20-F 1 d847155d20f.htm FORM 20-F Form 20-F
Table of Contents

As filed with the Securities and Exchange Commission on April 16, 2020 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 _________________________

 

FORM 20‑F

 _________________________

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Commission File Number: 33‑99720

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

(Exact name of Registrant as specified in its charter)

Arauco and Constitution Pulp Inc.

(Translation of Registrant’s name into English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

(Address of principal executive offices)

Gianfranco Truffello

Tel.: 56‑2‑2461‑7200

E‑mail: gianfranco.truffello@arauco.com

Avenida El Golf 150

14th Floor

Las Condes, Santiago

Chile

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

 _________________________

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

None

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

None

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

 

Title of each class:

4.750% Notes due 2022

4.500% Notes due 2024

3.875% Notes due 2027

4.250% Notes due 2029

4.200% Notes due 2030

5.500% Notes due 2047

5.500% Notes due 2049

5.150% Notes due 2050

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S‑T (§ 232.405 of this Chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☒  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

 

Large Accelerated Filer

o

Accelerated Filer

o

Non‑Accelerated Filer

Emerging Growth Company

o

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. o

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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

 

U.S. GAAP  o    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ☒

      Other  o

 

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

 

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

(Applicable only to issuers involved in bankruptcy proceedings during the past five years)

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes o  No o

 

 


Table of Contents

TABLE OF CONTENTS

 

 

 

Page

 

PART I

 

 

 

 

 

 

 

Item 1.

Identity of Directors, Senior Management and Advisers

 

 

1

 

 

 

 

 

Item 2.

Offer Statistics and Expected Timetable

 

 

1

 

 

 

 

 

Item 3.

Key Information

 

 

1

 

 

 

 

 

Item 4.

Information on our Company

 

 

19

 

 

 

 

 

Item 5.

Operating and Financial Review and Prospects

 

 

53

 

 

 

 

 

Item 6.

Directors, Senior Management and Employees

 

 

75

 

 

 

 

 

Item 7.

Major Shareholders and Related Party Transactions

 

 

82

 

 

 

 

 

Item 8.

Financial Information

 

 

84

 

 

 

 

 

Item 9.

The Offer and Listing

 

 

88

 

 

 

 

 

Item 10.

Additional Information

 

 

89

 

 

 

 

 

Item 11.

Quantitative and Qualitative Disclosures About Market Risk

 

 

97

 

 

 

 

 

Item 12.

Description of Securities Other than Equity Securities

 

 

99

 

 

 

 

 

PART II

 

 

 

 

 

 

 

Item 13.

Defaults, Dividend Arrearages and Delinquencies

 

 

100

 

 

 

 

 

Item 14.

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

 

 

100

 

 

 

 

 

Item 15.

Controls and Procedures

 

 

100

 

 

 

 

 

Item 16A.

Audit Committee Financial Expert

 

 

101

 

 

 

 

 

Item 16B.

Code of Ethics

 

 

101

 

 

 

 

 

Item 16C.

Principal Accountant Fees and Services

 

 

101

 

 

 

 

 

Item 16D.

Exemptions from the Listing Standards for Audit Committees

 

 

102

 

 

 

 

 

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

 

102

 

 

 

 

 

Item 16F.

Change in Registrant’s Certifying Accountant

 

 

102

 

 

 

 

 

Item 16G.

Corporate Governance

 

 

102

 

 

 

 

 

Item 16H.

Mine Safety Disclosures

 

 

102

 

 

 

 

 

PART III

 

 

 

 

 

 

 

Item 17.

Financial Statements

 

 

103

 

 

 

 

 

Item 18.

Financial Statements

 

 

103

 

 

 

 

 

Item 19.

Exhibits

 

 

104

 


Table of Contents
Table of Contents

 

CERTAIN TERMS AND CONVENTIONS

 

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

 

Unless otherwise specified, all references to “$,” “U.S.$,” “U.S. dollars” or “dollars” are to United States dollars; references to “Chilean pesos” or “Ch$” are to Chilean pesos; references to “Argentine pesos” or “AR$” are to Argentine pesos; references to “Brazilian reais” “Brazilian reals” or “R$” are to Brazilian reais; references to “Mexican pesos” or “MXN$” are to Mexican pesos; references to “€” or “euro” are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; and references to “UF” are to Unidades de Fomento. The UF is a unit of account that is linked to, and adjusted daily to reflect changes in, the Chilean consumer price index reported by the Instituto Nacional de Estadísticas (Chilean National Institute of Statistics). As of December 31, 2019, one UF equaled U.S.$37.81 and Ch$28,309.94.

 

Regarding our pulp business, references to “hardwood” kraft pulp are to pulp made from eucalyptus or short fiber, and references to “softwood” kraft pulp are to pulp made from pine or long fiber.

 

PRESENTATION OF FINANCIAL AND OTHER DATA

 

This report includes the audited consolidated statement of financial position of Arauco and our subsidiaries as of December 31, 2019 and 2018 and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for each of the three years for the period ended December 31, 2019 (collectively, the “audited consolidated financial statements” or “financial statements”). In addition, this report includes selected financial information as of and for the periods ended December 31, 2015, 2016, 2017, 2018 and 2019.

 

We make statements in this report about the pulp market partly on the basis of information from third-party sources. This information is principally sourced from reports published by Hawkins Wrights Ltd. and Resource Information Systems Inc., which are specialized consultants in the pulp market.

 

For your convenience, this annual report contains certain translations of Chilean peso amounts into U.S. dollars at specified rates. Unless otherwise indicated, the U.S. dollar equivalent for information in Chilean pesos is based on the observed exchange rate reported by Banco Central de Chile, which we refer to as the “Central Bank of Chile” or the “Central Bank.” The Federal Reserve Bank of New York does not report a noon buying rate for Chilean pesos. On December 31, 2019, the observed exchange rate for Chilean pesos, as published in the website of the Diario Oficial de la República de Chile (Official Gazette) on January 2, 2020, was Ch$748.74 to U.S.$1.00, and on April 13, 2020, the observed exchange rate was Ch$844.57 to U.S.$1.00. You should not construe these translations as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise specified, references to the devaluation or the appreciation of the Chilean peso against the U.S. dollar are in nominal terms (without adjusting for inflation) based on the observed exchange rates published by the Central Bank of Chile for the relevant period.

 

PART I

 

Item  1. Identity of Directors, Senior Management and Advisers

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

 
1

 

Table of Contents

 

SELECTED CONSOLIDATED FINANCIAL DATA

 

The selected consolidated financial information as of December 31, 2015, 2016, 2017, 2018 and 2019 and for each of the five years then ended is derived from, should be read in conjunction with, and is qualified in its entirety by reference to, our audited consolidated financial statements which have been prepared in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

 

 

As of and for the year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

INCOME STATEMENT DATA

 

(in thousands of U.S. dollars, except ratios and share data)

 

Revenue

 

 

5,329,214

 

 

 

5,954,833

 

 

 

5,238,341

 

 

 

4,761,385

 

 

 

5,146,740

 

Cost of sales

 

 

(3,910,378 )

 

 

(3,722,749 )

 

 

(3,574,532 )

 

 

(3,498,905 )

 

 

(3,511,425 )

Gross profit

 

 

1,418,836

 

 

 

2,232,084

 

 

 

1,663,809

 

 

 

1,262,480

 

 

 

1,635,315

 

Other income

 

 

232,393

 

 

 

124,304

 

 

 

111,513

 

 

 

257,863

 

 

 

273,026

 

Distribution costs

 

 

(586,873 )

 

 

(556,805 )

 

 

(523,300 )

 

 

(496,473 )

 

 

(528,470 )

Administrative expenses

 

 

(554,038 )

 

 

(561,284 )

 

 

(521,294 )

 

 

(474,469 )

 

 

(551,977 )

Other expenses

 

 

(203,698 )

 

 

(95,880 )

 

 

(240,165 )

 

 

(77,415 )

 

 

(83,388 )

Other income (loss)

 

 

21,674

 

 

 

14,213

 

 

 

0

 

 

 

0

 

 

 

0

 

Finance income

 

 

32,582

 

 

 

20,895

 

 

 

19,640

 

 

 

29,701

 

 

 

50,284

 

Finance costs

 

 

(273,639 )

 

 

(214,779 )

 

 

(287,958 )

 

 

(258,467 )

 

 

(262,962 )

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

 

 

7,775

 

 

 

17,246

 

 

 

17,017

 

 

 

23,939

 

 

 

6,748

 

Exchange rate differences

 

 

(32,507 )

 

 

(26,470 )

 

 

98

 

 

 

(3,935 )

 

 

(41,171 )

Income before income tax

 

 

62,505

 

 

 

953,524

 

 

 

239,360

 

 

 

263,224

 

 

 

497,405

 

Income tax

 

 

(535 )

 

 

(226,765 )

 

 

30,992

 

 

 

(45,647 )

 

 

(129,694 )

Net income

 

 

61,970

 

 

 

726,759

 

 

 

270,352

 

 

 

217,577

 

 

 

367,711

 

BALANCE SHEET DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

3,931,381

 

 

 

3,441,160

 

 

 

2,770,363

 

 

 

2,722,360

 

 

 

2,686,412

 

Property, plant and equipment

 

 

7,932,562

 

 

 

7,174,693

 

 

 

7,034,299

 

 

 

6,919,495

 

 

 

6,896,396

 

Biological assets (1)

 

 

3,669,426

 

 

 

3,652,263

 

 

 

3,766,942

 

 

 

3,898,991

 

 

 

3,826,597

 

Total assets

 

 

15,860,030

 

 

 

14,593,748

 

 

 

13,994,600

 

 

 

14,006,181

 

 

 

13,670,391

 

Total current liabilities

 

 

1,261,522

 

 

 

1,579,764

 

 

 

1,399,394

 

 

 

1,346,064

 

 

 

1,034,251

 

Total non‑current liabilities

 

 

7,229,093

 

 

 

5,675,013

 

 

 

5,478,313

 

 

 

5,660,834

 

 

 

5,989,695

 

Issued capital

 

 

353,618

 

 

 

353,618

 

 

 

353,618

 

 

 

353,618

 

 

 

353,618

 

Total equity

 

 

7,369,415

 

 

 

7,338,971

 

 

 

7,116,893

 

 

 

6,999,283

 

 

 

6,646,445

 

CASH FLOW DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash flow from operating activities

 

 

672,838

 

 

 

1,287,545

 

 

 

1,072,425

 

 

 

773,584

 

 

 

853,650

 

Net cash flow from investing activities

 

 

(1,317,741 )

 

 

(893,982 )

 

 

(633,348 )

 

 

(640,212 )

 

 

(477,780 )

Net cash flow from financing activities

 

 

1,147,432

 

 

 

123,247

 

 

 

(439,101 )

 

 

(38,484 )

 

 

(812,176 )

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

 

 

502,528

 

 

 

516,810

 

 

 

(24 )

 

 

94,888

 

 

 

(436,306 )

OTHER FINANCIAL DATA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures (2)

 

 

1,198,906

 

 

 

937,934

 

 

 

844,082

 

 

 

556,633

 

 

 

564,795

 

Depreciation and amortization

 

 

519,380

 

 

 

407,422

 

 

 

421,551

 

 

 

409,387

 

 

 

400,145

 

Fair value cost of timber harvested (3)

 

 

323,271

 

 

 

319,448

 

 

 

334,100

 

 

 

340,199

 

 

 

306,673

 

EBIT (3)

 

 

303,562

 

 

 

1,147,408

 

 

 

507,678

 

 

 

491,990

 

 

 

710,083

 

Adjusted EBITDA (3)

 

 

1,147,368

 

 

 

1,850,537

 

 

 

1,353,159

 

 

 

1,067,121

 

 

 

1,290,486

 

Adjusted EBITDA (3)/finance costs

 

 

4.19

 

 

 

8.62

 

 

 

4.70

 

 

 

4.13

 

 

 

4.91

 

Adjusted EBITDA (3)/revenue

 

 

21.5 %

 

 

31.1 %

 

 

25.8 %

 

 

22.4 %

 

 

25.1 %

Average debt (4)/Adjusted EBITDA (3)

 

 

4.60

 

 

 

2.37

 

 

 

3.23

 

 

 

4.12

 

 

 

3.64

 

Total debt (5)

 

 

6,049,790

 

 

 

4,510,276

 

 

 

4,273,518

 

 

 

4,481,003

 

 

 

4,305,435

 

Total debt (5)/capitalization (6)

 

 

45.1 %

 

 

38.1 %

 

 

37.5 %

 

 

39.0 %

 

 

39.3 %

Total debt (5)/equity attributable to parent company

 

 

82.5 %

 

 

61.8 %

 

 

60.4 %

 

 

64.4 %

 

 

65.1 %

Working capital (7)

 

 

2,669,859

 

 

 

1,861,396

 

 

 

1,370,969

 

 

 

1,376,296

 

 

 

1,652,161

 

Number of shares

 

 

113,159,655

 

 

 

113,159,655

 

 

 

113,159,655

 

 

 

113,159,655

 

 

 

113,159,655

 

Net income per share (U.S.$ per share)

 

 

0.5

 

 

 

6.4

 

 

 

2.4

 

 

 

1.9

 

 

 

3.2

 

Dividends paid

 

 

182,109

 

 

 

257,421

 

 

 

121,586

 

 

 

130,624

 

 

 

143,003

 

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

 

 

1.61

 

 

 

2.27

 

 

 

1.07

 

 

 

1.15

 

 

 

1.26

 

________________________

(1)      Biological assets refer to our forests and long‑standing trees (current and non‑current).

(2)      Includes capital expenditures in respect of property, plant and equipment and biological assets accrued for the period. Excludes acquisitions of companies.

(3)      We calculate EBIT as “net income” before “finance costs,” “finance income” and “income tax.” We calculate EBITDA as EBIT, plus “depreciation and amortization.”

 

 
2

 

Table of Contents
 

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

 

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

 

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

 

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

 

 

 

 

As of and for the year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands of U.S. dollars)

 

Net income

 

 

61,970

 

 

 

726,759

 

 

 

270,352

 

 

 

217,577

 

 

 

367,711

 

(+) Finance costs

 

 

273,639

 

 

 

214,779

 

 

 

287,958

 

 

 

258,467

 

 

 

262,962

 

(‑) Finance income

 

 

(32,582 )

 

 

(20,895 )

 

 

(19,640 )

 

 

(29,701 )

 

 

(50,284 )

(+) Income Tax

 

 

535

 

 

 

226,765

 

 

 

(30,992 )

 

 

45,647

 

 

 

129,694

 

EBIT

 

 

303,562

 

 

 

1,147,408

 

 

 

507,678

 

 

 

491,990

 

 

 

710,083

 

(+) Depreciation and amortization(*)

 

 

519,380

 

 

 

407,422

 

 

 

421,551

 

 

 

409,387

 

 

 

400,145

 

EBITDA

 

 

822,942

 

 

 

1,554,830

 

 

 

929,229

 

 

 

901,377

 

 

 

1,110,228

 

(+) Fair value cost of timber harvested

 

 

323,271

 

 

 

319,448

 

 

 

334,100

 

 

 

340,199

 

 

 

306,673

 

(‑) Gain from changes in fair value of biological assets....

 

 

(154,705 )

 

 

(84,476 )

 

 

(83,031 )

 

 

(208,562 )

 

 

(210,479 )

(+) Exchange rate differences

 

 

32,507

 

 

 

26,470

 

 

 

(98 )

 

 

3,935

 

 

 

41,171

 

(+) Others(**)

 

 

123,353

 

 

 

34,265

 

 

 

172,959

 

 

 

30,172

 

 

 

42,893

 

Adjusted EBITDA

 

 

1,147,368

 

 

 

1,850,537

 

 

 

1,353,159

 

 

 

1,067,121

 

 

 

1,290,486

 

 

(*) See Note 7 and Note 19 of our audited consolidated financial statements for more detail on depreciation and amortization.

 

(**) “Others” includes other non‑cash expenses or gains, mainly associated with charges for forestry losses due to fires and impairment for fixed assets and others. The increase in “Others” for 2017 is mainly due to provision for forestry losses that accounted for U.S.$138 million due to wildfires that affected the portion of our forests located in Chile at the beginning of 2017. The increase in “Others” for 2019 is mainly due to impairment provisions of property plant and equipment, which accounted for U.S.$115.8 million mainly related to North American panel mills and the Line 1 of the Arauco pulp mill.

________________

 

(4)      Average debt is calculated as the average of total debt between the beginning and the end of the applicable year.

(5)      Total debt is calculated as the sum of other current financial liabilities and other non‑current financial liabilities, minus hedging instruments.

(6)      Capitalization is calculated as total debt, including accrued interest, plus total equity.

(7)      Working capital is calculated by subtracting current liabilities from current assets.

 

 
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FORWARD‑LOOKING STATEMENTS

 

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

 

Forward‑looking statements involve inherent risks and uncertainties. These forward‑looking statements are based on current plans, estimates and projections; therefore, readers should not place undue reliance on them. Actual results could differ materially from those projected in such forward‑looking statements because of various factors that may be beyond our control, including but not limited to our ability to service our debt, fund our working capital requirements, comply with financial covenants in certain of our debt instruments, fund and implement our capital expenditure programs and maintain our relationships with customers, as well as the effects on us from competition, future worldwide demand for forestry and wood products we produce in the different countries in which we have industrial operations, international prices for forestry and sawn timber, the condition of our forests, possible shortages of energy, including electricity, the state of the economies in the main countries we operate and the world economy generally, the effects of a pandemic or epidemic and any subsequent mandatory regulatory restrictions or containment measures, the relative value of the local currencies in the countries we run manufacturing operations compared to other currencies, inflation, increases in interest rates, the effects of earthquakes, floods, tsunamis or other catastrophic events and changes in our regulatory environment, including our ability to comply with new or stricter environmental regulations and to resolve environmental liabilities. Forward‑looking statements in this annual report speak only as of their dates, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

 

 

 
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RISK FACTORS

 

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

 

Risks Relating to the Company

 

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

 

Prices for many of the products we sell can fluctuate significantly. The prices of our products are highly correlated with international prices. Consequently, prices of our products are highly dependent on prevailing international and regional prices. Historically, such prices have been subject to substantial variations.

 

During the period from January 1, 2015 to December 31, 2019, the average price for Norscan bleached softwood kraft market pulp sold in Europe (pulp produced in North American, Nordic and Central European countries and sold to manufacturers of paper products delivered in Northern Europe, or “NBSK – Europe”), which is the benchmark for bleached softwood pulp sold in Europe, ranged from a low of U.S.$789.20 per tonne in April 2016 to a high of U.S.$1,230.00 per tonne in October and November 2018. During the period from January 1, 2015 to December 31, 2019, the average price for Norscan bleached softwood kraft market pulp sold in China (pulp produced in North American, Nordic and Central European countries and sold to manufacturers of paper products delivered in China, or “NBSK – China”), which is the benchmark for bleached softwood pulp sold in China, ranged from a high of U.S.$902.61 per tonne in March 2018 to a low of U.S.$557.57 per tonne in December 2019. Throughout 2015 and during the first half of 2016, NBSK – Europe and NBSK – China prices followed a downward trend, as China began to change its economic structure from export‑driven growth to domestic‑demand‑driven growth. In addition, the price gap between softwood and hardwood fibers increased, creating incentives for pulp customers to switch from softwood to hardwood, and adding downward pressure to prices. For the remainder of 2016, prices slightly recovered and finally stabilized, ending the year at U.S.$808.83 and U.S.$607.32 per tonne for NBSK – Europe and NBSK – China, respectively. Throughout 2017, NBSK – Europe and NBSK – China prices had a positive trend, ending the year at U.S.$999.63 for prices in Europe and U.S.$886.35 for prices in China; rise in prices was mainly driven by an increase of demand in China and stable capacity levels. Such upward trend continued in Europe through October and November 2018 when prices reached U.S.$1,230, followed by a slight decrease in December 2018, ending the year at U.S.$1,200.02. During 2018 NBSK – China prices remained steady most of the year, with a slight decrease by the end of the year to U.S.$723.07, which was mainly due to the trade tensions between China and the United States. During the first months of 2019 prices for NBSK – China and NBSK - Europe remained relatively stable, due to the Chinese New Year that took place in February 2019 and lower pulp demand, respectively. After the first quarter and through the third quarter of 2019, prices in China and Europe began to markedly deteriorate mainly due to growing trade tensions between China and the United States and duties imposed by both countries that impacted pulp demand. During the fourth quarter of 2019, prices stabilized to a certain extent, ending the year at U.S.$819.95 per tonne for NBSK – Europe and U.S.$557.57 per tonne for NBSK – China.

 

During the period from January 1, 2015 through December 31, 2019, prices of bleached hardwood kraft pulp sold in Europe (pulp made from eucalyptus or birch which is sold in Europe and is the benchmark for bleached hardwood pulp sold in Europe, or “BHKP – Europe”) ranged from a low of U.S.$651.46 per tonne in January 2017 to a high of U.S.$1,050.01 per tonne in May 2018.  During the period from January 1, 2015 through December 31, 2019, prices of bleached hardwood kraft pulp sold in China (pulp made from eucalyptus or birch which is sold in China and is the benchmark for bleached hardwood pulp sold in China, or “BHKP – China”) ranged from a high of U.S.$772.26 per tonne in June 2018 to a low of U.S.$456.69 per tonne in December 2019. During 2015, both prices had an upward trend due to an increase in demand, particularly from China. However, expectations of additional supply during 2016 and especially in 2017 placed downward pressure on prices, which made prices for BHKP – Europe to reach U.S.$651.46 per tonne in January 2017 and prices for BHKP – China to reach U.S.$484.50 per tonne in October 2016. A new pulp mill located in Indonesia was supposed to begin its ramp‑up in November 2016, with an annual estimated capacity of 2.8 million tonnes. As the ramp‑up of this new mill was delayed and the annual capacity had a downward review for the following three to four years, pulp prices started to rise in China at the end of 2016 and in Europe at the beginning of 2017, which was also supported by stronger than expected demand from China. Due to operational problems in some pulp mills and lower than expected production from the Indonesian mill, prices continued to increase throughout 2017 reaching at the end of 2017, U.S.$979.31 and U.S.$768.57 per tonne for BHKP – Europe and BHKP – China, respectively. Sustained demand and stable capacity levels led to an increase in prices that continued through May 2018 for the BHKP – Europe when prices reached a peak at U.S.$1,050.01 and through June 2018 for the BHKP – China when prices reached a peak at U.S.$772.26. During the rest of the year, prices stabilized with a decrease towards the end of 2018, ending the year at U.S.$1,025.73 for BHKP – Europe and U.S.$652.51 for BHKP – China. Decrease in demand registered by the end of 2018 was mainly explained by the trade tensions between China and the United States. Hardwood pulp prices followed a similar trend to softwood pulp prices during the first quarter of 2019 after the first quarter prices started to decrease and continued through the end of the year, mainly due to (i) growing trade tensions between China and the United States, (ii) higher inventories of some pulp producers and (iii) lower economic activity in Europe. BHKP- Europe and BHKP – China prices ended the year at U.S.$680.01 and U.S.$456.92 per tonne, respectively.

 

 
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Although wood product markets improved until mid‑year 2015, added competition from countries with depreciated currencies increased supply to our traditional markets, such as North America, which caused average prices to decrease. Markets recovered during 2016, although Latin American exports continued to affect prices in countries such as the United States. The North American market showed an improvement in the construction sector, which provided steady demand. During 2017, the construction sector continued to improve, and average prices for wood products increased during certain months of the year. During the first half of 2018, Latin American countries (including Mexico) showed stable demand levels for wood products. Towards the end of 2018, the uncertainty surrounding the trade tensions between China and the United States affected demand. The construction sector in the United States experienced a slight increase compared to 2017, which was sustained throughout 2018. Average prices remained stable in 2018 compared to 2017, showing variations depending on the product. Throughout 2019, the panels market remained healthy with strong sales particularly in the United States and Canada. The sawn timber and plywood markets both evidenced from oversupply and prices were thereby affected. Additionally, trade tensions between China and the United States added further pressure on prices, especially with respect to sawn timber products. As a whole, wood products markets remained stable during 2019 in terms of prices and sales volume compared to 2018.

 

Global economic conditions may exert downward pressure on commodity prices, including the international prices of the products we sell, which could result in material and adverse declines in our revenues, results of operations and financial condition. We have no control over the factors that cause prices to change which include, among others:

 

 

·

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

 

 

 

 

·

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

 

 

 

 

·

world production capacity;

 

 

 

 

·

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

 

 

 

 

·

the availability of substitutes.

 

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

 

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

 

We experience substantial worldwide competition in each of our geographical markets and in each of our product lines. Several of our competitors are larger than we are and have greater financial and other resources, which, among other things, may enhance their ability to support strategic expenditures directed to increase their market share. Our market share may be adversely affected if we are unable to successfully continue to expand our productivity at the same pace as our competitors.

 

The pulp industry is sensitive to changes in industry capacity and producer inventories, as well as to cyclical changes in the world’s economies, all of which may significantly affect selling prices and, thereby, our profitability. One or more of these factors could materially and adversely affect our business, financial condition, results of operations and cash flows.

 

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

 

The global economy, and in particular global industrial production, is the primary driver of demand for pulp, paper and wood products. Our wood products segment, which is highly dependent on the strength of the home‑building industry, has experienced decreases in its prices and demand for its products from time to time.

 

 
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A decrease in the level of activity in either the domestic or the international markets within which we operate could adversely affect the demand and the price of our products and thus our cash flows and operational and financial results.

 

Our business, financial condition, results of operations and cash flows could be materially and adversely affected if the economic conditions in Asia, Europe, the United States and elsewhere deteriorate, and if we are unable to address competitive challenges resulting from currency fluctuations or reallocate our wood products and other products to other markets on equally beneficial terms, which could require us to recognize additional impairment charges.

 

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

 

We are a global company with industrial operations in eleven countries, from which we sell our products in the domestic market and through exports. In 2019, 32.3% of our sales were to customers in Asia, 32.1% to customers in North America, 23.5% to customers in Central and South America, 8.1% to customers in Europe, and 4.1% to customers in other countries. As a result, our results of operations and cash flows depend, to a significant degree, on economic, political and regulatory conditions in our principal markets. Our ability to compete effectively in our markets could be materially and adversely affected by a number of factors beyond our control, including deterioration in macroeconomic conditions, exchange rate volatility, government subsidies and the imposition of increased tariffs or other trade barriers. If our ability to sell our products competitively in one or more of our principal markets were impaired by any of these developments, it might be difficult to reallocate our products to other markets on equally favorable terms and our business, financial condition, results of operations and cash flows might be adversely affected.

 

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

 

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

 

On February 27, 2010, an earthquake measured at a magnitude of 8.8 on the Richter scale, followed by a tsunami that affected the coast, occurred in the South‑Central Region of Chile, an area where we maintain a substantial portion of our Chilean industrial operations. Immediately after the earthquake, all of our production units implemented their contingency plans, which involved shutting down operations and evaluating the damage caused to each facility by the earthquake. As a result of the earthquake and the subsequent tsunami, our Mutrún sawmill was destroyed.

 

The suspension of our operations in Chile resulted in significant asset impairment charges due to earthquake‑related damage to property and inventories as well as a significant decrease in our sales volumes due to plant closures, which had an adverse effect on our results of operations and cash flows.

 

We cannot assure you that we will not experience other suspensions or interruptions or unexpected damage to our property as a result of other earthquakes, aftershocks, tsunamis, any related repair and maintenance or other consequences associated with such events, or that our insurance coverage will be sufficient, any of which could have a material adverse effect on our revenue, results of operations and financial condition.

 

The costs of complying with, and addressing liabilities arising under, environmental laws and regulations have in the past and may in the future adversely affect our business, financial condition, results of operations and cash flows.

 

We have significant operations in Argentina, Brazil, Canada, Chile, Mexico and the United States. We also have operations in Uruguay through our 50% share in the Montes del Plata joint operation and in Spain, Portugal, Germany and South Africa through our 50% share in the Sonae Arauco joint venture. In each of those countries we are subject to a wide range of national and local environmental laws and regulations concerning, among other matters, the preparation of environmental impact assessments for our projects, the protection of the environment and human health, the generation, storage, handling and disposal of waste, the discharge of pollutants and the remediation of contamination. As a forest products manufacturer, we generate air and water emissions and solid and hazardous wastes. These emissions and our waste disposal are subject to limits and controls prescribed by law or by our operating permits, and we may be required to install or upgrade our pollution control equipment in order to meet these legal requirements. We have made, and expect to continue to make, expenditures to maintain compliance with environmental laws. Notwithstanding our policy to strictly comply with all requirements established by applicable environmental laws, any failure to comply with such environmental laws has resulted and may result in the future in civil, administrative or criminal fines or sanctions, claims for environmental damages, remediation obligations, the revocation of environmental authorizations or the temporary or permanent closure of facilities. Environmental regulations in countries in which we operate have become increasingly stringent in recent years (for example, in connection with the approval and development of new projects), and this trend is likely to continue. Future changes in environmental laws, or in the application, interpretation or enforcement of those laws, including new or stricter requirements related to harvesting activities, air and water emissions and/or climate change regulations, could result in substantially increased capital, operating or compliance costs, impose conditions that restrict or limit our operations or otherwise adversely affect our business, financial condition, results of operations and cash flows. These changes could also limit the availability of our funds for other purposes, which could adversely affect our business, financial condition, results of operations and cash flows.

