Arauco & Constitution Pulp 20F 2017 Annual report

Arauco & Constitution Pulp 20-F2017 FY Annual report (foreign)

Content analysis

As filed with the Securities and Exchange Commission on April 23, 2018

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017

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

14^th Floor

Las Condes, Santiago

Chile

(Address of principal executive offices)

Gianfranco Truffello

Tel.:56-2-2461-7221

E-mail:gianfranco.truffello@arauco.cl

Avenida El Golf 150

14^th 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:

7.250% Notes due 2019

5.000% Notes due 2021

4.750% Notes due 2022

4.500% Notes due 2024

3.875% Notes due 2027

5.500% Notes due 2047

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 awell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ 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 ☐ 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 ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

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. ☐

†	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 ☐

International Financial Reporting Standards as issued

by the International Accounting Standards Board ☒

Other ☐

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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes ☐ No ☒

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		20

Item 5.	Operating and Financial Review and Prospects		49

Item 6.	Directors, Senior Management and Employees		69

Item 7.	Major Shareholders and Related Party Transactions		76

Item 8.	Financial Information		78

Item 9.	The Offer and Listing		81

Item 10.	Additional Information		82

Item 11.	Quantitative and Qualitative Disclosures About Market Risk		91

Item 12.	Description of Securities Other than Equity Securities		93

PART II

Item 13.	Defaults, Dividend Arrearages and Delinquencies		94

Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		94

Item 15.	Controls and Procedures		94

Item 16A.	Audit Committee Financial Expert		95

Item 16B.	Code of Ethics		95

Item 16C.	Principal Accountant Fees and Services		95

Item 16D.	Exemptions from the Listing Standards for Audit Committees		97

Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		97

Item 16F.	Change in Registrant’s Certifying Accountant		97

Item 16G.	Corporate Governance		97

Item 16H.	Mine Safety Disclosures		97

PART III

Item 17.	Financial Statements		97

Item 18.	Financial Statements		97

Item 19.	Exhibits		98

CERTAIN TERMS AND CONVENTIONS

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

Unless otherwise specified, all references to “$,” “U.S.$,” “U.S. dollars” or “dollars” are to United States dollars; references to “Chilean pesos” or “Ch$” are to Chilean pesos; references to “Argentine pesos” or “AR$” are to Argentine pesos; references to “Brazilian reais” “Brazilian reals” or “R$” are to Brazilian reais; references to “€” or “euro” are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; references to “Rubles” are to Russian rubles; and references to “UF” are toUnidades 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 theInstituto Nacional de Estadísticas (Chilean National Institute of Statistics). As of December 31, 2017, one UF equaled U.S.$43.59 and Ch$26,798.14.

PRESENTATION OF FINANCIAL DATA

This report includes the audited consolidated statement of financial position of Arauco and our subsidiaries as of December 31, 2017, and 2016 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, 2017 (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, 2013, 2014, 2015, 2016 and 2017.

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, 2017, the observed exchange rate for Chilean pesos, as published in theDiario Oficial de la República de Chile (Official Gazette) on January 2, 2018, was Ch$614.75 to U.S.$1.00, and on April 18, 2018, the observed exchange rate was Ch$594.41 to U.S.$1.00. See “Exchange Rates.” You should not construe these translations as representations that the Chilean peso amounts actually represent such dollar amounts or could be converted into U.S. dollars at the rates indicated or at any other rate. Unless otherwise specified, references to the devaluation or the appreciation of the Chilean peso against the U.S. dollar are in nominal terms (without adjusting for inflation) based on the observed exchange rates published by the Central Bank of Chile for the relevant period.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial information as of December 31, 2013, 2014, 2015, 2016 and 2017 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,
	2017			2016			2015			2014			2013
	(in thousands of U.S. dollars, except ratios and share data)
INCOME STATEMENT DATA
Revenue		5,238,341			4,761,385			5,146,740			5,342,643			5,145,500
Cost of sales		(3,574,532	)		(3,498,905	)		(3,511,425	)		(3,654,146	)		(3,557,210	)
Gross profit		1,663,809			1,262,480			1,635,315			1,688,497			1,588,290
Other income		111,513			257,863			273,026			368,924			385,055
Distribution costs		(523,300	)		(496,473	)		(528,470	)		(556,837	)		(523,587	)
Administrative expenses		(521,294	)		(474,469	)		(551,977	)		(550,809	)		(544,694	)
Other expenses		(240,165	)		(77,415	)		(83,388	)		(138,769	)		(136,812	)
Finance income		19,640			29,701			50,284			30,772			19,062
Finance costs		(287,958	)		(258,467	)		(262,962	)		(246,473	)		(232,843	)
Share of profit (loss) of associates and joint ventures accounted for using equity method		17,017			23,939			6,748			7,481			6,260
Exchange rate differences		98			(3,935	)		(41,171	)		(9,961	)		(11,797	)
Income before income tax		239,360			263,224			497,405			592,825			548,934
Income tax		30,992			(45,647	)		(129,694	)		(448,652	)		(130,357	)

Net income		270,352			217,577			367,711			144,173			418,577
BALANCE SHEET DATA
Current assets		2,770,363			2,722,360			2,686,412			3,140,715			2,808,321
Property, plant and equipment		7,034,299			6,919,495			6,896,396			7,119,583			7,137,467
Biological assets⁽¹⁾		3,766,942			3,898,991			3,826,597			3,846,353			3,892,203
Total assets		13,994,600			14,006,181			13,670,391			14,593,214			14,335,106
Total current liabilities		1,399,394			1,346,064			1,034,251			1,547,086			1,682,016
Totalnon-current liabilities		5,478,313			5,660,834			5,989,695			6,231,392			5,608,550
Issued capital		353,618			353,618			353,618			353,618			353,618
Total equity		7,116,893			6,999,283			6,646,445			6,814,736			7,044,540
CASH FLOW DATA
Net cash flow from operating activities		1,072,425			773,584			853,650			985,175			897,720
Net cash flow from investing activities		(633,348	)		(640,212	)		(477,780	)		(655,158	)		(687,620	)
Net cash flow from financing activities		(439,101	)		(38,484	)		(812,176	)		(7,885	)		(7,776	)

Net (decrease) increase in cash and equivalents before effect of exchange rate changes		(24	)		94,888			(436,306	)		322,132			202,324
OTHER FINANCIAL DATA
Capital expenditures⁽²⁾		844,082			556,633			564,795			604,155			942,638
Depreciation and amortization		421,551			409,387			400,145			353,434			298,647
Fair value cost of timber harvested⁽³⁾		334,100			340,199			306,673			353,273			320,894
EBIT⁽³⁾		507,678			491,990			710,083			808,526			762,715
Adjusted EBITDA⁽³⁾		1,353,159			1,067,121			1,290,486			1,280,481			1,152,913
Adjusted EBITDA⁽³⁾/finance costs		4.70			4.13			4.91			5.20			4.91
Adjusted EBITDA⁽³⁾/revenue		25.8	%		22.4	%		25.1	%		24.0	%		22.2	%
Average debt⁽⁴⁾/Adjusted EBITDA⁽³⁾		3.23			4.12			3.64			3.95			4.37
Total debt⁽⁵⁾		4,273,518			4,481,003			4,305,435			5,078,430			5,026,494
Total debt⁽⁵⁾/capitalization⁽⁶⁾		37.5	%		39.0	%		39.3	%		42.7	%		41.6	%
Total debt⁽⁵⁾/equity attributable to parent company		60.4	%		64.4	%		65.1	%		75.0	%		71.9	%
Working capital⁽⁷⁾		1,370,969			1,376,296			1,652,161			1,593,629			1,126,305
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)		2.4			1.9			3.2			1.2			3.4
Dividends paid		121,586			130,624			143,003			141,089			140,054
Dividends per share (U.S.$ per share)		1.07			1.15			1.26			1.25			1.24

(1)	Biological assets refer to our forests andlong-standing trees (current andnon-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.”

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 anon-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 thenon-generally accepted accounting principles(non-GAAP) measures used by analysts to compare participants in our industry as it is anon-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 thesenon-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 ournon-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,
	2017			2016			2015			2014			2013
	(in thousands of U.S. dollars)
Net income		270,352			217,577			367,711			144,173			418,577
(+) Finance costs		287,958			258,467			262,962			246,473			232,843
(-) Finance income		(19,640	)		(29,701	)		(50,284	)		(30,772	)		(19,062	)
(+) Income Tax		(30,992	)		45,647			129,694			448,652			130,357
Adjusted EBIT		507,678			491,990			710,083			808,526			762,715
(+) Depreciation and amortization^(*)		421,551			409,387			400,145			353,434			317,647
EBITDA		929,229			901,377			1,110,228			1,161,960			1,080,362
(+) Fair value cost of timber harvested		334,100			340,199			306,673			353,273			320,894
(-) Gain from changes in fair value of biological assets		(83,031	)		(208,562	)		(210,479	)		(284,497	)		(269,671	)
(+) Exchange rate differences		(98	)		3,935			41,171			9,961			11,797
(+) Others^(**)		172,959			30,172			42,893			39,784			9,531

Adjusted EBITDA		1,353,159			1,067,121			1,290,486			1,280,481			1,152,913

(*)	See Note 3 of our audited consolidated financial statements for more detail on amortization and depreciation.

(**)

“Others” includes othernon-cash expenses or gains, mainly associated with charges for forestry losses due to fires and impairment for fixed assets and others. The increased in “Others” for 2017 is mainly due to provision for forestry losses that accounted U.S.$138 million due to wildfires that affected our forest at the beginning of 2017.

(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 othernon-current financial liabilities, less 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.

EXCHANGE RATES

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


	Daily Observed Exchange Rate
Year Ended December 31,	High		Low		Average⁽¹⁾		Period-End
	Ch$ per U.S.$
2013		533.95		466.50		495.18		524.61
2014		621.41		527.53		570.34		606.75
2015		715.66		597.10		654.66		710.16
2016		730.31		645.22		676.67		669.47
2017		679.05		614.75		649.12		614.75
Months(2017-2018)
October		640.52		619.68		629.49		636.80
November		645.32		629.21		634.22		645.32
December		655.74		614.75		635.31		614.75
January		609.49		599.33		605.01		603.25
February		603.07		588.28		596.36		593.61
March		609.58		595.93		603.91		603.39
April (through April 18)		605.17		594.41		600.37		594.41

Source: Central Bank of Chile

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

On April 18, 2018, the observed exchange rate, as published in the Official Gazette on April 19, 2018, was Ch$594.41 to U.S.$1.00.

FORWARD-LOOKING STATEMENTS

This annual report onForm 20-F contains words such as “believe,” “expect,” “anticipate” and similar expressions that identifyforward-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, areforward-looking statements. Such statements constituteforward-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. Theseforward-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 suchforward-looking statements because of various factors that may be beyond our control, including but not limited to our ability to service our debt, fund our working capital requirements, comply with financial covenants in certain of our debt instruments, fund and implement our capital expenditure programs and maintain our relationships with customers, as well as a change in control, the effects on us from competition, future demand for forestry and wood products in the Chilean, Argentine, Brazilian, Uruguayan and North American export markets, international prices for forestry and sawn timber, the condition of our forests, possible shortages of energy, including electricity, the state of the Chilean and world economies and manufacturing industries, the relative value of the Chilean peso compared to other currencies, inflation, increases in interest rates, the effects of earthquakes, floods, tsunamis or other catastrophic events and changes in our regulatory environment, including our ability to comply with new or stricter environmental regulations and to resolve environmental liabilities.Forward-looking statements in this annual report speak only as of their dates, and we do not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

RISK FACTORS

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

Risks Relating to Us and the Forestry Industry

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

Prices for many of the products we sell can fluctuate significantly. The 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, 2013 to December 31, 2017, the average price for Norscan bleached softwood kraft market pulp (pulp produced in North American, Nordic and Central European countries and sold to manufacturers of paper products delivered in Northern Europe, or “NBSK”), which is the benchmark for softwood bleached pulp, ranged from a low of U.S.$789.20 per tonne in April 2016 to a high of U.S.$999.63 per tonne in December 2017. NBSK prices averaged U.S.$856.91 per tonne in 2013. Throughout 2014, NBSK prices maintained a steady upward trend, reaching U.S.$932.15 per tonne inmid-January 2015, mainly driven by increased demand from China. Throughout 2015 and during the first half of 2016, NBSK prices followed a downward trend, decreasing to U.S.$789.2 per tonne at the end of April 2016, as China began to change its economic structure fromexport-driven growth todomestic-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 per tonne. At the beginning of 2017, NBSK prices began a positive trend that lasted until the end of the year, closing at U.S.$999.63. This upward pressure on prices was driven by an increase of domestic-demand in China.

In the case of bleached hardwood kraft pulp (pulp made from eucalyptus or birch which is sold in Europe, which is the benchmark for Bleached Eucalyptus Kraft Pulp, or “BEKP”), during the period from January 1, 2013 to December 31, 2017, prices ranged from a low of U.S.$651.46 per tonne in January 2017 to a high of U.S.$979.31 per tonne in December 2017. In 2014, two new short fiber pulp mills entered the market with a combined annual production capacity of 2.8 million tonnes. The additional supply caused BEKP prices to decline during the first nine months of 2014, reaching a price of U.S.$724.27 per tonne in September 2014. Thereafter, BEKP began an upward trend, reaching U.S.$811.17 per tonne in November 2015, following increased demand, particularly from China, which was able to absorb the increased supply. However, the expectation of additional supply during 2016 and especially in 2017 continued to place downward pressure on prices, which reached their lowest level in January 2017, at U.S.$651.46 per tonne. A new pulp mill located in Indonesia began itsramp-up in November 2016, initially with an annual capacity of estimated at 2.8 million tonnes. As theramp-up of new capacity was delayed, pulp prices started to rise at the beginning of 2017. Throughout 2017, prices continued to rise as the expected output of the mill located in Indonesia was revised to 1.7 million tonnes for the next three to four years and the lower capacity of other mills due to operational problems, leading to further increases in prices, reaching U.S.$979.31 per tonne at the end of 2017.

Although wood products markets improved untilmid-year 2015, new 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.

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

•

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

•

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

•

world production capacity;

•

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

•

the availability of substitutes.

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

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

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

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

The global economy, and in particular global industrial production, is the primary driver of demand for pulp, paper and wood products. Global industrial production dropped during the second half of 2008 and first half of 2009 due to the financial crisis and global economic conditions, resulting in a significant and widespread contraction in demand for pulp, paper and wood products. Due to this downturn in global industrial production, our pulp segment experienced significant price declines in the last quarter of 2008 and the first quarter of 2009, which severely affected our results. In addition, the significant downturn in thehome-building industry in the United States and Europe resulted in increased inventories of available new homes, significant declines in home prices, loss ofhome-equity values and loss of consumer confidence and demand. As a result of these events, our plywood and panel sales were adversely affected, continuing a downward trend both in volume and price across all markets. Ourmedium-density fiberboard molding sales also experienced a sharp decline in volume mainly due to lower activity in the United States and Canadian construction markets. Our wood products segment, which is also highly dependent on the strength of thehome-building industry, experienced decreases in its prices of and demand for its products. The decrease in demand of sawn timber primarily due to the credit crisis and downturn in the real estate market in the United States resulted in our decision to close five sawmills in 2008 and 2009.

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.

The financial and economic crisis that affected several European countries between 2009 and 2012 caused a general economic downturn in Europe, which negatively affected the banking and credit systems, employment and production. Thus, demand and prices for pulp and wood products declined in the European market.

The devaluation of the Chinese Yuan during the third quarter of 2015 increased volatility in the markets and resulted in a decline in global demand for commodities. Also in 2015, the currencies of several countries depreciated, such as the Canadian dollar, the Euro, the Chilean peso, the Brazilian real and the Argentine peso resulting in increased competition in exports, which in turn negatively impacted the average price of our wood products. A similar trend continued throughout 2016, although certain of these currencies recovered compared to the previous year. During 2017, certain currencies continued to recover such as the Canadian dollar, the Brazilian real, the Euro and the Chilean peso. The Argentine peso depreciated throughout the year.

Export sales to Asia accounted for 36.2% of our revenues in 2017 compared to 32.6% in 2016 and 32.5% in 2015, and export sales to North America accounted for 12.8% of our revenues in 2017 compared to 13.2% in 2016 and 12.7% in 2015.

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

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

In 2017, export sales, defined as sales out of the country where our goods were produced, accounted for 64.6% of our total revenues. During this period, 56.1% of our export sales were to customers in Asia and Oceania, 19.8% to customers in North America, 10.7% to customers in Europe, 7.6% to customers in Central and South America and 5.8% to customers in other countries. As a result, our results of operations and cash flows depend, to a significant degree, on economic, political and regulatory conditions in our principal export markets. Our ability to compete effectively in our export markets could be materially and adversely affected by a number of factors beyond our control, including deterioration in macroeconomic conditions, exchange rate volatility, government subsidies and the imposition of increased tariffs or other trade barriers. If our ability to sell our products competitively in one or more of our principal export markets were impaired by any of these developments, it might be difficult tore-allocate our products to other markets on equally favorable terms and our business, financial condition, results of operations and cash flows might be adversely affected.

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

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

On February 27, 2010, an earthquake measured at a magnitude of 8.8 on the Richter scale, followed by a tsunami that affected the coast, occurred in theSouth-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 toearthquake-related damage to property and inventories as well as a significant decrease in our sales volumes due to plant closures, which had an adverse effect on our results of operations and cash flows. Our insurance policies provided coverage up to an aggregate amount of U.S.$650 million for damages to our property, plant, equipment and inventories, with a deductible of U.S.$1 million for property damage, and for losses due to business interruption caused by such damage after the first 15 days for business interruption. On November 15, 2011, we and the insurers accepted the final report of the insurance adjusters. In accordance with such final report, we received a total recovery of U.S.$532.0 million.

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

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

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

We have been subject to a number of environmental administrative and judicial proceedings in Chile, including proceedings related to the Valdivia Mill, the Arauco Mill, the Nueva Aldea complex, the Licancel Mill and the Constitución Mill. As a result of these proceedings, we have been subject to monetary fines as well as sanctions, including orders to suspend or limit our operations.

In 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. According to applicable regulations, the government shall analyse and weigh the comments to prepare a final draft, prior to submitting for 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.

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. We expect the administrative proceeding to be closed by October 1, 2018.

In 2016, the Moncure mill was subject to an administrative proceeding for alleged infringements by the North Carolina Department of Environmental Quality (NCDEQ), which has terminated, as corrective actions have been executed, including ongoing training, the installation of alarms/interlocks and the installation of certain control devices.

Our Eugene, Oregon mill was subject to an administrative proceeding by the Lane Regional Air Protection Agency. We negotiated a settlement that included monetary fines and an agreement to implement improvements to certain emissions control equipment and processes. Additional proceedings, enforcement actions or claims related to compliance with environmental requirements or alleged environmental damages may also be brought against us in the future.

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

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

Our operations at the Valdivia Mill, have been subject to environmental scrutiny by Chilean environmental regulators and the Chilean public since the mill began its operations in 2004. A variety of concerns and claims have been raised regarding the mill’s potential environmental impacts in the area. Primarily, it has been alleged that the mill’s operations impacted the habitat of the nearby Carlos Anwandter Nature Sanctuary and contributed to the migration and death ofblack-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.

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 our mills which could adversely affect our business, financial condition, results of operations and cash flows.

In April 2005, theConsejo 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, to be 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 theConsejo 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, to be undertaken by an interdisciplinary committee of experts, about the current status of the wetland (which has already been completed); (ii) creating an artificial sentinel wetland for representative species, upriver from the discharge of effluents; (iii) implementing a monitoring program of environmental impact, within afive-year period; and (iv) creating a new research center focused on wetlands (Centro de Investigación de Humedales). The National Defense Council and Arauco have agreed upon the manner in which these measures have been implemented.

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

April 5, 2018 before the Third Environmental Court. A final decision by the Third Environmental Court is expected to be rendered during 2018 and may be further appealed before the Supreme Court. 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 require the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. Once these activities have been completed, the proceedings relating to Nueva Aldea and Constitución will end. We expect that these proceedings will end in 2018. 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 has been closed. Finally, the proceeding against Arauco Mill is still underway, and may result in material administrative fines or sanctions, the revocation of environmental authorizations or the temporary or permanent closure of facilities. The Company filed its defense in September 2017 and a decision by the Superintendence is expected in 2018.

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, 2017, we had approximately U.S.$4.3 billion of outstanding indebtedness. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and capital resources—Contractual obligations.” The economic environment prevailing at any point in time may prevent us from accessing, or restrict our access to, credit and capital markets to satisfy our financing needs, or we may not be able to refinance our existing indebtedness on terms that are favorable to us or at all. If we are unable to refinance our indebtedness as it becomes due, or if we refinance such indebtedness on terms that are not favorable to us, our business, results of operations and financial condition could be materially and adversely affected.

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 facilities are located in a region known for seismic activity that exposes our facilities in Chile to the risk of earthquakes and in some areas, to subsequent tsunamis.

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

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unscheduled maintenance outages;

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prolonged power failures;

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an equipment failure;

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fires, floods, hurricanes or other adverse weather;

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

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a chemical spill or release;

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explosion of a boiler;

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

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labor difficulties;

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terrorism or threats of terrorism;

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

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other operating problems.

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

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

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 an accounting value of approximately U.S.$210 million, according to IFRS accounting rules. The affected forest plantations represented approximately 6% of the IFRS value of the total of the forest plantations of the Company, and approximately 2% 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.

The forest plantations affected by the fires have insurance coverage, with their corresponding deductibles and limits. Based on the final report of the insurance appraisers, in October 2017 our subsidiary Forestal Arauco S.A. recovered a total of U.S.$35 million, after applying the U.S.$15 million deductible.

In turn, our El Cruce sawmill, which is owned by our subsidiary Maderas Arauco S.A., was also destroyed by the wildfires. El Cruce sawmill had a book value of approximately U.S.$4.5 million and an annual production capacity of 115,881 cubic meters, representing approximately 4.2% of our total sawmill production capacity at the time of the event. With regard to the insurance claim, in October 2017 we recovered U.S.$50.9 thousand on account of affected inventory, and during the first quarter of 2018, we expect to receive approximately U.S.$1.0 million net of the deductible on account of property damage.

During the fourth quarter of 2015 and the first quarter of 2016, fires affected our forest plantations and destroyed 618 hectares. During the fourth quarter of 2016 and the first quarter of 2017, fires affected our forest plantations and destroyed 82,040 hectares. During the fourth quarter of 2017 and the first quarter of 2018, approximately 587 hectares of our forest plantations were affected.

In addition, during the fouth quarter of 2017, our Viñales sawmill and remanufacturing facility suffered a stoppage of seven days due to a wildfire.

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. 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 managingnewly-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 44% of our employees in Chile, 49% of our employees in Argentina, 29% of our employees in Uruguay, 100% of our employees in Brazil and none of our employees in the United States or Canada were unionized as of December 31, 2017. In the past, certain work slowdowns, stoppages and otherlabor-related disruptions have adversely affected our operations.

During 2017, we experienced three stoppages in Chile caused by employees of ourthird-party contractors specifically in our Horcones complex during February (lasting two days), April (lasting two days) and November (lasting five days).

During 2016, in Chile we experienced seven stoppages caused by employees of ourthird-party contractors. We experienced stoppages in our Horcones complex caused by employees of our forestry contractors during February (lasting four days) and in April (lasting one day). Access to our El Colorado sawmill was blocked for three days in 2016. Our Viñales sawmill experienced three stoppages, each lasting one day, during the months of April, August and November 2016. During May 2016, our Constitución Mill had its access blocked for three days.

During 2015, transportation contractors blocked the entrances of our Horcones complex (Chile) on four separate occasions, on January 13, February 17, March 23 and September 21, 2015.

During 2014, there were two events of transportation contractors blocking the entrance to our Valdivia mill. The first blockade was on June 12, 2014 and lasted one day. The second was between August 29 and September 5, 2014. There were also four separate occasions of transportation contractors blocking the entrances of our Horcones complex on February 24 and 25, September 3, October 22 and 23, and November 20, 2014.

In January 2013, we experienced afour-day stoppage in Chile at the Arauco plywood mill, caused by employees ofthird-party contractors.

During 2017 and 2016, we suffered no labor disputes in Argentina.

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

During 2015, production shifts were reduced at the unit in Piray MDF and in the particleboard plant in Zarate (Argentina), in order to improve operational efficiencies. Although the shift reductions and communications were performed in accordance with the provisions of the Labor Contract Law, workers of the plant in Zarate went on strike, causing asix-hour stoppage. Also during 2015, the pulp union carried out three work stoppages and blockades in Arauco Argentina’s pulp mill: the first event occurred on May 25 for 3 days; the second on August 3, also lasting 3 days; and the last one on September 1, which lasted 14 days.

During 2013, we experienced (i) a27-day stoppage at Arauco Argentina’s Zarate mill in April 2013, as a result of a strike by the construction union; (ii) atwo-day stoppage at Arauco Argentina’s chemical mill in May 2013, as a result of a strike by the Santa Fe Federation of Labor; and (iii) aone-day stoppage at Arauco Argentina’s pulp mill in June 2013 and athree-day stoppage at Arauco Argentina’s pulp mill in October 2013, both as a result of a strike by the pulp union.

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

During 2017, in Uruguay we entered into a labor agreement with unions representing the employees of our pulp mill and forestry nursery.

In Uruguay, on June 4, 2016, our 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.

During 2014, we experienced 7.5 days of work stoppages during the final phase of construction at Montes del Plata in Uruguay and the start of operations, caused by contractors and third parties. During 2015, there were 28 minor events amounting to 5.5 days of work stoppages, caused by transportation and timber logistics contractors. Montes del Plata is the name of the 50/50 joint operation between Arauco and Stora Enso in Uruguay.

In 2013, we experienced approximately 33 days of work stoppages during the construction at Montes del Plata. These stoppages were caused by national and local strikes related to various labor conflicts mostly of Montes del Plata subcontractors.

Our Canadian and U.S. operations did not experience any work stoppages from 2013 through 2017.

We renewed allcollective-bargaining agreements that expired during 2017 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. On July 1, 2012, we commenced the process of insourcing the operation of 13 sawn timber industrial facilities, which had previously been managed bythird-party companies. In the process, we hired 2,900 employees of thesethird-party companies. As of December 31, 2017, we had contracts with approximately 883 contractors, who employed approximately 21,208 employees. Under Chilean and Brazilian 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.

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 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.

At the end of 2017, the Constitución pulp mill and the Viñales sawmill and remanufacturing facility experienced a40-day stoppage caused by workers of certain transportation companies. The agreements with the employers of the workers that acted with violence were terminated.

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

Risks Relating to Chile

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

As of December 31, 2017, 60.2% of our property, plant and equipment and forest assets were directly owned by Arauco and our Chilean subsidiaries, and in 2017, 59.3% of our revenues were attributable to our Chilean operations. Accordingly, our business, financial condition, results of operations and cash flows depend, to a considerable extent, upon economic conditions in Chile. Future changes in the Chilean economy – 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. The Chilean government’s actions have had and may continue to have a material effect on private sector entities. We have no control over and cannot predict how government intervention and policies will affect the Chilean economy or, directly and indirectly, our operations and revenues.

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

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

On September 29, 2014, Law No. 20,780, as amended on February 8, 2016 by Law No. 20,899, collectively known as the “Tax Reform”, introduced significant changes to the Chilean taxation system and strengthened the powers of theServicio de Impuestos Internos(Chilean IRS) to control, prevent, and counter tax evasion. The Tax Reform contemplates, among other matters, changes to the corporate tax regime, creating two general tax regimes. Since January 1, 2017, Chilean companies are subject to thesistema parcialmente integrado(the partially integrated regime) or thesistema de renta atribuida (the deemed taxation regime). The partially integrated regime is the default regime for companies owned by legal entities and only those companies owned by natural persons ornon-resident taxpayers are eligible to opt for the deemed taxation regime. As a consequence, the default regime applies to Arauco and its Chilean subsidiaries, that is, the partially integrated system. Both regimes provide for the gradual increase of the corporate tax rate to 24% in 2016 (21% in 2014, 22.5% in 2015 and 24% in 2016). Depending on the tax regime applicable to a company, tax rates will gradually be increased to a maximum rate of 25% in 2017, in the case of the deemed taxation regime, or 27% in 2018, in the case of the partially integrated regime.

The Superintendence of Securities and Insurance (former “SVS”, and the Commission for the Financial Market since January 2018) issuedOficio Circular No. 856on October 17,2014, which instructed regulated entities to record as a charge to shareholders’ equity in their statutory financial statements the difference in deferred tax assets and liabilities that resulted from the increase in the tax rate set forth in Law No. 20,780. The impact of this circular was incorporated in the statutory financial statements which are used to determine the distributable income. This circular differs from International Financial Reporting Standards (IFRS), which requires the impact to be recorded as part of the income statement. However, the financial statements that we prepared and filed with the SVS as of and for the periods ended September 30 and December 31, 2014, 2015, 2016 and 2017, account for deferred taxes in accordance withOficio Circular No. 856.

In our financial statements prepared in accordance with IFRS, the effect of the change in the tax rate of first category in assets and liabilities relating to deferred taxes resulted in an expense of U.S.$292,717,000 (U.S.$292,155,000 attributable to owners of the parent) that was recorded in the income statement for the year ended December 31, 2014.

Further amendments could affect our income tax rates. We have no control and cannot predict how such amendments will affect, directly or indirectly, the Chilean economy or our operations and revenues. Our operations and financial condition and the market price of our securities may be adversely affected by changes in policies involving exchange controls, taxation and other matters. Furthermore, the change imposed by SVS byOficio Circular 856 dated October 17, 2014 obliging companies under its supervision not to follow IFRS could lead investors to improperly determine Arauco’s results with respect to the effect of the tax reform on Arauco’s deferred taxes.

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 the “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.

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

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

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

Risks Relating to Argentina

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

As of December 31, 2017, 8.9% of our property, plant and equipment and forest assets were owned by our Argentine subsidiaries, and in 2017, 9.4% of our revenues were attributable to our Argentine operations. The financial condition and results of our Argentine operations, including the ability of our Argentine subsidiary Arauco Argentina S.A. (or “Arauco Argentina”, formerly known as Alto Paraná S.A.), to raise capital, depend, among other factors, upon economic conditions prevailing in Argentina. See “Item 4. Information on our Company—Description of Business—History.”

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. Between 2001 and 2016, there have been several monetary and currency exchange control measures implemented in Argentina, which have included the obligation to repatriate foreign currency earned abroad and tight restrictions on transferring funds abroad, with certain exceptions for authorized transactions. In 2016 and 2017, most of these measures have been eliminated or relaxed by the Argentine administration that took office as of December 10, 2015. After moving quickly to eliminateforeign-exchange restrictions and shifting to a more flexible exchange rate, the government announced its intention to reduce inflation gradually. However, such reduction is taking longer than originally expected.

In 2017, we signed an intercompany loan with Arauco Argentina for US$250 million, which proceeds were used to repay in full certain Arauco Argentina debt that we guaranteed. For a description of Arauco Argentina’s debt which we guaranteed see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

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.

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, 2017, 10.6% of our property, plant and equipment and forest assets were owned by our Brazilian subsidiaries, and in 2017, 7.6% of our revenues were attributable to our Brazilian operations. See “Item 4. Information on our Company—Description of Business.” As a result of the foregoing, to a certain extent, our business, financial condition, results of operations and cash flows will be dependent on economic conditions in Brazil.

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

The Brazilian government has exercised and continues to exercise a substantial influence over many aspects of the Brazilian economy. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other

measures, wage and price controls, currency devaluations, capital controls and limits on imports. The business, financial condition, results of operations and cash flows of our Brazilian subsidiaries may be adversely affected by such matters, changes in policy or regulation involving tariffs and exchange controls, as well as by factors such as:

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currency fluctuations;

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inflation;

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social instability;

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price instability;

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real estate ownership restrictions;

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interest rates;

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liquidity of domestic capital and lending markets,

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tax policy;

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political instability; and

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

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

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.

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

Brazil has, in the past, experienced high rates of inflation. More recently, Brazil’s rates of inflation were 5.9% in 2013, 6.4% in 2014, 10.7% in 2015, 6.3% in 2016 and 3.0% in 2017, as measured by theÍndice de Preços ao Consumidor-Amplo(Brazilian Consumer Price Index). In the past, inflation, governmental measures to combat inflation and public speculation about possible future actions have had significant effects on the Brazilian economy and on the financial condition and results of operation of business, such as ours, operating in Brazil.

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

The Brazilian real has historically suffered frequent devaluation. In the past, the Brazilian government has implemented various economic plans and exchange rate policies, including sudden devaluations, periodicmini-devaluations during which the frequency of adjustments has ranged from daily to monthly, floating exchange rate systems, exchange controls and dual exchange rate markets. Depreciation over shorter periods has resulted in significant fluctuations in the exchange rate between the Brazilian real and the U.S. dollar and other currencies.

For example, the Brazilian real appreciated against the U.S. dollar by 19.8% in 2016 and depreciated by 1.8% in 2017. The exchange rate between the Brazilian real and the U.S. dollar may continue to fluctuate and may rise or decline substantially from current levels. From January 1 to March 31, 2018 the Brazilian real depreciated by 1.4% with respect to the U.S. dollar.

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

Risks Relating to Uruguay

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

As of December 31, 2017, 15.7% of our property, plant and equipment and forest assets were owned by Montes del Plata and its affiliates in Uruguay, and in 2017, 8.5% of our revenues were attributable to the Uruguayan operations of Montes del Plata. See “Item 4. Information on our Company—Description of Business.”

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

Risks Relating to the United States and Canada

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

As of December 31, 2017, 4.2% of our property, plant and equipment and forest assets were owned by our U.S. subsidiaries, and in 2017, 11.4% of our revenues were attributable to our U.S. subsidiaries. See “Item 4. Information on our Company—Description of Business.”

As of December 31, 2017, 0.4% of our property, plant and equipment and forest assets were owned by our Canadian subsidiaries, and in 2017, 3.9% of our revenues were attributable to our consolidated Canadian subsidiaries, which includes our Canadian subsidiaries’ operations in the United States. See “Item 4. Information on our Company—Description of Business.”

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

Risks Relating to Other Markets

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

Our business, financial condition, results of operations and cash flows depend on the level of economic activity, government and foreign exchange policies and political and economic developments in our principal export markets. In 2015, 2016 and 2017, 90.8%, 92.2% and 94.2% respectively, of our total pulp sales, and 42.3%, 43.1%, and 42.6%, respectively, of our total sales of forestry and wood products, were attributable to exports, principally to customers in Asia, the Americas and Western Europe, collectively. Our business, earnings and prospects, as well as our financial condition, results of operations, cash flows and the market price of our securities, may be materially and adversely affected by developments in these export markets relating to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation, social instability or other political, economic or diplomatic developments. For example, certain target countries to which we export may impose buying restrictions in our industry, which may adversely affect our sales. We have no control over these conditions and developments which could adversely affect us and our business, financial condition, results of operations and cash flows or the price or market of our securities.

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.

Risks Relating to Our Securities

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

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

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

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

Under current Chilean law and regulations, payments of interest made from Chile to holders of debt securities who are neither residents nor domiciled or organized in Chile for purposes of Chilean taxation will, generally, be subject to Chilean withholding tax at a rate of 4.0%. Subject to certain exceptions, we will pay additional amounts (as described in “Item 10. Additional Information—Taxation”) so that the net amounts received by the holder of 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 March 7, 2013, Moody’s Investors Service, or Moody’s, downgraded our senior unsecured ratings to “Baa3” from “Baa2” with a negative outlook, citing deterioration in our performance coupled with a significant increase in debt that resulted in a significant increase in leverage. Additionally, Moody’s downgraded the rated notes of Arauco Argentina to “Baa3” from “Baa2”. On March 27, 2013, S&P lowered its rating on us from “BBB” to“BBB-”, citing high debt, our recent acquisitions, and soft pulp prices and rising operating costs. It considered our financial risk profile to be “intermediate” due to expectations of improved leverage.

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

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

On October 5, 2016, Fitch Ratings changed our ratings outlook from stable to negative, citing aslower-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.

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.

Item 4. Information on our Company

DESCRIPTION OF BUSINESS

We believe that, as of December 31, 2017, we were one of Latin America’s largest forest plantation owners, and that we are Chile’s largest exporter of forestry and wood products in terms of revenue. We have industrial operations in Chile, Argentina, Brazil, the United States, Canada, Uruguay (via our 50% share in Montes del Plata) and Spain, Portugal, Germany and South Africa (via our 50% share in Sonae Arauco). As of December 31, 2017, we had more than 1.0 million hectares of plantations in Chile, Argentina, Brazil and Uruguay combined. During 2017, we harvested approximately 24.6 million cubic meters of sawlogs and pulplogs and sold approximately 7.7 million cubic meters of wood products, including sawn timber (green andkiln-dried lumber), remanufactured wood products, plywood and panels (medium density fiber board, or MDF, particleboard, or PBO, and high density fiber board, or HB). During 2017, we sold approximately 3.8 million tonnes of pulp in the form of hardwood bleached pulp, softwood bleached pulp, softwood unbleached pulp and fluff pulp.

Based on information published by Hawkins Wright Ltd., an independent research company for the pulp and paper industry, as of December 31, 2017, we were one of the world’s largest producers of bleached and unbleached softwood kraft market pulp in terms of production capacity, with an estimated 6.3% share of the total world production capacity of bleached softwood kraft market pulp and a 22.2% share of the total world production capacity of unbleached softwood kraft market pulp. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. “Kraft pulp” is pulp produced using a chemical process.

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

History

Celulosa Arauco y Constitución S.A. is asociedad anónima (corporation) organized under the laws of Chile and subject to certain rules applicable tosociedades anónimas abiertas (Chilean public corporations). Our principal executive offices are located at Avenida El Golf 150, 14^th Floor, Las Condes, Santiago, Chile, and our telephone number is+56-2-2461-7200.

We were formed on September 14, 1979 in a merger between Industrias de Celulosa Arauco S.A., or Industrias Arauco, and Celulosa Constitución S.A., or Celulosa Constitución. Our two predecessor companies were created in the late 1960s and early 1970s by Corporación de Fomento de la Producción, or Corfo, a Chilean government development corporation, to develop forest resources, improve soil quality in former farming areas and promote employment. As part of the Chilean government’s privatization program, Corfo sold Industrias Arauco to Compañía de Petróleos de Chile S.A., or Copec, in 1977 and Celulosa Constitución to Copec in 1979. In October 2003, Copec transferred all of itsgasoline- andfuel-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 expanded our market opportunities outside of Chile.

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

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

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

On September 27, 2009, Arauco and its subsidiary Inversiones Arauco Internacional, executed a series of joint operation agreements with Stora Enso, pursuant to which Stora Enso Amsterdam B.V. agreed to transfer the ownership of 100% of the shares of Stora Enso Uruguay S.A. to Forestal Cono Sur. As a consequence of this transaction, Arauco and Stora Enso equally control all assets that both companies own in Uruguay. 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. acquired 50% of the shares of Dynea Brasil S.A. from Dynea AS for U.S.$15 million. As a result of this acquisition, we became the owner of 100% of the shares of Dynea Brasil S.A., which was absorbed by Arauco do Brasil S.A. in May 2010.

On January 18, 2011, as per the Montes del Plata joint operation, Arauco 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 total investment was approximately U.S.$2.5 billion. 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 that is 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. The total purchase price for the transaction was U.S.$473.5 million, of which we paid 49%. On May 31, 2012, Centaurus Holdings S.A. was absorbed by Florestal Vale do Corisco Ltda.

In 2011, Arauco Argentina acquired 100% of the shares of Greenagro S.A. or Greenagro, a company duly incorporated under the laws of Argentina, for a total purchase price of U.S.$10.7 million. Greenagro is engaged in forestry activities in the area of Isla Victoria, province of Entre Ríos, Argentina.

In 2012, Arauco Panels USA, one of our U.S. subsidiaries, acquired an industrial facility in Moncure, North Carolina, for U.S.$56 million plus approximately U.S.$6 million in respect of working capital, subject to adjustment based on actual working capital at closing. The facility includes MDF andhigh-density fiberboard, or HDF, production lines with annual production capacity of up to 330,000 cubic meters, a PBO production line with annual production capacity of up to 270,000 cubic meters and two melamine product production lines. This transaction closed in January 2012.

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

During the second quarter of 2013, ourwholly-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. The total purchase price for the transaction was U.S.$53 million.

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 the owner 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, Arauco’swholly-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.

On November 30, 2015, our subsidiary Inversiones Arauco Internacional Limitada, entered into a share purchase agreement with Sonae Industria (“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. The price paid was the amount of €137,500,000 (equivalent to U.S.$153.1 million at the time of the purchase). 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, Arauco informed the approval by its board of directors of the commencement of the construction of the “MDP Grayling” project, which will be located in the State of Michigan, United States of America. Such project will be carried out by our U.S. subsidiary Flakeboard America Limited. The project comprises 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. Arauco expects that the Project will commence its operations by the end of 2018 and that its sales will exceed U.S.$200 million per year. The execution of this project requires an estimated investment of U.S.$400 million, which are expected to be financed with Arauco’s own resources.

On September 13, 2017, Arauco announced the approval by its board of directors of the “Dissolving Pulp” project, relating to the Valdivia mill, which aims to diversify the type of pulp produced in the Valdivia mill, by enabling it to produce dissolving pulp. Arauco estimates that this project will require an investment of approximately U.S.$185 million. 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 Interconectado Central, or SIC) from the current units of the mill.

On December 6, 2017, our Brazilian subsidiary Arauco do Brasil S.A. purchased from Masisa S.A. 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.

On December 19, 2017, our subsidiaries Inversiones Arauco Internacional Limitada and AraucoMex, S.A. de C.V., agreed with the Chilean company Masisa S.A. 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. The price of this transaction was U.S.$245 million, to be paid to Masisa at the closing of the transaction (which is expected to occur in 2018). The main assets of the Masisa’s Mexican subsidiaries consist of three industrial complexes located in Chihuahua, Durango and Zitácuaro, that jointly have three PBO lines with an annual installed capacity of 519,000 m3; a MDF line with an annual installed capacity of 220,000 m3; three melamine (or TFL) lines with an annual installed capacity of 426,000 m3; a chemical plant with an annual installed capacity of 66,000 tons of resins and 60,600 tons of formaldehyde; and impregnation lines with an aggregate annual installed capacity of 22.8 million of m2. Furthermore, Maderas y Sintéticos de México, S.A. de C.V. is the lessee of a chemical plant in Lerma, with an annual installed capacity of 43,200 tons of resins and 22,000 tons of formaldehyde. The closing of this transaction is subject to several conditions precedent, customary in this type of transactions, the most relevant one being the approval by the Mexican antitrust authority (Comisión Federal de Competencia Económica or “COFECE”). Arauco expects that this transaction will close during the second semester of 2018.

Corporate Structure

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

The following table sets forth our ownership interests in our subsidiaries as of December 31, 2017.


	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 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		99.9992
Arauco Indústria de Painéis Ltda	Brazil		99.9990
Arauco Middle East DMCC	Dubai		99.9990
Arauco Nutrientes Naturales SpA	Chile		99.9484
Arauco Panels USA LLC	U.S.A.		99.9990
Arauco Perú S.A.	Peru		99.9990
Arauco Wood Products, Inc.	U.S.A.		99.9990
Araucomex S.A. de C.V.	Mexico		99.9990
Consorcio Protección Fitosanitaria Forestal S.A.	Chile		57.5223
Empreendimentos Florestais Santa Cruz Ltda.	Brazil		99.9795
Flakeboard America Limited	U.S.A.		99.9990
Flakeboard Company Limited	Canada		99.9990
Forestal Arauco S.A.	Chile		99.9484
Forestal Cholguán S.A.	Chile		98.4826
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
Mahal Empreendimentos e Participacoes S.A.	Brazil		99.9961
Novo Oeste Gestão de Ativos Florestais S.A.	Brazil		99.9991
Savitar S.A.	Argentina		99.9841
Servicios Aéreos Forestales Ltda.	Chile		99.9990
Servicios Logísticos Arauco S.A.	Chile		99.9997

Business Strategy

We focus on creating maximum value from our forestland, managing our operations sustainably and developing products that contribute to an economy based on renewable resources that improves the quality of life of millions of people around the world.

Combining science, technology and innovation, we seek to unfold the full potential of our plantations and develop renewable products in our forestry, pulp, timber, panels and clean energy business areas. We also manage our operations responsibly by adopting the best environmental practices and promoting the safety and development of employees and contractors.

We seek to create high quality products and materials for the paper, packaging, furniture, construction and energy industries, and to provide quality service to our customers, always seeking that our products be considered the superior choice.

Lastly, we strive to become a leader in corporate responsibility in the areas where we are present, showing respect for their communities and members, and by being active in their social and economic development.

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,
	2017		2016		2015
	(in millions of U.S. dollars)
Export Sales
Bleached pulp	$	1,935	$	1,628	$	1,762
Unbleached pulp		285		253		275
Sawn timber		400		400		419
Remanufactured wood products		231		218		231
Plywood		197		185		203
Panels		325		305		300
Other		10		2		4

Total export revenue	$	3,383	$	2,991	$	3,195

Domestic Sales
Bleached pulp	$	127	$	152	$	197
Unbleached pulp		9		7		8
Sawn timber		76		80		79
Remanufactured wood products		28		28		57
Plywood		41		42		37
Panels		1,318		1,229		1,297
Logs		73		63		88
Chips		25		21		18
Electric power		94		103		121
Other		64		45		50

Total domestic revenue	$	1,855	$	1,770	$	1,952

Revenue	$	5,238	$	4,761	$	5,147

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


	Year ended December 31
	2017		2016		2015
	(in millions of U.S. dollars)
Asia and Oceania	$	1,898	$	1,553	$	1,673
North America		671		627		656
Europe		361		326		236
Central and South America		256		299		482
Other		197		186		148

Total	$	3,383	$	2,991	$	3,195

Forestry Activity

Radiata pine grows at the fastest rates within a narrow band of latitude and under certain climatic conditions. One of Chile’s main advantages in the forestry products industry lies in the short growing cycle of its radiata pine plantations. The faster growth rate of radiata pine trees in Chile allows harvesting of pulplogs and sawlogs 16 to 18 years after planting and of high quality sawlogs 25 years after planting. For most temperate softwood forests in the Northern Hemisphere this range is 18 to 45 years for pulplogs and 50 to 150 years for high quality sawn timber. Consequently, the Chilean forestry industry is a relativelylow-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 themid-1970s, we have focused our forest management toward the application of advanced genetic and silviculture techniques to increase productivity and the quality of our plantations.

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

Throughout our history, we have demonstrated a continued commitment to the improvement of our forest management policies. 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. See “Item 4. Information on our Company—Certifications.”

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., 100% of the plantations owned by Arauco Argentina, 50% of the plantations we own in Uruguay through the Montes del Plata joint operation, 100% of the plantations owned by Arauco Forest Brasil, 80% of the plantations owned by Arauco Florestal Arapoti and 100% of the plantations owned by Mahal Empreendimentos e Participacoes S.A., unless otherwise mentioned.

As of December 31, 2017, our planted forests consisted of 66.5% radiata, taeda and elliottii pine and 31.2% 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 oflong-fiber pulp for sale to manufacturers of paper and packaging. Eucalyptus is used to produceshort-fiber pulp for sale to manufacturers of paper and tissue.

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 2017, Arauco planted a total of 62,128 hectares and harvested a total of 60,109 hectares in Chile, Argentina, Brazil and Uruguay. We believe that our annual harvests and plantations,long-term sustainable equilibrium is approximately 73.4 thousand hectares.

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, 2017, our aggregate radiata pine holdings comprised 36% of all Chilean radiata pine plantations, making us the country’s largest radiata pine plantation owner according to the Chilean Forestry Institute. As of December 31, 2017, we owned approximately 1.1 million hectares of land in Chile, of which 674 thousand hectares are forest plantations.

As of December 31, 2017, we owned approximately 263,219 hectares of forest and other land in Argentina, approximately 235,543 hectares of forest and other land in Brazil and approximately 123,464 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 (84.1%), globulus (2.3%), grandis (4.5%) and other species (9.1%).

