$

USDCOP

BBVA Colombia

5,000

10/28/2016

1/11/2017

USDCOP

BBVA Colombia

4,000

11/18/2016

2/9/2017

(255

)

USDCOP

BBVA Colombia

7,000

12/13/2016

3/10/2017

(12

)

(260

)

23.4.3. Uruguay

Forward

As of December 31, 2016, Arauco Uruguay maintains the following forward contracts in force and effect through a joint operation (50%) for the purposes of ensuring an exchange rate for sale of dollars:

Exchange rate

Institution

Notional ThU.S.$

Market Value ThU.S.$

UYUUSD

Banco Santander Uy

16,600

1,633

UYUUSD

Citibank U.K.

3,200

150

UYUUSD

HSBC Uruguay

10,750

1,256

3,039

The results of Arauco Uruguay’s also face exposure to the price variation of certain fuels, as occurs with Fuel Oil N°6, which is used during the cellulose manufacturing process. In order to minimize this risk, the volatility of future flows associated to the purchase of Fuel Oil No. 6 for years 2016, 2017 and part of 2018 has been limited, through forwards of this commodity. The agreements that are in force and effect as of December 31, 2016, are detailed below:

Exchange rate

Institution

Notional ThU.S.$

Market Value ThU.S.$

Fuel Oil N°6

JPMorgan Chase Bank, N.A.

5,508

1,059

Fuel Oil N°6

DNB Bank ASA

2,661

156

Fuel Oil N°6

Citibank U.K.

378

1,298

Swap

In addition, Arauco Uruguay´s maintains an Interest Rate Swap in force and effect, a derivative instrument which purpose is to set the interest rate of a variable rate debt in the same currency (USD). The valuation off this instrument as of December 31, 2016, is shown below:


Exchange rate	Institution	Notional ThU.S.$		Market Value ThU.S.$
USD	DNB Bank ASA		59,077		650

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Note: the amounts and market value in the tables included in section 23.4.4 represent 50% of the total, reflecting the equity stake held by Arauco in its Uruguayan subsidiaries.

23.5 Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the consolidated statements of financial position they are included in line items “Cash and cash equivalents” (certain components of cash and cash equivalents), “Trade and Other Current/Non-Current Receivables” and ”Accounts receivable from related parties”.

Loans and receivables are measured at amortized cost using the effective interest method and are tested for impairment. Financial assets that are classified as loans and receivables are: cash and cash-equivalents, time deposits, repurchase agreements, trade and other current/non-current receivables, and account receivables from related parties.

As of December 31, 2016, no provisions for impairment have been registered.


	December 2016 ThU.S.$		December 2015 ThU.S.$
Loans and Accounts Receivables		1,126,182		1,054,952
Cash and cash equivalents		396,837		303,236
Cash		149,446		143,324
Time Deposits		247,391		159,912
Trade and other receivables (net)		729,345		751,716
Trades and Other receivables		600,589		614,655
Lease receivable		764		15
Other receivables		114,530		133,922

Accounts receivable from related parties		13,462		3,124

23.5.1. Cash and Cash Equivalents

Includes cash on hand, bank checking accounts balances and time deposits and other short term highly liquid investments with an original maturity of three months or less. They are short-term, highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of changes in value.

The composition of cash and cash equivalents (including the balance of mutual funds displayed in this note as valuation, instruments at fair value with profit or loss) at December 31, 2016 and December 31, 2015, classified by origin coins is as follow:


	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$

Cash and Cash Equivalents		592,253		500,025
US Dollar		524,426		388,818
Euro		2,357		2,501
Other currencies		55,069		65,228
Chilean pesos		10,401		43,478

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

23.5.2 Time Deposits and Repurchase Agreements: The investment objective of time deposits and repurchase agreements is to maximize in the short-term the amounts of cash surpluses. These instruments are authorized by Arauco’s Investment Policy, which allows investing in fixed income securities. These instruments have a maturity of less than three months from the date of acquisition.

23.5.3 Trades and Other Receivables: These represent enforceable rights for Arauco resulting from the normal course of the business.

23.5.4 Other Receivables: These correspond to receivables from sales, services or loans that are not considered within the normal course of the business.

The provision for doubtful accounts is presented as a deduction of trade and other receivables. The provision for doubtful accounts is established based on an analysis of the age of the portfolio and considering the insurance coverage on accounts receivable. Other conditions are assessed for example when there is objective evidence that Arauco will not receive payments under the original sale terms and when the customer is a party to a bankruptcy court agreement or cessation of payments, and is written-off when Arauco has exhausted all levels of recovery of the receivable in a reasonable time.

23.5.5 Accounts receivable from related parties: Represent enforceable rights for Arauco resulting from the normal course of business, calling normal to the line of business, activity or purpose of exploitation and financing, and which Arauco owns a non-controlling ownership of the counterparty.

The following table sets forth trade and other current/non-current receivables classified by currencies as of December 31, 2016 and December 31, 2015:


	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$

Trades and other current receivables		701,610		733,322

US Dollar		489,056		507,032
Euros		26,544		27,595
Other currencies		77,907		75,082
Chilean pesos		106,681		123,056
U.F.		1,422		557

Accounts receivable from related parties, current		11,548		3,124
US Dollar		274		21
Other currencies		725		995
Chilean pesos		10,549		2,108

Trade and other non-current receivables		14,273		15,270

US Dollar		6,895		9,976
Other currencies		527		729
Chilean pesos		5,753		3,145
U.F.		1,098		1,420

Accounts receivable from related parties, non-current		957		—
U.F.		957		—

100

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

23.6 Total Financial Liabilities

Arauco’s financial liabilities to the date of these consolidated financial statements are as follows :


Financial Liabilities	December 2016 ThU.S.$		December 2015 ThU.S.$
Total Financial Liabilities		5,110,088		5,123,162

Financial liabilities at fair value through profit or loss (held for trading)		336		1,429
Hedging Liabilities		87,027		226,139

Financial Liabilities Measured at Amortized Cost		5,022,725		4,895,594

The following table sets forth the current portion of the non-current bank borrowings and debt issued as of December 31, 2016 and 2015.


	December 2016 ThU.S.$		December 2015 ThU.S.$
Bank borrowings Non-current - current portion		88,028		85,885
Bonds issued - current portion		62,506		55,193
Total		150,534		141,078

23.7 Financial Liabilities Measured at Amortized Cost

Financial liabilities correspond to non-derivative financial instruments with contractual cash-flow payments that can be either fixed or variable.

Also, this category includes those non-derivative financial liabilities for services or goods delivered to Arauco at the end of each reporting period that have not yet been paid. These amounts are not insured and are generally paid within thirty days after being recognized.

As the end of each reporting period, Arauco includes in this category bank borrowings, bonds issued denominated in U.S. Dollars and in UF, trade and other payables.

101

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


	*Currency*		*12-31-2016*		*12-31-2015*		*12-31-2016*		*12-31-2015*
			ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
			*Amortized Cost ThU.S.$*				*Fair Value ThU.S.$*
Total Financial Liabilities				5,022,725		4,895,594		5,158,789		5,095,197
Bonds Issued		U.S. Dollar		2,321,980		2,317,216		2,480,063		2,409,538
Bonds Issued		U.F.		1,130,679		863,118		1,078,934		923,775
Bank borrowings		U.S. Dollar		891,338		953,898		926,070		1,004,792
Bank borrowings		Other currencies		23,020		43,644		23,020		43,644
Financial Leasing		Other currencies		98,316		113,580		94,052		109,796
Financial Leasing		Chilean pesos		15,670		13,979		14,928		13,493
Trades and Other Payables		U.S. Dollar		150,162		174,469		150,162		174,469
Trades and Other Payables		Euro		13,034		8,808		13,034		8,808
Trades and Other Payables		Other currencies		70,736		70,303		70,736		70,303
Trades and Other Payables		Chilean pesos		285,359		324,361		285,359		324,361
Trades and Other Payables		U.F.		18,600		5,077		18,600		5,077
Related party payables		U.S. Dollar		1,968		962		1,968		962
Related party payables		Chilean pesos		1,863		6,179		1,863		6,179

The financial liabilities at amortized cost presented in the consolidated statements of financial positions as of December 31, 2016 and 2015 are as follows:


	December 2016
	Current ThU.S.$		Non-Current ThU.S.$		Total
Other financial liabilities		697,000		3,784,003		4,481,003
Trade and other payables		537,891		—		537,891
Related Party Payables		3,831		—		3,831
Total Financial Liabilities Measured at Amortized Cost		1,238,722		3,784,003		5,022,725


	December 2015
	Current ThU.S.$		Non-Current ThU.S.$		Total
Other financial liabilities		291,798		4,013,637		4,305,435
Trade and other payables		583,018		—		583,018
Related Party Payables		7,141		—		7,141
Total Financial Liabilities Measured at Amortized Cost		881,957		4,013,637		4,895,594

102

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

23.8 Cash Flow Hedges Reserve Reconciliation

The following table sets forth the reconciliation balances of cash flow hedges presented in Other Comprehensive Income:


	January - December
	2016			2015
	ThU.S.$			ThU.S.$
Opening balance		(55,396	)		(53,022	)
Fair value gains (losses) arising during the year		148,475			(113,021	)
Exchange differences of bonds hedged		(79,847	)		107,985
Finance costs		15,417			16,895
Settlements during the period		(10,198	)		(16,122	)
Deferred taxes		(17,355	)		1,889
Closing balance		1,096			(55,396	)

23.9 Capital Disclosures

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

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

Ensuring business continuity and normal operations in the long term;

Ensuring funding for new investments to achieve sustainable growth over time;

Keeping adequate capital structure considering all economic cycles that impact the business and the nature of the industry; and

Maximizing the Company’s value and providing an adequate return to shareholders.

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

Arauco determines and manages its capital structure based on its carrying amount of equity plus its financial debt (bank borrowings and bonds issued).

23.9.3 Quantitative Information on Capital Management

The following table sets forth the financial covenants that the Company has to comply with as part of the terms of certain of its obligations:

Instrument

December 2016
ThU.S.$

December 2015
ThU.S.$

Interest
coverage
>= 2,0x

Debt level
(1) <=
1, 2x

Domestic bonds

1,130,679

863,118

N/A

✓

Syndicate Loan

298,967

298,316

✓

N/R: Not required for the financial obligation

(1)

Debt to equity ratio (financial debt divided by equity plus non-controlling interests)

103

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

As of December 31, 2016 and December 31, 2015, Arauco has complied with all of its financial covenants.

The following table sets forth the credit ratings of our debt instruments as of December 31, 2016, are as follows:


Instrument	Standard & Poor’s	Fitch Ratings	Moody’s	Feller Rate
Local bonds	-	AA -	-	AA -
Foreign bonds	BBB -	BBB	Baa3	-

Capitalization requirements are established based on the Company’s financial needs and on maintaining an adequate liquidity level and complying with financial covenants established in current debt arrangements. The Company manages its capital structure and makes adjustments based on the prevailing economic conditions in order to mitigate the risks associated with adverse market conditions, and based on opportunities that may arise to improve the Company’s level of liquidity.

The capitalization of Arauco as of December 31, 2016 and December 31, 2015 is as follows:


	December 2016 ThU.S.$		December 2015 ThU.S.$
Equity		6,999,283		6,646,445
Bank borrowings		914,358		997,542
Financial leasing		113,986		127,559
Bonds issued		3,452,659		3,180,334

Capitalization		11,480,286		10,951,880

23.10 Risk Management

Arauco’s financial instruments are exposed to various financial risks: credit risk, liquidity risk and market risk (including exchange rate risks, interest rate risks and price risks).

Arauco’s overall risk management program focuses on uncertainty in financial markets and aims to minimize potential adverse effects on Arauco’s financial profitability.

Arauco’s financial risk management is overseen by the Corporate Finance Department. This department identifies, assesses and hedges financial risks in close collaboration with Arauco’s operational units.

23.10.1 Type of Risk: Credit Risk

Description

Credit risk refers to financial uncertainty at different periods of time relating to the fulfillment of obligations with counterparties, at the time of exercising the contract rights to receive cash or other financial assets on behalf of Arauco.

104

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Explanation of Credit Risk Exposure and How This Risk Arises

Arauco’s exposure to credit risk is directly related to each of its customer’s individual abilities to fulfill their contractual commitments, reflected in trade receivables.

Accounts exposed to credit risk are: trade receivable, financial lease debtors and other debtors.

Arauco does not have a securitized portfolio.