 

 
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In November 2015, the Cruces river, where the Valdivia Mill disposes its effluents, became subject to the Secondary Water Quality Standard for the Valdivia River Basin (hereinafter, the “Norm” or “SWQSVR”). The Valdivia Mill discharges its treated effluents into the Cruces River, which is part of the Valdivia River Basin.

 

The Company and other local entities challenged the validity of the Norm before the Third Environmental Court in January 2016, expressing concerns, among others, regarding various aspects of the Norm’s General Environmental and Social Impact Assessment (AGIES, for its acronym in Spanish). These objections included the lack of identification and consideration for the effective economic and social costs resulting from the adoption of the Norm. Other objections included that the Norm’s parameters and limits exceeded the reviewed water quality criteria enforced by reference countries in both quantity and stringency; and that many of the parameters and limits were not technically or environmentally reasonable. The Third Environmental Court ruled in our favor on September 29, 2016, declaring the invalidity of the Norm, which decision was upheld by the Supreme Court in July 2017.

 

In December 2017, the government restarted the rulemaking process and published a new draft SWQSVR for public comments. The draft proposes to regulate using practically the same parameters and limits included in the previous Norm declared void by the Supreme Court. In our opinion, the draft presents flaws similar to those detected in the previous rulemaking process, among others, the lack of identification and consideration of its actual economic and social costs and that most of its parameters and limits are not technically or environmentally reasonable. The public comment process finished in March 2018 and several comments from the public and different stakeholders were submitted, including various technical, economical and legal reports from third parties. In August 2019, a group of companies and institutions through the Association for the Development of Los Rios Region (Corporación para el Desarrollo de la Región de Los Rios or “CODEPROVAL”) challenged the validity of the new draft Norm filing an invalidation request. This request is currently under review by the Ministry of the Environment. According to applicable regulations, the government shall prepare a final draft, prior to submitting for consideration by the Sustainability Ministers’ Committee (Consejo de Ministros para la Sustentabilidad) and the President of the Republic. If the new norm enters into force, we cannot exclude that the authority may declare that the Valdivia River Basin is contaminated and thus initiate an administrative proceeding to impose a decontamination plan, which may include new limits on discharges of wastewater applicable to the Valdivia Mill.

 

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

 

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

 

In February 2009, as previously required by the environmental authorities, we submitted an environmental impact study for the construction of a pipeline to discharge the Valdivia Mill’s wastewater in the Pacific Ocean near Punta Maiquillahue, complying with the requirement that such wastewater be discharged in a body of water other than the Cruces River, the Carlos Anwandter Nature Sanctuary or their respective sources. In February 2010 and October 2012, the environmental authorities approved this environmental impact study subject to some conditions. On April 30, 2013, the Committee of Ministers passed Exempt Resolution No. 391, which modified certain paragraphs of the above mentioned approval (establishing effluent discharge limits for 13 parameters).

 

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

 

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

 

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

 

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

 

In connection with the death of fish in the Cruces River in January 2014 close to the Valdivia Mill’s effluent discharge, in January 2019, the public prosecutor’s local office (in Mariquina) filed charges (“formalización de la investigación”) against five individuals, three of them currently working for the Company. Also in January 2019, the National Defense Council instituted a civil lawsuit seeking reparations from us for environmental harm allegedly caused by our Valdivia Mill in connection with the death of fish in the Cruces River in January 2014. The National Defense Council did not determine the damages in this lawsuit, which could be sought by the National Defense Council in a separate proceeding before a civil court. The Company filed its defense in February 2019. The lawsuit remains under review by the court as of the date of this annual report. We cannot predict the outcome or impact of this lawsuit or when it may be resolved. If the result of such lawsuit is unfavorable to us, we may be required to conduct studies on ecosystems and biodiversity as well as to implement programs to both repopulate and monitor species under conservation. We may be required to incur in significant costs to repair any environmental harm a court determines we have caused, which could materially and adversely affect our business, financial condition, results of operations and cash flows.  

 

The commencement of similar criminal and civil proceedings against Arauco at any time in the future could adversely affect some of our mills. We can neither predict the likelihood that we will face such similar proceedings in the future, nor the likely outcome or impact of any such proceedings.

 

We are also subject to certain administrative proceedings. In 2016 the Superintendence of the Environment initiated administrative proceedings against the Valdivia, Nueva Aldea, Licancel and Constitución mills. In 2017, the Superintendence of the Environment initiated an administrative proceeding against the Arauco Mill. The first part of the proceeding against the Valdivia Mill concluded in 2017. On December 15, 2017, the Superintendence of the Environment decided that the Valdivia Mill was liable for ten out of eleven charges and imposed a fine of 7,777 UTA (approximately U.S.$6.5 million as of December 2018). We appealed this decision on April 5, 2018 before the Third Environmental Court. A decision by the Third Environmental Court was issued in February 2020. This decision partially accepted the claim, only in connection with the inadequate classification of one of the charges, ordering the Superintendence to make a new classification. The decision also mentioned that the Superintendence had not proved that the death of fish in the Cruces River in January 2014 was caused by the operations of the Valdivia Mill. This ruling was appealed by both the Superintendence and the Company before the Supreme Court. A final decision by the Supreme Court is expected to be rendered during 2020. In 2016, the Nueva Aldea and Constitución mills decided to submit compliance programs according to applicable regulations, both of which were approved by the Superintendence of the Environment. These programs required the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. All those actions and investments were promptly concluded. In December 2018 and July 2019, both compliance programs were officially terminated (“declaración de ejecución satisfactoria”) by the Superintendence of the Environment. With regard to the Licancel Mill, the Company filed its defense in June 2016. In February 2017, the Superintendence of the Environment found the Licancel Mill liable for three out of four charges and imposed a fine of 239 UTA (approximately U.S.$205,000). This decision was appealed before the above Superintendence, which on August 7, 2017, materially reduced the fine. Arauco paid the fine and this case was closed. Finally, with regard to the proceeding against Arauco Mill, the Company filed its defense in September 2017 and, in May 2018 the Superintendence of the Environment found the Arauco mill liable for two charges and imposed a fine of 699,6 UTA (approximately U.S.$635,000). Arauco paid the fine with a 25% reduction (taking advantage of a benefit established by Chilean law) and this case has been closed.

 

 
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In the United States, our Moncure mill was subject to an administrative proceeding by the North Carolina Department of Environment and Natural Resources. We negotiated a settlement (Special Order by Consent) in 2015 with the Environmental Management Commission (an agency of the State of North Carolina), which included a monetary fine and an agreement to replace certain emissions control equipment. Furthermore, on September 5, 2019, Arauco executed an additional agreement with the State of North Carolina to obtain additional time for modifications and acclimation of abatement equipment installed under such 2015 Special Order by Consent.  The Moncure mill is currently operating under such additional agreement.

 

In 2019, the Moncure mill received an initial notice of violation from the North Carolina Department of Environmental Quality (NCDEQ) for exceedances of stormwater benchmarks.  The administrative proceeding remains open until the Moncure mill can demonstrate ongoing compliance with such benchmarks.  There was no civil penalty assessed for the initial notice of violation.

 

Our Eugene, Oregon mill was subject to an administrative proceeding by the Lane Regional Air Protection Agency in 2018. We negotiated a settlement that included monetary fines and an agreement to implement improvements to certain emissions control equipment and processes. The mill was assessed a civil penalty, and after showing compliance this matter closed, unless the mill fails to meet emission standards in future compliance testing.

 

Any such proceedings or claims may have an adverse effect on our business, financial condition, results of operations and cash flows. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company—Environmental concerns led to the temporary suspension of our operations at the Valdivia Mill in 2005, which adversely affected, and in the future may continue to adversely affect, our business, financial condition, results of operations and cash flows.”

 

As a result of such proceedings, we cannot assure you that our mills will be able to operate without interruption. Any such interruption, or unexpected costs to resolve such proceedings, could have a material and adverse effect on our business, financial condition, results of operations and cash flows.

 

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

 

As of December 31, 2019, we had approximately U.S.$6.0 billion of outstanding indebtedness. See “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Condition, Results of Operations and Cash Flows—Liquidity and Capital Resources—Contractual Obligations.” The economic environment prevailing at any point in time may prevent us from accessing, or restrict our access to, credit and capital markets to satisfy our financing needs, or we may not be able to refinance our existing indebtedness on terms that are favorable to us or at all. If we are unable to refinance our indebtedness as it becomes due, or if we refinance such indebtedness on terms that are not favorable to us, our business, results of operations and financial condition could be materially and adversely affected.

 

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

 

A material disruption at any of our manufacturing, processing or remanufacturing facilities could prevent us from satisfying customer demand for our products, meeting our production targets and/or require us to make unplanned capital expenditures, resulting in lower sales, which could have a negative effect on our financial results. Our Chilean and Mexican facilities are located in regions known for seismic activity that exposes our facilities to the risk of earthquakes and, in some areas, to subsequent tsunamis.

 

In addition, our facilities (or any of our machines within an otherwise operational facility) could cease operations unexpectedly due to a number of events, including:

 

 

·

unscheduled maintenance outages;

 

 

 

 

·

prolonged power failures;

 

 

 

 

·

an equipment failure;

 

 

 

 

·

fires, floods, hurricanes or other adverse weather;

 

 
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·

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

 

 

 

 

·

a chemical spill or release;

 

 

 

 

·

explosion of equipment;

 

 

 

 

·

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

 

 

 

 

·

labor difficulties;

 

 

 

 

·

terrorism or threats of terrorism;

 

 

 

 

·

coronavirus or other global epidemic;

 

 

 

 

·

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

 

 

 

 

·

other operating problems.

 

In connection with losses to our production plants, facilities and equipment caused by material disruptions, our insurance coverage may be insufficient. The incurrence of losses or other liabilities that are not covered by insurance could result in significant and unexpected additional costs. Moreover, the terms and conditions for the renewal of our insurance policies may change in the future depending upon market circumstances and the type and amount of risks insured. See “Item 4. Information on our Company—Description of Business—Insurance”.

 

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

 

Domestic currencies of the countries in which we have industrial operations have been subject to depreciations and appreciations in the past and may be subject to significant fluctuations in the future. We transact a significant portion of our business in U.S. dollars, and the U.S. dollar is the currency of the primary economic environment in which we operate. A portion of our operating costs, however, is denominated in domestic currencies other than the U.S. dollar. Therefore, an increase in the exchange rate between any such domestic currencies and the U.S. dollar would increase our operating costs.

 

In addition, as an international company operating in Chile and several other countries, we transact a portion of our business and have assets and liabilities in Chilean pesos and other non‑U.S. dollar currencies, such as the Euro, the Argentine peso, the Uruguayan peso, the Brazilian real, the Colombian peso, the Mexican peso and the Canadian dollar, among others. To the extent that the Chilean peso depreciates against the U.S. dollar, our domestic revenues may be adversely affected when expressed in U.S. dollars. The same effects may occur for our domestic sales in Argentina, Brazil, Mexico and Canada, or other countries where we have operations for revenues related to products sold in each of the respective local currencies. As a result, fluctuations in the exchange rates of such foreign currencies relative to the U.S. dollar may have a material adverse effect on our business, results of operations, financial condition and cash flows.

 

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

 

Our operations are subject to various risks affecting our forests and manufacturing facilities, including disease and fire. Although to date certain pests and diseases afflicting radiata or taeda pine plantations in other parts of the world have not significantly affected the forestry industries in Chile, Argentina, Brazil or Uruguay, these pests or diseases may migrate and may significantly affect the forestry industries in Chile, Argentina, Brazil or Uruguay in the future.

 

Similarly, forest fires are always a risk, particularly during the forestry fires season that in Chile typically extends from the last quarter of each year through the southern hemisphere summer to the end of the first quarter of the following year.

 

In January and February 2017, wildfires, exacerbated by high temperatures, the action of the winds, low atmospheric humidity and the complexity of combatting multiple focal points that appeared simultaneously in different places, broke out in the central and southern regions of Chile, and in respect of the Company, in the Maule and Bío Bío regions. As a consequence of such fires, the Company suffered the burning of approximately 72,500 hectares of forest plantations, which had a fair value of approximately U.S.$210 million, according to IFRS accounting rules. The affected forest plantations represented approximately 5.6% of the fair value of the total of the forest plantations of the Company, and approximately 1.5% of the total assets of Arauco. The affected plantations have been managed by the Company in order to minimize the damage suffered as a consequence of the fires.

 

During the 2019-2020 forest fire season, approximately 2,304 hectares of our forest plantations have been affected.

 

 
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In connection with losses to our production plants, facilities and equipment caused by fires, our insurance coverage may be insufficient. We do not maintain insurance coverage against pests, diseases and, in certain areas, fires that could affect our planted forests. The incurrence of losses or other liabilities that are not covered by insurance could result in significant and unexpected additional costs. Moreover, the terms and conditions for the renewal of our insurance policies may change in the future depending upon market circumstances and the type and amount of risks insured. See “Item 4. Information on our Company—Description of Business—Insurance.”

 

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

 

A significant number of scientists, environmentalists, international organizations, regulators and other commentators maintain that global climate change has contributed, and will continue to contribute, to the increasing unpredictability, frequency and severity of natural disasters (including, but not limited to, hurricanes, droughts, tornadoes, freezes, other storms and fires) in certain parts of the world. As a result, a number of legal and regulatory measures as well as social initiatives have been introduced in numerous countries in an effort to reduce carbon dioxide and other greenhouse gas emissions and combat global climate change. Such reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment. In addition, our plantations are located in regions which have ideal climatic conditions for a short growing cycle. Any climate changes that negatively affect such favorable climate conditions in central or southern Chile or in any region in which we benefit from favorable climate conditions could adversely affect the growth rate and quality of our plantations, or our production costs.

 

A problem associated with climate change is water scarcity. This issue has been made visible by different national and international organizations. As a consequence, as part of our permanent commitment to develop a sustainable activity, we are working on different initiatives aimed at reducing water consumption in our industrial operations.

 

In this regard, the central region of Chile has experienced a drought during the last months of 2019 and, as a consequence, the Licancel Mill had to paralyze its activities for approximately three months.

 

Although we cannot predict the impact of changing global climate conditions, if any, or if legal, regulatory and social responses to concerns about global climate change, any such occurrences may negatively affect our business, financial condition, results of operations and cash flows.

 

We may undertake mergers, acquisitions and investments to expand or complement our operations that could result in operating difficulties or otherwise adversely affect our business, financial conditions and results of operations.

 

From time to time, we carry out mergers, acquisitions and investments to expand or complement our operations. In connection with such transactions, we may be exposed to various risks, including those arising from: (i) not having accurately assessed the value, future growth potential, strengths, weaknesses and potential profitability of potential acquisition targets; (ii) difficulties in successfully integrating, operating, maintaining or managing newly‑acquired operations, including personnel; (iii) unexpected costs of such  transactions; or (iv) unexpected contingent or other liabilities or claims that may arise from such transactions. If any of these risks were to materialize, it could adversely affect our business, financial condition and results of operations.

 

Our operations could be adversely affected by labor action and contractual disputes.

 

Approximately 59% of our employees in Chile, 54% of our employees in Argentina, 29% of our employees in Uruguay, 10.4% of our employees in Brazil (although 100% are represented by the unions), 40% of our employees in Mexico and none of our employees in the United States or Canada were unionized as of December 31, 2019. In the past, certain work slowdowns, stoppages and other labor‑related disruptions have adversely affected our operations.

 

In Chile we experienced (i) one stoppage during October 2019 (lasting three days), three stoppages caused by own employees in our pulp mill located in Horcones and that also affected other mills in the complex. Additionally, we had some specific stoppages during October and November 2019 as a result of social unrest in Chile, as our workers were not able to move to the production plants; (ii) one stoppage during April 2018 (lasting nine days), (iii) three stoppages caused by employees of our third party contractors in our Horcones complex during February (lasting two days), April (lasting two days) and November (lasting five days) of 2017; (iv) seven separate occasions of blockades during 2016, which included stoppages in the Horcones complex for four days and another for one day; a three‑day stoppage at the entrance of our El Colorado sawmill; three one‑day stoppages in our Viñales sawmill during the months of April, August and November 2016; and a three‑day stoppage in our Constitución Mill during May 2016; and (v) four separate occasions of transportation contractors blocking the entrance of our Horcones complex on January 13, February 17, March 24, and September 21, 2015. During 2015, the pulp union carried out three work stoppages and blockade; the first event occurred on May 25, lasting three days, the second on August 3, lasting three days and the last one on September 1, which lasted 14 days.

 

 
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At the end of 2017, the Constitución pulp mill and the Viñales sawmill and remanufacturing facility experienced a 40-day stoppage caused by workers of certain transportation companies.

 

 During 2019, there have been no strikes or other material work stoppages affecting our Mexican operations. We have collective-bargaining agreements with the unions representing the employees of our Mexican subsidiaries.

 

Our Argentine operations have experienced the following work stoppages in the last five years: (i) a five‑day stoppage at Arauco Argentina’s mill in Misiones in January 2015, as a result of a road blockage lead by the truckers union; (ii) a 6‑hour stoppage in Arauco Argentina’s mill in Zarate; and (iii) a stoppage of three days during May 2015 and August 2015, as well as a 14‑day stoppage during September 2015 in Arauco Argentina’s pulp mill, Puerto Esperanza. During December 2018, we renewed the collective bargaining agreement with the chemical union that represents the employees of Petroquímica General San Martín.

 

Our Brazilian operations have not experienced any work stoppages in the last nine years, other than a generalized trucker strike in 2018 that affected our operations. As a consequence of this event, the Company was prevented from receiving raw materials and dispatching products, and our employees could not easily access our Brazilian mills during such time, which resulted in a stoppage of ten days. As a result, transportation costs increased 25% in average, which directly affected the cost of our final product, rising them from 3% to 5% depending on the type of product.

 

During 2019, our Uruguayan operations did not experience any relevant work stoppages. In December 2019, the Uruguayan operations entered into a labor agreement with unions representing the employees of our pulp mill and forestry union. During 2018, our Uruguayan operations did not experience any relevant work stoppages. Also, during 2018 and 2017, we entered into a labor agreement with unions representing the employees of our pulp mill and forestry nursery in Uruguay.

 

On June 4, 2016, the Montes del Plata mill’s activity was suspended for five days as a result of labor unrest involving employees of our logistics contractors, who blocked the access to the mill. Montes del Plata is the name of the 50/50 joint operation between Arauco and Stora Enso in Uruguay.

 

During 2015, there were 28 minor events at Montes del Plata mill in Uruguay, amounting to 5.5 days of work stoppages, caused by transportation and timber logistics contractors.

 

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

 

We renewed all collective‑bargaining agreements that expired during 2019 in Chile. We cannot assure you that a work slowdown, or a work stoppage or strike, will not occur prior to or upon the expiration of our labor agreements, and we are unable to estimate the extent to which any such work slowdown, stoppage or strike may adversely affect our sales.

 

In addition, we depend to a significant extent on employees of contractors to which we outsource a wide range of services including management of certain of our plantations and transportation of raw materials and products.

 

In Chile, as of December 31, 2019, we had contracts with approximately 373 contractors, who employed approximately 18,150 employees. During 2019, we incorporated approximately 189 employees in the wood products business, who were previously employed by certain suppliers. Such employees work in the Horcones Complex, the Valdivia Complex, the Nueva Aldea Complex and the Arauco plywood mill. In June 2018, we also commenced an insourcing process in three forest nurseries that were previously managed by contractor companies, which involved the hiring of 715 employees directly.

 

In Brazil, as of December 31, 2019, we had contracts with approximately 50 contractors, who in turn employed approximately 480 employees.

 

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

 

 
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In Argentina, substantially similar joint liability rules apply to a principal and its contractors. In addition, national rural labor law, Law No. 26,727, promulgated on December 28, 2011 and fully in effect since March 2013, permits contractor employees under forestry contracts to bring actions directly against the principal to whom the employees’ services are being provided, instead of requiring them to bring actions against the contractor. For work or services related to the ordinary production process of a principal, the law provides that an employment relationship is deemed to exist between the principal and the employee of the contractor. By means of Decree No. 34/2019 (the “Decree”), the Argentine Federal Government declared a public emergency with regard to employment for a term of one hundred and eighty (180) days as of December 13, 2019 (the date the Decree was published in the Official Gazette). Within that scope, the Decree establishes that employees dismissed without cause are entitled to receive double severance. With the aim of generating new employment opportunities, employees hired after the Decree came into force will not be subject to the Decree.

 

Our U.S. operations must comply with the regulations of the Occupational Safety & Health Administration (OSHA) and the Federal Labor Standards Act (FLSA), among others.

 

Our Canadian operations must comply with the regulations of the Occupational Safety & Health Administration (OSHA). In August 2019, Arauco North America announced the closure of the St. Stephen particleboard operation. The main rationale behind this restructuring was the newly constructed Grayling, Michigan mill and the heavy cost structure of the St. Stephen operation.  On December 13, 2019, the particleboard operation officially ceased. Approximately 60 people were laid off.

 

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

 

Cybersecurity events, such as a cyberattack could adversely affect our business, financial condition and results of operations

 

Our business depends on information technology systems to effectively manage our production processes. Therefore, interruptions in these systems caused by employee error or attacks, external cyber-attacks, obsolescence or technical failures can deeply harm our business operations. Cybersecurity risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyberattacks. Any failure of our systems related to sensitive information could disrupt our business and result in production errors, processing inefficiencies and the loss of sales and customers, which in turn could result in decreased revenue, increased costs and excess or out-of-stock inventory levels.

 

Additionally, cyberattacks or internal actions, including negligence or misconduct of our employees and suppliers, may have a negative impact on our reputation, our relationship with external entities (government, regulators, partners, among others) and our strategic positioning with relation to our competitors. Any significant security breaches or disruptions in the performance of our information technology systems could have a material adverse effect on our results of operations and financial condition.

 

The novel coronavirus could have a significant adverse effect on our business operations.

 

In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province (COVID-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. Several measures have been undertaken by governments around the globe, including the use of quarantine, screening at airports and other transport hubs, travel restrictions, suspension of visas, nation-wide lockdowns, closing of public and private institutions, suspension of sport events, restrictions to museums and tourist attractions and extension of holidays, among many others. However, the virus continues to spread globally and, as of the date of this annual report, has affected more than 180 countries and territories around the world, including Chile, Argentina, Brazil, Uruguay, Mexico and the United States, among others. To date, the outbreak of the novel coronavirus has caused significant social and market disruption.  The long-term effects to the global economy and the Company of epidemics and other public health crises, such as the on-going novel coronavirus, are difficult to assess or predict, and may include a decline in market prices (including the market price of our securities), risks to employee health and safety, and reduced sales in geographic locations impacted. Any prolonged restrictive measures put in place in order to control an outbreak of a contagious disease or other adverse public health development in any of our targeted markets may have a significant effect on our business operations. Moreover, considering that some of our clients (especially in our pulp business) are located in China and other affected countries, the demand of our products and the logistics associated with the sale of those products may be adversely impacted, which would have a negative effect on our business operations. We have been affected by the need to implement policies limiting the efficiency and effectiveness of our industrial operations, including home office policies. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions as well as on our operations and financial condition. Additionally, we cannot predict how the disease will evolve (and potentially, spread) in the countries where we have industrial operations, nor anticipate what additional restrictions governments of those countries or other countries may impose.

 

 
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Risks Relating to Chile

 

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

 

As of December 31, 2019, 62.4% of our property, plant and equipment and forest assets were directly owned by Arauco and our Chilean subsidiaries, and in 2019, 54.3% of our revenues were attributable to our Chilean operations. Accordingly, our business, financial condition, results of operations and cash flows depend, to a considerable extent, upon political and economic conditions in Chile. Future changes in Chile’s political and economic conditions – affecting interest rates, inflation, tax rates or charges on imports and/or exports, among others – could adversely affect our business, financial condition, results of operations and cash flows and may impair our ability to proceed with our strategic plan of business. In addition, such changes may impact the market price of our securities.

 

Beginning in October 2019, Chile experienced a series of protests. These protests began after the government’s announcement of an increase in subway fares in Santiago but have since evolved to express broader concerns of the population. In response to such protests and related violence, the government suspended the increase in subway fares and declared a state of emergency and imposed a nighttime curfew in the greater Santiago region and other regions, which were in place for nine days and ended on October 28, 2019.

 

In addition, on November 15, 2019, representatives of Chile’s leading political parties agreed to hold a referendum in April 2020, which has been recently rescheduled to October 2020, allowing Chileans to vote on whether to replace the Constitution and, if so, whether the Constitution should be drafted by members of Congress along with citizens elected for that task (“Elected Citizens”) or by a special constituent assembly comprised entirely of Elected Citizens. Such agreement contemplated that, in case the result of the referendum is that a new Constitution should be drafted, all Elected Citizens will be elected in October 2020, which has been recently rescheduled to April 2021, and that the draft Constitution will be finalized in 2022. In such case, the final draft of the new Constitution will be submitted to a public referendum for approval.

 

We cannot assure that the current political and social situation or future developments in Chile, over which we have no control, will not have an adverse effect on our business, financial condition or result of operations. Further, we cannot assure that any new government policies, or any new law enacted by Congress in response to recent social developments will not adversely affect the Chilean economy or, directly or indirectly, our business, operations and revenues.

 

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

 

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

 

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

 

Risks Relating to Argentina

 

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

 

As of December 31, 2019, 6.8% of our property, plant and equipment and forest assets were located in Argentina, and in 2019, 7.4% of our revenues were attributable to our Argentine operations. As a result of the foregoing our business, financial condition, results of operations and cash flows will be dependent, to a certain extent, on economic conditions in Argentina. See “Item 4. Information on our Company—Description of Business—History.”

 

In 2017, we signed an intercompany loan with Arauco Argentina for U.S.$250 million, which proceeds were used to repay in full certain Arauco Argentina debt that we guaranteed. During 2018, Arauco Argentina prepaid U.S.$90 million. The balance due after such prepayment is U.S.$160 million.

 

 
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There are various aspects of the Argentine economy that could adversely affect our operations, including, among others, inflation, interest rates, foreign exchange controls and taxes. Although past restrictions did not materially affect Arauco Argentina’s business, financial condition, results of operations and cash flows, including its ability to service its debt or transfer funds abroad, if in the future such payments are restricted, our financial condition, results of operations and cash flows would be negatively affected.

 

We have no control over and cannot predict how any future changes in economic policy or other changes in the Argentine economy could affect our operations and revenues in Argentina.

 

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

 

The Argentine government has exercised and continues to exercise a substantial influence over many aspects of the Argentine economy. In furtherance of its economic objectives, the Argentine government has adopted a wide variety of measures, such as wage and price controls, currency devaluations, exchange and capital controls and limits on imports, among others. The business, financial condition, results of operations and cash flows of our Argentine subsidiaries may be adversely affected by any such measures or regulatory changes, including with respect to tariffs and exchange controls.

 

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

 

Future economic, social and political developments in Argentina may adversely affect the business, financial condition, results of operations and cash flows of our Argentine subsidiaries.

 

Risks Relating to Brazil

 

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

 

As of December 31, 2019, 8.0% of our property, plant and equipment and forest assets were located in Brazil and in 2019, 10.2% of our revenues were attributable to our Brazilian operations. See “Item 4. Information on our Company—Description of Business.” As a result of the foregoing, to a certain extent, our business, financial condition, results of operations and cash flows will be dependent on economic conditions in Brazil.

 

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

 

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

 

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

 

Future economic, social and political developments in Brazil may adversely affect the business, financial condition, results of operations and cash flows of our Brazilian subsidiaries.

 

Risks Relating to Uruguay

 

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

 

As of December 31, 2019, 15.1% of our property, plant and equipment and forest assets were located in Uruguay, and in 2019, 8.2% of our revenues were attributable to the Uruguayan joint operation of Montes del Plata. See “Item 4. Information on our Company—Description of Business.”

 

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

 

Risks Relating to the United States and Canada

 

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

 

As of December 31, 2019, 6.0% of our property, plant and equipment were owned by our U.S. subsidiaries, and in 2019, 13.6% of our revenues were attributable to our U.S. operations. See “Item 4. Information on our Company—Description of Business.”

 

As of December 31, 2019, 0.4% of our property, plant and equipment were owned by our Canadian subsidiaries, and in 2019, 3.8% of our revenues were attributable to our Canadian operations. See “Item 4. Information on our Company—Description of Business.”

 

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

 

Risks Relating to the México

 

Economic conditions and government policies in Mexico may have a material impact on the business, financial condition, results of operations and cash flows of our Mexican subsidiaries.

 

As of December 31, 2019, 1.3% of our property, plant and equipment were located in Mexico and in 2019, 2.4% of our revenues were attributable to our Mexican operations. See “Item 4. Information on our Company—Description of Business.”