Of the total land we own in these three countries, approximately 166,167 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 149,046 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, 2017.


	As of December 31, 2017
	Total		Distribution
	(in hectares)		(percentage)
Pine plantations⁽¹⁾
0-5 years		167,330		9.6	%
6-10 years		152,058		8.8	%
11-15 years		132,554		7.6	%
16-20 years		119,419		6.9	%
21+ years		99,939		5.8	%
Subtotal		671,300		38.7	%
Eucalyptus plantations⁽²⁾		315,387		18.2	%
Plantations of other species		22,669		1.3	%
Subtotal of Plantations		1,009,356		58.2	%
Land for plantations		98,743		5.7	%
Land for other uses⁽³⁾		629,303		36.1	%

Total⁽⁴⁾		1,734,402		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., 100% of the plantations owned by Arauco Argentina, 50% of the plantations we own in Uruguay through the Montes del Plata joint operation, 100% of the plantations owned by Arauco Forest Brasil, 80% of the plantations owned by Arauco Florestal Arapoti and 100% of the plantations owned by Mahal Empreendimentos e Participacoes S.A.. Also includes 23,698 hectares for which we have the right to harvest but do not own the land, of which 16,794 hectares are in Chile, 6,599 hectares are in Uruguay and 305 hectares are in Argentina.

Land Acquisition and Afforestation

Our total land assets have increased from fewer than 170,000 hectares in 1980 to 1,734,402 hectares as of December 31, 2017. In the five years ending December 31, 2017, we purchased 26,799 hectares of land, of which 26,136 hectares were purchased in Chile and 663 in Brazil. For more information regarding our material acquisitions, see “Item 4. Information on our Company—Description of the Busines —History”.

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

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

Forest Management

For our pine plantations, our forestry management activities seek to increase sawlogs through advanced genetic techniques, planting and site preparation procedures, thinning and pruning. Managed forests can produce trees of larger diameter and, if pruned, a higher proportion of clear wood, which generally commands a higher price than knotted wood. Although some land is not suitable for the production of pruned logs, as of December 31, 2017, approximately 63% 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, 2017, we had 16 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. Depending upon the species of tree to be planted and the nutrient and physical characteristics of the soil, we may also undertake a certain amount of ground preparation before planting. Our other principal forest activities are thinning, pruning and harvesting.

Thinning, or culling inferior trees from the plantation, occurs when 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 eight to 14 years old and results in an average reduction of the number of trees per hectare from the original stocking of 1,250 and 1,600, depending on the productivity of the land, to 700 in the first thinning(8-9 years) and to approximately 450 in the second thinning(12-14 years).

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

•

the cost of planting is relatively low,

•

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

•

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

Pruning involves removing branches, the source of knots, which are the main defect in sawn timber. Pruning results in ahigh-quality clear wood saw log of 5.3 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 themid-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.

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.


	2017		2016		2015
	(in hectares)
Thinning		5,553		16,229		14,003
Pruning		32,869		33,547		31,292
Harvesting		38,439		31,863		33,266

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, 2017, we had arrangements with more than 261 independent contractors that employed over 12,274 workers in Chile. Many of these contractors havelong-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 forest and farmland, and, as a result, they are naturally protected against the spread of certain diseases. In addition, our subsidiary Investigaciones Forestales Bioforest S.A., or Bioforest, has developed strategies to protect our forests from pests and diseases. During the last six years, radiata pine plantations in Chile have been affected by two health problems: 1) thesirex noctilio, a wasp which attacks stressed trees, has caused a natural selection for thinning and 2) the disease produced byphytophthora pinifolia has reduced the growth rate of certain trees. To mitigate the effects of thesirex noctilio, Bioforest has implemented a biological control program under which it has released into the affected forests natural enemies of thesirex noctilio, including thenematode, thebeddingia siricidicola and theparasitoid ibalia leucospoide. To control the spread ofphytophthora pinifolia, Bioforest has begun a genetic program to make our trees more tolerant to this disease and has also begun dispersing in our forests a fertilizer that further promotes resistance. For more information regarding certain risks to our forests presented by disease, see “Item 3. Key Information—Risk Factors—Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business, financial condition, results of operation and cash flows.”

We operate an extensive fire control organization to minimize any fire damage to our forests. The operation consists primarily of a system of spotter towers, manned 24 hours a day during the summer months, from which spotters report the direction of any fire observed to a central command post, where the fire’s exact location is determined and an appropriate ground and/or aerial response is formulated. The focus of this operation is to detect and control fires in less than 10 minutes in order to prevent fires from spreading. 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 Arauco’s plantations in the Maule and Bio Bio Regions in southern Chile. About 72,500 hectares of our forest plantations were damaged to some extent and our El Cruce Sawmill was destroyed as a result of these fires. Also, when feasible, we work in firefighting activities with authorities, other fire control organizations and local communities.

During the end of 2015 and during the first quarter of 2016, fires that affected our forest plantations destroyed 618 hectares. During the end of 2016 and the first quarter of 2017, approximately 82,040 hectares of our forest plantations were affected. See “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry—Disease or fire could affect our forests and manufacturing processes and, in turn, adversely affect our business financial conditions, results of operations and cash flows.”

Forest Production

We harvested 24.6 million cubic meters of logs during the year ended December 31, 2017, consisting of 8.8 million cubic meters of sawlogs, 8.5 million cubic meters of pine pulplogs and 7.3 million cubic meters of eucalyptus pulplogs and other logs. We did not export any pulplogs during 2017 because substantially all of the pulplogs from our forests were used in our pulp or panel mills. During 2017, our sawmills and panel mills used 7.0 million cubic meters of sawlogs. We also sold 1.6 million cubic meters of sawlogs to unaffiliated domestic sawmills during 2017.

A log merchandising facility located at the same site as our Horcones I and Horcones II sawmills optimizes, cuts and classifies wood destined for our plywood facility, sawmills or pulp mills with an annual processing capacity of 1.2 million cubic meters of logs per year. The Nueva Aldea complex also includes a log merchandising facility, with an annual processing capacity of 1.3 million cubic meters of logs per year.

Pulp

We believe that we were Chile’s largest producer of bleached and unbleached softwood market pulp in terms of production in 2017. For the year ended December 31, 2017, pulp sales were U.S.$2.4 billion, representing 45.0% of our total revenues for the period.

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

We use a chemical process, known as the kraft process, in our pulp mills in Chile, 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 tohigh-density tanks. For bleached pulp, the next step is afive-stage bleaching process using chemicals, primarily chlorine dioxide. At all of our pulp mills, the bleaching process is preceded by an oxygen delignification stage. Then, the fibers are subject to a final stage where a sheet is formed and subsequently dried and baled for transport to customers. The lignin and bark produced during this process is used as fuel in the boilers to produce steam, providing heat and generating electricity for the mill. Our bleached pulp is bleached to a 90+ brightness level, as measured by the ISO test procedure, which is one of the industry’s measurement methods.

Pulp Mills

As of December 31, 2017, we owned and operated five pulp mills in Chile, one in Argentina, and jointly owned and operated one in Uruguay with Stora Enso, with an aggregate installed annual production capacity of approximately 3.9 million tonnes. This figure includes 50% of our Uruguay (Montes del Plata) joint operation. Our six pulp mills, together with the 50% volume we include from our interest in the Montes del Plata mill, produced 3.3 million tonnes of bleached pulp and 0.4 million tonnes of unbleached pulp in 2017.

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. See “Item 4. Information on our Company—Certifications”.

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


	Year ended December 31,
	2017		2016		2015		2014		2013
	(in thousands of tonnes)
*Chile*
Arauco Mill
Arauco I		264		258		268		269		284
Arauco II (bleached)		456		475		474		483		510
Arauco II (unbleached)		21		—		—		—		—
Valdivia Mill (bleached)		550		550		549		550		550
Constitución Mill (unbleached)		270		278		303		310		311
Nueva Aldea Mill (bleached)		992		999		935		985		944
Nueva Aldea Mill (unbleached)		—		—		—		—		3
Licancel Mill (unbleached)		144		152		152		150		147

Subtotal		2,697		2,712		2,681		2,747		2,749

*Argentina*
Puerto Esperanza Mill (bleached)		310		341		314		282		331
*Uruguay*
Montes del Plata (bleached- 50%)		688		642		608		240		—

Total		3,695		3,695		3,603		3,269		3,080

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

Chile

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

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

Constitución Mill. The Constitución Mill is located in the heart of a group of our radiata pine forests in the Seventh Region of Chile. As of December 31, 2017, the Constitución Mill was the largest unbleached softwood market pulp mill in the world, with an installed annual production capacity of approximately 355,000 tonnes. The unbleached pulp produced in this mill does not use any chlorine in its production process.

Licancel Mill. We acquired the Licancel Mill in September 1999. It is located in Licantén, which is 250 kilometers south of Santiago. The mill has an installed annual production capacity of approximately 155,000 tonnes of eucalyptus kraft pulp and pine bleached and unbleached kraft pulp. The Licancel Mill is equipped to produce elementarychlorine-free pulp.

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

In February 2015, the Environmental Assessment Service (SEA) unanimously approved the Environmental Impact Statement submitted by Arauco in order to move forward with the dissolving pulp project being developed at Valdivia Pulp Mill. This initiative, which requires a U.S.$185 million investment, will allow Arauco to be the first company in Chile to produce this type of pulp, in addition to creating avalue-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 will increase the facility’s power generation by 15 megawatts (“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.

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

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 for paper use, currently representing almost all of the total bleached softwood pulp production capacity in Argentina.

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 (“AdT”) 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 AdT per year.

Regarding our Montes del Plata mill in Uruguay, during 2017 we made some operational improvements that led to an increase in the annual capacity of the mill, reaching approximately 1.4 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 700 thousand tonnes of annual capacity.

Production Costs

Based on information published by Hawkins Wright Ltd., our cash costs for softwood pulp production are lower than the average costs of market pulp producers in Canada, the United States and Scandinavia, particularly with respect to transportation, which enables our costs to be lower than the average costs of our Northern Hemisphere competitors, on a total delivered cost basis. The following table sets forth our costs for the production of bleached softwood kraft pulp.


	Arauco⁽¹⁾ Bleached Softwood Kraft Pulp Costs
	(in U.S.$ per tonne)
Wood		171
Chemicals		54
Labor and Others⁽²⁾		110
Total cash cost		335
Transportation⁽³⁾		31
Marketing and Sales		3
Total delivered cost		369

Source: Arauco

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

(2)	Includes labor, energy, maintenance costs, and other mill costs.

(3)	Delivered in China.

Sales

Estimated installed bleached kraft pulp capacity worldwide for the year ended December 31, 2017 equaled 63.6 million tonnes. Based on information published by Hawkins Wright Ltd., we believe that our production capacity represented 5.3% of this market in 2017. During the same year, we exported 97.9% of our bleached pulp, principally to customers in Asia and Western Europe.

Integrated manufacturers dominate the world production of unbleached softwood pulp, as opposed tonon-integrated companies that sell market pulp, like us. “Market pulp” is pulp sold to manufacturers of paper products, as opposed to pulp produced by an integrated paper producer for use in its paper production facilities. With a worldwide installed capacity of unbleached softwood kraft pulp of 2.2 million tonnes for 2017, according to Hawkins Wright Ltd., we are the world’s largest single producer of unbleached softwood market pulp, based on production capacity, with 22.2% of the total market in 2017. During the same year, 97.3% of our total unbleached market pulp sales (in terms of tonnes sold) consisted of export sales. While for the last six years Asia has been our principal export market for unbleached market pulp, we continually seek niche markets for our products in Western Europe and the United States.

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


	For the Year Ended December 31,
	2017		2016		2015
	(in tonnes)
Bleached Pulp
Asia and Oceania		2,311,090		2,153,550		2,003,058
Europe		547,012		557,726		603,593
North and South America		335,251		399,195		435,287
Other		134,422		130,289		35,999

Total		3,327,775		3,240,760		3,077,937

Unbleached Pulp
Asia and Oceania		338,648		326,332		325,394
North and South America		88,425		94,288		116,613
Europe		2,073		4,618		6,795
Other		15,948		14,446		10,756

Total		445,094		439,684		459,558

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 establishlong-term relationships withnon-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. RiskFactors-Risks Relating to Us and the Forestry Industry—Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows.”

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


	2017		2016		2015
	(U.S.$ per tonne)
Bleached Pulp
1Q		565		570		644
2Q		620		590		643
3Q		633		564		652
4Q		730		558		610

Unbleached Pulp
1Q		596		594		619
2Q		664		608		600
3Q		660		573		628
4Q		768		574		621

In accordance with customary pulp market practice, we do not havelong-term sales contracts with our customers (except for a few limited cases); rather, we maintainlong-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, 2017, more than 246 customers. As of December 31, 2017, we employed 12 sales agents to represent us in more than 43 countries. We manage this worldwide sales network from our headquarters in Chile.

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, 2017, sales of wood products totaled U.S.$2.6 billion, representing 50.0% of our total revenues.

Exports, which include sales to countries other than the countries in which the goods are produced, accounted for 44.1% of our total revenues of wood products for the year ended December 31, 2017. We sell panels primarily to customers in North America, Brazil, Chile, Argentina and other countries in Latin America.

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


	Year ended December 31,
	2017		2016		2015		2014		2013
	(in thousands of cubic meters)
Panels		4,866		4,754		4,915		4,840		4,738
Sawn timber		1,842		1,944		2,079		2,361		2,284
Remanufactured wood products		445		442		422		429		411
Plywood		567		564		594		444		425
Total		7,720		7,704		8,010		8,074		7,858

As of December 31, 2017, 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; six panel mills in the United States and two panel mills in Canada. Total aggregate installed annual production capacity as of December 31, 2017 was approximately 10.3 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. All our sawmills are located near our pine plantations. As of December 31, 2017, we also owned four remanufacturing facilities—three in Chile and one in Argentina—that reprocess sawn timber into remanufactured wood products, such as moldings, jams andpre-cut pieces that end users require for doors, furniture and door and window frames. These facilities produced 385,097 cubic meters of remanufactured wood products in 2017.

In December 2011, Arauco Panels USA, one of our U.S. subsidiaries, entered into an asset purchase agreement to acquire an industrial facility in Moncure, North Carolina for U.S.$56 million plus approximately U.S.$6 million in working capital. In June 2012, we entered into a share purchase agreement to acquire five panel mills in the United States, one of which was located in Albany, Oregon; two in Bennettsville, South Carolina; one in Eugene, Oregon; and one in Malvern, Arkansas and two panel mills in Canada, located in St. Stephen, New Brunswick and Sault Ste. Marie, Ontario. On July 1, 2012, we commenced the process of insourcing the operation of 13 sawn timber industrial facilities in Chile, which had previously been managed bythird-party companies. As a result, we incorporated 2,900 people into our workforce in that same year. 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), 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 December 19, 2017, our subsidiaries Inversiones Arauco Internacional Limitada and AraucoMex, S.A. de C.V., agreed to purchase 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. See “Item 4. Information on our Company—Description of Business—History.”

Our wood products mills in Chile, North America, Argentina and Brazil are certified under international standards. See “Item 4. Information on our Company Certifications”.

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.

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.

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

Nueva Aldea Mill.This mill was built on the same site as the original mill, which was destroyed as a result of the 2011 wildfires in theBio-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 242,000 cubic meters of lumber. It also has drying facilities with an installed annual capacity of approximately 166,000 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 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.

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.

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.

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.

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.

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 anon-site resin facility.

Sonae Arauco

Sonae Arauco, of which we own 50%, 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 of melamine papers plant in Germany, (iv) and two panel mills in South Africa. In the aggregate, the production capacity of Sonae Arauco is approximately 486,000 cubic meters of OSB, 1,444,000 cubic meters of MDF, 2,184,000 cubic meters of particleboards and 100,000 cubic meters of sawn timber.

Forestry Products

Our forestry products are sawlogs, pulplogs, posts and chips. As a result of our forest management policies and the increasing maturity of our plantations, our plantations are yielding increasing volumes of forestry products, particularly clear wood. As the volume of clear wood has grown, we have broadened our range of forestry products. For the year ended December 31, 2017, sales of forestry products were U.S.$97.9 million, representing 1.9% 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,
	2017		2016		2015		2014		2013
	(in thousands of cubic meters)
Sawlogs		1,608		1,328		1,793		2,262		2,149
Pulplogs		616		459		591		499		546
Posts		—		—		—		2		13
Chips		443		366		278		303		305

Energy and Sustainable Development

We utilize renewable fuels such as forest biomasssub-products in power plants that cogenerate the steam and electricity required for our manufacturing operations, thus contributing to reducing greenhouse emissions. Biomassco-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 SIC, which distributes electrical power throughout the Central and Southern Regions of Chile. In Uruguay, biomasssub-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, 2017:


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)⁽¹⁾		10		N.A.		—		N.A.
Nueva Aldea III		136		100		63		37
Bioenergía Viñales		41		31		9		22

Total Chile		606		481		272		209

Uruguay
Montes del Plata⁽²⁾		82		74		38		36

Total Uruguay		82		74		38		36

Argentina
Piray		38		23		15		8
Esperanza		40		35		40		—

Total Argentina		78		58		55		8

Total		766		613		365		253

(1)	Nueva Aldea II does not have energy available to sell to third parties

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

As of December 31, 2017, we had registered fiveco-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 industrialsub-products, including the wood pulpby-product called “black liquor”), which is a renewablecarbon-neutral fuel that allows the facilities to decrease their reliance onfossil-fuel intensive grid electricity.

Arauco was the first Chilean forestry company to issue Certificates of Emission Reductions (CERs or carbon credits) through the CDM of the Kyoto Protocol in Chile. From 2007 to December 31, 2017, we had issued a total of 3.95 million CERs with our CDM projects. As of the date of this annual report, accumulated in the period from 2007 to 2017, we have sold 2.7 million CERs, 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 Arauco for each of the years indicated:


	Year ended December 31
	2017		2016		2015		2014		2013		2012-2007
CERs issued (net of the commission paid to United Nations Framework Convention on Climate Change, or UNFCCC)		457,309		109,844		827,971		403,317		488,475		1.67 million
CERs sold or donated		1,095,780		561,619		1,375		42,567		—		1.04 million

In 2015, Arauco entered into along-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 2017, Arauco sold 493,659 CERs to Vattenfall Energy Trading Netherlands N.V. under thelong-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 abiomass-fueled power boiler with capacity to produce 210 tonnes of steam per hour and a 41 Megawattextraction-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). This project issued 96,110 Verified Carbon Units (VCUs) as its first verified emission reductions (VERs) on January 3, 2017.

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 first7-year crediting period. It is expected that this project will issue its first CERs in the first half of 2018.

Competition

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

Pulp

In general, our competitors in the pulp market vary depending on the geographical region and variety of pulp involved. CMPC Celulosa S.A., or CMPC, and Fibria Cellulose S.A., or Fibria, are our main competitors in most geographical regions. While Fibria produces hardwood pulp only, CMPC produces both softwood and hardwood pulp. In Asia, we also face competition from Canadian, Brazilian, Russian and Indonesian producers. In Europe, we face competition from Brazilian, Scandinavian and U.S. producers. Our main competitors with respect to unbleached softwood pulp are from Canada and Russia.

Wood Products

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

For sales of PBO, in the Latin American market we compete mainly with Duratex S.A., Masisa S.A., Novopan, Berneck S.A., Egger and Fibraplac S.A. In North America, we mainly compete with Panolam, Roseburg Forest Products Co., Funder America, Uniboard,Temple-Inland Inc., Kaycan Ltd. and Sonae Indústria, SGPS, SA.

Arauco’s principal competitors in the plywood markets are located in the United States, Finland, Chile and China. We compete mainly with CMPC, Eagon, Roseburg,Georgia-Pacific, and UPM, among others.

For remanufactured wood products, our main competitors are located in Chile, Brazil and the United States. For sawn timber, our main competitors are located in Europe, New Zealand, Canada and Chile. We believe that our operating efficiencies, competitive logistics costs, ability to serve customers with multiple specifications, geographical presence in 38 countries and the versatility of our radiata and taeda pine allow us to compete effectively in the world market for 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 47.3% of our aggregate export volume through this port in 2017;

•

Lirquén. A private port in Concepción in which we have an equity interest of 20.3% and through which we shipped 26.4% of our aggregate export volume during 2017; and

•

San Vicente. Astate-owned port near the city of Concepción through which we shipped 26.3% of our aggregate export volume during 2017.

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, 2017, we had approximately 120,000 AdT of pulp in storage in warehouses at foreign ports.

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

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

In Brazil, our efficient distribution system, which delivers finished products to 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 17 major ports of entry and are dispatched to more than 3,500 locations in the United States and Canada. Arauco’s eight composite panel plants in North America service over 580 customers throughout the region mainly through trucks, in addition to exporting products to the Caribbean, Central America and the Middle East.

Description of Property

The following table presents our principal properties as of December 31, 2017.


Country	Forestry	Plants and Facilities
Chile	1,112,177 total hectares 674,337 hectares of plantations	5 Pulp Mills 1 PBO Mill 1MDF-HB Mill 2 Plywood Mills 7 Sawmills 4 Remanufacturing Facilities
Argentina	263,219 total hectares 132,325 hectares of plantations	1 Pulp Mill 1 MDF Mill 1 PBO Mill 1 Sawmill 1 Remanufacturing Facility 1 Chemical Plant
Brazil	235,543 total hectares 128,810 hectares of plantations	2 MDF Mill 1 PBO Mill 1MDF-PBO Mill 1 Chemical Plant
Uruguay⁽¹⁾	123,464 total hectares 73,885 hectares of plantations	50% of 1 Pulp Mill
United States		2 PBO Mills 3 MDF Mills 1MDF-PBO Mill
Canada		1 MDF Mill 1MDF-PBO Mill
Portugal		50% of 1 MDF Mill⁽²⁾ 50% of 1 PBO Mill⁽²⁾ 50% of 1 Resin Plant⁽²⁾
Spain		50% of 1 MDF Mill⁽²⁾ 50% of 1 PBO Mill⁽²⁾ 50% of 1 Sawmill⁽²⁾
Germany		50% of 2 MDF Mills⁽²⁾ 50% of 1MDF-PBO Mill⁽²⁾ 50% of 1PBO-OSB Mill⁽²⁾ 50% of 1 Impregnation of melamine papers Plant⁽²⁾
South Africa		50% of 1 PBO Mill⁽²⁾ 50% of 1MDF-PBO Mill⁽²⁾

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

(2)	Corresponds to 50% of Sonae Arauco.

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

Insurance

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. 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 annualself-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. (52.75%), Mapfre S.A. (26.0%) and Ace Seguros S.A. (21.25%), and in Argentina, Brazil, United States and Canada are carried by Seguros Generales Suramericana S.A. (100%).

Also, we have contracted fire insurance policies for all of our Chilean forest holdings and nurseries but do not insure against pests or disease. In Argentina, we maintain fire insurance for 15,958 hectares of timber assets located in the Delta del Paraná, near Buenos Aires and Entre Ríos. For the rest of our Argentine operations, we do not maintain fire insurance for our timber assets because we believe that the risk of damage from fire is low as Argentina receives significant amounts of rainfall, particularly during the summer months. For our forests in Brazil we maintain fire insurance for 26,000 hectares of Novo Oeste’s timber assets located in Mato Grosso do Sul. For the rest of our forests in Brazil, we do not maintain fire insurance because we believe the risk of damage from fire does not justify the costs of carrying insurance. Terms, deductibles and limits of our insurance policies in all the countries where we operate are consistent with industry practice, which in conjunction with the Company’s own resources, allow it to minimize these risks.

After the 2017 wildfires in Chile, we increased the limits of our forestry insurance coverage in Chile to U.S.$100 million with a deductible of U.S.$15 million per event. The first layer which covers up to U.S.$50 million with a deductible of U.S.$15 million per event is carried by Seguros Generales Suramericana S.A. (60%) and Liberty Compañía de Seguros Generales S.A. (40%), and the second layer which covers up to U.S.$50 million in excess of the first layer of U.S.$50 million per event is carried by Seguros Generales Suramericana S.A. (100%).

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.$100 thousand. 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 with a deductible per event of R$1.5 million.

For more information regarding the risks for which we insure our property, see “Item 3. Key Information—Risk Factors—Risks Relating to Us and the Forestry Industry.”

On December 31, 2011, our Nueva Aldea industrial complex suffered significant fire damage at our plywood mill and forests due to wildfires that affected the Eight Region of Chile. Our forest insurance covered the losses related to our forest plantations. With regard to the property damage and business interruption, on December 11, 2012, we and the insurers accepted the final report of the insurance adjusters, and on December 16, 2013, we recovered U.S.$33 million, net of U.S.$110 million in advance payments that we had already received. With respect to our inventory, which was covered under a different policy, during 2013 we recovered U.S. $20.8 million.

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 an accounting 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 the U.S.$15 million deductible.

In turn, our El Cruce sawmill, which is owned by our subsidiary Maderas Arauco S.A., was also destroyed by the wildfires. El Cruce sawmill had a book value of approximately U.S.$4.5 million and an annual production capacity of 115,881 cubic meters, representing approximately 4.2% of our total sawmill production capacity at the time of the event. With regard to the insurance claim, in October 2017 we recovered U.S.$50.9 thousand on account of affected inventory, and during the first quarter of 2018 we expect to receive approximately U.S.$1.0 million net of the deductible on account of property damage.

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, 2015, our aggregate capital expenditures were U.S.$564.8 million, consisting primarily of U.S.$438.7 million for addition of property, plant and equipment and U.S.$126.1 million for the addition of biological assets.

For the year ended December 31, 2016, our aggregate capital expenditures were U.S.$556.6 million, consisting primarily of U.S.$419.2 million for addition of property, plant and equipment and U.S.$137.4 million for the addition of biological assets.

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 an increase in capital expenditures in respect of biological assets to replace those lost because of the wildfires in 2017.

For the year ending December 31, 2018, we have planned capital expenditures of U.S.$829 million, which principally include U.S.$311 million in maintenance of our existing mills, U.S.$280 million in expansion and other strategic initiatives, and U.S.$238 million in maintenance and acquisition of biological assets.

GOVERNMENT REGULATION

Environmental Regulation

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

Chile

The Chilean legislation to which we are subject includes theLey 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. The Valdivia Mill discharges its treated effluents into the Cruces River, which is part of the Valdivia River Basin.

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. According to applicable regulations, the government shall analyse and weigh the comments to prepare a final draft, prior to submitting for the consideration by the Sustentability Miniters’ 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.

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 Us and the Forestry Industry—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.”

As of the date of this annual report, we have been subject to certain administrative proceedings as a result of a pipe leakage in the Nueva Aldea Mill in 2013, the death of fish in the Cruces River in January 2014, close to the Valdivia Mill effluent discharge, and a pipe leakage in the Arauco Mill in February 2016, all of which are currently under investigation by the competent authorities. In addition, 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 found the Valdivia Mill liable for ten out of eleven charges and imposed a fine of 7,777 UTA (approximately U.S.$7.3 million as of March 29, 2018). We appealed this decision with the Superintendence, which ratified its prior decision on March 23, 2018. We appealed such ratification on April 5, 2018 before the Third Environmental Court. A final decision by the Third Environmental Court is expected to be rendered during 2018 and may be further appealed before the Supreme Court. 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 require the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. Once these activities have been completed, the proceedings relating to Nueva Aldea and Constitución will end. We expect that these proceedings will end in 2018. 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 has been closed. Finally, the proceeding against Arauco Mill is still underway, and may result in material administrative fines or sanctions, the revocation of environmental authorizations or the temporary or permanent closure of facilities. The Company filed its defense in September 2017 and a decision by the Superintendence is expected in 2018.

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 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,

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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

Our activities at Montes del Plata are subject to Uruguayan national and municipal environmental regulations. The principal environmental authorization required to carry out such project’s 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 as B or C, a comprehensive environmental impact assessment (which includes all aspects of the project, including water and noise, among others) is required and in some cases a public hearing may be required. Once the AAP is granted, the interested party is required to perform the project in accordance with the terms and conditions of such authorization.

For certain activities (including construction of an industrial plant) listed in Article 2 of Decree No. 349/005, a Viability Location Report, or VAL, is required. This report 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, and comes to regulate the environmental compliance of the relevant companies in the operational phase of the endeavor. Montes del Plata obtained this authorization from the National Environmental Bureau, DINAMA, in June 2014, and has been recently renewed until December 2020.

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:

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civil penalties;

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supplemental environmental projects;

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

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loss of operating permits;

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required installation of pollution control equipment; or

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remedial actions.

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

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

Forestry,Land-Use and Land Ownership Regulations

Chile

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

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

Argentina

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

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

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

Brazil

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

There are current 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 the subject to several judicial challenges. Currently, there is a pending litigation before theSupremo Tribunal Federal (Highest Court in Brazil) to determine if the Federal Law No. 5,709/1971 is applicable to Brazilian companies with foreign shareholders, as it could arguably be contrary to the Brazilian constitution. In addition, the Government is expected to submit a bill to Congress addressing this subject. 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 to future transactions. 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. If such forests were planted after January 1, 2007, they must also comply with the definition of quality wood. In order to obtain such classification, interested parties 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.

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

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

Certifications

Forestry

Certain of our subsidiaries have received various international and local environmental certifications as of the date of this annual report, which include, but are not limited to the following:

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Forest Stewardship Council^® Forest Management Certification: a forest management certification aimed at promoting forest management that is environmentally responsible, socially beneficial and economically viable for the world’s forests. FSC® is anon-profit organization devoted to encouraging the responsible management of the world’s forests (Forestal Arauco license code:FSC-C108276, Forestal Los Lagos license code:FSC-C008129, Eufores S.A. license code:FSC-C016979, Arauco ArgentinaS.A-Misiones license code:FSC-C128100, Arauco Argentina S.A.-Delta license code:FSC-C120468, Arauco Florestal Arapoti license code:FSC-C010673, Arauco Forest Brasil-Tunas do PR license code:FSC-C116843, Arauco Forest Brasil- C.Tenente e Sengés license code:FSC-C010303 and Mahal Empreendimentos e Participações S/A license code:FSC-C131921);

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

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

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FSC^® Chain of Custody Certification: a certification from the FSC® that is designed to ensure traceability from certified forest and other controlled sources to the finished product (Forestal Arauco Zona Norte license code: FSC – C013026, Forestal Arauco Zona Centro license code: FSC – C008122, Forestal Arauco Zona Sur license code: FSC – C017136, Forestal Los Lagos license code: FSC – C018322 and Eufores code:FSC-C023409);

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

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

Pulp

All our pulp mills in Chile are certified under ISO 9001, ISO 14001 and under standard Chain of Custody FSC^®and CERTFOR (PEFC Homologated). The Puerto Esperanza Pulp Mill in Argentina is certified under ISO 14001, OHSAS 18001 and Chain of Custody FSC^®. The Montes del Plata Mill in Uruguay is certified under Chain of Custody FSC^®. The following list sets forth the codes of license COC FSC® for each pulp mill:

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Arauco Pulp Mill:FSC-C006552

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Licancel Pulp Mill:FSC-C109896

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Constitución Pulp Mill:FSC-C109895

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Nueva Aldea Pulp Mill:FSC-C011929

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Valdivia Pulp Mill:FSC-C005084

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Puerto Esperanza Pulp Mill:FSC-C121377

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Celulosa y Energía Punta Pereira (Montes del Plata) Pulp Mill:FSC-C116413

Wood Products

Our panel mills in Chile are certified under standard Chain of Custody FSC (License CodeFSC-C119538), which includes two panel mills. Also, our seven sawmills, two plywood mills and the remanufacturing facilities are certified under the Chain of Custody FSC standard (License CodeFSC-C119538). Additionally, all our timber mills in Chile are certified under CERTFOR (PEFC homologated), ISO 14001 and Occupational Health and Safety Assessment Series (OHSAS) 18001.

In North America, all our panel mills are certified under the Chain of Custody FSC standard (License CodeFSC-C019364) and our composite panel mills are also certified under the ISO 14001/ OHSAS 18001 standard.

Our Zárate Mill and Piray sawmill in Argentina are certified under the Chain of Custody FSC standard (License CodeFSC-C119529). All our mills in Argentina are certified under the Environmental Management System ISO 14001 standard, as well as under the Occupational Health and Safety Assessment Series (OHSAS) 18001 standard. The sawmill Piray, remanufacture Piray, Zarate Mill and Chemical Arauco Argentina are certified under ISO 9001.

All our panel mills in Brazil are certified under the Environmental Management System ISO 14001. The Jaguaravia and Pien Mills are certified under the Chain of Custody FSC standard (License CodeFSC-C010928 andFSC-C118530).

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, HB, plywood, sawn timber and remanufactured wood products, forestry products, such as sawlogs and pulplogs, and sales of electricity. Export sales constituted 62.8% of our total revenues for the year ended December 31, 2016 and 64.6% of our total sales revenues for the year ended December 31, 2017. Sales of pulp constitute the single largest component of our revenues. 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 export markets. In 2014, we exported our products to Asia, North, Central and South America, Europe and, to a lesser extent, Africa and the Middle East. In 2014 and 2015, 91.8% and 90.8%, respectively, of total pulp revenues were export sales, and 43.9% and 42.3%, respectively, of total wood and forestry products revenues were export sales. In 2016, 92.2% of our total pulp revenues were export sales, and 43.1% of total wood and forestry products revenues were also export sales. In 2017, 94.2% of our total pulp revenues were exports sales, and 42.6% of total wood and forestry products revenues were also export sales. Our business, earnings and prospects may be materially and adversely affected by developments in our export markets with respect to inflation, interest rates, currency fluctuations, protectionism, government subsidies, price and wage controls, exchange control regulations, taxation, expropriation or social instability, as well as by political, economic or diplomatic developments.

As of December 31, 2017, 60.2% of our property, plant, equipment and forest assets were directly owned by us and our Chilean subsidiaries, 8.9% by our Argentine subsidiaries, 10.6% by our Brazilian subsidiaries, 4.6% by our U.S. and Canadian subsidiaries and 15.7% by our joint operation in Uruguay. In 2017, 59.3% of our consolidated revenues were derived from our operations in Chile, 9.4% of our consolidated revenues were derived from our operations in Argentina, 7.6% of our consolidated revenues were derived from our operations in Brazil, 15.3% of our consolidated revenues were derived from our operations in the United States and Canada and 8.5% 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 and Canada.

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

Chile

According to the Central Bank of Chile, Chile’s GDP increased by 2.3% in real terms during 2015, and in 2016 and 2017 it grew at rates of 1.6% and 1.1%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile.”

Argentina

According to theInstituto Nacional de Estadística y Censos (the Argentine National Statistics and Census Institute, or the “INDEC”), Argentina’s GDP increased by 2.6% in real terms during 2015, and in 2016, it declined by 2.3%. For 2017, the INDEC reported a growth of 2.9% in real GDP. In 2015 and 2016, the Argentine peso depreciated against the U.S. dollar by 51.7% and 20.9%, respectively. In 2017, the Argentine peso depreciated against the U.S. dollar by 16.4%.

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 2018.

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 our and Arauco Argentina’s business, financial condition or results of operations. See “Item 3. Key Information—Risk Factors—Risks Relating to Argentina.”

Brazil

According to theInstituto Brasileiro de Geografia e Estatística (the Brazilian Institute of Geography and Statistics), Brazil’s GDP decreased in real terms by 3.8% during 2015, and by 3.6% in 2016. In 2017, Brazil’s GDP increased in real terms by 1.0%. In 2015 the Brazilian real depreciated against the U.S. dollar by 47.7% and in 2016 the Brazilian real appreciated against the U.S. dollar by 19.8%. In 2017, the Brazilian real depreciated against the U.S. dollar by 1.8%. See “Item 3. Key Information—Risk Factors—Risks Relating to Brazil.”

Uruguay

According to theBanco Central del Uruguay (the Central Bank of Uruguay), Uruguay’s GDP increased by 0.4% in real terms during 2015, and in 2016 and 2017 it grew in real terms at rates of 1.5% and 2.9%, respectively. In 2015, the Uruguayan peso depreciated against the U.S. dollar by 23.2% but in 2016 it appreciated against the U.S. dollar by 3.2%. In 2017, the Uruguayan peso depreciated against the U.S. dollar by 1.0%. 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 2.6% in real terms during 2015, and in 2016 and 2017 it grew in real terms at rates of 1.6% and 2.3%, respectively. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

Canada

According to the Bank of Canada, Canada’s GDP increased by 1.2% in real terms during 2015, and in 2016 and 2017 it grew in real terms at rates of 1.4% and 3.0%, respectively. The Canadian dollar depreciated against the U.S. dollar by 19.6% in 2015, 3.8% in 2016 and 6.8% in 2017. See “Item 3. Key Information—Risk Factors—Risks Relating to the United States and Canada.”

Exchange Rate Fluctuations

We generally express our exports 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 2017, the value of the Chilean peso relative to the U.S. dollar increased by 8.7% in nominal terms, based on the observed exchange rates on December 31, 2016 and December 31, 2017. The observed exchange rate on April 18, 2018, as published in the Official Gazette on April 19, 2018, was Ch$594.41 to U.S.$1.00. For information regarding historical rates of exchange in Chile from January 1, 2013, see “Item 3. Key Information—Exchange Rates.”

The effect of exchange rate fluctuations is partially offset by the fact that certain of our operating expenses are denominated in U.S. dollars (such as our freight costs and selling expenses in the form of commissions paid to our sales agents abroad) and a significant part of our indebtedness is denominated in U.S. dollars. As of December 31, 2017, our U.S.dollar-denominated indebtedness was U.S. $4.3 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, Canadian and U.S. economies may impair our ability to proceed with our strategic plan, including with respect to pricing. For additional discussion regarding the risks we face in each of the aforementioned markets, see “Item 3. Key Information—Risk Factors—Risks Relating to Chile,” “—Risks Relating to Argentina,” “—Risks Relating to Brazil,” “—Risks Relating to Uruguay” and “—Risks Relating to the United States and Canada.”

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

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


	Year ended December 31,⁽¹⁾
Product⁽²⁾	2017		2016		2015
	(U.S.$ per tonne)⁽³⁾
Pulp
Bleached pulp		619.7		549.5		636.7
Unbleached pulp		659.0		592.4		616.6
	(U.S.$ per cubic meter)⁽³⁾
Wood Products
Sawn timber		258.5		246.8		239.8
Remanufactured wood products		582.8		556.1		686.4
Plywood		420.5		402.4		403.8
Panels		337.7		322.6		325.0

Forestry Products
Logs		32.7		35.3		36.9

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

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

(3)	We generally quote our prices in U.S. dollars for export sales and in Chilean pesos, Argentine pesos or Brazilian 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. Risk Factors—Risks Relating to Us and the Forestry Industry— Fluctuations in market price for our products could adversely affect our financial condition, results of operations and cash flows”.

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

Prices for unbleached softwood market pulp also follow cyclical patterns related to worldwide demand, stock levels and supply. Unbleached softwood market pulp represents about 3.1% of the total wood pulp market. The majority of such pulp is sold in Asia, and its price does not necessarily follow the cycle of prices for NBSK or BEKP.

In 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.$ 811.2 per tonne in October 2015. Following the October peak BEKP 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.$788.9 per tonne. 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. A new pulp mill located in Indonesia began itsramp-up in November 2016. With an annual capacity of 2.8 million tonnes, it is currently one of the largest pulp mills worldwide. Throughout 2015 and the first half of 2016, NBSK prices followed a downward trend, reaching U.S.$789.2 per tonne at the end of April 2016. For the remainder of the year, prices slightly recovered and stabilized, finishing the year at U.S.$808.83 per tonne.

During 2017, average prices of BEKP and NBSK followed an upward trend, with NBSK reaching U.S.$999.63 per ton at the end of the year, the highest level since 2011. BEKP 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). Prices increased mainly because the expected capacity of the mill located in Indonesia was revised to 1.7 million tonnes for the next three to four years and the lower capacity of other existing mills due to operational problems. Demand has had a steady rise during 2017, which also drove prices to reach higher levels.

Prices of NBSK

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


List Price as of December 31,			Change YoY
2014	U.S.$	932.06		2.8	%
2015		808.36		(13.8	)%
2016		808.83		0.7	%
2017		999.63		23.6	%

Prices of BEKP

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


List Price as of December 31,			Change YoY
2014	U.S.$	742.90		(3.5	)%
2015		788.91		6.2	%
2016		652.58		(17.3	)%
2017		979.31		50.1	%

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
2014	U.S.$	650.42		(9.9	)%
2015		601.70		(7.5	)%
2016		573.82		(4.6	)%
2017		768.03		33.8	%

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 2013, the average prices in our sawn timber and remanufactured wood products segment increased 1.0%. The average price of panels increased 0.5%.

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

During 2015, average prices and sales volume for our wood products declined by 5.3% and 0.9% respectively, compared to 2014. Overall, countries with depreciated currencies increased their exports, resulting in greater supply in several markets, which in turn, lowered 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 moldings products remained stable. As a result of the decrease in Argentina’s competitiveness in the export market, we focused our sales efforts with respect to panels primarily on the domestic market. The higher production of our Nueva Aldea Mill increased our plywood sales volume throughout the year. Particleboards also showed increased sales profits from 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 by 0.7% and 2.7% respectively, in each case compared to 2015. Sales volumes decreased compared to 2015, with panels sales volume dropping by 3.3% and sawn timber sales volume dropping by 4.6%. Argentine markets continued to be pressured during 2016, and opportunities to export to other countries were limited. Brazilian markets followed a similar trend, although there were higher export opportunities, where the depreciation of their local currency against the U.S. dollar made margins more competitive. These export opportunities were mainly to North America, where higher supply volumes entered the market, partially offset by healthy demand throughout the year. Our new commercial sales office in the Middle East also enabled us to reach new customers and have a better presence in those markets.

During 2017, average prices for our wood products division increased 5.1% 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 by 4.7% compared to 2016, offset by a decrease of 5.3% in sales volume. North American market demand improved in 2017 fueled 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 new MDF mills in Brazil and Mexico that increased competition, we were able to maintain and increase prices in some markets. With the acquisition of the assets of Masisa S.A. in Brazil, we expect to consolidate our position in the market.

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

Costs

Our major costs of sales are the following:

•

the cost of timber,

•

costs related to harvesting (forestry works),

•

maintenance costs,

•

chemical costs,

•

the cost of sawmill processing,

•

depreciation, and

•

energy and fuel costs.

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

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

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

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

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

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 14.9% 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%.

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.

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, are shown on the statement of financial position at fair value. Our forests are thus accounted for at fair value less estimatedpoint-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 thecash-generating units to which goodwill has been allocated. Arauco estimates the value either based on appraisals and/or the future cash flows expected to arise from thecash-generating unit and a suitable discount rate to calculate present value. See Note 17 to our audited consolidated financial statements.

Litigation and Contingencies

Arauco, its 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 Us and the Forestry Industry—We are subject to legal proceedings related to our mills which could adversely affect our business, financial condition, results of operations and cash flows” and “Item 8. Financial Information—Legal Proceedings.” See Note 18 to our audited consolidated financial statements.

Recently Issued Accounting Standards

Note 1 to our audited consolidated financial statements discusses new accounting pronouncements under IFRS that apply to annual periods beginning on or after January 1, 2017, 2018, 2019 and 2021. There are no additional pronouncements, amendments or interpretations that could have a material impact on our financial statements.

Results of Operations

The following table provides a breakdown of our financial results of operations and sales volumes as of and for the years ended December 31, 2015, 2016 and 2017. 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, 2015, 2016 and 2017 included elsewhere herein. The audited consolidated financial statements included herein are prepared in U.S. dollars and in accordance with IFRS. The wood products segment was previously referred to as the timber segment. See Note 24 to our audited consolidated financial statements.


	For the year ended December 31,
	2017								2016								2015
	Sales			%			Volume		Sales			%			Volume		Sales			%			Volume
	(in millions of U.S. dollars, except where indicated)
Revenue
Pulp
Bleached pulp⁽¹⁾		2,062.4			39.4	%		3,327.8		1,780.6			37.4	%		3,240.8		1,959.7			38.1	%		3,077.9
Unbleached pulp⁽¹⁾		293.3			5.6			445.1		260.5			5.5			439.7		283.4			5.5			459.6

Total		2,355.7			45.0	%		3,772.9		2,041.1			42.9	%		3,680.5		2,243.1			43.6			3,537.5

Wood Products
Panels⁽²⁾		1,643.3			31.4			4,866.2		1,533.6			32.2			4,753.9		1,597.2			31.0			4,914.8
Sawn timber⁽²⁾		476.1			9.1			1,841.6		479.8			10.1			1,943.8		498.4			9.7			2,078.9
Remanufactured wood products⁽²⁾		259.3			5.0			445.0		245.5			5.2			441.6		287.5			5.6			418.8
Plywood		238.2			4.5			566.5		226.9			4.8			563.9		239.9			4.7			594.1

Total		2,616.9			50.0			7,719.3		2,485.8			52.2	%		7,703.2		2,623.0			51.0	%		8,006.6

Forestry
Logs, net⁽²⁾		72.6			1.4			2,223.7		63.1			1.3			1,787.5		87.9			1.7			2,384.3
Chips		25.2			0.5			443.4		20.8			0.4			366.2		17.6			0.3			277.6
Other		8.2			0.1			5.2		6.1			0.1			7.8		3.6			0.1			15.7

Total		106.0			2.0			2,672.3		90.0			1.9	%		2,161.5		109.1			2.1	%		2,677.6

Energy		93.8			1.8					103.4			2.2					121.1			2.4
Other		65.9			1.2					41.1			0.9					50.4			1.0

Total revenue		5,238.3			100	%				4,761.4			100	%				5,146.7			100	%

Cost of sales
Timber		(725.1	)							(736.4	)							(641.8	)
Forestry labor costs		(631.3	)							(600.3	)							(636.1	)
Maintenance costs		(262.8	)							(313.5	)							(305.7	)
Chemical costs		(517.5	)							(479.3	)							(539.9	)
Depreciation		(389.8	)							(378.0	)							(371.9	)
Other costs of sales		(1,048.0	)							(991.4	)							(1,016.0	)

Total cost of sales		(3,574.5	)							(3,498.9	)							(3,511.4	)

Gross profit		1,663.8			31.8	%				1,262.5			26.5	%				1,635.3			31.8	%
Other income		111.5								257.9								273.0
Distribution costs		(523.3	)							(496.5	)							(528.5	)
Administrative expenses		(521.3	)							(474.5	)							(552.0	)
Other expenses		(240.1	)							(77.4	)							(83.4	)
Financial income		19.6								29.7								50.3
Financial costs		(287.9	)							(258.5	)							(263.0	)
Share of profit (loss) of associates and joint ventures accounted for using equity method		17.0								23.9								6.7
Exchange rate differences		0.1								(3.9	)							(41.2	)
Income before income tax		239.4								263.2								497.4
Income tax		31.0								(45.6	)							(129.7	)
Net income		270.4								217.6								367.7

(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.

Year Ended December 31, 2016 Compared to Year Ended December 31, 2017

Revenue

Revenues increased by 10.0% from U.S.$4,761.4 million in 2016 to U.S.$5,238.3 million in 2017, primarily as a result of:

•

a 15.4%, or U.S.$314.6 million, increase in revenues from pulp;

•

a 5.3%, or U.S.$131.1 million, increase in revenues from wood products;

•

a 17.8%, or U.S.$16.0 million, increase in revenues from forestry products

Pulp. Revenues from bleached and unbleached pulp increased by 15.4% from U.S.$2,041.1 million in 2016 to U.S.$2,355.7 million in 2017, reflecting a 2.5% increase in sales volume and a 12.6% increase in average prices. Sales of bleached pulp increased by 15.8% due to a 12.8% increase in average prices and a 2.7% increase in sales volume. 2017 started with a large gap between softwood and hardwood, with both prices increasing. The growth in hardwood prices was greater than the increase in softwood prices, which implied that through the year the gap between both prices decreased significantly. The increase in hardwood prices was driven by lower expected supply capacity of the pulp mill in Indonesia, because the market expected a capacity of 2.8 million tonnes annually and instead we expect the capacity to be stable at 1.7 million tonnes for the next three to four years. Lower capacity due to operational problems in existing mills in the industry also impacted the supply and compensated the new production. Demand has had a steady rise during 2017 as certain policies, including import restrictions of unsorted waste paper, put in place by the Chinese government to stimulate internal consumption, helped support pulp demand in China. Revenues from unbleached pulp increased by 12.6% during 2017, mainly due to a 11.2% increase in average prices and a 1.2% increase in sales volume.