	December 2016 ThU.S.$		December 2015 ThU.S.$
Current Receivables

Trades receivables		598,597		614,623
Financial lease receivables		411		9
Other Debtors		102,602		118,690
Net subtotal		701,610		733,322

Trades receivables		609,102		625,201
Financial lease receivables		512		125
Other Debtors		108,640		127,856
Gross subtotal		718,254		753,182

Provision for doubtful trade receivables		10,505		10,578
Provision for doubtful lease receivables		101		116
Provision for doubtful other debtors		6,038		9,166
Subtotal Bad Debt		16,644		19,860

Non-Current Receivables

Trades receivables		1,992		32
Financial lease receivables		353		6
Other Debtors		11,928		15,232
Net Subtotal		14,273		15,270

Trades receivables		1,992		32
Financial lease receivables		353		6
Other Debtors		11,928		15,232
Gross subtotal		14,273		15,270

Provision for doubtful trade receivables		—		—
Provision for doubtful lease receivables		—		—
Provision for doubtful other debtors		—		—
Subtotal Bad Debt		—		—

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

The Credit and Collections Sub-Division, dependent from the Treasury Division, is the area entrusted with minimizing the credit risk of the accounts receivable, supervising the delinquency of the accounts. The regulations and procedures applicable for the control and administration of the Arauco Group can be found in the Corporate Credit Policy.

As of December 31, 2016, Arauco’s balance for commercial Debtors was ThU.S.$ 609,102 of which, according to the agreed sales conditions, 54.3% corresponded to sales on credit (open account), 40.82% to sales with letters of credit and 4.88% to other types of sales, distributed in 2,274 debtors. The client with the largest Open Account debt represented 2.14% of the total accounts receivable as of that date.

105

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Below we provide detail regarding accounts receivable, classified in tranches.

December 31, 2016


Age of trade receivables
Days	Non-past due			1 to 30			31 to 60			61 to 90			91 to 120			121 to 150			151 to 180			181 to 210			211 to 250			More than 250			Total
ThU.S$		562,386			31,106			257			881			39			18			21			11			64			14,319			609,102
%		92.33	%		5.11	%		0.04	%		0.14	%		0.01	%		0.00	%		0.00	%		0.00	%		0.01	%		2.36	%		100	%
December 31, 2015
Age of trade receivables
Days	Non-past due			1 to 30			31 to 60			61 to 90			91 to 120			121 to 150			151 to 180			181 to 210			211 to 250			More than 250			Total
ThU.S$		571,499			18,927			2,303			2,332			363			168			1,102			1,413			1,444			25,650			625,201
%		91.41	%		3.03	%		0.37	%		0.37	%		0.06	%		0.03	%		0.18	%		0.23	%		0.23	%		4.10	%		100	%

Arauco does not conduct rescheduling or renegotiations with its clients that imply an amendment to the maturity of the invoices and, should it be necessary, any debt renegotiation with a client shall be analyzed on a case-by-case basis and subjected to the approval of the Corporate Finance Division.

Regarding the provisions from non-enforceable accounts, below we provide detail for the movements as of December 31, 2016 and December 31, 2015:


	12-31-2016			12-31-2015
	ThU.S.$			ThU.S.$
Opening balance		(19,860	)		(18,520	)

Impairment losses recognized on receivables		(3,950	)		(3,072	)
Reversal of impairment losses		7,166			1,732
Closing balance		(16,644	)		(19,860	)

Currently there is a policy for provisions for doubtful accounts receivable under IFRS for all the Arauco group companies.

Explanation regarding the Sales Risk with Letters of Credit

The sales with letters of credit mainly occur in markets in Asia and the Middle East. Periodically, a credit assessment is conducted regarding the banks that issue the letters of credit with the purpose of obtaining their score over the basis of risk-qualification ratings, country-specific risk and financial statements. The decision of approving the issuing bank or asking for confirmation of the letter of credit is made in consideration to this assessment.

106

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Explanation of the Sales Risk with Credit Line

Sales on credit are subject to the credit limit for each customer. The approval or rejection of a credit limit for all term sales is conducted by the Corporate Credit Sub-Division, as well as by the Credit and Collections area for North America, Brazil and Argentina, which report to the Corporate Finance Division. The regulations and procedures applicable for the correct control and risk management over the sales on credit are ruled by the Credit Policy.

A procedure that must be applied by all the companies of the Arauco group has been established for the approval and/or modification of client credit lines. Credit line requests are entered to the SAP that analyzes all available information. Afterwards, the same are either approved or rejected in each one of the internal committees of each company belonging to the Arauco group, depending on the maximum amount authorized by the Credit Policy. Lines of credit are renewed during this internal process on a yearly basis.

All sales are automatically controlled by a credit verification system, which has been configured to block any orders from clients who are delinquent in a given percentage of a debt and/or from clients whose line of credit, as of the time of the product’s shipping, has been exceeded or is overdue.

In order to minimize the credit risk for term or Open Account sales, it is Arauco’s policy to take out insurance to cover the export sales of companies Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Forestal Arauco S.A., and Arauco do Brasil S.A., as well as the domestic sales of Arauco México S.A. de C.V., Arauco Wood Inc, Arauco Colombia S.A., Arauco Perú S.A., Arauco Panels USA LLC, Flakeboard Company Ltd., Flakeboard America Ltd., Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Arauco Florestal Arapoti, Arauco Forest Brasil S.A. and Arauco do Brasil S.A. Arauco works with credit insurance company Continental (AA- rating, as per risk rating companies Humphreys and Fitch Ratings). In order to cover the export sales and domestic sales of Arauco Argentina S.A., the preferred credit insurance company is Insur (a subsidiary of Continental in Argentina). Both companies grant a 90% coverage over the amount of each invoice, without deductibles, for registered clients and of 80% for non-registered clients. (Non-registered clients are those whose lines range between ThU.S.$ 5 and ThU.S.$ 50 (equivalent currency of their invoicing) of the local sales of companies Arauco Perú S.A., Arauco Colombia S.A., Arauco México S.A. de C.V., Arauco Do Brasil S.A., Arauco Argentina S.A. and Maderas Arauco S.A. Lines in excess of the aforesaid amounts correspond to registered clients.

107

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

As another way of minimizing risk and supporting a line of credit approved by the Credit Committee, Arauco holds guarantees such as mortgages, pledges, Standby letters of credit, bank performance bonds, checks, promissory notes, loans or any other that could be required under the laws of each country. The total amount held in guarantees amounts to US$99.5 million, effective as of December 2016, as summarized in the following chart. The procedure for guarantees is regulated by Arauco’s Policy on Guarantees, whose purpose is to control their accounting, due date and custody.


Guarantees Arauco Group (ThU.S.$)
Guarantees Debtors (received from clients)
Certificate of deposits	15,159	15.2	%
Standby	6,872	6.9	%
Promissory notes	63,464	63.8	%
Finance	3,057	3.1	%
Mortgage	8,298	8.3	%
Pledge	2,433	2.4	%
Promissory notes	200	0.2	%
Total Guarantees	99,483	100.0	%

The maximum exposure to credit risk is limited to the value at amortized cost of the Debtors’ account for sales registered as of the date of this report, minus the percentage of sales insured by the aforementioned credit insurance companies and the guarantees granted in favor of Arauco.

In summary, the open account debt covered by the various insurance policies and guarantees amounts to 98.8% and, therefore, Arauco’s portfolio exposure amounts to 1.2%.


Secured Open Account Receivables	ThU.S.$		%
Total open account receivables		330,754		100.0	%
Secured receivables(*)		326,785		98.8	%
Unsecured receivables		3,969		1.2	%

(*)	Insured Debt is deemed to be the portion of accounts receivable that is covered by a credit company or by guarantees such as standby letters of credit, mortgages, performance bonds, among others

Investment Policy:

Arauco has an Investment Policy which identifies and limits the financial instruments and the entities into which the Arauco companies, in particular Celulosa Arauco y Constitucion S.A., are authorized to invest. The Company’s Treasury Department is centralized with operations in Chile. The Head Office is responsible for carrying out investments, cash flow surplus investments, and short and long term debt subscriptions. Exceptions to this rule are specific investments made through other companies where authorization is required from the Chief Financial Officer.

For financial instruments, the only permitted investments are fixed income investments with adequate liquidity. Each instrument has defined classifications and limits, depending on duration and type of issuer.

Regarding intermediaries (such as banks, securities brokers and dealers of mutual funds that are bank affiliates), a scoring methodology is used to determine the relative degree of risk of each intermediary based on their financial position and assign score points that result in a credit risk rating to each intermediary. Arauco uses this scoring system to determine its investment limits for each intermediary.

108

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The required information to evaluate the various criteria are obtained from published financial statements from the banks under evaluation and from the credit risk ratings of short and long term debt securities obtained from rating agencies authorized by the Superintendence of Banks and Financial Institutions (Fitch Ratings Chile, Humphreys and Feller Rate).

The criteria evaluated are: Capital and Reserves, Current Ratio, Return on equity, Net Income to Operating income Ratio, Debt to Equity Ratio and the Credit Risk rating of each entity.

Any necessary exceptions regarding investment limits in each particular instrument or entity must have the authorization from Arauco’s Chief Financial Officer.

23.10.2 Type of Risk: Liquidity Risk

Description

This risk corresponds to Arauco’s ability to fulfill its financial obligations upon maturity.

Explanation of Liquidity Risk Exposure and How This Risk Arises

Arauco’s exposure to liquidity risk is mainly from its obligations to bondholders, banks and financial institutions, creditors and other payables. Liquidity risk may arise if Arauco is unable to meet the net cash flow requirements, which sustain its operations under both normal and exceptional circumstances.

Explanation of Objectives, Policies and Processes for Risk Management, and Measurement Methods

The Financial Management Department monitors on an ongoing basis the Company’s cash flow forecasts based on short and long term forecasts and available financing alternatives. In order to manage the risk level of financial assets, Arauco follows its investment policy.

109

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The following tables detail Arauco’s liquidity analysis for its financial liabilities as of December 30, 2016 and December 31, 2015. The tables have been drawn up based on the contractual undiscounted cash outflows and their remaining contractual maturities:


December 31, 2016						Maturity														Total
Tax ID	Name		Currency		Name- Country Loans with banks	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate		Nominal rate
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Scotiabank- Chile		—		36		302,242		—		—		—		—		36		302,242		1.63%		1.63%
—		Arauco Argentina S.A.		U.S. Dollar	Banco Galicia- Argentina		5,031		—		—		—		—		—		—		5,031		—		2.00%		2.00%
—		Arauco Argentina S.A.		Argentine Pesos	Banco Macro- Argentina		11		29		—		—		—		—		—		40		—		15.25%		15.25%
—		Zona Franca Punta Pereira		U.S. Dollar	Interamerican Development Bank		1,178		1,027		2,450		2,387		2,324		2,256		4,302		2,205		13,719		Libor + 2.05%		Libor + 2.05%
—		Zona Franca Punta Pereira		U.S. Dollar	Interamerican Development Bank		2,990		2,782		5,997		5,830		5,664		—		—		5,772		17,491		Libor + 1.80%		Libor + 1.80%
—		Zona Franca Punta Pereira		U.S. Dollar	BBVA		16,176		—		—		—		—		—		—		16,176		—		3.23%		Libor + 2%
—		Zona Franca Punta Pereira		U.S. Dollar	Citibank		—		2,501		—		—		—		—		—		2,501		—		2.95%		Libor + 1.75%
—		Zona Franca Punta Pereira		U.S. Dollar	Scotiabank		2,501		—		—		—		—		—		—		2,501		—		1.60%		1.60%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Banco Interamericano de Desarrollo		4,768		4,143		9,895		9,637		9,379		9,096		17,371		8,911		55,378		3.30%		Libor + 2.05%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Banco Interamericano de Desarrollo		12,104		11,237		24,249		23,568		22,888		—		—		23,341		70,705		3.05%		Libor + 1.80%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Finnish Export Credit		25,474		20,774		43,915		44,538		45,209		45,882		70,166		46,248		249,710		3.20%		3.20%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Dnb Nor Bank		89		—		—		—		—		—		—		89		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco Republica Oriental de Uruguay		24,733		12,563		—		—		—		—		—		37,296		—		Libor + 1.75%		Libor + 1.75%
—		Eufores S.A.		U.S. Dollar	Citibank		5		—		—		—		—		—		—		5		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco HSBC- Uruguay		1,202		—		—		—		—		—		—		1,202		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco Itau - Uruguay		10,135		5,003		—		—		—		—		—		15,138		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Heritage		1,351		—		—		—		—		—		—		1,351		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco Santander		22,735		—		—		—		—		—		—		22,735		—		Libor + 2.00%		Libor + 2.00%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco ABC - Brazil		7		18		—		—		—		—		—		25		—		2.50%		2.50%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco Itau		2,713		321		—		—		—		—		—		3,034		—		9.50%		9.50%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco Votorantim		13		25		—		—		—		—		—		38		—		5.50%		5.50%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco Santander		2		46		100		100		57		7		—		48		264		9.34%		9.34%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Itau		2		6		1		—		—		—		—		8		1		2.50%		2.50%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Itau		13		38		51		4		—		—		—		51		55		3.50%		3.50%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Bradesco		11		33		44		37		—		—		—		44		81		6.00%		6.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Bradesco		400		—		—		—		—		—		—		400		—		8.75%		8.75%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Votorantim		17		—		—		—		—		369		369		17		738		5.00%		5.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Safra		22		66		88		22		—		—		—		88		110		6.00%		6.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Safra		8		21		27		27		27		11		—		29		92		10.00%		10.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		1		16		16		16		8		—		—		17		40		9.00%		9.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		5		18		30		30		19		8		—		23		87		9.22%		9.22%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Bradesco		20		57		77		23		—		—		—		77		100		5.91%		5.91%
—		Arauco Forest Brasil S.A.		U.S. Dollar	Banco Alfa		—		5		9		9		9		5		—		5		32		7.94%		7.94%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Alfa		—		12		23		23		23		11		—		12		80		11.30%		11.30%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Itau -Brazil		4		12		1		2		—		—		—		16		3		2.50%		2.50%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Votorantim - Brazil		195		520		694		405		—		327		327		715		1,753		8.59%		8.59%
—		Arauco Forest Brasil S.A.		U.S. Dollar	Banco Votorantim - Brazil		35		101		134		78		—		—		—		136		212		7.44%		7.44%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Bndes Subcrédito A-B-D		4		—		—		—		114		460		346		4		920		9.82%		9.82%
—		Arauco Forest Brasil S.A.		U.S. Dollar	Banco Bndes Subcrédito C		4		—		—		—		24		144		120		4		288		7.05%		7.05%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Santander		1		32		—		—		—		—		—		33		—		9.32%		9.32%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco John Deere		62		41		41		32		10		—		—		103		83		6.00%		6.00%
—		Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes Subcrédito E-I		23		—		758		3,030		2,272		—		—		23		6,060		8.91%		8.91%
—		Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes Subcrédito F-J		16		—		454		1,818		1,363		—		—		16		3,635		9.91%		9.91%
—		Mahal Emprendimientos Pat. S.A.		U.S. Dollar	Bndes Subcrédito G-K		60		—		339		2,037		1,697		—		—		60		4,073		7.05%		7.05%
—		Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes Subcrédito H-L		19		—		504		2,020		1,514		—		—		19		4,038		11.11%		11.11%

					Total		134,140		61,483		392,139		95,673		92,601		58,576		93,001		195,623		731,990

110

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


December 31, 2016				Maturity														Total
Tax ID	Name	Currency	Name - Country Bonds	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate			Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	UF	Barau-F		—		1,931		11,587		29,091		27,486		33,383		180,490		1,931		282,037		4.24	%		4.21	%
93.458.000-2	Celulosa Arauco y Constitución S.A.	UF	Barau-J		2,115		—		6,344		6,344		203,030		—		—		2,115		215,718		3.23	%		3.22	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-P		—		996		7,794		7,794		7,794		7,794		242,571		996		273,747		3.96	%		3.96	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-Q		586		9,839		21,758		21,172		20,586		10,073		—		10,425		73,589		2.96	%		2.98	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-R		1,755		—		7,022		7,022		7,022		7,022		290,572		1,755		318,660		3.57	%		3.57	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-S		—		600		4,695		4,695		4,695		4,695		210,785		600		229,565		2.44	%		2.89	%
—	Arauco Argentina S.A.	U.S. Dollar	Bono 144 A – Argentina		—		270,787		—		—		—		—		—		270,787		—		6.39	%		6.38	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee Bonds 2019		15,205		—		36,250		534,254		—		—		—		15,205		570,504		7.26	%		7.25	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee Bonds 2nd Emission		2,734		124,949		—		—		—		—		—		127,683		—		7.50	%		7.50	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee 2021		8,889		—		20,000		20,000		20,000		406,926		—		8,889		466,926		5.02	%		5.00	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee 2022		11,215		—		23,750		23,750		23,750		23,750		504,895		11,215		599,895		4.77	%		4.75	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee 2024		9,376		—		22,500		22,500		22,500		22,500		569,625		9,376		659,625		4.52	%		4.50	%

			Total		51,875		409,102		161,700		676,622		336,863		516,143		1,998,938		460,977		3,690,266


December 31, 2016				Maturity														Total
Tax ID	Name	Currency	Name - Country Lease	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate	Nominal rate
85.805.200-9	Forestal Arauco S.A.	UF	Banco Santander		237		1,616		—		1,179		—		1,201		—		1,853		2,380	—	—
85.805.200-9	Forestal Arauco S.A.	UF	Banco Scotiabank		1,571		4,970		—		7,731		—		4,259		—		6,541		11,990	—	—
85.805.200-9	Forestal Arauco S.A.	UF	Banco Estado		645		2,008		—		5,092		—		2,035		—		2,653		7,127	—	—
85.805.200-9	Forestal Arauco S.A.	UF	Banco de Chile		3,294		10,861		—		16,861		—		8,906		—		14,155		25,767	—	—
85.805.200-9	Forestal Arauco S.A.	UF	Banco BBVA		1,673		5,030		—		4,663		—		183		—		6,703		4,846	—	—
85.805.200-9	Forestal Arauco S.A.	UF	Banco Credito e Inversiones		982		2,994		—		7,501		—		2,824		—		3,976		10,325	—	—
85.805.200-9	Forestal Arauco S.A.	Chilean Pesos	Banco Santander		46		138		—		61		—		—		—		184		61	—	—
85.805.200-9	Forestal Arauco S.A.	Chilean Pesos	Banco Chile		439		1,317		—		2,418		—		929		—		1,756		3,347	—	—
85.805.200-9	Forestal Arauco S.A.	Chilean Pesos	Banco Credito e Inversiones		647		1,932		—		5,053		—		2,690		—		2,579		7,743	—	—

			Total		9,534		30,866		—		50,559		—		23,027		—		40,400		73,586

As part of the policy of Arauco, it considers compliance with all Accounts Payable, whether with related (see Note 13) or third parties, within a period not exceeding 30 days.

111

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


December 31, 2015				Maturity														Total
Tax ID	Name	Currency	Name - Country Loans with banks	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate		Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Scotiabank- Chile		—		25		4,638		301,770		—		—		—		25		306,408		1.53%		Libor +0.70%
—	Arauco Argentina S.A.	Argentine Pesos	Banco Macro- Argentina		—		49		48		—		—		—		—		49		48		15.25%		15.25%
—	Arauco Argentina S.A.	Argentine Pesos	Banco Galicia- Argentina		—		307		—		—		—		—		—		307		—		15.25%		15.25%
—	Zona Franca Punta Pereira S.A.	U.S. Dollar	Interamerican Development Bank		1,163		1,023		2,450		2,396		2,343		2,289		6,514		2,186		15,992		Libor + 2,05%		Libor + 2,05%
—	Zona Franca Punta Pereira S.A.	U.S. Dollar	Interamerican Development Bank		166		2,777		6,076		5,934		5,794		5,652		—		2,943		23,456		Libor + 1,80%		Libor + 1,80%
—	Zona Franca Punta Pereira S.A.	U.S. Dollar	Banco Santander		20,013		—		—		—		—		—		—		20,013		—		Libor + 2,00%		Libor + 2,00%
—	Celulosa y Energia Punta Pereira S.A.	U.S. Dollar	Finnish Export Credit		25,810		20,354		52,288		51,368		50,477		49,694		118,826		46,164		322,653		3.20%		3.20%
—	Celulosa y Energia Punta Pereira S.A.	U.S. Dollar	Interamerican Development bank		4,706		4,126		9,900		9,680		9,460		9,242		26,298		8,832		64,580		Libor + 2,05%		Libor + 2,05%
—	Celulosa y Energia Punta Pereira S.A.	U.S. Dollar	Interamerican Development bank		675		11,220		24,566		23,991		23,417		22,843		—		11,895		94,817		Libor + 1,80%		Libor + 1,80%
—	Celulosa y Energia Punta Pereira S.A.	U.S. Dollar	Dnb Nor Bank		—		245		—		—		—		—		—		245		—		Libor + 2,00%		Libor + 2,00%
—	Eufores S.A.	U.S. Dollar	Banco BBVA - Uruguay		16,115		—		—		—		—		—		—		16,115		—		Libor + 2,00%		Libor + 2,00%
—	Eufores S.A.	U.S. Dollar	Banco Republica Oriental de Uruguay		16,689		18,555		—		—		—		—		—		35,244		—		Libor + 1,75%		Libor + 1,75%
—	Eufores S.A.	U.S. Dollar	Citibank		—		2,514		—		—		—		—		—		2,514		—		Libor + 2,00%		Libor + 2,00%
—	Eufores S.A.	U.S. Dollar	Banco HSBC- Uruguay		1,201		—		—		—		—		—		—		1,201		—		Libor + 2,00%		Libor + 2,00%
—	Eufores S.A.	U.S. Dollar	Banco Itau -Uruguay		5,065		5,004		—		—		—		—		—		10,069		—		Libor + 2,00%		Libor + 2,00%
—	Eufores S.A.	U.S. Dollar	Heritage		1,357		—		—		—		—		—		—		1,357		—		Libor + 2,00%		Libor + 2,00%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco ABC		5		17		20		—		—		—		—		22		20		2.50%		2.50%
—	Arauco Do Brasil S.A.	U.S. Dollar	Banco Bradesco		831		—		—		—		—		—		—		831		—		1.80%		1.80%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco Bradesco		3,960		1,256		—		—		—		—		—		5,216		—		8.75%		8.75%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco do Brazil - Brazil		23		72		—		—		—		—		—		95		—		8.70%		8.70%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco HSBC- Brazil		7,779		—		—		—		—		—		—		7,779		—		8.00%		8.00%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco Itau -Brazil		47		43		—		—		—		—		—		90		—		8.43%		8.43%
—	Arauco Do Brasil S.A.	U.S. Dollar	Banco JP Morgan		7,912		4,356		—		—		—		—		—		12,268		—		1.71%		1.71%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco Votorantim - Brazil		19		38		32		—		—		—		—		57		32		6.30%		6.30%
—	Arauco Do Brasil S.A.	Brazilian Real	Banco Santander		12,881		3		37		76		75		39		—		12,884		227		8.00%		8.00%
—	Arauco Do Brasil S.A.	Brazilian Real	Fundo de Desenvolvimiento Econom. - Brazil		7		27		7		—		—		—		—		34		7		0.00%		0.00%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Itau		3		6		8		1		—		—		—		9		9		2.50%		2.50%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Itau		12		31		43		43		3		—		—		43		89		3.50%		3.50%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Bradesco		11		27		37		37		31		—		—		38		105		6.00%		6.00%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Votorantim		—		14		—		—		—		—		617		14		617		5.00%		5.00%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Safra		19		55		73		73		18		—		—		74		164		6.00%		5.00%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Safra		6		17		23		23		23		24		9		23		102		10.00%		10.00%
—	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Santander		4		24		27		27		27		13		—		28		94		9.22%		9.22%
—	Arauco Forest Brasil S.A.	Brazilian Real	Banco Bradesco		—		66		—		—		—		144		—		66		144		7.81%		7.81%
—	Arauco Forest Brasil S.A.	Brazilian Real	Banco Bradesco		307		—		—		—		—		—		—		307		—		12.11%		12.11%
—	Arauco Forest Brasil S.A.	Brazilian Real	Banco Itau -Brazil		9		13		—		86		14		—		—		22		100		5.52%		5.52%
—	Arauco Forest Brasil S.A.	Brazilian Real	Banco Votorantim - Brazil		—		285		—		—		—		1,474		546		285		2,020		9.31%		9.31%
—	Arauco Forest Brasil S.A.	U.S. Dollar	Banco Votorantim - Brazil		—		62		—		—		—		347		—		62		347		9.00%		9.00%
—	Arauco Forest Brasil S.A.	Brazilian Real	Bndes		—		3		—		—		—		—		757		3		757		4.61%		4.61%
—	Arauco Forest Brasil S.A.	U.S. Dollar	Bndes		—		4		—		—		—		6		289		4		295		10.80%		10.80%
—	Arauco Forest Brasil S.A.	Brazilian Real	Banco Santander		—		16		—		—		—		96		—		16		96		9.50%		9.50%
—	Arauco Forest Brasil S.A.	Brazilian Real	Banco John Deere		—		207		—		—		—		—		—		207		—		6.00%		6.00%
—	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Bndes Subcrédito E-I		—		19		—		622		2,492		1,870		—		19		4,984		9.91%		9.91%
—	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Bndes Subcrédito F-J		—		12		—		374		1,496		1,122		—		12		2,992		10.91%		10.91%
—	Mahal Emprendimientos Pat. S.A.	U.S. Dollar	Bndes Subcrédito G-K		—		61		—		511		2,037		1,528		—		61		4,076		6.99%		6.99%
—	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Bndes Subcrédito H-L		—		15		—		444		1,646		1,233		—		15		3,323		12.11%		12.11%