 

In the past, Mexico has experienced several periods of slow or negative economic growth, high inflation, high interest rates, currency devaluation and other economic problems. Future economic, social and political developments in Mexico may adversely affect the business, financial condition, results of operations and cash flows of our Mexican subsidiaries.

 

Risks Relating to Other Markets

 

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

 

Our business, financial condition, results of operations and cash flows depend on the level of economic activity, government and foreign exchange policies and political and economic developments in our principal markets. Our business, earnings and prospects, as well as our financial condition, results of operations, cash flows and the market price of our securities, may be materially and adversely affected by developments in our principal markets relating to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation, social instability or other political, economic or diplomatic developments. For example, certain target countries to which we export may impose buying restrictions in our industry, which may adversely affect our sales. We have no control over these conditions and developments which could adversely affect us and our business, financial condition, results of operations and cash flows or the price or market of our securities.

 

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

 

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

 

 
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Risks Relating to Our Securities

 

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

 

Our cash flow and ability to service debt is dependent, in part, on the cash flow and earnings of our subsidiaries and the payment of funds by those subsidiaries to us, in the form of loans, interest, dividends or otherwise. Our subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due under the terms of our securities or to make any funds available for such purpose.

 

Furthermore, claims of creditors of our subsidiaries, including trade creditors, will have priority over our creditors, including holders of our securities, with respect to the assets and cash flow of our subsidiaries. Our right to receive assets of any of our subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of our securities to participate in those assets) will be effectively subordinated to the claims of our subsidiaries’ creditors.

 

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

 

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

 

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

 

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

 

On October 5, 2016, Fitch Ratings changed our ratings outlook from stable to negative, citing a slower‑than‑expected decline of our net leverage due to weak operational cash flows, which in turn were affected by lower pulp prices throughout the year.

 

On September 25, 2018, Fitch Ratings changed our ratings outlook from negative to stable, mentioning that the ratings were supported by the Company’s strong financial position and business position as a low-cost producer of market pulp.

 

On January 31, 2019, Feller Rate changed our local rating from AA- to AA, stating that this change was attributable to the strategic plan of the Company, focused on high internationalization through investments and acquisitions, which has led to an improvement in business profile and main credit indicators.

 

On September 27, 2019, Fitch Ratings changed our ratings outlook from stable to negative, mentioning a projected increase in net debt as a result of weaker pulp prices which has also decreased the operating cash flow available.

 

On October 15, 2019, Standard & Poor’s changed our ratings outlook from stable to negative, citing higher leverage expectations for the next two years amid lower-than-expected pulp prices coupled with a high investment cycle.

 

We cannot assure you that we will not be subject to further credit rating downgrades. Credit rating downgrades below investment grade could have a material and adverse effect on our ability to service our debt, including our securities, which, in turn, could have a material adverse effect on our business, financial condition and results of operations.

 

 

 
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Item 4. Information on our Company

 

DESCRIPTION OF BUSINESS

 

Overview

 

We believe that we are one of Latin America’s largest forest plantation owners and one of the world’s largest producers of bleached and unbleached softwood kraft pulp, bleached hardwood kraft pulp and wood products in terms of production capacity. We have industrial operations in Chile, Argentina, Brazil, Mexico, the United States and Canada. We also have industrial operations in Uruguay, through our 50% share in the Montes del Plata joint operation, and in Spain, Portugal, Germany and South Africa, through our 50% share in the Sonae Arauco joint venture. As of December 31, 2019, we had more than 1.0 million hectares of plantations in Chile, Argentina, Brazil and Uruguay combined.

 

During 2019, (i) we sold 3.7 million metric tons of pulp, in the form of hardwood bleached pulp, softwood bleached pulp, softwood unbleached pulp and fluff pulp; (ii) we sold 8.7 million cubic meters of wood products, including sawn timber (green and kiln-dried lumber), remanufactured wood products, plywood and panels (medium-density fiberboard, or MDF, particleboard, or PBO, and high-density fiberboard, or HB); and (iii) we harvested 20.8 million cubic meters of sawlogs and pulplogs. Our revenues are derived from export sales and domestic sales in the countries where we have industrial operations. During 2019, sales in Asia, North America, and South and Central America accounted for 32.3%, 32.1% and 23.5%, respectively, of our total revenue for such year.

 

As of December 31, 2019, our planted forests consisted of approximately 64.3% radiata, taeda and elliottii pine and approximately 33.6% eucalyptus. We seek to manage our forestry resources sustainably in a way that ensures that the annual growth of our forests is equal to or greater than the volume of resources harvested each year. In 2019, we planted a total of 70,615 hectares and harvested a total of 54,805 hectares in Chile, Argentina, Brazil and Uruguay.

 

We operate our business through three main divisions: pulp, wood products and forestry products, each as described below.

 

Pulp. We own and operate five pulp mills in Chile, one in Argentina and jointly own and operate one in Uruguay through our Montes del Plata joint operation with Stora Enso Oyj. Our aggregate installed annual pulp production capacity (including our 50% share of the Montes del Plata mill’s 1.4 million metric ton capacity) is approximately 4.0 million metric tons. During 2019, our pulp mills produced 3.3 million tonnes of bleached pulp and 0.5 million tonnes of unbleached pulp. During 2019, our sales volume (in tonnes) in Asia and Oceania, Europe, and North and South America represented approximately 71.9%, 17.5% and 10.5%, respectively, of our total pulp sales volume. During 2019, our pulp revenues were U.S.$2,296.1 million, representing 43.1% of our total revenues for such year.

 

Wood Products. Our wood products segment (formerly known as our timber segment) consists of our fiberboard panels, plywood, sawn timber and remanufactured wood products manufacturing operations. We own and operate fiberboard panels and plywood mills in Chile, Argentina, Brazil, the United States, Canada and Mexico. Fiberboard includes hardboard or high-density fiberboard, medium-density fiberboard and particleboard. The total annual production capacity of our fiberboard panel and plywood mills is approximately 8.5 million cubic meters of fiberboard panels and plywood.

 

During 2019, our sales volume (in cubic meters) of medium-density fiberboard panels, particleboard panels and hardboard panels represented approximately 54.0%, 45.9% and 0.2% of our total fiberboard panel sales volume, respectively. During 2019, our fiberboard panels sale volume (in cubic meters) in the United States and Canada, Brazil, Mexico, Argentina, Chile, and other countries represented approximately 51.0%, 23.9%, 10.8%, 5.8%, 4.5% and 4.1%, respectively, of our total fiberboard panel sales volume.

 

During 2019, our fiberboard panel and plywood mills (excluding the mills owned by Sonae Arauco) produced approximately 6.6 million cubic meters of fiberboard panels and plywood. During 2019, our fiberboard panel and plywood revenues (excluding Sonae Arauco) were U.S.$2,063.8 million, representing 38.7% of our total revenues for such year.

 

We have seven sawmills in operation in Chile and one in Argentina with an aggregate installed annual production capacity of approximately 2.8 million cubic meters of sawn timber. We also own four remanufacturing facilities in Chile and one in Argentina that reprocess sawn timber into remanufactured wood products such as mouldings, jams and pre-cut pieces for doors, furniture and door and window frames. In 2019, we produced 2.5 million cubic metres of sawn timber and remanufactured wood products. During 2019, our sawn timber and remanufactured wood products revenues were U.S.$678.1 million representing 12.7% of our total revenue for that year.

 

During 2019, our wood products sales volume (in cubic meters) in North America, Central and South America, Asia and Oceania, and other countries represented approximately 52.7%, 31.3%, 11.8% and 4.2%, respectively, of our total wood products sales volume. In the same period, our wood products revenues were U.S.$2,741.9 million representing 51.5% of our total revenues.

 

 
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Forestry Products. Our forestry products are sawlogs, pulplogs, chips and others in Chile, Argentina and Brazil. During 2019, our forestry products revenues (from sales to third parties) were U.S.$128.7 million, representing 2.4% of our total revenues for such year.

 

 History

 

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

 

In 1996, we acquired Alto Paraná S.A., an Argentine company (that, effective January 1, 2015, changed its name to Arauco Argentina S.A.), which, at the time of the acquisition, owned plantations and other land in Argentina and manufactured and sold bleached softwood kraft pulp. With this acquisition, we began the expansion of our market opportunities outside of Chile.

 

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

 

In 2009, through a subsidiary, together with a subsidiary of Stora Enso, we acquired the Uruguayan subsidiaries of ENCE. The main assets of these Uruguayan companies included 130,000 hectares of land, of which 73,000 had forestry plantations, 6,000 hectares under agreements with third parties, an industrial site, the necessary environmental permits for the construction of a pulp mill, a river terminal, a chip producing mill and a nursery.

 

On August 26, 2009, our subsidiary Placas do Paraná S.A. (now, Arauco do Brasil S.A.) acquired 100% of the shares of Tafisa Brasil, by means of a share purchase agreement executed among SCS Beheer, B.V., Tafiber—Tableros de Fibras Ibéricos, S.L. (each of which is a subsidiary of Sonae Indústria, SGPS, S.A.) and Placas do Paraná S.A. The primary asset of Tafisa Brasil (which has been renamed Arauco do Brasil S.A.) is a panel production facility located in the city of Piên, Brazil, which is in the state of Paraná. The facility has an annual total installed capacity of 750,000 cubic meters, which includes three production lines: two lines producing MDF and one line producing PBO. The facility also has added‑value lines to produce products for the construction and furniture industries.

 

On September 27, 2009, we and our subsidiary Arauco Internacional, executed a series of joint operation agreements with Stora Enso, pursuant to which Stora Enso Amsterdam B.V. agreed to transfer the ownership of 100% of the shares of Stora Enso Uruguay S.A. to Forestal Cono Sur. As a consequence of this transaction, we and Stora Enso equally control all assets that both companies own in Uruguay. Such joint operation, named Montes del Plata, is formed by the companies Forestal Cono Sur S.A., Stora Enso Uruguay S.A., Eufores S.A., Celulosa y Energía Punta Pereira S.A., Zona Franca Punta Pereira S.A., Ongar S.A., Terminal Logística e Industrial M´Bopicuá S.A.and El Esparragal Asociación Agraria de R.L.

 

In April 2010, our subsidiary Arauco do Brasil S.A. became the owner of 100% of the shares of Dynea Brasil S.A., which was absorbed by Arauco do Brasil S.A. in May 2010.

 

On January 18, 2011, as per the Montes del Plata joint operation, we and Stora Enso agreed to carry out the construction of a state of the art pulp mill with an annual capacity of 1.3 million tonnes, a port and a power producing unit based on renewable sources, all located in Punta Pereira in the department of Colonia, Uruguay. The pulp mill entered the production phase in June 2014 and reached full production capacity in October 2015.

 

In November 2011, Centaurus Holdings S.A., a Brazilian company 51% owned by Klabin S.A. and 49% owned by our subsidiary Arauco Forest Brasil S.A., acquired the shares of Florestal Vale do Corisco Ltda., which has 107,000 hectares of land in the Brazilian state of Paraná. On May 31, 2012, Centaurus Holdings S.A. was absorbed by Florestal Vale do Corisco Ltda.

 

In 2011, our subsidiary Arauco Argentina acquired 100% of the shares of Greenagro S.A., a company engaged in forestry activities in the area of Isla Victoria, province of Entre Ríos, Argentina.

 

 
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In 2012, Arauco Panels USA, one of our U.S. subsidiaries, acquired an industrial facility in Moncure, North Carolina. The facility includes MDF and high‑density fiberboard, or HDF, production lines with annual production capacity of up to 330,000 cubic meters, a PBO production line with annual production capacity of up to 270,000 cubic meters and two melamine product production lines.

 

In September, 2012, we acquired 100% of the shares of Flakeboard Company Limited or Flakeboard, a key North American producer of wood paneling for furniture that owns and operates seven panel mills in Canada and the U.S. with an aggregate annual production capacity of 1.2 million cubic meters of MDF panels, an annual production capacity of 1.2 million cubic meters of PBO, and an annual production capacity of 634,000 cubic meters of melamine.

 

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

 

On July 28, 2015, Mahal Empreendimentos e Participações S.A., a Brazilian company, of which our subsidiary Arauco Forest Brasil S.A. owned 84.53% (at the time of the purchase mentioned below) and Empreendimentos Florestais Santa Cruz Ltda. owned 15.47%, acquired 37,625 hectares of land in the Brazilian state of Mato Grosso do Sul.

 

           On October 27, 2015, our subsidiary Arauco Forest Brasil S.A acquired 51% of the shares of Novo Oeste Gestão de Ativos Florestais S.A. As a result of this acquisition, we became owners of 100% of the shares of Novo Oeste Gestão de Ativos Florestais S.A., which has 26,229 hectares of forestry plantations in the Brazilian state of Mato Grosso do Sul.

 

On December 1, 2015, our wholly‑owned subsidiaries Paneles Arauco S.A., Aserraderos Arauco S.A. and Arauco Distribución S.A. were merged into Paneles Arauco S.A., company which operates in the wood products segment (previously referred to as timber segment), including in the panel and sawmill businesses. In August 2016, Paneles Arauco S.A. changed its name to Maderas Arauco S.A.

 

On November 30, 2015, our subsidiary Arauco Internacional, entered into a share purchase agreement with Sonae Industria, or Sonae, under which the purchase of 50% of the shares of a Spanish subsidiary of Sonae, currently named Tableros de Fibras S.A., was agreed, along with the name change to “Sonae Arauco”. According with the executed agreements, both Sonae and Arauco agreed to jointly control Sonae Arauco. On May 31, 2016, we closed the Sonae Arauco transaction. Sonae Arauco and its subsidiaries produce market wood panels, of the OSB, MDF and PBO type, and sawn timber through the operation of: (i) two panel plants and one sawmill in Spain; (ii) two panel plants and one resin plant in Portugal; (iii) four panel plants and one impregnation papers plant in Germany, (iv) and two panel mills in South Africa. In the aggregate, the production capacity of Sonae Arauco is approximately 460,000 cubic meters of OSB, 1,450,000 cubic meters of MDF, 2,270,000 cubic meters of particleboards and 100,000 cubic meters of sawn timber.

 

On October 25, 2016, our board of directors approved the commencement of the construction by our U.S. subsidiary Flakeboard America Limited, of the “MDP Grayling” project, to be located in the State of Michigan, United States of America. The project comprised the construction and operation of a plant that will manufacture medium-density particle board, or MDP. Arauco expects that the production capacity of the plant will be 800,000 cubic meters of finished product per year, of which approximately 300,000 cubic meters will be coated with melamine paper. The project started its operations by April 2019. The execution of this project required an estimated investment of approximately U.S.$450 million, which was financed using our own resources and bank loans.

 

On September 13, 2017, our board of directors approved the “Dissolving Pulp” project, relating to the Valdivia mill, which aims to diversify the type of pulp produced in our Valdivia mill, by enabling it to produce dissolving pulp. We estimate that this project is likely to require an investment of approximately U.S.$195 million (as revised in 2019). This project will be carried out in the current facilities of the Valdivia mill, implementing certain adjustments and incorporating new equipment. Among others, the project contemplates the installation of two new additional digesters to optimize the production level of dissolving pulp, a new discharging tank (storing process) of pulp and certain modifications to the treatment areas. In addition, the project is expected to increase the Valdivia’s mill capacity to inject energy to the Chilean power grid (Sistema Eléctrico Central, or SEN, formerly the Sistema Interconectado Central) from the current units of the mill. Construction of this project was completed at the end of 2019, and the mill is expected to start to produce dissolving pulp during the second quarter of 2020.

 

 
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On December 6, 2017, our Brazilian subsidiary Arauco do Brasil S.A. purchased from Masisa S.A., or Masisa, all of the equity rights in Masisa do Brasil Ltda., currently named Arauco Indústria de Painéis Ltda. The enterprise value of the transaction was U.S.$102.8 million, subject to certain deductions made under the contract. The main assets owned by Masisa do Brasil Ltda. consist of two industrial complexes located in Ponta Grossa (Paraná) and in Montenegro (Rio Grande do Sul). They have a line of MDF boards with an annual installed capacity of 300,000 m3, a line of MDP boards with a current annual installed capacity of 500,000 m3, and four lines of melamine coating, with a total annual installed capacity of 660,000 m3. The amount paid for the equity rights of Masisa do Brasil Ltda. was U.S.$ 32.9 million.

 

On December 19, 2017, our subsidiaries Arauco Internacional and AraucoMex, S.A. de C.V., agreed with the Chilean company, Masisa, the purchase of all of the shares of Masisa’s Mexican subsidiaries, namely Maderas y Sintéticos de México, S.A. de C.V., Maderas y Sintéticos Servicios, S.A. de C.V., Masisa Manufactura, S.A. de C.V., Placacentro Masisa México, S.A. de C.V. and Masnova Química, S.A. de C.V., or Masisa’s Mexican Subsidiaries. The transaction closed on January 31, 2019 as detailed below.

 

On July 24, 2018, our board of directors approved a project for the Modernization and Expansion of the Arauco Mill (Proyecto Modernización y Ampliación de la Planta Arauco, or MAPA project). The MAPA project contemplates an estimated investment of approximately U.S.$2,350 million and is located at the commune and province of Arauco, in the Bio Bio Region, Chile. The project consists of the construction and start-up of a new production line of 1,560,000 annual tonnes of bleached hardwood kraft pulp (Line 3). Line 1 of the Arauco Mill will cease its operations once the Line 3 comes online. Once completed, this project is expected to increase the net production of the Arauco Mill by approximately 1,270,000 tonnes of pulp, reaching a total production capacity of approximately 2,100,000 annual tonnes. We commenced construction of this project in February 2019 and seek to complete it in the second quarter of 2021.

 

On January 31, 2019, our subsidiaries Arauco Internacional and AraucoMex, S.A. de C.V., acquired the shares of Masisa’s Mexican subsidiaries for a price of approximately U.S.$160 million. The main assets acquired are two industrial complexes located in Durango and Zitácuaro, that consist of three particleboard (PBO) lines with an annual installed capacity of 339,000 m3; an MDF boards line of with an annual installed capacity of 220,000 m3; melamine coating (or TFL) lines with an annual installed capacity of 309,000 m3; a chemical plant with an installed capacity of 60,000 tonnes of resins and 60,600 tonnes of formaldehyde; and impregnation lines with an aggregate annual installed capacity of 28.9 million of m2. In addition, one of the acquired Mexican subsidiaries, namely Maderas y Sintéticos de México, S.A. de C.V. (currently, Arauco Industria de México S.A de C.V.), is the lessee of a chemical plant in Lerma, with an installed capacity of 43,200 tonnes of resins and 21,600 tonnes of formaldehyde.

 

On September 1, 2019, our subsidiary Arauco North America Inc, acquired the shares of Prime-Line, Inc. for a price of approximately U.S.$19.8 million. The main asset acquired consists of a facility with three fully automated MDF moulding lines with an installed annual capacity of 135,000 m3.   

 

Our principal executive offices are located at Avenida El Golf 150, 14th Floor, Las Condes, Santiago, Chile, and our telephone number is +56‑2‑2461‑7200. Our website is www.arauco.cl or www.arauco.com. The contents of our website and other websites referred to herein are not part of this annual report. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC (http://www.sec.gov).

 

Corporate Structure

 

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

 

 
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The following table sets forth our ownership interests in our subsidiaries as of December 31, 2019.

 

 

 

Country of
incorporation

 

Total stock held

 

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

 

Mexico

 

 

99.9990 %

Arauco Argentina S.A.

 

Argentina

 

 

99.9801

 

Arauco Australia Pty Ltd

 

Australia

 

 

99.9990

 

Arauco Bioenergía S.A.

 

Chile

 

 

99.9999

 

Arauco Canada Ltd. (ex Flakeboard Company Limited)

 

Canada

 

 

99.9990

 

Arauco Colombia S.A.

 

Colombia

 

 

99.9982

 

Arauco do Brasil S.A.

 

Brazil

 

 

99.9990

 

Arauco Europe Cooperatief U.A.

 

The Netherlands

 

 

99.9990

 

Arauco Florestal Arapoti S.A.

 

Brazil

 

 

79.9992

 

Arauco Forest Brasil S.A.

 

Brazil

 

 

99.9991

 

Arauco Industria de México S.A. de C.V.

 

Mexico

 

 

99.9990

 

Arauco Indústria de Painéis Ltda.

 

Brazil

 

 

99.9990

 

Arauco Middle East DMCC

 

Dubai

 

 

99.9990

 

Arauco North America, Inc.

 

U.S.A.

 

 

99.9990

 

Arauco Nutrientes Naturales SpA

 

Chile

 

 

99.9484

 

Arauco Perú S.A.

 

Peru

 

 

99.9990

 

Arauco Química S.A. de C.V.

 

Mexico

 

 

99.9990

 

Arauco Serviquimex S.A. de C.V.

 

Mexico

 

 

99.9990

 

Arauco Wood (China) Company Limited

 

China

 

 

99.9990

 

Araucomex S.A. de C.V.

 

Mexico

 

 

99.9990

 

Araucomex Servicios S.A. de C.V.

 

Mexico

 

 

99.9990

 

Consorcio Protección Fitosanitaria Forestal S.A.

 

Chile

 

 

57.0831

 

Empreendimentos Florestais Santa Cruz Ltda

 

Brazil

 

 

99.9985

 

Forestal Arauco S.A.

 

Chile

 

 

99.9484

 

Forestal Cholguán S.A.

 

Chile

 

 

98.5676

 

Forestal Los Lagos S.A.

 

Chile

 

 

79.9587

 

Forestal Nuestra Señora del Carmen S.A.

 

Argentina

 

 

99.9805

 

Forestal Talavera S.A.

 

Argentina

 

 

99.9942

 

Greenagro S.A.

 

Argentina

 

 

97.9805

 

Inversiones Arauco Internacional Ltda

 

Chile

 

 

99.9990

 

Investigaciones Forestales Bioforest S.A.

 

Chile

 

 

99.9489

 

Leasing Forestal S.A.

 

Argentina

 

 

99.9801

 

Maderas Arauco S.A. (Ex Paneles Arauco S.A.)

 

Chile

 

 

99.9995

 

Maderas Arauco Costa Rica S.A.

 

Costa Rica

 

 

99.9990

 

Mahal Empreendimentos e Participacoes S.A.

 

Brazil

 

 

99.9990

 

Novo Oeste Gestão de Ativos Florestais S.A.

 

Brazil

 

 

99.9990

 

Prime-Line, Inc.

 

U.S.A.

 

 

99.9990

 

Savitar S.A.

 

Argentina

 

 

99.9841

 

Servicios Aéreos Forestales Ltda

 

Chile

 

 

99.9990

 

Servicios Logísticos Arauco S.A.

 

Chile

 

 

99.9997

 

Tablered Araucomex, S.A. de C.V.

 

Mexico

 

 

99.9990

 

 
 
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Business Strategy

 

Our strategy consists of focusing on maximizing value and pursuing growth opportunities with respect to our forestland and industrial assets, managing our operations sustainably and developing products that contribute to an economy based on renewable resources that we believe improves the quality of life of millions of people around the world. We seek to implement our strategy through the following principles and initiatives:

 

 

·

Striving to combine science, technology and innovation in order to unlock the full potential of our plantations and develop renewable products in our forestry, pulp, timber, panels and clean energy business areas.

 

 

 

 

·

Seeking to manage our operations in an environmentally and socially responsible manner by adopting the best environmental practices and promoting the safety and development of our employees and contractors.

 

 

 

 

·

Creating high quality products and materials for the paper, packaging, furniture, construction and energy industries, and providing high quality service to our customers.

 

 

 

 

·

Consolidating and expanding our presence internationally in regions we believe offer comparative advantages in the industry sectors in which we operate.

 

Domestic and Export Sales

 

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

 

 

 

Year ended December 31,  

 

 

 

2019  

 

 

2018  

 

 

2017  

 

 

 

(in millions of U.S. dollars)

 

Export Sales

 

 

 

 

 

 

 

 

 

Bleached pulp

 

$ 1,857

 

 

$ 2,402

 

 

$ 1,935

 

Unbleached pulp

 

 

298

 

 

 

410

 

 

 

285

 

Sawn timber

 

 

380

 

 

 

421

 

 

 

400

 

 Remanufactured wood products

 

 

231

 

 

 

230

 

 

 

231

 

Plywood

 

 

169

 

 

 

215

 

 

 

197

 

Fiberboard panels

 

 

347

 

 

 

340

 

 

 

325

 

Other

 

 

27

 

 

 

22

 

 

 

10

 

Total export revenue

 

$ 3,308

 

 

$ 4,040

 

 

$ 3,383

 

Domestic Sales

 

 

 

 

 

 

 

 

 

 

 

 

Bleached pulp

 

$ 124

 

 

$ 135

 

 

$ 127

 

Unbleached pulp

 

 

17

 

 

 

8

 

 

 

9

 

Sawn timber

 

 

48

 

 

 

67

 

 

 

76

 

Remanufactured wood products

 

 

19

 

 

 

23

 

 

 

28

 

Plywood

 

 

36

 

 

 

40

 

 

 

41

 

Fiberboard panels

 

 

1,512

 

 

 

1,385

 

 

 

1,318

 

Logs

 

 

72

 

 

 

72

 

 

 

73

 

Chips

 

 

30

 

 

 

31

 

 

 

25

 

Electric power

 

 

74

 

 

 

87

 

 

 

94

 

Other

 

 

87

 

 

 

67

 

 

 

64

 

         Total domestic revenue

 

$ 2,021

 

 

$ 1,915

 

 

$ 1,855

 

Revenue

 

$ 5,329

 

 

$ 5,955

 

 

$ 5,238

 

 

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

 

 

 

Year ended December 31  

 

 

 

2019  

 

 

2018  

 

 

2017  

 

 

 

(in millions of U.S. dollars)

 

Export Sales (1)

 

 

 

 

 

 

 

 

 

         Asia

 

$ 1,720

 

 

$ 2,388

 

 

$ 1,898

 

         North America

 

 

705

 

 

 

664

 

 

 

671

 

         Europe

 

 

431

 

 

 

479

 

 

 

361

 

         Central and South America

 

 

232

 

 

 

289

 

 

 

256

 

         Other

 

 

220

 

 

 

220

 

 

 

197

 

                     Total export revenues

 

$ 3,308

 

 

$ 4,040

 

 

$ 3,383

 

Domestic Sales (2)

 

 

 

 

 

 

 

 

 

 

 

 

         Asia

 

 

-

 

 

 

-

 

 

 

-

 

         North America

 

 

1,003

 

 

 

812

 

 

 

796

 

         Europe

 

 

-

 

 

 

-

 

 

 

-

 

         Central and South America

 

 

1,018

 

 

 

1,103

 

 

 

1,060

 

         Other

 

 

-

 

 

 

-

 

 

 

-

 

                     Total domestic revenues

 

$ 2,021

 

 

$ 1,915

 

 

$ 1,856

 

                      Revenue

 

$ 5,329

 

 

$ 5,955

 

 

$ 5,239

 

 

(1)     Export sales are sales in a country different from the country where the goods were produced

(2)     Domestic sales are sales in the same country where the goods were produced

 

Forestry Activity

 

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

 

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

 

Throughout our history, we have demonstrated a continued commitment to the improvement of our forest management policies. We have adopted environmentally sensitive policies towards our holdings of native forests, which are protected and preserved in their entirety. Our products come from our established plantations only; we do not sell any products derived from our native forests. We conduct our forestry operations in accordance with current legislative and environmental sustainability standards. Certain of our subsidiaries have received various environmental certifications as of the date of this annual report. You can find more information about our certifications under the “sustainability” section of our website (https://www.arauco.cl/na/sostenibilidad/certificaciones/).

 

Forest Plantations

 

The information in this section refers to 100% of the plantations owned by Forestal Arauco S.A. (Chile), 80% of the plantations owned by Forestal Los Lagos S.A. (Chile), 100% of the plantations owned by Arauco Argentina (Argentina), 50% of the plantations we own in Uruguay through the Montes del Plata joint operation, 100% of the  plantations owned in Brazil by Arauco Forest Brasil, 80% of the plantations owned by Arauco Florestal Arapoti, 100% of the plantations owned by Mahal Empreendimentos e Participacoes S.A., 100% of the plantations owned by Novo Oeste Gestao de Ativo Florestais S.A. and 100% of plantations owned by Arauco Forest Brasil in the areas granted in usufruct by Florestal Vale do Corisco, unless otherwise mentioned.

 

As of December 31, 2019, our planted forests consisted of 64.3% radiata, taeda and elliottii pine and 33.6% eucalyptus. Radiata, taeda and elliottii pine have a rapid growth rate and a short harvest cycle compared to other commercial softwoods. These pine species are sufficiently versatile for both the production of forestry and timber and the production of long‑fiber pulp for sale to manufacturers of paper and packaging. Eucalyptus is used to produce short‑fiber pulp for sale to manufacturers of paper and tissue.

 

 
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We seek to manage our forestry resources seeking to ensure that the annual growth of our forest is equal to or greater than the volume of resources harvested each year. In 2019, Arauco planted a total of 70,615 hectares and harvested a total of 54,805 hectares in Chile, Argentina, Brazil and Uruguay.