Wood products.Revenues from wood products increased by 5.3% from U.S.$2,485.8 million in 2016 to U.S.$2,616.9 million in 2017. This increase in revenues was primarily due to a 5.1% increase in average prices, and by a 0.2% increase in sales volume. Despite additional supply from Brazil and North America competitors, revenues from panels increased by 7.1%, driven by a 4.7% increase in average prices and a 2.4% increase in sales volume. Argentina showed an increase in prices and sales volume in MDF and PBO, mainly due to better conditions in the economy. In Brazil PBO and MDF average prices improved, due to economic growth compared to a contraction in the two prior years.

Revenues from sawn timber decreased by 0.8%, from U.S.$479.8 million in 2016 to U.S.$476.1 million in 2017 due to a 5.3% decrease in sales volume, partially offset by a 4.7% increase in average prices. During the first quarter of 2017, forestry fires in Chile damaged our El Cruce Sawmill, which stopped its operations. Our other sawmills were able to absorb the lack of production. Demand from Asia and Middle East, our principal customers for these products, have shown improvements during the year. Remanufactured

products revenues increased 5.6% from U.S.$245.5 million in 2016 to U.S.$259.3 million in 2017 due to a 4.8% increase in average prices and a 0.8% in sales volume. Plywood revenues increased 5.0% from U.S.$226.9 million in 2016 to U.S.$238.2 million in 2017 with sales volumes increasing 0.5% and prices increasing 4.5%. The North American market showed a high demand in retail, distribution and industrial customers.

Forestry products.Revenues from forestry products increased by 17.8% from U.S.$90.0 million in 2016 to U.S.$106.1 million in 2017. This increase was primarily the result of a U.S.$9.6 million increase in logs sales, driven in turn by a U.S.$8.2 million increase in sales in sawlogs, and a U.S.$1.4 million increase in sales in pulplogs.

Other revenue.Revenues from other sources, consisting mainly of sales of energy and chemicals, increased by 10.5% from U.S.$144.4 million in 2016 to U.S.$159.7 million in 2017. This was primarily the result of a U.S.$24.9 million increase in other services, partially offset by a U.S.$ 9.6 million decrease in energy sales.

Cost of sales

Cost of sales increased by 2.2% from U.S.$3,498.9 million in 2016 to U.S.$3,574.5 million in 2017, primarily as a result of a 33.3% increase in cost of energy and fuel used in our operations mainly driven by higher average prices of fuel. Our forestry labor cost increased by 5.2% due to increased forestry production and our chemical products costs increased by 8.0%. These increased costs were largely offset by a 16.2% decrease in our maintenance costs.

Gross Profit

As a percentage of total revenue, our gross profit increased from 26.5% in 2016 to 31.8% in 2017, primarily as a result of a 10.0% increase in sales revenue, while cost of sales rose slightly by 2.2%.

Other income

Other income decreased by 56.8% from U.S.$257.9 million in 2016 to U.S.$111.5 million in 2017. Profits from changes in the fair value of our biological assets decreased by 60.2% compared to 2016, mainly due to a change in the forest valuation contained in the IFRS forest assessment. This change in estimation originated from forest inventory differences, associated to pruning and thinning that were not carried out according to schedule, climate reasons, and an update in the growth tables considered in the valuation.

Distribution costs

Distribution costs increased by 5.4% from U.S.$496.5 million in 2016 to U.S.$523.3 million in 2017, primarily due to an increase of 7.6%, or U.S.$27.1 million, in total shipping and freight costs. This increase was explained by an increase in sales volume in our pulp division. As a percentage of revenue, distribution costs remained fairly stable, at 10.0% in 2017, compared to 10.4% in 2016.

Administrative expenses

Administrative expenses increased by 9.9% from U.S.$474.5 million in 2016 to U.S.$521.3 million in 2017. As a percentage of revenue, administrative expenses remained stable at 10.0% in 2017 and 2016.

Other expenses

Other expenses increased by 210.2% from U.S.$77.4 million in 2016 to U.S.$240.1 million in 2017 due to the forestry fires that affected our forest during 2017. Loss totaled approximately U.S.$173.1 million net of U.S.$35.0 million that we received from the insurance company; thereby the loss was U.S.$138.1 million.

Finance costs

Finance costs increased by 11.4%, from U.S.$258.5 million in 2016 to U.S.$287.9 million in 2017. This increase is explained by our repurchase of Notes due in 2019, 2021 and 2022 in November 2017. The costs incurred in the repurchase primarily included a premium payment that amounted to approximately U.S.$60 million. During 2017 we continued to focus on our deleveraging process.

Exchange rate differences

Gains from exchange rate differences totaled U.S.$0.1 million in 2017, compared to the U.S.$3.9 million loss that we had in 2016. This was primarily due to the appreciation of the Chilean peso which increased our cash and cash equivalents and outstanding debt in this currency. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada—Argentina.”

Income tax

We recorded an income tax gain of U.S.$31.0 million in 2017 compared to an expense of U.S.$45.6 million in 2016. This increase is attributable to lower income before tax and the effect in deferred taxes a result of the tax rate reduction in United States and Argentina which accounted for U.S.$17.6 and U.S.$62.7 million.

Net income

Net income in 2017 increased by 24.3% from U.S.$217.6 million in 2016 to U.S.$270.4 million in 2017. Higher sales in all of our business segments increased our gross profit by 31.8% or U.S.$401.3 million and our income tax gain, all of which was partially offset by higher other operating expenses and lower other operating income.

Year Ended December 31, 2015 Compared to Year Ended December 31, 2016

Revenue

Revenues decreased 7.5% from U.S.$5,146.7 million in 2015 to U.S.$4,761.4 million in 2016, primarily as a result of:

•

a 9.0%, or U.S.$202.0 million, decrease in revenues from pulp;

•

a 5.2%, or U.S.$137.2 million, decrease in revenues from timber;

•

a 17.6%, or U.S.$19.2 million, decrease in revenues from forestry products.

Pulp. Revenues from bleached and unbleached pulp decreased 9.0% from U.S.$2,243.1 million in 2015 to U.S.$2,041.1 million in 2016, reflecting a 9.0% decrease in sales volume and a 2.3% decrease in average prices. Sales of bleached pulp decreased 9.1% due to a 13.7% decrease in average prices, partially offset by a 5.3% increase in sales volume. During 2016, the gap between softwood and hardwood prices increased but prices remained stable during the last quarter. Hardwood prices followed a downward trend during the whole year due to an increase of supply to the market and lower expected demand. A pulp mill in Indonesia, with capacity of 2.8 million tonnes of hardwood pulp (currently the largest pulp mill worldwide) was set to start operations by the end of 2016. However, as we reached the second semester of 2016, it became clear to the market that the startup of the new mill would be delayed, thus taking pressure off prices. Demand also started picking up in China driven by the revitalization of its exports and price inflation. Softwood prices remained fairly stable after a drop during the first two quarters of 2016, along with stable demand. Revenues from unbleached pulp decreased 8.1% during 2016, mainly due to a 3.9% decrease in average prices and a 4.3% decrease in sales volume.

Timber.Revenues from timber decreased 5.2% from U.S.$2,623.0 million in 2015 to U.S.$2,485.8 million in 2016. This decrease in revenues was primarily due to a 3.8% decrease in sales volume and a 1.5% decrease in average prices. Panel prices, in particular for MDF moldings and other value added products, declined as a result of increased supply originating from Brazil and other countries with depreciated currencies, which in turn increased competition. Argentina showed a decline in prices and sales volume in PBO and MDF, mainly due to the economic downturn and difficulties exporting these items to other countries.

Revenues from sawn timber decreased 3.7%, from U.S.$498.4 million to U.S.$479.8 million due to a 6.5% decrease in sales volume, partially offset by a 2.9% increase in average prices. After a weak first quarter, sawn timber markets recovered over the rest of 2016, although not reaching the same revenues levels of 2015. Asia showed an overall healthy demand for our sawn timber products, although competition increased from countries with depreciated currencies. Remanufactured products revenues decreased 14.6% from U.S.$287.5 million in 2015 to U.S.$245.5 million due to a 19.0% decrease in average prices, partially offset by a 5.4% increase in sales volume. Plywood revenues decreased 5.4% from U.S.$239.9 million in 2015 to U.S.$226.9 million in 2016, with sales volumes decreasing 5.1% and prices decreasing 2.3%. The North American market maintained its dynamism, with the Housing Starts index maintaining its positive trend during 2016, which resulted in a sustained demand for sawn timber products.

Forestry products.Revenues from forestry products decreased 17.6% from U.S.$109.2 million in 2015 to U.S.$90.0 million in 2016. This decrease was primarily the result of a U.S.$24.8 million decrease in the revenues of log sales, driven in turn by a U.S.$8.8 million decrease in sales in sawlogs, and a U.S.$16.0 million decrease in sales in pulplogs.

Other revenue.Revenues from other sources, consisting mainly of sales of energy and chemicals, decreased 15.7% from U.S.$171.4 million in 2015 to U.S.$144.4 million in 2016. This was primarily a result of a U.S.$17.7 million decrease in our energy sales, as a result of a decrease in average electricity prices in Chile.

Cost of sales

Cost of sales decreased 0.4% from U.S.$3,511.4 million in 2015 to U.S.$3,498.9 million in 2016, primarily as a result of a 3.8% decrease in sales volume of our timber products, which in turn decreased forestry labor costs by 5.6%. Costs of energy and fuel used in our operations decreased by 18.9% compared to 2015, as well as costs of energy we sold back to the power grid which decreased by 4.1%, mainly driven by a decline in average prices of crude oil and its derivatives compared to 2015 average prices.

Gross Profit

As a percentage of total revenue, our gross profit decreased from 31.8% in 2015 to 26.5% in 2016, primarily as a result of a 7.5% decrease in sales revenue, while cost of sales declined slightly by 0.4%.

Other income

Other income decreased 5.6% from U.S.$273.0 million in 2015 to U.S.$257.9 million in 2016. Profits from changes in the fair value of our biological assets remained more or less stable, decreasing slightly by 0.9% compared to 2015. In addition, we generated no gains on business combinations achieved in stages compared to a gain of U.S.$8.2 million in 2015, due to the purchase of the remaining 51.0% of Novo Oeste in Brazil during the last quarter of 2015.

Distribution costs

Distribution costs decreased 6.1% from U.S.$528.5 million in 2015 to U.S.$496.5 million in 2016, primarily due to a decrease by 7.7%, or U.S.$29.6 million, in total shipping and freight costs. This decrease was explained by a decline in shipping and freight tariffs. As a percentage of revenue, distribution costs remained fairly stable, at 10.4% in 2016, compared to 10.3% in 2015.

Administrative expenses

Administrative expenses decreased 14.0% from U.S.$552.0 million in 2015 to U.S.$474.5 million in 2016. As a percentage of revenue, administrative expenses also decreased from 10.7% in 2015 to 10.0% in 2016.

Finance costs

Finance costs decreased 1.7%, from U.S.$263.0 million in 2015 to U.S.$258.5 million in 2016. Despite an increase in total debt when compared to 2015, the decrease in finance costs was mainly due to the issuance of a local bond in December 2016, which served to refinance short and/orlong-term liabilities. During the rest of 2016 we continued to focus on our de leveraging process.

Exchange rate differences

Losses from exchange rate differences totaled U.S.$3.9 million in 2016. In particular, the depreciation of the Argentine peso affected our cash and cash equivalents and account receivables of our Argentine subsidiary. Since the functional currency of our Brazilian subsidiaries, Arauco do Brasil S.A. and Arauco Forest Brasil S.A., is the Brazilian real, the depreciation of the Brazilian real also generated a loss given that their outstanding loans are denominated in U.S. dollars. See “—Economic Indicators in Chile, Argentina, Brazil, Uruguay, the United States and Canada—Argentina.”

Income tax

We recorded an income tax expense of U.S.$45.6 million in 2016 compared to U.S.$129.7 million in 2015. This decrease is mainly attributable to lower revenues which in turn decreased by 7.5% or U.S.$385.4 million compared to 2015. The decrease is also attributable to a direct credit in 2016 of approximately U.S.$16.7 million which positively impacted our income tax expense, as a

result of a net increase in deferred tax assets attributable to the carry forward of unused tax losses after the restructuring of Novo Oeste, acquired at the end of 2015. See “Item 3. Risk Factors—Risks Relating to Chile—A tax reform bill with significant changes for companies was approved in September 2014 and the Chilean Superintendence of Securities and Insurance, or SVS, modified accounting reporting standards for companies under its supervision in October 2014.”

Net income

Net income in 2016 decreased 40.8% from U.S.$367.7 million in 2015 to U.S.$217.6 million in 2016. Lower sales in all of our business segments decreased our gross profit by 22.8% or U.S.$357.8 million. Lower distribution costs and administrative expenses partially offset this effect. See “Item 3—Risk Factors—Risks Relating to Chile—A tax reform bill with significant changes for companies was approved in September 2014 and the Chilean Superintendence of Securities and Insurance, or SVS, modified accounting reporting standards for companies under its supervision in October 2014.”

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.

We also have access to two committed credit facility lines, which total U.S.$325.8 million. The first line has an available amount of UF2,885,000, or approximately U.S.$125.8 million, and matures on January 29, 2020. The second line has a maximum available amount of U.S.$200.0 million and matures on March 27, 2020. As of the date of this annual report, Arauco has not used any of these committed credit facility lines.

Cash Flow from Operating Activities

Our net cash flow provided by operating activities was U.S.$1,072.4 million in 2017 and U.S.$773.6 million in 2016. This increase was principally due to a U.S.$488.2 million increase in our collection of sales of goods and services, as well as a U.S.$104.0 million decrease in other payments for operating activities.

Our net cash flow provided by operating activities was U.S.$773.6 million in 2016 and U.S.$853.7million in 2015. This decline was principally due to a 12.4% decrease in the collection of sales of goods and services. This was partially offset by a U.S.$345.6 million decrease in payments to suppliers of goods and services.

Cash Flow Used in Investing Activities

Our net cash used in investing activities was U.S.$633.3 million in 2017 and U.S.$640.2 million in 2016. This decrease was principally due to a decrease in capital expenditure, of 1.6%, or U.S.$11.0 million, mainly as a result of cash flows used to purchase in associates. Capital expenditures in 2017, included U.S.$165.0 million in the “MDP Grayling” project in Michigan, U.S.$ 179.2 million in plantation and U.S.$51.8 million in the water treatment plant in the Arauco mill.

Our net cash used in investing activities was U.S.$640.2 million in 2016 and U.S.$477.8 million in 2015. This increase was principally due to higher capital expenditures, including U.S.$51.2 million for the water treatment plant in our Arauco Mill; U.S.$153.1 million for the acquisition of 50% of Sonae Arauco; and U.S.$ 16.0 million as the “MDP Grayling” project in Michigan began its construction phase.

Cash Flow Used in Financing Activities

Our net cash used in financing activities was U.S.$439.1 million in 2017, compared to the U.S.$38.5 million used in 2016. During 2017, we received U.S.$1,312.5 million in loan proceeds, and we paid U.S.$1,627.7 million of principal of and interest on our debt, including U.S.$877.0 million in a U.S.dollar-denominated bonds, U.S.$270.0 million in a U.S.dollar-denominated bond of our subsidiary Arauco Argentina, and U.S.$100.0 million in the prepayment of debt of a credit loan. In addition, we paid U.S.$121.6 million in dividends.

Our net cash used in financing activities was U.S.$38.5 million in 2016, compared to U.S.$812.2 million used in 2015. During 2016, we received U.S.$737.7 million in loan proceeds, and we paid U.S.$645.2 million of principal and interest on our debt, including U.S.$72.0 million in payment of principal of loans made in connection with the construction of the Montes del Plata Mill. In addition, we paid U.S.$130.6 million in dividends.

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

Contractual Obligations

As is customary practice in the pulp industry, we generally do not havelong-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, 2017, 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⁾		455,865		997,792		907,017		3,223,296		5,583,970
Purchase obligations⁽²⁾		62,226		12,397		—		—		74,623
Capital (finance) lease obligations		44,341		50,020		18,015		—		112,376

Total		562,432		1,060,209		925,032		3,223,296		5,770,969

(1)

Includes estimated interest payments related to debt obligations based on market values as of December 31, 2017. In the case of floating rate debt, interest rate is calculated using the current index setting in place as of December 31, 2017, and assume no changes in theyear-end index for any of the future periods. The interest rate on our floating rate debt is determined principally by reference to the Londoninter-bank offered rate (LIBOR), and as of December 31, 2017, the average spread for our U.S. dollar floating rate debt oversix-month LIBOR was 1.42%. Approximately 14.0% of our total debt is floating rate debt as December 31, 2017.

(2)

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

Investing Activities

During 2017, our investment activities were mainly aimed at sustaining our existing property, plant and equipment, as well as our biological assets. These investments included:

•

U.S.$179.2 million invested in plantations;

•

U.S.$165.0 million invested for the “MDP Grayling” Project; and

•

U.S.$51.8 million invested for the water treatment plant in the Arauco Mill.

Financing Activities

During 2017, our principal financing activities were as follows:

On November 30, 2017, we prepaid U.S.$100.0 million of credit loan due in September 28, 2018.

On November 2, 2017, Arauco issued two series of bonds in the international capital markets for a total amount of U.S.$900 million. The amount of the issuance of the10-year Series was U.S.$500 million while the amount of the30-year series was U.S.$400 million. The proceeds from the issuance were used to (A) repurchase in part the following bonds issued by Arauco in the United States of America: (i) U.S.$297.2 million of the U.S.$500 million 7.250% Notes due 2019, (ii) U.S.$199.7 million of the U.S.$400 million 5.000% Notes due 2021, and (iii) U.S.$244.1 million of the U.S.$500 million 4.750% Notes due 2022; and (B) other general corporate purposes.

On September 15, 2017, we made the final payment of U.S.$125.0 million repaying in full our 7.5% Notes due 2017.

On June 9, 2017, we made the final payment of U.S.$270.0 million repaying in full our 6.375% Notes due 2017.

On April 21, 2017, through our subsidiary Flakeboard America, we obtained a committed facility loan for a total of U.S.$300 million. The tenor of this loan is a total of seven years: disbursements can be made during the first two years, and will then be amortized semiannually for the next five years, with a final balloon payment of 70% of the total loan.

As of December 31, 2017, our current portion of our bank debt was U.S.$392.9 million of which 98.2% was U.S.dollar-denominated. As of December 31, 2017, our totalnon-current portion of our bank debt was U.S.$465.6 million of which 96.5% was U.S.dollar-denominated.

As of December 31, 2017, we also had total capital markets borrowings (including the current portion of such debt) of U.S.$3.3 billion, 62.3% of which were U.S.dollar-denominated.

As of December 31, 2017, the weighted average maturity of ournon-current debt was 9.11 years. The interest rate on our floating rate debt is determined principally by reference to the Londoninter-bank offered rate (LIBOR), and as of December 31, 2017, the average spread for our U.S. dollar floating rate debt oversix-month LIBOR was 1.42%. As of December 31, 2017, the average interest rate for our U.S. dollar fixed rate debt was 4.72%. These average rates do not reflect the effect of swap agreements.

As of December 31, 2017, we guaranteed obligations of U.S.$408.4 million related to Montes del Plata, U.S.$131.0 million related to Flakeboard America for the “MDP Grayling” project, U.S.$43.9 million related to Arauco do Brasil and U.S.$19.0 million related to Arauco Forest Brasil 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 the bank loan agreements in effect on December 31, 2017 are as follows:

•

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

•

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

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

•

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

We were in compliance with all bank loan and bond covenants as of December 31, 2017. Our U.S.dollar-denominated bonds do not contain financial covenants.

OFF-BALANCE SHEET ARRANGEMENTS

We do not have anyoff-balance sheet arrangements.

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 commercial offices on a centralized basis. In the case of our Argentine, North American and Brazilian subsidiaries, the management of their daily treasury activities is independent from our Corporate Finance Department, although following the same corporate policy.

The activities of our Uruguayan subsidiary 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 subsidiaries are supervised by a financial committee integrated by members of both shareholders’ finance departments.

HEDGING

We periodically review our exposure to risks arising from fluctuations in foreign exchange rates and interest rates and decide, on acase-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:


Bank	U.F. Notional Amount		U.S.$ Notional Amount		Hedging Start Date		Maturity
Deutsche—U.K.		1,000,000		43,618,307		10-30-2011		10-30-2021
JP Morgan—N.A.		1,000,000		43,618,307		10-30-2011		10-30-2021
Deutsche—U.K.		1,000,000		37,977,065		04-30-2014		04-30-2019
BBVA—Chile		1,000,000		38,426,435		10-30-2014		04-30-2023
BBVA—Chile		1,000,000		38,378,440		10-30-2014		04-30-2023
Santander—Chile		1,000,000		37,977,065		10-30-2014		04-30-2023
BCI—Chile		1,000,000		37,621,562		10-30-2014		04-30-2023
Corpbanca—Chile		1,000,000		42,864,859		09-01-2010		09-01-2020
BBVA—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
BBVA—Chile		1,000,000		42,864,257		09-01-2010		09-01-2020
Corpbanca—Chile		1,000,000		46,474,122		05-15-2012		11-15-2021
JP Morgan—N.A.		1,000,000		47,163,640		11-15-2012		11-15-2021
BBVA—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
Santander—Chile		3,000,000		128,611,183		10-01-2014		04-01-2024
JP Morgan – U.K.		1,000,000		43,185,224		10-01-2014		04-01-2024
Corpbanca—Chile		1,000,000		43,277,070		10-01-2014		04-01-2024
BCI—Chile		875,000		37,787,071		10-01-2014		04-01-2021
BCI—Chile		875,000		37,797,108		10-01-2014		04-01-2021
Santander—Chile		5,000,000		201,340,031		11-15-2016		11-15-2026
TOTAL		28,750,000		1,203,502,865

Thesecross-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.

The aggregate fair value of ourcross-currency swap agreements as of December 31, 2017, represented an asset of U.S.$47.5 million as compared to December 31, 2016, when they represented a liability of U.S.$80.3 million.

Interest Rate Swap Agreements

We have outstanding the following interest rate swap agreements to hedge fluctuations in floating rates forlong-term debt in Uruguay:


Bank	Currency		U.S.$ Notional Amount
DNB Bank ASA		USD		50,637,607	⁽¹⁾

(1)

U.S.$ notional amount includes multiple contract agreements.

The fair value of this agreement as of December 31, 2017, represented an asset of U.S.$729,498 for Arauco. The fair value shown in the table above is 50% of total fair value, since these agreements were entered into by Montes del Plata (of which Arauco owns 50% of its shares).

Forward Agreements

As of December 31, 2017, we have outstanding forward agreements in Colombia and Uruguay to hedge fluctuations in their respective local currencies, as follows:


Bank	Exchange Rate		U.S.$ Notional Amount			Hedging Start Date	Maturity
BBVA Colombia		USD-COP		6,000000		10-11-2017	01-10-2018
Corpbanca Colombia		USD-COP		8,000,000		11-14-2017	02-13-2018
Corpbanca Colombia		USD-COP		2,100,000		12-21-2017	03-12-2018
Banco Santander Uruguay		USD-UYU		24,000,000	⁽¹⁾	—	—
HSBC Uruguay		USD-UYU		9,000,000	⁽¹⁾	—	—

(1)

U.S.$ notional amount includes multiple contract agreements.

The fair value of these agreements as of December 31, 2017, represented an asset of U.S.$1.6 million for Arauco, which includes 50% of total fair value, since these agreements were entered into by Montes del Plata (of which Arauco owns 50% of its shares).

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, 2017, 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		4,760,063	⁽¹⁾
DNB Bank ASA	Fuel Oil No. 6		4,002,214	⁽¹⁾
Citibank U.K.	Fuel Oil No. 6		761,046	⁽¹⁾

(1)

U.S.$ notional amount includes multiple contract agreements.

The fair value of these agreements as of December 31, 2017, represented an asset of U.S.$2.2 million for Arauco. The fair value shown in the table above is 50% of total fair value, 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.$2.6 million in 2015, U.S.$2.7 million in 2016 and U.S.$3.4 million in 2017 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 oflong-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.

TREND INFORMATION

From December 31, 2017 through March 31, 2018, prices for softwood increased by 9.3%, reaching U.S.$1,092.4 per tonne in NBSK index, while prices for hardwood increased by 5.2%, to U.S.$1,030.08 per tonne in the BEKP index. World economies continue growing and the unsorted waste paper restriction in China helped in the demand side in both fibers. No new supply entering the market and constant growth of demand will contribute to maintain the level of prices.

Demand for wood products has a positive outlook for the current year. In the case of panels, the Housing Starts index in United States market remains in a positive trend, although we expect more supply in the remanufactured products from a strong competition from China and Brazil, placing some pressure over prices. In Brazil, we look forward to some improvements in local consumption that will lead to higher sales volume and prices. In the MDF and PBO markets we could see more supply. The Argentine market remains stable and construction is improving, which is expected to lead to better results. European demand remains strong and continues conversion to higher value products. Sonae Arauco had a better than expected 2017, and as European markets continue recovering we expect increase in sales. Prices and sales volume for remanufactured products experienced a decrease during the first months of 2018 in Argentina and North America. On the plywood products, during the first months of 2018 we experienced an increase in average prices, despite a decrease in sales volume. Asia and Oceania remain with a steady demand with some opportunities for price increases.

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

Item 6. Directors, Senior Management and Employees

DIRECTORS AND EXECUTIVE OFFICERS

Directors

A Board of Directors manages our business. Ourestatutos(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 bere-elected for any number of periods. The current board was elected in April 2017, and their terms will be renewed in April 2020. 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	31	Chairman	73
Roberto Angelini	31	FirstVice-Chairman	69
Jorge Andueza	24	SecondVice-Chairman	69
Alberto Etchegaray	24	Director	72
Eduardo Navarro	10	Director	52
Timothy C. Purcell	13	Director	58
Franco Mellafe	3	Director	42
Juan Ignacio Langlois	2	Director	50
Jorge Bunster⁽¹⁾	17	Director	65

(1)	Jorge Bunster was Director from1996-2010. He rejoined the Board of Directors in April 2017.

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

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

Roberto Angelinibecame a Director on April 30, 1986 and became FirstVice-Chairman of the Board of Directors on May 4, 2007. He served asVice-Chairman of the Board of Directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as SecondVice-Chairman of the Board of Directors from January 27, 2005 to May 4, 2007. He serves as Chairman of the board of directors of Empresas Copec, COPEC, AntarChile, Corpesca S.A., PesqueraIquique-Guanaye S.A., Inversiones Alxar S.A. and Servicios Corporativos Sercor S.A. He also serves as a member of the boards of directors of Forestal Arauco, Empresa Pesquera Eperva S.A., Orizon S.A. and Inversiones Siemel S.A. Mr. Angelini holds a degree in civil engineering from the Catholic University of Chile.

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

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

Eduardo Navarrobecame a Director on September 25, 2007. He is also the Chief Executive Officer of Empresas Copec S.A., the Chief Executive Officer of PesqueraIquique-Guanaye S.A., and serves as chairman of the board of Abastible S.A. and Duragas S.A. and a member of the board of directors of COPEC, Solgas S.A., Corpesca S.A., Orizon S.A., Inversiones Alxar S.A., Inversiones Laguna Blanca S.A. and Inversiones del Nordeste. Mr. Navarro holds degrees in commercial engineering and economics, and a master’s degree in economics, all from the Catholic University of Chile.

Timothy C. Purcellbecame a Director on April 26, 2005. He is also Managing Partner of Linzor Capital Partners, LP. Mr. Purcell currently serves as a member of the Board of Directors of Komax, S.A., Engenium Capital S.A. de C.V., Tip de México, S.A. de C.V., and Corporación Santo Tomás. He is also Chairman of the board of directors of Enseña Chile, Trustee of International House in New York and member of the board of directors of Colegios Cree in Chile. Mr. Purcell received an undergraduate degree with distinction in economics from Cornell University, as well as a master’s degree in international studies from the University of Pennsylvania and a master’s degree in business from Wharton Business School.

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

Juan Ignacio Langlois became a director on April 26, 2016. He is also Partner of Tyndall Group. Mr. Langlois currently serves as a member of the board of directors of Metrogas S.A. and theInstituto Chileno de Administración Racional de Empresas (ICARE). He also serves as alternative director of Minera Las Cenizas S.A. Mr. Langlois received a law degree with maximum distinction from the Universidad de Chile School of law as well as a master’s degree in business administration (MBA) from theKenan-Flagler Business School, University of North Carolina at Chapel Hill.

Jorge Bunsterserved as a member of the Board of Directors of the Company between April 1994 and March 2010, when he voluntarily resigned to assume the position of Vice Minister of Foreign Trade at the Ministry of Foreign Affairs of Chile, and subsequently, on April 2012, as Minister of Energy until March of 2014. Mr. Bunster serves as a member of the boards of directors of COPEC, Orizon S.A. and Empresa Pesquera Eperva S.A.. Mr. Bunster holds degrees in commercial engineering and economics from the Catholic University of Chile and a master’s degree in business administration from IESE, Navarra University, Spain.

Executive Officers

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


Name	Years with Arauco	Position	Age
Matías Domeyko⁽¹⁾	31	Chief Executive Officer	56
Cristián Infante	22	President & Chief Operating Officer	51
Gianfranco Truffello	24	Chief Financial Officer	50
Robinson Tajmuch	27	SeniorVice-President Comptroller	61
Iván Chamorro	17	SeniorVice-President Human Resources & EHS	44
Franco Bozzalla	28	SeniorVice-President Wood Pulp & Energy	55
Charles Kimber	32	Senior Vice-President Commercial & Corporate Affairs	56
Antonio Luque	25	SeniorVice-President Timber & Panels	61
Camila Merino	7	SeniorVice-President Forestry	50
Gonzalo Zegers	10	SeniorVice-President International & Business Development	57
Felipe Guzmán	10	General Counsel	48

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

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

Matías Domeykois the Chief Executive Officer of Arauco. Mr. Domeyko worked at Arauco from 1987 to 1994, and then rejoined in 1997 as our Chief Financial Officer. In 2005, Mr. Domeyko assumed the position of Chief Executive Officer of Arauco. He previously served as the Director of Development of Copec. Mr. Domeyko holds a degree in commercial engineering from the University of Chile.

Cristián Infanteis the President & Chief Operating Officer of Arauco, a position that was created by Arauco in July 2011. He joined Arauco in 1996 as a wood pulp sales representative, and in 1998 was appointed sales manager for industrial lumber and remanufactured products of Forestal Arauco. He then moved to Centromaderas S.A., where he worked until 2001. Mr. Infante later served as the Corporate Management & Development and Atlantic Region Managing Director. Mr. Infante holds a degree in civil engineering from the Catholic University of Chile.

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

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

Iván Chamorrois the SeniorVice-President Human Resources & EHS of Arauco. He holds a degree in civil engineering and MBA from the Catholic University of Chile. Mr. Chamorro joined the company in 2001, working in the commercial department and later, as its Manager of Public Affairs and Communications.

Franco Bozzallais the SeniorVice-President Wood Pulp & Energy of Arauco. He joined Arauco in 1990. He was formerly a sales representative of Forestal Arauco and the Panels Area Managing Director. Mr. Bozzalla holds a degree in civil engineering from the Catholic University of Chile.

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

Antonio Luqueis the SeniorVice-President Timber & Panels of Arauco. He joined Arauco in 1993. Before joining Arauco, he was the General Manager of Cabildo S.A. and a research engineer at Compañía Industrial. Mr. Luque holds a degree in civil engineering from the University of Chile.

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

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

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

Compensation

For 2017, the aggregate compensation of all our directors and executive officers and senior managers paid or accrued in that year for services in all capacities, including salaries and compensation for their service to those executive officers who serve as directors, was U.S.$2.6 million. We do not maintain any pension or retirement programs or incentive compensation plans for our directors or executive officers. We also do not maintain any plans providing for benefits upon termination of employment. The following table sets out the compensation of our directors, executive officers and senior managers for their services in 2017.


Name	2017
Manuel Bezanilla	U.S.$	522,807
Roberto Angelini		328,862
Jorge Andueza		328,862
Cristián Infante		116,166
Matías Domeyko		107,029
Jorge Garnham M.		71,302
Alberto Etchegaray		122,920
Eduardo Navarro		122,920
Timothy C. Purcell		122,928
Franco Mellafe		181,948
Alvaro Saavedra		45,441
Jorge Serón		12,274
Robinson Tajmuch		12,274
Antonio Luque		24,000
Gonzalo Zegers		24,000
Pablo Ruival		32,308
Sergio Gantuz		32,308
Camila Merino		9,152
Jorge Bunster		82,715
Pablo Mainardi		113,846
Juan Ignacio Langlois		122,867

Total Compensation		2,566,928

Board Practices

In 2013, we created an audit committee, which was composed of two directors, Jorge Andueza and Timothy C. Purcell, as well as the Chief Executive Officer of Arauco, the Chief Operating Officer of Arauco, the SeniorVice-President Comptroller of Arauco and the General Counsel of Arauco. Our securities are not listed on any U.S. national securities exchange and, therefore, we are not subject to the rules relating to audit committees imposed by theSarbanes-Oxley Act of 2002, as amended. In the Board of Director´s Meeting of November 24, 2015, it was agreed to reinforce the role of the audit committee, giving it new powers and amplifying its members. It is now composed by three directors: Jorge Andueza, Timothy C. Purcell, and Eduardo Navarro, as well as the Chief Executive Officer of Arauco, the President and Chief Operating Officer of Arauco, the SeniorVice-President Comptroller of Arauco, and the General Counsel of Arauco. It was also agreed that it would report to the Board of Directors on a biannual basis.

We also have an ethics committee that ensures compliance with our ethics code, which defines, promotes and regulates behavior of professional and personal excellence consistent with our philosophy and values to be followed by all our staff. The members of the ethics committee are Jorge Andueza (second vice president of the Board of Directors), Matías Domeyko (CEO), Cristián Infante (President and COO) and Felipe Guzmán (General Counsel).

Employees

The following table provides a breakdown of our employees by main category of activity as of the end of each year in thethree-year period ended December 31, 2017.


	2017		2016		2015
Executives		498		450		446
Professionals and Technicians		4,453		4,192		4,621
Workers		10,428		9,597		9,681

Total		15,379		14,239		14,748

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

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

Approximately 44% of our employees in Chile, 49% of our employees in Argentina, 29% of our employees in Uruguay, 100% of our employees in Brazil and none of our employees in the United States or Canada were unionized as of December 31, 2017. We negotiate collective bargaining agreements of two, three or four years’ duration with unionized employees.

We have stable employee relations in Chile, Argentina, Brazil, Uruguay, the United States and Canada. Our Chilean operations have not experienced any work stoppages in the last five years other than (i) 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; (ii) seven separate occasions of blockades during 2016 which include stoppages in the Horcones complex for four days and another for one day; athree-day stoppage at the entrance of our El Colorado sawmill; threeone-day stoppages in our Viñales sawmill during the months of April, August and November 2016; and athree-stoppage in our Constitución Mill during May 2016; (iii) four separate occasions of transportation contractors blocking the entrance of our Horcones complex on January 13, February 17, March 24, and September 21, 2015; (iv) aone-day stoppage at the Valdivia Pulp Mill on June 12, 2014 and aneight-day stoppage between August 29 and September 5, 2014, caused by employees of third party service providers, (v) four separate occasions of transportation

contractors blocking the entrances of our Horcones complex on February 24 and 25, September 3, October 22 and 23, and November 20, 2014, (vi) afour-day stoppage at the Arauco plywood mill in January 2013, caused by employees ofthird-party contractors. During 2015, the pulp union carried out three work stoppages and blockade; the first event occurred on May 25 for three days, the second on August 3, lasting three days; and the last one on September 1, which lasted 14 days.

Our Argentine operations have not experienced any work stoppages in the last five years other than (i) a27-day stoppage at Arauco Argentina’s Zarate mill in April 2013, as a result of a strike by the construction union; (ii) atwo-day stoppage at Arauco Argentina’s chemical mill in May 2013, as a result of a strike by the Santa Fe Federation of Labor; (iii) aone-day stoppage at Arauco Argentina’s pulp mill in June 2013 and athree-day stoppage at Arauco Argentina’s pulp mill in October 2013, both as a result of a strike by the pulp union; (iv) afour-day stoppage at Arauco Argentina’s pulp mill in December 2014, as a result of a strike by the pulp union; (v) afive-day stoppage at Arauco Argentina’s mill in Misiones in January 2015, as a result of a road blockage lead by the truckers union; (vi) a6-hour stoppage in Arauco Argentina’s mill in Zarate; and a stoppage of 3 days during May 2015 and August 2015, as well as a14-day stoppage during September in Arauco Argentina’s pulp mill, Puerto Esperanza.

Our Brazilian operations have not experienced any work stoppages in the last seven years. During 2017, our Uruguayan operations have not experienced any relevant work stoppages. Also, during 2017, we entered into a labor agreement with unions representing the employees of our pulp mill and forestry nursery in Uruguay.

In 2013, we experienced approximately 33 days of work stoppages during the construction at the Montes del Plata joint operation in Uruguay. These stoppages were caused by national and local strikes, related to various labor conflicts mostly of Montes del Plata subcontractors. On June 4, 2016, the 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.

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

SHARE OWNERSHIP

Our FirstVice-Chairman, Roberto Angelini, owns directly and indirectly 29.7% of Inversiones Angelini y Compañía Limitada (“Inversiones Angelini”), which is the principal shareholder of AntarChile. He directly owns 0.2% of AntarChile. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Roberto Angelini beneficially owns 11.6% of our shares.

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

Item 7. Major Shareholders and Related Party Transactions

MAJOR SHAREHOLDERS

Our only outstanding voting securities are shares of common stock of a single series, without nominal (par) value. The following table sets forth certain information concerning ownership of our common stock, as of April 18, 2018, with respect to each shareholder known by us to own more than 5% of the outstanding shares of our common stock and all of our directors and executive officers, as a group.


	Number of Shares Owned		Percentage Ownership
Empresas Copec		113,134,814		99.98
Directors and executive officers of our Company, as a group		—		—

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

Empresas Copec is a Chilean public company listed on the Santiago Stock Exchange, the Valparaíso Stock Exchange and the Chilean Electronic Stock Exchange. It is a holding company, the principal interests of which are in Arauco, gasoline distribution, electricity, gas distribution, fishing and mining. Before October 1, 2003, Empresas Copec’s legal name was Compañía de Petróleos de Chile S.A. As of that date, Compañía de Petróleos de Chile S.A. transferred all its gasoline andfuel-related business assets to a new subsidiary, Compañía de Petróleos de Chile COPEC S.A., and changed its legal name to Empresas Copec S.A. As of December 31, 2017, AntarChile owned 60.8% of Empresas Copec.

Through its ownership in Empresas Copec, AntarChile beneficially owned 60.8% of our shares as of December 31, 2017. As of April 18, 2018, AntarChile beneficially owned 60.8% of our shares. Inversiones Angelini in turn owns 63.4% of AntarChile’s shares, and certain other related investors own an additional 10.9% of AntarChile. Inversiones Angelini and such other investors are defined herein as the “Angelini Group.”

The principal equity owners of interest in Inversiones Angelini are Mrs. María Noseda Zambra with 10.9%, Mr. Roberto Angelini Rossi directly and indirectly with 29.7%, and Mrs. Patricia Angelini Rossi directly and indirectly with 24.3%. Mrs. María Noseda Zambra passed away on April 15, 2018.

As of December 31, 2017, and April 18, 2018, the Angelini Group controlled Arauco through the ownership structure described above.

RELATED PARTY TRANSACTIONS

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

Notwithstanding the above, in accordance with Article 147 of the Chilean Companies Act, our Board has resolved that the following transactions with related parties do not need to follow the procedure set forth in the previous paragraph: (i) transactions which do not involve material amounts; (ii) transactions with affiliates in which we control 95% or more of the equity; and (iii) transactions that are considered by our Board to be performed in the ordinary course of our business in accordance with our general policy of customary dealings, which was approved by our Board on March 27, 2018 and is available to shareholders at our main office and is published on our website, at www.arauco.cl.

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

•

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

•

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

•

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

•

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

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

Our transactions with affiliates include the following:

•

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

•

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

•

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

•

We obtain legal services from Portaluppi, Guzmán y Bezanilla, a law firm of which one of our directors, Manuel Bezanilla is a partner. In addition, José Tomás Guzmán, a former director who resigned in December 2015, is also a partner of such firm.

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

Item 8. Financial Information

See “Item 18—Financial Statements.”

EXPORT SALES

Export sales constituted 64.6% of our revenues for the year ended December 31, 2017. Our total export revenues for 2017 were U.S.$3,382.9 million. Our principal overseas markets are Asia, North America and Western Europe. See “Item 4. Information on our Company—Description of Business—Domestic and Export Sales.”

LEGAL PROCEEDINGS

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

While Chilean law in general provides that only individuals can be convicted in criminal actions, Chilean Law No. 20,393, which was published in the Official Gazette on December 2, 2009, and amended by Chilean Law No. 20,931 published in the Official Gazette on July 5, 2016, provides an exception to this general rule, under which criminal responsibility of legal entities can be established for criminal offenses related to the financing of terrorism, asset laundering, receiving or bribery. We do not have knowledge of any fact that could result in our criminal responsibility under such law.

We are also subject to certain administrative proceedings as a result of a pipe leakage in the Nueva Aldea Mill in 2013, the death of fish in the Cruces River in January 2014, close to the Valdivia Mill effluent discharge, and a pipe leakage in the Arauco Mill in February 2016, all of which are currently under investigation by the competent authorities. In addition, 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 found the Valdivia Mill liable for ten out of eleven charges and imposed a fine of 7,777 UTA (approximately U.S.$ 7.3 million as of March 29, 2018). We appealed this decision with the Superintendence which ratified its prior decision on March 23, 2018. We appealed such ratification on April 5, 2018 before the Third Environmental Court. A final decision by the Third Environmental Court is expected to be rendered during 2018 and may be further appealed before the Supreme Court. 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 require the mills to implement actions and/or make certain investments in connection with the charges made by the Superintendence. Once these activities have been completed, the proceedings relating to Nueva Aldea and Constitución will end. We expect that these proceedings will end in 2018. 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 has been closed. Finally, the proceeding against Arauco Mill is still underway, and may result in material administrative fines or sanctions, the revocation of environmental authorizations or the temporary or permanent closure of facilities. The Company filed its defense in September 2017 and a decision by the Superintendence is expected in 2018.

Tax Litigation in Argentina

On December 14, 2007, theAdministración Federal de Ingresos Públicos (Federal Administration of Public Revenues, or AFIP), Argentina’s internal revenue service, notified our Argentine subsidiary, Alto Paraná S.A., which effective January 1, 2015, changed its name to Arauco Argentina S.A., or Arauco Argentina, of a claim for alleged unpaid taxes for fiscal years 2002, 2003 and 2004 in the aggregate amount of AR$418 million (or approximately U.S.$22 million at December 31, 2017 exchange rate) including principal, interest and penalties accrued through such date, arising from a dispute regarding certain income tax deductions (related to debt issued by Arauco Argentina in 2001 and repaid in 2007) taken by Arauco Argentina and challenged by the AFIP. On February 8, 2010, theTribunal Fiscal de la Nación (Argentina’s Tax Court), issued an administrative ruling requiring that Arauco Argentina pay the AFIP’s claim in full.

Arauco Argentina appealed this administrative ruling to the Court of Appeals, in addition to filing an injunctive action requesting that the court stay Arauco Argentina’s payment obligation until resolution of its pending appeal. On May 13, 2010, the Court of Appeals granted an injunction of Arauco Argentina’s payment obligation in exchange for the posting of a surety bond in the amount of AR$633.6 million (or approximately U.S.$34 million at December 31, 2017 exchange rate). On December 28, 2012, the Court of Appeals dismissed Arauco Argentina’s appeal. Arauco Argentina appealed this decision before the Argentine Supreme Court of Justice, or the Argentine Supreme Court. The appeal was under consideration by the Argentine Supreme Court since May 29, 2013. As of the date of this annual report, the injunction granted by the Court of Appeals is still in force.

On July 22, 2016, Argentine Law N° 27,260 was promulgated, which established a regime for the exceptional regularization of tax, social security and customs obligations that were at that time subject to judicial proceedings (the “Regularization Regime”).

In September 2016, and considering the significant advantages offered by the Regularization Regime, Arauco Argentina accepted participating in the regime in relation to theabove-mentioned claim by AFIP. Entering the Regularization Regime meant for Arauco Argentina the exemption of the applicable fines as well as the release of a portion of accrued interests. As a result, the disbursement amounted to AR$ 248.5 million (or approximately U.S.$13 million at December 31, 2017 exchange rate). Additionally, Arauco Argentina must carry out the payment of the costs and expenses to be determined by the courts, determination which is still pending at the time of this annual report. The decision to enter into the Regularization Regime required an unconditional release of Arauco Argentina in relation to the regularized obligations, as well as the release and waiver of any action derived for it in the above proceedings. On November 1, 2016, the Supreme Court accepted Arauco Argentina’s release and ordered the return of the file to the competent court. On April 18, 2017, Chamber I of the National Court of Appeals declared that the Company had abandoned its actions and rights, including its repetition rights, thus condoning the fine and the corresponding interests. Additionally, the Court of Appeals deferred the court fee determination until payment of the state attorneys has been decided by the lower court, ordering as well the reimbursement of the contingency insurance posted. The bond has been released and returned to the insurance company.

Tax Litigation in Chile

On August 25, 2005, the Chilean IRS issued tax calculations No. 184 and No. 185 of 2005 objecting to certain capital reduction transactions effected by Arauco on April 16, 2001 and October 31, 2001, and furthermore, requesting reimbursement for amounts returned to us in respect of certain claimed tax losses. On November 7, 2005, we requested aRevisión de la Actuación Fiscalizadora (Review of the Supervision Action, or RAF), which is an administrative review of the tax action brought by the Chilean IRS, and subsequently, a claim was filed against theabove-mentioned tax calculations No. 184 and No. 185 of 2005. The RAF was resolved on January 9, 2009 by the Chilean IRS, which resolution, however, only partially sustained our request. In response, we filed an additional complaint with regard to the portion of the RAF that was not granted administrative review. On September 20, 2017, the Chilean Tax and Custom Court resolved to confirm the Chilean IRS tax calculations No. 184 and No. 185. On October 12, 2017, Arauco appealed this decision before the Santiago Court of Appeals. As of the date of this annual report, the appeal is still under review.

Our Company believes that its position in respect of this complaint is supported by solid legal arguments and that there is a reasonable likelihood that this matter will result in a favorable outcome for us. However, if this result does not occur, it is possible that an obligation will arise for the amount specified, which was Ch$3,362,265,453 (equivalent to U.S.$5,022 thousand), plus any accrued interest as of the payment date.

Tax Litigation in Brazil

On November 8, 2012, Brazilian Tax Authorities issued an Infraction Notice against one of our Brazilian subsidiaries, Arauco do Brasil S.A., for alleged unpaid taxes purportedly due by such company for the years 2006 to 2010 in the aggregate amount of R$172 million (approximately U.S.$85 million). In particular, the Tax Authorities (i) objected to the deductibility of certain payments made and expenses incurred (including premium amortization, interest and legal expenses) by Arauco do Brasil between 2005 and 2010 and (ii) alleged that Arauco do Brasil made certain underpayments in respect of the Brazilian Corporate Income Tax and the Brazilian Social Contribution on Net Profits during 2010. Currently, the aggregate amount of the claims asserted in the Infraction Notice, plus interest, correspond to R$185 million (approximately U.S.$79 million).