			Total		126,795		72,948		100,273		397,456		99,353		97,616		153,856		199,743		848,554

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December 31, 2016

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


December 31,2015				Maturity														Total
Tax ID	Name	Currency	Name - Country Bonds	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate			Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	UF	Barau-F		—		1,771		10,625		10,625		32,403		31,438		239,473		1,771		324,564		4.24	%		4.25	%
93.458.000-2	Celulosa Arauco y Constitución S.A.	UF	Barau-J		1,939		—		5,818		5,818		5,818		186,141		—		1,939		203,595		3.23	%		3.22	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-P		—		913		7,147		7,147		7,147		7,147		229,723		913		258,311		3.96	%		3.96	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-Q		—		538		11,266		19,979		19,442		18,905		9,251		538		78,843		2.96	%		2.98	%
93.458.000-3	Celulosa Arauco y Constitución S.A.	UF	Barau-R		—		1,610		6,439		6,439		6,439		6,439		272,750		1,610		298,506		3.57	%		3.57	%
—	Arauco Argentina S.A.	U.S. Dollar	Bono 144 A - Argentina		—		1,004		277,869		—		—		—		—		1,004		277,869		6.39	%		6.38	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee Bonds 2019		15,205		—		36,250		36,250		533,483		—		—		15,205		605,983		7.26	%		7.25	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee Bonds 2nd Emission		2,734		—		134,257		—		—		—		—		2,734		134,257		7.50	%		7.50	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee 2021		8,889		—		20,000		20,000		20,000		20,000		406,108		8,889		486,108		5.02	%		5.00	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee 2022		11,215		—		23,750		23,750		23,750		23,750		527,255		11,215		622,255		4.77	%		4.75	%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollar	Yankee 2024		9,375		—		22,500		22,500		22,500		22,500		590,928		9,375		680,928		4.52	%		4.50	%

			Total		49,357		5,836		555,921		152,508		670,982		316,320		2,275,488		55,193		3,971,219


December 31, 2015				Maturity														Total
Tax ID	Name	Currency	Name - Country Lease	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate		Nominal rate
85.805.200-9	Forestal Arauco S.A.	UF	Banco Santander		338		904		650		650		3,362		—		—		1,242		4,662		—		—
85.805.200-9	Forestal Arauco S.A.	UF	Banco Scotiabank		1,303		4,370		4,875		4,875		6,059		—		—		5,673		15,809		—		—
85.805.200-9	Forestal Arauco S.A.	UF	Banco Estado		361		1,160		1,471		1,471		1,957		—		—		1,521		4,899		—		—
85.805.200-9	Forestal Arauco S.A.	UF	Banco de Chile		4,026		11,489		11,301		11,301		12,650		—		—		15,515		35,252		—		—
85.805.200-9	Forestal Arauco S.A.	UF	Banco BBVA		1,814		5,344		4,490		4,490		3,374		—		—		7,158		12,354		—		—
85.805.200-9	Forestal Arauco S.A.	UF	Banco Credito e Inversiones		557		1,672		2,129		2,129		3,008		—		—		2,229		7,266		—		—
85.805.200-9	Forestal Arauco S.A.	Chilean Pesos	Banco Santander		172		517		575		576		—		—		—		689		1,151		—		—
85.805.200-9	Forestal Arauco S.A.	Chilean Pesos	Banco Chile		262		704		824		824		365		—		—		966		2,013		—		—
85.805.200-9	Forestal Arauco S.A.	Chilean Pesos	Banco Credito e Inversiones		468		1,401		1,834		1,834		3,623		—		—		1,869		7,291		—		—

			Total		9,301		27,561		28,149		28,150		34,398		0		0		36,862		90,697

As part of the policy of Arauco, it considers compliance with all Accounts Payable, whether with related (see Note 13) or third parties , within a period not exceeding 30 days.

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December 31, 2016

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

Guarantees

As of the date of these consolidated financial statements, Arauco has financial assets of approximately MU.S.$56 that have been pledged to third parties (beneficiaries), as direct guarantee. If Arauco does not fulfill its obligations, the guarantors could execute the guarantees.

As of December 31, 2016, the total assets pledged as an indirect guarantee were MU.S.$783. In contrast to direct guarantees, indirect guarantees are given to secure obligations assumed by a third party.

On September 29, 2011, Arauco entered into a Security Agreement under which it granted a non-joint guarantee limited to 50% of the obligations of the Uruguayan companies (joint ventures) Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A., under the IDB Facility Agreement in the amount of up to MU.S.$454 and the Finnevera Guaranteed Facility Agreement in the amount of up to MU.S.$900. Both loan agreements were signed with the International Development Bank. Such guarantee is included in the table below, under indirect guarantees.

Direct and indirect guarantees granted by Arauco:

DIRECT


Subsidiary	Guarantee	Assets Pledged	Currency	ThU.S.$	Guarantor
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	488	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	313	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	230	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	209	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	129	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	100	National Customs Service
Arauco Forest Brasil S.A.	Endorsement of Arauco do Brasil	—	U.S. Dollar	654	Bank Votorantim S.A.
Arauco Forest Brasil S.A.	Endorsement of Arauco do Brasil	—	U.S. Dollar	3,592	Bank Votorantim S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	136	Bank Bradesco S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	99	Bank Bradesco S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	740	Bank John Deere S.A.
Arauco Forest Brasil S.A.	Mortgage Industrial Plant of Jaguariaíva of Arauco do Brasil	—	U.S. Dollar	47,041	BNDES
Arauco do Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	201	Bank Votorantim S.A.
Arauco do Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	106	Bank ABC Brasil S.A.
Arauco do Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	213	Bank Santander S.A.
Arauco Florestal Arapoti S.A.	Endorsement of Arauco do Brasil	—	U.S. Dollar	738	Bank Votorantim S.A.
Arauco Florestal Arapoti S.A.	Equipment	Property plant and equipment	U.S. Dollar	204	Bank Itaú BBA S.A.
Arauco Florestal Arapoti S.A.	Equipment	Property plant and equipment	U.S. Dollar	395	Bank Safra S.A.
Arauco Bioenergía S.A.	Guarantee letter	—	Chilean Pesos	221	Minera Escondida Ltda.
Arauco Bioenergía S.A.	Guarantee letter	—	Chilean Pesos	323	Minera Escondida Ltda.
Arauco Bioenergía S.A.	Guarantee letter	—	Chilean Pesos	121	CODELCO S.A.
		Total		56,253


INDIRECT
Subsidiary	Guarantee	Assets Pledged	Currency	ThU.S.$	Guarantor
Celulosa Arauco y Constitución S.A.	Suretyship not supportive and cumulative	—	U.S. Dollar	494,468	Joint Ventures (Uruguay)
Celulosa Arauco y Constitución S.A.	Full Guarantee	—	U.S. Dollar	270,000	Arauco Argentina (U.S. bondholders)
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	U.S. Dollar	4,362	Arauco Forest Brazil y Mahal (Brazil)
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Brazilian Real	14,653	Arauco Forest Brazil y Mahal (Brazil)
		Total		783,483

23.10.3 Type of Risk: Market Risk – Exchange Rate

Description

Market risk arises from the probability of being affected by losses from fluctuations in currencies exchange rates in which assets and liabilities are denominated, in a functional currency other than the functional currency of Arauco.

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December 31, 2016

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

Explanation of Currency Risk Exposure and How This Risk Arises

Arauco is exposed to the foreign currency risk from currency fluctuations arising from sales, purchases and obligations undertaken in foreign currencies, such as the Chilean Peso, Euro, Brazilian Real or other foreign currencies. In the case of significant exchange rate variations, the Chilean Peso is the currency that represents the main currency risk. See Note 11 for details assets and liabilities classified by currency.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

Arauco performs sensitivity analyses to measure the effect of this variable on equity and net result.

Sensitivity analysis considers a variation of +/- 10% of the exchange rate over the Chilean Peso. This fluctuation range is considered possible given current market conditions as of the date of these financial statements. With all other variables at a constant rate, a U.S. Dollar exchange rate variation of +/- 10% in relation to the Chilean Peso would mean a change in the net income year after tax +/- 5.28% (equivalent to MU.S.$ +/- 11,5), and +/- 0.10% of equity (equivalent to MU.S.$ +/- 6.9).

Additionally, a sensitivity analysis is carried out assuming a variation of +/- 10% in the closing exchange rate on the Brazilian Real, which is considered a possible range of fluctuation given the market conditions as of the date of these financial statements. With all the other variables constant, a variation of +/- 10% in the exchange rate of the dollar on the Brazilian Real would mean a variation on the net income after tax +/- 1,22% (equivalent to MU.S.$2.7) and a change on the equity of +/- 0.02% (equivalent to MU.S.$1.6).

23.10.4 Type of Risk: Market Risk – Interest rate risk

Description

Interest rate risk refers to the sensitivity of the value of financial assets and liabilities in terms of interest rate fluctuations.

Explanation of Interest Rate Risk Exposure and How This Risk Arises

Arauco is exposed to risks due to interest rate fluctuations for bonds issued, bank borrowings and financial instruments that bear interest at a variable rate.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

Arauco completes its risk analysis by reviewing its exposure to changes in interest rates. As of December 31, 2016, 12.9% our financial debt accrues interest at variable rates. A change of +/- 10% in the interest rate is considered a possible range of fluctuation. Such market conditions would affect the income after tax at rate of +/- 0.12% (equivalent to MU.S.$-/+ 0.3) and +/- 0.002% (equivalent to MU.S.$-/+ 0.2) on equity.

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Unaudited Consolidated Financial Statements

December 31, 2016

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


*Thousands of dollars*	December 2016 ThU.S.$		Total
Fixed rate		3,903,942		87.1	%
Bonds issued		3,452,659
Bank borrowings (*)		337,297
Financial leasing		113,986
Variable rate		577,061		12.9	%
Bonds issued		0
Loans with Banks		577,061
Total		4,481,003		100.0	%


*Thousands of dollars*	December 2015		Total
Fixed rate		3,689,719		85.7	%
Bonds issued		3,180,334
Bank borrowings (*)		381,826
Financial leasing		127,559

Variable rate		615,716		14.3	%
Bonds issued		—
Loans with Banks		615,716
Total		4,305,435		100,0	%

(*)	Includes variable rate bank borrowings changed by fixed rate swaps.

23.10.5 Type of Risk: Market Risk – Price of Pulp Risks

Description

Pulp prices are determined by world and regional market conditions. Prices fluctuate based on demand, production capacity, commercial strategies adopted by large-scale forestry companies, pulp and paper producers and by the availability of substitutes.

Explanation of Price Risk Exposure and How This Risk Arises

Pulp prices are reflected in revenue from sales and directly affect the net income for the period.

As of December 31, 2016, revenue due to pulp sales accounted for 45.1% of total sales. Pulp prices are fixed on a monthly basis in accordance with the market. Forward contracts or other financial instruments are not used for pulp sales.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

This risk is approached in different ways. Arauco has a team of specialists who perform periodic market and competition analyses, providing tools to analyze and evaluate trends and adjust forecasts. Similarly, Arauco performs price financial sensitivity analysis in order to take the necessary safeguards to confront different scenarios in the best possible manner.

Sensitivity analysis considers a variation of +/- 10% in the average pulp price, a possible fluctuation range given current market conditions at the date of the closing balance. With all other variables constant, a variation of +/- 10% in the average pulp price would mean a variation of 64.80% (equivalent to MU.S.$ 141.0) on the income for the year after tax and +/- 1.21% (equivalent to MU.S.$84.6) on equity.

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December 31, 2016

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

NOTE 24. OPERATING SEGMENTS

The main products that generate revenue for each operating segment are described as follows:

•

Pulp: The main products sold by this operating segment are long fiber bleached pulp (BSKP), short fiber bleached pulp (BHKP), long fiber raw pulp (UKP), and pulp fluff.