 

Our planted radiata pine forests are located in central and southern Chile, and most are located in close proximity to our major production facilities. As of December 31, 2019, our aggregate radiata pine holdings comprised 39.4% of all Chilean radiata pine plantations. As of December 31, 2019, we owned approximately 1.1 million hectares of land in Chile, of which 697 thousand hectares are forest plantations.

 

As of December 31, 2019, we owned approximately 264,707 hectares of forest and other land in Argentina, approximately 245,284 hectares of forest and other land in Brazil and approximately 131,138 hectares of forest and other land that Montes del Plata owns in Uruguay. Of the total land we own in Uruguay through Montes del Plata, 100% is planted with eucalyptus: dunnii (93.1%), globulus (0.5%), grandis (2.4%) and other species (4.0%).  

 

Of the total land we own in Argentina, Brazil and Uruguay, approximately 164,209 hectares of land are planted with taeda pine and elliottii pine, both species of softwood that have a growth rate similar to that of radiata pine, and 156,453 hectares with eucalyptus. The balance includes plantations of other species of trees, land to be planted, protected areas and native forests.

 

The following table sets forth the number of hectares and types of uses of our land holdings and rights, as of December 31, 2019.

 

 

 

As of December 31, 2019

 

 

 

Total

 

 

Distribution

 

 

 

(in hectares)

 

 

(percentage)

 

Pine plantations (1)

 

 

 

 

 

 

0‑5 years

 

 

198,335

 

 

 

11.3

 

6‑10 years

 

 

135,541

 

 

 

7.7

 

11‑15 years

 

 

144,128

 

 

 

8.2

 

16‑20 years

 

 

90,041

 

 

 

5.1

 

21+ years

 

 

99,024

 

 

 

5.6

 

Subtotal

 

 

667,070

 

 

 

37.9

 

Eucalyptus plantations (2)

 

 

348,880

 

 

 

19.8

 

Plantations of other species

 

 

22,156

 

 

 

1.3

 

Subtotal of Plantations

 

 

1,038,106

 

 

 

59.0

 

Land for plantations

 

 

97,240

 

 

 

5.5

 

Land for other uses (3)

 

 

622,840

 

 

 

35.4

 

Total (4)

 

 

1,758,186

 

 

 

100.0

 

________________

(1)      All years are calculated from the date of planting.

(2)      Approximately 81% of our eucalyptus plantations are less than 10 years old.

(3)      Includes roads, firebreaks, native forests and yards.

(4)      Includes 100% of the plantations owned by Forestal Arauco S.A. (Chile), 80% of the plantations owned by Forestal Los Lagos S.A. (Chile), 100% of the plantations owned by Arauco Argentina (Argentina), 50% of the plantations we own in Uruguay through the Montes del Plata joint operation, 100% of the plantations owned in Brazil by Arauco Forest Brasil, 80% of the plantations owned by Arauco Florestal Arapoti, 100% of the plantations owned by Mahal Empreendimentos e Participacoes S.A., 100% of the plantations owned by Novo Oeste Gestao de Ativo Florestais S.A. and 100% of plantations owned by Arauco Forest Brasil in the areas granted in usufruct by Florestal Vale do Corisco. Also includes 14,136 hectares for which we have the right to harvest but do not own the land, of which 13,831 hectares are in Chile, and 305 hectares are in Argentina.

 

Land Acquisition and Afforestation

 

Our total land assets have increased from fewer than 170,000 hectares in 1980 to 1,758,187 hectares as of December 31, 2019. In the five years ending December 31, 2019, we purchased 6,460 hectares of land, all of which were purchased in Chile. For more information regarding our material acquisitions, see “Item 4. Information on our Company—Description of the Business —History”.

 

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

 

We plan to continue our policy of supplementing our pulplog production with purchases from domestic third parties. We believe that this policy is economically efficient, given the significant quantities of pulplog available from third parties and our increasing proportion of sawlogs yielded from our plantations. We believe that the aggregate of our existing plantations, the land that we own which we intend to afforest and the volume that we purchase from third‑parties will be sufficient to satisfy our anticipated future demand for sawlogs and pulplogs.

 

Forest Management

 

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although some land is not suitable for the production of pruned logs, as of December 31, 2019, approximately 58.0% of our pine forests in Chile were conducive to clear wood production.

 

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

 

As of December 31, 2019, we had 8 nurseries in Chile, Argentina, Brazil and Uruguay (through Montes del Plata), in which we grow seedlings using seeds and cuttings from genetically selected trees. To achieve higher quality trees and an increased growth rate, we apply strict selection criteria to the trees from which seedlings are produced. We then plant the seedlings manually or mechanically. Depending upon the species of tree to be planted and the nutrient and physical characteristics of the soil, we may also undertake a certain amount of ground preparation before planting. Our other principal forest activities are thinning, pruning and harvesting.

 

Thinning, or cutting inferior trees from the plantation, occurs when commercially necessary. Thinned trees are used in pulp production or, depending on the quality of the land, as sawlogs. Commercial thinning occurs when trees are 8 to 14 years old and results in an average reduction of the number of trees per hectare from the original stocking of 1,000 and 1,333, depending on the productivity of the land, to approximately 700 in the first thinning (8 to 9 years) and to approximately 450 in the second thinning (12 to 14 years).

 

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

 

 

·

the cost of planting is relatively low,

 

 

 

 

·

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

 

 

 

 

·

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

 

Pruning involves removing branches, the source of knots, which are the main defect in sawn timber. Pruning results in a high‑quality clear wood saw log of 5.8 meters from each tree, and is conducted three times:

 

 

·

when trees are five to seven years old,

 

 

 

 

·

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

 

 

 

 

·

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

 

Our eucalyptus plantations are neither thinned nor pruned.

 

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

 

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

 

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

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in hectares)

 

Thinning

 

 

26,071

 

 

 

10,358

 

 

 

5,553

 

Pruning

 

 

30,075

 

 

 

36,172

 

 

 

32,869

 

Harvesting

 

 

28,340

 

 

 

36,267

 

 

 

38,932

 

 

We manage our forest activities, but we hire independent contractors to perform the bulk of our operations, including planting, maintenance, thinning, pruning, harvesting, transportation and access road construction. As of December 31, 2019, we had arrangements with more than 231 independent contractors that employed over 14,062 workers in Chile. Many of these contractors have long‑standing relationships with us, but we award the majority of contracts based on competitive bids. We believe that our arrangements with independent contractors provide greater flexibility and efficiency than performing these activities directly.

 

Our plantations are interspersed with native forests and farmland, and, as a result, they are naturally protected against the spread of certain pests and diseases. In addition, we have strategies to protect our forests from phytosanitary threats. In recent years, radiata pine plantations in Chile have been affected by two main problems: 1) the insect Sirex noctilio, a wasp which attacks and kills stressed trees, and 2) the fungus Fusarium circinatum which causes plant mortality during the first year after planting. To mitigate the effects of the Sirex noctilio, we have implemented a biological control program under which we have released into the affected forests natural enemies of the Sirex noctilio, including the nematode, the Beddingia siricidicola and the parasitoid Ibalia leucospoide. To reduce damage by Fusarium circinatum, we identified the main sources of the fungus inoculum in the nursery and implemented a new protocol to manage the disease and reduce plant mortality. For more information regarding certain risks to our forests presented by disease, see “Item 3. Key Information—Risk Factors—Risks Relating to the Company—Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial condition, results of operation and cash flows.”

 

We operate an extensive fire control system to minimize fire damage to our forests. The operation consists primarily of a system of automated spotter towers, cameras and drones from which information regarding direction of any fire observed is sent to a central command post, manned 24 hours a day during the summer months, where the fire’s exact location is determined, and an appropriate ground and/or aerial response is formulated. The focus of this operation is to detect the fires as soon as possible and to reach the location in less than 20 minutes in order to prevent fires from spreading. Also, when feasible, we work in firefighting activities with authorities, other fire control organizations and local communities. During the years 2015 and 2016, this system limited fire damage to our forests to an average of 3,907 hectares of the plantations per year. Notwithstanding such system, during January and February 2017, large forest fires affected our plantations in the Maule and Bio Bio Regions in southern Chile. About 72,500 hectares of our forest plantations were damaged, and our El Cruce Sawmill was destroyed as a result of these fires.

 

During the 2015-2016 forest fire season in Chile, fires that affected our forest plantations destroyed 618 hectares. During the 2016-2017 forest fire season in Chile, approximately 82,040 hectares of our forest plantations were affected. During the 2017-2018 forest fire season in Chile, approximately 587 hectares of our forest plantations were affected by forest fires. In the 2018-2019 season, approximately 1,347 hectares of our forest plantations were affected by forest fires. During the 2019-2020 season, approximately 2,304 hectares of our forest plantations were affected by forest fires.

 

Forest Production

 

We harvested 20.8 million cubic meters of logs during the year ended December 31, 2019, consisting of 8.9 million cubic meters of sawlogs, 6.7 million cubic meters of pine pulplogs and 5.2 million cubic meters of eucalyptus pulplogs and other logs. During 2019, our sawmills and panel mills used 7.1 million cubic meters of sawlogs. We also sold 1.6 million cubic meters of sawlogs to unaffiliated domestic sawmills during 2019.

 

A log merchandising facility located at the same site as our Horcones I and Horcones II sawmills (Chile) optimizes, cuts and classifies wood destined for our plywood facility, sawmills or pulp mills with an annual processing capacity of 2.0 million cubic meters of logs per year. The Nueva Aldea complex (Chile) also includes a log merchandising facility, with an annual processing capacity of 2.6 million cubic meters of logs per year.

 

 
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Our forests are subject to various risks, including disease or fire. The forest plantations affected by the fires had insurance coverage, with their corresponding deductibles and limits.

 

During the 2018-2019 forest fire season in Chile, the number of wildfires was 25% higher than 2017-2018, and consumed approximately 1,347 hectares of our forest plantations, representing a 129% increase over the preceding season. Nevertheless, that figure is well below the burned surface area in the 2016-2017 season: the burned surface in 2018-2019 only represents 1.8% of the hectares burned in 2016-2017 season. The affected forest plantations had a fair value of approximately U.S.$5.0 million representing approximately 0.135% of the fair value of our total forest plantations and approximately 0.032% of our total assets, in each case under IFRS.

 

Pulp

 

We believe that we were Chile’s largest producer of bleached and unbleached softwood market pulp in terms of production in 2019. For the year ended December 31, 2019, our worldwide pulp sales were U.S.$2.4 billion, representing 43.1% of our total revenues for such year.

 

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

 

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

 

Pulp Mills

 

As of December 31, 2019, we owned and operated five pulp mills in Chile, one in Argentina, and jointly owned and operated one in Uruguay with Stora Enso, with an aggregate installed annual production capacity of approximately 4.0 million tonnes. This figure includes 50% of our Montes del Plata joint operation in Uruguay. Our six pulp mills, together with the 50% volume we include from our interest in the Montes del Plata mill, produced 3.3 million tonnes of bleached pulp and 0.5 million tonnes of unbleached pulp in 2019.

 

All our pulp mills in Chile, the Puerto Esperanza pulp mill in Argentina and the Montes del Plata mill in Uruguay are certified under international standards. You can find more information about our certifications under the “sustainability” section of our website (https://www.arauco.cl/na/sostenibilidad/certificaciones).

 

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

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands of tonnes)

 

Chile

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arauco Mill

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Arauco I (bleached)

 

 

262

 

 

 

271

 

 

 

264

 

 

 

258

 

 

 

268

 

Arauco II (bleached)

 

 

496

 

 

 

451

 

 

 

456

 

 

 

475

 

 

 

474

 

Arauco II (unbleached)

 

 

-

 

 

 

32

 

 

 

21

 

 

 

-

 

 

 

-

 

Valdivia Mill (bleached)

 

 

491

 

 

 

548

 

 

 

550

 

 

 

550

 

 

 

549

 

Constitución Mill (unbleached)

 

 

311

 

 

 

318

 

 

 

270

 

 

 

278

 

 

 

303

 

Nueva Aldea Mill (bleached)

 

 

1,022

 

 

 

1,033

 

 

 

992

 

 

 

999

 

 

 

935

 

Licancel Mill (unbleached)

 

 

142

 

 

 

158

 

 

 

144

 

 

 

152

 

 

 

152

 

Subtotal

 

 

2,725

 

 

 

2,811

 

 

 

2,697

 

 

 

2,712

 

 

 

2,681

 

Argentina

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Puerto Esperanza Mill (bleached)

 

 

304

 

 

 

326

 

 

 

310

 

 

 

341

 

 

 

314

 

Uruguay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Montes del Plata (bleached ‑ 50%)

 

 

693

 

 

 

654

 

 

 

688

 

 

 

643

 

 

 

608

 

Total     

 

 

3,721

 

 

 

3,791

 

 

 

3,695

 

 

 

3,696

 

 

 

3,603

 

__________________

 

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

 

Chile

 

Arauco I. Arauco I or Line 1, which began operations in 1972, is located at the Arauco Mill in the heart of a group of our radiata pine plantations in the Eighth Region of Chile. Arauco I produces elementary chlorine‑free pulp, which does not use chlorine gas. Elementary chlorine‑free pulp is also produced by most of our competitors in each of the world’s major pulp producing regions. The installed annual production capacity of Arauco I is approximately 290,000 tonnes of bleached hardwood kraft pulp.

 

Arauco II. Also located at the Arauco Mill, Arauco II was completed in 1991. Arauco II’s pulping process is generally the same as that of Arauco I, but it includes technological improvements in its production process and environmental design. Arauco II is also equipped to produce elementary chlorine‑free pulp. The installed annual production capacity of Arauco II is approximately 510,000 tonnes. Although the mill mainly produces bleached softwood kraft pulp, it could also produce unbleached softwood kraft pulp.

 

On July 24, 2018, the MAPA project was approved by our board of directors. The MAPA project contemplates an estimated investment of approximately U.S.$2,350 million and is to be located at the commune and province of Arauco, in the Bio Bio Region, Chile. The project consists of the construction and start-up of a new production line of 1,560,000 annual tonnes of bleached hardwood kraft pulp (Line 3). Line 1 of the Arauco Mill will cease its operations once Line 3 comes online. Once completed, this project is expected to increase the net production of the Arauco Mill by approximately 1,270,000 tonnes of pulp, reaching a total production capacity of approximately 2,100,000 annual tonnes. We commenced construction of this project in February 2019 and seek to complete it during the second quarter of 2021.

 

Constitución Mill. The Constitución Mill is located in the heart of a group of our radiata pine forests in the Maule Region, Chile. As of December 31, 2019, the Constitución Mill was the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of approximately 355,000 tonnes. The unbleached pulp produced in this mill does not use any chlorine in its production process.

 

Licancel Mill. We acquired the Licancel Mill in September 1999. It is located in Licantén, which is 250 kilometers south of Santiago. Investments made during 2018 increased the mill’s installed annual production capacity from approximately 155,000 tonnes to 160,000 tonnes of unbleached softwood kraft pulp.

 

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

 

In February 2015, the Environmental Assessment Service (SEA) unanimously approved the Environmental Impact Statement submitted by Arauco in order to move forward with the dissolving pulp project being developed at Valdivia Pulp Mill. This initiative, which requires a U.S.$195 million (as revised in 2019) investment, will allow Arauco to be the first company in Chile to produce this type of pulp, in addition to creating a value‑added product and diversifying its supply to the market. Dissolving pulp is mainly used in the manufacture of viscose, which is known for its softness, shine, purity and high water absorption, making it suitable for use in the production of fabric medical items and personal care items, specifically clothing. Unlike synthetic fibers that are mostly produced from oil-based sources, dissolving pulp is natural and renewable. In addition, this project is expected to increase the facility’s power generation by approximately 15 megawatts, or MW, in comparison with the power generation during bleached hardwood kraft pulp campaign. In July 2017, the project was approved by the authorities and in September 2017, the board of directors of Arauco unanimously approved the project, which has started its construction phase in the fourth quarter of 2017. Construction of this project was completed at the end of 2019, and the mill is expected to start to produce dissolving pulp during the second quarter of 2020.

 

Nueva Aldea Mill. Located in the Eighth Region of Chile, this mill was completed in 2006, and after certain investments made during 2018, it increased its production capacity from 1,027,000 tonnes per year to 1,040,000 tonnes per year, half of which is dedicated to the production of bleached softwood kraft pulp and the other half of which is dedicated to the production of bleached hardwood kraft pulp. The Nueva Aldea Mill is equipped to produce elementary chlorine‑free pulp.

 

 
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Argentina

 

Puerto Esperanza Mill. Arauco Argentina’s softwood pulp mill is located in the Province of Misiones, a region whose soil and climate are favorable for the rapid growth of pine trees. The Puerto Esperanza Mill (formerly known as Alto Paraná mill) is the only bleached softwood kraft market pulp facility in Argentina. The mill has an installed annual production capacity of 350,000 tonnes of pulp, consisting of fluff pulp and bleached softwood pulp.

 

Uruguay

 

Montes del Plata. Located in Punta Pereira in the department of Colonia, Uruguay, the Montes del Plata Pulp Mill began operations in June 2014. The total investment was approximately U.S.$2.7 billion. The mill has an annual installed capacity of 1.4 million air dry tonnes of bleached pulp. On June 4, 2014, the environmental authorities of Uruguay (MVOTMA) approved an annual production capacity of the Montes del Plata mill of 1.5 million tonnes per year.

 

Regarding our Montes del Plata mill in Uruguay, during 2017 and 2019 we made some operational improvements that led to an increase in the annual capacity of the mill, reaching approximately 1.42 million tonnes from 1.3 million tonnes. Of the total annual capacity of the mill we own the 50% due to the joint operation we had with Stora Enso, which correspond approximately to 710 thousand tonnes of annual capacity.

 

Production Costs

 

Based on information published by Hawkins Wright Ltd., we believe that in 2019 our total delivered cash cost for bleached softwood kraft pulp produced in Chile and delivered to China was lower than the average total delivered cash cost for such softwood pulp produced in certain other regions and delivered to China, particularly with respect to transportation to China.

 

The following table sets forth (i) our cash costs for the production in Chile of bleached softwood kraft pulp and (ii) based on information published by Hawkins Wright Ltd., the estimated average cash costs for bleached softwood kraft pulp produced in the  other regions.

 

 

 

Cash Production Costs of Bleached Softwood Kraft Pulp by Region

 

 

 

Arauco(1)

 

 

British

Columbia

Coast

 

 

West

Canada

Interior

 

 

United

States

 

 

Sweden

 

 

Finland

 

 

 

(in U.S.$ per tonne)

 

Wood

 

 

199

 

 

 

280

 

 

 

234

 

 

 

189

 

 

 

271

 

 

 

295

 

Chemicals

 

 

57

 

 

 

64

 

 

 

64

 

 

 

69

 

 

 

53

 

 

 

61

 

Labor and other cash costs(2)

 

 

124

 

 

 

176

 

 

 

193

 

 

 

200

 

 

 

114

 

 

 

91

 

Operating costs

 

 

380

 

 

 

520

 

 

 

491

 

 

 

458

 

 

 

438

 

 

 

447

 

Transportation(3)

 

 

33

 

 

 

48

 

 

 

87

 

 

 

49

 

 

 

57

 

 

 

70

 

Marketing and sales

 

 

3

 

 

 

7

 

 

 

13

 

 

 

15

 

 

 

6

 

 

 

9

 

Total delivered cash cost

 

 

416

 

 

 

575

 

 

 

591

 

 

 

522

 

 

 

501

 

 

 

526

 

_______________

 

Source: Arauco and Hawkins Wright Ltd. (“The Outlook for Paper Grade Pulp Demand, Supply, Cost and Prices”, December 2019)

(1)      Includes only cash costs for Arauco’s bleached softwood kraft pulp produced in Chile.

(2)      Other cash costs includes energy, maintenance costs and other mill costs.

(3)      Includes transportation cost only for bleached softwood kraft pulp delivered to China (and not other markets).

 

 
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Sales

 

Estimated installed bleached kraft pulp capacity worldwide for the year ended December 31, 2019 equaled 66.4 million tonnes. Based on information published by Hawkins Wright Ltd., we believe that our production capacity represented approximately 5.0% of this market in 2019. During the same year, we exported 98.0% of our bleached pulp (in terms of tonnes sold), principally to customers in Asia and Western Europe.

 

Integrated manufacturers dominate the world production of unbleached softwood pulp, as opposed to non‑integrated companies like us that sell market pulp. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its own paper production facilities. With a worldwide installed capacity of unbleached softwood kraft pulp of 2.5 million tonnes for 2019, according to Hawkins Wright Ltd., we are the world’s largest single producer of unbleached softwood market pulp, in terms of production capacity, with 19.6% of the total market in 2019. During the same year, 97.9% of our total unbleached market pulp sales (in terms of tonnes sold) consisted of export sales. While for the last seven years Asia has been our principal export market for unbleached market pulp, we continually seek niche markets for our products in Western Europe and the United States.

 

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

 

 

 

For the Year Ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(in tonnes)

 

Bleached Pulp

 

 

 

 

 

 

 

 

 

Asia and Oceania

 

 

2,302,046

 

 

 

2,289,694

 

 

 

2,311,090

 

Europe

 

 

653,459

 

 

 

597,116

 

 

 

547,012

 

North and South America

 

 

313,744

 

 

 

301,226

 

 

 

335,251

 

Other

 

 

1,634

 

 

 

532

 

 

 

134,422

 

Total

 

 

3,270,883

 

 

 

3,188,568

 

 

 

3,327,775

 

Unbleached Pulp

 

 

 

 

 

 

 

 

 

 

 

 

Asia and Oceania

 

 

391,011

 

 

 

407,659

 

 

 

338,648

 

North and South America

 

 

81,353

 

 

 

81,600

 

 

 

88,425

 

Europe

 

 

1,101

 

 

 

1,186

 

 

 

2,073

 

Other

 

 

2,067

 

 

 

3,729

 

 

 

15,948

 

Total

 

 

475,532

 

 

 

494,174

 

 

 

445,094

 

 

While there are many grades and varieties, pulp is a commodity that is marketed primarily based on price and service. In marketing our pulp, we seek to establish long‑term relationships with non‑integrated end users of pulp by providing a competitively priced, high‑quality, consistent product and excellent service. The quality of our pulp derives from the high standards of production that we maintain at our mills and our use of a single species of tree, in contrast to pulp producers in some of the world’s major softwood pulp producing regions that mix different species, depending on availability and seasonality. Our bleached pulp is marketed under the brand names “Arauco” and “Arauco Argentina” and our unbleached pulp is marketed under the brand name “Celco.” The 50% share of the pulp produced from Montes del Plata is marketed under the brand name “Arauco.”

 

Prices for bleached kraft market pulp produced from radiata pine and eucalyptus normally fluctuate depending on prevailing world prices, which historically have been cyclical. The fluctuations generally depend on worldwide demand, world production capacity, business strategies adopted by major forestry, pulp and paper producers, the availability of substitutes and the relative strength of the U.S. dollar. See “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Conditions, Results of Operations and Cash Flows—Overview” and “—Pulp Prices” and “Item 3. Key Information—Risk Factors—Risks Relating to the Company—Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows.” 

 

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

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

(U.S.$ per tonne)

 

Bleached Pulp

 

 

 

 

 

 

 

 

 

1Q

 

 

682

 

 

 

784

 

 

 

565

 

2Q

 

 

663

 

 

 

804

 

 

 

620

 

3Q

 

 

562

 

 

 

808

 

 

 

633

 

4Q

 

 

529

 

 

 

773

 

 

 

730

 

Unbleached Pulp

 

 

 

 

 

 

 

 

 

 

 

 

1Q

 

 

733

 

 

 

847

 

 

 

596

 

2Q

 

 

702

 

 

 

873

 

 

 

664

 

3Q

 

 

577

 

 

 

876

 

 

 

660

 

4Q

 

 

536

 

 

 

864

 

 

 

768

 

 

In accordance with customary pulp market practice, we do not have long‑term sales contracts with our customers (except for a few limited cases); rather, we maintain long‑standing relationships with our customers with whom we periodically reach agreements on specific volumes and prices. We have a diversified customer base located throughout the world and totaling, as of December 31, 2019, more than 231 customers. As of December 31, 2019, we employed 10 sales agents to represent us in more than 38 countries. We manage this worldwide sales network from our headquarters in Chile.

 

 

 
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Wood Products

 

We produce panels (fiberboard and particleboard), sawn timber (green, kiln‑dried lumber and flitches), remanufactured wood products and plywood. For the year ended December 31, 2019, sales of wood products totaled U.S.$2.7 billion, representing 51.5% of our total revenues. We sell our wood products primarily to customers in North America, Central and South America and Asia and Oceania.

 

The following table sets forth our wood products sales to unaffiliated third parties for each of the years indicated.

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands of cubic meters)

 

Panels

 

 

5,908

 

 

 

5,410

 

 

 

4,866

 

 

 

4,754

 

 

 

4,915

 

Sawn timber

 

 

1,811

 

 

 

1,825

 

 

 

1,893

 

 

 

2,022

 

 

 

2,079

 

Remanufactured wood products

 

 

443

 

 

 

438

 

 

 

445

 

 

 

442

 

 

 

422

 

Plywood

 

 

494

 

 

 

532

 

 

 

567

 

 

 

564

 

 

 

594

 

Total

 

 

8,656

 

 

 

8,205

 

 

 

7,771

 

 

 

7,782

 

 

 

8,010

 

 

As of December 31, 2019, we owned and operated two panel mills, seven sawmills and two plywood mills in Chile; two panel mills and one sawmill in Argentina; four panel mills in Brazil; two panel mills in Mexico, seven panel mills and one MDF moulding mill in the United States and two panel mills in Canada. Our total aggregate installed annual production capacity as of December 31, 2019 was approximately 8.5 million cubic meters. We operate our sawmills in coordination with our forestry and sales operations, since our sawn timber is generally produced in accordance with customer specifications. As of December 31, 2019, we also owned five remanufacturing facilities—four in Chile and one in Argentina—that reprocess sawn timber into remanufactured wood products, such as moldings, jams and pre‑cut pieces that end users require for doors, furniture and door and window frames. These facilities produced 384,197 cubic meters of remanufactured wood products in 2019.

 

In 2015, we agreed to purchase a 50% of Sonae Arauco for a total purchase price of €137.5 million (equivalent to U.S.$153.1 million at the time of the purchase), comprising the following operations: (i) two panel plants and one sawmill in Spain; (ii) two panel plants and one resin plant in Portugal; (iii) four panel plants and one impregnation of melamine papers plant in Germany, (iv) and two panel mills in South Africa. The transaction closed on May 31, 2016.

 

On December 6, 2017, our Brazilian subsidiary Arauco do Brasil S.A. purchased all of the equity rights in Masisa do Brasil Ltda. See “Item 4. Information on our Company—Description of Business—History.”

 

On January 31, 2019, our subsidiaries Arauco Internacional and AraucoMex, S.A. de C.V., acquired the shares of Masisa’s Mexican Subsidiaries. See “Item 4. Information on our Company—Description of Business—History.”

 

On September 1, 2019, our subsidiary Arauco North America Inc., acquired the shares of Prime-Line Inc. See “Item 4. Information on our Company—Description of Business—History.”

 

Our wood products mills in Chile, North America, Argentina, Brazil and Mexico are certified under international standards. You can find more information about our certifications under the “sustainability” section of our website (https://www.arauco.cl/na/sostenibilidad/certificaciones/).

 

Chile

 

Teno Mill. This mill, which began production on July 4, 2012, has an installed annual production capacity of 300,000 cubic meters of PBO and 240,000 cubic meters of melamine laminate panels. The complex has a continuous PBO panel production line, two laminated panel production lines and one impregnation line. In 2018, Teno mill started its production capacity increase project through the Teno 340 project, to increase the PBO annual installed capacity up to 340,000 cubic meters. The Teno 340 project came into operation during the first quarter of 2020.

 

Trupán‑Cholguán Mill. This mill has an installed annual production capacity of approximately 575,000 cubic meters of panels and 40,000 cubic meters of melamine panels. It has three production lines, one of which produces HB with an annual capacity of 60,000 cubic meters and the other two of which produce MDF with an annual production capacity of 165,000 and 350,000 cubic meters, respectively. The HB line was shut down in April 2019.

 

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

 

Nueva Aldea Plywood Mill. This mill was built on the same site as the original mill, which was destroyed as a result of the 2011 wildfires in the Bio‑Bio Region of Chile. The new Nueva Aldea Mill started operating on December 18, 2013. It has an annual production capacity of 360,000 cubic meters of plywood panels.

 

Cholguán Sawmill and Remanufacturing Facilities. This sawmill has installed annual production capacity of approximately 317,000 cubic meters of lumber, as well as drying kiln facilities with installed annual production capacity of approximately 273,000 cubic meters and two remanufacturing facilities with installed annual production capacity of approximately 92,000 cubic meters of remanufactured wood products. The Cholguán sawmill also has a special facility for making laminating beams with installed annual production capacity of approximately 12,500 cubic meters.

 

Colorado Sawmill. This sawmill has an installed annual production capacity of approximately 273,000 cubic meters of lumber and produces “green” sawn timber (or sawn timber that is not kiln dried) for the Chilean, Japanese and Middle Eastern markets. It also has drying facilities with installed annual production capacity of approximately 175,000 cubic meters.