On December 11, 2012, Arauco do Brasil filed an objection to cancel the Infraction Notice before the Judgment Office of the Brazilian Revenue Service, first administrative level.

On July 20, 2015, the Judgment Office of the Brazilian Revenue Service rejected Arauco do Brasil’s objection. Arauco do Brasil filed an appeal before the CARF (Conselho Administrativo de Recursos Fiscais), which is the second administrative level.

The CARF’s decision occurred on May 16, 2017, which accepted some of the Company’s arguments but maintained other charges. We may continue to object the outstanding alledged infraction, which is estimated at U.S.$ 17.3 million as of December 31, 2017, increased by monetary correction.

As of the date of this annual report, the decision by Arauco do Brasil of filing a Special Appeal is still under analysis, since the CARF’s decision has not been notified yet. We believe that the Special Appeal will be based on solid legal arguments and that there is a reasonable likelihood that this matter will result in a favorable outcome for Arauco do Brasil. If the Special Appeal is rejected, we intend to begin the relevant proceedings to contest the Infraction Notice before the Brazilian Justice. However, if the cancellation of the Infraction Notice does not occur, it is possible that an obligation will arise for the amount above specified, plus any accrued interest and penalties as of the payment date.

DIVIDEND POLICY

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

For the year ended December 31, 2014, under IFRS, our results were affected by an increase in our deferred taxes resulting from the increase of the tax rate set forth in Law No. 20,780. However, according to Oficio Circular 856 of the SVS dated October 17, 2014, we were required to record the difference in assets and liabilities for deferred taxes as a charge to our net worth for purposes of our financial statements reported to the SVS. As such, our annual dividend distribution for the year ended December 31, 2014 was based on our profit calculated according to IFRS, as modified by Oficio Circular 856 of the SVS. See “Item 3. Key Information—Risk Factors—Risks Relating to Chile—A tax reform bill with significant changes for companies was approved in September 2014 and the Chilean Superintendence of Securities and Insurance, or SVS, modified accounting reporting standards for companies under its supervision in October 2014.”

On April 21, 2015, our shareholders approved a final dividend of U.S.$0.866672295 per share for 2014, which was distributed on May 13, 2015. On November 24, 2015, our Board of Directors approved an interim dividend of U.S.$0.385117532 per share, which was distributed on December 16, 2015. On April 26, 2016, our shareholders approved a final dividend of U.S.$0.876827598 per share for 2015, which was distributed on May 11, 2016. On November 22, 2016, our Board of Directors approved an interim dividend of U.S.$0.2613312999 per share, which was distributed on December 14, 2016. On April 25, 2017, our shareholders approved a final dividend of U.S.$0.52142834529 per share for 2016, which was distributed on May 10, 2017. On November 28, 2017, our Board of Directors approved an interim dividend of U.S.$0.5345863395 per share, which was distributed on December 20, 2017. On March 27, 2018, our Board of Directors approved a final dividend of U.S.$1,00541893372 per share for 2017, to be distributed on May 9, 2018, all of which is subject to shareholders’ approval at the meeting to be held on April 24, 2018.

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

Item 9. The Offer and Listing

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

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

Item 10. Additional Information

ARTICLES OF INCORPORATION ANDBY-LAWS

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

Organization and Registration

We are asociedad anónima (corporation) organized in Chile under the laws of Chile, subject to certain rules applicable tosociedades anónima abiertas (Chilean public corporations), which bylaws were approved on August 18, 1971, by resolution300-S of the Chilean Securities Commission and recorded in the Santiago Commercial Register of 1971 on page 6433 under entry number 2994 and on page 6431 under entry number 2993. Notice was published in the Official Gazette on September 4, 1971.

Objects and Purposes

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

Capital

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

Directors

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

Ourby-laws provide that we may enter into acts or contracts in which one or more directors are interested only if the interested director’s interest is made known to the board, the acts or contracts are approved by the board and the terms of the act or contract conform to those prevailing in the market. In addition, board resolutions approving interested director transactions must be reported by the chair of the meeting at the first shareholders’ meeting following the approval of the interested director transaction. See “Item 7. Major Shareholders and Related Party Transaction” for further information on related party transactions.

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

Shareholders

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

Voting Rights

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

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transformation, including division or merger with another company;

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advanced dissolution;

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change of corporate domicile;

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reduction in our equity capital;

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approval and appraisal ofnon-cash capital contributions;

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reduction in the number of members of the Board of Directors;

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

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

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

Changes to Shareholders’ Rights

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

Shareholders’ Meetings

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

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

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

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

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

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the election or dismissal of the members of the Board of Directors; and

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any matter of corporate interest that is not considered transacted at a special shareholders’ meeting pursuant to the Chilean law.

Special shareholders’ meetings may be held at any time required by corporate needs to consider any matter that the law or ourby-laws require to be considered at a shareholders’ meeting. Ourby-laws require the meeting notice to disclose any matters to be discussed at a special shareholders’ meeting. According to theby-laws, the following matters must be considered at special shareholders’ meetings:

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dissolution;

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transformation, merger or division and the amendment of ourby-laws;

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the issue of bonds or debentures convertible into shares;

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

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the grant of real or personal guarantees to secure obligations of third parties, unless they are subsidiaries, in which case the approval of the Board of Directors will be sufficient.

Any other matters within the competence of regular shareholders’ meetings may be considered at special shareholders’ meetings.

Any act of a shareholders’ meeting relating to our dissolution, transformation, merger or division, the amendment of ourby-laws, any disposal of 50% or more of our assets or the issue of bonds convertible into shares or convertible debentures must be held before a notary public, who must certify that the minutes of such meeting are the true expression of what occurred and was resolved at such meeting.

Allocation of Net Income and Distribution of Dividends

Ourby-laws provide that the shareholders at a regular shareholders’ meeting shall determine the annual distribution of our net profits for each financial period, within the limitations prescribed by law. The shareholders shall also set the date on which any distribution shall be paid, within the time limits prescribed by law. Chilean law prescribes that distributions shall be paid within 30 days of the regular shareholders’ meeting at which such distribution was determined.

In accordance with Chilean law, in the event of liquidation, capital can be distributed to the shareholders only after the rights of the creditors have been secured or debts owed to creditors have been paid. Ourby-laws provide that a shareholders’ meeting will appoint one or more liquidators to carry out the liquidation and to call shareholders’ meetings, as required under Chilean law.

Regulation of and Restrictions on Foreign Investors

There are no limitations on the rights to hold securities, including rights ofnon-resident or foreign shareholders to hold or exercise voting rights on securities.

Disclosure of Shareholder Ownership

We register certain information about our shareholders in our shareholder registry. We are required to disclose this information to the Chilean Securities Commission on a quarterly basis.

Rights of Shareholders

Ourby-laws provide that, in the case of a dispute between shareholders or between shareholders and management, the parties will submit their dispute to an arbitrator, who may determine the procedural rules to be used in the arbitration but must issue a final judgment in accordance with Chilean law. Subject to limited exceptions, the arbitrator’s judgment shall not be subject to appeal. The parties shall appoint the arbitrator by mutual agreement and if no agreement is reached, an arbitrator will be appointed by the civil court system from among present and former associate justices of the Supreme Court of Justice of Chile.

EXCHANGE CONTROLS

The Central Bank is responsible for, among other things, monetary policies and exchange controls in Chile. Prior to 1989, Chilean law permitted the purchase and sale of foreign currency only in cases explicitly authorized by the Central Bank. Law No. 18,840, theLey Orgánica Constitucional del Banco Central de Chile (Organic Law of the Central Bank of Chile), or the Central Bank Act, enacted in 1989, liberalized the rules that govern the ability to buy and sell foreign currency.

The Central Bank Act empowers the Central Bank to determine which types of foreign exchange operations must be carried out in the Formal Exchange Market rather than theMercado Cambiario Informal (Informal Exchange Market). The Central Bank has ruled that certain foreign exchange transactions, including those attendant to foreign investments and bond issuances, may be effected only in the Formal Exchange Market. The Central Bank may also impose restrictions on foreign exchange operations that are conducted or are required to be conducted in the Formal Exchange Market. These restrictions may include the requirement of prior authorization from the Central Bank, the imposition of reserve requirements and the limitation of foreign exchange operations that may be conducted by the entities that participate in the Formal Exchange Market.

The Formal Exchange Market consists of banks and other entities authorized by the Central Bank to participate in such Formal Exchange Market. On April 16, 2001, the Central Bank agreed that, effective April 19, 2001, the prior foreign exchange restrictions would be eliminated and a newCompendio de Normas de Cambios Internacionales (Compendium of Foreign Exchange Regulations) would be applied.

The main objective of this change was to facilitate capital movements from and into Chile and to encourage foreign investment.

The following specific restrictions were eliminated:

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a reserve requirement with the Central Bank for a period of one year;

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the requirement for prior approval by the Central Bank for certain operations, such as repatriation of investments and payments to foreign creditors;

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the mandatory return of foreign currencies to Chile; and

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the mandatory conversion of foreign currencies into Chilean pesos.

Under the amended regulations, only the following limitations are applicable to these operations:

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the Central Bank must be provided with information related to certain operations, such as foreign investments and foreign credits; and

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certain operations,such as money transfers to and from Chile related to foreign investments and foreign credits, must be conducted within the Formal Exchange Market.

International Issue of Bonds

Before April 19, 2001, any international issue of bonds was subject to approval by the Central Bank after submission of an application to the Central Bank through a bank or other participant in the Formal Exchange Market. Absent the Central Bank’s authorization, issuers were unable to offer bonds outside of Chile. On April 19, 2001, the Central Bank issued foreign exchange regulations, effective as of March 1, 2002, that were included in the Chapters XIV and VIII of the Compendium, applicable to bond issues made either from Chile or through an agency abroad. It must be noted however, that all debt issues made before the regulations remain subject to the regulations existing at the time of their issue.

Debt Securities Issued Directly by Us

In accordance with the regulations issued by the Central Bank, which are included in the Chapter XIV of the Compendium, any international issue of bonds in an aggregate amount exceeding U.S.$1,000,000 must be registered and dated by the Central Bank or by a bank or other entity authorized by the Central Bank to participate in the Formal Exchange Market before the proceeds from the issuance can be remitted to Chile and received by the issuer or simultaneously with the remittance into Chile of such proceeds. The issuer must submit forms regarding the offering to the registering entity or directly to the Central Bank, along with a letter of instructions indicating whether it prefers to receive the proceeds in Chilean pesos or in a foreign currency. If presented through a Formal Exchange Market entity, such entity must, in turn, verify that the forms submitted by the issuer are in accordance with the documentation relating to the issue and inform the Central Bank of the operation no later than 11:00 a.m. on the banking business day following the date on which the proceeds of the issue are transferred to the issuer.

If the issuer opts to receive the proceeds of the issue outside of Chile, it must report this to the Central Bank directly or through a Formal Exchange Market entity during the first ten calendar days of the month following the one in which the proceeds were received.

Chapter XIV of the Compendium also states that proceeds from the issue, as well as payment of capital and interest relating to the issue, must be received and sent from and through the Formal Exchange Market, but purchases of U.S. dollars in connection with payments on debt securities issued directly by us can be made either in the Formal or in the Informal Exchange Market. There can be no assurance, however, that we will be able to purchase U.S. dollars in the Informal Exchange Market or in the Formal Exchange Market at the time or in the amounts required to pay debt service related to any such debt securities. There can also be no assurance that further Central Bank regulations or legislative changes to the current foreign exchange control regime in Chile would not restrict or prevent our purchase of U.S. dollars to make payments under our securities.

In the case of debt securities issued directly by us before the effectiveness of the foreign exchange regulations, the registration of the debt securities with the Central Bank grants us access to the Formal Exchange Market for the purchase of U.S. dollars necessary to make payments in respect of those securities but requires that payments on such debt securities shall be made only with U.S. dollars purchased in the Formal Exchange Market.

We will also be required to inform the Central Bank quarterly of the outstanding amounts due under our securities and from time to time of any information that has been previously filed.

The regulations of Chapter XIV of the Compendium do not make any reference to theone-year mandatory deposit in the Central Bank that was previously required by Chapter XIV. However, the Central Bank is authorized, under the Central Bank Act, to impose such a requirement.

Debt Securities Issued Through Our Panamanian Agency

In December 1996, we established a registered agency in Panama. We may from time to time issue debt securities directly or through our Panamanian agency depending on, among other factors, whether or not we expect to bring the proceeds thereof into Chile. In such cases, the proceeds of such issuance of the notes may be brought into Chile or held abroad. In either case, however, in accordance with Chapter VIII of the Compendium, we were required to inform the Central Bank of the issuance of international bonds through our Panamanian agency during the first ten calendar days of the month following the one in which the disbursement of funds to the agency was produced, and provide the schedule of payments of the notes. On December 27, 2007, the requirement to provide such information to the Central Bank was eliminated. We are no longer required to inform the Central Bank of future issuances of bonds made through our Panamanian agency.

Purchases of U.S. dollars in connection with payments on debt securities issued through our Panamanian agency, whether before or after April 19, 2001, can be made either in the Formal Exchange Market or in the Informal Exchange Market. Although we were required to inform the Central Bank of the issuance of debt securities through our Panamanian agency, such communication to the Central Bank did not give us access to the Formal Exchange Market for the purchase of U.S. dollars necessary to make payments in respect of those debt securities.

There can be no assurance that we will be able to purchase U.S. dollars in the Informal Exchange Market or in the Formal Exchange Market at the time or in the amounts required to pay debt service related to any such debt securities. There can also be no assurance that further Central Bank regulations or legislative changes to the current foreign exchange control regime in Chile and will not restrict or prevent our purchase of U.S. dollars to make payments under our securities from Chile.

TAXATION

General

The following summary contains a description of certain Chilean and United States federal income tax consequences of the purchase, ownership and disposition of our securities, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase our securities. This summary does not describe any tax consequences arising under the laws of any state, locality or taxing jurisdiction other than the United States and Chile.

This summary is based on the tax laws of Chile and the United States as in effect on the date of this Form20-F, as well as regulations, rulings and decisions of Chile and the United States available on or before such date and now in effect. All of the foregoing is subject to change, and any changes could apply retroactively and could affect the continued validity of this summary.

Prospective purchasers of our securities should consult their own tax advisors as to the Chilean, United States or other tax consequences of the purchase, ownership and disposition of our securities, including, in particular, the application to their particular situations of the tax considerations discussed below, as well as the application of state, local, foreign or other tax laws.

Chile and the United States have executed an income and capital tax treaty for the avoidance of double taxation and the prevention of fiscal evasion, but this treaty is not in effect, and its effectiveness is contingent upon ratification in the United States Senate. At this time, it is not clear when the United States Senate will consider ratification, and therefore the effective date of the treaty is uncertain.

Chilean Taxation

The following is a general summary of the principal consequences under Chilean tax law, as currently in effect, of an investment in our securities made by a foreign holder. Foreign holder means either:

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in the case of an individual, a person who is neither a resident nor is domiciled in Chile. For purposes of Chilean taxation, (a) an individual is resident in Chile if he or she has remained in Chile for more than six months in one calendar year, or a total of more than six months in two consecutive fiscal years and (b) an individual is domiciled in Chile if such individual resides in Chile with the intention of remaining in Chile (the intention will be determined according to the circumstances); or

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in the case of a legal entity, a legal entity that is not organized under the laws of Chile, unless our securities are assigned to a branch or a permanent establishment of such entity in Chile.

Under Chile’s income tax law, our payments of interest made from Chile in respect to our securities to a foreign holder will generally be subject to a Chilean withholding tax assessed at a rate of 4.0%, or the Chilean Interest Withholding Tax, only to the extent the requirements for applying a 4.0% rate are complied with. In addition, consideration should be given to the fact that the rate might be higher if these payments do not comply with the requirements established in the law with the purpose to determine the indebtedness limit of the local entity.

We have agreed, subject to specific exceptions and limitations, to pay to the foreign holders of notes additional amounts in respect of the Chilean Interest Withholding Tax in order to ensure that the interest amount the foreign holder receives is net of Chilean Interest Withholding Tax. If we pay additional amounts in respect of the Chilean Interest Withholding Tax, any tax refunds in respect of these amounts will be for our benefit. In the event that certain changes in Chilean tax laws require us to pay additional interest amounts in respect of the Chilean Interest Withholding Tax at a rate in excess of 4.0%, we have the right to redeem our securities.

Under existing Chilean law and regulations, a foreign holder will not be subject to any Chilean taxes in respect of payments of principal that we make with respect to our securities. Our payments with respect to our securities of amounts not considered principal or interest may be subject to a Chilean withholding tax of up to 35%.

The Chilean Income Tax Law provides that a foreign holder is subject to income tax on his Chilean source income. For this purpose, Chilean source income means earnings from activities performed in Chile or from the sale, disposition or other transactions in connection with assets or goods located in Chile. Article 11 of the Chilean income tax law states that, for this purpose, notes and other private or public securities will only be considered as located in Chile if they are issued in Chile by a Chilean issuer. In consideration that our securities are not issued in Chile, any capital gains realized on the sale or other disposition by a foreign holder of our securities generally will not be subject to any Chilean income taxes.

A foreign holder will not be liable for estate, gift, inheritance or similar taxes with respect to its holdings unless the securities held by a foreign holder:

•

are located in Chile at the time of such foreign holder’s death or at the time the transfer takes place, or

•

were purchased or acquired with monies obtained from Chilean sources.

A foreign holder will not be liable for Chilean stamp, registration or similar taxes.

The issue of our securities directly by us was subject to the Chilean stamp tax, which we paid. The issue of our securities through our Panamanian Branch was not subject to a stamp tax.

United States Taxation

This summary of certain United States federal income tax considerations deals principally with United States Holders that acquired our securities as part of the initial offering of our securities, hold our securities as capital assets and whose functional currency is the United States dollar. It does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular investor, and generally does not address the tax treatment of United States Holders that may be subject to special tax rules, such as banks, financial institutions,tax-exempt entities, regulated investment companies, real estate investment trusts, insurance companies, partnerships and partners therein, dealers in securities or currencies, traders in securities electing to mark to market, certainshort-term holders of our securities, persons that will hold our securities as a position in a “straddle” or conversion transaction, or as part of a “synthetic security” or other integrated financial transaction, persons that own (or are deemed to own for United States tax purposes) 10% or more of our stock by vote or value or persons that are not United States Holders. United States Holders should be aware that the U.S. federal income tax consequences of holding our securities may be materially different for investors described in the previous sentence, including as a result of certain laws applicable to investors with short holding periods or that engage in hedging transactions.

Under recently enacted legislation, U.S. holders that use an accrual method of accounting for U.S. federal income tax purposes generally will be required to include certain amounts in income no later than the time such amounts are reflected on certain financial statements. The application of this rule thus may require the accrual of income earlier than would be the case under the general tax rules applicable to accrual basis taxpayers, although the precise application of this rule is unclear at this time. This rule generally will be effective for tax years beginning after December 31, 2017 or, for debt securities issued with original issue discount, for tax years beginning after December 31, 2018. U.S. holders that use an accrual method of accounting should consult with their tax advisors regarding the potential applicability of this legislation to their particular situation.

As used under this section “United States Taxation,” the term “United States Holder” means a beneficial owner of a Note that is a citizen or resident of the United States or a United States domestic corporation or that otherwise is subject to United States federal income taxation on a net income basis in respect of our securities.

Taxation of Interest and Additional Amounts

A United States Holder will treat the gross amount of interest and Additional Amounts (i.e., without reduction for Chilean Interest Withholding Tax, determined utilizing the 4.0% Chilean Interest Withholding Tax rate applicable to all United States Holders of our securities) as ordinary interest income in respect of our securities at the time that such payments are accrued or are received, in accordance with the United States Holder’s method of tax accounting. Any Chilean Interest Withholding Tax paid will be treated as foreign income taxes eligible for credit against such United States Holder’s United States federal income tax liability, subject to generally applicable limitations and conditions, or, at the election of such United States Holder, for deduction in computing such United States Holder’s taxable income. Interest and Additional Amounts will constitute income from sources outside the United States for foreign tax credit purposes. Such income generally will constitute “passive category income.” Foreign tax credits will not be allowed for withholding taxes imposed in respect of certainshort-term or hedged positions in securities and may not be allowed for withholding taxes imposed in respect of arrangements in which a United States Holder’s expected economic profit is insubstantial. United States Holders should consult their own advisors concerning the implications of these rules in light of their particular circumstances.

The calculation of foreign tax credits and, in the case of a United States Holder that elects to deduct foreign taxes, the availability of deductions, involves the application of rules that depend on a United States Holder’s particular circumstances. United States Holders should consult their own tax advisors regarding the availability of foreign tax credits and the treatment of Additional Amounts.

A Holder of our securities that is, with respect to the United States, a foreign corporation or a nonresident alien individual (a“Non-U.S. Holder”) generally will not be subject to United States federal income or withholding tax on interest income or Additional Amounts earned in respect of our securities, unless such income is effectively connected with the conduct by theNon-U.S. Holder of a trade or business in the United States.

Taxation of Dispositions

A United States Holder will generally recognize gain or loss on the sale, exchange or other disposition of a security in an amount equal to the difference between the amount realized on the sale, exchange or other disposition and the tax basis in the security. If Chilean income tax is withheld on the sale, exchange or other disposition of our securities, the amount realized by a U.S. holder will include the gross amount of the proceeds of that sale, exchange or other disposition before deduction of the Chilean income tax. A United States Holder’s tax basis in a security will generally equal its cost. Gain or loss realized by a United States Holder on the sale, redemption or other disposition of our securities generally will be treated as capital gain or loss and such gain or loss will belong-term capital gain or loss if at the time of the disposition, our securities have been held for more than one year. The net amount oflong-term capital gain realized by a United States Holder that is an individual is generally taxed at a reduced rate. Gain, if any, realized by a United States Holder generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Consequently, in the case of gain from the disposition of securities that is subject to Chilean income tax, a United States Holder may not be able to benefit from the foreign tax credit for that Chilean income tax, unless the United States Holder can apply the credit against U.S. federal income tax payable on other income from foreign sources. Alternatively, the United States Holder may generally elect to take a deduction for the Chilean income tax paid. The rules governing foreign tax credits are complex and a United States Holder should consult its own tax advisor regarding the availability of foreign tax credits under its particular circumstances.

ANon-U.S. Holder of our securities will not be subject to United States federal income or withholding tax on gain realized on the sale or other disposition of our securities unless (i) such gain is effectively connected with the conduct by theNon-U.S. Holder of a trade or business in the United States or (ii) in the case of gain realized by an individualNon-U.S. Holder, theNon-U.S. Holder is present in the United States for 183 days or more in the taxable year of the sale and certain other conditions are met.

Specified Foreign Financial Assets

Certain United States Holders that own “specified foreign financial assets” with an aggregate value in excess of USD 50,000 are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at anon-U.S. financial institution, as well as securities issued by anon-U.S. issuer (which would include our Securities) that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. United States Holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Holders should consult their own tax advisors concerning the application of these rules to their investment in the Securities, including the application of the rules to their particular circumstances.

Backup Withholding and Information Reporting

Payments of principal, premium, if any, and interest on our securities and payment of the proceeds of any disposition of our securities made to certain United States Holders may be subject to U.S. information reporting requirements. In addition, certain United States Holders may be subject to a U.S. backup withholding tax in respect of such payments if they do not provide their taxpayer identification numbers to the payor or otherwise establish an exemption.Non-U.S. Holders generally are exempt from these withholding and reporting requirements, but may be required to comply with applicable certification and identification procedures to establish their eligibility for such an exemption.

DOCUMENTS ON DISPLAY

We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the SEC. These materials, including this Annual Report and the exhibits thereto, may be inspected and copied at the Commission’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the materials may be obtained from the Public Reference Room at the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. In addition, the Commission maintains an Internet website at http://www.sec.gov, from which these materials may be electronically accessed. The public may obtain information on the operation of the Commission’s Public Reference Room by calling the Commission in the United States at1-800-SEC-0330.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our risk management activities includesforward-looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in suchforward-looking statements.

We are exposed to market risk from changes in interest rates and currency exchange rates. Our Board of Directors approves our policies that address these risks. From time to time, we assess our exposure and monitor opportunities to manage these risks, including entering into derivative contracts. For information on the currency and interest rate swaps into which we entered with respect to a portion of our borrowings, see “Item 5. Operating and Financial Review and Prospects—Hedging” and Note 23 to our audited consolidated financial statements. In the normal course of business, we also face risks that are eithernon-financial ornon-quantifiable. Such risks principally include country risk, credit risk and legal risk and are not represented in the tables below.

Interest Rate Risk

Interest rate risk exists principally with respect to our indebtedness that bears interest at floating rates. As of December 31, 2017, we had outstanding U.S.$4.3 billion of indebtedness, including accrued interest and discounts and costs of issuance, of which 86.0% bore interest at fixed interest rates and 14.0% bore interest at floating rates of interest. These average rates do not reflect the effect of swap agreements. 67.7% of our indebtedness was denominated in U.S. dollars as of that date. The interest rate on our variable rate debt is determined principally by reference to LIBOR. As of December 31, 2017, we were party to an interest rate swap agreement in our Uruguayan subsidiary to hedge fluctuations in floating rates forlong-term debt. See “Item 5. Operating and Financial review and Prospects – Hedging” and Note 23 to our audited consolidated financial statements.

The following table summarizes our debt obligations, as of December 31, 2017. These obligations are sensitive to changes in interest rates. The table presents the aggregate principal amount of each category of indebtedness maturing in each year, at the weighted average interest rate for each category of indebtedness. Average interest rates for liabilities are calculated based on the prevailing interest rate for each loan as of December 31, 2017.


	Average Interest Rate			2018		2019		2020		2021		2022		Thereafter		Total Debt		Fair Value
	(U.S.$ in millions)
Interest
Bearing Debt
Fixed Rate
(U.S.$-denominated)		4.72	%		81.4		246.9		45.2		245.0		299.6		1,394.4		2,312.4		2,407.2
(UF/CLP$-denominated)		3.28	%		74.9		73.9		291.8		46.9		55.8		813.9		1,357.3		1,547.8
(R$-denominated)		8.62	%		4.4		0.4		0.4		0.7		0.6		—		6.5		6.5
Floating Rate
(U.S.$denominated) LIBOR+		1.42	%		336.9		40.8		40.4		23.8		23.7		114.6		580.2		628.4
(R$-denominated) TJLP +		3.70	%		2.7		7.4		5.4		0.9		0.7		—		17.1		17.1

Total					500.2		369.4		383.3		317.3		380.4		2,322.9		4,273.5		4,607.0

Foreign Currency Risk

Our principal exchange rate risk involves changes in the value of the Chilean peso and, to a lesser extent, the Brazilian real, the Argentine peso and the Euro relative to the U.S. dollar. We estimate that a majority of our consolidated costs and expenses are denominated in U.S. dollars. As of December 31, 2017:

•

67.6% of our accounts receivable were denominated in U.S. dollars, 13.1% in Chilean pesos and 11.0% were denominated in Brazilian reais;

•

85.0% of our cash andshort-term investments were denominated in U.S. dollars, 3.9% were denominated in Chilean pesos, 1.7% in Argentine pesos and 8.0% in Brazilian reais;

•

67.7% of our debt was denominated in U.S. dollars before swaps; and

•

a significant portion of our consolidated total assets was denominated in U.S. dollars.

Substantially all of our foreigncurrency-denominated revenues, costs and expenses, receivables and indebtedness are denominated in U.S. dollars. As of December 31, 2017, 67.7% of our debt was denominated in U.S. dollars before swaps. As of December 31, 2017, we were party to cross currency swap agreements in Chile to hedge our local bonds in UF, and forward agreements to swap local currencies to U.S. dollars. See “Item 5. Operating and Financial review and Prospects – Hedging” and Note 23 to our audited consolidated financial statements. Accordingly, variations in the value of the Chilean peso relative to the U.S. dollar will not have a significant effect on the cost in U.S. dollars of our foreign debt service obligations.

Commodity Risk

Prices for pulp, forestry and wood products can fluctuate significantly, and our revenues are highly sensitive to fluctuations in such prices. For a more detailed discussion and sensitivity analysis relating to the risks arising from changes in the market price of pulp, which is our primary commodity risk, see Note 23 to our audited consolidated financial statements. As of December 31, 2017, we were party to derivative contracts to partially hedge our exposure to fuel oil in Uruguay, which include commodity swap agreements. See “Item 5. Operating and Financial review and Prospects – Hedging” and Note 23 to our audited consolidated financial statements.

Item 12. Description of Securities Other than Equity Securities

Not applicable.

PART II

Item 13. Defaults, Dividend Arrearages and Delinquencies

None.

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

None.

Item 15. Controls and Procedures

(a)Disclosure controls and procedures.We carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and SeniorVice-President Comptroller, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2017. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and SeniorVice-President Comptroller concluded that the disclosure controls and procedures, as of December 31, 2017, were effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms and that such information is accumulated and communicated to our management, including the Chief Executive Officer and SeniorVice-President Comptroller, as appropriate to allow timely decisions regarding required disclosure.

(b)Management’s annual report on internal controls and procedures.Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended. Under the supervision and with the participation of our management, including our Chief Executive Officer and SeniorVice-President Comptroller, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our evaluation under the framework inInternal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, 2017.

(c)Attestation Report of the registered public accounting firm. Not applicable.

(d)Changes in internal controls over financial reporting.There has been no change in our internal control over financial reporting during 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

We have an audit committee, described in “Item 6. Directors, Senior Management and Employees—Directors and Executive Officers.” We believe that the members of our audit committee have sufficient financial and other experience to perform their responsibilities. Our Board of Directors has determined that Timothy C. Purcell qualifies as an “audit committee financial expert” within the meaning of Item 16A of Form20-F and is independent as that term is defined in Rule10A-3 under the Exchange Act. For a description of Mr. Purcell’s professional experience, see “Item 6. Directors, Senior Management and Employees—Directors and Executive Officers.”

Item 16B. Code of Ethics

We have adopted a code of ethics, as defined in Item 16B of Form20-F under the Securities Exchange Act of 1934, as amended. Our code of ethics applies to all of our employees, including, but not limited to, our Chief Executive Officer, Chief Financial Officer and SeniorVice-President Comptroller. We will provide any person without charge, upon request, a copy of such code of ethics. Requests for a copy of the code of ethics may be made to Celulosa Arauco y Constitución S.A., El Golf 150, 14^th Floor, Santiago, Chile, Attn: Gianfranco Truffello, tel.(011-562)2461-7200, fax(011-562)2461-7541. Our code of ethics is also published on our website at www.arauco.cl. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and SeniorVice-President Comptroller, or if we grant any waiver of such provisions, we will disclose the amendment or waiver in our annual report on Form20-F. On December 20, 2016, we amended our code of ethics to incorporate provisions relating to the protection of corporate property, a declaration of Arauco’s five corporate values, an extension of the scope of persons who can inform breaches under the code of ethics and an amendment to the list of crimes for which the company may be liable, to include the crime of reception (delito de receptación).

Item 16C. Principal Accountant Fees and Services

Audit andNon-Audit Fees

The following table sets forth the fees billed to us by our independent auditors PricewaterhouseCoopers Consultores Auditores SpA, or PwC, during the fiscal years ended December 31, 2016 and 2017.


	Year ended December 31,
	2017		2016
	(U.S.$ in thousands)
Audit fees	$	2,466	$	2,185
Audit-related fees		509		—
Tax fees		1,702		823
Other fees		1,093		—
Total fees	$	5,770	$	3,008

Audit fees in the above table are the aggregate fees billed by PwC for the fiscal years ended December 31, 2017 and 2016, in each case in connection with the audit of our annual financial statements in accordance with IFRS, as well as the review of other filings.

Audit-related fees in the above table are the aggregate fees billed by PwC for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor, including due diligence in Brazil and Mexico.

Tax fees in the above table are fees billed by PwC for the fiscal years ended December 31, 2017 and 2016, associated with tax compliance services in Chile, Brazil, Argentina, Colombia, Uruguay and Mexico; and tax consultation services in Chile, Argentina, Spain and the United States.

Other fees in the above table are fees billed by PwC related to an assessment of internal control over financial reporting for the fiscal year 2017 with the purpose of issuing a report indicating control deficiencies associated with either control design deficiencies or control effectiveness for the Company’s entities in Chile, United States, Argentina and Brazil. This service is still ongoing as of the date of this report.

Audit Committee Approval Policies and Procedures

Our Board of Directors has establishedpre-approval policies and procedures for the engagement of our independent auditors. Pursuant to ourpre-approval policy, our Board of Directors haspre-approved a list of services that our independent auditors are allowed to provide to us or our subsidiaries.

Additionally, our Board of Directors expressly approves, on acase-by-case basis, any engagement of our independent auditors for audit andnon-audit services that are not included on thepre-approved list.

All services described in each of paragraphs (b) through (d) of this Item were approved by the Board of Directors pursuant to paragraph (c)(7)(i)(C) of Rule2-01 of RegulationS-X.

Item 16D. Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

Item 16F. Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G. Corporate Governance

Not applicable. Neither our stock nor ourSEC-registered securities are listed on any stock exchange or other regulated market.

Item 16H. Mine Safety Disclosures

Not applicable.

PART III

Item 17. Financial Statements

Not applicable.

Item 18. Financial Statements

Our audited consolidated financial statements have been prepared in accordance with IFRS, as issued by the IASB, and are included in this annual report beginning at pageF-1.

Item 19. Exhibits

Documents filed as exhibits to this annual report:



1.1		English translation of theestatutos(by-laws) of Celulosa Arauco y Constitución S.A., as of April 22, 2014 (incorporated by reference to Exhibit 1.1 to Arauco’s Annual Report on Form20-F for the fiscal year ended December 31, 2013, filed on April 29, 2014, Commission fileNo. 033-99720).

8.1		List of subsidiaries

12.1		Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002

12.2		Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002

13.1		Certification of chief executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002

101	*	XBRL Instance Document and related items.

Omitted from the exhibits filed with this annual report are certain instruments and agreements with respect to ourlong-term debt, none of which authorizes securities in a total amount that exceeds 10% of our total assets. We hereby agree to furnish to the SEC copies of any such omitted instruments or agreements as the SEC requests.

As permitted by Rule 405(a)(2)(ii) of RegulationS-T, the registrant’s XBRL (eXtensible Business Reporting Language) information will be furnished in an amendment to this Form20-F that will be filed no more than 30 days after the date hereof. In accordance with Rule 402 of RegulationS-T, such XBRL information will be furnished and not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Act, will be deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise will not be subject to liability under those sections.

Index of Exhibits



1.1		English translation of theby-laws (estatutos) of Celulosa Arauco y Constitución S.A., dated as of April 22, 2014 (incorporated by reference to Exhibit 1.1 to Arauco’s Annual Report on Form20-F for the fiscal year ended December 31, 2013, filed on April 29, 2014, Commission fileNo. 033-99720).

8.1		List of subsidiaries.

12.1		Certification of chief executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

12.2		Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

13.1		Certification of chief executive officer and principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

101*		XBRL Instance Document and related items.

The registrant hereby certifies that it meets all of the requirements for filing on Form20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.


CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

By:		/s/ Matías Domeyko
		Matías Domeyko
		Chief Executive Officer

Date: April 23, 2018

CONSOLIDATED

FINANCIAL STATEMENTS

AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2017

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Celulosa Arauco y Constitución S.A.

Opinion on the Financial Statements

We have audited the accompanying consolidated statement of financial position of Celulosa Arauco y Constitución S.A. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of profit or loss, comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers Consultores, Auditores SpA

Santiago, Chile

April 20, 2018

We have served as the Company’s auditor since 2015.

INDEX


	Page

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION		F-1

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS		F-3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME		F-4

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY		F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS		F-6

NOTE 1. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS		F-7

NOTE 2. ACCOUTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES		F-28

NOTE 3. DISCLOSURE OF OTHER INFORMATION		F-29

NOTE 4. INVENTORIES		F-34

NOTE 5. CASH AND CASH EQUIVALENTS		F-35

NOTE 6. INCOME TAXES AND DEFERRED TAXES		F-36

NOTE 7. PROPERTY, PLANT AND EQUIPMENT		F-41

NOTE 8. LEASES		F-45

NOTE 9. REVENUE		F-46

NOTE 10. EMPLOYEE BENEFITS		F-47

NOTE 11. BALANCES IN FOREIGN CURRENCY AND FOREIGN CURRENCY EXCHANGE RATE IMPACT IN PROFIT OR LOSS		F-48

NOTE 12. BORROWING COSTS		F-53

NOTE 13. RELATED PARTIES		F-53

NOTE 14. CONSOLIDATED FINANCIAL STATEMENTS		F-58

NOTE 15. INVESTMENTS IN ASSOCIATES		F-59

NOTE 16. INTERESTS IN JOINT ARRANGEMENTS		F-62

NOTE 17. IMPAIRMENT OF ASSETS		F-65

NOTE 18. PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES		F-66

NOTE 19. INTANGIBLE ASSETS		F-76

NOTE 20. BIOLOGICAL ASSETS		F-77

NOTE 21. ENVIRONMENTAL MATTERS		F-80

NOTE 22.NON-CURRENT ASSETS HELD FOR SALE		F-82

NOTE 23. FINANCIAL INSTRUMENTS		F-83

NOTE 24. REPORTABLE SEGMENTS		F-105

NOTE 25. OTHERNON-FINANCIAL ASSETS ANDNON-FINANCIAL LIABILITIES		F-111

NOTE 26. DISTRIBUTABLE NET Profit AND EARNINGS PER SHARE		F-112

NOTE 27. SUBSEQUENT EVENTS		F-114

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


	Note		12-31-2017 ThU.S.$		12-31-2016 ThU.S.$

Assets
Current Assets
Cash and cash equivalents		5		589,886		592,253
Other current financial assets		23		3,504		5,201
Other currentnon-financial assets		25		129,837		144,915
Trade and other current receivables		23		814,412		701,610
Accounts receivable due from related companies		13		3,488		12,505
Current inventories		4		868,462		852,612
Current biological assets		20		307,796		306,117
Current tax assets				49,471		104,088

Total Current Assets other than assets or disposal groups classified as held for sale				2,766,856		2,719,301

Non-Current Assets or disposal groups classified as held for sale		22		3,507		3,059

Non-Current Assets or disposal groups classified as held for sale or as held for distribution to owners				3,507		3,059

Total Current Assets				2,770,363		2,722,360
Non-Current Assets
Othernon-current financial assets		23		56,600		8,868
Othernon-currentnon-financial assets		25		121,521		130,319
Trade and othernon-current receivables				16,040		14,273
Accounts receivable due from related companies,non-current		13		1,056		957
Investments accounted for using equity method		15-16		368,772		446,548
Intangible assets other than goodwill		19		88,615		89,497
Goodwill		17		69,922		74,893
Property, plant and equipment		7		7,034,299		6,919,495
Non-current biological assets		20		3,459,146		3,592,874
Deferred tax assets				8,266		6,097
TotalNon-Current Assets				11,224,237		11,283,821
Total Assets				13,994,600		14,006,181

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

F-1

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)


	Note		12-31-2017 ThU.S.$			12-31-2016 ThU.S.$

Equity and Liabilities
Liabilities
Current Liabilities
Other current financial liabilities		23		500,344			697,452
Trade and other current payables		23		717,346			537,891
Accounts payable to related companies		13		11,208			3,831
Other current provisions		18		2,728			842
Current tax liabilities				8,088			1,641
Current provisions for employee benefits		10		5,730			5,244
Other currentnon-financial liabilities		25		153,950			99,163
Total Current Liabilities other than assets included in disposal groups classified as held for sale				1,399,394			1,346,064

Total Current Liabilities				1,399,394			1,346,064
Non-Current Liabilities
Othernon-current financial liabilities		23		3,778,567			3,870,914
Othernon-current provisions		18		36,008			38,138
Deferred tax liabilities		6		1,485,365			1,631,065
Non-current provisions for employee benefits		10		66,033			60,084
Othernon-currentnon-financial liabilities		25		112,340			60,633
TotalNon-Current Liabilities				5,478,313			5,660,834
Total Liabilities				6,877,707			7,006,898
Equity
Issued capital				353,618			353,618
Retained earnings				7,425,133			7,329,675
Other reserves				(703,778	)		(728,042	)

Equity attributable to parent company				7,074,973			6,955,251

Non-controlling interests				41,920			44,032
Total Equity				7,116,893			6,999,283
Total Equity and Liabilities				13,994,600			14,006,181

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

F-2

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS


			For the years ended December 31,
	Note		2017 ThU.S.$			2016 ThU.S.$			2015 ThU.S.$
Statements of profit or loss

Revenue		9		5,238,341			4,761,385			5,146,740
Cost of sales		3		(3,574,532	)		(3,498,905	)		(3,511,425	)
Gross profit				1,663,809			1,262,480			1,635,315
Other income		3		111,513			257,863			273,026
Distribution costs		3		(523,300	)		(496,473	)		(528,470	)
Administrative expenses		3		(521,294	)		(474,469	)		(551,977	)
Other expense		3		(240,165	)		(77,415	)		(83,388	)
Profit from operating activities				490,563			471,986			744,506
Finance income		3		19,640			29,701			50,284
Finance costs		3		(287,958	)		(258,467	)		(262,962	)
Share of profit of associates and joint ventures accounted for using equity method		15		17,017			23,939			6,748
Exchange rate differences				98			(3,935	)		(41,171	)
Profit before income tax				239,360			263,224			497,405
Income Tax		6		30,992			(45,647	)		(129,694	)
Net Profit				270,352			217,577			367,711

Net profit attributable to
Net profit attributable to parent company				269,724			213,801			362,689
Net profit attributable tonon-controlling interests				628			3,776			5,022
Net Profit				270,352			217,577			367,711


Basic and diluted earnings per share (in U.S.$ per share)
Basic and diluted earnings per share from continuing operations				2.3836			1.8894			3.2051

Basic and diluted earnings per share				2.3836			1.8894			3.2051

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

F-3

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


			For the years ended December 31,
	Note		2017 ThU.S.$			2016 ThU.S.$			2015 ThU.S.$
Net profit				270,352			217,577			367,711
Components of other comprehensive income that will not be reclassified to profit or loss before tax:
Other comprehensive income before tax actuarial gain (losses) on defined benefit plans				2,499			(5,593	)		(1,530	)

Share of other comprehensive income of associates and joint ventures accounted for using equity method				8,754			132			(1,008	)

Other Comprehensive Income that will not be reclassified to profit or loss before tax				11,253			(5,461	)		(2,538	)

Components of other comprehensive income that will be reclassified to profit or loss before tax:

Exchange differences on translation

Gains (losses) on exchange differences on translation, before tax		11		11,873			173,754			(385,109	)

Other Comprehensive Income before tax exchange differences on translation				11,873			173,754			(385,109	)

Cash flow hedges

Gains (losses) on cash flow hedges, before tax		23		22,212			84,045			11,859

Recycle of cash flow hedges to profit or loss before tax		23		(16,965	)		(10,198	)		(16,122	)

Other Comprehensive Income before tax Cash flow hedges				5,247			73,847			(4,263	)

Other Comprehensive income that will be reclassified to profit or loss before tax				17,120			247,601			(389,372	)

Income tax relating to components of other comprehensive Income that will not be reclassified to profit or loss before tax

Income tax relating to actuarial losses on defined benefit plans				(673	)		1,509			649
Income tax relating to share of other comprehensive income of associates and joint ventures accounted for using equity method				(2,086	)		(106	)		227

Income tax relating to components of other comprehensive Income that will be reclassified to profit or loss before tax

Income tax relating to cash flow hedges		23		(5,917	)		(20,055	)		(1,738	)

Income tax relating to recycle of cash flow hedges		23		4,326			2,700			3,627

Income tax relating to components of other comprehensive income that will be reclassified to profit or loss				(1,591	)		(17,355	)		1,889
Other comprehensive (loss) income				24,023			226,188			(389,145	)

Comprehensive (loss) income				294,375			443,765			(21,434	)

Comprehensive Income attributable to
Comprehensive (loss) income, attributable to owners of parent company				293,988			435,119			(15,619	)
Comprehensive (loss) income, attributable tonon-controlling interests				387			8,646			(5,815	)

Total comprehensive (loss) income				294,375			443,765			(21,434	)

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

F-4

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


12-31-2017	Issued Capital ThU.S.$		Reserve of exchange differences on translation ThU.S.$			Reserve of cash flow hedges ThU.S.$		Reserve of actuarial losses on defined benefit plans ThU.S.$			Other Reserves ThU.S.$			Total other Reserves ThU.S.$			Retained Earnings ThU.S.$			Equity attributable to owners of parent ThU.S.$			Non - controlling interests ThU.S.$			Total Equity ThU.S.$
Opening balance at01-01-2017		353,618		(703,886	)		1,096		(20,752	)		(4,500	)		(728,042	)		7,329,675			6,955,251			44,032			6,999,283
Changes in Equity:
Comprehensive income
Net profit																		269,724			269,724			628			270.352
Other comprehensive income, net of tax				12,114			3,656		1,826			6,668			24,264						24,264			(241	)		24.023
Comprehensive income		—		12,114			3,656		1,826			6,668			24,264			269,724			293,988			387			294.375
Dividends																		(174,266	)		(174,266	)		(2,483	)		(176.749	)
Increase (decrease) from transfers and other changes																		—			—			(16	)		(16	)
Changes in equity		—		12,114			3,656		1,826			6,668			24,264			95,458			119,722			(2,112	)		117.610
Closing balance at12-31-2017		353,618		(691,772	)		4,752		(18,926	)		2,168			(703,778	)		7,425,133			7,074,973			41,920			7,116,893


12-31-2016	Issued Capital ThU.S.$		Reserve of exchange differences on translation ThU.S.$			Reserve of cash flow hedges ThU.S.$			Reserve of actuarial losses on defined benefit plans ThU.S.$			Other Reserves ThU.S.$			Total other Reserves ThU.S.$			Retained Earnings ThU.S.$			Equity attributable to owners of parent ThU.S.$			Non - controlling interests ThU.S.$			Total Equity ThU.S.$
Opening balance at01-01-2016		353,618		(872,770	)		(55,396	)		(16,668	)		(4,526	)		(949,360	)		7,204,452			6,608,710			37,735			6,646,445
Changes in Equity:
Comprehensive income
Net profit																			213,801			213,801			3.776			217.577
Other comprehensive income, net of tax				168,884			56,492			(4,084	)		26			221,318						221,318			4.870			226.188
Comprehensive income		—		168,884			56,492			(4,084	)		26			221,318			213,801			435,119			8.646			443.765
Dividends																			(88,578	)		(88,578	)		(2,250	)		(90.828	)
Increase (decrease) from transfers and other changes																			—			—			(99	)		(99	)
Changes in equity		—		168,884			56,492			(4,084	)		26			221,318			125,223			346,541			6,297			352.838
Closing balance at12-31-2016		353,618		(703,886	)		1,096			(20,752	)		(4,500	)		(728,042	)		7,329,675			6,955,251			44,032			6,999,283


12-31-2015	Issued Capital ThU.S.$		Reserve of exchange differences on translation ThU.S.$			Reserve of cash flow hedges ThU.S.$			Reserve of actuarial losses on defined benefit plans ThU.S.$			Other Reserves ThU.S.$			Total other Reserves ThU.S.$			Retained Earnings ThU.S.$			Equity attributable to owners of parent ThU.S.$			Non - controlling interests ThU.S.$			Total Equity ThU.S.$
Opening balance at01-01-2015		353,618		(498,495	)		(53,022	)		(15,790	)		(3,745	)		(571,052	)		6,984,564			6,767,130			47,606			6,814,736
Changes in Equity:
Comprehensive income
Net profit																			362,689			362,689			5,022			367,711
Other comprehensive income, net of tax				(374,275	)		(2,374	)		(878	)		(781	)		(378,308	)					(378,308	)		(10,837	)		(389,145	)
Comprehensive income		—		(374,275	)		(2,374	)		(878	)		(781	)		(378,308	)		362,689			(15,619	)		(5,815	)		(21,434	)
Dividends																			(142,801	)		(142,801	)		(3,228	)		(146,029	)
Increase (decrease) from transfers and other changes																			—			—			(828	)		(828	)
Changes in equity		—		(374,275	)		(2,374	)		(878	)		(781	)		(378,308	)		219,888			(158,420	)		(9,871	)		(168,291	)
Closing balance at12-31-2015		353,618		(872,770	)		(55,396	)		(16,668	)		(4,526	)		(949,360	)		7,204,452			6,608,710			37,735			6,646,445

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

F-5

CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the years ended December 31,
	2017 ThU.S.$			2016 ThU.S.$			2015 ThU.S.$
STATEMENTS OF CASH FLOWS
Cash Flows from (used in) Operating Activities
Classes of cash receipts from operating activities
Receipts from sales of goods and rendering of services		5,508,705			5,020,551			5,733,693
Other cash receipts from operating activities		365,238			470,765			337,696
Classes of cash payments
Payments to suppliers for goods and services		(3,850,367	)		(3,914,976	)		(4,260,587	)
Payments to and on behalf of employees		(532,223	)		(320,738	)		(490,723	)
Other cash payments from operating activities		(128,314	)		(232,271	)		(193,334	)
Interest paid		(261,186	)		(191,573	)		(205,797	)
Interest received		18,966			29,380			17,720
Income taxes paid		(37,942	)		(83,903	)		(87,784	)
Other inflows (outflows) of cash, net		(10,452	)		(3,651	)		2,766

Net Cash flows from Operating Activities		1,072,425			773,584			853,650

Cash flows (used in) investing activities

Cash flow used in obtaining control of subsidiaries or other businesses		(15,918	)		—			(10,090	)
Cash used for contributions and purchase of associates and joint ventures		—			(153,135	)		(814	)
Other cash receipts from sales of equity or debt instruments in other entities		1			6,781			—
Loans to related parties		—			—			(23,628	)
Proceeds from sale of property, plant and equipment		6,308			17,685			5,860
Purchase of property, plant and equipment		(448,314	)		(356,153	)		(321,385	)
Proceeds from sales of intangible assets		—			—			99
Purchase of intangible assets		(10,468	)		(14,858	)		(10,395	)
Proceeds from sales of other long-term assets		2,609			1,644			506
Purchase of othernon-current assets		(179,184	)		(140,707	)		(126,132	)
Dividends received		7,287			4,772			6,350
Other inflows (outflows) of cash, net		4,331			(6,241	)		1,849

Cash flows used in Investing Activities		(633,348	)		(640,212	)		(477,780	)

Cash flows from (used in) Financing Activities

Total borrowings obtained		1,312,481			737,653			280,863
Debt obtained in long-term		1,025,096			187,845			890
Debt obtained in short-term		287,385			549,808			279,973
Repayments of borrowings		(1,627,711	)		(645,211	)		(949,183	)
Dividends paid		(121,586	)		(130,624	)		(143,003	)
Other outflows of cash, net		(2,285	)		(302	)		(853	)
Cash flows used in Financing Activities		(439,101	)		(38,484	)		(812,176	)
Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes		(24	)		94,888			(436,306	)
Effect of exchange rate changes on cash and cash equivalents		(2,343	)		(2,660	)		(34,821	)
Net increase (decrease) of Cash and Cash equivalents		(2,367	)		92,228			(471,127	)

Cash and cash equivalents, at the beginning of the period		592,253			500,025			971,152

Cash and cash equivalents, at the end of the period		589,886			592,253			500,025

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

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2017 AND 2016

NOTE 1.

PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

Entity Information

Celulosa Arauco y Constitución S.A. and subsidiaries, (hereafter “Arauco” or the “Company”), tax identification number93,458,000-1, is a closely held corporation, that was registered in the Securities Registry (the “Registry”) of the Superintendency of Securities and Insurance (current Chilean Commission for the Financial Market (“CMF”)) as No. 042 on June 14, 1982. Additionally, the Company is registered as anon-accelerated filer in the Securities and Exchange Commission (SEC) of the United States of America.

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

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

Arauco is principally engaged in the production and sale of products related to the forestry and timber industries. Its main operations are focused on business areas of pulp, wood products and forestry.

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

The ultimate shareholders of Arauco are Mrs. María Noseda Zambra de Angelini (who passed away on April 15, 2018), Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi, who have control fundamentally as follows:

(i)

Through Inversiones Angelini y Cía. Ltda., entity wich has 63.4015% of the shares of AntarChile S.A. and

(ii)

Mr. Roberto Angelini Rossi through the statutory control of Inversiones Golfo Blanco Ltda., direct owner of 5.77307% of the shares of AntarChile S.A.; and Mrs. Patricia Angelini Rossi, through the statutory control of Inversiones Senda Blanca Ltda., direct owner of 4.32981% of the shares of AntarChile S.A.

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

F-7

Presentation of Consolidated Financial Statements

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

•

Consolidated Statements of Financial Positionas of December 31, 2017 and 2016.

•

Consolidated Statements of Profit or Loss for the years ended December 31, 2017, 2016 and 2015.

•

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015.

•

Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016 and 2015.

•

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015.

•

Explanatory disclosures (notes)

Period Covered by the Consolidated Financial Statements

As of December 31, 2017 and 2016 and for the periods between January 1 and December 31, 2017, 2016 and 2015.

Date of Approval of Consolidated Financial Statements

These consolidated financial statements were approved by the Board of Directors of the Company (the “Board”) at the Extraordinary Meeting on April 20, 2018.

Abbreviations used in this report:

IFRS – International Financial Reporting Standards

IASB – International Accounting Standards Board

IAS – International Accounting Standards

IFRIC – International Financial Reporting Standards Interpretations Committee

MU.S.$ – Millions of U.S. dollars

ThU.S.$ – Thousands of U.S. dollars

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

UTA – Annual Tax Unit

ICMS – Tax movement of inventories and services (Brazil)

Functional and Presentation Currency

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

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

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

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

F-8

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

Summary of significant accounting policies

a)	Basis for preparation of consolidated financial statements

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and they represent the explicit and unreserved adoption of IFRS.

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

b)	Critical accounting estimates and judgments

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

- Biological Assets

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

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

F-9

- Goodwill

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

- Litigation and Contingencies

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

c)	Consolidation

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

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

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

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

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

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

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

c) rights arising from other contractual arrangements; and

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

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

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

F-10

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

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

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

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

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

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

d)	Segments

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

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

•

Pulp

•

Wood products

•

Forestry

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

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e)	Functional currency

(i) Functional currency

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

(ii) Translation to the presentation currency of Arauco

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

(iii) Foreign Currency Transactions

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

f)	Cash and cash equivalents

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

g)	Financial Instruments

Financial assets

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

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

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

Derivative financial instruments are explained in Note 1 h)

Financial liabilities

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

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

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

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

h)	Derivative financial instruments

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

Derivatives are initially recognized at fair value at the date the derivative contracts are entered into and are subsequentlyre-measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss unless the derivative is designated as a hedging instrument and complies with hedge accounting requirements of IAS 39, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

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

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

At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives

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

-Fair Value Hedges under IAS39-Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognized in profit or loss immediately, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The change in the fair value of the hedging instrument and the change in the hedged item attributable to the hedged risk are recognized in profit or loss in the line item relating to the hedged item.

-Cash flow hedges under IAS 39 -The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income and accumulated under the heading of cash flow hedging reserve. The gain or loss relating to the ineffective portion is recognized immediately in profit or loss, and is included in the Finance costs line item in the consolidated statement of profit or loss. Amounts previously recognized in other comprehensive income are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognized hedged item.

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

i)	Inventories

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

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

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

Biological assets are transferred to inventories when forests are harvested.

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

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

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

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j)	Non-current assets held for sale

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

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

k)	Business Combinations

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

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

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

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

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

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

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

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

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Arauco measures the fair value of the acquired company in the business combination achieved in stage (“step acquisition”), recognizing the effects of remeasurement of previously held equity in the acquiree in the statements of profit or loss.

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

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

l)	Investments in associates and joint arrangements

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

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

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

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

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

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

If Arauco’s share of losses of an associate or joint venture equals or exceeds its interest in the associate or joint venture, Arauco discontinues recognizing its share of further losses. After Arauco’s carrying value in the investee is reduced to zero, additional losses are provided for, and a liability is recognized, only to the extent that Arauco has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, Arauco resumes

recognizing its share of those profits only after its share of the profits equals the share of losses not recognized.

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m)	Intangible assets other than goodwill

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

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

(i) Computer Software

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

(ii) Water Rights, Easements and Other Rights

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

(iii) Customers and trade relations with customers

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

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n)	Goodwill

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

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

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

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

Goodwill recognized for the acquisition of the subsidiary Arauco do Brasil S.A. whose functional currency is the Brazilian Real, is translated into U.S. Dollars at the closing exchange rate.

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o)	Property, Plant and Equipment

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

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

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

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

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

p)	Leases

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

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

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

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

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

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q)	Biological Assets

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

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

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

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

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

r)	Income taxes and deferred taxes.

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

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

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

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

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s)	Provisions

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

t)	Revenue recognition

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

(i) Revenue recognition from the Sale of Goods

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

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

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

The main Incoterms used by Arauco are the following:

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

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

(ii) Revenue recognition from Rendering of Services

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

Arauco mainly provides power supply services which are transacted principally in the spot market of the Sistema Interconectado Central (“Central Interconnected System”). According to current regulations, the prices on that market called “Marginal Costs” are

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calculated by the Centro de Despacho Económico de Carga del Sistema Interconectado Central (CDEC–SIC) (“Economic Load Dispatch Center of the Central Interconnected System”) and are generally recognized in the period in which the services are rendered.

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

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

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

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

u)	Minimum dividend

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

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

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

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

v)	Earning per share

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

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w)	Impairment

Non-financial Assets

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

A previously recognized impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount however a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.

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

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

Goodwill

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

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

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

Financial Assets

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

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

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

x)	Employee Benefits

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

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

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

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

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

y)	Employee Vacations

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

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

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z)	Recent accounting pronouncements

a) Standards, interpretations and amendments that are mandatory for the first time for annual periods beginning on January 1, 2017:


Amendments and improvements	Content	Mandatory application for annual periods beginning on or after

IAS 7	Statements of Cash Flows Introduces additional disclosure that enable users of financial statements to evaluate changes in liabilities arising from financial activities.	January 1, 2017

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

IFRS 12	Disclosure of Interests in Other Entities. Clarifies the scope of this rule.	January 1, 2017

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

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


Standards and interpretations	Content	Mandatory application for annual periods beginning on or after

IFRS 9	Financial Instruments Supersedes IAS 39. This final version includes requirements for the classification and measurement of financial assets and liabilities and introduces an ‘expected credit loss’ model for the measurement of the impairment. Hedge accounting part was included in IFRS 9 published at November 2013.	January 1, 2018

IFRS 15	Revenue from Contracts with Customers Provides a single, principles based five-step model to be applied to all contracts with customers. The principles include information related to nature, amount, opportunity and uncerntainty of the revenue and cash flows from contracts with customers.	January 1, 2018

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

IFRIC 22	Transactions in Foreign Currency and Anticipated Considerations Applies to a transaction in foreign currency (or partially in foreign currency) when an entity recognizes anon-financial asset or anon-financial liability arising from the payment or collection of an anticipated consideration, before recognizing the related asset, expense, or income.	January 1, 2018

IFRIC 23	Uncertain tax positions It clarifies the method of applying the acknowledgment and measurement requirements of IAS 12 when there is uncertainty regarding the fiscal treatments.	January 1, 2019

IFRS 17	Insurance Contracts Supersedes IFRS 4. It changes mainly the accounting for insurance contracts and inverstments contracts.	January 1, 2021

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Amendments and improvements	Content	Mandatory application for annual periods beginning on or after

IFRS 1	First-time Adoption of International Financial Reporting Standards Deletes the short-term exemptions for first time adopters regarding to IFRS 7, IAS 9 and IFRS 10.	January 1, 2018

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

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

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

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

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

IAS 28	Investments in associates and joint ventures Measurement of the investments in associates and joint ventures at fair value.	January 1, 2018

IAS 28	Investments in associates and joint ventures It clarifies that an entity applies IFRS 9 Financial Instruments to long-term interests in an associate or joint venture that form part of the net investment in the associate or joint venture but to which the equity method is not applied.	January 1, 2019

IFRS 9	Financial instruments Allows assets to be measured at amortised cost.	January 1, 2019

IFRS 3	Business Combinations Clarifies that when an entity obtains control of a business that is a joint operation, it is a business combination achieve by steps.	January 1, 2019

IFRS 11	Joint Arrangements Clarifies that when an entity obtains joint control of a business that is a joint operation, the entity does not remeasure previously held interests in that business.	January 1, 2019

IAS 12	Income taxes Clarifies the income tax consequences of dividends from financial instruments at amortized cost should be recognized according to the past transactions or events that generated distributable profits.	January 1, 2019

IAS 23	Borrowing Costs Clarifies that if any specific borrowing remains outstanding after the related asset is ready for its intended use or sale, that borrowing becomes part of the general borrowings.	January 1, 2019

F-26

IFRS 9 - Financial Instruments.

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

Consequently, Arauco does not expect the new standard to have a significant impact in the classification and measurement of its financial assets.

IFRS 15 – Revenue from Contracts with Customers.

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

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

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

IFRS 15 requires separate presentation of contract assets and contract liabilities in the balance sheet. This will result in some reclassifications as of January 1, 2018 in relation to contract liabilities in relation to volume-based rebates, which are currently included in other balance sheet line items.

Arauco intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognized in retained earnings as of January 1, 2018 and that comparatives will not be restated.

IFRS 16 - Leases

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

The group’s main assets are held under financial leases by Arauco and its affiliates, and therefore we do not expect that the new standard will have a significant impact on the financial statements. However, the group has yet to evaluate which other adjustments, if any, would be necessary due to changes in the definition of the term of the lease and the various treatments of variable rent payments and extension and termination options. Therefore, it is not yet possible to estimate the value of the right to use the assets and liabilities under leases that will be recognized upon the implementation of the new standard, or how this could affect the group’s earnings or losses and the classification of future cash flows.

F-27

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

NOTE 2.

ACCOUTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

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

F-28

NOTE 3.

DISCLOSURE OF OTHER INFORMATION

a)	Disclosure of information on Issued Capital

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

100% of Capital corresponds to ordinary shares


	12-31-2017	12-31-2016
Description of Ordinary Capital Share Types	100% of Capital corresponds to ordinary shares
Number of Authorized Shares by Type of Capital in Ordinary Shares	113,159,655
Nominal Value of Shares by Type of Capital in Ordinary Shares	ThU.S.$0.0031210 per share
Amount of Capital in Shares by Type of Ordinary Shares that Constitute Capital	ThU.S.$353,618
	12-31-2017	12-31-2016
Number of Shares Issued and Fully Paid by Type of Capital in Ordinary Shares	113,159,655

b)	Dividends paid

The interim dividend paid in December 2017 was equivalent to 20% of the distributable net profit calculated as of the end of September 2017 and was considered a decrease in the statements of changes in equity.

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

The ThU.S.$174,266 (ThU.S.$ 88,578 as of December 31, 2016) presented in the statements of changes in equity correspond to the minimum dividend provision recorded for the period 2017.

In the Statements of Cash Flow in the line item “Dividends Paid” an amount of ThU.S.$121,586 is presented for the year ended December 31, 2017 (ThU.S.$130,624 for the year ended December 31, 2016), of which ThU.S.$119,499 (ThU.S.$ 128,793 for the year ended December 31, 2016) correspond to the payment of dividends of the parent company.

F-29

The following are the dividends paid and per share amounts during the periods 2017, 2016 and 2015:


Detail of Dividend Paid, Ordinary Shares
Dividend Paid			Interim Dividend
Type of Shares for which there is a Dividend Paid			Ordinary Shares
Date of Dividend Paid			12-20-2017
Amount of Dividend			ThU.S.$60,494
Number of Shares for which Dividends are Paid			113,159,655
Dividend per Share			U.S.$0.53459


Detail of Dividend Paid, Ordinary Shares
Dividend Paid			Final Dividend
Type of Shares for which there is a Dividend Paid			Ordinary Shares
Date of Dividend Paid			05-10-2017
Amount of Dividend			ThU.S.$59,005
Number of Shares for which Dividends are Paid			113,159,655
Dividend per Share			U.S.$0.52143


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


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


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


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

F-30

c)	Disclosure of Information on Reserves

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

Reserves of exchange differences on translation

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

Reserves of cash flow hedges

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

Reserve of Actuarial Losses in Defined Benefit Plans

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

Other reserves

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

F-31

Other items in the Statements of Profit or Loss

The table below sets forth other income, other expenses, finance income, finance costs and share of profit (loss) of associates and joint ventures for the years ended December 31, 2017, 2016 and 2015 are as follows:


	January - December
	2017			2016			2015
	ThU.S.$			ThU.S.$			ThU.S.$
Classes of Other Income
Other Income, Total		111,513			257,863			273,026
Gain from changes in fair value of biological assets (See note 20)		83,031			208,562			210,479
Net income from insurance compensation		1,305			3,222			1,522
Revenue from export promotion		3,542			2,350			2,692
Lease income		3,061			4,687			2,654
Gain on sales of assets		13,444			17,485			11,849
Gain on business combination achieved in stages		—			—			8,744
Access easement		565			3,756			8,160
Recovery of tax credits		—			2,033			8,081
Other operating results (*)		6,565			15,768			18,845

Classes of Other Expenses by activity
Total of Other Expenses by activity		(240,165	)		(77,415	)		(83,388	)
Depreciation		(1,880	)		(562	)		(1,407	)
Legal expenses		(3,882	)		(5,087	)		(5,082	)
Impairment provision for property, plant and equipment and others		(33,240	)		(14,979	)		(12,321	)
Operating expenses related to plants stoppage		(5,861	)		(3,926	)		(3,917	)
Expenses related to projects		(2,139	)		(1,620	)		(532	)
Loss of asset sales		(4,691	)		(2,283	)		(2,475	)
Loss and repair of assets		(3,739	)		(1,307	)		(316	)
Loss of forest due to fires (**)		(138,139	)		(15,193	)		(34,850	)
Other Taxes		(17,463	)		(8,261	)		(8,981	)
Research and development expenses		(2,594	)		(2,684	)		(2,604	)
Fines, readjustments and interests		(3,675	)		(1,004	)		(1,139	)
Loss on disposal of associates		—			(10,369	)		—
Others rentals no operational		(1,877	)		—			—
Other expenses		(20,985	)		(10,140	)		(9,764	)

Classes of financing income
Financing income, total		19,640			29,701			50,284
Financial income from mutual funds – term deposits		11,023			11,439			15,128
Financial income resulting from swap – forward instruments		3,602			7,226			4,439
Financial income resulting from loans with related companies		—			—			17,629
Other financial income		5,015			11,036			13,088

Classes of financing costs
Financing costs, Total		(287,958	)		(258,467	)		(262,962	)
Interest expense, Banks loans		(31,014	)		(33,224	)		(40,690	)
Interest expense, Bonds		(223,602	)		(183,203	)		(189,526	)
Interest expense, other financial instruments		(15,706	)		(17,221	)		(7,260	)
Other financial costs		(17,636	)		(24,819	)		(25,486	)

Share of profit (loss) of associates and joint ventures accounted for using equity method
Total		17,017			23,939			6,748
Investments in associates		4,855			16,348			5,573
Joint ventures		12,162			7,591			1,175

(*)	”Other operating results” includes income from interests, extraction of sand and gravel from wharfage and indemnities, among others.

(**)	Loss of forest due to fires are presented net of ThU.S.$35,000 from insurance compensation as of December 2017.

F-32

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


	January - December
Cost of sales	2017 ThU.S.$		2016 ThU.S.$		2015 ThU.S.$
Timber		725,114		736,399		641,821
Forestry labor costs		631,276		600,320		636,100
Depreciation and amortization		389,847		377,983		371,851
Maintenance costs		262,764		313,500		305,701
Chemical costs		517,478		479,335		539,856
Sawmill Services		109,776		117,340		128,801
Other Raw Materials		188,874		221,950		226,342
Other Indirect costs		178,447		143,074		138,900
Energy and fuel		186,041		139,527		172,077
Cost of electricity		42,008		39,960		41,674
Wage and salaries		342,907		329,517		308,302
Total		3,574,532		3,498,905		3,511,425


	January - December
Distribution cost	2017 ThU.S.$			2016 ThU.S.$		2015 ThU.S.$
Selling costs		39,175			33,557		48,160
Commissions		14,880			13,880		15,801
Insurance		3,620			3,216		4,601
Provision for doubtful accounts		(245	)		910		3,137
Other selling costs		20,920			15,551		24,621
Shipping and freight costs		484,125			462,916		480,310
Port services		30,996			28,028		26,216
Freights		384,523			357,442		387,081
Other shipping and freight costs		68,606			77,446		67,013
Total		523,300			496,473		528,470


	January - December
Administrative expenses	2017 ThU.S.$		2016 ThU.S.$		2015 ThU.S.$
Wages and salaries		218,720		198,042		227,407
Marketing, advertising, promotion and publications expenses		10,046		9,937		10,422
Insurances		17,122		21,526		28,216
Depreciation and amortization		28,210		29,285		24,587
Computer services		27,193		27,735		31,897
Lease rentals (offices, other property and vehicles)		14,195		13,391		13,527
Donations, contributions, scholarships		12,772		10,396		11,172
Fees (legal and technical advisors)		43,107		43,809		49,556
Property taxes, city permits and rights		17,281		15,962		19,196
Cleaning services, security services and transportation		25,153		26,975		25,638
Third-party variable services (maneuvers, logistics)		46,097		40,277		56,093
Basic services		8,423		8,653		9,395
Maintenance and repair		5,579		7,617		8,361
Seminars, courses, training materials		2,526		3,560		5,156
Other administration expenses		44,870		17,304		31,354
Total		521,294		474,469		551,977

F-33

NOTE 4.

INVENTORIES


Components of Inventory	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Raw materials		103,049		61,252
Production supplies		98,548		102,760
Work in progress		56,194		59,332
Finished goods		441,726		468,544
Spare Parts		168,945		160,724
Total Inventories		868,462		852,612

Inventories recognized as cost of sales at December 31, 2017 were ThU.S.$3,511,871 (ThU.S.$3,423,439 and ThU.S.$3,416,235 at December 31, 2016 and 2015, respectively).

In order to have the inventories recorded at net realizable value at December 31, 2017, a net decrease of inventories was recognized associated with a higher provision of obsolescence of ThU.S.$1,264 (ThU.S.$8,397 and ThU.S.$ 6,909 at December 31, 2016 and 2015, respectively). As of December 31, 2017, the amount of obsolescence provision is ThU.S.$28,684 (ThU.S.$27,420 at December 31, 2016).

At December 31, 2017, there were inventory write-offs of ThU.S.$1,427 (ThU.S.$1,332 and ThU.S.$ 4,215 at December 31, 2016 and 2015, respectively)

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

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

Agricultural Products

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

F-34

NOTE 5.

CASH AND CASH EQUIVALENTS

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

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

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

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


Components of Cash and Cash Equivalents	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Cash on hand		148		3,156
Bank checking account balances		209,037		146,290
Time deposits		292,105		247,391
Mutual funds		73,170		195,416
Other cash and cash equivalents (*)		15,426		—
Total		589,886		592,253

(*)	Applies to purchase contracts resale commitments.

The risk classification of the mutual funds in effect as of December 31, 2017 and December 31, 2016 is shown below.


	December 2017 ThU.S.$		December 2016 ThU.S.$
AAAfm		70,808		192,895
AAfm		2,362		2,521
Total Mutual Funds		73,170		195,416

Changes in Financial Liabilities


			Cash Flow
	Opening balance 12-31-2016 ThU.S.$		Borrowings obtained ThU.S.$		Borrowings paid ThU.S.$			Interest paid ThU.S.$			Accrued interest ThU.S.$		Inflation adjustment ThU.S.$			Non-cash movements ThU.S.$			Closing balance 12-31-2017 ThU.S.$
Borrowings from banks		914,358		421,309		(481,205	)		(28,141	)		27,894		(439	)		4,681			858,457
Hedging liabilities		87,364		—		—			—			—		—			(81,971	)		5,393
Bonds and promissory notes		3,452,658		891,172		(1,146,506	)		(233,045	)		218,326		122,324			(2,244	)		3,302,685

Total		4,454,380		1,312,481		(1,627,711	)		(261,186	)		246,220		121,885			(79,534	)		4,166,535


			Cash Flow
	Opening balance 12-31-2015 ThU.S.$		Borrowings obtained ThU.S.$		Borrowings paid ThU.S.$			Interest paid ThU.S.$			Accrued interest ThU.S.$		Inflation adjustment ThU.S.$		Non-cash movements ThU.S.$			Closing balance 12-31-2016 ThU.S.$
Borrowings from banks		997,542		550,226		(645,211	)		(27,692	)		27,471		9		12,013			914,358
Hedging liabilities		227,568		—		—			—			—		—		(140,204	)		87,364
Bonds and promissory notes		3,180,334		187,427		—			(163,881	)		165,017		79,923		3,838			3,452,658

Total		4,405,444		737,653		(645,211	)		(191,573	)		192,488		79,932		(124,353	)		4,454,380

F-35

NOTE 6.

INCOME TAXES AND DEFERRED TAXES

The tax rates applicable in the countries in which Arauco operates are 25.5% in Chile, 35% in Argentina, 34% in Brazil, 25% in Uruguay and 35% in the United States (federal tax).

On September 29, 2014, the Official Gazette enacted Law No. 20,780, which introduced various amendments to the current income tax system, as well as to other taxes in Chile. The main amendment was the establishment of an option between two tax regimes: attributed income system and the partially integrated system. One of the effects of the regime selection is that it attaches a progressive increase in the First Category Tax for the fiscal years of 2014, 2015, 2016 and 2017 onwards, increasing to 21%, 22,5%, 24% y 25%, respectively, if the Company chooses the application of an attributed income system, or an increase to 21%, 22.5%, 24%, 25.5% y 27% for the fiscal years 2014, 2015, 2016, 2017, 2018 and thereafter, if the Company chooses the application of the partially integrated system.

Subsequently, on February 28, 2016, the Official Gazette enacted Law No. 20,899, which introduced amendments to Law No. 20,780. Among the main amendments is the incorporation of certain limitations for applying to the attributed income system, and therefore Arauco’s Chilean companies must apply the general rule, that is, the partially integrated system.

On December 22, 2017, a new law was enacted in the United States that amended several articles of the Income Tax Act. The most relevant amendments of this law include the reduction of the income tax rate, from 35% as to 21% by 2018 fiscal year. This amendment generated a benefit of ThU.S.$ 17,600 for Arauco’s subsidiaries in that country as of December 31, 2017, as a result of the reduction of the net deferred liabilities generated by the reduction of the federal income tax rate.

On December 29, 2017, Law No. 27,430 was enacted in the Official Gazette of Argentina, which amended several articles of the Income Tax Act. The most relevant amendments include the reduction of the federal income tax rate from 35% to 30% by 2018 and 2019 fiscal years, and 25% by 2020. This amendment generated a benefit of ThU.S$ 62,677 for Arauco’s subsidiaries in that country as of December 31, 2017, as a result of the reduction of the net deferred liabilities generated by the reduction of the federal income tax rate.

F-36

Deferred Tax Assets

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


	12-31-2017			12-31-2016
Deferred Tax Assets	ThU.S.$			ThU.S.$
Deferred tax Assets relating to Provisions		7,433			5,771
Deferred tax Assets relating to Accrued Liabilities		11,267			11,716
Deferred tax Assets relating to Post-Employment benefits		19,276			17,618
Deferred tax Assets relating to Property, Plant and equipment		11,657			9,806
Deferred tax Assets relating to Financial Instruments		4,348			12,699
Deferred tax Assets relating to Tax Loss Carryforward		62,706			50,917
Deferred tax Assets relating to Inventories	��	5,941			7,158
Deferred tax Assets relating to Provisions for Income		21,354			7,069
Deferred tax Assets relating to Allowance for Doubtful Accounts		5,149			4,886
Intangible revaluation differences		10,389			10
Deferred tax Assets relating to Other Deductible Temporary Differences		27,364			22,985
Total Deferred Tax Assets		186,884			157,866

Offsetting presentation		(178,618	)		(151,769	)

Net Effect		8,266			6,097

Certain subsidiaries of Arauco mainly in Chile, Brazil and Uruguay, as of the date of these consolidated financial statements, present tax losses for which we estimate that, given the projection of future profits, will allow the recovery of these assets. The total amount of these tax losses is ThU.S.$216,397 (ThU.S.$178,064 at December 31, 2016), which are mainly originated by operational and financial losses.

In addition, as of the closing of these consolidated financial statements there are ThU.S.$167,862 (ThU.S.$176,280 at December 31, 2016) ofnon-recoverable tax losses from companies in Uruguay as joint operations based on the participation of Arauco and subsidiaries in USA, for which deferred tax assets have not been recognized. The estimated recovery period exceeds the expiry date of such tax losses.

Deferred Tax Liabilities

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


	12-31-2017			12-31-2016
Deferred Tax Liabilities	ThU.S.$			ThU.S.$
Deferred tax Liabilities relating to Property, Plant and Equipment		860,498			934,892
Deferred tax Liabilities relating to Financial Instruments		12,684			7,186
Deferred tax Liabilities relating to Biological Assets		676,876			719,577
Deferred tax Liabilities relating to Inventory		32,580			31,072
Deferred tax Liabilities relating to Prepaid Expenses		41,600			42,881
Deferred tax Liabilities relating to Intangible		22,014			27,222
Deferred tax Liabilities relating to Other Taxable Temporary Differences		17,731			20,004
Total Deferred Tax Liabilities		1,663,983			1,782,834

Offsetting presentation		(178,618	)		(151,769	)

Net Effect		1,485,365			1,631,065

The effect of changes in current and deferred tax liabilities related to financial hedging instruments corresponds to a credit of ThU.S.$1,591 for the year ended December 31, 2017 (compared to a credit of ThU.S.$17,355 for the year ended December 31, 2016), which is presented net in Reserves for Cash Flow Hedges in the Consolidated Statement of changes in Equity.

F-37

Reconciliation of deferred tax assets and liabilities


Deferred Tax Assets	Opening Balance 01-01-2017 ThU.S.$		Deferred tax Expenses (Income) ThU.S.$			Deferred tax of items charged to other comprehensive income ThU.S.$			Increase (decrease) through Business Combination ThU.S.$		Increase (decrease) Net exchange differences ThU.S.$			Closing balance 12-31-2017 ThU.S$
Deferred tax Assets relating to Provisions		5,771		931			—			726		5			7,433
Deferred tax Assets relating to Accrued Liabilities		11,716		(405	)		—			—		(44	)		11,267
Deferred tax Assets relating to Post-Employment benefits		17,618		2,286			(673	)		—		45			19,276
Deferred tax Assets relating to Property, Plant and equipment		9,806		1,850			—			—		1			11,657
Deferred tax Assets relating to Financial Instruments		12,699		1,414			(9,764	)		—		(1	)		4,348
Deferred tax Assets relating to Tax Loss Carryforward		50,917		7,271			—			6,093		(1,575	)		62,706
Deferred tax Assets relating to Inventories		7,158		(1,435	)		—			221		(3	)		5,941
Deferred tax Assets relating to Provisions for Income		7,069		(3,697	)		—			—		—			3,372
Deferred tax Assets relating to Allowance for Doubtful Accounts		4,886		(854	)		—			1,133		(16	)		5,149
Intangible revaluation differences		10		(954	)		—			11,333		—			10,389
Deferred tax Assets relating to Other Deductible Temporary Differences		30,216		6,943			—			9,134		(948	)		45,345
Total Deferred Tax Assets		157,866		13,350			(10,437	)		28,640		(2,536	)		186,883

Deferred Tax Liabilities	Opening Balance 01-01-2017 ThU.S.$		Deferred tax Expenses (Income) ThU.S.$			Deferred tax of items charged to other comprehensive income ThU.S.$			Increase (decrease) through Business Combination ThU.S.$		Increase (decrease) Net exchange differences ThU.S.$			Closing balance 12-31-2017 ThU.S.$
Deferred tax Liabilities relating to Property, Plant and Equipment		934,892		(82,445	)		—			9,735		(1,684	)		860,498
Deferred tax Liabilities relating to Financial Instruments		7,186		5,497			—			—		1			12,684
Deferred tax Liabilities relating to Biological Assets		719,577		(79,947	)		—			37,246		(751	)		676,876
Deferred tax Liabilities relating to Inventory		31,072		1,508			—			—		—			32,580
Deferred tax Liabilities relating to Prepaid Expenses		42,881		(1,281	)		—			—		—			41,600
Deferred tax Liabilities relating to Intangible		27,222		(4,880	)		—			—		(328	)		22,014
Deferred tax Liabilities relating to Other Taxable Temporary Differences		20,004		(6,730	)		—			4,467		(10	)		17,731
Total Deferred Tax Liabilities		1,782,834		(168,278	)		—			52,199		(2,772	)		1,663,983


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

Deferred Tax Liabilities	Opening Balance 01-01-2016 ThU.S.$		Deferred tax Expenses (Income) ThU.S.$			Deferred tax of items charged to other comprehensive income ThU.S.$			Increase (decrease) Net exchange differences ThU.S.$			Closing balance 12-31-2016 ThU.S.$
Deferred tax Liabilities relating to Property, Plant and Equipment		930,608		(1,065	)		—			5,349			934,892
Deferred tax Liabilities relating to Financial Instruments		6,376		810			—			—			7,186
Deferred tax Liabilities relating to Biological Assets		693,103		12,642			—			13,832			719,577
Deferred tax Liabilities relating to Inventory		31,912		(840	)		—			—			31,072
Deferred tax Liabilities relating to Prepaid Expenses		40,907		2,078			—			(104	)		42,881
Deferred tax Liabilities relating to Intangible		26,419		(528	)		—			1,331			27,222
Deferred tax Liabilities relating to Other Taxable Temporary Differences		26,203		(9,229	)		—			3,030			20,004
Total Deferred Tax Liabilities		1,755,528		3,868			—			23,438			1,782,834

F-38

Temporary Differences

The following tables summarize the deductible and taxable temporary differences:

12-31-2017

12-31-2016

Deductible

Taxable

Deductible

Taxable

Difference

Detail of classes of Deferred Tax Temporary Differences

ThU.S.$

Deferred Tax Assets

124,178

106,949

Deferred Tax Assets - Tax loss carryforward

62,706

50,917

Deferred Tax Liabilities

1,663,983

1,782,834

Total

186,884

1,663,983

157,866

1,782,834



	January - December
	2017		2016			2015
Detail of Temporary Difference Income and Loss Amounts	ThU.S.$		ThU.S.$			ThU.S.$
Deferred Tax Assets		6,079		9,093			(15,306	)
Deferred Tax Assets - Tax loss carryforward		7,270		11,498			(959	)
Deferred Tax Liabilities		168,279		(3,868	)		(26,259	)
Total		181,628		16,723			(42,524	)

Income Tax Expense

Income tax expense consists of the following:


	January - December
	2017			2016			2015
Income Tax composition	ThU.S.$			ThU.S.$			ThU.S.$
Current income tax expense		(155,292	)		(58,831	)		(87,908	)
Tax benefit arising from unrecognized tax assets previously used to reduce current tax expense		3,018			—			—
Prior period current income tax adjustments		(227	)		(6,899	)		4,033
Other current benefit tax (expenses)		1,865			3,360			(3,295	)
Current Tax Expense, Net		(150,636	)		(62,370	)		(87,170	)

Deferred tax expense relating to origination and reversal of temporary differences		174,358			5,225			(41,565	)
Tax benefit arising from previously unrecognized tax loss carryforward		7,270			11,498			(959	)
Total deferred Tax benefit (expense), Net		181,628			16,723			(42,524	)
Income Tax benefit (expense), Total		30,992			(45,647	)		(129,694	)

F-39

The following table presents the current income tax expense detailed by foreign and domestic (Chile) companies at December 31, 2017, 2016 and 2015:


	January - December
	2017 ThU.S.$			2016 ThU.S.$			2015 ThU.S.$
Foreign current income tax expense		(28,071	)		(27,931	)		(33,129	)
Domestic current income tax expense		(122,565	)		(34,439	)		(54,041	)
Total current income tax expense		(150,636	)		(62,370	)		(87,170	)

Foreign deferred tax benefit (expense)		94,228			7,794			(17,240	)
Domestic deferred tax benefit (expense)		87,400			8,929			(25,284	)
Total deferred tax benefit (expense)		181,628			16,723			(42,524	)
Total tax benefit (expense)		30,992			(45,647	)		(129,694	)

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

The reconciliation of income tax expense is as follows:


	January - December
	2017			2016			2015
Reconciliation of Income tax from Statutory Rate to Effective Tax Rate	ThU.S.$			ThU.S.$			ThU.S.$
Statutory domestic (Chile) income tax rate		25.5	%		24.0	%		22.5	%
Tax Expense at statutory tax rate		(61,037	)		(63,174	)		(111,916	)
Tax effect of foreign tax rates		(7,118	)		(13,368	)		(16,099	)
Tax effect of revenues exempt from taxation		40,133			33,834			41,268
Tax effect of not deductible expenses		(28,783	)		(10,987	)		(40,866	)
Tax rate effect of tax loss carry forwards		(44	)		—			14
Tax effect of Previously Unrecognized Tax Benefit in the Statements of Profit or Loss		195			—			(857	)
Tax effect of a new evaluation of assets for deferred not recognized taxes		5,311			17,157			307
Tax rate effect from change in tax rate (opening balances)		78,946			(3,681	)		(3,445	)
Tax rate effect of adjustments for current tax of prior periods		(227	)		(6,899	)		4,033
Other tax rate effects		3,616			1,471			(2,128	)
Total adjustments to tax expense at applicable tax rate		92,029			17,527			(17,778	)
Tax benefit (expense) at effective tax rate		30,992			(45,647	)		(129,694	)

F-40

NOTE 7.

PROPERTY, PLANT AND EQUIPMENT


	12-31-2017			12-31-2016
Property, Plant and Equipment, Net	ThU.S.$			ThU.S.$
Construction work in progress		597,351			321,031
Land		1,008,310			991,450
Buildings		2,135,201			2,169,731
Plant and equipment		3,112,755			3,256,348
Information technology equipment		22,665			24,154
Fixtures and fittings		12,297			9,880
Motor vehicles		15,959			16,858
Other property, plant and equipment		129,761			130,043
Total Net		7,034,299			6,919,495

Property, Plant and Equipment, Gross
Construction work in progress		597,351			321,031
Land		1,008,310			991,450
Buildings		3,926,157			3,825,259
Plant and equipment		6,410,561			6,128,494
Information technology equipment		82,765			76,421
Fixtures and fittings		40,388			33,613
Motor vehicles		49,756			48,534
Other property, plant and equipment		159,720			153,838
Total Gross		12,275,008			11,578,640

Accumulated depreciation and impairment
Buildings		(1,790,956	)		(1,655,528	)
Plant and equipment		(3,297,806	)		(2,872,146	)
Information technology equipment		(60,100	)		(52,267	)
Fixtures and fittings		(28,091	)		(23,733	)
Motor vehicles		(33,797	)		(31,676	)
Other property, plant and equipment		(29,959	)		(23,795	)
Total		(5,240,709	)		(4,659,145	)

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

As of December 31, 2017, there are no significant assets pledged as collateral to be disclosed in these consolidated financial statements.

F-41

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


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Amount committed for the acquisition of property, plant and equipment		112,924		122,757

F-42

Reconciliation of Property, Plant and Equipment

The following tables set forth the reconciliation of the carrying amount of property, plant and equipment as of December 31, 2017 and December 31, 2016:


Movement of Property, Plant and Equipment	Construction work in progress ThU.S.$			Land ThU.S.$			Buildings ThU.S.$			Plant and equipment ThU.S.$			IT Equipment ThU.S.$			Fixtures and fittings ThU.S.$				Motor vehicles ThU.S.$			Other Property, Plant and Equipment ThU.S.$			TOTAL ThU.S.$
Opening Balance01-01-2017		321,031			991,450			2,169,731			3,256,348			24,154			9,880				16,858			130,043			6,919,495
Changes
Additions		440,394			277			12,932			65,938			787			556				2,161			10,788			533,833
Acquisitions through business combinations		3,460			4,009			17,214			46,415			164			986				241			2,022			74,511
Disposals		—			(1,878	)		(48	)		(5,492	)		(26	)		(26	)			(292	)		(262	)		(8,024	)
Retirements		(1,585	)		(75	)		(3,809	)		(3,900	)		(4	)		(29	)			(127	)		(7,211	)		(16,740	)
Depreciation		—			—			(125,692	)		(311,819	)		(6,080	)		(2,268	)			(3,546	)		(5,421	)		(454,826	)
Impairment loss recognized in profit or loss		(208	)		—			(769	)		(8,271	)		(5	)		(310	)			—			(338	)		(9,901	)
Increase (decrease) through net exchange differences		290			(2,728	)		961			(2,394	)		51			(31	)			67			69			(3,715	)
Reclassification of assets held for sale		(418	)		—			—			84			—			—				—			—			(334	)
Increase (decrease) through transfers from construction in progress		(165,613	)		17,255			64,681			75,846			3,624			3,539				597			71			—
Total changes		276,320			16,860			(34,530	)		(143,593	)		(1,489	)		2,417				(899	)		(282	)		114,804
Closing balance12-31-2017		597,351			1,008,310			2,135,201			3,112,755			22,665			12,297				15,959			129,761			7,034,299

Movement of Property, Plant and Equipment	Construction work in progress ThU.S.$			Land ThU.S.$			Buildings ThU.S.$			Plant and equipment ThU.S.$			IT Equipment ThU.S.$			Fixtures and fittings ThU.S.$				Motor vehicles ThU.S.$			Other Property, Plant and Equipment ThU.S.$			TOTAL ThU.S.$
Opening Balance01-01-2016		251,519			951,638			2,182,643			3,346,675			26,210			11,860				16,721			109,130			6,896,396
Changes
Additions		317,159			6,350			7,966			59,997			554			269		��		1,281			25,618			419,194
Disposals		(44	)		(1,107	)		(443	)		(2,382	)		(105	)		—				(199	)		(1,607	)		(5,887	)
Retirements		(1,754	)		(295	)		(926	)		(2,209	)		(24	)		(8	)			(30	)		(2,811	)		(8,057	)
Depreciation		—			—			(122,257	)		(330,876	)		(5,352	)		(1,970	)			(3,969	)		(4,729	)		(469,153	)
Impairment loss recognized in profit or loss		—			—			9			(1,254	)		(7	)		(1	)			—			(1,553	)		(2,806	)
Increase (decrease) through net exchange differences		6,610			30,514			(2,388	)		51,224			134			116				112			3,145			89,467
Reclassification of assets held for sale		—			—			—			341			—			—				—			—			341
Increase (decrease) through transfers from construction in progress		(252,459	)		4,350			105,127			134,832			2,744			(386	)			2,942			2,850			—
Total changes		69,512			39,812			(12,912	)		(90,327	)		(2,056	)		(1,980	)			137			20,913			23,099
Closing balance12-31-2016		321,031			991,450			2,169,731			3,256,348			24,154			9,880				16,858			130,043			6,919,495

F-43

The depreciation expense for the period ending December 31, 2017, 2016 and 2015 is as follows:

January-December

2017

2016

2015

Depreciation for the year

ThU.S.$

Cost of sales

381,725

371,170

365,401

Administrative expenses

23,005

21,546

19,084

Other expenses

3,494

2,119

3,707

Total

408,224

394,835

388,192

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


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

See Note 12 for details of capitalized borrowing costs.

F-44

NOTE 8. LEASES

Arauco acting as lessee


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Property, Plant and Equipment under finance leases		116,534		117,206
Plant and equipment		116,534		117,206

Reconciliation of Financial Lease Minimum Payments:


	12-31-2017
	Present Value
Periods	ThU.S.$
Less than one year		44,341
Between one and five years		68,035
More than five years		—
Total		112,376

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

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

F-45

Arauco acting as lessor

Reconciliation of Financial Lease Minimum Payments:


	12-31-2017
	Gross		Interest		Present Value
Periods	ThU.S.$		ThU.S.$		ThU.S.$
Less than one year		12,001		69		11,932
Between one and five years		1,174		—		1,174
More than five years		—		—		—
Total		13,175		69		13,106


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

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

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

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

NOTE 9.

REVENUE

January - December

Classes of revenue

2017
ThU.S.$

2016
ThU.S.$

2015
ThU.S.$

Revenue from sales of goods

5,133,339

4,649,581

5,018,138

Revenue from rendering of services

105,002

111,804

128,602

Total

5,238,341

4,761,385

5,146,740

F-46

NOTE 10.

EMPLOYEE BENEFITS

Classes of Benefits and Expenses by Employee


	2017 ThU.S.$		2016 ThU.S.$		2015 ThU.S.$
Employee expenses		563,117		532,957		537,629
Wages and salaries		542,981		506,993		519,066
Severance indemnities		20,136		25,964		18,563


	2017			2016			2015
Discount rate		5.11	%		4.52	%		4.91	%
Inflation		2.77	%		2.79	%		2.95	%
Annual rate of wage growth		5.22	%		5.22	%		5.22	%
Mortality rate (1)		RV-2014			RV-2009			RV-2009

(1)

For the purposes of determining the technical reserves, Chilean annuity providers are required by law to utilize the mortality tables specified by the SVS (currently Chilean Commission for the Financial Market). The most recent table is theRV-2014, which is based on Chilean pensioner experience from 2006-2013 (SP & SVS, 2013). The mortality tables distinguish between males and females.


Sensitivities to assumptions	2017 ThU.S.$
Discount rate
Increase in 100 bps		(5,170	)
Decrease in 100 bps		6,018
Wage growth rates
Increase in 100 bps		5,590
Decrease in 100 bps		(5,212	)

The following tables set forth the balances and the reconciliation of the present value of severance indemnities obligations as of December 31, 2017 and December 31, 2016:


	12-31-2017			12-31-2016
	ThU.S.$			ThU.S.$
Current		5,730			5,244
Non-current		66,033			60,084
Total		71,763			65,328

Reconciliation of the present value of severance indemnities obligations	12-31-2017 ThU.S.$			12-31-2016 ThU.S.$
Opening balance		65,328			56,433
Current service cost		5,583			5,334
Interest cost		3,208			2,957
(Gains) losses from changes in actuarial assumptions		(3,711	)		2,083
Actuarial gains and losses arising from experience		1,212			3,503
Benefits paid		(5,654	)		(7,871	)
Increase (decrease) for foreign currency exchange rates changes		5,792			2,889
Closing balance		71,763			65,328

F-47

NOTE 11.

BALANCES IN FOREIGN CURRENCY AND FOREIGN CURRENCY EXCHANGE RATE IMPACT IN PROFIT OR LOSS.