•

Timber: The range of products sold by this operating segment are plywood panels, MDF panels (medium density fiberboard), Hardboard Panels, PB Panels (agglomerated different sizes of sawn wood and remanufactured products such as moldings, precut pieces and finger joints.

The Wood segment was created following the merger of the companies indicated in Note 14, which resulted in the merger of the previous sawmills and boards segments. Disclosures made as of December 31, 2015, have been reformulated for comparative purposes.

•

Forestry: This operating segment produces and sells sawn logs, pulpable logs, posts and chips made from owned forests of Radiata and Taeda pine, eucalyptus globulus and nitens forests. Additionally, purchases logs and woodchip from third parties, which it sells to its other operating segment.

Pulp

The Pulp operating segment uses wood exclusively from pine and eucalyptus plantations for the production of different classes of wood cellulose or pulp. Bleached pulp is mainly used as raw material for producing printing and writing paper, as well as toilet paper and high quality wrapping paper. Unbleached pulp is used to produce packing paper, filters, fiber cement products, dielectric paper and others. On the other hand, fluff pulp is mainly used in the production of diapers and female hygiene products.

Arauco has seven plants, five in Chile, one in Argentina and one in Uruguay and they have a total production capacity of approximately 3.9 million tons per year. Pulp is sold in more than 45 countries, mainly in Asia and Europe.

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December 31, 2016

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

Timber

The Panels operating segment produces a wide range of panel products and several kinds of moldings aimed at the furniture, decoration and construction industries. It consists of 17 industrial plants: 5 in Chile, 2 in Argentina, 2 in Brazil, and 8 plants around USA and Canada. The Company has a total annual production capacity of 6.7 million cubic meters of PBO, MDF, Hardboards, plywood and moldings.

The Sawn Timber operating segment produces a wide range of wood and remanufactured products with different kinds of uses and appearances, which include a wide variety of uses in the furniture, packing, construction and refurbishing industries.

With 9 saw mills in operation (8 in Chile and 1 in Argentina), the Company has a production capacity of 3 million cubic meters of sawn wood.

Furthermore, the Company has 5 remanufacturing plants, 4 in Chile and 1 in Argentina. These plants reprocess sawn wood and produce high quality remanufactured products, such as finger joint and solid moldings as well as precut pieces.

Forestry

The Forestry operating segment is Arauco’s core business. It provides raw materials for all products manufactured and sold by the Company. By directly controlling the growth of the forests to be processed, Arauco guarantees itself quality wood for each of its products.

Arauco holds forestry assets distributed throughout Chile, Argentina, Brazil and Uruguay, reaching 1.7 million hectares as of December 31, 2016, of which 1 million hectares are used for plantations, 409 thousand hectares for native forests, 191 thousand hectares for other uses and 52 thousand hectares are to be planted.

Arauco’s principal plantations consist of radiata and taeda pine and eucalyptus to a lesser degree. These are species that have fast growth rates and short harvest cycles compared with other long fiber commercial woods.

Arauco has no customers representing 10% or more of its revenues.

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December 31, 2016

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

Below, please find summarized information concerning the assets, liabilities and profits and losses at the end of each period, by segments. The profit (loss) of each segment informed takes into consideration that taxes and income and financial costs have not been allocated to the various segments, and are shown as part of the Corporate’s segment:


Year ended December 31, 2016	Pulp ThU.S.$		Forestry ThU.S.$		Timber ThU.S.$		Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$

Revenues from external customers		2,146,079		96,488		2,494,750		24,068			—			4,761,385			—			4,761,385
Revenues from transactions with other operating segments		41,586		1,105,220		6,938		34,085			—			1,187,829			(1,187,829	)		—


Finance income		—		—		—		—			29,701			29,701			—			29,701
Finance costs		—		—		—		—			(258,467	)		(258,467	)		—			(258,467	)
Net finance costs		—		—		—		—			(228,766	)		(228,766	)		—			(228,766	)


Depreciation and amortizations		240,699		19,996		139,844		2,524			6,319			409,382			—			409,382
Sum of significant income accounts		212		227,776		269		—			—			228,257			—			228,257
Sum of significant expense accounts		0		15,193		12,561		—			—			27,754			—			27,754


Profit (loss) of each reportable segment		308,536		98,955		165,887		(2,559	)		(353,242	)		217,577			—			217,577


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

Associates		—		—		—		—			16,348			16,348			—			16,348
Joint ventures		—		—		5,475		—			2,116			7,591			—			7,591

Income tax expense		—		—		—		—			(45,647	)		(45,647	)		—			(45,647	)

Geographical information on revenues
Revenue – Chilean entities		1,756,659		52,161		1,275,937		885			—			3,085,642			—			3,085,642
Revenue – Foreign entities		389,420		44,327		1,218,813		23,183			—			1,675,743			—			1,675,743
Total Ordinary Income		2,146,079		96,488		2,494,750		24,068			—			4,761,385			—			4,761,385


Year ended December 31, 2016	Pulp ThU.S.$		Forestry ThU.S.$		Timber ThU.S.$		Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Amounts of additions to non-current assets

Acquisition of property,plant and equipment and biological assets		205,205		182,743		118,408		1,479			3,883			511,718			—			511,718

Acquisition and contribution of investments in associates and joint venture		—		—		153,135		—			—			15 3,135			—			153,135

119

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


Year ended December 31, 2016	Pulp ThU.S.$		Forestry ThU.S.$		Timber ThU.S.$			Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Segment assets		5,077,300		5,492,364		2,515,092			30,970		932,059			14,047,785			(41,604	)		14,006,181
Segments assets (excluding deferred tax assets)		5,077,300		5,492,364		2,515,092			30,970		925,962			14,041,688			(41,604	)		14,000,084
Deferred tax assets		—		—		—			—		6,097			6,097			—			6,097

Investments accounted through equity method
Associates		—		160,490		—			—		105,285			265,775			—			265,775
Joint Ventures		—		—		161,703			—		19,070			180,773			—			180,773
Segment liabilities		277,474		161,091		311,667			11,836		6,244,830			7,006,898			—			7,006,898
Segments liabilities (excluding deferred tax liabilities)		277,474		161,091		311,667			11,836		4,613,765			5,375,833			—			5,375,833
Deferred tax liabilities		—		—		—			—		1,631,065			1,631,065			—			1,631,065

Geographical information on non-current assets
Chile		2,572,702		3,509,727		721,418			27		135,808			6,939,682			(3,575	)		6,936,107
Foreign countries		1,740,559		1,525,190		1,016,633			23,040		42,292			4,347,714			—			4,347,714
Non-current assets, Total		4,313,261		5,034,917		1,738,051			23,067		178,100			11,287,396			(3,575	)		11,283,821


Year ended December 31, 2015	Pulp ThU.S.$		Forestry ThU.S.$		Timber ThU.S.$			Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$

Revenues from external customers		2,363,973		116,368		2,633,211			33,188		—			5,146,740			—			5,146,740
Revenues from transactions with other operating segments		43,414		491,703		10,673			32,543		—			578,333			(578,333	)		—


Finance income		—		—		—			—		50,284			50,284			—			50,284
Finance costs		—		—		—			—		(262,962	)		(262,962	)		—			(262,962	)
Net finance costs		—		—		—			—		(212,678	)		(212,678	)		—			(212,678	)


Depreciation and amortizations		231,916		18,211		139,446			3,913		6,659			400,145			—			400,145
Sum of significant income accounts		31		220,907		4,823			—		—			225,761			—			225,761
Sum of significant expense accounts		585		35,610		3,383			35		—			39,613			—			39,613


Profit (loss) of each reportable segment		455,190		137,829		264,473			1,815		(491,596	)		367,711			—			367,711


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

Associates		—		—		—			—		5,572			5,572			—			5,572
Joint ventures		—		—		(470	)		—		1,646			1,176			—			1,176

Income tax expense		—		—		—			—		(129,694	)		(129,694	)		—			(129,694	)

Geographical information on revenues
Revenue – Chilean entities		1,913,303		68,986		1,325,985			597		—			3,308,871			—			3,308,871
Revenue – Foreign entities		450,670		47,382		1,307,226			32,591		—			1,837,869			—			1,837,869
Total Ordinary Income		2,363,973		116,368		2,633,211			33,188		—			5,146,740			—			5,146,740

120

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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


Year ended December 31, 2015	Pulp ThU.S.$		Forestry ThU.S.$		Timber ThU.S.$		Others ThU.S.$		Corporate ThU.S.$		Sub Total ThU.S.$		Elimination ThU.S.$			Total ThU.S.$

Amounts of additions to non-current assets

Acquisition of property,plant and equipment and biological assets		199,094		155,872		94,191		1,754		7,001		457,912		—			457,912
Acquisition and contribution of investments in associates and joint venture		—		814		—		—		—		814		—			814


Year ended December 31, 2015	Pulp ThU.S.$		Forestry ThU.S.$		Timber ThU.S.$		Others ThU.S.$		Corporate ThU.S.$		Sub Total ThU.S.$		Elimination ThU.S.$			Total ThU.S.$
Segment assets		5,172,095		5,471,322		2,374,134		31,679		669,703		13,718,933		(48,542	)		13,670,391
Segments assets (excluding deferred tax assets)		5,172,095		5,471,322		2,374,134		31,679		665,968		13,715,198		(48,542	)		13,666,656
Deferred tax assets		—		—		—		—		3,735		3,735		—			3,735

Investments accounted through equity method
Associates		—		121,359		—		—		119,781		241,140		—			241,140
Joint Ventures		—		—		3,573		—		20,099		23,672		—			23,672
Segment liabilities		318,880		147,432		269,963		11,526		6,276,145		7,023,946		—			7,023,946
Segments liabilities (excluding deferred tax liabilities)		318,880		147,432		269,963		11,526		4,657,133		5,404,934		—			5,404,934
Deferred tax liabilities		—		—		—		—		1,619,012		1,619,012		—			1,619,012

Geographical information on non-current assets
Chile		2,565,307		3,536,372		758,936		30		128,185		6,988,830		(2,955	)		6,985,875
Foreign countries		1,782,286		1,313,685		735,924		23,406		142,803		3,998,104		—			3,998,104
Non-current assets, Total		4,347,593		4,850,057		1,494,860		23,436		270,988		10,986,934		(2,955	)		10,983,979

121

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The following is a breakdown of the cash flows by segment, which data is presented in a complementary manner, as required pursuant to local requirements:


Year ended December 31, 2016	Pulp ThU.S.$			Forestry ThU.S.$			Timber ThU.S.$			Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$	Total ThU.S.$
Cash Flows by segment
Cash Flows from (used in) Operating Activities		501,565			243,162			382,075			2,610			(355,828	)		773,584				773,584
Cash flows (used in) investing activities		(206,424	)		(153,898	)		(275,100	)		(1,479	)		(3,311	)		(640,212	)			(640,212	)
Cash flows from (used in) Financing Activities		(92,006	)		5,290			(38,668	)		0			86,900			(38,484	)			(38,484	)
Net increase (decrease) in Cash and Cash Equivalents		203,135			94,554			68,307			1,131			(272,239	)		94,888				94,888


Year ended December 31, 2015	Pulp ThU.S.$			Forestry ThU.S.$			Timber ThU.S.$			Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$	Total ThU.S.$
Cash Flows by segment
Cash Flows from (used in) Operating Activities		606,570			251,888			390,584			2,722			(398,114	)		853,650				853,650
Cash flows (used in) investing activities		(202,473	)		(142,879	)		(97,316	)		(1,790	)		(33,322	)		(477,780	)			(477,780	)
Cash flows from (used in) Financing Activities		(60,395	)		(1,189	)		(151,395	)		—			(599,197	)		(812,176	)			(812,176	)
Net increase (decrease) in Cash and Cash Equivalents		343,702			107,820			141,873			932			(1,030,633	)		(436,306	)			(436,306	)

122

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

Information required by geographic area:

2016

Geographical area

Local
country

Foreign country

Chile

Argentina

Brazil

USA/Canada

Uruguay

Total

Disclosure of geographical areas

ThU.S.$

Revenues at 12-31-2016

3,085,642

360,224

354,170

779,356

181,993

4,761,385

Non-current Assets at 12-31-2016 other than deferred tax

6,931,755

960,596

1,186,538

397,924

1,800,911

11,277,724

2015

Geographical area

Local
country

Foreign country

Chile

Argentina

Brazil

USA/Canada

Uruguay

Total

Disclosure of geographical areas

ThU.S.$

Revenues at 12-31-2015

3,308,871

481,881

378,719

787,036

190,233

5,146,740

Non-current Assets at 12-31-2015 other than deferred tax

6,986,236

978,285

837,886

364,889

1,812,948

10,980,244

123

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 25. OTHER NON-FINANCIAL ASSETS AND NON-FINANCIAL LIABILITIES


Current non-financial assets	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Roads to amortize current		41,812		47,731
Prepayment to amortize (insurance + others)		23,086		20,398
Recoverable taxes (Relating to purchases)		71,357		62,468
Other current non-financial assets		8,660		3,359
Total		144,915		133,956


Non-current non-financial assets	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Roads to amortize, non-current		121,894		111,319
Guarantee values		3,302		2,635
Recoverable taxes		1,493		7,767
Other non-current non-financial assets		3,630		3,795
Total		130,319		125,516


Current non-financial liabilities	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
Provision of minimum dividend (1)		60,312		102,305
ICMS tax payable		14,856		6,172
Other tax payable		16,202		19,442
Other Current non-financial liabilities		7,793		3,804
Total		99,163		131,723

(1)	Provision includes a minimum dividend of subsidiary minority.