 

Horcones I Sawmill and Remanufacturing Facility. This sawmill has an installed annual production capacity of approximately 484,000 cubic meters of lumber. It also has drying kilns with an installed annual capacity of approximately 362,000 cubic meters and a remanufacturing facility with an installed annual production capacity of approximately 130,000 cubic meters of remanufactured wood products.

 

Horcones II Sawmill. The annual production capacity of this mill is approximately 300,000 cubic meters of lumber. It also has drying facilities with an installed annual capacity of approximately 170,000 cubic meters.

 

Nueva Aldea Sawmill. This mill has installed annual production capacity of approximately 431,000 cubic meters of sawn timber and is equipped with drying kilns with installed annual capacity of approximately 351,000 cubic meters.

 

Valdivia Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 464,000 cubic meters of lumber. It also has drying facilities with an installed annual capacity of approximately 336,000 cubic meters and a remanufacturing facility with installed annual capacity of approximately 85,000 cubic meters of remanufactured wood products.

 

Viñales Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 377,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual capacity of approximately 358,000 cubic meters and a remanufacturing facility with an installed annual capacity of approximately 101,000 cubic meters of remanufactured wood products.

 

Argentina

 

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

 

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

 

Piray Sawmill and Remanufacturing Facility. This sawmill has installed annual production capacity of approximately 318,000 cubic meters of lumber. It is also equipped with drying kilns with installed annual production capacity of approximately 308,000 cubic meters and a remanufacturing facility with installed annual production capacity of approximately 67,000 cubic meters of remanufactured wood products.

 

Brazil

 

Jaguariaiva Mill. This mill produces MDF and has an installed annual production capacity of approximately 780,000 cubic meters of MDF panels through the first production line and 500,000 cubic meters of MDF panels through the second production line. Its total melamine lamination capacity is 480,000 cubic meters.

 

Piên Mill. This mill has an installed annual production capacity of approximately 750,000 cubic meters of panels distributed among two production lines with a production capacity of 440,000 cubic meters of MDF boards, 310,000 cubic meters of PBO and 264,000 cubic meters of melamine lamination. In December 2018, the powder silo of one of the lines in this mill suffered damage that paralyzed the operations of the PBO panels for approximately ten days. This event did not cause a material impact on the financial statements.

 

 
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Montenegro Mill. This mill has an installed annual production capacity of approximately 410,000 cubic meters of PBO panels and 200,000 cubic meters of melamine lamination.

 

Ponta Grossa Mill. This mill produces MDF and has an installed annual production capacity of approximately 310,000 cubic meters of MDF panels. Its melamine lamination capacity is 360,000 cubic meters.

 

México

 

Durango Mill. This mill includes two PBO production lines with an annual installed capacity of 155,000 cubic meters; one MDF production line with a current annual installed capacity of 250,000 cubic meters and four melamine lines with an annual installed capacity of 210,000 cubic meters. The Durango mill was acquired in January 2019.       

 

Zitácuaro Mill. This mill includes one PBO production line with an annual installed capacity of 184,000 cubic meters and three melamine production lines with an annual installed capacity of 107,120 cubic meters. Zitácuaro mill was acquired on January 2019.        

 

United States

 

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

 

Bennettsville Mill. This mill located in South Carolina has an installed annual production capacity of approximately 251,000 cubic meters of MDF.

 

Eugene Mill. This mill located in Oregon has an installed annual production capacity of approximately 154,000 cubic meters of MDF. We expect to shut down the operation of this mill in May 2020.

 

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

 

Carolina Mill. This mill located in South Carolina has an installed annual production capacity of approximately 600,000 cubic meters of PBO and 285,000 cubic meters of melamine lamination. An expansion project was completed in the fourth quarter of 2016, increasing the mill’s PBO production capacity by 104,000 cubic meters and melamine capacity by 153,000 cubic meters.

 

Moncure Mill. This facility located in North Carolina includes an MDF production line with an annual production capacity of 285,000 cubic meters, a PBO production line with an annual production capacity of 262,000 cubic meters and two melamine lamination production lines with a combined annual production capacity of 150,000 cubic meters. In April 2020, we expect to close the PBO production line, and to integrate the MDF line with a MDF moulding line.

 

Grayling Mill. This facility is located in Michigan and includes one production line with an annual installed production capacity of 800,000 cubic meters of PBO and two melamine lamination production lines with a combined annual production capacity of 250,000 cubic meters. Construction of this facility commenced in 2017, and its operations commenced in April 2019. On January 30, 2020, our Grayling mill suffered a fire; no injuries or deaths occurred. This led to an unplanned maintenance stoppage. As of the date of this annual report, the Grayling mill is back in operation.

 

Panolam Mill. This facility is located in Oregon and includes two thermally fused lamination lines with an annual installed production capacity of 75,000 cubic meters of melamine. It was acquired in July 2018.

 

Primeline Mill. This facility is located in Arkansas and includes three MDF moulding production lines with an annual installed production capacity of 135,000 cubic meters. It was acquired in September 2019.

 

Canada

 

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

 

 
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St. Stephen Mill. This mill located in New Brunswick has an installed annual production capacity of approximately 376,000 cubic meters of panels distributed between two production lines with a production capacity of 216,000 cubic meters of PBO and 160,000 cubic meters of thin HDF, in addition to a melamine lamination capacity of 255,000 cubic meters, paint/print and décor paper lines and with an on‑site resin facility. During the last quarter of 2019, this mill shut down its particleboard manufacturing operations.

 

Sonae Arauco

 

Sonae Arauco, of which we own 50%, produces, together with its subsidiaries, market wood panels, of the OSB, MDF and PBO type, and sawn timber through the operation of: (i) two panel plants and one sawmill in Spain; (ii) two panel plants and one resin plant in Portugal; (iii) four panel plants and one impregnation of melamine papers plant in Germany, (iv) and two panel mills in South Africa (one of them is currently shut down). In the aggregate, the production capacity of Sonae Arauco is approximately 516,000 cubic meters of OSB, 1,482,000 cubic meters of MDF, 2,330,000 cubic meters of particleboards and 50,000 cubic meters of sawn timber.

 

 

 

 

 

 

 

 

 
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Forestry Products

 

Our forestry products are mainly sawlogs, pulplogs,  chips and others. As a result of our forest management policies and the increasing maturity of our plantations, our plantations are yielding increasing volumes of forestry products, particularly clear wood. As the volume of clear wood has grown, we have broadened our range of forestry products. For the year ended December 31, 2019, sales of forestry products were U.S.$128.7 million, representing 2.4% of our revenues for such year.

 

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

 

 

 

Year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

 

(in thousands of cubic meters)

 

Sawlogs

 

 

1,815

 

 

 

1,794

 

 

 

1,608

 

 

 

1,328

 

 

 

1,793

 

Pulplogs

 

 

762

 

 

 

746

 

 

 

616

 

 

 

459

 

 

 

591

 

Chips

 

 

361

 

 

 

546

 

 

 

443

 

 

 

366

 

 

 

278

 

Others

 

 

1,229

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

Energy and Sustainable Development

 

We utilize renewable fuels such as forest biomass sub‑products in power plants that cogenerate the steam and electricity required for our manufacturing operations, thus contributing to reducing greenhouse emissions. Biomass co‑generation allows for a high thermal efficiency, approaching 80% in some cases. In addition to meeting our own energy needs, in Chile we generate a significant amount of surplus power, which we deliver to the SEN, which distributes electrical power throughout the Central and Southern Regions of Chile. In Uruguay, biomass sub‑products from our Montes del Plata Mill also cogenerate the steam and electricity to meet our energy needs, and surplus power is delivered to the Uruguayan power grid.

 

The following table sets forth, by country and mill, our energy producing facilities and their annual installed capacities, maximum generation, average consumption and surplus power as of December 31, 2019:

 

Country/Mill

 

Installed Capacity
(MW)

 

 

Maximum

Generation

(MW)

 

 

Average

Consumption

(MW)

 

 

Surplus power delivered

to Power Grid
(MW)

 

Chile:

 

 

 

 

 

 

 

 

 

 

 

 

Arauco

 

 

127

 

 

 

105

 

 

 

81

 

 

 

24

 

Constitución

 

 

40

 

 

 

30

 

 

 

22

 

 

 

8

 

Cholguán

 

 

29

 

 

 

28

 

 

 

15

 

 

 

13

 

Licancel

 

 

29

 

 

 

20

 

 

 

14

 

 

 

6

 

Valdivia

 

 

140

 

 

 

115

 

 

 

54

 

 

 

61

 

Horcones (gas/diesel)

 

 

24

 

 

 

24

 

 

 

-

 

 

 

24

 

Nueva Aldea I

 

 

30

 

 

 

28

 

 

 

14

 

 

 

14

 

Nueva Aldea II (diesel)

 

 

10

 

 

N.A.

 

 

 

-

 

 

 

10

 

Nueva Aldea III

 

 

136

 

 

 

100

 

 

 

63

 

 

 

37

 

Bioenergía Viñales

 

 

41

 

 

 

31

 

 

 

9

 

 

 

22

 

Total Chile

 

 

606

 

 

 

481

 

 

 

272

 

 

 

219

 

Uruguay:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Montes del Plata (1)

 

 

91

 

 

 

90

 

 

 

39

 

 

 

50

 

Total Uruguay

 

 

91

 

 

 

90

 

 

 

39

 

 

 

50

 

Argentina:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Piray

 

 

40

 

 

 

36

 

 

 

28

 

 

 

8

 

Puerto Esperanza

 

 

42

 

 

 

35

 

 

 

35

 

 

 

-

 

Total Argentina

 

 

82

 

 

 

71

 

 

 

63

 

 

 

8

 

Total

 

 

779

 

 

 

642

 

 

 

374

 

 

 

277

 

 

(1)       Considers 50% of joint operation Montes del Plata

 

As of December 31, 2019, we had registered five co‑generation power plants in Chile as greenhouse emission reduction project activities under the Clean Development Mechanism (CDM) of the Kyoto Protocol. Three of them were registered during 2006, Trupán, Nueva Aldea (first phase) and Nueva Aldea (second phase); a fourth plant was registered in 2009, the Valdivia biomass power plant; and the fifth one was registered in January 2011, the Horcones power plant expansion project. Each of these power plants generates electricity through forestry biomass (forestry and wood industrial sub‑products, including the wood pulp by‑product called “black liquor”), which is a renewable carbon‑neutral fuel that allows the facilities to decrease their reliance on fossil‑fuel intensive grid electricity.

 

 
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We were the first Chilean forestry company to issue Certificates of Emission Reductions (CERs or carbon credits) through the CDM of the Kyoto Protocol in Chile. From 2007 to December 31, 2019, we had contributed 8.02% of total carbon credits in the energy generation from residual biomass projects portfolio registered worldwide in accordance with the CDM standard. This represents a net issuance of 4.31 million CERs with our CDM projects.

 

During the period from 2007 through 2019, we have sold 2.98 million CERs in the aggregate, mainly to European companies subject to compliance obligations under the European Trading Scheme (ETS) and to global companies who aim to compensate their emissions in the voluntary market. The following table presents the total amount of CERs issued and sold by us for each of the years indicated:

 

 

 

Year ended December 31

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013‑2007

 

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

 

 

109,842

 

 

 

247,588

 

 

 

457,309

 

 

 

109,844

 

 

 

827,971

 

 

 

403,317

 

 

2.15 million

 

CERs sold or donated

 

 

-

 

 

 

658,512

 

 

 

1,095,780

 

 

 

561,619

 

 

 

1,375

 

 

 

42,567

 

 

1.04 million

 

 

In 2015, we entered into a long‑term sale agreement with Vattenfall Energy Trading Netherlands N.V., pursuant to which Arauco agreed to sell all its CERs generated between 2013 and 2020 to Vattenfall. This agreement provides for the sale of our carbon credits in the European compliance market, which is the largest carbon credit market currently in operation. In 2019, Arauco did not sell CERs to Vattenfall Energy Trading Netherlands N.V. under the long-term agreement.

 

The Viñales biomass power plant, which began operations on May 17, 2012, reached its maximum production capacity on August 29, 2012. The power plant is located alongside the Viñales sawmill, in Chile’s Seventh Region. The plant includes a biomass‑fueled power boiler with capacity to produce 210 tonnes of steam per hour and a 41 Megawatt extraction‑condensing turbo generator. This power plant was also developed as an emission reduction project initiative by Arauco. On January 27, 2013, the Viñales emission reduction project activity was successfully registered as a greenhouse gas emission reduction project activity under the voluntary carbon standard: Verified Carbon Standard (VCS). Between 2017 and 2019 this project issued a volume of 602,886 Verified Carbon Units (VCUs).

 

During January 2013, the biomass cogeneration power plant located in the Montes del Plata pulp mill facility in Uruguay was successfully registered as a CDM project activity. This was the eleventh CDM project registered in Uruguay. This project activity is expected to generate an average of 124,000 CERs per year, during its first 7‑year crediting period. On April 26, 2018, the first issuance of CERs was accomplished by generating 66,006 CERs with the Punta Pereira biomass power plant project.

 

Sustainability

 

Sustainability Strategy

 

We are committed to promoting an economy based on renewable resources and to developing products that improve the lives of millions of persons around the globe as a result of our sustainable management of renewable assets. We aim to maximize the value of our forestry assets through growth based on generating economies of scale and competitive advantages that are sustainable over time. Through science, technology and innovation, we seek to unlock the full value of our plantations in accordance with rigorous management standards to ensure constant improvement in our environmental performance and a manner that promotes the health, safety and development of our personnel and neighboring communities.

 

 
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Persons of Excellence

 

A key part of our sustainability strategy is having people of excellence, because they provide us with a distinctive organizational culture that enables us to embrace future challenges and achieve results sustainably.  We focus on attracting, training and retaining a talented and inclusive team of persons who share our values to place the safety of people first, to respect and protect the environment and local communities we depend on, to value teamwork and the ability to reconcile different points of view to achieve a common objective, and to question the present and challenge the future, daring to take risks and innovate.

 

Occupational Health and Safety

 

We believe that our people represent the heart of our company. Accordingly, the safety and health of our employees and collaborators is one of our highest priorities. Our risk management model promotes a safety culture based on the value of people and teamwork and is designed to foster conditions for work that is both safe and productive.  Our employees are affirmatively encouraged to be part of safety teams and assume prominent roles not only in their own safety but also in the safety of others. 

 

We strive to ensure sanitary and healthy workplace conditions for our workers to enhance their high performance at work, promote illness-free operations and encourage a healthy lifestyle. Prevention of occupational diseases lies in the proper implementation of two key processes. The first is environmental surveillance, focused on identification, evaluation and control of risks that our workers might be exposed to. The second is medical surveillance, focused on prevention and early detection of illnesses in subclinical or pre-symptomatic phases, so we can adopt the necessary measures to mitigate or reverse the progress of any such illness.

 

Initiatives to enhance the health and safety of our personnel include the following:

 

 

o

We train our workers to understand the risks they may be exposed to as well as measures available to mitigate the risk of occupational illness. Our workers potentially exposed to risk of occupational illness are required to have periodic medical examinations, and workers who work at heights, in confined spaces or operate mobile equipment are required to have periodic medical examinations to determine their fitness to perform such tasks.

 

 

 

 

o

Our Healthy Life (Cultura Sana) program in Chile has the purpose to enhance the health and overall wellness of our personnel by promoting the benefits of the following five core principles: (i) a healthy workplace environment, (ii) good nutrition, (iii) an alcohol and drug-free workplace, (iv) regular exercise and physical activity and (v) dedication to family.

 

 

 

 

o

We have programs in Brazil to protect our workers from high levels of noise and to provide respiratory protection, as well as an ergonomics program and vaccination control, and programs for our workers in Argentina providing regular flu vaccines.

 

 

 

 

o

During 2019 we started the implementation of a company-wide Alcohol and Drug Policy that focuses on prevention of alcohol abuse and drug consumption and provides rehabilitation for those workers requiring assistance. This policy also includes early detection control mechanisms. We expect that this Policy will be implemented in all countries in which we have industrial operations during 2020.

 

Community and Social Development

 

We seek to be a virtuous actor in the communities we are a part of and an active agent in their economic and social development.  We are committed to the United Nations’ Sustainable Development Goals and believe that the development and wellbeing of our local communities is essential to the sustainability of our business. Through a model of dialogue and participation, we engage actively with local communities and implement a range of social and community programs that promote collaboration and common interests including, among others, the following:

 

 

o

For over thirty years our Educational Foundation (Fundación Educacional Arauco) in Chile has contributed to the widespread improvement of the quality of local education by strengthening the core competencies and teaching skills of school principals and teachers in hundreds of schools serving thousands of young students.

 

 

 

 

o

Our Water Supply Challenge (Desafío Agua) program in Chile promotes improved community hygiene and sanitation by providing equipment and infrastructure to rural communities and schools to improve their access to reliable sources of clean water for human consumption.

 

 

 

 

o

We promote access to affordable housing through our Housing Program (Programa Vivienda) in Chile by counseling our employees, suppliers and their families in applying for public housing subsidies and by assisting them in finding and evaluating adequate housing. Since its inception, our Programa Vivienda program has supported the construction of more than 1,700 new housing units to the program’s beneficiaries.

 

 
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o

Our Program for the Adoption of an Angel in North America is organized in collaboration with The Salvation Army and is dedicated to the collection and distribution of holiday gifts to underprivileged children and needy senior citizens.

 

 

 

 

o

Our Environmental Education program (Educación Ambiental Arauco) focuses on schools in communities in Brazil where we have presence and promotes values, knowledge and awareness regarding the importance of environmental conservation and sustainable forestry practices.

 

Responsible Management of our Forestry and Other Renewable Assets

 

We base our business on the production and management of renewable forest resources and taking care of the environment and our natural resources is very important. The planning of our forest cycle is complemental and consistent with our operational activities, selling wood products and supplying our industrial mills.

 

Carbon Footprint

 

We believe that responsible management of forests and plantations can be a meaningful solution to address urgent challenges presented by climate change. Responsible forest management can reduce the deforestation and degradation of natural forests and mitigate global CO2 emissions. As a result, in 2019 we announced our commitment to certificate our carbon neutrality by 2020, which constitutes a concrete step towards facing challenges presented by climate change and positions us to be the first forestry company to achieve this important goal. We are also committed to adhering to the Science Based Targets, a worldwide initiative that encourages companies to make efforts to decrease their greenhouse gas emissions in accordance with targets determined by the latest climate science to be needed to meet the goals of the 2015 Paris Agreement among signatory nations.

 

Preservation of Native Forests

 

A part of our forestry assets consists of native forests, and we are committed to their preservation and restoration. We manage our native forests in accordance with scientific research and conservation strategies developed in close collaboration with governmental authorities, local communities and environmental organizations. We manage some of our native forests as parks open to the public and others as High Conservation Value Areas (“HCVA”) or strictly protected areas. 

 

We continue to implement an ambitious, long-term program to restore approximately 25,000 hectares of native forests in Chile. The areas targeted for restoration include large areas of plantations which are going to be restored with native vegetation and other areas of native forests damaged by forest fires. In selecting sites for restoration, we make a special effort to identify those whose restoration will provide not only environmental but also social benefits.

 

Special Protected Areas

 

In addition to native forests, our forestry assets also include sites of such special environmental, social and cultural significance that they have been designated as HVCAs. We consult actively with local communities and specialists in order to identify HVCAs of particular social significance. Our designation allows these sites to be specifically identified, maintained and improved in a manner that enhances their biological, ecosystemic and cultural attributes. 

 

Monitoring Biodiversity and Protecting Ecosystems

 

We believe that forests are more than wood and fiber. They are a critical part of a larger ecosystem which we try to protect, maintain and enhance. One of the main challenges of our business is to maintain and enhance biodiversity in our forests. To do so, we apply a Biodiversity and Ecosystem Services Policy that emphasizes constant assessment and management of the effects of our operations on biodiversity and other ecosystems. We make a constant effort to conduct research programs to identify biodiversity elements (species, ecosystems, wetlands, etc.) and to prepare management protocols and monitoring plans emphasizing threat control. Many of the most significant areas in terms of biodiversity are designated as HCVAs.

 

 
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Management of Water Resources

 

Water is an essential element for the life of plants, animals and humans. That is why the increase in consumption in a context of climate change has generated growing awareness of the importance of managing water in a sustainable manner. Its decreasing availability has imposed on us the challenge to improve water management, infrastructure and uses, aiming to guarantee its availability in enough quality and quantity.

 

From an industrial point of view, continuous improvement and efficient use of water is an important goal for us. In this regard, among others, we monitor water availability in the facilities where we draw water from; and we look to implement diverse initiatives aimed at optimizing water usage.

 

Forest Fire Prevention

 

We strive to sustain the integrity of our forestland, protecting forest plantations and neighboring communities and conservation areas. We seek to decrease the occurrence of forest fires and to manage combustible material to lessen the potential propagation of fires when they occur. Due to Chile’s climatic conditions, our plantations in Chile have historically been at greater risk of forest fire than our plantations in other countries.  The fires of recent seasons in Chile have allowed us to develop enhanced measures to address fire prevention, detection and control.

 

We work with neighboring communities through joint fire prevention initiatives including local fire prevention committees in which neighbors, governmental authorities and private businesses collaborate. We have strengthened our fire detection capabilities by creating a new, unified central command post in Chile that collects all information on detection and resource deployment and by deploying new monitoring and early detection tools such as, fixed and robot cameras, and by developing patrol routes for fire detection during high risk periods.

 

We continuously seek to improve measures to reduce the intensity and speed of fires once there is an outbreak. We maintain hundreds of kilometers of fire protection belts, consisting of firebreaks (gaps in combustible vegetation) and fire buffer zones (areas of reduced vegetation), to protect residential areas near our forest plantations.  We deploy air and ground resources, including night firefighting crews, to respond quickly in the initial phase of outbreaks and continue to enhance our resources available for firefighting.

 

Environmental Management of our Industrial Operations

 

Environmental management in our industrial processes is key for us. We center our activities around tracing and monitoring management and continuous improvement and compliance with environmental regulations, especially in terms of odors, effluents, atmospheric emissions and solid residues.

 

Our industrial mills and forestry assets are certified under national and international standards related to corporate governance, environment, quality, health and safety and responsible forest management. Our plants and mills have environmental metrics associated to raw material consumption, effluents, solid waste, water consumption, energy consumption, among others. At the same time, we continuously monitor our effluents and emissions, as means of guaranteeing compliance with our environmental commitments and adequate environmental surveillance.

 

Solid Waste Disposal

 

Solid waste that comes from the manufacturing of our products is treated in accordance with the environmental applicable regulatory framework and our management policies. In the case of our pulp business, solid residues mostly come from the caustification process; in the case of our lime kilns, from our effluent treatment plants in the form of sludge, among other sources. Most of these residues are sent to our own deposits of industrial residues. Nevertheless, as part of our strategy and environmental objectives, we have studied to add value to these residues by selling them to companies with whom we have arrangements so that they can use these residues as raw materials. The main uses are manufacturing of concrete, as soil improver both in agriculture and in forestry, and also manufacturing of fertilizers.

 

In the case of our wood products business, we have a strategy that seeks to increase the percentage of residues recycled and to diminish the volume of those that go to final disposal.

 

Liquid Effluents

 

Most of our industrial operations generate liquid effluents. These are continuously monitored to ensure that the emission levels stay between the parameters defined by the relevant authorities and/or applicable regulatory framework. All of our pulp mills have state-of-the-art effluent treatment systems.

 

 
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In our wood products business, our mills also treat their liquid effluents. This is done either in the pulp mills adjacent to them if applicable or, when there is no neighboring pulp mill, in independent systems.

 

Energy Management

 

In a context in which the clean energy supply is limited, renewable energy generation and its efficient use are a challenge for us. By using biomass in our boilers, we are self-sufficient in energy consumption in Chile, Argentina and Uruguay, contributing energy surplus to the country’s power grid. In addition to energy generation, our recovery boilers recover inorganic compounds that are part of the process. We also promote greater efficiency in its processes to reduce energy consumption and improve environmental performance.

 

Air Emissions

 

 Air emissions are permanently monitored. In the case of our pulp mills, Total Reduced Sulphur (“TRS”) is continuously controlled in order to minimize odor-related events associated to TRS gas venting. Particle air emissions are controlled through mitigation equipment, such as electrostatic precipitators and gas washers.

 

In the case of our wood products mills, emissions of particulates are controlled through mitigation equipment such as gas scrubbers and electrostatic precipitators. Fine wood dust emissions from remanufacturing and sawing processes are reduced by using bag filters that collect the sawdust, which we then use as biomass fuel.

 

Competition

 

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

 

Pulp

 

In general, most relevant market pulp producers have activities in several regions as they try to avoid concentration in few specific markets. Our main competitors in hardwood pulp in Europe, Asia and the Middle East are Suzano Papel e Cellulose S.A. (or “Suzano”, which was merged with Fibria Cellulose S.A. on January 14, 2019), CMPC Celulosa S.A. (or “CMPC”), El Dorado Brasil Celulose S.A., Celulosa Nipo-Brasileira S.A, and UPM-Kymmene Oyj (or “UPM”). We also face competition in hardwood pulp from Asia Pacific Resources International Holdings Limited and Asia Pulp and Paper, in Asia and the Middle East, but not in Europe.

 

In the softwood pulp market, in Asia, our main competitors are Canadian producers such as Canfor Corporation, Cariboo Pulp and Paper, Zellstoff Celgar Limited and Zellstoff Celgar Limited Partnership, among others, as well as the Russian producer Ilim Pulp Enterprise Ltd. During 2019, we faced a more aggressive competition from Scandinavian producers, such as UPM, Södra Skogsägarna, Mercer International Inc. and Svenska Cellulosa AB.

 

Wood Products

 

Our main competitors in the MDF market are: in Latin America, Duratex S.A., Masisa, Berneck, Proteak, Guararapes, Egger, Duraplay and other large South American producers; in North America, local producers such as Roseburg Forest Products Co., West Fraser, Swiss Krono and Plum Creek; in Asia, producers from Malaysia and China; and in the Middle East and India, producers from Europe and Southeast Asia.

 

For sales of PBO, in the Latin American market we compete mainly with Duratex S.A., Masisa, Novopan, Berneck S.A., Egger and Fibraplac S.A. In North America, we mainly compete with Roseburg Forest Products Co., Funder America, Uniboard, Temple‑Inland Inc., Kaycan Ltd., Kronospan, Sonae Indústria, and in the future we expect to compete with Egger as well, once it finishes construction of several new mills in the south of the United States.

 

Our principal competitors in the plywood markets are located in the United States, Finland, Chile, Brazil, Uruguay and China. We compete mainly with CMPC, Eagon, Roseburg, Georgia‑Pacific, Guararapes, Sudati, Lumin, Metsa and UPM, among others.

 

For remanufactured wood products, our main competitors are located in Chile, China, Brazil and the United States.

 

 
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For sawn timber, our main competitors are located in Europe (mainly Germany and the Baltic countries), Brazil, New Zealand, Canada, the United States and Chile. We believe that our operating efficiencies, competitive logistics costs, ability to serve customers with multiple specifications, geographical presence in 50 countries and the versatility of our radiata and taeda pine allow us to compete effectively in the world market for timber products.

 

Transportation, Storage and Distribution

 

To remain competitive worldwide, we ship our products to various distribution centers around the world from which final delivery to the customer is made.

 

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

 

 

·

Coronel. A private port located between Concepción and the Arauco Mill, which we built as a member of a consortium with five other companies and in which we have an equity interest of 50%. We shipped approximately 51% of our aggregate export volume through this port in 2019;

 

 

 

 

·

Lirquén. A private port in Concepción in which as of December 31, 2018, we had an equity interest of 20.3%. On April 5, 2019, we sold such equity interest to DP World Holding UK Ltd.. During 2019, we shipped approximately 29% of our aggregate export volume through this port; and

 

 

 

 

·

San Vicente. A state‑owned port near the city of Concepción through which we shipped approximately 20% of our aggregate export volume during 2019.

 

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

 

We ship pulp to various ports in Europe, North and South America and Asia and, as is customary in the pulp industry, we store some stock in those ports. We use 12 foreign ports that have warehouse facilities available, and standard storage terms provide that we are entitled to a certain period of storage free of charge. We seek to ensure that we do not exceed the free storage period for each shipment. As of December 31, 2019, we had approximately 28,508 tonnes of pulp in storage in warehouses at foreign ports.

 

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

 

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

 

In Brazil, our efficient distribution system, which delivers finished products to more than 870 customers in over 350 cities, many of which are separated by long distances, is a key component to our competitiveness.

 

In Uruguay, our finished product of hardwood pulp is mainly shipped to Europe and Asia through our own Montes del Plata Mill port located next to the pulp mill in Punta Pereira, Colonia, Uruguay.

 

In North America, products sourced from our South American operations are shipped into 20 major ports of entry and storaged in 14 warehouses. These are dispatched to more than 3,500 locations in the United States and Canada. Arauco’s nine composite panel plants, one plant of MDF moulding and one plant of treatment paper in North America service over 580 customers throughout the region mainly through trucks and rail, in addition to exporting products to Central America.