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Total Current Assets		2,770,363		2,722,360

Cash and Cash Equivalents		589,886		592,253
U.S Dollar		501,352		524,426
Euros		4,306		2,357
Brazilian Real		47,314		47,696
Argentine Pesos		10,038		4,046
Other currencies		3,685		3,327
Chilean Pesos		23,191		10,401

Other current financial assets		3,504		5,201
U.S Dollar		3,497		4,879
Argentine Pesos		—		315
Other currencies		7		7

Other currentnon-financial assets		129,837		144,915
U.S Dollar		48,632		62,246
Euros		104		71
Brazilian Real		17,158		22,537
Argentine Pesos		5,832		12,261
Other currencies		5,306		3,500
Chilean Pesos		52,805		44,300

Trade and other current receivables		814,412		701,610
U.S Dollar		550,674		489,056
Euros		20,498		26,544
Brazilian Real		89,673		46,150
Argentine Pesos		26,863		15,137
Other currencies		17,702		16,620
Chilean Pesos		106,442		106,681
U.F.		2,560		1,422

Accounts receivable due from related companies		3,488		12,505
U.S Dollar		726		274
Brazilian Real		171		726
Chilean Pesos		2,192		10,548
U.F.		399		957

Current Inventories		868,462		852,612
U.S Dollar		809,689		812,748
Brazilian Real		58,773		39,864

Current biological assets		307,796		306,117
U.S Dollar		270,761		271,551
Brazilian Real		37,035		34,566

Current tax assets		49,471		104,088
U.S Dollar		7,769		6,199
Brazilian Real		6,721		5,798
Argentine Pesos		—		39
Other currencies		3,188		2,696
Chilean Pesos		31,793		89,356

Non-current assets or disposal groups classified as held for sale		3,507		3,059
U.S Dollar		2,835		3,059
Brazilian Real		672		—

F-48


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
TotalNon-Current Assets		11,224,237		11,283,821

Othernon-current financial assets		56,600		8,868
U.S Dollar		56,600		8,868

Othernon-currentnon-financial assets		121,521		130,319
U.S Dollar		104,711		95,658
Brazilian Real		4,629		4,042
Argentine Pesos		11,303		9,900
Other currencies		693		636
Chilean Pesos		185		20,083

Trade and othernon-current receivables		16,040		14,273
U.S Dollar		4,247		6,895
Brazilian Real		3,345		—
Other currencies		—		527
Chilean Pesos		6,692		5,753
U.F.		1,756		1,098

Accounts receivable due from related companies,non-current		1,056		957
U.F.		1,056		957

Investments accounted for using equity method		368,772		446,548
U.S Dollar		130,276		124,324
Euros		185,410		156,990
Brazilian Real		53,080		165,203
Chilean Pesos		6		31

Intangible assets other than goodwill		88,615		89,497
U.S Dollar		87,007		88,394
Brazilian Real		1,516		1,026
Chilean Pesos		92		77

Goodwill		69,922		74,893
U.S Dollar		42,656		42,508
Brazilian Real		27,266		32,385

Property, plant and equipment		7,034,299		6,919,495
U.S Dollar		6,443,081		6,394,105
Brazilian Real		585,202		520,448
Chilean Pesos		6,016		4,942

Non-current biological assets		3,459,146		3,592,874
U.S Dollar		2,934,819		3,185,872
Brazilian Real		524,327		407,002

Deferred tax assets		8,266		6,097
U.S Dollar		4,319		4,134
Brazilian Real		3,622		1,697
Other currencies		32		52
Chilean Pesos		293		214

F-49


	12-31-2017						12-31-2016
	Up to 90 days		From 91 days to 1 year		Total		Up to 90 days		From 91 days to 1 year		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Total Liabilities, current		1,045,364		354,030		1,399,394		806,280		539,784		1,346,064

Other current financial liabilities		148,778		351,566		500,344		196,001		501,451		697,452
U.S Dollar		134,125		284,293		418,418		178,442		455,908		634,350
Brazilian Real		2,383		4,660		7,043		3,558		1,282		4,840
Argentine Pesos		—		—		—		11		29		40
Chilean Pesos		1,508		4,116		5,624		1,132		3,387		4,519
U.F.		10,762		58,497		69,259		12,858		40,845		53,703

Bank Loans		110,700		282,172		392,872		134,140		61,483		195,623
U.S Dollar		108,317		277,512		385,829		130,571		60,172		190,743
Brazilian Real		2,383		4,660		7,043		3,558		1,282		4,840
Argentine Pesos		—		—		—		11		29		40

Financial Leases		9,928		34,413		44,341		9,534		30,866		40,400
Chilean Pesos		1,508		4,116		5,624		1,132		3,387		4,519
U.F.		8,420		30,297		38,717		8,402		27,479		35,881

Other Loans		28,150		34,981		63,131		52,327		409,102		461,429
U.S Dollar		25,808		6,781		32,589		47,871		395,736		443,607
U.F.		2,342		28,200		30,542		4,456		13,366		17,822

Trade and other current payables		717,342		4		717,346		511,371		26,520		537,891
U.S Dollar		193,562		—		193,562		146,652		3,510		150,162
Euros		9,099		—		9,099		12,006		1,028		13,034
Brazilian Real		124,917		—		124,917		4,849		21,982		26,831
Argentine Pesos		29,243		—		29,243		31,661		—		31,661
Other currencies		4,936		—		4,936		12,244		—		12,244
Chilean Pesos		333,525		4		333,529		285,359		—		285,359
U.F.		22,060		—		22,060		18,600		—		18,600

Accounts payable to related companies		11,208		—		11,208		3,831		—		3,831
U.S Dollar		1,354		—		1,354		1,969		—		1,969
Chilean Pesos		9,854		—		9,854		1,862		—		1,862

Other current provisions		2,728		—		2,728		842		—		842
U.S Dollar		622		—		622		842		—		842
Brazilian Real		2,106		—		2,106		—		—		—
Current tax liabilities		6,361		1,727		8,088		1,641		—		1,641
U.S Dollar		283		—		283		448		—		448
Euros		158		—		158		7		—		7
Argentine Pesos		46		—		46		133		—		133
Other currencies		479		—		479		574		—		574
Chilean Pesos		5,395		1,727		7,122		479		—		479

Current provisions for employee benefits		5,595		135		5,730		5,214		30		5,244
Chilean Pesos		5,595		135		5,730		5,214		30		5,244

Other currentnon-financial liabilities		153,352		598		153,950		87,380		11,783		99,163
U.S Dollar		119,309		582		119,891		62,974		163		63,137
Euros		77		—		77		53		—		53
Brazilian Real		18,016		—		18,016		9,426		11,616		21,042
Argentine Pesos		3,215		—		3,215		3,474		—		3,474
Other currencies		3,906		—		3,906		3,202		—		3,202
Chilean Pesos		8,809		16		8,825		8,183		4		8,187
U.F.		20		—		20		68		—		68

F-50


	12-31-2017						12-31-2016
	From 13 months to 5 years		More than 5 years		Total		From 13 months to 5 years		More than 5 years		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$

Totalnon-current liabilities		3,025,553		2,452,760		5,478,313		3,599,291		2,061,543		5,660,834

Othernon-current financial liabilities		1,455,641		2,322,926		3,778,567		2,020,484		1,850,430		3,870,914
U.S Dollar		970,631		1,508,999		2,479,630		1,591,127		1,075,204		2,666,331
Brazilian Real		16,506		—		16,506		17,098		1,042		18,140
Chilean Pesos		9,839		—		9,839		11,151		—		11,151
U.F.		458,665		813,927		1,272,592		401,108		774,184		1,175,292

Bank Loans		327,424		138,161		465,585		626,384		92,351		718,735
U.S Dollar		310,918		138,161		449,079		609,286		91,309		700,595
Brazilian Real		16,506		—		16,506		17,098		1,042		18,140

Financial Leases		68,035		—		68,035		73,586		—		73,586
Chilean Pesos		9,839		—		9,839		11,151		—		11,151
U.F.		58,196		—		58,196		62,435		—		62,435

Other Loans		1,060,182		2,184,765		3,244,947		1,320,514		1,758,079		3,078,593
U.S Dollar		659,713		1,370,838		2,030,551		981,841		983,895		1,965,736
U.F.		400,469		813,927		1,214,396		338,673		774,184		1,112,857

Othernon-current provisions		36,008		—		36,008		38,138		—		38,138
U.S Dollar		7		—		7		1		—		1
Brazilian Real		4,682		—		4,682		5,425		—		5,425
Argentine Pesos		31,316		—		31,316		32,712		—		32,712
Chilean Pesos		3		—		3		—		—		—

Deferred tax liabilities		1,355,531		129,834		1,485,365		1,479,596		151,469		1,631,065
U.S Dollar		1,247,096		129,834		1,376,930		1,412,506		131,406		1,543,912
Brazilian Real		108,435		—		108,435		67,090		20,063		87,153

Non-current provisions for employee benefits		66,033		—		66,033		60,084		—		60,084
Other currencies		129		—		129		144		—		144
Chilean Pesos		65,904		—		65,904		59,940		—		59,940

Othernon-currentnon-financial liabilities		112,340		—		112,340		989		59,644		60,633
U.S Dollar		13		—		13		430		—		430
Brazilian Real		111,634		—		111,634		—		59,644		59,644
Argentine Pesos		480		—		480		349		—		349
Chilean Pesos		213		—		213		206		—		206
U.F.		—		—		—		4		—		4

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


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

F-51

The table below shows a detail per company of the effect in the period of the Reserve of Exchange Differences on translation:


	January - December
	2017			2016			2015
	ThU.S.$			ThU.S.$			ThU.S.$
Arauco do Brasil S.A.		(6,537	)		73,087			(155,390	)
Arauco Forest Brasil S.A.		(6,929	)		68,314			(140,992	)
Arauco Florestal Arapoti S.A.		(1,051	)		19,523			(43,189	)
Arauco Distribución S.A.		—			—			(4,180	)
Sonae Arauco S.A.		20,547			—			—
Arauco Argentina S.A.		(752	)		4,989			(13,308	)
Flakeboard Company Limited		6,529			2,984			(16,915	)
Others		307			(13	)		(301	)

Total reserve of exchange differences on translation		12,114			168,884			(374,275	)

Effect of foreign exchange rates changes


	January-December
	2017		2016			2015
	ThU.S.$		ThU.S.$			ThU.S.$
Exchange differences recognized in profit or loss, except for those arising on financial instruments measured at fair value through profit or loss		98		(3,935	)		(40,827	)
Reserve of exchange differences on translation (withNon-controlling interests)		11,873		173,754			(385,109	)

F-52

NOTE 12.

BORROWING COSTS

Arauco estimates the average rate of borrowings to finance its current investments projects. The average rate loans to finance these investments projects were claculated to record the capitalization.


	January - December
	2017			2016
	ThU.S.$			ThU.S.$
Property, plant and equipment capitalized cost

Property, plant and equipment capitalized interest cost rate		4.91	%		5.11	%

Amount of the capitalized interest cost, property, plant and equipment		5,603			2,177

NOTE 13.

RELATED PARTIES

Related Party Disclosures

Related parties are those entities defined in IAS 24 and under the rules of the Superintendency of Securities and Insurance (current Chilean Commission for the Financial Market) and the Chilean Corporations Law.

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

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

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

Name of Group’s Main Shareholders

The ultimate shareholders of Arauco, direct and indirectly, are Mrs. Maria Noseda Zambra de Angelini, Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi. Mrs. María Noseda Zambra (who passed away on April 15, 2018).

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

Empresas Copec S.A.

F-53

Compensation to Key Management Personnel

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

Pricing Strategy Terms and Conditions Corresponding to Transactions with Related Parties

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

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


			Functional	% Ownership interest 12-31-2017						% Ownership interest 12-31-2016
ID N°	Company Name	Country	Currency	Direct		Indirect		Total		Direct		Indirect		Total
—	Agenciamiento y Servicios Profesionales S.A.	Mexico	U.S. Dollar		0.0020		99.9970		99.9990		0.0020		99.9970		99.9990
—	Arauco Argentina S.A.	Argentina	U.S. Dollar		9.9753		90.0048		99.9801		9.9753		90.0048		99.9801
—	Arauco Australia Pty Ltd.	Australia	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
96547510-9	Arauco Bioenergía S.A.	Chile	U.S. Dollar		98.0000		1.9999		99.9999		98.0000		1.9999		99.9999
—	Arauco Colombia S.A.	Colombia	U.S. Dollar		1.4778		98.5204		99.9982		1.4778		98.5204		99.9982
—	Arauco do Brasil S.A.	Brazil	Brazilian Real		1.1624		98.8366		99.9990		1.1624		98.8366		99.9990
—	Arauco Europe Cooperatief U.A.	Netherlands	U.S. Dollar		0.5689		99.4301		99.9990		0.4614		99.5376		99.9990
—	Arauco Florestal Arapoti S.A.	Brazil	Brazilian Real		—		79.9992		79.9992		—		79.9992		79.9992
—	Arauco Forest Brasil S.A.	Brazil	Brazilian Real		9.9971		90.0021		99.9992		10.1297		89.8694		99.9991
—	Arauco Industria de Paineis Ltda.	Brazil	Brazilian Real		—		99.9990		99.9990		—		—		—
—	Arauco Middle East DMCC	Dubai	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
76620842-8	Arauco Nutrientes Naturales SPA	Chile	U.S. Dollar		—		99.9484		99.9484		—		99.9484		99.9484
—	Arauco Panels USA, LLC	USA	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
—	Arauco Perú S.A.	Peru	U.S. Dollar		0.0013		99.9977		99.9990		0.0013		99.9977		99.9990
—	Arauco Wood Products, Inc.	USA	U.S. Dollar		0.0004		99.9986		99.9990		0.0004		99.9986		99.9990
—	Araucomex S.A. de C.V.	Mexico	U.S. Dollar		0.0005		99.9985		99.9990		0.0005		99.9985		99.9990
96657900-5	Consorcio Protección Fitosanitaria Forestal S.A.	Chile	Chilean Pesos		—		57.5223		57.5223		—		57.5404		57.5404
—	Empreendimentos Florestais Santa Cruz Ltda.	Brazil	Brazilian Real		—		99.9795		99.9795		—		99.9789		99.9789
—	Flakeboard America Limited	USA	U.S. Dollar		—		99.9990		99.9990		—		99.9990		99.9990
—	Flakeboard Company Ltd.	Canada	Canadian Dollar		—		99.9990		99.9990		—		99.9990		99.9990
85805200-9	Forestal Arauco S.A.	Chile	U.S. Dollar		99.9484		—		99.9484		99.9484		—		99.9484
93838000-7	Forestal Cholguán S.A.	Chile	U.S. Dollar		—		98.4826		98.4826		—		98.4744		98.4744
—	Forestal Concepción S.A.	Panama	U.S. Dollar		—		—		—		0.0050		99.9940		99.9990
78049140-K	Forestal Los Lagos S.A.	Chile	U.S. Dollar		—		79.9587		79.9587		—		79.9587		79.9587
—	Forestal Nuestra Señora del Carmen S.A.	Argentina	Argentine pesos		—		99.9805		99.9805		—		99.9805		99.9805
—	Forestal Talavera S.A.	Argentina	Argentine pesos		—		99.9942		99.9942		—		99.9942		99.9942
—	Greenagro S.A.	Argentina	Argentine pesos		—		97.9805		97.9805		—		97.9805		97.9805
96563550-5	Inversiones Arauco Internacional Ltda.	Chile	U.S. Dollar		98.0186		1.9804		99.9990		98.0186		1.9804		99.9990
79990550-7	Investigaciones Forestales Bioforest S.A.	Chile	Chilean Pesos		1.0000		98.9489		99.9489		1.0000		98.9489		99.9489
—	Leasing Forestal S.A.	Argentina	Argentine pesos		—		99.9801		99.9801		—		99.9801		99.9801
96510970-6	Maderas Arauco S.A. (ex Paneles Arauco S.A.)	Chile	U.S. Dollar		99.0000		0.9995		99.9995		99.0000		0.9995		99.9995
—	Mahal Empreendimentos e Participacoes S.A.	Brazil	Brazilian Real		—		99.9961		99.9961		—		99.9934		99.9934
—	Novo Oeste Gestao de Ativos Florestais S.A.	Brazil	Brazilian Real		—		99.9991		99.9991		—		99.9990		99.9990
—	Savitar S.A.	Argentina	Argentine pesos		—		99.9841		99.9841		—		99.9841		99.9841
76375371-9	Servicios Aéreos Forestales Ltda.	Chile	U.S. Dollar		0.0100		99.9890		99.9990		0.0100		99.9890		99.9990
96637330-K	Servicios Logísticos Arauco S.A.	Chile	U.S. Dollar		45.0000		54.9997		99.9997		45.0000		54.9997		99.9997

F-54

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


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

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

Employee Benefits for Key Management Personnel

January - December

2017

2016

2015

ThU.S.$

Salaries and bonuses

59,501

73,398

65,760

Per diem compensation to members of the Board of Directors

2,566

1,783

1,097

Termination benefits

4,936

6,174

2,250

Total

67,003

81,355

69,107

Related Party Receivables, Current

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Maturity

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Forestal Mininco S.A.

91.440.000-7

Common Stockholder

Chile

Chilean pesos

30 days

Eka Chile S.A.

99.500.140-3

Joint Venture

Chile

Chilean pesos

30 days

2,027

1,701

Forestal del Sur S.A.

79.825.060-4

Common director

Chile

Chilean pesos

30 days

7,618

Unilin Arauco Pisos Ltda.

—

Joint Venture

Brazil

Brazilian Real

30 days

171

726

Colbún S.A.

96.505.760-9

Common director

Chile

Chilean pesos

30 days

136

—

CMPC Celulosa S.A.

96.532.330-9

Common Stockholder

Chile

Chilean pesos

—

Fundación Educacional Arauco

71.625.000-8

Common director

Chile

Chilean pesos

—

1,188

Fundación Acerca Redes

65.097.218-K

Parent company is founder and
contributor

Chile

U.S. Dollar

30 days

726

274

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of an Associate

Chile

U.F.

30 days

399

957

TOTAL

3,488

12,505

Related Party Receivables,Non-Current

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Maturity

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of an Associate

Chile

U.F.

Sep-18

528

478

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of an Associate

Chile

U.F.

Sep-19

528

478

TOTAL

1,056

957

F-55

Related Party Payables, Current

Name of Related party

Tax ID No.

Nature of
Relationship

Country

Currency

Maturity

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Compañía de Petróleos de Chile S.A.

99.520.000-7

Common controlling parent

Chile

Chilean pesos

30 days

8,837

1,758

Abastible S.A.

91.806.000-6

Controlling Parent’s Subsidiary

Chile

Chilean pesos

30 days

545

Fundación Educacional Arauco

71.625.000-8

Common director

Chile

Chilean pesos

30 days

—

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

86.370.800-1

Common director

Chile

Chilean pesos

30 days

—

Portaluppi, Guzman y Bezanilla Abogados

78.096.080-9

Common director

Chile

Chilean pesos

30 days

146

—

Empresa Nacional de Telecomunicaciones S.A.

92.580.000-7

Common Stockholder

Chile

Chilean pesos

30 days

137

—

Servicios Corporativos Sercor S.A.

96.925.430-1

Subsidiary of the Associate

Chile

Chilean pesos

30 days

—

Puerto Lirquén S.A.

96.959.030-1

Subsidiary of the Associate

Chile

U.S. Dollar

30 days

1,354

1,246

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the Associate

Chile

U.S. Dollar

—

723

Adm.Estaciones de Servicio Serco Ltda.

79.689.550-0

Common controlling parent

Chile

Chilean pesos

30 days

—

Adm. de Ventas al Detalle Arco Prime Ltda.

77.215.640-5

Common controlling parent

Chile

Chilean pesos

30 days

Empresa Distrib. Papeles y Cartones S.A.

88.566.900-k

Common Stockholder

Chile

Chilean pesos

—

Elemental S.A.

76.659.730-0

Indirect associate of
controlling parent

Chile

Chilean pesos

30 days

—

Woodtech S.A.

76.724.000-7

Indirect associate of
controlling parent

Chile

Chilean pesos

30 days

—

TOTAL

11,208

3,831

F-56

Related Party Transactions

Purchases

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Transaction Descriptions

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Abastible S.A.

91.806.000-6

Common controlling parent

Chile

Chilean pesos

Fuel

3,115

2,199

2,503

Empresas Copec S.A.

90.690.000-9

Controlling Parent

Chile

Chilean pesos

Management service

106

356

233

Compañía de Petróleos de Chile S.A.

99.520.000-7

Common controlling parent

Chile

Chilean pesos

Fuel and other

66,789

39,732

61,245

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the Associate

Chile

U.S. Dollar

Transport and stowage

9,986

8,633

10,917

Puerto Lirquén S.A.

96.959.030-1

Subsidiary of the Associate

Chile

U.S. Dollar

Port services

6,956

7,311

7,694

EKA Chile S.A.

99.500.140-3

Joint Venture

Chile

Chilean pesos

Sodium chlorate

44,055

47,236

39,362

Forestal del Sur S.A.

79.825.060-4

Common director

Chile

Chilean pesos

Wood and ships

1,310

2,093

2,018

Portaluppi, Guzman y Bezanilla Abogados

78.096.080-9

Common director

Chile

Chilean pesos

Legal services

1,496

1,295

1,312

Empresa Nacional de Telecomunicaciones S.A.

92.580.000-7

Common Stockholder

Chile

Chilean pesos

Telephone services

460

512

552

CMPC Maderas S.A.

95.304.000-K

Common Stockholder

Chile

Chilean pesos

Wood and logs

330

511

267

Forestal Mininco S.A.

91.440.000-7

Common Stockholder

Chile

Chilean pesos

Wood and logs

180

204

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

86.370.800-1

Common director

Chile

Chilean pesos

Computer Services

130

249

Empresa de Residuos Resiter Ltda

89.696.400-3

Common director

Chile

Chilean pesos

Industrial Cleaning
Services

—

(285

)

Empresas de Residuos Industriales Resiter Ltda

76.329.072-7

Common director

Chile

Chilean pesos

Industrial Cleaning
Services

—

5,027

Resiter Uruguay S.A.

—

Common director

Uruguay

U.S. Dollar

Service to collect
solid waste

—

774

Colbún Transmisión S.A.

76.218.856-2

Common director

Chile

Chilean pesos

Electrical Power

389

383

447

Woodtech S.A.

76.724.000-7

Indirect associate of
controlling parent

Chile

Chilean pesos

Wood volumen
measurement services

2,239

982

—

Inversiones Siemel S.A.

94.082.000-6

Common Stockholder

Chile

Chilean pesos

Rentals

596

777

—

CMPC Celulosa S.A.

96.532.330-9

Common Stockholder

Chile

Chilean pesos

Others purchases

965

2,217

Sales

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Transaction Descriptions

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Compañía de Petróleos de Chile S.A.

99.520.000-7

Common controlling parent

Chile

Chilean pesos

Charter Services

202

—

Colbún S.A.

96.505.760-9

Common director

Chile

Chilean pesos

Electrical Power

1,128

5,999

1,083

EKA Chile S.A.

99.500.140-3

Joint venture

Chile

Chilean pesos

Electrical Power

19,182

16,326

17,543

Stora Enso Arapoti Industria de Papel S.A.

—

Subsidiary of the Associate

Brazil

Brazilian Real

Wood

—

1,149

5,617

Forestal del Sur S.A.

79.825.060-4

Common director

Chile

Chilean pesos

Harvesting services,
Wood and chips

25,322

21,657

19,328

Forestal Mininco S.A.

91.440.000-7

Common Stockholder

Chile

Chilean pesos

Wood

—

311

Compañía Puerto de Coronel S.A.

79.895.330-3

Subsidiary of the Associate

Chile

U.F.

Sale Land

—

1,914

—

Unilin Arauco Pisos Ltda.

—

Joint venture

Brazil

Brazilian Real

Wood

2,966

5,263

2,666

Other Transactions

Name of Related Party

Tax ID No.

Nature of
Relationship

Country

Currency

Transaction Descriptions

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

12-31-2015
ThU.S.$

Novo Oeste Gestao de Ativo Florestais S.A.

—

Subsidiary of the Associate

Brazil

Brazilian Real

Loans (Capital and interest)

—

41,091

(1)	Since October 2015, the company is a subsidiary of Arauco, therefore, the transactions presented in this note are those made with this Company until that month (see Note 14).

F-57

NOTE 14.

CONSOLIDATED FINANCIAL STATEMENTS

On December 6, 2017, the subsidiary Arauco do Brasil S.A. acquired all the equity rights of Masisa do Brasil Ltda. (currently Arauco Industria de Paineis Ltda.) for a value of ThU.S.$ 32,698. During December 2017, Arauco paid ThU.S.$ 15,918. Later, in February 2018, the remaining balance of ThU.S$ 16,780 was paid. The main assets acquired consist of 2 industrial complexes that would give Arauco an installed capacity of approximately 10 million m3.

Arauco recognized the acquisition of Arauco Industria de Paineis Ltda. over the basis of the information available at the date of the transaction, performing a preliminary calculation of the allocation of fair values in the acquisition of this Company. The recorded assets and liabilities are considered provisional amounts and may be adjusted during the measurement period of this acquisition, in order to reflect new information obtained regarding facts and circumstances existing as of the date of acquisition which, had they been known, would have affected the measurements of the amounts recorded by that date. The measurement period will not exceed the term of one year, from the acquisition date.

The table below shows the fair values of assets and liabilities at the date of the transaction:


ARAUCO INDUSTRIA DE PAINEIS LTDA.	12-06-2017 ThU.S.$
Cash and cash equivalent		4,345
Trade and other current receivables		49,715
Inventories		23,331
Property, plant and equipment		68,321
Other assets		27,012
Total assets		172,724
Other financial liabilities, current andnon-current		43,218
Trade and other payables		26,437
Other liabilities		70,371
Total liabilities		140,026

The following table shows revenue and net profit recognized at the acquisition day:


ARAUCO INDUSTRIA DE PAINEIS LTDA.	12-01-2017 al 12-31-2017 ThU.S.$
Revenue		11,830
Net loss		(1,376	)

If the acquisition had occurred on January 1, 2017, consolidatedpro-forma revenue and profit for the year ended December 31, 2017 would have been:


CELULOSA ARAUCO Y CONSTITUCIÓN S.A. AND SUBSIDIARIES	January-December 2017 (Pro-forma) ThU.S.$
Revenue		5,395,859
Net profit		261,776

These amounts have been calculated using the subsidiary’s results and adjusting them for property, plant and equipment impairments before the acquisition.

On August 2, 2016, our subsidiary Forestal Arauco S.A. incorporated the company Arauco Nutrientes Naturales SPA, with a capital contribution of ThU.S.$5,000 of which, as of December 31, 2017 ThU.S.$3,000 had been paid. The corporate purpose of the company is the manufacture and sale of products made from extracts, fruits, and others.

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

F-58

NOTE 15.

INVESTMENTS IN ASSOCIATES

At December 31, 2017 and December 31, 2016 there were no new investments in associates to report.

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

The following tables set forth information about Investments in associates.


Name	Puertos y Logística S.A.
Country	Chile
Functional Currency	U.S. Dollar
Corporate purpose	Docking and warehousing operations for proprietary and third party use, cargo of all classes of goods, as well, as warehousing and transport operations.
Ownership interest (%)	20.2767%

	12-31-2017	12-31-2016
Carrying amount	ThU.S.$62,225	ThU.S.$61,505

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

	12-31-2017	12-31-2016
Carrying amount	ThU.S.$47,619	ThU.S.$43,559

Name	Servicios Corporativos Sercor S.A.
Country	Chile
Functional Currency	Chilean Pesos
Corporate purpose	Consulting services related to business management to Boards of Directors and Senior Management of all Arauco’s entities.
Ownership interest (%)	20.0000%

	12-31-2017	12-31-2016
Carrying amount	ThU.S.$191	ThU.S.$190

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

	12-31-2017	12-31-2016
Carrying amount	ThU.S.$(4)	ThU.S.$(1)

F-59


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

	12-31-2017	12-31-2016
Carrying amount	ThU.S.$6	ThU.S.$31

Name	Vale do Corisco S.A.
Country	Brazil
Functional Currency	Brazilian Real
Corporate purpose	Management of forestry activities.
Ownership interest (%)	49.0000%

	12-31-2017	12-31-2016
Carrying amount	ThU.S.$48,921	ThU.S.$160,490

F-60

Summarized Financial Information of Associates


	Assets
12-31-2017	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$			Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		92,816			29			4,296			—			6,384			5			25			103,555
Non-current		590,309			97,072			769			—			126,215			45			24			814,434
Total		683,125			97,101			5,065			—			132,599			50			49			917,989

	Liabilities
	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$			Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		44,564			82			3,219			—			123			—			14			48,002
Non-current		331,681			—			871			—			32,636			5			50			365,243
Equity		306,880			97,019			975			—			99,840			45			(15	)		504,744
Total		683,125			97,101			5,065			—			132,599			50			49			917,989
12-31-2017
Revenues		130,720			4,741			5,211			—			34,449			2			30			175,153
Expenses		(132,538	)		—			(5,246	)		—			(29,648	)		(10	)		(36	)		(167,478	)
Profit or loss (continuing operations)		(1,818	)		4,741			(35	)		—			4,801			(8	)		(6	)		7,675
Other comprehensive income		5,850						—			—			95,039			—			—			100,889
Total comprehensive income		4,032			4,741			(35	)		—			99,840			(8	)		(6	)		108,564
Dividends		—			—			—			—			—			—			—			—

	Assets
12-31-2016	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$			Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		76,021			29			4,608			—			24,972			6			26			105,662
Non-current		572,831			88,936			668			—			415,083			153			63			1,077,734
Total		648,852			88,965			5,276			—			440,055			159			89			1,183,396

	Liabilities
	Puertos y Logística S.A. ThU.S.$			Inversiones Puerto Coronel S.A. ThU.S.$			Serv.Corporativos Sercor S.A. ThU.S.$			Stora Enso Arapoti Ind.de Papel S.A. ThU.S.$			Vale do Corisco S.A. ThU.S.$			Consorcio Tecnológico Bioenercel S.A. ThU.S.$			Genómica Forestal S.A. ThU.S.$			Total ThU.S.$
Current		44,457			82			3,412			—			3,446			—			9			51,406
Non-current		301,065			—			912			—			109,079			6			85			411,147
Equity		303,330			88,883			952			—			327,530			153			(5	)		720,843
Total		648,852			88,965			5,276			—			440,055			159			89			1,183,396
12-31-2016
Revenues		107,722			3,072			4,591			492			44,822			33			94			160,826
Expenses		(98,642	)		—			(4,587	)		(6,320	)		(15,238	)		(147	)		(100	)		(125,034	)
Profit or loss (continuing operations)		9,080			3,072			4			(5,828	)		29,584			(114	)		(6	)		35,792
Other comprehensive income		7,385			(29	)		—			—			—			—			—			7,356
Total Comprehensive income		16,465			3,043			4			(5,828	)		29,584			(114	)		(6	)		43,177
Dividends		—			—			—			—			1,420			—			—			1,420

Reconciliation of Investment in Associates and Joint Ventures


	12-31-2017 ThU.S.$			12-31-2016 ThU.S.$
Opening balance as of January 1. 2017		446,548			264,812
Changes
Investment in joint ventures, Additions		—			153,135
Disposals, Investments in associates and joint ventures		—			(14,510	)
Share of profit (loss) in investment in associates		4,855			16,349
Share of profit (loss) in investment in joint ventures		12,162			7,590
Dividends Received, Investments in Associates		(8,586	)		(5,320	)
Increase (Decrease) in foreign exchange currency on translation of Associates and Joint Ventures		22,726			20,634
Other increase (decrease) in investment and associates and joint ventures (*)		(108,933	)		3,858
Total changes		(77,776	)		181,736
Ending balance		368,772			446,548

(*)	In May 2017, Arauco’s associate Florestal Vale do Corisco S.A. performed a return of capital to its shareholders. This transaction did not generate effects in the Consolidated Statements of Profit or Loss nor modified Arauco’s shareholding in Florestal Vale do Corisco S.A.

F-61


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Carrying amount of associates accounted for using equity method		158,772		265,775
Carrying amount of joint ventures accounted for using equity method		209,805		180,773
Total investment accounted for using equity method		368,577		446,548

NOTE 16.

INTERESTS IN JOINT ARRANGEMENTS

Investments and contributions made

On May 31, 2016, Inversiones Arauco Internacional Limitada, Arauco’s subsidiary, acquired 50% of the shares of Tableros de Fibras S.A, a Spanish subsidiary of SONAE INDUSTRIA, SGPS, S.A. (“Sonae”), which as of such date changed its name to “Sonae Arauco S.A.”. The price paid by Arauco for the acquisition of 50% of the shares of Sonae Arauco was the amount of €137,500,000 (equivalent to ThU.S.$153,135 at the acquisition date). This transaction generated a goodwill of ThU.S.$36,190, as shown in the Consolidated Statements of Financial Position as part of the investment.

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

In the aggregate, the production capacity of Sonae Arauco is of approximately 1.4 million m3 of MDF, 2.1 million m3 of particleboard, 486,000 m3 of OSB and 50,000 m3 of sawn timber.

As of December 31, 2017 and 2016, Arauco has not carried out any contributions to Uruguayan companies Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A.

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

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

F-62

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

12-31-2017

12-31-2016

Celulosa y Energía Punta Pereira S.A. (Uruguay)

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

202,669

186,626

173,258

182,834

Non-current

2,076,255

586,034

2,131,266

735,679

Equity

1,506,264

1,386,011

Total Joint Arrangement

2,278,924

2,304,524

Investment

753,132

693,006

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Income

768,508

680,819

Expenses

(650,174

)

(618,387

)

Joint Arrangement Net Income (Loss)

118,334

62,432

12-31-2017

12-31-2016

Forestal Cono Sur S.A. (consolidated)

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

33,012

22,582

23,745

21,039

Non-current

174,943

2,314

178,236

1,381

Equity

183,059

179,561

Total Joint Arrangement

207,955

201,981

Investment

91,530

89,781

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Income

15,113

8,443

Expenses

(9,926

)

(2,876

)

Joint Arrangement Net Income (Loss)

5,187

5,567

12-31-2017

12-31-2016

Eufores S.A. (consolidated)

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

183,175

180,298

178,644

200,525

Non-current

612,187

7,948

604,736

23,052

Equity

607,116

559,803

Total Joint Arrangement

795,362

783,380

Investment

303,558

279,902

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Income

336,705

296,927

Expenses

(286,616

)

(280,054

)

Joint Arrangement Net Income (Loss)

50,089

16,873

12-31-2017

12-31-2016

Zona Franca Punta Pereira S.A. (Uruguay)

Assets
ThU.S.$

Liabilities
ThU.S.$

Assets
ThU.S.$

Liabilities
ThU.S.$

Current

6,105

97,233

4,397

82,331

Non-current

483,884

43,180

492,815

63,021

Equity

349,576

351,860

Total Joint Arrangement

489,989

497,212

Investment

174,788

175,930

12-31-2017
ThU.S.$

12-31-2016
ThU.S.$

Income

22,129

31,042

Expenses

(24,413

)

(25,966

)

Joint Arrangement Net Income (Loss)

(2,284

)

5,076

F-63

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


	12-31-2017					12-31-2016
Unilin Arauco Pisos Ltda.	Assets ThU.S.$			Liabilities ThU.S.$		Assets ThU.S.$			Liabilities ThU.S.$
Current		7,270			4,461		7,900			3,549
Non-current		5,535			28		5,094			18
Equity					8,316					9,427
Total Joint Arrangement		12,805			12,805		12,994			12,994

Investment		4,158					4,714


	12-31-2017 ThU.S.$					12-31-2016 ThU.S.$
Income		17,910					1,305
Expenses		(18,736	)				(1,974	)
Joint Arrangement Net Income (Loss)		(826	)				(669	)
Other comprehensive income		—					—
Comprehensive income		(826	)				(669	)
Dividends		—					—

	12-31-2017					12-31-2016
Eka Chile S.A.	Assets ThU.S.$			Liabilities ThU.S.$		Assets ThU.S.$			Liabilities ThU.S.$
Current		18,876			5,388		15,817			4,348
Non-current		32,040			5,054		31,690			5,021
Equity					40,474					38,138
Total Joint Arrangement		50,916			50,916		47,507			47,507

Investment		20,237					19,069


	12-31-2017 ThU.S.$					12-31-2016 ThU.S.$
Income		43,678					48,276
Expenses		(40,111	)				(44,045	)
Joint Arrangement Net Income (Loss)		3,567					4,231
Other comprehensive income		—					—
Comprehensive income		3,567					4,231
Dividends		—					—

	12-31-2017					12-31-2016
Sonae Arauco S.A.	Assets ThU.S.$			Liabilities ThU.S.$		Assets ThU.S.$			Liabilities ThU.S.$
Current		265,578			235,676		223,145			213,228
Non-current		664,689			323,770		616,467			312,404
Equity					370,821					313,980
Total Joint Arrangement		930,267			930,267		839,612			839,612

Net assets		151,920					120,800
Net asset adjustment (Goodwill)		33,491					36,190
Investment		185,411					156,990


	12-31-2017 ThU.S.$					12-31-2016 ThU.S.$
Income		976,936					507,179
Expenses		(954,979	)				(495,560	)
Joint Arrangement Net Income (Loss)		21,957					11,619
Other comprehensive income		—					—
Comprehensive income		21,957					11,619
Dividends		—					—

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NOTE 17.

IMPAIRMENT OF ASSETS

Provisions for impairment of property, plant and equipment due to technical obsolescence have been recorded as of December 31, 2017 and December 31, 2016, respectively, as shown below:


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

	12-31-2017	12-31-2016
Information relevant to the sum of all impairment	ThU.S.$17,396	ThU.S.$7,993

Goodwill

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

At the date of these consolidated financial statements, the balance of goodwill is ThU.S.$69,922 (ThU.S.$74,893 at December 31, 2016), as shown below:


Goodwill	12-31-2017 ThU.S.$			12-31-2016 ThU.S.$
Opening balance at January 1		74,893			69,475
Impairment		(4,640	)		—
Increase (decrease) in foreign currency exchange		(331	)		5,418
Closing balance at December 31, 2017		69,922			74,893

Of the total of goodwill, ThU.S.$39,841 (ThU.S.$39,694 as of December 31, 2016) are generated by the acquisition of “Flakeboard”, a company that, directly and/or through its subsidiaries, possesses and operates 7 panel plants, for which Arauco acquired and paid, on September 24, 2012, the price of ThU.S.$242,502 for the 100% interest ownership.

The recoverable amount for Flakeboard’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections covering a5-year term, applying a real discount rate of 6.7% which reflects current market assessments for the wood products segment in North America.

The investment in the panel plant in Pien, Brazil generated a goodwill of ThU.S.$27,266 (ThU.S.$32,385 as of December 31, 2016).

The recoverable amount for the Pien plant’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections based on the operational plan approved by the Administration, covering a5-year term, applying a 7% real discount rate that reflects current evaluations for the panel segment in Brazil.

As a result of the annual impairment test, the carrying value of the goodwill of the plants exceeded their recoverable value, and therefore impairment losses of ThU.S.$4,640 were recognized.

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NOTE 18.

PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES

The contingent liabilities for outstanding litigations are as follows:

Celulosa Arauco y Constitución S.A.

1.On August 25, 2005, the Chilean Servicio de Impuestos Internos (the “Chilean IRS”) issued tax resolutions No. 184 and No. 185 of 2005, and objected certain income tax returns made by Arauco on April 16, 2001 and October 31, 2001, and furthermore, requested the reimbursement of the amounts returned in connection to tax losses, along with the amendment of the FUT (Tax Profits Fund) Registry balance. In consideration to the foregoing, the above mentioned tax resolutions ordered the restitution of the historical amount of $4,571,664,617 (equal to ThU.S.$7,436 as of December 31, 2017). On November 7, 2005, the Company requested a Review of the Supervision Action (Revisión de la Actuación Fiscalizadora, or “RAF”), which is an administrative review of the tax action brought by the Chilean IRS, and filed a claim disputing the above mentioned tax resolutions No. 184 and 185 of 2005. The RAF was resolved on January 9, 2009 by the Chilean IRS, partially sustaining the Company’s request, granting a discount to the total amount of $1,209,399,164 (equal to ThU.S.$1,967, as of December 31, 2017), resulting in a total disputed amount of $3,362,265,453 (equal to ThU.S.$5,469 as of December 31, 2017); consequently, on this date the claim corresponding to the sums not granted during the enforcement stage was filed. On February 19, 2010, the Court acknowledged receipt of the Company’s request. Subsequently, the tax authority issued a report and the Company commented on such report.

On September 26, 2014, Arauco requested the submission of this claim to the competent jurisdiction of the new Tax and Customs Courts. On October 10, 2014, Arauco’s request was granted. Currently the action is being considered by these new Courts under the Docket No. RUC14-9-0002087-3. On March 20, 2015, the SII responded to the allegations submitted by Arauco against Liquidations No. 184 and 185 of 2005. On June 19, 2017, the Court issued the evidence production ruling, which resolution was notified via certified letter on July 23 of 2017. Arauco lodged a motion for reconsideration and a supplementary appeal, requesting the terms of the evidence production ruling be modified. On July 7, 2017, the Court upheld the motion for reconsideration. On September 20, 2017, the Court issued its first instance decision confirming the liquidations. On October 12, 2017, Arauco challenged the decision through an appeal, requesting the Court of Appeals of Santiago to revoke the first instance decision and uphold Arauco’s claim instead. The case is pending.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore as of December 31, 2017, Arauco has not made any provision whatsoever in connection to this contingency.

2. In connection with Licancel Plant, on June 22, 2011, the Company was notified of a civil claim for compensation of prejudice for an alleged tort liability, filed by twelve fishermen of the Mataquito River before the Court of First Instance, Guarantee and Family of Licantén under Docket number73-2011. The case arose out of dead fish allegedly found in the Mataquito River on June 5, 2007 caused by the Licancel Plant. The plaintiffs seek to be compensated for alleged damages that they had from the aforementioned event, including loss of profits, pain and suffering and an alleged contractual liability, for a total of $2,695,560,000 (equal to ThU.S.$4,824 as of December 31, 2017).

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On October 21, 2015, the Court issued a definitive first instance decision partially admitting the claim, sentencing Celulosa Arauco y Constitución S.A. to pay each claimant – asnon-monetary damages – the sum of $5,000,000 (equal to ThU.S.$8, as of December 31, 2017) plus adjustments, in accordance with the variation of the Consumer Price Index, calculated as of the month of May 2007, up to the month when the payment is made. On November 16, 2015, the defendant challenged the definitive decision through the submission of a cassation appeal based on formal aspects and an ordinary appeal. In turn, the plaintiff adhered to the appeal, seeking to have the amount of thenon-monetary damages recognized by the first instance decision increased. On June 27, 2017, the Court of Appeals of Talca confirmed the ruling, additionally declaring that it increased the amount awarded asnon-monetary damages to $10,000,000 (equal to ThU.S.$16 as of December 31, 2017) for each claimant, plus Consumer Price Index-based adjustments, calculated from the date of the first instance ruling (October 21, 2015) up to the date of effective payment. On July 12, 2017, Arauco filed a cassation appeal based on both procedural and substantial flaws. On October 5, 2017, Arauco became a party to the Appeal.

On December 20, 2017 the parties reached a complete agreement, thus putting an end to the trial through a settlement, with Celulosa Arauco y Constitución S.A., paying - without recognizing any liability in connection with the events - an amount lower than ninety million pesos, with the plaintiffs, in turn, abandoning the cassation appeals that they had lodged. On December 28, 2017, the Supreme Corte issued a ruling declaring the waiver of both remedies. Proceedings Terminated.

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

On February 12, 2016, the Company submitted its defenses.

On December 15, 2017, the Superintendence of the Environment issued Exempted Resolution No. 1,487, closing the punitive administrative proceeding, absolving the company with regards to one of the charges and convicting for other 10 charges, applying a fine of 7,777 UTA (equal to ThU.S.$ 7,131 as of December 31, 2017). On December 22, 2017, the Company submitted a motion for reconsideration regarding Exempted Resolution No. 1,487, before the SMA, requesting that we be absolved of all infringements, with the exception of the charge specified under number 7 (late submission of the water quality report regarding the Cruces river).

Exempted Resolution No. 357, issued by the Superintendence of the Environment (SMA) was notified on March 23rd, 2018, through which the reconsideration appeal lodged by the company was rejected. In consideration to the foregoing, on April 5, 2018, a judicial claim was submitted before the Third Environmental Court against Exempted Resolutions No. 1487 and No. 357 of the SMA. The complaint was declared admissible and an official letter was sent to the SMA for it to issue a report. Proceedings Pending. (Case File:R-64-2018, Third Environmental Court.)

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company, and therefore as of December 31, 2017, Arauco has not made any provision whatsoever in connection to this contingency.

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

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

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

On October 31, 2017, a final report was submitted regarding the Compliance Program, which evidenced the complete and comprehensive performance of all actions and measures envisaged in said program. The SMA must issue its opinion regarding the satisfactory performance of the Compliance Program.

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

Regarding the 4 charges pressed by the Superintendence of the Environment through Exempted Resolution No. 1/Case FileF-020-2016, dated May 6, 2016, against the Company for alleged infringements to the Environmental Qualification Resolutions of the Licancel Plant, we can inform the following:

On February 1, 2017, the Environment Superintendent issued Exempted Resolution No. 71, imposing a fine against the Company for the amount of 239 Annual Tax Units (UTA) (equivalent to ThU.S.$ 219, as of December 31, 2017).

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

On August 7, 2017, a ruling was issued to resolve the reconsideration appeal, partially upholding the Company’s request regarding Charge No. 2, thus reducing the portion of the fine that corresponds to this charge, from 234 UTA to 177 UTA (equivalent to ThU.S.$215, as of December 31, 2017).

Additionally, regarding the total amount of the fine imposed for Charges Nos. 1, 2 and 3 (No. 4 had been rendered ineffective previously), the 25% reduction benefit was granted as a result of paying within the first 5 business days, and the total sum amounted to 136.5 UTA (equivalent to ThU.S.$125 as of December 31, 2017). Case closed.

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

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

The final report regarding the Compliance Program was submitted on October 2, 2017, and further supplemented on December 11, 2017, evidencing the complete and comprehensive performance of all the actions and measures envisaged in said program. The SMA must issue its opinion regarding the satisfactory performance of the Compliance Program.

Since the Company’s position is grounded in solid legal arguments, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2017, Arauco has not made any provision whatsoever in connection to this contingency.

Arauco Argentina S.A.

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

This determination reached $417,908,207 Argentine Pesos (equivalent to ThU.S.$22,409 as of December 31, 2017) for principal, compensatory interest and fines.

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

Likewise, the Company requested an interim measure of relief before the Chamber of Appeals, so that the Chamber may order the suspension of the determination’s enforceability while the final judgment is pending. On May 13, 2010, Chamber I of the National Chamber of Appeals for Federal Administrative Disputes approved the request, subject to the pledge of collateral, which collateral was furnished by the Company by means of Insurance Policy No. 86058, issued by Zurich Argentina Cia. de Seguros S.A. for $633,616,741 Argentine Pesos (equivalent to ThU.S.$ 33,976 as of December 31, 2017).

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

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

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

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

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

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

As of this date, the updated amount for the contingency amounted to approximately $891,758,132 Argentine Pesos (equal to ThU.S.$47,818 as of December 31, 2017), corresponding to principal, interest and fines. The Company decided to pay in cash, and the balance that was finally paid amounted to $248,503,504 Argentine Pesos (equal to ThU.S.$ 13,626 as of December 31, 2017). Additionally, the Company shall assume the payment of all litigation costs and trial expenses, the sum of which was undetermined as of the date of these financial statements. On November 1, 2016, the Nation’s Supreme Court of Justice declared the above mentioned remedy’s abandonment and returned the file to the court of origin. On November 30, 2016, the First Chamber of the National Appeals Court declared that the case file as returned. On April 18, 2017, Chamber I of the National Chamber declared that the Company had abandoned its actions and rights, including its repetition rights, thus condoning the fine and the corresponding interests. Additionally, it ordered the deferral of the fees regulation until payment of the state attorneys has been decided before the lower court, ordering the reimbursement of the Surety Insurance. The contingency insurance policy has been redeemed and returned to the insurance company.

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

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

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

In March, 2005, Note No. 145/05 of the Undersecretary of Agriculture, Livestock and Afforestation suspended the benefit that exempted Arauco Argentina S.A. from paying export duties under Law No. 25,080. This measure is currently under discussion by the Company. On November 8, 2006, the V Chamber of the National Appeals Court for Adversarial Administrative and Federal Matters issued a ruling ordering Arauco Argentina S.A. to continue to enjoy an exemption from paying the exportation duties, in the same manner and scope it had prior to the suspension ordered by Note No. 145/05, if the

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clearance of merchandise is performed pursuant to the guarantee regime established in article 453, subsection a) of the Customs Code, for the exempted tax obligation. The judicial measure became effective beginning on March of 2007 by collateralization through the granting of bond (caución) policies for each shipment permits exempted from payment of export duty. The company maintains an assignment of funds equivalent to $437,149,340 Argentine Pesos (ThU.S.$ 23,440 as of December 31, 2017) for guaranteed export duties, which appears under not current provisions. Additionally, the Company filed a restitution claim for a total amount of US$6,555,207, plus interests accrued from the service of the claim, corresponding to export duties between March 2005 and March 2007, as a result of the application of Note 145/05 issued by the Undersecretary of Agriculture, Livestock and Afforestation. Both the underlying issue and the restitution claim have yet to be resolved.