Non-current non-financial liabilities	12-31-2016 ThU.S.$		12-31-2015 ThU.S.$
ICMS tax payable		58,606		45,365
Other non-current non-financial liabilities		2,027		1,876
Total		60,633		47,241

124

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 26. DISTRIBUTABLE NET INCOME AND EARNINGS PER SHARE

Distributable net income

As a general policy, the Board of Directors of Arauco agreed that the net income to be distributed as dividend is determined based on realized net gains/(losses) of any relevant variations in the value of unrealized assets and liabilities, which are excluded from the calculation of net income during the period such changes are made.

As a result of the foregoing, for purposes of determining the distributable net income of the Company, which is the same considered for calculating the minimum dividend required and additional dividend, the following unrealized gains/losses are excluded from the net income for the year:

Unrealized gains/losses relating to the fair value recorded for forestry assets under IAS 41, adding them back to distributable net income when they are realized through sale or disposed of by other means.

Those generated through the acquisition of entities. These results will be added back to net income when they are realized through sale.

The deferred taxes associated with the amounts described in 1) and 2) above are also excluded.

The following table details the adjustments made for the determination of distributable net income as December 31, 2016 and 2015 in order to determine the provision of 40% of the distributable net income for each year:


	Distributable Net Income ThU.S.$
Net income attributable to owners of parent at 12-31-2016		213,801
Adjustments:
Biological Assets
Unrealized gains/losses		(204,671	)
Realized gains/losses		210,223
Deferred income taxes		2,089

Total adjustments		7,641

Distributable Net Income at 12-31-2016		221,442


	Distributable Net Income ThU.S.$
Net income attributable to owners of parent at 12-31-2015		362,689
Adjustments:
Biological Assets
Unrealized gains/losses		(205,527	)
Realized gains/losses		203,730
Deferred income taxes		(3,889	)

Total adjustments		(5,686	)

Distributable Net Income at 12-31-2015		357,003

125

CELULOSA ARAUCO Y CONSTITUCION S.A.

AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

The Company expects to maintain its policy of distributing 40% of its net distributable income as dividends for all future fiscal years, but will also consider the alternative of distributing a provisional dividend at year end.

As of December 31, 2016 in the Classified Statement of Financial Position, under the line item Other Ordinary Non-Financial Liabilities for an amount of ThU.S.$99,163, a total of ThU.S.$59,005 correspond to a provision for the minimum dividend for the 2016 period, corresponding to the Parent Company, after discounting the provisional dividend distribution of ThU.S.$ 29,572, paid to the shareholders in December 2016.

Basic and diluted earnings per share

Basic earnings per share are calculated by dividing the profit or loss attributable to ordinary equity holders of parent by the weighted average number of ordinary shares outstanding. Arauco does not have any shares with potential dilutive effect.


	January-December
	2016 ThU.S.$		2015 ThU.S.$
Profit or loss attributable to ordinary equity holder of parent		213,801		362,689
Weighted average of number of shares		113,159,655		113,159,655
Basic earnings per share (in U.S.$ per share)		1.89		3.21

126

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AND SUBSIDIARIES

Unaudited Consolidated Financial Statements

December 31, 2016

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

NOTE 27. SUBSEQUENT EVENTS

After closing of these Financial Statements, and as a result of the fires that affected the country (Chile), particularly in the regions of Maule and Bio Bio, the Company suffered the burning of approximately 80,000 hectares of forest plantations, whose accounting value amounts to approximately US$240 million, as per the IFRS accounting rules. This amounts represents 6% of the Company’s total forest plantations value.

The affected forest plantations will be managed by the Company to minimize the damages caused by the fires. It is estimated that this management will allow for a final recovery between 10% and 20% of the aforementioned US$ 240 million. Additionally, the forest plantations affected by the fires are insured, with their respective deductibles and limitations. Due to the foregoing, it is estimated that up to US$ 35 million will be recovered for this concept.

2)	The issuance of these consolidated financial statements for the period ended December 31, 2016 was approved by the Board of Directors of Arauco at the Extraordinary Session No. 564 held on March 9, 2017

Subsequent to December 31, 2016 and until the date of issuance of these consolidated financial statements, there have been no events, other than those discussed above, that could materially affect the presentation of these financial statements.

127

LOGO

Celulosa Arauco y Constitución S.A.

Fourth Quarter 2016 Results

March 13, 2017


HIGHLIGHTS

REVENUES U.S.$ 1,220.6 MILLION

Arauco’s revenues reached U.S.$ 1,220.6 million during the fourth quarter of 2016, a 2.8% or U.S.$ 33.1 million increase compared to the U.S.$ 1,187.5 million obtained in the third quarter of 2016.

NET INCOME U.S.$ 75.8 MILLION

Net income reached U.S.$ 75.8 million, an increase of 141.1% or U.S.$ 44.3 million compared to the U.S.$ 31.4 million obtained in the third quarter of 2016. For the full year, net income totaled U.S.$ 217.6 million.

ADJUSTED EBITDA U.S.$ 259.9 MILLION

Adjusted EBITDA reached U.S.$ 259.9 million, an increase of 1.5% or U.S.$ 3.8 million compared to the U.S.$ 256.1 million obtained during the third quarter of 2016. For the full year, adjusted EBITDA totaled U.S.$ 1,052.2 million.

NET FINANCIAL DEBT/ LTM ADJUSTED EBITDA

Net Financial Debt / LTM⁽¹⁾ Adjusted EBITDA ratio reached 3.7x in this quarter, an increase compared to the 3.6x obtained in the third quarter of 2016.

(1)	LTM = Last Twelve Months

CAPEX

CAPEX reached U.S.$ 163.5 million, an increase of 26.8% or U.S.$ 34.5 million compared to the U.S.$ 129.0 million spent during the third quarter of 2016.

Conference Call

Friday, March 17^th, 2017

13:00 Santiago Time

12:00 Eastern Time (New York)

Please Dial:

+1 (844) 839 2184 from USA

+1 (412) 317 2505 from other countries

Password: Arauco

For further information, please contact:

Marcelo Bennett

marcelo.bennett@arauco.cl

Phone: (562) 2461 7309

Fernanda Paz Vásquez

fernanda.vasquez@arauco.cl

Phone: (562) 2461 7494

investor_relations@arauco.cl

LOGO

For more details on Arauco´s financial statements please refer to www.svs.cl or www.arauco.cl

Readers are referred to the documents filed by Arauco with the United States Securities and Exchange Commission, specifically the most recent filing on Form 20-F that identifies important risk factors that could cause actual results to differ from those contained in the forward-looking statements. All forward-looking statements are based on information available to Arauco on the date hereof and Arauco does not assume any obligation to update such statements. References herein to “U.S.$” are to United States dollars. Discrepancies in any table between totals and sums of the amounts listed are due to rounding. This report is unaudited.


OVERVIEW

Arauco’s fourth quarter results were better than last quarter´s, lifted by better prices in the pulp business segment. Our Adjusted EBITDA increased in comparison to last quarter, but was not enough to boost our Adjusted EBITDA Margin that was 21.3% at quarter-end.

The first half of the quarter was fraught with uncertainty as to when the new pulp capacity would kick in and have a real impact in prices. However, worries were dissipated as the producers coming on line set a clearer timeline and some supply was postponed to a later date. Arauco was able to push through price hikes at quarter end, setting the tone for the coming months which are more optimistic in comparison to the projections set out for the beginning of the year.

Our wood products business segment showed mixed results as did last quarter´s, with sawn timber markets compensating a more pressured panels market.

Despite higher cash from operations, Arauco’s Free Cash Flow during this quarter was negative U.S.$ 7.2 million, mainly due to higher CAPEX investments as the Grayling Project picks up pace, as well as higher outflow due to the seasonal payment of dividends.


In U.S. Million	Q4 2016			Q3 2016			Q4 2015			QoQ			YoY			YTD 2016			YTD 2015			YoY Acum

Revenue		1,220.6			1,187.5			1,206.8			2.8	%		1.1	%		4,761.4			5,146.7			-7.5	%
Net income		75.8			31.4			89.1			141.1	%		-15.0	%		217.6			367.7			-40.8	%
Adjusted EBITDA		259.9			256.1			289.1			1.5	%		-10.1	%		1,052.2			1,282.4			-18.0	%
Adjusted EBITDA
Margin		21.3	%		21.6	%		24.0	%		-1.3	%		-11.1	%		22.1	%		24.9	%		-11.3	%
LTM Adj. EBITDA		1,052.2			1,081.4			1,282.4			-2.7	%		-18.0	%		1,052.2			1,282.4			-18.0	%
CAPEX		163.5			129.0			83.5			26.8	%		95.7	%		664.9			468.7			41.8	%
Net Financial Debt		3,888.8			3,882.9			3,805.4			0.2	%		2.2	%		3,888.8			3,805.4			2.2	%
Net Financial Debt /
LTM Adj. EBITDA		3.7x			3.6x			3.0x			2.9	%		24.6	%		3.7x			3.0x			24.6	%

Adjusted EBITDA and EBITDA Margin

(In U.S.$ Million)

LOGO


INCOME STATEMENT

Net income for the fourth quarter of 2016 was U.S.$ 75.8 million, an increase of 141.1% or U.S.$ 44.3 million compared to the U.S.$ 31.4 million obtained in the third quarter of this year.


In U.S.$ Million	Q4 2016			Q3 2016			QoQ

Revenues		1,220.6			1,187.5			2.8	%
Cost of sales		(896.7	)		(890.5	)		0.7	%
Distribution costs		(136.0	)		(126.1	)		7.9	%
Administrative expenses		(110.6	)		(127.3	)		-13.1	%
Other income		68.2			69.9			-2.3	%
Other expenses		(33.5	)		(10.5	)		220.4	%
Financial income		3.9			7.9			-49.9	%
Financial costs		(58.0	)		(64.7	)		-10.3	%
Participation in (loss) profit in associates and joint ventures accounted through equity method		9.9			4.0			150.2	%
Exchange rate differences		(3.9	)		(1.0	)		289.2	%

Income before income tax		64.0			49.3			*29.9*	%

Income tax		11.7			(17.8	)		-165.8	%

Net income		75.8			31.4			*141.1*	%

Revenues reached U.S.$ 1,220.6 million during the fourth quarter of 2016 compared with the U.S.$ 1,187.5 million in the previous quarter, as a result of an increase in our pulp and forestry segments, which had decreased in the previous period. Revenue from our energy sales dropped 29.6% compared to last quarter, with prices decreasing 6.1% and volume dropping 23.5% in comparison to the last quarter. The drop in volume is mainly due to the annual maintenance stoppage in our Valdivia Mill, which has 140 MW of energy production capacity. Average prices in our pulp business decreased 2.2% but sales volume increased by 11.5%, which boosted revenues. In our wood products business, average prices increased 2.2% while sales volume decreased 3.5%. The following table shows a breakdown of our revenue sales distributed by business segment:


In U.S.$ Million	Q4 2016		Q3 2016		QoQ

Pulp(*)		557.4		521.4		6.9	%
Wood Products(*)		629.7		638.1		-1.3	%
Forestry		27.5		21.9		25.5	%
Others		6.0		6.1		-1.2	%

Total		1,220.6		1,187.5		*2.8*	%

(*)	Pulp and Wood division sales include energy

Sales by Business Segment 4Q 2016

LOGO

Cost of sales for the fourth quarter of the year reached U.S.$ 896.7 million, U.S.$ 6.2 million or 0.7% higher than the U.S.$ 890.5 million obtained in the third quarter of 2016. Sawmill services and Timber costs increased mainly due to the increase in sales volume of sawn timber. Unitary costs for softwood bleached pulp decreased 0.8% compared to last quarter, while hardwood bleached pulp remained stable. Unitary costs for unbleached softwood pulp decreased 10.5% compared to last quarter, which shows the effect of the maintenance stoppage during the third quarter of our Licancel Mill and Arauco Pulp Mill Line 2.