 

 
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Description of Property

 

The following table presents our principal properties as of December 31, 2019.

 

Country

Forestry

Plants and Facilities

Chile

1,117,058 total hectares

697,251 hectares of plantations

5 Pulp Mills

1 PBO Mill

1 MDF-HB Mill(1)

2 Plywood Mills

7 Sawmills

4 Remanufacturing Facilities

Argentina

264,707 total hectares

132,517 hectares of plantations

1 Pulp Mill

1 MDF Mill

1 PBO Mill

1 Sawmill

1 Remanufacturing Facility

1 Resin Plant

Brazil

245,284 total hectares

129,561 hectares of plantations

2 MDF Mill

1 PBO Mill

1 MDF‑PBO Mill

1 Resin Plant

Uruguay (3)

131,138 total hectares

78,778 hectares of plantations

50% of 1 Pulp Mill

United States

 

3 PBO Mills

3 MDF Mills

1 MDF‑PBO Mill

1 MDF moulding Mill

1 Impregnation of melamine papers Plant

Canada

 

1 MDF Mill

1 HDF‑PBO Mill(4)

1 Resin Plant

México

 

1 PBO Mill

1 MDF-PBO Mill

1 Resin Plant

Portugal

 

50% of 1 MDF Mill (3)

50% of 1 PBO Mill (3)

50% of 1 Resin Plant (3)

Spain

 

50% of 1 MDF Mill (3)

50% of 1 PBO Mill (3)

50% of 1 Sawmill (3)

Germany

 

50% of 2 MDF Mills (3)

50% of 1 MDF‑PBO Mill (3)

50% of 1 PBO‑OSB Mill (3)

50% of 1 Impregnation of melamine papers Plant (3)

South Africa

 

50% of 1 PBO Mill (3)(5)

50% of 1 MDF-PBO Mill (3)

 

(1) The HB line has been recently shut down

(2) Corresponds to 50% of Montes del Plata.

(3) Corresponds to 50% of Sonae Arauco.

(4) The PBO line was shut down during the last quarter of 2019.

(5) This mill is currently shut down

 

Future expansion plans will depend on global market conditions. For information regarding environmental risks associated with our use of our properties, see “Item 3. Key Information—Risk Factors—Risks Relating to the Company.”

 

 
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Insurance

 

We carry a global insurance program, consistent with industry practice, covering our production plants, facilities and equipment. This insurance provides coverage, in the event of fire, explosion, machinery breakdowns or natural disasters, including earthquakes and tsunamis. Subject to exclusions and deductibles, our insurance covers up to U.S.$750 million per loss in Chile, U.S.$300 million per loss in Argentina, United States and Canada (for Arauco North America) and R$839 million per loss in Brazil, including physical damage and business interruption for up to 18 months for Chile, Argentina and Brazil, and up to 12 months for United States and Canada. The deductibles for Chile and Argentina for physical damage are U.S.$3 million per occurrence for damages caused. In case of damages caused by earthquakes and tsunamis in Chile, the deductible is 2% of the total insured amount for each location, subject to a cap of U.S.$25 million. Deductibles for Chile and Argentina for business interruption are 30 days for all losses, 45 days for machinery breakdowns and 45 days for machinery breakdowns of turbines. For Chile and Argentina, we also have an annual self‑insurance retention of U.S.$15 million, with a U.S.$7.5 million maximum per event. The deductible for Arauco North America, including physical damage and business interruption is U.S.$2.5 million. The deductible for Brazil, including physical damage and business interruption is R$5 million. Our insurance policy covering our production plants, facilities and equipment in Chile are carried by Seguros Generales Suramericana S.A. (50.0%), Mapfre S.A. (25.0%) and Chubb Seguros Chile S.A. (25.0%); in Argentina and Brazil are carried by Seguros Generales Suramericana S.A. (100%); in the United States is carried by SOMPO Japan Insurance Company of America (100%), and in Canada by Royal & Sun Alliance Insurance Company of Canada, Inc. (100%).

 

In Chile, we have contracted fire insurance coverage for all of our Chilean forest holdings and nurseries but do not insure against pests or disease.

 

In January and February 2017, wildfires, exacerbated by high temperatures, the action of the winds, low atmospheric humidity and the complexity of combatting multiple focal points that appeared simultaneously in different places, broke out in the central and southern regions of Chile, and with respect to us, in the Maule and Bio Bio regions. As a consequence of such fires, we suffered the burning of approximately 72,500 hectares of forest plantations, which had a fair value of approximately U.S.$210 million, according to IFRS. The forest plantations affected by the fires had insurance coverage, with their corresponding deductibles and limits. In accordance with the final report of the insurance adjusters, in October 2017 our subsidiary Forestal Arauco S.A. recovered U.S.$35 million, after applying a U.S.$15 million deductible.

 

After the 2017 wildfires in Chile, we increased the limits of our forestry insurance coverage in Chile to U.S.$85 million with a deductible of U.S.$25 million for the whole season (regardless of the number of the events). This policy is carried by Mapfre S.A. (100%), and the insurance period is from October 3, 2019 to October 3, 2020. We also established satellite-assessment for damaged areas, which enables us to face potential claims in a faster way.

 

During the 2018-2019 forest fire season, the number of wildfires was 25% higher than 2017-2018 and consumed approximately 1,347 hectares of our forest plantations, representing a 129% increase over the preceding season. Nevertheless, that figure is well below the burned surface area in 2016-2017 season: the burned surface in 2018-2019 only represents 1.8% of the hectares burned in 2016-2017 season. The affected forest plantations had a fair value of approximately U.S.$5.0 million representing approximately 0.135% of the fair value of our total forest plantations and approximately 0.032% of our total assets, in each case under IFRS.

 

In Argentina, we maintain fire insurance for 16,768 hectares of timber assets located in the Delta del Paraná, close to Buenos Aires and Entre Ríos. The insurance policies for plantations located in the Delta del Paraná, Argentina, are carried by Sancor Seguros and have a maximum limit of U.S.$7 million with a deductible of U.S.$80,000. For the rest of our forests in Argentina, we do not maintain fire insurance because we believe that the risk of damage from fire is low as Argentina receives significant amounts of rainfall, particularly during the summer months.

 

In Brazil we maintain fire insurance for 26,000 hectares of Novo Oeste’s timber assets located in Mato Grosso do Sul. Our insurance policies for some of our plantations located in Mato Grosso do Sul, Brazil, are carried by Fairfax Insurance and have a maximum limit of R$30 million (approximately U.S.$6 million as of December 31, 2019) with a deductible per event of R$1.5 million (approximately U.S.$300,000 as of December 31, 2019). For the rest of our forests in Brazil, we do not maintain fire insurance because we believe the risk of damage from fire does not justify the costs of carrying insurance.

 

We believe that the terms, deductibles and limits of our insurance policies in all the countries where we operate are generally consistent with industry practice, and that such insurance in conjunction with our own resources, allow us to manage these risks responsibly.  

 

 
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In connection with losses to our production plants, facilities, forests and equipment caused by fires or otherwise, our insurance coverage may be insufficient. The incurrence of losses or other liabilities that are not covered by insurance could result in significant and unexpected additional costs. Moreover, the terms and conditions for the renewal of our insurance policies may change in the future depending upon market circumstances and the type and amount of risks insured. For more information regarding the risks for which we insure our property, see “Item 3. Key Information—Risk Factors—Risks Relating to the Company.”

 

Cybersecurity

 

We have developed a cybersecurity policy based on the guidelines and criteria contemplated by the international standards ISO 27001 and ISO 27002, as well as control mechanisms, technologies, processes and procedures developed on the basis of guidelines and criteria addressed by the international standard ISO 27032 / NIST. Additionally, we periodically make security assessments, which allow us to complement and improve ongoing initiatives. For more information regarding cybersecurity risk, see “Item 3. Key Information—Risk Factors—Risk Relating to Our Company—Cybersecurity events, such as a cyber-attack could adversely affect our business, financial condition and results of operations.”

 

 

 

 

 

 

 
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Capital Expenditures

 

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

 

For the year ended December 31, 2017, our aggregate capital expenditures were U.S.$844.1 million, consisting primarily of U.S.$533.8 million for addition of property, plant and equipment and U.S.$310.3 million for the addition of biological assets. The increase with respect to 2016 was mainly attributable to higher capital expenditures in respect of biological assets to replace those lost because of the wildfires in 2017.  

 

For the year ended December 31, 2018, our aggregate capital expenditures were U. S.$938.0 million, consisting primarily of U.S.$730.5 million for addition of property, plant and equipment and U.S.$207.5 million for the addition of biological assets. The increase with respect to 2017 was mainly attributable to higher capital expenditures in ongoing projects.

 

For the year ended December 31, 2019, our aggregate capital expenditures were U.S.$1,198.9 million, consisting primarily of U.S.$972.1 million for the addition of property, plant and equipment and U.S.$226.8 million for the addition of biological assets. The increase with respect to 2018 was mainly attributable to higher capital expenditures in ongoing projects, primarily the MAPA project.  

 

For the year ending December 31, 2020, we have planned capital expenditures of U.S.$1,527.7 million, which primarily includes U.S.$926.4 million for strategic projects and initiatives, U.S.$361.4 million for maintenance of our existing mills and U.S.$239.9 million for maintenance and acquisition of biological assets.

 

 

 
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Government Regulation

 

Environmental Regulation

 

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

 

Chile

 

The Chilean legislation to which we are subject includes the Ley Sobre Bases Generales del Medio Ambiente (Chilean Environmental Law) and related regulations. Current environmental institutions include the following public entities: the Ministry of the Environment (aimed at developing national environmental policy), the Service of Environmental Evaluation (in charge of administering the environmental assessment system), the Evaluation Commissions (in charge of evaluating projects and activities within the Environmental Impact Evaluation System), and the Superintendence of Environment (in charge of supervising and auditing environmental compliance).

 

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

 

Governmental agencies may participate in the oversight of the implementation of projects in accordance with their environmental impact studies or declarations of environmental impact. Under the Chilean Environmental Law and other regulations, affected private citizens, public agencies and local authorities can sue to enforce compliance with environmental regulations. Enforcement remedies include temporary or permanent closure of facilities and fines. The Superintendence of Environment has issued numerous resolutions, instructions and requirements to various companies, officials and supervised parties, including our Company.

 

In November 2015, the Cruces river, where the Valdivia Mill disposes its effluents, became subject to the Norm (as defined above). The Valdivia Mill discharges its treated effluents into the Cruces River, which is part of the Valdivia River Basin.

 

The Company and other local entities challenged the validity of the Norm before the Third Environmental Court in January 2016, expressing concerns, among others, regarding various aspects of the Norm’s General Environmental and Social Impact Assessment (AGIES, for its acronym in Spanish). These objections included the lack of identification and consideration for the effective economic and social costs resulting from the adoption of the Norm. Other objections included that the Norm’s parameters and limits exceeded the reviewed water quality criteria enforced by reference countries in both quantity and stringency; and that many of the parameters and limits were not technically or environmentally reasonable. The Third Environmental Court ruled in our favor on September 29, 2016, declaring the invalidity of the Norm, which decision was upheld by the Supreme Court in July 2017.

 

In December 2017, the government restarted the rulemaking process and published a new draft SWQSVR for public comments. The draft proposes to regulate using practically the same parameters and limits included in the previous Norm declared void by the Supreme Court. In our opinion, the draft presents flaws similar to those detected in the previous rulemaking process, among others, the lack of identification and consideration of its actual economic and social costs and that most of its parameters and limits are not technically or environmentally reasonable. The public comment process finished in March 2018 and several comments from the public and different stakeholders were submitted, including several technical, economical and legal reports from third parties, were submitted. In August 2019, a group of companies and institutions through CODEPROVAL challenged the validity of the new draft Norm filing an invalidation request. This request is currently under review by the Ministry of the Environment. According to applicable regulations, the government shall prepare a final draft, prior to submitting for the consideration by the Sustentability Ministers’ Committee (Consejo de Ministros para la Sustentabilidad) and the President of the Republic. Once the new norm enters into force, we cannot exclude that the authority may declare that the Valdivia River Basin is contaminated and thus initiate an administrative proceeding to impose a decontamination plan, which may include new limits on discharges of wastewater applicable to the Valdivia Mill.

 

 
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The application of these environmental laws and remedies may adversely affect the manner in which we seek to implement our business strategy and our ability to realize our strategy. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company—The costs to comply with, and to address liabilities arising under, environmental laws and regulations could adversely affect our business, financial condition, results of operations and cash flows.”

 

We have faced, and continue to face, certain other environmental proceedings in connection with certain of our mills. For a description of these proceedings, see “Item 8. Financial Information—Legal Proceedings.” and Note 18 of our audited consolidated financial statements.

 

Argentina

 

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

 

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

 

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

 

Brazil

 

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

   

 

·  fines,

 

 

 

 

·

partial or total suspension of activities,

 

 

 

 

·

forfeiture or restriction of tax incentives or benefits, or

 

 

 

 

·

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

 

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

 

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

 

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

 

Uruguay

 

The activities of the Montes del Plata joint operation are subject to Uruguayan national and municipal environmental regulations. The principal environmental authorization required to carry out such project’s construction activities was the environmental authorization, or AAP, regulated by the Environmental Impact Assessment Act, Law No. 16,466, and its regulatory Decree No. 349/005. AAPs are granted by the National Environmental Bureau, or DINAMA, which pertains to the Ministry of Housing, Land Use Management and Environment, or MVOTMA. In order to obtain this authorization, an applicant must submit a complete report regarding all aspects of any proposed works including a classification of the same by a competent professional in one of the three categories, A, B or C. If the proposed project is classified by DINAMA as B or C, a comprehensive environmental impact assessment (which includes all aspects of the project) is required and in some cases a public hearing may be required (such as when the project is classified as C). Once the AAP is granted, the interested party is required to perform the project in accordance with the terms and conditions of such authorization.

 

 
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For certain activities (including, construction of an industrial plant), a Viability Location Report, or VAL, is required. This report should be submitted before the National Environmental Bureau and must include a notification to the municipal government where the project is to be located (Intendencia) and the delivery of information similar to that required for the AAP. This process contemplates a period for public comment on summary information that is available. The Intendencia involved in any such project may submit its findings to the DINAMA for consideration. The VAL, if needed, must be obtained prior to the AAP. The relevant companies that comprise Montes del Plata have already obtained the AAP and the VAL.

 

Once construction is completed according to the approved project and the AAP conditions, and prior to starting operations, a company needs to obtain the environmental authorization for operation, or AAO, which is regulated by the same decree, comes to regulate the environmental compliance of the relevant companies in the operational phase of the endeavor and needs to be renewed every 3 years. Montes del Plata obtained this authorization from the National Environmental Bureau, DINAMA, in June 2014, and has been renewed until October 2022.

 

We believe that the Montes del Plata operation is currently in material compliance with applicable local and national environmental regulations in Uruguay.

 

United States and Canada

 

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

 

 

·

civil penalties;

 

 

 

 

·

supplemental environmental projects;

 

 

 

 

·

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

 

 

 

 

·

loss of operating permits;

 

 

 

 

·

required installation of pollution control equipment; or

 

 

 

 

·

remedial actions.

 

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

 

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

 

Forestry, Land‑Use and Land Ownership Regulations

 

Chile

 

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

 

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

 

Argentina

 

The management and exploitation of forests in Argentina is regulated by National Law No. 13,273, National Law No. 25,080 (as amended and extended by Laws No. 26,432 and 27,487), National Decree No. 710, Provincial Law No. 854, Provincial Law No. 3,426 and other regulations promulgated thereunder, which collectively constitute the regulatory framework. The regulatory framework imposes a variety of restrictions on the management and exploitation of forests in Argentina. The regulatory framework regulates the replanting of land after harvesting.

 

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

 

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

 

Brazil

 

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

 

There are discussions about certain Brazilian legal restrictions on the acquisition of rural properties by foreign companies and by Brazilian companies controlled by foreign persons.  Those restrictions are contained in the Opinion issued by the Office of the General Counsel to the Federal Government in August 2010, which has been subject to several judicial challenges.  Currently, there is a pending litigation before the Supremo Tribunal Federal (Highest Court in Brazil) to determine if Federal Law No. 5,709/1971 is applicable to Brazilian companies with foreign shareholders, as it could arguably be contrary to the Brazilian constitution. Our local counsel has advised us that although in their opinion these restrictions are not applicable to the transactions consummated by our Brazilian subsidiaries, they could apply from August 2010 and to future transactions which have as object, the acquisition of land by persons that have foreign majority capital.

 

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

 

Uruguay

 

The management and exploitation of forests in Uruguay is regulated primarily by Law No. 15,939 (as amended by Law No. 18,083 and by the regulatory decree No. 452/988), which has declared forestry activity as an area of national interest. This law classifies forests into three categories: protectors, yield and general, and provides certain tax and financial benefits related to forests classified as protectors and yield located in areas classified as forestry priority. In order to obtain such classification, interested parties must submit a forestry management plan to the General Forestry Bureau. This law also establishes certain conservation requirements and controls for each category of forest.

 

These regulations are also included in Decree No. 333/004 (General Principles and Basic Technical Standards to achieve soil and water rational and sustainable use and their recovery), and Decree No. 405/008 (Responsible and Sustainable Use of Soil).

 

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

 

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

 

 
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Item 5. Operating and Financial Review and Prospects

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND CASH FLOWS

 

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

 

Overview

 

We derive our revenues from the sale of bleached and unbleached pulp, wood products such as MDF, PBO, plywood, sawn timber and remanufactured wood products, forestry products, such as sawlogs and pulplogs, and sales of electricity. We sell our products in domestic and export markets. During 2018 sales of pulp constituted the single largest component of our revenues, but in 2019 wood products constituted the largest component of our sales. As occurs with other commodities, pulp is subject to significant cyclical price fluctuations determined by global supply and demand. Accordingly, our revenues are subject to cyclical fluctuations. Prices for wood and forestry products, also fluctuate significantly among domestic markets. Although prices tend to have the most significant effect on our results of operations, sales volume and product mix, production costs and exchange rate fluctuations also can have a substantial impact on our results.

 

Our business, results of operations and cash flows depend, to a large extent, on the level of economic activity, on government and foreign exchange policies and on political and economic developments in our principal markets. In 2017 and 2018, 67.3% and 69.2% of our pulp was sold to customers in Asia, respectively, 14.0% and 11.8% to customers in Europe, respectively, and 12.9% and 14.0% to customers in Central and South America, respectively. In 2019, 62.1% of our pulp was sold to customers in Asia, 16.6% to customers in Europe, and 13.9% to customers in Central and South America. In our wood products business, in 2017 and 2018, 54.0% and 31.1% of our sales were to customers in North America, and Central and South America, respectively. In 2019, 58.9% of our wood products were sold to customers in North America and 27.8% to customers in Central and South America. Our business, earnings and prospects may be materially and adversely affected by developments in our markets with respect to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation or social instability, as well as by political, economic or diplomatic developments.

 

As of December 31, 2019, 62.4% of our property, plant, equipment and forest assets were directly owned by us and our Chilean subsidiaries, 6.8% by our Argentine subsidiaries, 8.0% by our Brazilian subsidiaries, 6.4% by our U.S. and Canadian subsidiaries, 1.3% by our Mexican subsidiaries and 15.1% by our joint operation in Uruguay. In 2019, 54.3% of our consolidated revenues were derived from our operations in Chile, 7.4% of our consolidated revenues were derived from our operations in Argentina, 10.2% of our consolidated revenues were derived from our operations in Brazil, 17.4% of our consolidated revenues were derived from our operations in the United States and Canada, 2.4% of our consolidated revenues were derived from our operations in Mexico and 8.2% of our revenues were derived from our operations in Uruguay. Accordingly, our financial condition, results of operations and cash flows are affected by, to a significant degree, economic conditions in Chile, Argentina, Brazil, Uruguay, the United States, Canada and Mexico.

 

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

 

Chile

 

According to the Central Bank of Chile, Chile’s GDP increased by 1.2% in real terms during 2017, and in 2018 and 2019 it grew at rates of 3.9% and 1.1%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile.”

 

 
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Argentina

 

According to the Instituto Nacional de Estadística y Censos (the Argentine National Statistics and Census Institute, or the “INDEC”), Argentina’s GDP increased by 2.7% in 2017, and in 2018, it declined by 2.5% in real terms. For 2019, the INDEC reported a decline of 2.2% in real GDP. In 2017 and 2018, the Argentine peso depreciated against the U.S. dollar by 16.4% and 105.3%, respectively. In 2019, the Argentine peso depreciated against the U.S. dollar by 58.3%. The INDEC’s national CPI (as defined below) has registered an increase of 47.1% on a year-over-year comparison for 2018, and an increase of 52.9% for 2019.

 

On January 8, 2016, the new Argentine administration declared a state of administrative emergency for the national statistical system and the INDEC that remained in effect through December 31, 2016.  Following the emergency declaration, the INDEC ceased publishing statistical data until a rearrangement of its technical and administrative structure was finalized. As of the date of this annual report, the INDEC has published certain revised data, including the Indice de Precios al Consumidor (Consumer Prices Index, or the “CPI”) monthly data since May 2016 and foreign trade and balance of payment statistics. On June 29, 2016, the INDEC published a report including revised GDP data for the years 2004 through 2015. On July 11, 2017, the INDEC started to publish the national CPI. The INDEC has since then published the national CPI for each month through March 2020.

 

Although reports published by the International Monetary Fund (IMF) stated that their staff used alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation rates considerably higher than those published by the INDEC between 2007 and 2015, on November 9, 2016, the IMF Executive Board lifted its censure on Argentina, noting that Argentina had resumed the publication of data in a manner consistent with its obligations under the Articles of Agreement of the IMF.  Future economic, social and political developments in Argentina, over which we have no control, could impair Arauco Argentina’s business, financial condition or results of operations.  See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina.”

 

Brazil

 

According to the Instituto Brasileiro de Geografia e Estatística (the Brazilian Institute of Geography and Statistics), Brazil’s GDP increased in real terms by 1.0% during 2017 and by 1.1% during 2018. In 2019, Brazil’s GDP increased in real terms by 1.1%. In 2017 and 2018, the Brazilian real depreciated against the U.S. dollar by 1.8% and 14.6%, respectively. In 2019, the Brazilian real depreciated against the U.S. dollar by 3.9%. See “Item 3. Key Information—Risk Factors—Risks Relating to Brazil.”

 

Uruguay

 

According to the Banco Central del Uruguay (the Central Bank of Uruguay), during 2017 and 2018 Uruguay’s GDP grew in real terms at rates of 2.6% and 1.6%, respectively. In 2019, Uruguay’s GDP increased in real terms by 0.2%. In 2017 and 2018, the Uruguayan depreciated against the U.S. dollar by 1.0% and 12.9%, respectively. In 2019, the Uruguayan peso depreciated against the U.S. dollar by 15.1%. See “Item 3. Key Information—Risk Factors—Risks Relating to Uruguay.”

 

United States

 

According to the U.S. Bureau of Economic Analysis, the United States GDP increased by 2.3% in real terms during 2017, and in 2018 and 2019 it grew in real terms at rates of 2.9% and 2.3%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

 

 
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Canada

 

According to the Bank of Canada, Canada’s GDP increased by 3.0% in real terms during 2017, and in 2018 and 2019 it grew in real terms at rates of 2.0% and 1.6%, respectively. The Canadian dollar depreciated against the U.S. dollar by 6.8% in 2017, 6.9% in 2018 and appreciated by 4.4% in 2019. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

 

Mexico

 

According to the Banco de México, Mexico’s GDP increased by 2.1% in real terms during 2017, and in 2018 and 2019 it grew in real terms at rates of 2.1% and decreased by 0.1%, respectively. The Mexican peso appreciated against the U.S. dollar by 9.8% in 2017, depreciated by 1.8% in 2018 and appreciated by 2.6% in 2019. See “Item 3. Key Information—Risk Factors—Risks Relating to Mexico.”

 

Exchange Rate Fluctuations

 

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

 

The Chilean peso has been subject to devaluation in the past and could be subject to significant fluctuations in the future. During 2019, the value of the Chilean peso relative to the U.S. dollar increased by 7.8% in nominal terms, based on the observed exchange rates on December 31, 2018 and December 31, 2019. The observed exchange rate on April 13, 2020, as published in the Official Gazette on April 14, 2020, was Ch$844.57 to U.S.$1.00.

 

The effect of exchange rate fluctuations is partially offset by the fact that certain of our operating expenses are denominated in U.S. dollars (such as our freight costs and selling expenses in the form of commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2019, our U.S. dollar‑denominated indebtedness was U.S.$4.4 billion. In addition, if the U.S. dollar appreciates against the legal currency in any of our export markets, we must, from time to time, express our sales in that local currency to compete effectively.

 

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

 

Fluctuations in Market Prices for our Products

 

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

 

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

 

 

 

Year ended December 31,(1)

 

Product (2)

 

2019

 

 

2018

 

 

2017

 

 

 

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

 

Pulp

 

 

 

 

 

 

 

 

 

Bleached pulp

 

 

605.8

 

 

 

795.6

 

 

 

619.7

 

Unbleached pulp

 

 

661.3

 

 

 

846.7

 

 

 

659.0

 

 

 

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

Wood Products

 

 

 

 

 

 

 

 

 

 

 

 

Sawn timber

 

 

236.3

 

 

 

267.2

 

 

 

251.5

 

Remanufactured wood products

 

 

565.0

 

 

 

577.1

 

 

 

582.8

 

Plywood

 

 

415.5

 

 

 

480.7

 

 

 

420.5

 

Panels

 

 

314.6

 

 

 

318.9

 

 

 

337.7

 

Forestry Products

 

 

 

 

 

 

 

 

 

 

 

 

Logs

 

 

31.6

 

 

 

28.3

 

 

 

32.7

 

______________________

 

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

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

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

 

Pulp Prices

 

Overview

 

Historically, world pulp prices have been subject to significant fluctuations over relatively short periods of time. Pulp prices mainly depend on worldwide demand, world production capacity, worldwide pulp and paper inventory levels and availability of substitutes, and in general terms, are directly related to global economic growth. All of these factors are beyond our control. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company— Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows”.

 

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

 

Prices for unbleached softwood market pulp also follow cyclical patterns related to worldwide demand, stock levels and supply. Based on information published by Hawkins Wright Ltd., unbleached softwood market pulp represents about 3.5% of the total wood pulp market. The majority of such pulp is sold in Asia, and its price does not necessarily follow the cycle of prices for softwood or hardwood.

 

In 2015, a new pulp mill entered the short fiber pulp market with an annual production capacity of 1.3 million tonnes. During the first half of 2015 the short fiber market remained stable, with a peak price of U.S.$811.17 per tonne in October 2015 for BHKP -Europe and U.S.$669.36 per tonne in June 2015 for BHKP – China. Following the peak, prices began to decrease as a result of the global economic downturn and lower demand in the Chinese market as a result of the devaluation of the Yuan, ending the year at a price of U.S.$788.91 per tonne for BHKP – Europe and U.S.$584.65 per tonne for BHKP – China. Expectations of new supply during 2016 and especially in 2017, continued to pressure prices down, reaching their lowest level for 2016 in December 2016, at U.S.$652.58 per tonne for BHKP – Europe and in October 2016 at U.S.$484.5 per tonne for BHKP – China. A new pulp mill located in Indonesia began its ramp‑up in November 2016. It had a projected capacity of 2.8 million tonnes. Throughout 2015 and the first half of 2016, softwood prices followed a downward trend, reaching U.S.$789.2 per tonne at the end of April 2016 for NBSK – Europe and U.S.585.37 per tonne in November 2016 for NBSK – China. For the remainder of the year, prices slightly recovered and stabilized, finishing the year at U.S.$808.83 and U.S.$607.32 per tonne in respect of NBSK – Europe and NBSK – China, respectively.

 

During 2017, average prices of hardwood and softwood followed an upward trend, with NBSK – Europe reaching U.S.$999.63 per tonne at the end of the year (the highest level since 2011) and NBSK – China reaching U.S.$886.35 per tonne. BHKP – Europe prices increased significantly during 2017 reaching U.S.$979.31 at the end of the year (the rise in this type of fiber has reduced the gap between both fibers). The same trend was followed by the BHKP – China index, reaching U.S.$768.57, its peak, at the end of the year. Prices increased mainly because of (i) a reduction in the Indonesian mill’s production capacity for the next three to four years and (ii) the lower capacity of other existing mills due to operational problems. Demand had a steady rise during 2017, which also drove prices to reach higher levels.

 

 
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During 2018, average prices of hardwood and softwood prices followed an upward trend, slightly decreasing in the last part of the year, with NBSK – Europe reaching U.S.$1,200.02 per tonne, NBSK – China reaching U.S.$723.07 per tonne, BHKP – Europe reaching U.S.$1,025.73 per tonne and BHKP – China reaching U.S.$652.51. The positive trend during most of the year was mainly due to strong demand and stable capacity levels, while the slight decrease at the end of 2018 was mainly driven by the trade tensions between China and the United States.