On the other hand, in April 2016, the Secretary of Agriculture, Livestock and Fishing issued Resolution No.154 – E/2016, that requires that the holders of enterprises that have received the fiscal benefits envisaged by Law No. 25,080, establish collateral to cover a third of the duration of the project, with a minimum term of five years. During May of 2017, the Company modified the duly established collateral in accordance to the terms of said Resolution, for which reason the security was ultimately established at an amount of $276,508,024 (ThU.S.$14,827 as of December 31, 2017).

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

Arauco do Brasil S.A.

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

On July 20, 2015, Arauco do Brasil was notified of the first-level administrative ruling which partially upheld the Infringement, at the estimated amount of R$164,159,000 (ThU.S.$49,572 as of December 31, 2017). Against this ruling, a Voluntary Appeal was filed seeking to revoke the Infringement Notice before the Brazilian Administrative Tax Council (Conselho Administrativo de Recursos Fiscais de Brasil or “CARF”), which is the second administrative level. The CARF’s decision was issued on May 16, 2017, and took into consideration certain arguments presented by the Company regarding the agios, but preserving other charges. Administratively, it is possible that the parties can file a Special Remedy. If the current scenario remains in place, it is estimated that the claim will amount to R$57,278,771 (ThU.S.$17,297 as of December 31, 2017), plus correction increments.

The company believes that its challenge against the Infringement Notice is based on sound legal grounds and that a reasonable possibility exists that this matter will be resolved in favor of the company. Otherwise, as the next step, the Company will discuss the Infringement Notice before the Brazilian Justice Courts.

Forestal Arauco S.A.

1. Maquinarias y Equipos Klenner Limitada filed a civil damages claim before the First Civil Court of Valdivia, Case File numberC-375-2015, against Forestal Arauco S.A. The claim seeks compensation for alleged damages brought as a result of the termination of a service provision contract that took place on February 9, 2010. The plaintiff valued the damages in the amount of $4,203,216,164 (equivalent to ThU.S.$ 6,837, as of December 31, 2017).

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On November 14, 2016, the lower court issued a ruling partially upholding the claim, convicting Forestal Arauco S.A. to pay the sum of $115,026,673 (equivalent to ThU.S.$ 187 as of December 31, 2017) as general damage, and the sum of $607,849,413 (equivalent to ThU.S.$ 989 as of December 31, 2017) for loss profit, rejecting the claim for alleged moral damage, all without ordering the payment of litigation expenses.

Forestal Arauco S.A. challenged the ruling filing a cassation remedy based on procedural violations as well as an appeal. The plaintiff also challenged the ruling through an appeal. On August 14, 2017, the Court of Appeals decided to only uphold the appeal filed by Forestal Arauco S.A., dismissing the claim in its entirety.

On September 1, 2017, the plaintiff challenged the decision rendered by the Court of Appeals, filing a formal cassation appeal and a cassation appeal on the merits before the Supreme Court. Proceedings pending.

Considering that the Company’s position is based on solid legal grounds, there is a reasonable margin for obtaining a favorable result for the Company and therefore, as of December 31, 2017, Arauco has not made any provision whatsoever in connection to this contingency.

2. On April 28, 2015, the company was notified of and answered the action for recovery submitted in ordinary proceedings by Mr. Rodrigo Huanquimilla Arcos and Mr. Mario Andrades Rojas, attorneys at law, on behalf of 24 members of the Arcos succession, who claiming to be owners of the estate that they identify as Hacienda Quivolgo, of 5,202 hectares, request that Forestal Celco S.A., currently Forestal Arauco S.A., be sentenced to return the above mentioned real property plus civil and natural fruits or revenues as well as any estates adhered to it, along with any damages that the real property may have suffered, with litigation costs. The company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

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

On December 9, 2016, the Court summoned the parties for the issuance of the ruling. On February 24, 2017, the first instance final ruling was notified, which ruling dismissed the claim in its entirety, and imposed the payment of court costs. On March 8, 2017, the claimant appealed against the first instance decision. Currently, the case is pending before the Court of Appeals, with the decree declaring that the case is ready to be heard by the Court being issued on April 12. Pending (Court of Appeals of Talca Case FileNo. 949-2017).

3. On April 6, 2015, the company was notified through a rogatory letter regarding the claim submitted by Mr. Gustavo Andrés Ochagavía Urrutia, attorney at law, acting on behalf of 23 members of the Arcos succession, who claim to be the owners of the estate that they identify as Hacienda Quivolgo, of 5,202 hectares, requesting that Forestal Celco S.A., currently Forestal Arauco S.A., be ordered to return the above mentioned real property plus

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civil and natural fruits or revenues as well as any estates adhered to it, along with any damages that the real property may have suffered, with litigation costs. They base their claim in that Forestal Celco S.A., currently Forestal Arauco S.A., is allegedly in possession but does not own the real property in question. On April 28, 2014, the company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

On January 8, 2016, the defendant requested a consolidation of the proceedings with Case file334-2014, as well as the suspension of the proceedings until this request is decided upon. The Court ordered this case file to be joined with the proceedings of case file No.C-334-2014 of the Civil Court of Constitución.

On February 24, 2017, the final ruling of the lower court was notified, completely dismissing the claim, with litigation costs.

On March 8, 2017, the plaintiff filed an appeal against the lower court final ruling. Currently, the case is pending before the Court of Appeals, with the decree declaring that the case is ready to be heard by the Court being issued on April 12. Pending (Court of Appeals of Talca Case FileNo. 949-2017).

4. On August 24, 2017, the company was notified of a civil claim for recovery in ordinary proceedings, filed by Mrs. Carmen Muñoz Domínguez on behalf of Forestal Ezrece S.A. The plaintiff argues that its client would be the rightful owner – as a result of an assignment and sale – of 87.5% of the hereditary rights in the rural real estate property called “Pino Huacho,” located in the boroughs of Los Alamos and of Cañete, province of Lebu, Eighth Region, for a surface area amounting to 5,144.22 hectares, which actions would be under the possession of Forestal Arauco S.A. The claimant has requested the court to order Forestal Arauco S.A. to be sentenced to restitute these actions and rights. Forestal Arauco S.A. answered the claim, requesting its total dismissal, with litigation costs, and further filing a counterclaim based on the ordinary prescription and, in lieu thereof, based on extraordinary prescription.

Currently, and having exhausted the period of discussion both for the main action as well as the counterclaim, the Court issued the corresponding evidence production resolution. Forestal Arauco S.A. lodged a reconsideration remedy with a subsidiary appeal. The Court partially upheld the reconsideration and overruled the subsidiary appeal. Forestal Arauco S.A. lodged an appeal for the review of facts, dated April 11th, which was upheld by the Court of Appeals of Concepcion, ordering the Court to grant the processing of the appeal.

Proceedings currently in the evidence production stage. Pending. (Case FileC-109-2017 First Instance and Guarantee Court of Lebu).

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

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Provisions recorded as of December 31, 2017 and December 31, 2016 are as follows:


Classes of Provisions	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Provisions, Current		2,728		842
Provisions for litigations		616		427
Other provisions		2,112		415
Provisions,non-Current		36,008		38,138
Provisions for litigations		12,556		14,696
Other provisions		23,452		23,442

Total Provisions		38,736		38,980

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	12-31-2017
Movements in Provisions	Litigations (*) ThU.S.$			Other Provisions (**) ThU.S.$			Total ThU.S.$
Opening balance		15,123			23,857			38,980
Changes in provisions
Increase in existing provisions		1,314			16			1,330
Increase through business combinations		—			2,106			2,106
Used provisions		(1,578	)		—			(1,578	)
Increase (decrease) in foreign currency exchange		(1,493	)		—			(1,493	)
Other Increases (Decreases)		(193	)		(416	)		(609	)
Total Changes		(1,950	)		1,706			(244	)
Closing balance		13,173			25,563			38,736

(*)	The increase in legal claims is composed mainly of ThU.S.$908 and ThU.S.$375 Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsuits.

(**)	The change in Other Increases (Decreases) in Other provisions is due to a reverse of the provision in Zona Franca Punta Pereira (Uruguay). The increase through business combination corresponds to the acquisition of Arauco Industrias de Paineis.


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

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

(**)	The change in Other Increases (Decreases) in Other provisions is due to a reverse of the ThU.S.$ 100 corresponding to Arauco Argentina.


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

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

(**)

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

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

F-75

NOTE 19.

INTANGIBLE ASSETS


	12-31-2017			12-31-2016
Classes of Intangible Assets, Net	ThU.S.$			ThU.S.$
Intangible assets, net		88,615			89,497
Computer software		26,747			26,370
Water rights		5,697			5,689
Customer		47,144			50,982
Other identifiable intangible assets		9,027			6,456
Classes of intangible Assets, Gross		173,426			159,025
Computer software		81,907			72,008
Water rights		5,697			5,689
Customer		72,685			71,275
Other identifiable intangible assets		13,137			10,053
Classes of accumulated amortization and impairment
Total accumulated amortization and impairment		(84,811	)		(69,528	)
Accumulated amortization and impairment, intangible assets		(84,811	)		(69,528	)
Computer software		(55,160	)		(45,638	)
Customer		(25,541	)		(20,293	)
Other identifiable intangible assets		(4,110	)		(3,597	)

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


	12-31-2017
Reconciliation of intangible assets	Computer Software ThU.S.$			Water Rights ThU.S.$		Customer ThU.S.$			Others ThU.S.$			TOTAL ThU.S.$
Opening Balance		26,370			5,689		50,982			6,456			89,497
Changes
Additions		7,487			8		—			2,973			10,468
Additions through business combination		320			—		—			—			320
Disposals		(181	)		—		—			—			(181	)
Amortization		(8,122	)		—		(4,797	)		(408	)		(13,327	)
Increase (Decrease) related to foreign currency translation		873			—		959			(96	)		1,736
Other Increases (Decreases)		—			—		—			102			102
Changes Total		377			8		(3,838	)		2,571			(882	)
Closing Balance		26,747			5,697		47,144			9,027			88,615

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


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

The amortization of customer and computer software is presented in the Consolidated Statements of Profit or Loss under the “Administrative Expenses” line item.

F-76

NOTE 20.

BIOLOGICAL ASSETS

Biological assets comprise forestry plantations, mainly radiata and taeda pine, and to a lesser extent eucalyptus. The plantations are located in Chile, Argentina, Brazil and Uruguay, with a total surface of 1.7 million hectares as of December 31, 2017 out of which 1 million hectares are used for forestry planting, 431 thousand hectares are native forest, 195 thousand hectares are used for other purposes and 99 thousand hectares not yet planted.

For the year ended December 31, 2017, the production volume of logs totaled 20.7 million m3 (18.7 million m3 as of December 31, 2016).

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

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

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

•

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

•

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

•

Future plantations are not considered.

•

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

•

Expected cash flows are determined in terms of harvest and expected sale of forestry products, associated with the demand from the Company’s own industrial centers and sales to third parties at market prices. Sales margin of the different products that are harvested in the forest is also considered in the valuation. The changes in the value of the plantations pursuant to the criteria defined above are accounted for in the results for the fiscal year, as established in IAS 41. These changes are presented in the Consolidated Statements of Profit or Loss under the line item Other income per function, which as of December 31, 2017 amounted to ThU.S.$83,031 (ThU.S.$ 208,562 as of December 31, 2016). The appraisal of biological assets resulted in a greater cost of the lumber sold in comparison to the real incurred cost, which is presented included in the cost of sales which as of December 31, 2017 amounted to ThU.S.$213,234 (ThU.S.$204,971 as of December 31, 2016).

•

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

•

The discount rates used are 7.5% in Chile (8% at 2016), 8% Brazil and Uruguay, and 12% in Argentina.

•

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

F-77

•

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

•

The average crop age by species and country is:


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

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


		ThU.S.$
Discount rate	0,5		(98,304	)
	-0,5		103,444
Margins (%)	10		370,058
	-10		(370,058	)

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

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

The Company has contracted fire insurance policies for its forestry plantatios, which in conjunction with the Company’s resources, allow risks to be minimized.

Detail of Biological Assets Pledged as Security

As of December 31, 2017, there are no forestry plantations pledged as security.

Detail of Biological Assets with Restricted Ownership

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

No significant government grants have been received.

Current andNon-Current Biological Assets

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


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Current		307,796		306,117
Non-current		3,459,146		3,592,874
Total		3,766,942		3,898,991

F-78

Reconciliation of carrying amount of biological assets


Movement	12-31-2017 ThU.S.$
Opening Balance		3,898,991
Changes in Biological Assets
Additions through acquisition and costs of new plantations		182,322
Increase due tonon-cash capital distribution from Vale do Corisco S.A. (see Note 15)		127,927
Sales		(5,289	)
Harvest		(341,108	)
Gain (losses) arising from changes in fair value less costs to sale		83,031
Increases (decreases) in Foreign Currency Translation		(5,792	)
Loss of forest due to fires		(173,139	)
Other Increases (decreases)		(1	)

Total Changes		(132,049	)

Closing Balance		3,766,942


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

Total Changes		72,394

Closing Balance		3,898,991

(*)	On May 2017, Arauco’s associate Vale do Corisco S.A. performed a return of capital to its shareholders. This operation did not generate effects in the Consolidated Statements of Profit or Loss nor modified Arauco’s shareholding in Florestal Vale do Corisco S.A.

In January 2017, Arauco was affected by fires that consumed 72,564 hectares of forest plantations, recorded in the balance sheet in MU.S.$ 210, representing 5.6% of the value of Arauco’s forestry plantations.

The affected plantations have been managed by the company in order to minimize the damage caused by the fires. This management has allowed for the recovery of 17.6% of the afore mentioned amount of MU.S.$210. Additionally, the forest plantations affected by the fires were insured, with their corresponding deductibles and limitations. As a consequence of the above, the sum recovered from the insurance company amounted to MU.S$ 35.

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

F-79

NOTE 21.

ENVIRONMENTAL MATTERS

Environment Management

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

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

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

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

These investments are reflected in the Consolidated Financial Statements as Properties, Plants and Equipment when they refer to disbursements in major works executed and are reflected in Expenses when they refer to improvements or management not directly associated with investment projects.

F-80

Detail information of disbursements related to the environment

As of December 31, 2017 and December 31, 2016 Arauco has made and / or has committed the following disbursements by major environmental projects:

12-31-2017

Disbursements undertaken 2017

Committed Disbursements

Company

Name of project

State of
project

Amount
ThU.S.$

Asset
Expense

Asset/expense
destination
item

Amount
ThU.S.$

Estimated
date

Arauco Do Brasil S.A.

Environmental improvement studies

In process

1,008

Assets

Property, plant
and equipment

2018

Arauco Do Brasil S.A.

Environmental improvement studies

In process

1,058

Expense

Administration
expenses

296

2018

Celulosa Arauco Y Constitucion S.A.

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

In process

5,811

Assets

Property, plant
and equipment

4,068

2018

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

17,435

Assets

Property, plant
and equipment

20,694

2018

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

Finished

10,326

Assets

Property, plant
and equipment

—

Celulosa Arauco Y Constitucion S.A.

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

In process

47,512

Assets

Property, plant
and equipment

17,837

2018

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

26,578

Expense

Operating cost

6,214

2018

Arauco Argentina S.A.

Construction emisario

In process

2,312

Assets

Property, plant
and equipment

797

2018

Arauco Argentina S.A.

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

In process

139

Assets

Property, plant
and equipment

2018

Arauco Argentina S.A.

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

In process

Assets

Property, plant
and equipment

5,921

2018

Maderas Arauco S.A.

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

In process

432

Expense

Administration
expenses

—

2018

Maderas Arauco S.A.

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

In process

1,346

Expense

Operating cost

—

Maderas Arauco S.A.

Environmental improvement studies

In process

Assets

Property, plant
and equipment

332

Forestal Arauco S.A.

Environmental improvement studies

In process

983

Expense

Administration
expenses

1,165

2018

Forestal los Lagos S.A.

Environmental improvement studies

In process

229

Expense

Operating cost

290

2018

TOTAL

115,277

57,690

12-31-2016

Disbursements undertaken 2016

Committed Disbursements

Company

Name of project

State of
project

Amount
ThU.S.$

Asset
Expense

Asset/expense
destination
item

Amount
ThU.S.$

Estimated
date

Arauco Do Brasil S.A.

Environmental improvement studies

In process

285

Assets

Property, plant
and equipment

417

2017

Arauco Do Brasil S.A.

Environmental improvement studies

In process

385

Expense

Administration
expenses

1,231

2017

Celulosa Arauco Y Constitucion S.A.

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

In process

1,585

Assets

Property, plant
and equipment

1,396

2017

Celulosa Arauco Y Constitucion S.A.

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

In process

476

Assets

Property, plant
and equipment

8,085

2018

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

611

Assets

Property, plant
and equipment

20,658

2017

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

Finished

1,271

Assets

Property, plant
and equipment

—

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

1,218

Assets

Property, plant
and equipment

14,736

2018

Celulosa Arauco Y Constitucion S.A.

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

In process

51,703

Assets

Property, plant
and equipment

64,450

2017

Celulosa Arauco Y Constitucion S.A.

Environmental improvement studies

In process

26,990

Expense

Operating cost

4,180

2018

Celulosa Arauco Y Constitucion S.A.

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

Finished

144

Assets

Property, plant
and equipment

—

Arauco Argentina S.A.

Construction emisario

In process

Assets

Property, plant
and equipment

824

2017

Arauco Argentina S.A.

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

In process

187

Assets

Property, plant
and equipment

124

2017

Arauco Argentina S.A.

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

In process

183

Assets

Property, plant
and equipment

6,112

2017

Paneles Arauco S.A.

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

Finished

1,332

Expense

Operating cost

—

Paneles Arauco S.A.

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

Finished

465

Expense

Administration
expenses

—

Paneles Arauco S.A.

Environmental improvement studies

In process

1,217

Assets

Property, plant
and equipment

304

2017

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

Environmental improvement studies

In process

643

Expense

Administration
expenses

946

2017

Forestal Los Lagos S.A.

Environmental improvement studies

In process

225

Expense

Operating cost

2017

TOTAL

88,928

123,481

F-81

NOTE 22.

NON-CURRENT ASSETS HELD FOR SALE

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

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


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Land		160		160
Buildings		1,122		1,122
Property, plant and equipment		2,225		1,777
Total		3,507		3,059

As of December 31, 2017, 2016 and 2015, there were no significant effects on results related to the sale of assets held for sale.

F-82

NOTE 23.

FINANCIAL INSTRUMENTS

23.1 Classification

Arauco’s financial instruments as of December 31, 2017 and December 31, 2016, are displayed in the table below. Regarding those instruments valued at an amortized cost, as estimation of their fair value is displayed for informational purposes.


	December 2017				December 2016
Financial Instruments *Thousands of dollars*	Carrying amount		Fair Value		Carrying amount		Fair Value
Fair value through profit or loss (held for trading) (1)		74,849		74,849		198,582		198,582
Derivatives		1,679		1,679		3,166		3,166
Mutual funds (2)		73,170		73,170		195,416		195,416
Loans and Accounts Receivables		1,351,712		1,351,712		1,126,182		1,126,182
Cash and cash equivalents (amortized cost)		516,716		516,716		396,837		396,837
Cash		209,185		209,185		149,446		149,446
Time deposits		292,105		292,105		247,391		247,391
Agreements		15,426		15,426		—		—
Accounts Receivable (net)		830,452		830,452		715,883		715,883
Trade and other receivables		709,983		709,983		600,589		600,589
Lease receivable		13,106		13,106		764		764
Other receivables		107,363		107,363		114,530		114,530
Accounts receivable due from related parties		4,544		4,544		13,462		13,462
Other Financial Assets (5)		58,425		58,425		10,903		10,903

Financial liabilities at amortized cost (3)		5,002,072		5,198,654		5,022,725		5,158,789
Bonds issued denominated in U.S. Dollars		2,057,746		2,135,893		2,321,980		2,480,063
Bonds issued denominated in U.F. (4)		1,244,939		1,333,087		1,130,679		1,078,934
Bank Loans in U.S. Dollars		835,099		870,399		891,338		926,070
Bank borrowing denominated in U.S. Dollars		23,358		23,358		23,020		23,020
Financial leasing		112,376		107,363		113,986		108,980
Trade and other payables		717,346		717,346		537,891		537,891
Accounts payable to related parties		11,208		11,208		3,831		3,831
Financial liabilities at fair value through profit or loss		137		137		336		336
Forward		137		137		336		336
Hedging Liabilities		5,256		5,256		87,027		87,027

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

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

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

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

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

F-83

23.2 Fair Value Hierarchy of Financial Assets and Liabilities

The assets and liabilities measured at fair value in the consolidated statements of financial position as of December 31, 2017, have been measured based on the valuation methodologies provided in IAS 39. The methodologies applied for each financial instrument are classified according to their hierarchy as follows:

•

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

•

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

•

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


	Fair Value December 2017 ThU.S.$		Fair value
Financial Instruments	Fair Value December 2017 ThU.S.$		Level 1 ThU.S.$		Level 2 ThU.S.$		Level 3 ThU.S.$
Fair value through profit or loss (held for trading)
Derivatives		1,679				1,679
Mutual Funds		73,170		73,170
Other financial assets		58,425		2,654		55,771
Financial liabilities measured at amortized cost
Bonds issued denominated in U.S. Dollars		2,135,893		2,135,893
Bonds issued denominated in U.F. (4)		1,333,087		1,333,087
Bank loans in U.S. Dollars		870,399				870,399
Bank borrowing denominated in U.S. Dollars		23,358				23,358
Financial leasing		107,363				107,363
Financial liabilities at fair value through profit or loss		137				137
Hedging liabilities		5,256				5,256

23.3 Explanation of the valuation of Financial Instruments.

Cash and cash equivalent and accounts receivable

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

Derivative financial instruments

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

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

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

F-84

Financial Liabilities

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

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

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

The following table sets forth a reconciliation between the financial liabilities and the consolidated statements of financial position as of December 31, 2017 and 2016:


Thousands of dollars	December 2017
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Other current financial liabilities, Total		From 13 months to 5 years		More than 5 years		Othernon- current financial liabilities, Total		Total
Bonds obligations		28,013		34,981		62,994		1,054,926		2,184,765		3,239,691		3,302,685
Bank borrowing		110,700		282,172		392,872		327,424		138,161		465,585		858,457
Financial Leasing		9,928		34,413		44,341		68,035		—		68,035		112,376
Swap and Forward		137		—		137		5,256		—		5,256		5,393

Other Financial Liabilities, Total (a)		148,778		351,566		500,344		1,455,641		2,322,926		3,778,567		4,278,911


Thousands of dollars	December 2017
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Total Current		From 13 months to 5 years		More than 5 years		Totalnon- current		Total
Trades and other payables		717,342		4		717,346		—		—		—		717,346
Accounts payable to related companies		11,208		—		11,208		—		—		—		11,208

Accounts Payable, Total (b)		728,550		4		728,554		—		—		—		728,554

Financial Liabilities, Total (a) + (b)		877,328		351,570		1,228,898		1,455,641		2,322,926		3,778,567		5,007,465


Thousands of dollars	December 2016
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Other current financial liabilities, Total		From 13 months to 5 years		More than 5 years		Othernon- current financial liabilities, Total		Total
Bonds obligations		51,874		409,102		460,976		1,233,603		1,758,079		2,991,682		3,452,658
Bank borrowings		134,140		61,483		195,623		626,384		92,351		718,735		914,358
Financial leasing		9,534		30,866		40,400		73,586		—		73,586		113,986
Swap and Forward		453		—		453		86,911		—		86,911		87,364

Other Financial Liabilities, Total (a)		196,001		501,451		697,452		2,020,484		1,850,430		3,870,914		4,568,366


Thousands of dollars	December 2016
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Total Current		From 13 months to 5 years		More than 5 years		Totalnon- current		Total
Trades and other payables		511,371		26,520		537,891		—		—		—		537,891
Accounts payable to related companies		3,831		—		3,831		—		—		—		3,831

Accounts Payable, Total (b)		515,202		26,520		541,722		—		—		—		541,722

Financial Liabilities, Total (a) + (b)		711,203		527,971		1,239,174		2,020,484		1,850,430		3,870,914		5,110,088

F-85

23.4 Derivative Instruments

Hedging instruments recorded as of December 31, 2017 and 2016 are cash flow hedges. Arauco uses derivatives for hedging purposes, such as cross currency swaps, currency and commodity forwards, interest rate swaps, and options. Depending on the fair value of each instrument, the position could be either an asset or a liability, and they are listed in the Statements of Financial Position under OtherNon-Current Financial Assets or OtherNon-current Financial Liabilities, respectively. The effects for the period are presented under Equity as Other Comprehensive Income or the Statements of Comprehensive Income as Finance Income or Finance Costs, net of differences in exchange rate of the hedged items and the deferred tax.

A summary of the derivative financial instruments included in the Statements of Financial Position as of the end of this period, is presented below:


Financial Instruments	2017 Fair Value ThU.S.$			2016 Fair Value ThU.S.$
Assets at fair value through profit or loss (held for trading)		1,679			3,166
Derivative-Uruguay (1)		1,672			3,159
Forward-Colombia		7			7
Hedging Assets		55,771			8,658
Derivative-Uruguay (1)		3,037			2,029
Cross Currency Swaps		52,734			6,629
Financial liabilities at fair value through profit or loss		(137	)		(336	)
Forward-Colombia		(137	)		(267	)
Derivative-Uruguay (1)		—			(69	)
Hedging Liabilities		(5,256	)		(87,027	)
Cross Currency Swaps		(5,248	)		(86,895	)
Derivative-Uruguay (1)		(8	)		(132	)

(1)

Includes Swap and Forward from Uruguay tables.

23.4.1. Chile

Cross currency swaps

Arauco is exposed to the risk of variability in cash flows from changes in foreign exchange rates and inflation, mainly due to balances of assets denominated in U.S. Dollars and other currencies differente from the functional currency, which causes mismatches that could affect operating results.

F-86

Below are the cross currency swaps that Arauco has as of December 31, 2017 and 2016 to cover the exposure to the exchange rate risk generated from bonds denominated in U.F.:


Bond	Institution	Amount U.S.$		Amount U.F.		Starting date		Ending date		Market Value ThU.S.$ 2017			Market Value ThU.S. 2016
F	Deutsche—U.K.		43,618,307		1,000,000		10-30-2011		10-30-2021		213			(4,703	)
F	JP Morgan—N.A.		43,618,307		1,000,000		10-30-2011		10-30-2021		306			(4,584	)
F	Deutsche—U.K.		37,977,065		1,000,000		04-30-2014		04-30-2019		6,599			1,782
F	BBVA—Chile		38,426,435		1,000,000		10-30-2014		04-30-2023		5,252			558
F	BBVA—Chile		38,378,440		1,000,000		10-30-2014		04-30-2023		5,550			908
F	Santander—Chile		37,977,065		1,000,000		10-30-2014		04-30-2023		6,051			1,427
F	BCI—Chile		37,621,562		1,000,000		10-30-2014		04-30-2023		6,549			1,954
J	Corpbanca—Chile		42,864,859		1,000,000		09-01-2010		09-01-2020		(292	)		(5,505	)
J	BBVA—Chile		42,864,859		1,000,000		09-01-2010		09-01-2020		(292	)		(5,505	)
J	Deutsche—U.K.		42,864,859		1,000,000		09-01-2010		09-01-2020		(356	)		(5,590	)
J	Santander—Spain		42,873,112		1,000,000		09-01-2010		09-01-2020		(263	)		(5,463	)
J	BBVA—Chile		42,864,257		1,000,000		09-01-2010		09-01-2020		(152	)		(5,318	)
P	Corpbanca—Chile		46,474,122		1,000,000		05-15-2012		11-15-2021		(1,775	)		(6,355	)
P	JP Morgan—N.A.		47,163,640		1,000,000		11-15-2012		11-15-2021		(1,753	)		(6,157	)
P	BBVA—Chile		42,412,852		1,000,000		11-15-2013		11-15-2023		1,854			(2,548	)
P	Santander—Chile		41,752,718		1,000,000		11-15-2013		11-15-2023		2,777			(1,591	)
P	Deutsche—U.K.		41,752,718		1,000,000		11-15-2013		11-15-2023		2,800			(1,564	)
R	Santander—Chile		128,611,183		3,000,000		10-01-2014		04-01-2024		(365	)		(13,815	)
R	JP Morgan—U.K.		43,185,224		1,000,000		10-01-2014		04-01-2024		329			(4,039	)
R	Corpbanca—Chile		43,277,070		1,000,000		10-01-2014		04-01-2024		327			(4,026	)
Q	BCI—Chile		43,185,224		1,000,000		10-01-2014		04-01-2021		1,022			(3,524	)
Q	BCI—Chile		43,196,695		1,000,000		10-01-2014		04-01-2021		1,070			(3,443	)
S	Santander—Chile		201,340,031		5,000,000		11-15-2016		11-15-2026		12,035			(3,165	)

											47,486			(80,266	)

Arauco needs to minimize the risk of the exchange rate, as it holds debt in pesos, adjustable to reflect inflation. The objective of this position in the swap is to eliminate the uncertainty of the exchange rate, exchanging the flows derived from obligations expressed in adjustable pesos of the bonds described above, with flows in U.S. dollars (Arauco’s functional currency), at a fixed and determined exchange rate as of the agreement’s execution date.

Through an effectiveness test, and pursuant to IAS 39, we were able to validate that the aforementioned hedging instruments are highly effective within an acceptable range for Arauco, for the purposes of eliminating the uncertainty of the exchange rate in the commitments derived from the hedged object.

23.4.2. Colombia

Forward contracts that are in force and effect, executed by Arauco Colombia as of December 31, 2017 and 2016, are detailed in the following table:


Exchange rate	Institution		Amount ThU.S.$		Starting date		Ending date		December 2017 Market Value ThU.S.$
USDCOP		BBVA Colombia		6,000		10-11-2017		01-10-2018		(1	)
USDCOP		Corpbanca Colombia		8,000		11-14-2017		02-13-2018		(136	)
USDCOP		Corpbanca Colombia		2,100		12-21-2017		03-12-2018		7

										(130	)


Exchange rate	Institution		Amount ThU.S.$		Starting date		Ending date		December 2016 Market Value ThU.S.$
USDCOP		BBVA Colombia		5,000		10-28-2016		01-11-2017		7
USDCOP		BBVA Colombia		4,000		11-18-2016		02-09-2017		(255	)
USDCOP		BBVA Colombia		7,000		12-13-2016		03-10-2017		(12	)

										(260	)

F-87

23.4.3. Uruguay

Forward

As of December 31, 2017 and 2016, Arauco Uruguay maintains the following forward contracts in force and effect for the purposes of ensuring an exchange rate for sale of dollars:

Exchange rate

Institution

Notional
ThU.S.$

December 2017
Market Value
ThU.S.$

UYUUSD

Banco Santander Uy

24,000

1,213

UYUUSD

HSBC Uruguay

9,000

543

1,756

Exchange rate

Institution

Notional
ThU.S.$

December 2016
Market Value
ThU.S.$

UYUUSD

Banco Santander Uy

16,600

1,633

UYUUSD

Citibank U.K.

3,200

150

UYUUSD

HSBC Uruguay

10,750

1,256

3,039

Arauco Uruguay’s profits and losses also face exposure to the price variation of certain fuels, as occurs with Fuel Oil N°6, which is used during the cellulose manufacturing process. In order to minimize this risk, the volatility of future flows associated to the purchase of Fuel Oil No. 6 for years 2017, 2018 and part of 2019 has been limited, through forwards of this commodity. The agreements that are in force and effect as of December 31, 2017 and 2016, are detailed below:


Commodity	Institution	Notional ThU.S.$		December 2017 Market Value ThU.S.$
Fuel Oil N°6	JPMorgan Chase Bank, N.A.		4,760		1,372
Fuel Oil N°6	DNB Bank ASA		4,002		732
Fuel Oil N°6	Citibank U.K.		761		112

					2,216


Commodity	Institution	Notional ThU.S.$		December 2016 Market Value ThU.S.$
Fuel Oil N°6	JPMorgan Chase Bank, N.A.		5,508		1,059
Fuel Oil N°6	DNB Bank ASA		2,661		156
Fuel Oil N°6	Citibank U.K.		378		83

					1,298

F-88

Interest Rate Swap

In addition, Arauco Uruguay’s maintains an Interest Rate Swap in force and effect, a derivative instrument which purpose is to set the interest rate of a variable rate debt in the same currency (USD). The valuation off this instrument as of December 31, 2017, is shown below:

Exchange rate

Institution

Notional
ThU.S.$

December 2017
Market Value
ThU.S.$

USD

DNB Bank ASA

50,638

729

Exchange rate

Institution

Notional
ThU.S.$

December 2016
Market Value
ThU.S.$

USD

DNB Bank ASA

59,077

650

23.5 Loans and Receivables

Loans and receivables arenon-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the consolidated statements of financial position, they are included in line items “Cash and cash equivalents” (certain components of cash and cash equivalents), “Trade and OtherCurrent/Non-Current Receivables” and “Accounts receivable due from related parties”.

Loans and receivables are measured at amortized cost using the effective interest method and are tested for impairment. Financial assets that are classified as loans and receivables are: cash and cash-equivalents, time deposits, repurchase agreements, trade and othercurrent/non-current receivables, and accounts receivable due from related parties.

As of December 31, 2017 and 2016, there are provisions for impairment for ThU.S.$ 14,501 and ThU.S.$ 16,644, respectively.


	December 2017 ThU.S.$		December 2016 ThU.S.$
Loans and Accounts Receivables		1,351,712		1,126,182
Cash and cash equivalents		516,716		396,837
Cash		209,185		149,446
Time Deposits		292,105		247,391
Agreements		15,426		—
Trade and other receivables (net)		834,996		729,345
Trade and other receivables		709,983		600,589
Lease receivable		13,106		764
Other receivables		107,363		114,530
Accounts receivable due from related parties		4,544		13,462

23.5.1. Cash and Cash Equivalents

Includes cash on hand, bank checking account balances and time deposits and other short term highly liquid investments with an original maturity of three months or less. They are short-term, highly liquid investments that are readily convertible to known amounts of cash, and which are subject to an insignificant risk of changes in value.

F-89

The composition of cash and cash equivalents (including the balance of mutual funds displayed in this note as valuation, instruments at fair value with profit or loss) at December 31, 2017 and December 31, 2016, classified by origin coins is as follow:


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Cash and Cash Equivalents		589,886		592,253
U.S. Dollars		501,352		524,426
Euro		4,306		2,357
Other currencies		61,037		55,069
Chilean pesos		23,191		10,401

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

23.5.3 Trade and Other Receivables:Theserepresent enforceable rights for Arauco resulting from the normal course of the business.

23.5.4 Other Receivables: These correspond to receivables from sales, services or loans that are not considered within the normal course of the business.

The provision for doubtful accounts is presented as a deduction of trade and other receivables. The provision for doubtful accounts is established based on an analysis of the age of the portfolio and considering the insurance coverage on accounts receivable. Other conditions are assessed for example when there is objective evidence that Arauco will not receive payments under the original sale terms and when the customer is a party to a bankruptcy court agreement or cessation of payments, and iswritten-off when Arauco has exhausted all levels of recovery of the receivable in a reasonable time.

23.5.5 Accounts receivable due from related parties: Represent enforceable rights for Arauco resulting from the normal course of business, calling normal to the line of business, activity or purpose of exploitation and financing, and which Arauco owns anon-controlling ownership of the counterparty.

The following table sets forth trade and othercurrent/non-current receivables classified by currencies as of December 31, 2017 and December 31, 2016:


	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Trades and other current receivables		814,412		701,610
U.S. Dollars		550,674		489,056
Euros		20,498		26,544
Other currencies		134,238		77,907
Chilean pesos		106,442		106,681
U.F.		2,560		1,422

Accounts receivable from related parties, current		3,488		12,505
U.S. Dollars		726		274
Other currencies		171		726
Chilean pesos		2,192		10,548
U.F.		399		957

Trade and othernon-current receivables		16,040		14,273
U.S. Dollars		4,247		6,895
Other currencies		3,345		527
Chilean pesos		6,692		5,753
U.F.		1,756		1,098

Accounts receivable from related parties,non-current		1,056		957
U.F.		1,056		957

F-90

23.6 Total Financial Liabilities

Arauco’s financial liabilities to the date of these consolidated financial statements are as follows:


	December 2017 ThU.S.$		December 2016 ThU.S.$
Financial Liabilities	December 2017 ThU.S.$		December 2016 ThU.S.$
Total Financial Liabilities		5,007,465		5,110,088
Financial liabilities at fair value through profit or loss (held for trading)		137		336
Hedging Liabilities		5,256		87,027
Financial Liabilities Measured at Amortized Cost		5,002,072		5,022,725

The following table sets forth the current portion of thenon-current bank borrowings and debt issued as of December 31, 2017 and 2016.


	December 2017 ThU.S.$		December 2016 ThU.S.$
Bank borrowings - current portion		92,693		88,028
Bonds issued - current portion		107,268		62,506
Total		199,961		150,534

23.7 Financial Liabilities Measured at Amortized Cost

Financial liabilities correspond tonon-derivative financial instruments with contractual cash-flow payments that can be either fixed or variable.

Also, this category includes thosenon-derivative financial liabilities for services or goods delivered to Arauco at the end of each reporting period that have not yet been paid. These amounts are not insured and are generally paid within thirty days after being recognized.

At the end of each reporting period, Arauco includes in this category bank borrowings, bonds issued denominated in U.S. Dollars and in U.F., trade and other payables.


			*12-31-2017* ThU.S.$		*12-31-2016* ThU.S.$		*12-31-2017* ThU.S.$		*12-31-2016* ThU.S.$
	*Currency*		*Amortized Cost*				*Fair Value*
Total Financial Liabilities				5,002,072		5,022,725		5,198,654		5,158,789
Bonds Issued		U.S. Dollar		2,057,747		2,321,980		2,135,893		2,480,063
Bonds Issued		U.F.		1,244,938		1,130,679		1,333,087		1,078,934
Bank borrowings		U.S. Dollar		834,908		891,338		870,399		926,070
Bank borrowings		Other currencies		23,549		23,020		23,358		23,020
Financial Leasing		Other currencies		96,913		98,316		92,542		94,052
Financial Leasing		Chilean pesos		15,463		15,670		14,821		14,928
Trades and Other Payables		U.S. Dollar		194,342		150,162		194,342		150,162
Trades and Other Payables		Euro		8,848		13,034		8,848		13,034
Trades and Other Payables		Other currencies		158,567		70,736		158,567		70,736
Trades and Other Payables		Chilean pesos		333,529		285,359		333,529		285,359
Trades and Other Payables		U.F.		22,060		18,600		22,060		18,600
Related party payables		U.S. Dollar		1,354		1,969		1,354		1,968
Related party payables		Chilean pesos		9,854		1,862		9,854		1,863

F-91

The financial liabilities at amortized cost presented in the consolidated statements of financial positions as of December 31, 2017 and 2016 are as follows:


	December 2017
	Current ThU.S.$		Non-Current ThU.S.$		Total ThU.S.$
Other financial liabilities		500,207		3,773,311		4,273,518
Trade and other payables		717,346		—		717,346
Related Party Payables		11,208		—		11,208
Total Financial Liabilities Measured at Amortized Cost		1,228,761		3,773,311		5,002,072

	December 2016
	Current ThU.S.$		Non-Current ThU.S.$		Total ThU.S.$
Other financial liabilities		697,000		3,784,003		4,481,003
Trade and other payables		537,891		—		537,891
Related Party Payables		3,831		—		3,831
Total Financial Liabilities Measured at Amortized Cost		1,238,722		3,784,003		5,022,725

F-92

23.8 Cash Flow Hedges Reserve Reconciliation

The following table sets forth the reconciliation balances of cash flow hedges presented in Other Comprehensive Income:


	January-December
	2017 ThU.S.$			2016 ThU.S.$			2015 ThU.S.$
Opening balance		1,096			(55,396	)		(53,022	)
Gains (losses) on cash flow hedges		22,212			84,045			11,859
Recycle of cash flow hedges to profit or loss		(16,965	)		(10,198	)		(16,122	)
Income tax		(5,917	)		(20,055	)		(1,738	)
Recycle of income tax		4,326			2,700			3,627
Closing balance		4,752			1,096			(55,396	)

23.9 Capital Disclosures

23.9.1 Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco’s policies on capital management have the objective of:

Ensuring business continuity and normal operations in the long term;

Ensuring funding for new investments to achieve sustainable growth over time;

Keeping adequate capital structure considering all economic cycles that impact the business and the nature of the industry; and

Maximizing the Company’s value and providing an adequate return to shareholders.

23.9.2 Qualitative Information on Objectives, Policies and Processes applied by the Company regarding Capital Management

Arauco determines and manages its capital structure based on its carrying amount of equity plus its financial debt (bank borrowings and bonds issued).

23.9.3 Quantitative Information on Capital Management

The following table sets forth the financial covenants that the Company has to comply with as part of the terms of certain of its obligations:

Instrument

December 2017
ThU.S.$

December 2016
ThU.S.$

Interest
coverage
>= 2,0x

Debt level
(1) <= 1,2x

Domestic bonds (Chile)

1,244,939

1,130,679

N/R

Syndicate Loan Scotia

199,597

298,967

Syndicate Loan Banco Estado - Grayling

130,953

—

N/R:

Not required for the financial obligation

(1)

Debt to equity ratio (financial debt divided by equity plusnon-controlling interests)

As of December 31, 2017 and December 31, 2016, Arauco has complied with all of its financial covenants.

F-93

The following table sets forth the credit ratings of our debt instruments as of December 31, 2017, are as follows:


Instrument	Standard & Poor’s	Fitch Ratings	Moody’s	Feller Rate
Local bonds	—	AA-	—	AA-
Foreign bonds	BBB-	BBB	Baa3	—

Capitalization requirements are established based on the Company’s financial needs and on maintaining an adequate liquidity level and complying with financial covenants established in current debt arrangements. The Company manages its capital structure and makes adjustments based on the prevailing economic conditions in order to mitigate the risks associated with adverse market conditions, and based on opportunities that may arise to improve the Company’s level of liquidity.

The capitalization of Arauco as of December 31, 2017 and December 31, 2016 is as follows:


	December 2017 ThU.S.$		December 2016 ThU.S.$
Equity		7,116,893		6,999,283
Bank borrowings		858,457		914,358
Financial leasing		112,376		113,986
Bonds issued		3,302,685		3,452,659

Capitalization		11,390,411		11,480,286

23.10 Risk Management

Arauco’s financial instruments are exposed to various financial risks: credit risk, liquidity risk and market risk (including exchange rate risks, interest rate risks and price risks).

Arauco’s overall risk management program focuses on uncertainty in financial markets and aims to minimize potential adverse effects on Arauco’s financial profitability.

Arauco’s financial risk management is overseen by the Corporate Finance Department. This department identifies, assesses and hedges financial risks in close collaboration with Arauco’s operational units.

23.10.1 Type of Risk: Credit Risk

Description

Credit risk refers to financial uncertainty at different periods of time relating to the fulfillment of obligations with counterparties, at the time of exercising the contract rights to receive cash or other financial assets on behalf of Arauco.

F-94

Explanation of Credit Risk Exposure and How This Risk Arises

Arauco’s exposure to credit risk is directly related to each of its customer’s individual abilities to fulfill their contractual commitments, reflected in trade receivables.

Accounts exposed to credit risk are: trade receivable, financial lease debtors and other debtors.

Arauco does not have a securitized portfolio.


	December 2017 ThU.S.$		December 2016 ThU.S.$
Current Receivables
Trade receivables		706,485		598,597
Financial lease receivables		11,932		411
Other debtors		95,995		102,602
Net subtotal		814,412		701,610
Trade receivables		715,217		609,102
Financial lease receivables		12,033		512
Other debtors		101,663		108,640
Gross subtotal		828,913		718,254
Provision for doubtful trade receivables		8,732		10,505
Provision for doubtful lease receivables		101		101
Provision for doubtful other debtors		5,668		6,038
Subtotal Bad Debt		14,501		16,644
Non-Current Receivables
Trade receivables		3,498		1,992
Financial lease receivables		1,174		353
Other debtors		11,368		11,928
Net Subtotal		16,040		14,273
Trade receivables		3,498		1,992
Financial lease receivables		1,174		353
Other debtors		11,368		11,928
Gross subtotal		16,040		14,273
Provision for doubtful trade receivables		—		—
Provision for doubtful lease receivables		—		—
Provision for doubtful other debtors		—		—
Subtotal Bad Debt		—		—

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

The Credit and CollectionsSub-Division, dependent from the Treasury Division, is the area entrusted with minimizing the credit risk of the accounts receivable, supervising the delinquency of the accounts. The regulations and procedures applicable for the control and administration of the Arauco Group can be found in the Corporate Credit Policy.

As of December 31, 2017, Arauco’s balance for commercial Debtors was ThU.S.$ 718,714 of which, according to the agreed sales conditions, 59.18% corresponded to sales on credit (open account), 37.83% to sales with letters of credit and 2.99% to other types of sales, distributed in 2,245 debtors. The client with the largest Open Account debt represented 3.49% of the total accounts receivable as of that date.

Below we provide detail regarding accounts receivable, classified in tranches.

F-95

December 31, 2017


Age of trade receivables

Days	Non-past due			1 to 30			31 to 60			61 to 90			91 to 120			121 to 150			151 to 180			181 to 210			211 to 250			More than 250			Total
ThU.S.$		662,963			39,459			551			955			50			34			2,238			56			97			12,312			718,715
%		92.20	%		5.50	%		0.10	%		0.10	%		0.00	%		0.00	%		0.30	%		0.00	%		0.00	%		1.70	%		100	%

December 31, 2016


Age of trade receivables

Days	Non-past due			1 to 30			31 to 60			61 to 90			91 to 120			121 to 150			151 to 180			181 to 210			211 to 250			More than 250			Total
ThU.S.$		564,378			31,106			257			881			39			18			21			11			64			14,319			611,094
%		92.40	%		5.10	%		0.00	%		0.10	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		2.30	%		100	%

Arauco does not conduct rescheduling or renegotiations with its clients that imply an amendment to the maturity of the invoices and, should it be necessary, any debt renegotiation with a client shall be analyzed on acase-by-case basis and subjected to the approval of the Corporate Finance Division.

Regarding the provisions fromnon-enforceable accounts, below we provide detail for the movements as of December 31, 2017, 2016 and 2015:


	12-31-2017 ThU.S.$			12-31-2016 ThU.S.$			12-31-2015 ThU.S.$
Opening balance		(16,644	)		(19,860	)		(18,520	)
Impairment losses recognized on receivables		(139	)		(3,950	)		(3,072	)
Reversal of impairment losses		2,282			7,166			1,732
Closing balance		(14,501	)		(16,644	)		(19,860	)

Currently there is a policy for provisions for doubtful accounts receivable under IFRS for all the Arauco group companies.

Explanation regarding the Sales Risk with Letters of Credit

The sales with letters of credit mainly occur in markets in Asia and the Middle East. Periodically, a credit assessment is conducted regarding the banks that issue the letters of credit with the purpose of obtaining their score over the basis of risk-qualification ratings, country-specific risk and financial statements. The decision of approving the issuing bank or asking for confirmation of the letter of credit is made in consideration to this assessment.

F-96

Explanation of the Sales Risk with Credit Line

Sales on credit are subject to the credit limit for each customer. The approval or rejection of a credit limit for all term sales is conducted by the Corporate CreditSub-Division, as well as by the Credit and Collections area for North America, Brazil and Argentina, which report to the Corporate Finance Division. The regulations and procedures applicable for the correct control and risk management over the sales on credit are ruled by the Credit Policy.