In U.S.$ Million	Q4 2016		Q3 2016		QoQ

Timber		183.4		177.4		3.3	%
Forestry costs		157.0		168.0		-6.6	%
Depreciation and amortization		100.5		93.5		7.5	%
Maintenance costs		81.9		79.0		3.6	%
Chemical costs		122.0		120.1		1.6	%
Sawmill services		33.3		25.1		32.8	%
Other raw materials and indirect costs		83.4		101.6		-17.9	%
Energy and fuel		37.7		32.3		16.8	%
Cost of electricity		9.8		9.9		-1.0	%
Wage, salaries and severance indemnities		87.9		83.6		5.1	%

Cost of Sales		896.7		890.5		*0.7*	%

Administrative expenses overall decreased by 13.1% or U.S.$ 16.7 million. The item with the greatest absolute difference is Other administration expenses, mainly due to a reversal of a provision, reclassified from Other income to Other administration expenses, therefore decreasing the amount of administrative expenses. The rest of the items varied at most U.S.$ 1.9 million compared to last quarter.


In U.S.$ Million	Q4 2016		Q3 2016		QoQ

Wage, salaries and severance indemnities		50.9		49.1		3.6	%
Marketing, advertising, promotion and publications expenses		2.7		2.6		0.8	%
Insurance		4.8		4.5		8.0	%
Depreciation and amortization		7.6		8.5		-10.6	%
Computer services		9.6		10.4		-7.8	%
Lease rentals (offices, warehouses and machinery)		3.8		3.6		6.1	%
Donations, contributions, scholarships		3.2		1.5		114.4	%
Fees (legal and technical advisories)		9.7		14.2		-31.6	%
Property taxes, patents and municipality rights		3.1		5.0		-38.8	%
Other administration expenses		15.3		27.9		-45.2	%

Administrative Expenses		110.6		127.3		*-13.1*	%

Distribution costs increased 7.9% or U.S.$ 10.0 million, due to shipping and freight costs. Sales volume in our pulp business segment increased compared to last quarter as a whole, with Arauco Argentina continuing to expand their sales in the Asian pulp markets.


In U.S.$ Million	Q4 2016		Q3 2016		QoQ

Commissions		3.4		3.3		3.0	%
Insurance		0.8		0.6		35.3	%
Other selling costs		4.1		4.6		-11.5	%
Port services		7.7		7.2		6.8	%
Freights		97.5		92.5		5.5	%
Other shipping and freight costs		22.5		17.9		25.9	%

Distribution Costs		136.0		126.1		*7.9*	%

As a percentage, administrative expenses and distribution costs combined were 20.2%, showing a downward trend compared to the 21.3% in the previous quarter.

Other income fell 2.3% or U.S.$ 1.6 million this quarter. The main decrease comes from other operating results, with the reclassification of a reversal of provision to Administrative expenses. Gains from changes in biological assets increased 68.0% due to gains that were previously not accounted for in the third quarter. During the year, overall gains from changes in biological assets fluctuated around U.S.$ 50 million each quarter.


In U.S.$ Million	Q4 2016			Q3 2016		QoQ

Gain from changes in fair value of biological assets		68.8			40.9		68.0	%
Net income from insurance compensation		0.5			0.5		-10.6	%
Leases received		0.9			2.2		-56.6	%
Gains on sales of assets		5.4			1.9		—
Access easement		0.2			3.5		-94.4	%
Recovery of tax credits		1.1			1.0		7.2	%
Other operating results		(8.6	)		19.8		-143.3	%

Other Income		68.2			69.9		*-2.3*	%

Other expenses rose overall 220.4% or U.S.$ 23.1 million. This increase is mainly due to provision for forestry fire losses, since forestry fire season usually starts during October and lasts until May of the following year. Project expenses were U.S.$ 1.6 million as the Grayling Project started its construction phase. Impairment provisions increased in comparison to last quarter by U.S.$ 9.9 million, mainly coming from Argentina, Chile and North America.


In U.S.$ Million	Q4 2016			Q3 2016		QoQ

Depreciation		(0.4	)		0.3		-220.3	%
Legal payments		0.2			0.2		6.9	%
Impairment provision property, plant and equipment and others		11.5			1.6		—
Plants stoppage operating expenses		1.4			0.5		174.7	%
Project expenses		1.6			—		—
Gain (loss) from asset sales		1.0			0.4		143.6	%
Loss of assets		0.4			0.3		29.2	%
Provision for forestry fire losses		12.5			0.6		—
Other taxes		1.6			1.7		-3.5	%
Research and development expenses		0.8			0.8		0.1	%
Compensation and eviction		0.4			1.3		-67.4	%
Fines, readjustments and interest		0.2			0.5		-69.9	%
Other expenses (donations, repayments insurance)		2.2			2.1		3.7	%

Other expenses		33.5			10.5		*220.4*	%

Foreign exchange differences showed a loss of U.S.$ 3.9 million, a U.S.$ 2.9 million difference when compared to the previous quarter that ended at U.S.$ 1.0 million. During this quarter, the Chilean Peso depreciated 1.7% against the U.S. dollar while the Argentine Peso depreciated 4.4% this quarter, which lowers our cash and cash equivalents in U.S. dollar. Our Brazilian subsidiary´s functional currency is the Brazilian real, and therefore the appreciation of 1.1% during the quarter against the U.S. dollar positively affected our U.S. dollar-denominated debt in that country.

Income tax had a gain compared to last quarter of U.S.$ 29.6 million or 141.1%. This was due to our investment in Novo Oeste done at the end of 2015, which was restructured during the year 2016. Due to this restructuring, it was determined that there was income tax that would be recoverable in future periods due to the carry forward of unused tax losses. Therefore, a deferred tax asset was recognized.


ADJUSTED EBITDA

Adjusted EBITDA for the fourth quarter of 2016 was U.S.$ 259.9 million, 1.5% or U.S.$ 3.8 million higher than the US$ 256.1 million reached during the previous quarter. In terms of Adjusted EBITDA by business, during the fourth quarter of the year we had a gain in all of our business segments. Higher pulp prices have propelled pulp EBITDA higher after a downward trend during the former part of the year. Forestry EBITDA was impacted by an accounting adjustment in forestry road costs last quarter. Wood products also regained traction and was mainly driven by better sales and volume of sawn timber.


In U.S.$ Million	Q4 2016			Q3 2016			Q4 2015			QoQ			YoY

Net Income		75.8			31.4			89.1			141.1	%		-15.0	%
Financial costs		58.0			64.7			69.2			-10.3	%		-16.1	%
Financial income		(3.9	)		(7.9	)		(15.2	)		-49.9	%		-74.1	%
Income tax		(11.7	)		17.8			26.1			-165.8	%		-144.9	%

EBIT		118.1			106.1			169.2			*11.3*	%		*-30.2*	%

Depreciation & amortization		107.6			102.8			101.3			4.7	%		6.3	%

EBITDA		225.7			208.9			270.5			*8.1*	%		*-16.6*	%

Fair value cost of timber harvested		86.5			86.6			75.2			-0.1	%		15.1	%
Gain from changes in fair value of biological assets		(68.8	)		(40.9	)		(69.8	)		68.0	%		-1.5	%
Exchange rate differences		3.9			1.0			13.3			289.2	%		-71.1	%
Others (*)		12.5			0.6			(0.1	)		—			—

Adjusted EBITDA		259.9			256.1			289.1			*1.4*	%		*-10.1*	%

(*)	Includes provision from forestry fire losses.

Adjusted EBITDA Variation by Business Segment Q3 2016 – Q4 2016

(In U.S.$ Million)

LOGO


FORESTRY BUSINESS

The Adjusted EBITDA for our forestry business reached U.S.$ 61.1 million during this quarter, which translates to a 23.2% or U.S.$ 11.5 million increase compared to the previous quarter.

Adjusted EBITDA for Forestry Business

(In U.S.$ Million)

LOGO

During the fourth quarter, our forestry production was 5.3 million m3, which remained at similar levels produced in the previous quarter. Sales volume decreased by 1.4% from 7.6 million m3 to 7.5 million m3.

Production, Purchases and Sales Volume

(In Thousand m³)

LOGO


PULP BUSINESS

The Adjusted EBITDA for our pulp business reached U.S.$ 128.4 million during this quarter, which translates to a 7.7% increase or U.S.$ 9.2 million compared to the previous quarter.

Adjusted EBITDA for Pulp Business

(In U.S.$ Million)

LOGO

Global Pulp Demand Change

Q3 2016 – Q4 2016

LOGO

Production and Sales Volume

(In Thousands AdT)

LOGO

Pressures in Asian pulp prices subsided, with long fiber prices stabilizing while short fiber prices positively gaining traction and reaching a 7.5% gain during the quarter. With these price movements the price gap moved from U.S.$ 95 per ton to U.S.$ 50 per ton. China was the main driver of recovering prices, with demand increasing to such a point that many paper producers had their productions sold off until February. Particularly in China, local prices rose by 10% in long fiber and 25% in short fiber, with the price gap decreasing from U.S.$ 90 to less than U.S.$ 10. Price surges have also been successfully passed to the final client, finally reflecting the depreciation the Chinese currency had suffered during the year. Older paper mills that do not use quality paper grade pulp have ceased production, while more modern paper mills have upped their production levels. Overall, paper supply is estimated to increase 700 thousand tons between the fourth quarter of 2016 and the coming year.

during the end of November.


WOOD PRODUCTS BUSINESS

The Adjusted EBITDA for our wood products business reached U.S.$ 86.1 million during this quarter, which translates to a 0.8% decrease or U.S.$ 0.7 million compared to the previous quarter.

Adjusted EBITDA for Wood Product Business

(In U.S.$ Million)

LOGO

Changes in Arauco Volume Sales by Market

Q3 2016 – Q4 2016

LOGO

Production and Sales Volume: Panels

(In Thousand m³)

LOGO

Production and Sales Volume: Sawn Timber

(In Thousand m³)

LOGO

Panels markets had a drop in sales volume, but results were optimistic at quarter-end. North America had lower seasonal sales due to the winter season that brings harsher weather as well as the holidays. MDF panels started with uncertainty as to how the production of West Frazier would impact future prices. Rumors that Mexican producers would increase capacity pressured prices during the quarter. The MDF moldings market had an overall stable demand. In Mexico, the devaluating currency and the incoming capacity decreased sales compared to last quarter, but did not have as big an impact as expected. Clients were cautious in taking stock positions at the beginning of the quarter, and sales increased in November only to decrease in December due to seasonal effects. Particleboard had a positive quarter all around, especially in value-added products.

Sawn timber markets predominantly increased sales volume and prices during this quarter. Demand in Asia and Oceania was strong despite more supply in the markets from Europe and Brazil. Product mix was crucial to remain ahead of our competitors, and Arauco was even able to increase prices in a few key products. In the Middle East, the construction market remained solid, but prices did decrease due to higher competition. For plywood in Europe, fourth quarter prices consolidated the price increases that occurred during the third quarter in plywood.


CAPITAL EXPENDITURES


U.S.$ Million	Q4 2016		Q3 2016		Q4 2015		YTD 2016		YTD 2015

Cash flows used in purchase of associates and joint ventures		—		—		10.1		153.1		10.1
Other cash payments to acquire interests in joint ventures		—		—		0.8		—		0.8
Purchase and sales of property, plant and equipment		113.1		97.6		62.5		356.2		321.4
Purchase and sales of intangible assets		13.0		0.2		7.5		14.9		10.3
Purchase of other long-term assets		37.4		31.2		2.7		140.7		126.1

Total CAPEX		163.5		129.0		83.5		664.9		468.7

During this quarter, capital expenditures increased by U.S.$ 34.5 million or 26.8% compared to the third quarter of 2016. Arauco disbursed U.S.$ 18.0 million for the water treatment plant during this quarter, accumulating a total of U.S.$ 51.2 million during the year 2016. For the the Grayling Project in Michigan, approximately U.S.$ 16.0 million was expended during the fourth quarter, summing a total of U.S.$ 20.8 million for the year 2016. Plantations CAPEX across all countries amounted to U.S.$ 37.0 million. The maintenance stoppage in our Valdivia Mill cost approximately U.S.$ 13.2 million, while the maintenance stoppage in our Nueva Aldea Mill was approximately U.S.$ 16.8 million. In Argentina, the maintenance stoppage in our Alto Paraná Mill cost approximately U.S.$ 12.9 million, which included the modification of Line 2, the modification of the digester, installation of a press and the change of the debarking drum in Line 1.The remaining CAPEX pertains to sustaining business investments.