 

During 2019, average prices decreased 31.7% with respect to NBSK – Europe, reaching U.S.$819.95 per tonne at the end of the year, and 22.9% with respect to NBSK – China, reaching U.S.$557.57. BHKP – Europe decreased 33.7%, reaching U.S.$680.01 per tonne, and BHKP – China decreased 30.0%, reaching U.S.$456.92. The downward trend during most of 2019 was mainly driven by trade tensions between China and the United States, as well as lower paper demand in Europe, which affected both hardwood and softwood prices. Hardwood prices were also adversely impacted by the high levels of inventories registered during the year, which started to decrease after mid-2019. Towards the end of 2019, prices stabilized due to some agreements between China and the United States and due to a decrease in inventories.

 

Prices of NBSK – Europe(1)

 

The following table sets forth the prices for NBSK – Europe for the years indicated, as well as the variation with respect to the previous year, as listed on the NBSK – Europe index for the years indicated:

 

List Price as of December 31,

 

U.S.$/tonne

 

 

Change

YoY*

 

2016

 

 

808.83

 

 

 

0.7 %

2017

 

 

999.63

 

 

 

23.6 %

2018

 

 

1,200.02

 

 

 

20.0 %

2019

 

 

819.95

 

 

 

(31.7 )%

 

*YoY means year over year

 

Prices of NBSK – China (1)

 

The following table sets forth the prices for NBSK – China for the years indicated, as well as the variation with respect to the previous year, as listed on the NBSK – China index for the years indicated:

 

List Price as of December 31,

 

U.S.$/tonne

 

 

Change

YoY*

 

2016

 

 

607.32

 

 

 

1.1 %

2017

 

 

886.35

 

 

 

45.9 %

2018

 

 

723.07

 

 

 

(18.4 )%

2019

 

 

557.57

 

 

 

(22.9 )%

 

*YoY means year over year

 

Prices of BHKP – Europe (1)

 

The following table sets forth the prices for BHKP – Europe for the years indicated, as well as the variation with respect to the previous year, as listed on the BHKP – Europe index for the years indicated:

 

List Price as of December 31,

 

U.S.$/tonne

 

 

Change

YoY*

 

2016

 

 

652.58

 

 

 

(17.3 )%

2017

 

 

979.31

 

 

 

50.1 %

2018

 

 

1,025.73

 

 

 

4.7 %

2019

 

 

680.01

 

 

 

(33.7 )%

 

*YoY means year over year

 

 
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Prices of BHKP – China (1)

 

The following table sets forth the prices for BHKP – China for the years indicated, as well as the variation with respect to the previous year, as listed on the BHKP – China index for the years indicated:

 

List Price as of December 31,

 

U.S.$/tonne

 

 

Change

YoY* 

 

2016

 

 

528.06

 

 

 

(9.7 )%

2017

 

 

768.57

 

 

 

45.5 %

2018

 

 

652.51

 

 

 

(15.1 )%

2019

 

 

456.92

 

 

 

(30.0 )%

 

*YoY means year over year

 

(1) Source: RISI.

 

Prices of UKP

 

The following table sets forth the market price of UKP for the years indicated, as well as the variation with respect to the previous year:

 

Price as of December 31,

 

 

 

Change

YoY

 

2016

 

 

573.82

 

 

 

(4.6 )%

2017

 

 

768.03

 

 

 

33.8 %

2018

 

 

853.77

 

 

 

11.2 %

2019

 

 

515.79

 

 

 

(39.6 )%

 

Source: Arauco.

 

Forestry and Wood Products Prices

 

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

 

During 2015, average prices and sales volume for our wood products declined 5.3% and 0.9% respectively, in each case compared to 2014. Overall, countries with depreciated currencies increased their exports, resulting in greater supply in several markets, which in turn, lowered average prices. In Brazil, for example, overall average prices dropped due to the country’s economic slowdown. In North America, increased competition mainly affected the MDF market, with increased exports from Brazilian and Canadian producers, among others. Prices for our molding products remained stable. As a result of a decrease in the competitiveness of Argentina’s wood products in the export market, we focused our sales efforts with respect to our panels primarily produced on the domestic Argentine market. The higher production of our Nueva Aldea Mill in Chile increased our plywood sales volume throughout the year. Particleboard sales also increased in 2015 primarily as a result of increased production at our Teno Mill, which reached full production capacity during the first quarter of 2015. We were also able to improve product mix sales, increasing sales of our greater value added products (such as melamine products).  In addition, we experienced increased competition in the Middle East in the sawn timber market during the first six months of 2015 due to higher supply from European markets.

 

During 2016, average prices for our panels and sawn timber declined 0.7% and 2.7% respectively, in each case compared to 2015. Sales volumes in 2016 also decreased compared to 2015, with panels sales volume dropping 3.3% and sawn timber sales volume dropping 4.6%. Argentine markets for our wood products continued to be pressured during 2016, and opportunities to export our Argentine production to other countries were limited. Brazilian markets followed a similar trend, although there were greater export opportunities, insofar as the depreciation of the Brazilian local currency against the U.S. dollar made Brazilian margins more competitive. These export opportunities were mainly to North America, where higher supply volumes entered the market, partially offset by healthy demand throughout 2016. Our new commercial sales office in the Middle East also enabled us to reach new customers and have a better presence in those markets.

 

 
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During 2017, average prices for our wood products division increased 4.4% compared to 2016. The panels market increased in average prices and sales volume by 4.7% and 2.4% respectively compared to 2016. Our sawn timber average prices increased 1.9% compared to 2016, offset by a 2.6% decrease in sales volume. North American market demand improved in 2017, fueled primarily by the construction and retail sectors. The Brazilian market has been recovering slowly after the economic and political crisis. The Argentine market has improved in sales volume. Despite the production of new MDF mills in Brazil and Mexico that increased competition, we were able to maintain and increase prices in some markets.

 

During 2018, average prices of our wood products decreased 1.5% compared to 2017. The panels market showed a 5.6% decrease in average prices while sales volumes showed a 11.2% increase. The downward trend in prices was explained by an oversupply mainly from Brazil, Chile, the United States and Asia, and seasonality in the northern hemisphere. Sawn timber had a 6.3% increase in average prices throughout 2018, partially offset by a 3.6% decrease in sales volume, which was mainly explained by lower demand from China, which in turn is related to the uncertainty surrounding the trade tensions between this country and the United States.

 

During 2019, average prices of our wood products decreased 4.5% compared to 2018. Our panels sales showed a 9.2% increase in volume, partially offset by a 1.3% decrease in average prices. Our volume increase in panels sales was mainly explained by the start-up of our new Grayling mill and our acquisition of the Mexican assets, in each case in the first quarter of 2019. In 2019, average prices for our sawn timber decreased 11.6%, and the volume of our sawn timber sales decreased 0.8%, which was mainly explained by the trade tension between China and the United States.

 

Prices for our forestry and sawn timber may decline in the future. Our results of operations may be materially affected if the prices of our products decline from current levels.

 

Costs and Expenses

 

Costs of Sale

 

Our major costs of sales are the following:

 

 

·

timber,

 

 

 

 

·

chemicals,

 

 

 

 

·

forestry labor,

 

 

 

 

·

depreciation and amortization,

 

 

 

 

·

maintenance,

 

 

 

 

·

other raw materials, and

 

 

 

 

·

energy and fuel.

 

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

 

In 2015, our cost of sales decreased 3.9% when compared to 2014. Energy and fuel costs decreased 25.5% when compared to 2014, mainly due to the global decline in crude oil prices and its derivatives. In addition, cost of timber declined 20.7% mainly due to the decrease in the volume of sales of sawn timber, especially in Chile. The depreciation of each of the Chilean peso, the Argentine peso and the Brazilian real against the U.S. Dollar had a positive effect on costs denominated in those depreciated currencies.

 

In 2016, our cost of sales decreased by 0.4% when compared to 2015. The cost of chemical products and energy and fuels for use during our production process decreased by 11.2% and 18.9% respectively, in each case compared to 2015. Energy prices followed a downward trend during the entire 2016, while fuel prices continued at levels much lower than their historical average (despite certain recovery in price levels during the second half of the year). Lower forestry labor costs also allowed for lower total cost of sales. A partially offsetting factor was the cost of timber which increased by 14.7% mostly as a result of our increase in sales volume in our pulp segment by 4.0% and an increase in the fair value cost of timber harvested by 10.9%.

 

 
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In 2017, our cost of sales increased by 2.2% compared to 2016. The cost of energy and fuels for our production processes increased by 33.3% and the cost for our chemical products increased by 8.0% in 2017 compared to 2016. Fuel prices rose during 2017, following an upward trend of various commodities. Higher indirect cost and forestry labor cost also had an impact on the higher cost of sales. These cost increases were partially offset by lower maintenance cost and other raw materials cost that decreased 16.2% and 14.9%, respectively, compared to 2016. 

 

In 2018, our costs of sales increased by 4.1% compared to 2017. The main reason was the 8.3% increase in the cost of chemical products used in our production processes. Additionally, the cost of forestry labor increased by 6.5% compared to 2017, and other raw materials costs were 21.1% higher. These higher costs were partially offset by a 4.7% decrease in the cost of wood and a 18.3% decrease in costs of electricity.

 

In 2019, our cost of sales increased by 5.0% compared to 2018. The main reason was the 27.3% increase in the cost of timber, due to a slight increase in pulp sales volume, the start-up of Grayling mill and the new Mexican subsidiaries acquired in January 2019. Additionally, due to the adoption of IFRS 16, depreciation of the right of use started to affect the cost of sales. Depreciation and amortization also increased by 9.7%. These increases were partially offset by a 18.5% decrease in forestry labor costs and lower indirect costs by 19.2%.

 

Distribution Costs

 

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

 

Administrative Expenses

 

Our major administrative expenses are wages and salaries, traffic, shipping and freight costs, information technology (IT) expenses, insurance expenses and commissions.

 

Critical Accounting Policies

 

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

 

Biological Assets

 

IAS 41 requires that biological assets, such as standing trees, be shown on our statement of financial position at fair value. Our forests are thus accounted for at fair value minus estimated point‑of‑sale costs at harvest, considering that the fair value of these assets can be measured reliably.

 

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

 

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

 

Impairment of goodwill

 

Determining whether goodwill is impaired requires an estimate of the value in use of the cash‑generating units to which goodwill has been allocated. We estimate the value either based on appraisals and/or the future cash flows expected to arise from the cash‑generating unit and a suitable discount rate to calculate present value. See Note 17 to our audited consolidated financial statements.

 

 
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Litigation and Contingencies

 

We and our subsidiaries and our Uruguayan joint operation Montes del Plata are subject to certain ongoing lawsuits, the future effects of which need to be estimated by our management in collaboration with our legal advisors. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company—We have been subject to legal proceedings related to our mills which could adversely affect our business, financial condition, results of operations and cash flows” and “Item 8. Financial Information—Legal Proceedings.” See Note 18 to our audited consolidated financial statements.

 

Recently Issued Accounting Standards

 

Note 1 to our audited consolidated financial statements discusses new standards, interpretations and amendments that are mandatory for the first time for the annual period beginning on January 1, 2019 and also the new standards, interpretations and amendments, the application of which is not yet mandatory, which have not been adopted in advance.

 

Results of Operations

 

The following table provides a breakdown of our financial results of operations and sales volumes as of and for the years ended December 31, 2017, 2018 and 2019. The table and the discussion that follows are based on and should be read in conjunction with our audited consolidated financial statements, including the notes thereto, as of and for the years ended December 31, 2017, 2018 and 2019 included elsewhere herein. The audited consolidated financial statements included herein are prepared in U.S. dollars and in accordance with IFRS.

 

 

 

For the year ended December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

 

Sales

 

 

%

 

 

Volume

 

 

Sales

 

 

%

 

 

Volume

 

 

Sales

 

 

%

 

 

Volume

 

 

 

(in millions of U.S. dollars, except percentages and volume)

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pulp

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bleached pulp(1)

 

 

1,981.6

 

 

 

37.2

 

 

 

3,270.9

 

 

 

2,536.9

 

 

 

42.6

 

 

 

3,188.6

 

 

 

2,062.4

 

 

 

39.4

 

 

 

3,327.8

 

Unbleached pulp(1)

 

 

314.5

 

 

 

5.9

 

 

 

475.5

 

 

 

418.4

 

 

 

7.0

 

 

 

494.2

 

 

 

293.3

 

 

 

5.6

 

 

 

445.1

 

Total

 

 

2,296.1

 

 

 

43.1

 

 

 

3,746.4

 

 

 

2,955.3

 

 

 

49.6

 

 

 

3,682.7

 

 

 

2,355.7

 

 

 

45.0

 

 

 

3,772.9

 

Wood Products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiberboard panels(2)

 

 

1,858.6

 

 

 

34.9

 

 

 

5,908.0

 

 

 

1,725.1

 

 

 

29.0

 

 

 

5,410.0

 

 

 

1,643.3

 

 

 

31.4

 

 

 

4,866.2

 

Sawn timber(2)

 

 

428.0

 

 

 

8.0

 

 

 

1,811.3

 

 

 

487.7

 

 

 

8.2

 

 

 

1,825.0

 

 

 

476.1

 

 

 

9.1

 

 

 

1,893.0

 

Remanufactured wood products(2)

 

 

250.1

 

 

 

4.7

 

 

 

442.7

 

 

 

252.6

 

 

 

4.2

 

 

 

437.7

 

 

 

259.3

 

 

 

5.0

 

 

 

445.0

 

Plywood

 

 

205.2

 

 

 

3.8

 

 

 

493.8

 

 

 

255.5

 

 

 

4.3

 

 

 

531.6

 

 

 

238.2

 

 

 

4.5

 

 

 

566.5

 

Total

 

 

2,741.9

 

 

 

51.4

 

 

 

8,655.8

 

 

 

2,721.0

 

 

 

45.7

 

 

 

8,204.3

 

 

 

2,616.9

 

 

 

50.0

 

 

 

7,770.7

 

Forestry

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Logs, net(2)

 

 

72.4

 

 

 

1.4

 

 

 

2,577.0

 

 

 

71.9

 

 

 

1.2

 

 

 

2,540.0

 

 

 

72.6

 

 

 

1.4

 

 

 

2,223.7

 

Chips

 

 

30.3

 

 

 

0.5

 

 

 

360.8

 

 

 

31.4

 

 

 

0.5

 

 

 

546.0

 

 

 

25.2

 

 

 

0.5

 

 

 

443.4

 

Other

 

 

26.0

 

 

 

0.5

 

 

 

1,229.5

 

 

 

4.1

 

 

 

0.1

 

 

 

0.1

 

 

 

8.2

 

 

 

0.1

 

 

 

5.2

 

Total

 

 

128.7

 

 

 

2.4

 

 

 

4,167.3

 

 

 

107.4

 

 

 

1.8

 

 

 

3,086.1

 

 

 

106.0

 

 

 

2.0

 

 

 

2,672.3

 

Energy

 

 

74.5

 

 

 

1.4

 

 

 

 

 

 

 

86.7

 

 

 

1.5

 

 

 

 

 

 

 

93.8

 

 

 

1.8

 

 

 

 

 

Other

 

 

88.0

 

 

 

1.7

 

 

 

 

 

 

 

84.4

 

 

 

1.4

 

 

 

 

 

 

 

65.9

 

 

 

1.2

 

 

 

 

 

Total revenue

 

 

5,329.2

 

 

 

100

 

 

 

 

 

 

 

5,954.8

 

 

 

100

 

 

 

 

 

 

 

5,238.3

 

 

 

100

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timber

 

 

(879.6 )

 

 

 

 

 

 

 

 

 

 

(691.1 )

 

 

 

 

 

 

 

 

 

 

(725.1 )

 

 

 

 

 

 

 

 

Forestry labor costs

 

 

(547.7 )

 

 

 

 

 

 

 

 

 

 

(672.2 )

 

 

 

 

 

 

 

 

 

 

(631.3 )

 

 

 

 

 

 

 

 

Maintenance costs

 

 

(294.9 )

 

 

 

 

 

 

 

 

 

 

(280.7 )

 

 

 

 

 

 

 

 

 

 

(262.8 )

 

 

 

 

 

 

 

 

Chemical costs

 

 

(557.1 )

 

 

 

 

 

 

 

 

 

 

(560.2 )

 

 

 

 

 

 

 

 

 

 

(517.5 )

 

 

 

 

 

 

 

 

Depreciation and amortization.

 

 

(414.1 )

 

 

 

 

 

 

 

 

 

 

(377.6 )

 

 

 

 

 

 

 

 

 

 

(389.8 )

 

 

 

 

 

 

 

 

    Other costs of sales

 

 

(1,217.0 )

 

 

 

 

 

 

 

 

 

 

(1,140.9 )

 

 

 

 

 

 

 

 

 

 

(1,048.0 )

 

 

 

 

 

 

 

 

Total cost of sales

 

 

(3,910.4 )

 

 

 

 

 

 

 

 

 

 

(3,722.7 )

 

 

 

 

 

 

 

 

 

 

(3,574.5 )

 

 

 

 

 

 

 

 

Gross profit

 

 

1,418.8

 

 

 

26.6 %

 

 

 

 

 

 

2,232.1

 

 

 

37.5 %

 

 

 

 

 

 

1,663.8

 

 

 

31.8 %

 

 

 

 

Other income

 

 

232.4

 

 

 

 

 

 

 

 

 

 

 

124.3

 

 

 

 

 

 

 

 

 

 

 

111.5

 

 

 

 

 

 

 

 

 

    Distribution costs

 

 

(586.9 )

 

 

 

 

 

 

 

 

 

 

(556.8 )

 

 

 

 

 

 

 

 

 

 

(523.3 )

 

 

 

 

 

 

 

 

    Administrative expenses

 

 

(554.0 )

 

 

 

 

 

 

 

 

 

 

(561.3 )

 

 

 

 

 

 

 

 

 

 

(521.3 )

 

 

 

 

 

 

 

 

Other expenses

 

 

(203.7 )

 

 

 

 

 

 

 

 

 

 

(95.9 )

 

 

 

 

 

 

 

 

 

 

(240.1 )

 

 

 

 

 

 

 

 

Other income (loss)

 

 

21.7

 

 

 

 

 

 

 

 

 

 

 

14.2

 

 

 

 

 

 

 

 

 

 

 

-

 

 

 

 

 

 

 

 

 

Financial income

 

 

32.6

 

 

 

 

 

 

 

 

 

 

 

20.9

 

 

 

 

 

 

 

 

 

 

 

19.6

 

 

 

 

 

 

 

 

 

Financial costs

 

 

(273.6 )

 

 

 

 

 

 

 

 

 

 

(214.8 )

 

 

 

 

 

 

 

 

 

 

(287.9 )

 

 

 

 

 

 

 

 

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

 

 

7.9

 

 

 

 

 

 

 

 

 

 

 

17.2

 

 

 

 

 

 

 

 

 

 

 

17.0

 

 

 

 

 

 

 

 

 

Exchange rate differences

 

 

(32.5 )

 

 

 

 

 

 

 

 

 

 

(26.5 )

 

 

 

 

 

 

 

 

 

 

0.1

 

 

 

 

 

 

 

 

 

Income before income tax

 

 

62.5

 

 

 

 

 

 

 

 

 

 

 

953.5

 

 

 

 

 

 

 

 

 

 

 

239.4

 

 

 

 

 

 

 

 

 

Income tax

 

 

(0.5 )

 

 

 

 

 

 

 

 

 

 

(226.8 )

 

 

 

 

 

 

 

 

 

 

31.0

 

 

 

 

 

 

 

 

 

Net income

 

 

62.0

 

 

 

 

 

 

 

 

 

 

 

726.8

 

 

 

 

 

 

 

 

 

 

 

270.4

 

 

 

 

 

 

 

 

 

_____________ 

(1)       Volumes measured in thousands of tonnes. Does not include subproduct sales (i.e. energy, chemicals) which are presented in the pulp reportable segment in Note 24 in our audited consolidated financial statements.

(2)       Volumes measured in thousands of cubic meters. Does not include subproduct sales (i.e. energy, chemicals) which are presented in the wood products reportable segment in Note 24 in our audited consolidated financial statements.

 

 
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Year Ended December 31, 2018 Compared to Year Ended December 31, 2019

 

Revenue

 

Revenues decreased 10.5%, from U.S.$5,954.8 million in 2018 to U.S.$5,329.2 million in 2019, primarily as a result of:

 

 

·

a 22.3%, or U.S.$659.2 million, decrease in revenues from pulp;

 

 

 

 

·

a 0.8%, or U.S.$20.9 million, increase in revenues from wood products; and

 

 

 

 

·

a 19.8%, or U.S.$21.3 million, increase in revenues from forestry products

 

Pulp. Revenues from bleached and unbleached pulp decreased 22.3%, from U.S.$2,955.3 million in 2018 to U.S.$2,296.1 million in 2019, mainly due to a 23.6% decrease in average prices, partially offset by a 1.7% increase in sales volume. Sales of bleached pulp decreased 21.9% mainly due to a 23.9% decrease in average prices, partially offset by a 2.6% increase in sales volume. Revenues from unbleached pulp decreased 24.8% during 2019, mainly due to a 21.9% decrease in average prices and a 3.8% decrease in sales volume. Prices for both types of fiber (softwood and hardwood) showed a similar downward trend throughout most of 2019, and demand stabilized only during the last quarter. Throughout 2019, both prices and sales volume were adversely affected by trade tensions between China and the United States, weak economic activity in Europe and high global inventory levels.

 

Wood products. Revenues from wood products increased 0.8%, from U.S.$2,721.0 million in 2018 to U.S.$2,741.9 million in 2019, primarily due to a 5.5% increase in sales volume, partially offset by a 4.5% decrease in average prices.

 

Revenues from panel products increased 7.7% from U.S.$1,725.1 million in 2018 to U.S.$1,858.6 million in 2019, due to a 9.2% increase in sales volume, partially offset by a 1.3% decrease in average prices. Our increased sales volume in 2019 was primarily due to increased production attributable to the start-up of our Grayling mill in April 2019 and our acquisition in January 2019 of the Mexican subsidiaries.

 

Revenues from sawn timber decreased 12.2%, from U.S.$487.7 million in 2018 to U.S.$428.0 million in 2019, mainly due to a 11.6% decrease in average prices and a 0.8% decrease in sales volume. The decrease in average prices was primarily due to trade tensions between China and the United States which resulted in lower demand during the second half of 2019 in our principal Asian markets.

 

Revenues from plywood decreased 19.7%, from U.S.$255.5 million in 2018 to U.S.$205.2 million in 2019, mainly due to a 13.6% decrease in average prices and a 7.1% decrease in sales volume.

 

 
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Revenues from remanufactured wood products sales decreased 1.0%, from U.S.$252.6 million in 2018 to U.S.$250.1 million in 2019, mainly due to a 2.1% decrease in average prices, partially offset by a 1.1% increase in sales volume.

 

Forestry products. Revenues from forestry products increased by 19.8%, from U.S.$107.4 million in 2018 to U.S.$128.7 million in 2019, mainly due to a U.S.$21.9 million increase in other sales, which mainly corresponded to sales of wood to third parties by our Brazilian subsidiaries.

 

Other revenue. Revenues from other sources, consisting mainly of sales of energy, chemicals and other services, decreased by 5.1% from U.S.$171.1 million in 2018 to U.S.$162.5 million in 2019, primarily as a result of a U.S.$12.3 million decrease in sales of energy.

 

Cost of sales

 

Cost of sales increased 5.0%, from U.S.$3,722.7 million in 2018 to U.S.$3,910.4 million in 2019, primarily as a result of (i) a 27.3% increase in timber costs mainly due to the start-up of our Grayling mill in the first quarter of 2019, the incorporation of our Mexican subsidiaries which we acquired in January 2019, and an increase in pulp sales volume, and (ii) the adoption of IFRS 16, effective as of January 1, 2019, which required depreciation of our right to use leased assets. These increases were partially offset by an 18.5% decrease in forestry labor costs.

 

Gross Profit

 

As a percentage of total revenue, our gross profit decreased from 37.5% in 2018 to 26.6% in 2019, primarily as a result of a 10.5% decrease in sales revenue and a 5.0% increase in our cost of sales.

 

Other income

 

Other income increased 87.0% from U.S.$124.3 million in 2018 to U.S.$232.4 million in 2019. This increase was mainly due to a U.S.$70.2 million increase in gains resulting from changes in fair value of biological assets and an increase of other operating results due to the sale of the shares of Puertos y Logística S.A. in April 2019.

 

Distribution costs

 

Distribution costs increased 5.4%, from U.S.$556.8 million in 2018 to U.S.$586.9 million in 2019, primarily due to a 7.2% increase, or U.S.$31.7 million, in freight costs. This increase was mainly explained by an increase in pulp sales volume. As a percentage of revenue, distribution costs increased to 11.0% in 2019, compared to 9.4% in 2018.

 

Administrative expenses

 

Administrative expenses decreased 1.3% from U.S.$561.3 million in 2018 to U.S.$554.0 million in 2019. This decrease was mainly explained by an U.S.$18.7 million decrease in wages and salaries, partially offset by the effect of IFRS 16 adoption, which became effective on January 1, 2019 and required depreciation of our right to use leased assets. As a percentage of revenue, administrative expenses increased to 10.4% in 2019, compared to 9.4% in 2018.

 

Other expenses

 

Other expenses increased 112.5%, from U.S.$95.9 million in 2018 to U.S.$203.7 million in 2019, mainly due to an increase of U.S.$87.1 million in an impairment provision for property, plant and equipment, primarily in some of our North American mills and the Arauco mill. The impairment provision with respect to the Line 1 of the Arauco Mill totaled approximately U.S.$33.6 million in 2019. Line 1 will be permanently shut down when the MAPA project is completed.

 

Other income (loss)

 

Other income (loss) increased 52.5%, from U.S.$14.2 million in 2018 to U.S.$21.7 million in 2019, mainly due to a bargain purchase gain recognized following our acquisition of the Mexican panel assets in January 2019.

 

 
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Finance costs

 

Finance costs increased 27.4%, from U.S.$214.8 million in 2018 to U.S.$273.6 million in 2019, primarily due to an increase in interest payments related to bonds (which include premiums and accrued interest paid with respect to the repurchase of bonds on April and October 2019) and an increase in our interest on the right of use leased assets due to the adoption of IFRS 16.

 

Exchange rate differences

 

Losses from exchange rate differences increased 22.8%, from U.S.$26.5 million in 2018 to U.S.$32.5 million in 2019, primarily due to the depreciation in 2019 of the Argentine peso, the Brazilian reais and the Chilean Peso against the US dollar. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada.”

 

Income tax

 

We recorded an income tax expense of U.S.$0.5 million in 2019 compared to an expense of U.S.$226.8 million in 2018. This decrease was primarily attributable to a lower pre-tax income.

 

Net income

 

Net income decreased 91.5% from U.S.$726.8 million in 2018 to U.S.$62.0 million in 2019. This is mainly explained by lower sales in our pulp business, which in the aggregate decreased our gross profit by U.S.$813.3 million, and an increase in other operating expenses.

 

Year Ended December 31, 2017 Compared to Year Ended December 31, 2018

 

Revenue

 

Revenues increased by 13.7% from U.S.$5,238.3 million in 2017 to U.S.$5,954.8 million in 2018, primarily as a result of:

 

 

·

a 25.5%, or U.S.$599.6 million, increase in revenues from pulp;

 

 

 

 

·

a 4.0%, or U.S.$104.1 million, increase in revenues from wood products;

 

 

 

 

·

a 1.3%, or U.S.$1.4 million, increase in revenues from forestry products

 

Pulp. Revenues from bleached and unbleached pulp increased by 25.5% from U.S.$ 2,355.7 million in 2017 to U.S.$2,955.3 million in 2018, reflecting a 28.5% increase in average prices, partially offset by a 2.4% decrease in sales volume. Sales of bleached pulp increased by 23.0% due to a 28.4% increase in average prices, partially offset by a 4.2% decrease in sales volume. Revenues from unbleached pulp increased by 42.6% during 2018, mainly due to a 28.5% increase in average prices and a 11.0% increase in sales volume. Prices for both types of fiber (softwood and hardwood) showed a similar upward trend throughout most of 2018, and demand remained stable until the last quarter. By the end of the year, both prices and demand were impacted by the effects of the trade tensions between China and the United States.

 

Wood products. Revenues from wood products increased by 4.0% from U.S.$2,616.9 million in 2017 to U.S.$2,721.0 million in 2018, primarily due to a 5.6% increase in sales volume, partially offset by a slight average price decrease of 1.5%.

 

Fiberboard panels products sales had a 5.0% increase compared to 2017, driven by a 11.2% increase in sales volume, which was partially offset by an average price decrease of 5.6%.

 

Revenues from sawn timber increased by 2.4%, from U.S.$476.1 million in 2017 to U.S.$487.7 million in 2018 due to a 6.3% increase in average prices, partially offset by a 3.6% decrease in sales volume. Trade tension between China and the United States resulted in lower demand during the second half of 2018 from the Asian markets. Plywood revenues increased by 7.3% from U.S.$238.2 million in 2017 to U.S.$255.5 million in 2018, mainly due to a 14.3% increase in average prices, slightly offset by 6.2% decrease in sales volume.