FREE CASH FLOW

During this quarter, cash provided by operating activities increased U.S.$ 32.6 million, due to a recovering EBITDA

in all of our business segments and less interest payments during the fourth quarter compared to the third quarter. Cash used by investment activities rose U.S.$ 32.9 million due to a higher CAPEX spending during the quarter. In addition, cash used by financing activities during this quarter was U.S.$ 30.1 million due to the cash advancement of dividends that are due in May 2016.


U.S.$ Million	Q4 2016			Q3 2016			Q4 2015

Adjusted EBITDA		259.9			256.1			289.1
Working Capital Variation		(34.6	)		(1.0	)		(51.0	)
Interest paid and received		(22.6	)		(68.8	)		(29.0	)
Income tax paid		(12.8	)		(36.4	)		(23.8	)
Other cash inflows (outflows)		(13.7	)		(6.2	)		(19.7	)

Cash from Operations		176.2			143.7			165.6

Capex		(163.5	)		(129.0	)		(83.5	)
Proceeds from investment activities		8.3			3.0			2.6
Other inflows of cash, net		(2.6	)		1.2			(0.3	)

Cash from Investment Activities		(157.8	)		(124.9	)		(81.2	)

Dividends paid		(30.1	)		(0.3	)		(43.9	)
Other inflows of cash, net		(0.1	)		(0.3	)		0.1

Cash from (used) in financing activities - Net of proceeds and repayments		(30.1	)		(0.6	)		(43.9	)

Effect of exchange rate changes on cash and cash equivalents		4.5			(7.2	)		(14.6	)

Free Cash Flow		(7.2	)		11.0			26.0

Net Debt Variation Q3 2016 – Q4 2016

(In U.S.$ Million)

LOGO


FINANCIAL DEBT AND CASH

Arauco’s financial debt as of December 31, 2016 reached U.S.$ 4,481.0 million, an increase of 3.2% or U.S.$ 138.4 million when compared to September 30, 2016, mainly due to a local bond that was issued in December 2016 for UF 5.0 million or approximately U.S.$ 201.4 million. Our consolidated net financial debt increased 0.2% or U.S.$ 5.9 million when compared with September 2016, while cash and cash equivalents increased by U.S.$ 132.6 million.

Our leverage, measured as Net Financial Debt/LTM Adjusted EBITDA, increased compared to last quarter from 3.6 times to 3.7 times.

December

September

December

In U.S.$ Million

2016

2015

Short term financial debt

697.0

716.9

291.8

Long term financial debt

3,784.0

3,625.7

4,013.6

TOTAL FINANCIAL DEBT

4,481.0

4,342.6

4,305.4

Cash and cash equivalents

592.3

459.7

500.0

NET FINANCIAL DEBT

3,888.8

3,882.9

3,805.4

Net Financial Debt and Leverage

(In U.S.$ Million)

LOGO


Debt by Currency		Debt by Instrument

(*)	UF is a Chilean monetary unit indexed to inflation.


Financial Debt Profile

For the year 2017, bank amortizations (which include accrued interest) sum up a total of U.S.$ 236.0 million, which include the following maturities: U.S.$ 185.5 million of loans in Montes del Plata, U.S.$ 40.4 million of leasing sin Chile, U.S.$5.0 in our Brazilian subsidiaries, and U.S.$ 5.0 million in our Argentinian subsidiary. Bond amortizations during 2017 include U.S.$ 270.0 million for the Alto Paraná bond due in June; U.S.$ 125.0 million in a Yankee bond due in September; and the first amortization of U.S.$ 9.8 million for our local bond BARAU-Q in October. On December 1, 2016, Arauco issued a local bond for UF 5.0 million equivalent to U.S.$ 201.4 million to refinance part of the maturities due in 2027. The remaining years have not undergone any major changes in financial obligations as compared to the previous quarter.

Financial Obligation by Year

(In U.S.$ Million)

LOGO

Cash

Our cash position was U.S.$ 592.3 million at the end of the fourth quarter, which is a U.S.$ 132.6 million or 28.8% increase compared to the end of the third quarter of 2016. This was mainly due to the issuance of a local bond for approximately U.S.$ 201.4 million, which was offset by U.S.$ 30.1 paid in dividends and higher capital expenditures for U.S.$ 35.0 mainly due to the Grayling Project in the United States.


Cash by Currency		Cash by Instrument


FOURTH QUARTER AND SUBSEQUENT EVENTS AND NEWS

Arauco issued a local bond in December 2016

On December 1^st, 2016, Arauco issued a bond in the local market for UF 5.0 million, or approximately U.S.$ 201.4 million. Filed under the “S” Series Bonds, the tenor of this bond is 10 years and the principal will be paid in one installment at the end of the term. Interest shall accrue as of November 15, 2016 and will be payable semiannually. The purpose of this bond is to refinance short and/or long-term liabilities. This bond is issued against a line registered in the local Superintendence of Securities and Insurance for a maximum amount of UF 10.0 million, giving Arauco the ability to issue an additional UF 5.0 million if the need arises. The UF 5.0 million already issued have been swapped completely to U.S. dollar.

Chile faces large forest fires during the first quarter of 2017

During the months of January through February, there were large forest fires that affected the Maule and Bio Bio regions in southern Chile. Due to these fires, about 80,000 hectares of our forest plantations- currently valued at U.S.$ 240 million in our books - were damaged to some extent. The total amount corresponds to approximately 6% of the value of our total forest plantations under IFRS and approximately 2% of the total assets of Arauco. Once Arauco finishes the handling of the damaged forests to minimize the loss, about 10% to 20% of the areas affected could be recoverable. Our forest plantations in Chile are insured with corresponding deductibles and limits, and we have estimated to recover up to U.S.$ 35 million through insurance coverage. During the forest fires, our sawn timber mill El Cruce was also damaged. Total annual capacity of this mill was 116 thousand cubic meters, which makes up about 4% of our total sawmill annual capacity.


FINANCIAL STATEMENTS

Income Statement


In US$ Million	Q4 2016			Q3 2016			Q4 2015			FY 2016			FY 2015

Revenues		1,220.6			1,187.5			1,206.8			4,761.4			5,146.7
Cost of sales		(896.7	)		(890.5	)		(837.6	)		(3,498.9	)		(3,511.4	)

Gross profit		323.9			297.0			369.2			1,262.5			1,635.3

Other income		68.2			69.9			90.5			257.9			273.0
Distribution costs		(136.0	)		(126.1	)		(124.2	)		(496.5	)		(528.5	)
Administrative expenses		(110.6	)		(127.3	)		(147.3	)		(474.5	)		(552.0	)
Other expenses		(33.5	)		(10.5	)		(11.1	)		(77.4	)		(83.4	)
Financial income		3.9			7.9			15.2			29.7			50.3
Financial costs		(58.0	)		(64.7	)		(69.2	)		(258.5	)		(263.0	)
Participation in (loss) profit in associates and joint ventures accounted through equity method		9.9			4.0			5.5			23.9			6.7
Exchange rate differences		(3.9	)		(1.0	)		(13.3	)		(3.9	)		(41.2	)

Income before income tax		64.0			49.3			115.3			263.2			497.4

Income tax		11.7			(17.8	)		(26.1	)		(45.6	)		(129.7	)

Net income		75.8			31.4			89.1			217.6			367.7

Profit attributable to parent company		73.6			31.1			86.6			213.8			362.7
Profit attributable to non-parent company		2.2			0.3			2.5			3.8			5.0


Balance Sheet


In US$ Million	Q4 2016		Q3 2016		Q4 2015

Cash and cash equivalents		592.3		459.7		500.0
Other financial current assets		5.2		9.6		32.2
Other current non-financial assets		144.9		177.6		134.0
Trade and other receivables-net		701.6		642.5		733.3
Related party receivables		12.5		3.7		3.1
Inventories		852.6		909.6		910.0
Biological assets, current		306.1		297.5		306.5
Tax assets		104.1		92.3		64.1
Non-Current Assets classified as held for sale		3.1		3.1		3.2

Total Current Assets		2,722.4		2,595.6		2,686.4

Other non-current financial assets		8.9		5.3		0.6
Other non-current and non-financial assets		130.3		129.9		125.5
Non-current receivables		15.2		15.5		15.3
Investments accounted through equity method		446.5		438.5		264.8
Intangible assets		89.5		81.6		88.1
Goodwill		74.9		75.1		69.5
Property, plant and equipment		6,919.5		6,914.3		6,896.4
Biological assets, non-current		3,592.9		3,588.5		3,520.1
Deferred tax assets		6.1		3.9		3.7

Total Non-Current Assets		11,283.8		11,252.7		10,984.0

TOTAL ASSETS		14,006.2		13,848.3		13,670.4

Other financial liabilities, current		697.5		717.9		296.0
Trade and other payables		537.9		558.0		583.0
Related party payables		3.8		7.3		7.1
Other provisions, current		0.8		0.6		0.9
Tax liabilities		1.6		8.9		11.0
Current provision for employee benefits		5.2		5.2		4.5
Other non-financial liabilities, current		99.2		91.3		131.7

Total Current Liabilities		1,346.1		1,389.2		1,034.3

Other non-current financial liabilities		3,870.9		3,731.5		4,237.0
Other provisions, non-current		38.1		38.7		34.5
Deferred tax liabilities		1,631.1		1,637.5		1,619.0
Non-current provision for employee benefits		60.1		59.8		51.9
Other non-financial liabilities, non-current		60.6		60.1		47.2

Total Non-Current Liabilities		5,660.8		5,527.6		5,989.7

Non-parent participation		44.0		44.5		37.7

Net equity attributable to parent company		6,955.3		6,886.9		6,608.7

TOTAL LIABILITIES AND EQUITY		14,006.2		13,848.3		13,670.4


Cash Flow Statement


US$ Million	Q4 2016			Q3 2016			Q4 2015			FY 2016			FY 2015

Receipts from sales of goods and rendering of services		1,139.6			1,308.9			1,362.8			5,020.6			5,733.7
Other cash receipts (payments)		55.0			70.7			45.4			258.5			168.5
Payments of suppliers and personnel (less)		(983.0	)		(1,127.2	)		(1,187.2	)		(4,235.7	)		(4,751.3	)
Interest paid and received		(22.6	)		(68.8	)		(29.0	)		(182.2	)		(212.2	)
Income tax paid		(12.8	)		(36.4	)		(23.8	)		(83.9	)		(87.8	)
Other (outflows) inflows of cash, net		(0.1	)		(3.6	)		(2.6	)		(3.7	)		2.8

Net Cash Provided by (Used in) Operating Activities		176.2			143.7			165.6			773.6			853.7

Capital Expenditures		(163.5	)		(129.0	)		(83.5	)		(664.9	)		(468.7	)
Other investment cash flows		5.7			4.1			2.3			24.6			(9.1	)

Net Cash Provided by (Used in) Investing Activities		(157.8	)		(124.9	)		(81.2	)		(640.2	)		(477.8	)

Proceeds from borrowings		195.2			175.5			31.9			737.7			280.9
Repayments of borrowings		(55.4	)		(254.2	)		(86.7	)		(645.2	)		(949.2	)
Dividends paid		(30.1	)		(0.3	)		(43.9	)		(130.6	)		(143.0	)
Other inflows of cash, net		(0.1	)		(0.3	)		0.1			(0.3	)		(0.9	)

Net Cash Provided by (Used in) Financing Activities		109.7			(79.3	)		(98.7	)		(38.5	)		(812.2	)

Total Cash Inflow (Outflow) of the Period		128.1			(60.5	)		(14.2	)		94.9			(436.3	)

Effect of exchange rate changes on cash and cash equivalents		4.5			(7.2	)		(14.6	)		(2.7	)		(34.8	)
Cash and Cash equivalents at beginning of the period		459.7			527.4			528.9			500.0			971.2

Cash and Cash Equivalents at end of the Period		592.3			459.7			500.0			592.3			500.0

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	Celulosa Arauco y Constitución, S.A.
	(Registrant)

Date: March 29, 2017	By:	/s/ Matías Domeyko Cassel
	Name:	Matías Domeyko Cassel
	Title:	Chief Executive Officer