 

Forestry products. Revenues from forestry products increased by 1.3% from U.S.$106.0 million in 2017 to U.S.$107.4 million in 2018. This increase was primarily the result of a U.S.$6.2 million increase in chips sales partially offset by a slight decrease in logs sales of 1.1%, explained by a U.S.$6.1 million decrease in pulplogs sales. 

 

 
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Other revenue. Revenues from other sources, consisting mainly of sales of energy, chemicals and other services, increased by 7.1% from U.S.$159.7 million in 2017 to U.S.$171.1 million in 2018, primarily as a result of a U.S.$18.5 million increase in other export sales of fire-damaged wood. This was partially offset by a U.S.$7.0 million decrease in energy sales.

 

Cost of sales

 

Cost of sales increased by 4.1% from U.S.$3,574.5 million in 2017 to U.S.$3,722.7 million in 2018, primarily as a result of a 8.3% increase in chemical products and a 6.5% increase in forestry labor cost due to higher production. These increased costs were partially offset by a 4.7% decrease in the cost of timber.

 

Gross Profit

 

As a percentage of total revenue, our gross profit increased from 31.8% in 2017 to 37.5% in 2018, primarily as a result of a 13.7% increase in sales revenue, while cost of sales rose slightly by 4.1%.

 

Other income

 

Other income increased by 11.5% from U.S.$111.5 million in 2017 to U.S.$124.3 million in 2018. This was mainly due to compensations received in our energy business of U.S.$4.6 million and an increase of profits from changes in the fair value of our biological assets of U.S.$1.4 million.

 

Distribution costs

 

Distribution costs increased by 6.4% from U.S.$523.3 million in 2017 to U.S.$556.8 million in 2018, primarily due to an increase of 7.6%, or U.S.$31.1 million in total freight costs. This increase was mainly explained by higher freight tariffs in the United States (due to a certified truck driver shortage), and higher sales volume. As a percentage of revenue, distribution costs remained fairly stable at 9.4% in 2018, compared to 10.0% in 2017.

 

Administrative expenses

 

Administrative expenses increased by 7.7% from U.S.$521.3 million in 2017 to U.S.$561.3 million in 2018. As a percentage of revenue, administrative expenses remained stable at 9.4% in 2018, compared to 10.0% in 2017.

 

Other expenses

 

Other expenses decreased by 60.0% from U.S.$240.2 million in 2017 to U.S.$95.9 million in 2018 due to lower forestry fires in comparison with the ones affecting our forests during 2017.

 

Other income (loss)

 

Other income (loss) reached U.S.$14.2 million in 2018, explained by a profit due to bargain acquisition recognized following the acquisition of Masisa’s assets in Brazil.

 

Finance costs

 

Finance costs decreased by 25.4%, from U.S.$287.9 million in 2017 to U.S.$214.8 million in 2018, primarily due to lower incurred costs compared to 2017 when we repurchased our Notes due in 2019, 2021 and 2022, including a premium payment that amounted to approximately U.S.$60 million.

 

Exchange rate differences

 

Losses from exchange rate differences totaled U.S.$26.5 million in 2018 compared to the U.S.$0.1 million gain in 2017. These losses were primarily due to the depreciation of the Argentine peso, the Brazilian real and the Chilean peso. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada.”

 

Income tax

 

We recorded an income tax expense of U.S.$226.8 million in 2018 compared to a gain of U.S.$31.0 million in 2017. This increase was attributable to our higher income from operational activities in 2018, which is mainly explained by higher revenues in Chile by 18.5%. During 2017 we had a positive effect in deferred taxes, as a result of tax rate reductions in the United States and Argentina which accounted for U.S.$17.6 million and U.S.$62.7 million, respectively.

 

 
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Net income

 

Net income in 2018 increased by 168.8% from U.S.$270.4 million in 2017 to U.S.$726.8 million in 2018. This is explained by higher sales in our different business segments, which in the aggregate increased our gross profit by 34.2% or U.S.$568.3 million, as well as a decrease in financial costs and other operating expenses, all of which was partially offset by higher income tax losses.

 

Liquidity and Capital Resources

 

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

 

Arauco has a liquidity policy, approved by the Board of Directors, which maintains conservative criteria regarding Arauco’s liquidity management.

 

As of December 31, 2019, we had access to two committed credit facility lines, which totaled U.S.$314.4 million. The first line had an available amount of UF 2,885,000, or approximately U.S.$109.0 million and expired on January 29, 2020 and was not renewed. The second line had a maximum available amount of U.S.$200.0 million and expired on March 27, 2020. This line was terminated in advance, due to a new committed credit facility line that we entered into on February 20, 2020, for a total amount of U.S.$375.0 million and expires on February 20, 2025. To date, we have not drawn on under this credit facility.

 

Cash Flow from Operating Activities

 

Our net cash flow provided by operating activities was U.S.$672.8 million in 2019 and U.S.$1,287.5 million in 2018. This decrease was principally due to a U.S.$239.3 million increase in income tax paid and received due to the annual income tax that was paid in April 2019. Additionally, proceeds from sales of goods and rendering of services decreased U.S.$216.4 million, which was partially offset by a U.S.$118.4 million increase in other cash receipts from operational activities.

 

Our net cash flow provided by operating activities was U.S.$1,287.5 million in 2018 and U.S.$1,072.4 million in 2017. This increase was principally due to a U.S.$621.1 million increase in sales of goods and services, partially offset by a U.S.$348.4 million increase in payments to suppliers and employees.

 

Cash Flow Used in Investing Activities

 

Our net cash used in investing activities was U.S.$1,317.7 million in 2019 and U.S.$894.0 million in 2018. This increase was principally due to an increase in purchases of property, plant and equipment of 48.0%, or U.S.$324.4 million, mainly as a result of investments related to the “MAPA” project. Capital expenditures in 2019 mainly included U.S.$500.7 million in the “MAPA” project, U.S.$107.0 million in the “Dissolving Pulp” project and U.S.$36.2 million in the Grayling mill.

 

Our net cash used in investing activities was U.S.$894.0 million in 2018 and U.S.$633.3 million in 2017. This increase was principally due to an increase in capital expenditures of 50.8%, or U.S.$227.7 million, mainly as a result of purchases of property, plant and equipment. Capital expenditures in 2018 included U.S.$196.6 million in the “MDP Grayling” project in Michigan (United States), U.S.$124.9 million in the “MAPA” project, U.S.$52.9 million in the “Dissolving Pulp” project and U.S.$16.2 million in the water treatment plant in the Arauco mill.

 

Cash Flow from Financing Activities

 

Our net cash provided by financing activities was U.S.$1,147.4 million in 2019, compared to U.S.$123.2 million in 2018. During 2019, we received U.S.$2,142.4 million in loan proceeds, and we paid U.S.$802.3 million of principal and interest on our debt. In addition, we paid U.S.$182.1 million in dividends.

 

Our net cash provided by financing activities was U.S.$123.2 million in 2018, compared to the U.S.$439.1 million used in 2017. During 2018, we received U.S.$863.6 million in loan proceeds, and we paid U.S.$481.9 million of principal of and interest on our debt. In addition, we paid U.S.$257.4 million in dividends.

 

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

 

Contractual Obligations

 

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

 

The following table sets forth certain contractual obligations as of December 31, 2019, and the period in which the contractual obligations come due.

 

 

 

Payments Due by Period

 

 

 

Less than 1
year

 

 

1‑3 years

 

 

3‑5 years

 

 

More than
5 years

 

 

Total

 

 

 

(in thousands of U.S. dollars)

 

Debt obligations (1)

 

 

635,651

 

 

 

839,491

 

 

 

1,487,340

 

 

 

6,265,315

 

 

 

9,227,797

 

Purchase obligations (2)

 

 

530,889

 

 

 

556,557

 

 

 

-

 

 

 

-

 

 

 

1,087,446

 

Lease obligations

 

 

83,204

 

 

 

139,179

 

 

 

63,510

 

 

 

128,874

 

 

 

414,767

 

Total

 

 

1,249,744

 

 

 

1,535,227

 

 

 

1,550,850

 

 

 

6,394,189

 

 

 

10,730,010

 

________________ 

(1)   

Includes estimated interest payments related to debt obligations based on market values as of December 31, 2019. In the case of floating rate debt, interest rate is calculated using the current index setting in place as of December 31, 2019 and assume no changes in the year‑end index for any of the future periods. The interest rate on our floating rate debt is determined principally by reference to the London inter‑bank offered rate (LIBOR), and as of December 31, 2019, the average spread for our U.S. dollar floating rate debt over six‑month LIBOR was 1.47%. Approximately 11.0% of our total debt is floating rate debt as December 31, 2019.

(2)

Excludes contracts entered into with independent contractors to perform operations on our behalf. Our payment obligations under such contracts are not pre‑determined, but rather depend on the performance of certain variables. Accordingly, we cannot quantify our contractual obligations under such contracts.

 

Investing Activities

 

During 2019, our main investment activities were investments in projects; sustaining our panel, sawmill and pulp mills, and sustaining our biological assets. The project capitalization investments included primarily:

 

 

· 

U.S.$500.7 million invested in the “MAPA” project;

 

·

U.S.$107.0 million invested in the “Dissolving Pulp” project; and

 

·

U.S.$36.2 million invested in the “MDP Grayling” project.

 

Financing Activities in 2019

 

During 2019, our principal financing activities were as follows:

 

On December 19, 2019, we redeemed in full our outstanding 5.000% notes due 2021, including a make-whole payment of U.S.$91.7 million.

 

On October 29, 2019, we issued two series of sustainability bonds in the international capital markets for a total amount of U.S.$1,000.0 million (one series with a 10-year maturity and the other one with a 30-year maturity). The amount of the issuance was U.S.$500.0 million for each of those series. The proceeds of the issuance were used (A) to finance part of the “MAPA” project, (B) to repurchase part of the following bonds issued by us in the United States: (i) U.S.$43.5 million (out of U.S.$135.1 million) of the 5.000% Notes due 2021, and (ii) U.S.$129.7 million (out of U.S.$255.9 million) of the 4.750% Notes due 2022, and (C) for other capital management activities. These bonds were the first sustainable bonds issued by us; we were the first forestry company in Latin America to issue a sustainable bond. These bonds are classified as “sustainable” since, regardless of the use of proceeds described above, we will allocate an amount equivalent to the resources obtained from such issuance and placement to finance or refinance, in whole or in part, one or more green (environmental) and social projects selected for the purposes of the issuance in accordance with the Sustainability Bond Framework adopted by us.

 

 
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On July 29, 2019, we made a final payment of U.S.$169.6 million to repay in full our 7.250% Notes due 2019.

 

On April 30, 2019, we issued two series of bonds in the international capital markets for a total amount of U.S.$1,000.0 million (one series with a 10-year maturity and the other one with a 30-year maturity). The amount of the issuance was U.S.$500.0 million for each of those series. The proceeds of the issuance were used (A) to finance part of the “MAPA” project, (B) to repurchase part of the following bonds issued by us in the United States: (i) U.S.$33.2 million (out of U.S.$202.8 million) of the 7.250% Notes due 2019 and (ii) U.S.$65.1 million (out of U.S.$200.3 million) of the 5.000% Notes due 2021, and (C) for other general corporate purposes.

 

On April 1, 2019, we signed an export credit agreement with Finnvera (the Finnish state-owned financing company) and three banks entities (BNP Paribas, JP Morgan Chase & Co. and Santander) for a total amount of €555.0 million. The agreement sets forth the disbursement period during the construction of the “MAPA” project and a 8.5 year maturity period with equal amortizations installments. The funds will be used to purchase the main equipment for the “MAPA” project from the main suppliers (i.e., Andritz and Valmet). As of December 31, 2019, the total amount disbursed was €112.4 million. Since Finnvera provides export financing to companies that can comply with Finnvera’s environmental and social requirements, the fact that we entered into this credit agreement evidences our commitment with sustainable development, as well as our compliance with those sustainability standards imposed by Finnvera.

 

As of December 31, 2019, the current portion of our bank debt was U.S.$183.3 million of which 97.6% was U.S. dollar‑denominated. As of December 31, 2019, our total non‑current portion of our bank debt was U.S.$763.7 million of which 84.5% was U.S. dollar‑denominated.

 

As of December 31, 2019, we also had total capital markets borrowings (including the current portion of such debt) of U.S.$ 4.8 billion, 72.5% of which were U.S. dollar‑denominated.

 

          As of December 31, 2019, the weighted average maturity of our non‑current debt was 16.17 years. The interest rate on our floating rate debt is determined principally by reference to the London inter‑bank offered rate (LIBOR), and as of December 31, 2019, the average spread for our U.S. dollar floating rate debt over six‑month LIBOR was 1.47%. As of December 31, 2019, the average interest rate for our U.S. dollar fixed rate debt was 4.52%. These average rates do not reflect the effect of swap agreements.

 

          As of December 31, 2019, we guaranteed obligations of U.S.$236.1 million related to Montes del Plata, U.S.$300.0 million related to Arauco North America and U.S.$7.0 million related to Arauco Forest Brazil and Mahal.

 

The instruments and agreements governing our bank loans and local bonds set limits on our incurrence of debt and liabilities through the use of financial covenants. The principal financial covenants contained in our bank loan agreements in effect on December 31, 2019 are as follows:

 

 

· 

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

 

 

 

 

·

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

 

The principal financial covenant contained in our local bond agreements in effect on December 31, 2019 is:

 

 

·    

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

 

We were in compliance with all bank loan and bond covenants as of December 31, 2019. Our U.S. dollar‑denominated bonds do not contain financial covenants.

 

 
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Off-balance Sheet Arrangements

 

We do not have any off‑balance sheet arrangements.

 

 

 

 

 

 

 
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Treasury Management

 

Our corporate financial policy establishes a set of guidelines, procedures and responsibilities to minimize certain financial risks to which we are exposed and to regulate such policy with a global corporate view. This policy seeks to manage such risks in our best interests, covering all countries where we operate, and is administered by our Corporate Finance Department (based in Chile).

 

We manage the treasury activities of all our Chilean subsidiaries and certain foreign subsidiaries on a centralized basis. In the case of our Argentine, Mexican and Brazilian subsidiaries, our Corporate Finance Department supervises and controls compliance with our finance policies but their daily treasury activities are managed independently.

 

The treasury activities of our Uruguayan joint operations are governed by a corporate financial policy approved by its board of directors based on the same principles underlying our cash and deposits policy. In addition, the Uruguayan joint operations are supervised by a financial committee integrated by members of both shareholders’ finance departments.

 

The treasury activities of Sonae Arauco, our joint venture with Sonae, are governed by a corporate financial policy approved by its board of directors, based on the same principles underlying our cash and deposits policy. In addition, they are supervised by a financial committee integrated by members of both shareholders.

 

 
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Hedging

 

We periodically review our exposure to risks arising from fluctuations in foreign exchange rates and interest rates and decide, on a case‑by‑case basis, at our senior management level whether to hedge such risks. Our Derivatives Policy establishes the minimum requisites our counterparties must meet, as well as proper procedures. As a result, from time to time we enter into currency and interest rate swaps with respect to a portion of our borrowings. See Note 23 to our audited consolidated financial statements. Arauco applies hedge accounting for financial instruments whose purpose is to hedge against foreign currency fluctuations.

 

Cross Currency Swap Agreements

 

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

 

 

 

UF Notional
Amount

 

 

U.S.$ Notional

Amount

 

 

Hedging Start

Date

 

Maturity

 

Deutsche – U.K.

 

 

909,091

 

 

 

39,653,006

 

 

10/30/2011

 

10/30/2021

 

JPMorgan – N.A.

 

 

909,091

 

 

 

39,653,006

 

 

10/30/2011

 

10/30/2021

 

Scotiabank – Chile

 

 

909,091

 

 

 

34,933,122

 

 

04/30/2014

 

04/30/2023

 

Scotiabank – Chile

 

 

909,091

 

 

 

34,889,491

 

 

04/30/2014

 

04/30/2023

 

Santander – Chile

 

 

909,091

 

 

 

34,524,604

 

 

04/30/2014

 

04/30/2023

 

BCI – Chile

 

 

909,091

 

 

 

34,201,420

 

 

04/30/2014

 

04/30/2023

 

Banco de Chile – Chile

 

 

909,091

 

 

 

34,524,605

 

 

10/30/2019

 

10/30/2029

 

Itaú Corpbanca – Chile

 

 

1,000,000

 

 

 

42,864,859

 

 

09/01/2010

 

09/01/2020

 

Scotiabank – Chile

 

 

1,000,000

 

 

 

42,864,859

 

 

09/01/2010

 

09/01/2020

 

Deutsche – U.K.

 

 

1,000,000

 

 

 

42,864,859

 

 

09/01/2010

 

09/01/2020

 

Santander – Spain

 

 

1,000,000

 

 

 

42,873,112

 

 

09/01/2010

 

09/01/2020

 

Scotiabank – Chile

 

 

1,000,000

 

 

 

42,864,257

 

 

09/01/2010

 

09/01/2020

 

Itaú Corpbanca – Chile

 

 

1,000,000

 

 

 

46,474,122

 

 

05/15/2012

 

11/15/2021

 

JPMorgan – N.A.

 

 

1,000,000

 

 

 

47,163,640

 

 

11/15/2012

 

11/15/2021

 

Scotiabank – Chile

 

 

1,000,000

 

 

 

42,412,852

 

 

11/15/2013

 

11/15/2023

 

Santander – Chile

 

 

1,000,000

 

 

 

41,752,718

 

 

11/15/2013

 

11/15/2023

 

Deutsche – U.K.

 

 

1,000,000

 

 

 

41,752,718

 

 

11/15/2013

 

11/15/2023

 

BCI - Chile

 

 

375,000

 

 

 

16,194,459

 

 

10/01/2014

 

04/01/2021

 

BCI - Chile

 

 

375,000

 

 

 

16,198,761

 

 

10/01/2014

 

04/01/2021

 

Santander – Chile

 

 

3,000,000

 

 

 

128,611,183

 

 

10/01/2014

 

04/01/2024

 

JPMorgan – U.K.

 

 

1,000,000

 

 

 

43,185,224

 

 

10/01/2014

 

04/01/2024

 

Itaú Corpbanca – Chile

 

 

1,000,000

 

 

 

43,277,070

 

 

10/01/2014

 

04/01/2024

 

Santander – Chile

 

 

5,000,000

 

 

 

201,340,031

 

 

11/15/2016

 

11/15/2026

 

Goldman Sachs – N.A.

 

 

1,000,000

 

 

 

40,521,750

 

 

10/10/2018

 

10/10/2028

 

Scotiabank – Chile

 

 

1,000,000

 

 

 

40,537,926

 

 

10/10/2018

 

10/10/2028

 

Goldman Sachs – N.A.

 

 

1,000,000

 

 

 

40,066,555

 

 

10/10/2018

 

10/10/2028

 

Santander – Chile

 

 

3,000,000

 

 

 

118,400,504

 

 

10/10/2018

 

10/10/2038

 

Santander – Chile

 

 

2,500,000

 

 

 

97,971,786

 

 

10/10/2018

 

10/10/2038

 

Total

 

 

35,613,636

 

 

 

1,472,572,499

 

 

 

 

 

 

 

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

 

We have outstanding the following cross currency swap agreements in Chile to hedge our bank loans denominated in Euro:

 

 

 

EUR Notional
Amount

 

 

U.S.$ Notional

Amount

 

 

Hedging

Start Date

 

Maturity

 

Santander – Chile

 

 

100,000,000

 

 

 

118,670,000

 

 

06/15/2021

 

12/15/2029

 

Banco de Chile – Chile

 

 

50,000,000

 

 

 

59,335,000

 

 

06/15/2021

 

12/15/2029

 

MUFG Bank – Japan

 

 

100,000,000

 

 

 

118,670,000

 

 

06/15/2021

 

12/15/2029

 

JP Morgan – N.A.

 

 

200,000,000

 

 

 

237,340,000

 

 

06/15/2021

 

12/15/2029

 

HSBC – N.A.

 

 

50,000,000

 

 

 

59,335,000

 

 

06/15/2021

 

12/15/2029

 

Total

 

 

500,000,000

 

 

 

593,350,000

 

 

 

 

 

 

 

 
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Through these cross-currency swap agreements we receive cash flows in EUR, which allow us to comply with the terms of our outstanding bank liabilities and pay fixed amounts in U.S. dollars, the currency in which a significant amount of our assets and sales are denominated.

 

The aggregate fair value of our UF and EUR cross‑currency swap agreements as of December 31, 2019, represented a liability of U.S.$106.6 million as compared to December 31, 2018, when they represented a liability of U.S.$51.2 million.

 

Interest Rate Swap Agreements

 

We have outstanding the following interest rate swap agreements to hedge fluctuations in floating rates for long‑term debt in Uruguay:

 

Bank

 

Currency

U.S.$ Notional Amount

DNB Bank ASA

 

USD

 

33,758,405(1)

 

(1)   U.S.$ notional amount includes multiple contract agreements.

 

The fair value of this agreement as of December 31, 2019, represented a liability of U.S.$7.6 million for Arauco. The notional amount shown in the table above and the fair value account for 50% of the notional amount and the fair value respectively, since these agreements were entered into by Montes del Plata (of which Arauco owns 50% of its shares).

 

Forward Agreements

 

As of December 31, 2019, we have outstanding forward agreements in Chile, Colombia and Uruguay to hedge fluctuations in the respective local currencies, as follows:

 

Bank

 

Exchange Rate

 

U.S.$ Notional

Amount

 

 

Hedging Start

Date

 

 

Maturity

 

Banco de Chile – Chile

 

USD-CLP

 

 

47,198,102

 

 

10/11/2019

 

 

12/11/2020

 

Banco de Chile – Chile

 

USD-CLP

 

 

47,136,593

 

 

10/11/2019

 

 

12/11/2020

 

BCI – Chile

 

USD-CLP

 

 

47,061,633

 

 

10/11/2019

 

 

12/11/2020

 

Itaú Corpbanca – Chile

 

USD-CLP

 

 

47,102,491

 

 

10/11/2019

 

 

12/11/2020

 

Itaú Corpbanca – Chile

 

USD-CLP

 

 

46,838,174

 

 

10/11/2019

 

 

12/11/2020

 

Itaú Corpbanca – Chile

 

USD-CLP

 

 

49,519,410

 

 

10/11/2019

 

 

12/11/2020

 

BCI – Chile

 

USD-CLP

 

 

48,292,295

 

 

10/11/2019

 

 

12/11/2020

 

Itaú Corpbanca – Chile

 

USD-CLP

 

 

51,267,096

 

 

01/10/2020

 

 

12/11/2020

 

Scotiabank – Chile

 

USD-CLP

 

 

51,222,327

 

 

01/10/2020

 

 

12/11/2020

 

Corpbanca Colombia

 

USD-COP

 

 

2,000,000

 

 

11/07/2019

 

 

01/14/2020

 

Corpbanca Colombia

 

USD-COP

 

 

1,700,000

 

 

11/25/2019

 

 

02/11/2020

 

Banco Santander Uruguay

 

USD‑UYU

 

 

8,070,000 (1)

 

 

 

 

HSBC Uruguay

 

USD‑UYU

 

 

12,915,000 (1)

 

 

 

 

Citibank U.K.

 

USD‑UYU

 

 

1,500,000 (1)

 

 

-

 

 

 

-

 

Banco Itaú Uruguay

 

USD-UYU

 

 

3,710,000 (1)

 

 

-

 

 

 

-

 

Citibank U.K.

 

USD-EUR

 

 

833,000 (1)

 

 

 

 

 

(1)     U.S.$ notional amount includes multiple contract agreements.

 

The fair value of these agreements as of December 31, 2019, represented a liability of U.S.$18.3 million, which includes the Chilean and the Colombian forward agreements and the 50% of total fair value of the forward agreements entered into by Montes del Plata (of which Arauco owns 50% of its shares).

 

 
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Commodity Swap Agreements

 

We have also analyzed our exposure to risks associated with fluctuations in the prices of commodities, including fuel oil. As of December 31, 2019, we had outstanding the following commodity swap agreements to hedge fluctuations in the prices of fuel oil in Uruguay:

 

Bank

 

Exchange Rate

 

U.S.$ Notional Amount

JPMorgan Chase Bank, N.A.

 

Fuel Oil No. 6

 

6,924,720(1)

DNB Bank ASA

 

Fuel Oil No. 6

 

5,241,366(1)

 

(1)     U.S.$ notional amount includes multiple contract agreements.

 

The fair value of these agreements as of December 31, 2019, represented an asset of U.S.$1.4 million for Arauco. The notional amount shown in the table above and the fair value account for 50% of the notional amount and the fair value, respectively, since these agreements were entered into by Montes del Plata (of which Arauco owns 50% of its shares).

 

Research and Development

 

We spent U.S.$9.8 million in 2017, U.S.$12.0 million in 2018 and U.S.$10.9 million in 2019 on research and development. We conduct our principal research and development programs through our subsidiary, Bioforest, which concentrates its efforts on applying and implementing advanced technologies to the specific characteristics of our forests and mills.

 

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

 

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

 

 
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Trend Information

 

Pulp

 

At the end of 2019, pulp demand in China started showing better signs mainly due to the easing of trade-related tensions between China and the United States, and lower inventories in both softwood and hardwood pulp. However, during Chinese New Year celebrations, the COVID-19 epidemic appeared, and we faced some logistic issues in China because of the difficulties in ports and transportation. For March orders, our prices were slightly affected in short fiber, mainly because of uncertainty in the market. At the end of March, with the apparent control of the disease, we saw that logistics were normalizing and demand remained stable mainly due to higher tissue consumption and restocking by paper producers.

 

In Europe, during December 2019 and January 2020, we saw an active pulp demand but with the arrival of the COVID-19 there is a lot of uncertainty because of the impact that the disease may cause in demand and normal operations, especially in Italy and Spain. Until March 2020, we were still having a healthy demand specially from tissue producers. The rapid advance of the pandemic in Europe may cause a negative impact on demand and logistics.

 

In relation to our pulp mills as of March 2020, regarding COVID-19, wood pulp production was declared as an essential business by the authorities in the countries where we have operations. Nevertheless, in some of them we have had some positive tested direct or indirect employees and we have taken all the actions required by governmental authorities.

 

Regarding the MAPA project, as of March 2020, we had an advance of 44.6%. Due to the effects of COVID-19, additionally to the measures we have taken in all of our mills, contractors and subcontractors were adopting additional measures to strengthen sanitary conditions.

 

Wood Products

 

At the beginning of 2020, the trend for panels was positive. In the United States, the Housing Starts index appeared to maintain a healthy trend reaching approximately 1.6 million units per year in February. Mexico was showing a good demand even with a weak economic activity. Brazil and Argentina were recovering volumes and, in some products obtaining better margins. But the effects of COVID-19 put a lot of uncertainty in these markets. Lower construction figures, restrictions in logistics and the quarantine declared in some countries adversely impacted the demand of our products. In the United States, Canada and Argentina this industry was declared essential. The rapid advance of the pandemic in our principal markets, including North America, may have a material negative impact on demand and logistics.

 

In the case of sawn timber and remanufactured wood products, the uncertainty is also adversely affecting demand in some markets. Nevertheless, in the case of China and other Asian markets we are seeing a good demand.

 

For more information regarding trends in our business, see “Item 5. Operating and Financial Review and Prospects—Management’s Discussion and Analysis of Financial Condition —Results of Operations and Cash Flows —Overview”.” For risks affecting our business, see “Item 3. Key Information—Risk Factors.”

 

 
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Item 6. Directors, Senior Management and Employees

 

DIRECTORS AND EXECUTIVE OFFICERS

 

Directors

 

A Board of Directors manages our business. Our estatutos (by‑laws) require that the Board of Directors consist of nine directors. Our directors cannot also be our executives. The entire board is elected every three years and can be re‑elected for any number of periods. The current board was elected in April 2017, and their terms will be renewed in April 2020. It is expected that in the next shareholders’ meeting of the Company, scheduled to be held on April 21, 2020, the current board will be re-elected. The board may appoint replacements to fill any vacancies that occur during periods between elections; however, at the annual shareholders’ meeting following any such replacement, an election of the entire board must take place. Scheduled meetings of the Board of Directors are generally held once a month. Extraordinary board meetings are called when summoned by the Chairman or when requested by at least two directors. We have not entered into any contracts with our current directors to provide any benefits upon the termination of their relationship with us. We do not have a compensation committee.

 

Our current directors are listed below.

 

Name

 

Years as Director

 

 

Position

 

Age

 

Manuel Bezanilla

 

33

 

 

Chairman

 

75

 

Roberto Angelini

 

33

 

 

First Vice‑Chairman

 

71

 

Jorge Andueza

 

26

 

 

Second Vice‑Chairman

 

71

 

Alberto Etchegaray

 

26

 

 

Director

 

74

 

Eduardo Navarro

 

12

 

 

Director

 

54

 

Timothy C. Purcell

 

15

 

 

Director

 

60

 

Franco Mellafe

 

5