A procedure that must be applied by all the companies of the Arauco group has been established for the approval and/or modification of client credit lines. Credit line requests are entered to the SAP that analyzes all available information. Afterwards, the same are either approved or rejected in each one of the internal committees of each company belonging to the Arauco group, depending on the maximum amount authorized by the Credit Policy. Lines of credit are renewed during this internal process on a yearly basis.

All sales are automatically controlled by a credit verification system, which has been configured to block any orders from clients who are delinquent in a given percentage of a debt and/or from clients whose line of credit, as of the time of the product’s shipping, has been exceeded or is overdue.

In order to minimize the credit risk for term or Open Account sales, it is Arauco’s policy to take out insurance to cover the export sales of companies Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Forestal Arauco S.A., and Arauco do Brasil S.A., as well as the domestic sales of Arauco México S.A. de C.V., Arauco Wood Inc, Arauco Colombia S.A., Arauco Perú S.A., Arauco Panels USA LLC, Flakeboard Company Ltd., Flakeboard America Ltd., Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Arauco Florestal Arapoti, Arauco Forest Brasil S.A. and Arauco do Brasil S.A. Arauco works with credit insurance company Continental(AA- rating, as per risk rating companies Humphreys and Fitch Ratings). In order to cover the export sales and domestic sales of Arauco Argentina S.A., the preferred credit insurance company is Insur (a subsidiary of Continental in Argentina). Both companies grant a 90% coverage over the amount of each invoice, without deductibles, for registered clients and of 85% fornon-registered clients.(Non-registered clients are those whose lines range between ThU.S.$ 5 and ThU.S.$ 70 (equivalent currency of their invoicing) of the local sales of companies Arauco Perú S.A., Arauco Colombia S.A., Arauco México S.A. de C.V., Arauco Do Brasil S.A., Arauco Argentina S.A. and Maderas Arauco S.A. Lines in excess of the aforesaid amounts correspond to registered clients.

F-97

As another way of minimizing risk and supporting a line of credit approved by the Credit Committee, Arauco holds guarantees such as mortgages, pledges, Standby letters of credit, bank performance bonds, checks, promissory notes, loans or any other that could be required under the laws of each country. The total amount held in guarantees amounts to ThU.S.$98.7 million, effective as of December 2017, as summarized in the following chart. The procedure for guarantees is regulated by Arauco’s Policy on Guarantees, whose purpose is to control their accounting, due date and custody.


Guarantees Arauco Group (ThU.S.$)
Guarantees Debtors (received from clients)
Certificate of deposits	7,106	7.3	%
Standby	6,942	7.0	%
Promissory notes	71,961	72.9	%
Finance	3,094	3.1	%
Mortgage	6,849	6.9	%
Pledge	2,580	2.6	%
Promissory notes	200	0.2	%
Total Guarantees	98,732	100.0	%

The maximum exposure to credit risk is limited to the value at amortized cost of the Debtors’ account for sales registered as of the date of this report, minus the percentage of sales insured by the aforementioned credit insurance companies and the guarantees granted in favor of Arauco.

In summary, the open account debt covered by the various insurance policies and guarantees amounts to 97.4% and, therefore, Arauco’s portfolio exposure amounts to 2.6%.


Secured Open Accounts Receivable	ThU.S.$		%
Total open accounts receivable		391,992		100.0	%
Secured receivables (*)		381,800		97.4	%
Unsecured receivables		10,192		2.6	%

(*)	Insured Debt is deemed to be the portion of accounts receivable that is covered by a credit company or by guarantees such as standby letters of credit, mortgages, performance bonds, among others

Investment Policy:

Arauco has an Investment Policy which identifies and limits the financial instruments and the entities into which the Arauco companies, in particular Celulosa Arauco y Constitucion S.A., are authorized to invest. The Company’s Treasury Department is centralized with operations in Chile. The Head Office is responsible for carrying out investments, cash flow surplus investments, and short and long term debt subscriptions. Exceptions to this rule are specific investments made through other companies where authorization is required from the Chief Financial Officer.

For financial instruments, the only permitted investments are fixed income investments with adequate liquidity. Each instrument has defined classifications and limits, depending on duration and type of issuer.

Regarding intermediaries (such as banks, securities brokers and dealers of mutual funds that are bank affiliates), a scoring methodology is used to determine the relative degree of risk of each intermediary based on their financial position and assign score points that result in a credit risk rating to each intermediary. Arauco uses this scoring system to determine its investment limits for each intermediary.

The required information to evaluate the various criteria are obtained from published financial statements from the banks under evaluation and from the credit risk ratings of short and long term debt securities obtained from rating agencies authorized by the Superintendence of Banks and Financial Institutions (Fitch Ratings Chile, Humphreys and Feller Rate).

F-98

The criteria evaluated are: Capital and Reserves, Current Ratio, Return on equity, Net Income to Operating income Ratio, Debt to Equity Ratio and the Credit Risk rating of each entity.

Any necessary exceptions regarding investment limits in each particular instrument or entity must have the authorization from Arauco’s Chief Financial Officer.

23.10.2 Type of Risk: Liquidity Risk

Description

This risk corresponds to Arauco’s ability to fulfill its financial obligations upon maturity.

Explanation of Liquidity Risk Exposure and How This Risk Arises

Arauco’s exposure to liquidity risk is mainly from its obligations to bondholders, banks and financial institutions, creditors and other payables. Liquidity risk may arise if Arauco is unable to meet the net cash flow requirements, which sustain its operations under both normal and exceptional circumstances.

Explanation of Objectives, Policies and Processes for Risk Management, and Measurement Methods

The Financial Management Department monitors on an ongoing basis the Company’s cash flow forecasts based on short and long term forecasts and available financing alternatives. In order to manage the risk level of financial assets, Arauco follows its investment policy.

F-99

The following tables detail Arauco’s liquidity analysis for its financial liabilities as of December 31, 2017 and December 31, 2016. The tables have been drawn up based on the contractual undiscounted cash outflows and their remaining contractual maturities:

December 31, 2017


					Maturity														Total
Tax ID	Name	Currency		Name - Country Loans with banks	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate			Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.		U.S. Dollar	Scotiabank- Chile		25		199,572		—		—		—		—		—		199,597		—		1.70	%	Libor + 0.70%
—	Zona Franca Punta Pereira		U.S. Dollar	Interamerican Development Bank		1,167		1,032		2,434		2,361		2,282		2,201		2,120		2,199		11,398		3.51	%	Libor + 2.05%
—	Zona Franca Punta Pereira		U.S. Dollar	Interamerican Development Bank		2,953		2,787		5,870		5,676		—		—		—		5,740		11,546		3.26	%	Libor + 1.80%
—	Zona Franca Punta Pereira		U.S. Dollar	BBVA		14,007		—		—		—		—		—		—		14,007		—		3.13	%	Libor + 1.75%
—	Zona Franca Punta Pereira		U.S. Dollar	Citibank		—		4,503		—		—		—		—		—		4,503		—		3.10	%	Libor + 1.75%
—	Zona Franca Punta Pereira		U.S. Dollar	Scotiabank		3		2,506		—		—		—		—		—		2,509		—		3.17	%	3.17%
—	Celulosa y Energia Punta Pereira		U.S. Dollar	Banco Interamericano de Desarrollo		4,723		4,161		9,828		9,526		9,201		8,885		8,570		8,884		46,010		3.51	%	Libor + 2.05%
—	Celulosa y Energia Punta Pereira		U.S. Dollar	Banco Interamericano de Desarrollo		11,946		11,255		23,735		22,938		—		—		—		23,201		46,673		3.26	%	Libor + 1.80%
—	Celulosa y Energia Punta Pereira		U.S. Dollar	Finnish Export Credit		25,176		21,214		50,198		49,484		47,929		47,207		23,564		46,390		218,382		3.20	%	3.20%
—	Celulosa y Energia Punta Pereira		U.S. Dollar	Dnb Nor Bank		—		45		—		—		—		—		—		45		—		0.00	%	Libor + 2%
—	Eufores S.A.		U.S. Dollar	Banco Republica Oriental de Uruguay		24,746		12,564		—		—		—		—		—		37,310		—		3.08	%	Libor + 1.75%
—	Eufores S.A.		U.S. Dollar	Citibank		6		—		—		—		—		—		—		6		—		3.43	%	Libor + 2%
—	Eufores S.A.		U.S. Dollar	Banco HSBC- Uruguay		1,200		—		—		—		—		—		—		1,200		—		2.91	%	Libor + 1.75%
—	Eufores S.A.		U.S. Dollar	Banco Itau - Uruguay		4		12,513		—		—		—		—		—		12,517		—		3.08	%	Libor + 1.75%
—	Eufores S.A.		U.S. Dollar	Heritage		1,352		—		—		—		—		—		—		1,352		—		3.03	%	Libor + 1.75%
—	Eufores S.A.		U.S. Dollar	Banco Santander		20,230		5,013		—		—		—		—		—		25,243		—		3.06	%	Libor + 1.75%
—	Arauco Do Brasil S.A.		Brazilian Real	Banco Santander		23		67		89		46		—		—		—		90		135		9.50	%	9.50%
—	Arauco Do Brasil S.A.		Brazilian Real	Banco Alfa		18		56		74		74		74		7		—		74		229		10.75	%	Tljp+2%+ spread 1.75%
—	Arauco Do Brasil S.A.		Brazilian Real	Banco Santander		3		7		10		10		7		—		—		10		27		11.00	%	Tljp+2%+ spread 2%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Itau		1		—		—		—		—		—		—		1		—		2.50	%	2.50%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Itau		13		37		4		—		—		—		—		50		4		3.50	%	3.50%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Bradesco		11		33		36		—		—		—		—		44		36		6.00	%	6.00%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Votorantim		16		—		—		—		364		364		—		16		728		5.00	%	5.00%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Safra		22		65		22		—		—		—		—		87		22		6.00	%	6.00%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Safra		7		20		27		27		11		—		—		27		65		10.00	%	10.00%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		981		907		—		—		—		—		—		1,888		—		9.50	%	9.50%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		—		16		16		8		—		—		—		16		24		9.00	%	9.00%
—	Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		12		52		85		74		64		54		—		64		277		10.49	%	10.49%
—	Arauco Forest Brasil S.A.		Brazilian Real	Banco Bradesco		20		69		53		28		28		16		—		89		125		9.00	%	9.00%
—	Arauco Forest Brasil S.A.		U.S. Dollar	Banco Alfa		2		7		9		9		5		—		—		9		23		8.20	%	Cesta+2%+spread 1.8%
—	Arauco Forest Brasil S.A.		Brazilian Real	Banco Alfa		6		17		23		22		11		—		—		23		56		10.80	%	Tljp+2%+Spread 1.8%
—	Arauco Forest Brasil S.A.		Brazilian Real	Banco Itau- Brazil		1		—		—		—		—		—		—		1		—		2.50	%	2.50%
—	Arauco Forest Brasil S.A.		Brazilian Real	Banco Votorantim -Brazil		192		619		403		—		322		322		—		811		1,047		8.10	%	Tljp+1.8%+Spread 2%
—	Arauco Forest Brasil S.A.		U.S. Dollar	Banco Votorantim -Brazil		34		—		78		—		—		—		—		34		78		7.70	%	Cesta+1.3%+spread 2%
—	Arauco Forest Brasil S.A.		Brazilian Real	Banco Bndes SubcréditoA-B-D		4		—		—		115		458		344		—		4		917		9.82	%	Tljp + 2.91%
—	Arauco Forest Brasil S.A.		U.S. Dollar	Banco Bndes Subcrédito C		5		—		—		24		145		120		—		5		289		7.30	%	Cesta+2.91%
—	Arauco Forest Brasil S.A.		Brazilian Real	Banco Santander		995		984		107		212		202		161		—		1,979		682		8.90	%	8.90%
—	Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes SubcréditoE-I		23		754		3,017		2,262		—		—		—		777		5,279		9.91	%	Tljp + 2.91%
—	Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes SubcréditoF-J		16		452		1,810		1,358		—		—		—		468		3,168		10.91	%	Tljp + 3.91%
—	Mahal Emprendimientos Pat. S.A.		U.S. Dollar	Bndes SubcréditoG-K		63		339		2,037		1,697		—		—		—		402		3,734		7.31	%	Cesta + 2.91%
—	Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes SubcréditoH-L		19		504		2,011		1,509		—		—		—		523		3,520		12.11	%	Tljp + 5.11%
—	Mahal Emprendimientos Pat. S.A.		Brazilian Real	Banco Santander		—		—		27		27		27		—		—		—		81		11.00	%	Tljp+2%+Spread 2%
—	Mahal Emprendimientos Pat. S.A.		U.S. Dollar	Banco Santander		—		—		13		13		12		—		—		—		38		8.40	%	Cesta+2%+Spread 2%
—	Novo Oeste Gestao de Ativos Florestais S.A.		Brazilian Real	Banco Santander		—		1		26		28		28		2		—		1		84		11.00	%	Tljp+2%+Spread 2%
—	Novo Oeste Gestao de Ativos Florestais S.A.		U.S. Dollar	Banco Santander		—		1		12		13		13		1		—		1		39		8.40	%	Tljp+2%+Spread 2%
—	Flakeboard America Ltd		U.S. Dollar	Banco del Estado de Chile		675		—		5,060		4,839		17,925		17,925		111,309		675		157,058		3.00	%	Libor + 1.65%

				Total		110,700		282,172		107,114		102,380		79,108		77,609		145,563		392,872		511,774


December 31, 2017							Maturity														Total
							Up to 3		3 to 12		1 to 2		2 to 3		3 to 4		4 to 5		More than 5				Non		Effective			Nominal
					Name - Country		months		months		years		years		years		years		years		Current		Current		rate			rate
Tax ID	Name		Currency		Bonds		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-F		—		1,528		28,132		27,301		26,469		25,638		156,181		1,528		263,721		4.24	%		4.21	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-F		—		611		11,340		11,005		10,670		10,335		62,958		611		106,308		4.25	%		4.21	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-J		2,342		—		7,027		224,916		—		—		—		2,342		231,943		3.23	%		3.22	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-P		—		1,103		8,633		8,633		8,633		28,334		240,175		1,103		294,408		3.96	%		3.96	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-Q		—		22,364		23,445		22,796		11,154		—		—		22,364		57,395		2.96	%		2.98	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-R		—		1,944		7,777		7,777		7,777		7,777		314,228		1,944		345,336		3.57	%		3.57	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.		Barau-S		—		650		5,200		5,200		5,200		5,200		230,228		650		251,028		2.44	%		2.89	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar		Yankee 2019		6,168		—		217,034		—		—		—		—		6,168		217,034		7.26	%		7.25	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar		Yankee 2021		4,422		—		10,013		10,013		204,138		—		—		4,422		224,164		5.02	%		5.00	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar		Yankee 2022		5,705		—		12,153		12,153		12,153		259,072		—		5,705		295,531		4.77	%		4.75	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar		Yankee 2024		9,375		—		22,500		22,500		22,500		22,500		548,324		9,375		638,324		4.52	%		4.50	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar		Yankee 2027		—		3,175		19,375		19,375		19,375		19,375		582,479		3,175		659,979		3.90	%		3.88	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar		Yankee 2047		—		3,607		22,000		22,000		22,000		22,000		943,160		3,607		1,031,160		5.50	%		5.50	%

						Total		28,012		34,982		394,629		393,669		350,069		400,231		3,077,733		62,994		4,616,331


December 31, 2017							Maturity														Total
							Up to 3		3 to 12		1 to 2		2 to 3		3 to 4		4 to 5		More than 5				Non		Effective		Nominal
					Name - Country		months		months		years		years		years		years		years		Current		Current		rate		rate
Tax ID	Name		Currency		Lease		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
85.805.200-9		Forestal Arauco S.A.		U.F.		Banco Santander		168		1,026		983		983		—		—		—		1,194		1,966		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.		Banco Scotiabank		1,563		3,772		4,139		4,139		638		638		—		5,335		9,554		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.		Banco Estado		749		2,182		2,318		2,318		230		230		—		2,931		5,096		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.		Banco de Chile		3,346		13,995		7,886		7,886		2,247		2,247		—		17,341		20,266		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.		Banco BBVA		1,151		3,421		447		447		—		—		—		4,572		894		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.		Banco Credito e Inversiones		1,443		5,901		4,856		4,856		5,354		5,354		—		7,344		20,420		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos		Banco Santander		50		17		—		—		—		—		—		67		—		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos		Banco Chile		607		1,547		1,015		1,015		123		123		—		2,154		2,276		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos		Banco Credito e Inversiones		767		2,301		3,032		3,032		179		179		—		3,068		6,422		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos		Banco Scotiabank		84		251		334		334		237		236		—		335		1,141		—		—

						Total		9,928		34,413		25,010		25,010		9,008		9,007		—		44,341		68,035

As part of the policy of Arauco, it considers compliance with all Accounts Payable, whether with related (see Note 13) or third parties, within a period not exceeding 30 days.

F-100


December 31, 2016						Maturity														Total
Tax ID	Name		Currency		Name -Country Loans with banks	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate		Nominal rate
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Scotiabank- Chile		—		36		302,242		—		—		—		—		36		302,242		1.63%		1.63%
—		Arauco Argentina S.A.		U.S. Dollar	Banco Galicia- Argentina		5,031		—		—		—		—		—		—		5,031		—		2.00%		2.00%
—		Arauco Argentina S.A.		Argentine Pesos	Banco Macro- Argentina		11		29		—		—		—		—		—		40		—		15.25%		15.25%
—		Zona Franca Punta Pereira		U.S. Dollar	Interamerican Development Bank		1,178		1,027		2,450		2,387		2,324		2,256		4,302		2,205		13,719		Libor + 2.05%		Libor + 2.05%
—		Zona Franca Punta Pereira		U.S. Dollar	Interamerican Development Bank		2,990		2,782		5,997		5,830		5,664		—		—		5,772		17,491		Libor + 1.80%		Libor + 1.80%
—		Zona Franca Punta Pereira		U.S. Dollar	BBVA		16,176		—		—		—		—		—		—		16,176		—		3.23%		Libor + 2%
—		Zona Franca Punta Pereira		U.S. Dollar	Citibank		—		2,501		—		—		—		—		—		2,501		—		2.95%		Libor + 1.75%
—		Zona Franca Punta Pereira		U.S. Dollar	Scotiabank		2,501		—		—		—		—		—		—		2,501		—		1.60%		1.60%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Banco Interamericano de Desarrollo		4,768		4,143		9,895		9,637		9,379		9,096		17,371		8,911		55,378		3.30%		Libor + 2.05%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Banco Interamericano de Desarrollo		12,104		11,237		24,249		23,568		22,888		—		—		23,341		70,705		3.05%		Libor + 1.80%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Finnish Export Credit		25,474		20,774		43,915		44,538		45,209		45,882		70,166		46,248		249,710		3.20%		3.20%
—		Celulosa y Energia Punta Pereira		U.S. Dollar	Dnb Nor Bank		89		—		—		—		—		—		—		89		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco Republica Oriental de Uruguay		24,733		12,563		—		—		—		—		—		37,296		—		Libor + 1.75%		Libor + 1.75%
—		Eufores S.A.		U.S. Dollar	Citibank		5		—		—		—		—		—		—		5		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco HSBC- Uruguay		1,202		—		—		—		—		—		—		1,202		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco Itau - Uruguay		10,135		5,003		—		—		—		—		—		15,138		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Heritage		1,351		—		—		—		—		—		—		1,351		—		Libor + 2.00%		Libor + 2.00%
—		Eufores S.A.		U.S. Dollar	Banco Santander		22,735		—		—		—		—		—		—		22,735		—		Libor + 2.00%		Libor + 2.00%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco ABC - Brazil		7		18		—		—		—		—		—		25		—		2.50%		2.50%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco Itau		2,713		321		—		—		—		—		—		3,034		—		9.50%		9.50%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco Votorantim		13		25		—		—		—		—		—		38		—		5.50%		5.50%
—		Arauco Do Brasil S.A.		Brazilian Real	Banco Santander		2		46		100		100		57		7		—		48		264		9.34%		9.34%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Itau		2		6		1		—		—		—		—		8		1		2.50%		2.50%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Itau		13		38		51		4		—		—		—		51		55		3.50%		3.50%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Bradesco		11		33		44		37		—		—		—		44		81		6.00%		6.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Bradesco		400		—		—		—		—		—		—		400		—		8.75%		8.75%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Votorantim		17		—		—		—		—		369		369		17		738		5.00%		5.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Safra		22		66		88		22		—		—		—		88		110		6.00%		6.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Safra		8		21		27		27		27		11		—		29		92		10.00%		10.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		1		16		16		16		8		—		—		17		40		9.00%		9.00%
—		Arauco Florestal Arapoti S.A.		Brazilian Real	Banco Santander		5		18		30		30		19		8		—		23		87		9.22%		9.22%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Bradesco		20		57		77		23		—		—		—		77		100		5.91%		5.91%
—		Arauco Forest Brasil S.A.		U.S. Dollar	Banco Alfa		—		5		9		9		9		5		—		5		32		7.94%		7.94%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Alfa		—		12		23		23		23		11		—		12		80		11.30%		11.30%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Itau- Brazil		4		12		1		2		—		—		—		16		3		2.50%		2.50%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Votorantim - Brazil		195		520		694		405		—		327		327		715		1,753		8.59%		8.59%
—		Arauco Forest Brasil S.A.		U.S. Dollar	Banco Votorantim - Brazil		35		101		134		78		—		—		—		136		212		7.44%		7.44%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Bndes Subcrédito A-B-D		4		—		—		—		114		460		346		4		920		9.82%		9.82%
—		Arauco Forest Brasil S.A.		U.S. Dollar	Banco Bndes Subcrédito C		4		—		—		—		24		144		120		4		288		7.05%		7.05%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco Santander		1		32		—		—		—		—		—		33		—		9.32%		9.32%
—		Arauco Forest Brasil S.A.		Brazilian Real	Banco John Deere		62		41		41		32		10		—		—		103		83		6.00%		6.00%
—		Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes Subcrédito E-I		23		—		758		3,030		2,272		—		—		23		6,060		8.91%		8.91%
—		Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes Subcrédito F-J		16		—		454		1,818		1,363		—		—		16		3,635		9.91%		9.91%
—		Mahal Emprendimientos Pat. S.A.		U.S. Dollar	Bndes Subcrédito G-K		60		—		339		2,037		1,697		—		—		60		4,073		7.05%		7.05%
—		Mahal Emprendimientos Pat. S.A.		Brazilian Real	Bndes Subcrédito H-L		19		—		504		2,020		1,514		—		—		19		4,038		11.11%		11.11%

					Total		134,140		61,483		392,139		95,673		92,601		58,576		93,001		195,623		731,990



December 31, 2016						Maturity																Total
Tax ID	Name		Currency		Name -Country Bonds	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate			Nominal rate
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.	Barau-F		—		1,931		11,587		29,091		27,486		33,383		180,490		1,931		282,037		4.24	%		4.21	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.	Barau-J		2,115		—		6,344		6,344		203,030		—		—		2,115		215,718		3.23	%		3.22	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.	Barau-P		—		996		7,794		7,794		7,794		7,794		242,571		996		273,747		3.96	%		3.96	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.	Barau-Q		586		9,839		21,758		21,172		20,586		10,073		—		10,425		73,589		2.96	%		2.98	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.	Barau-R		1,755		—		7,022		7,022		7,022		7,022		290,572		1,755		318,660		3.57	%		3.57	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.F.	Barau-S		—		600		4,695		4,695		4,695		4,695		210,785		600		229,565		2.44	%		2.89	%
—		Arauco Argentina S.A.		U.S. Dollar	Bono 144 A – Argentina		—		270,787		—		—		—		—		—		270,787		—		6.39	%		6.38	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Yankee Bonds 2019		15,205		—		36,250		534,254		—		—		—		15,205		570,504		7.26	%		7.25	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Yankee Bonds 2nd Emission		2,734		124,949		—		—		—		—		—		127,683		—		7.50	%		7.50	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Yankee 2021		8,889		—		20,000		20,000		20,000		406,926		—		8,889		466,926		5.02	%		5.00	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Yankee 2022		11,215		—		23,750		23,750		23,750		23,750		504,895		11,215		599,895		4.77	%		4.75	%
93.458.000-1		Celulosa Arauco y Constitución S.A.		U.S. Dollar	Yankee 2024		9,376		—		22,500		22,500		22,500		22,500		569,625		9,376		659,625		4.52	%		4.50	%

					Total		51,875		409,102		161,700		676,622		336,863		516,143		1,998,938		460,977		3,690,266


December 31, 2016						Maturity														Total
Tax ID	Name		Currency		Name -Country Lease	Up to 3 months ThU.S.$		3 to 12 months ThU.S.$		1 to 2 years ThU.S.$		2 to 3 years ThU.S.$		3 to 4 years ThU.S.$		4 to 5 years ThU.S.$		More than 5 years ThU.S.$		Current ThU.S.$		Non Current ThU.S.$		Effective rate		Nominal rate
85.805.200-9		Forestal Arauco S.A.		U.F.	Banco Santander		237		1,616		—		1,179		—		1,201		—		1,853		2,380		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.	Banco Scotiabank		1,571		4,970		—		7,731		—		4,259		—		6,541		11,990		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.	Banco Estado		645		2,008		—		5,092		—		2,035		—		2,653		7,127		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.	Banco de Chile		3,294		10,861		—		16,861		—		8,906		—		14,155		25,767		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.	Banco BBVA		1,673		5,030		—		4,663		—		183		—		6,703		4,846		—		—
85.805.200-9		Forestal Arauco S.A.		U.F.	Banco Credito e Inversiones		982		2,994		—		7,501		—		2,824		—		3,976		10,325		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos	Banco Santander		46		138		—		61		—		—		—		184		61		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos	Banco Chile		439		1,317		—		2,418		—		929		—		1,756		3,347		—		—
85.805.200-9		Forestal Arauco S.A.		Chilean Pesos	Banco Credito e Inversiones		647		1,932		—		5,053		—		2,690		—		2,579		7,743		—		—

					Total		9,534		30,866		—		50,559		—		23,027		—		40,400		73,586

As part of the policy of Arauco, it considers compliance with all Accounts Payable, whether with related (see Note 13) or third parties, within a period not exceeding 30 days.

Guarantees

As of the date of these consolidated financial statements, Arauco has financial assets of approximately MU.S.$55 that have been pledged to third parties (beneficiaries), as direct guarantee. If Arauco does not fulfill its obligations, the guarantors could execute the guarantees.

As of December 31, 2017, the total assets pledged as an indirect guarantee were MU.S.$602. In contrast to direct guarantees, indirect guarantees are given to secure obligations assumed by a third party.

On September 29, 2011, Arauco entered into a Security Agreement under which it granted anon-joint guarantee limited to 50% of the obligations of the Uruguayan companies (joint ventures) Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A., under the IDB Facility Agreement in the amount of up to MU.S.$454 and the Finnevera Guaranteed Facility Agreement in the amount of up to MU.S.$900. Both loan agreements were signed with the International Development Bank. Such guarantee is included in the table below, under indirect guarantees.

Direct and indirect guarantees granted by Arauco:


DIRECT
Subsidiary	Guarantee	Assets Pledged	Currency	ThU.S.$	Guarantor
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	488	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	313	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	230	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	209	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Chilean Pesos	100	National Customs Service
Arauco Forest Brasil S.A.	Mortgage Industrial Plant of Jaguariaíva of Arauco do Brasil	—	U.S. Dollar	46.346	BNDES
Arauco Forest Brasil S.A.	Endorsement of ADB + Guarantee Letter AISA	—	U.S. Dollar	3.539	Bank Votorantim S.A.
Arauco Forest Brasil S.A.	Endorsement of Arauco do Brasil	—	U.S. Dollar	645	Bank Votorantim S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	224	Bank Santander S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	134	Bank Bradesco S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	113	Bank Bradesco S.A.
Arauco Forest Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	97	Bank Bradesco S.A.
Arauco do Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	209	Bank Santander S.A.
Arauco do Brasil S.A.	Equipment	Property plant and equipment	U.S. Dollar	206	Bank Alpha S.A.
Arauco Florestal Arapoti S.A.	Endorsement of Arauco do Brasil	—	U.S. Dollar	727	Bank Votorantim S.A.
Arauco Florestal Arapoti S.A.	Equipment	Property plant and equipment	U.S. Dollar	389	Bank Safra S.A.
Arauco Florestal Arapoti S.A.	Equipment	Property plant and equipment	U.S. Dollar	232	Bank Santander S.A.
Arauco Florestal Arapoti S.A.	Equipment	Property plant and equipment	U.S. Dollar	201	Bank Itaú BBA S.A.
Arauco Florestal Arapoti S.A.	Equipment	Property plant and equipment	U.S. Dollar	96	Bank Bradesco S.A.
Arauco Bioenergía S.A.	Guarantee letter	—	Chilean Pesos	185	Minera Escondida Ltda.
Arauco Bioenergía S.A.	Guarantee letter	—	Chilean Pesos	121	CODELCO S.A.
		Total		54.804


INDIRECT
Subsidiary	Guarantee	Assets Pledged	Currency	ThU.S.$	Guarantor
Celulosa Arauco y Constitución S.A.	Suretyship not supportive and cumulative	—	U.S. Dollar	408.351	Joint Ventures (Uruguay)
Celulosa Arauco y Constitución S.A.	Full Guarantee	—	U.S. Dollar	131.000	Arauco Forest Brasil y Mahal (Brazil)
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	U.S. Dollar	4.362	Arauco Forest Brasil y Mahal (Brazil)
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	Brazilian Real	14.593	Arauco Forest Brasil y Mahal (Brazil)
Celulosa Arauco y Constitución S.A.	Guarantee letter	—	U.S. Dollar	43.896	Masisa S.A.
		Total		602.202

23.10.3 Type of Risk: Market Risk – Exchange Rate

Description

Market risk arises from the probability of being affected by losses from fluctuations in currencies exchange rates in which assets and liabilities are denominated, in a functional currency other than the functional currency of Arauco.

F-102

Explanation of Currency Risk Exposure and How This Risk Arises

Arauco is exposed to the foreign currency risk from currency fluctuations arising from sales, purchases and obligations undertaken in foreign currencies, such as the Chilean Peso, Euro, Brazilian Real or other foreign currencies. In the case of significant exchange rate variations, the Chilean Peso is the currency that represents the main currency risk. See Note 11 for details assets and liabilities classified by currency.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

Arauco performs sensitivity analyses to measure the effect of this variable on equity and net result.

Sensitivity analysis considers a variation of +/- 10% of the exchange rate over the Chilean Peso. This fluctuation range is considered possible given current market conditions as of the date of these financial statements. With all other variables at a constant rate, a U.S. Dollar exchange rate variation of +/- 10% in relation to the Chilean Peso would mean a change in the net income year after tax +/- 9.98% (equivalent to ThU.S.$ +/- 26,968), and +/- 0.23% of equity (equivalent to ThU.S.$ +/- 16,181).

Additionally, a sensitivity analysis is carried out assuming a variation of +/- 10% in the closing exchange rate on the Brazilian Real, which is considered a possible range of fluctuation given the market conditions as of the date of these financial statements. With all the other variables constant, a variation of +/- 10% in the exchange rate of the dollar on the Brazilian Real would mean a variation on the net income after tax +/- 1,67% (equivalent to ThU.S.$4,500) and a change on the equity of +/- 0.04% (equivalent to ThU.S.$2,700).

23.10.4 Type of Risk: Market Risk – Interest rate risk

Description

Interest rate risk refers to the sensitivity of the value of financial assets and liabilities in terms of interest rate fluctuations.

Explanation of Interest Rate Risk Exposure and How This Risk Arises

Arauco is exposed to risks due to interest rate fluctuations for bonds issued, bank borrowings and financial instruments that bear interest at a variable rate.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

Arauco completes its risk analysis by reviewing its exposure to changes in interest rates. As of December 31, 2017, 14% our financial debt accrues interest at variable rates. A change of +/- 10% in the interest rate is considered a possible range of fluctuation. Such market conditions would affect the income after tax at rate of +/- 0.41% (equivalent to ThU.S.$-/+ 1,097) and +/- 0.01% (equivalent to ThU.S.$-/+ 658) on equity.

F-103


Thousands of dollars	December 2017 ThU.S.$		Total
Fixed rate		3,676,210		86.0	%
Bonds issued		3,302,685
Bank borrowings (*)		261,149
Financial leasing		112,376
Variable rate		597,308		14.0	%
Bonds issued		—
Loans with Banks		597,308
Total		4,273,518		100.0	%

Thousands of dollars	December 2016 ThU.S.$		Total
Fixed rate		3,903,942		87.1	%
Bonds issued		3,452,659
Bank borrowings (*)		337,297
Financial leasing		113,986
Variable rate		577,061		12.9	%
Bonds issued		—
Loans with Banks		577,061
Total		4,481,003		100.0	%

(*)	Includes variable rate bank borrowings changed by fixed rate swaps.

23.10.5 Type of Risk: Market Risk – Price of Pulp Risks

Description

Pulp prices are determined by world and regional market conditions. Prices fluctuate based on demand, production capacity, commercial strategies adopted by large-scale forestry companies, pulp and paper producers and by the availability of substitutes.

Explanation of Price Risk Exposure and How This Risk Arises

Pulp prices are reflected in revenue from sales and directly affect the net income for the period.

As of December 31, 2017, revenue due to pulp sales accounted for 46.8% of total sales. Pulp prices are fixed on a monthly basis in accordance with the market. Forward contracts or other financial instruments are not used for pulp sales.

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

This risk is approached in different ways. Arauco has a team of specialists who perform periodic market and competition analyses, providing tools to analyze and evaluate trends and adjust forecasts. Similarly, Arauco performs price financial sensitivity analysis in order to take the necessary safeguards to confront different scenarios in the best possible manner.

Sensitivity analysis considers a variation of +/- 10% in the average pulp price, a possible fluctuation range given current market conditions at the date of the closing balance. With all other variables constant, a variation of +/- 10% in the average pulp price would mean a variation of +/- 72.94% (equivalent to ThU.S.$ 197,022) on the income for the year after tax and +/- 1.66% (equivalent to ThU.S.$118,213) on equity.

F-104

NOTE 24.

REPORTABLE SEGMENTS

The main products that generate revenue for each reportable segment are described as follows:

•

Pulp: The main products sold by this reportable segment are long fiber bleached pulp (BSKP), short fiber bleached pulp (BHKP), long fiber raw pulp (UKP), and pulp fluff.

•

Wood products: The range of products sold by this reportable segment are plywood panels, MDF panels (medium density fiberboard), Hardboard Panels, PB Panels (agglomerated) different sizes of sawn wood and remanufactured products such as moldings, precut pieces and finger joints.

•

Forestry: This reportable segment produces and sells sawn logs, pulpable logs, posts and chips made from owned forests of Radiata and Taeda pine, eucalyptus globulus and nitens forests. Additionally, purchases logs and woodchip from third parties, which it sells to its other reportable segment.

Arauco has revised its disclosure of the split of revenues between Chilean entities and foreign entities within its presentation of geographical information relating to the years ended December 31, 2016 and 2015 to correct the classification of revenues from subsidiaries in Uruguay. There was no impact to the Consolidated Statements of Profit or Loss, Consolidated Statements of Comprehensive Income, Consolidated Statements of Cash Flow nor to the Consolidated Statements of Changes in Equity. In addition, the corrections did not affect the Company’s service of its debt obligations.

Pulp

The Pulp reportable segment uses wood exclusively from pine and eucalyptus plantations for the production of different classes of wood cellulose or pulp. Bleached pulp is mainly used as raw material for producing printing and writing paper, as well as toilet paper and high quality wrapping paper. Unbleached pulp is used to produce packing paper, filters, fiber cement products, dielectric paper and others. On the other hand, fluff pulp is mainly used in the production of diapers and female hygiene products.

Arauco has seven plants, five in Chile, one in Argentina and one in Uruguay and they have a total production capacity of approximately 3.9 million tons per year. Pulp is sold in more than 45 countries, mainly in Asia and Europe.

F-105

Wood products

The Panels area produces a wide range of panel products and several kinds of moldings aimed at the furniture, decoration and construction industries. It consists of 19 industrial plants: 5 in Chile, 2 in Argentina, 4 in Brazil, and 8 plants around USA and Canada. The Company has a total annual production capacity of 6.8 million cubic meters of PBO, MDF, Hardboards, plywood and moldings.

Through the joint venture Sonae Arauco (see note 16), Arauco produces and sells wood panels, of the type of MDF, PB and OSB, and sawn timber, through the operation of 2 panel plants and one sawmill in Spain; 2 panel plants and one resin plant in Portugal; 4 panel plants in Germany and 2 panel plants in South Africa.

In total, Sonae Arauco’s production capacity is approximately 1.4 million m3 of MDF, 2.1 million m3 of PB, 486,000 m3 of OSB and 50,000 m3 of sawn lumber.

The Sawn Timber area produces a wide range of wood and remanufactured products with different kinds of uses and appearances, which include a wide variety of uses in the furniture, packing, construction and refurbishing industries.

With 8 saw mills in operation (7 in Chile and 1 in Argentina), the Company has a production capacity of 3 million m3 of sawn wood.

Furthermore, the Company has 5 remanufacturing plants, 4 in Chile and 1 in Argentina. These plants reprocess sawn wood and produce high quality remanufactured products, such as finger joint and solid moldings as well as precut pieces.

Forestry

The Forestry reportable segment is Arauco’s core business. It provides raw materials for all products manufactured and sold by the Company. By directly controlling the growth of the forests to be processed, Arauco guarantees itself quality wood for each of its products.

Arauco holds forestry assets distributed throughout Chile, Argentina, Brazil and Uruguay, reaching 1.7 million hectares as of December 31, 2017, of which 1 million hectares are used for plantations, 431 thousand hectares for native forests, 195 thousand hectares for other uses and 99 thousand hectares are to be planted.

Arauco’s principal plantations consist of radiata and taeda pine and eucalyptus to a lesser degree. These are species that have fast growth rates and short harvest cycles compared with other long fiber commercial woods.

Arauco has no customers representing 10% or more of its revenues.

F-106

Below, please find summarized information concerning the assets, liabilities and profits and losses at the end of each period, by segments. The profit (loss) of each segment informed takes into consideration that taxes and income and financial costs have not been allocated to the various segments, and are shown as part of the Corporate’s segment:


Year ended December 31, 2017	Pulp ThU.S.$		Forestry ThU.S.$			Wood products ThU.S.$		Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Revenues from external customers		2,451,363		114,122			2,633,773		39,083		—			5,238,341			—			5,238,341
Revenues from transactions with other operating segments		43,829		970,384			6,297		35,659		—			1,056,169			(1,056,169	)		—

Finance income		—		—			—		—		19,640			19,640			—			19,640
Finance costs		—		—			—		—		(287,958	)		(287,958	)		—			(287,958	)
Net finance costs		—		—			—		—		(268,318	)		(268,318	)		—			(268,318	)

Depreciation and amortizations		246,382		22,011			142,504		3,568		7,086			421,551			—			421,551
Sum of significant income accounts		581		91,089			1,304		—		—			92,974			—			92,974
Sum of significant expense accounts		—		138,139			3,333		—		—			141,472			—			141,472

Profit (loss) of each reportable segment		589,934		(210,566	)		225,317		6,668		(341,001	)		270,352			—			270,352

Share of profit (loss) of associates and joint ventures accounted for using equity method
Associates		—		—			—		—		4,855			4,855			—			4,855
Joint ventures		—		—			10,378		—		1,784			12,162			—			12,162

Income tax expense		—		—			—		—		30,992			30,992			—			30,992

Geographical information on revenues
Revenue – Chilean entities		1,781,769		55,946			1,265,161		692		—			3,103,568			—			3,103,568
Revenue – Foreign entities		669,594		58,176			1,368,612		38,391		—			2,134,773			—			2,134,773
Total Ordinary Income		2,451,363		114,122			2,633,773		39,083		—			5,238,341			—			5,238,341


Year ended December 31, 2017	Pulp ThU.S.$		Forestry ThU.S.$			Wood products ThU.S.$		Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Amounts of additions tonon-current assets
Acquisition of property, plant and equipment and biological assets		191,771		211,245			230,395		428		4,127			637,966			—			637,966
Acquisition and contribution of investments in associates and joint venture		—		—			—		—		15,918			15,918			—			15,918


Year ended December 31, 2017	Pulp ThU.S.$		Forestry ThU.S.$			Wood products ThU.S.$		Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Segment assets		5,035,105		5,040,500			3,024,120		52,640		881,000			14,033,365			(38,765	)		13,994,600
Segments assets (excluding deferred tax assets)		5,035,105		5,040,500			3,024,120		52,640		872,734			14,025,099			(38,765	)		13,986,334
Deferred tax assets		—		—			—		—		8,266			8,266			—			8,266
Investments accounted through equity method
Associates		—		48,921			—		—		110,046			158,967			—			158,967
Joint Ventures		—		—			189,568		—		20,237			209,805			—			209,805
Segment liabilities		325,598		184,721			489,022		16,100		5,862,266			6,877,707			—			6,877,707
Segment liabilities (excluding deferred tax liabilities)		325,598		184,721			489,022		16,100		4,376,902			5,392,343			—			5,392,343
Deferred tax liabilities		—		—			—		—		1,485,364			1,485,364			—			1,485,364

Geographical information onnon-current assets
Chile		2,537,947		3,221,911			666,234		22,220		187,639			6,635,951			(4,635	)		6,631,316
Foreign countries		1,700,240		1,648,557			1,191,895		21,571		30,658			4,592,921			—			4,592,921
Non-current assets, Total		4,238,187		4,870,468			1,858,129		43,791		218,297			11,228,872			(4,635	)		11,224,237

F-107


Year ended December 31, 2016	Pulp ThU.S.$		Forestry ThU.S.$		Wood products ThU.S.$		Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Revenues from external customers		2,146,079		96,488		2,494,750		24,068			—			4,761,385			—			4,761,385
Revenues from transactions with other reportable segments		41,586		1,105,220		6,938		34,085			—			1,187,829			(1,187,829	)		—

Finance income		—		—		—		—			29,701			29,701			—			29,701
Finance costs		—		—		—		—			(258,467	)		(258,467	)		—			(258,467	)
Net finance costs		—		—		—		—			(228,766	)		(228,766	)		—			(228,766	)

Depreciation and amortizations		240,699		19,996		139,844		2,529			6,319			409,387			—			409,387
Sum of significant income accounts		212		227,776		269		—			—			228,257			—			228,257
Sum of significant expense accounts		—		15,193		12,565		—			—			27,758			—			27,758

Profit (loss) of each reportable segment		308,536		98,955		165,887		(2,559	)		(353,242	)		217,577			—			217,577

Share of profit (loss) of associates and joint ventures accounted for using equity method
Associates		—		—		—		—			16,348			16,348			—			16,348
Joint ventures		—		—		5,475		—			2,116			7,591			—			7,591

Income tax expense		—		—		—		—			(45,647	)		(45,647	)		—			(45,647	)
Geographical information on revenues
Revenue – Chilean entities		1,521,453		52,161		1,275,937		885			—			2,850,436			—			2,850,436
Revenue – Foreign entities		624,626		44,327		1,218,813		23,183			—			1,910,949			—			1,910,949
Total Ordinary Income		2,146,079		96,488		2,494,750		24,068			—			4,761,385			—			4,761,385


Year ended December 31, 2016	Pulp ThU.S.$		Forestry ThU.S.$		Wood products ThU.S.$		Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Amounts of additions tonon-current assets
Acquisition of property, plant and equipment and biological assets		205,205		182,743		118,408		1,479			3,883			511,718			—			511,718
Acquisition and contribution of investments in associates and joint venture		—		—		153,135		—			—			153,135			—			153,135


Year ended December 31, 2016	Pulp ThU.S.$		Forestry ThU.S.$		Wood products ThU.S.$		Others ThU.S.$			Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Segment assets		5,077,300		5,492,364		2,515,092		30,970			932,059			14,047,785			(41,604	)		14,006,181
Segments assets (excluding deferred tax assets)		5,077,300		5,492,364		2,515,092		30,970			925,962			14,041,688			(41,604	)		14,000,084
Deferred tax assets		—		—		—		—			6,097			6,097			—			6,097
Investments accounted through equity method
Associates		—		160,490		—		—			105,285			265,775			—			265,775
Joint Ventures		—		—		161,703		—			19,070			180,773			—			180,773
Segment liabilities		277,474		161,091		311,667		11,836			6,244,830			7,006,898			—			7,006,898
Segment liabilities (excluding deferred tax liabilities)		277,474		161,091		311,667		11,836			4,613,765			5,375,833			—			5,375,833
Deferred tax liabilities		—		—		—		—			1,631,065			1,631,065			—			1,631,065

Geographical information onnon-current assets
Chile		2,572,702		3,509,727		721,418		27			135,808			6,939,682			(3,575	)		6,936,107
Foreign countries		1,740,559		1,525,190		1,016,633		23,040			42,292			4,347,714			—			4,347,714
Non-current assets, Total		4,313,261		5,034,917		1,738,051		23,067			178,100			11,287,396			(3,575	)		11,283,821

F-108


Year ended December 31, 2015	Pulp ThU.S.$		Forestry ThU.S.$		Wood products ThU.S.$			Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Revenues from external customers		2,363,973		116,368		2,633,211			33,188		—			5,146,740			—			5,146,740
Revenues from transactions with other reportable segments		43,414		491,703		10,673			32,543		—			578,333			(578,333	)		—

Finance income		—		—		—			—		50,284			50,284			—			50,284
Finance costs		—		—		—			—		(262,962	)		(262,962	)		—			(262,962	)
Net finance costs		—		—		—			—		(212,678	)		(212,678	)		—			(212,678	)

Depreciation and amortizations		231,916		18,211		139,446			3,913		6,659			400,145			—			400,145
Sum of significant income accounts		31		220,907		4,823			—		—			225,761			—			225,761
Sum of significant expense accounts		585		35,610		3,383			35		—			39,613			—			39,613

Profit (loss) of each reportable segment		455,190		137,829		264,473			1,815		(491,596	)		367,711			—			367,711

Share of profit (loss) of associates and joint ventures accounted for using equity method
Associates		—		—		—			—		5,572			5,572			—			5,572
Joint ventures		—		—		(470	)		—		1,646			1,176			—			1,176

Income tax expense		—		—		—			—		(129,694	)		(129,694	)		—			(129,694	)

Geographical information on revenues
Revenue – Chilean entities		1,680,804		68,986		1,323,886			597		—			3,074,273			—			3,074,273
Revenue – Foreign entities		683,169		47,382		1,309,325			32,591		—			2,072,467			—			2,072,467
Total Ordinary Income		2,363,973		116,368		2,633,211			33,188		—			5,146,740			—			5,146,740


Year ended December 31, 2015	Pulp ThU.S.$		Forestry ThU.S.$		Wood products ThU.S.$			Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Amounts of additions tonon-current assets
Acquisition of property, plant and equipment and biological assets		199,094		155,872		94,191			1,754		7,001			457,912			—			457,912
Acquisition and contribution of investments in associates and joint venture		—		814		—			—		—			814			—			814


Year ended December 31, 2015	Pulp ThU.S.$		Forestry ThU.S.$		Wood products ThU.S.$			Others ThU.S.$		Corporate ThU.S.$			Sub Total ThU.S.$			Elimination ThU.S.$			Total ThU.S.$
Segment assets		5,172,095		5,471,322		2,374,134			31,679		669,703			13,718,933			(48,542	)		13,670,391
Segments assets (excluding deferred tax assets)		5,172,095		5,471,322		2,374,134			31,679		665,968			13,715,198			(48,542	)		13,666,656
Deferred tax assets		—		—		—			—		3,735			3,735			—			3,735
Investments accounted through equity method
Associates		—		121,359		—			—		119,781			241,140			—			241,140
Joint Ventures		—		—		3,573			—		20,099			23,672			—			23,672
Segment liabilities		318,880		147,432		269,963			11,526		6,276,145			7,023,946			—			7,023,946
Segment liabilities (excluding deferred tax liabilities)		318,880		147,432		269,963			11,526		4,657,133			5,404,934			—			5,404,934
Deferred tax liabilities		—		—		—			—		1,619,012			1,619,012			—			1,619,012

Geographical information onnon-current assets
Chile		2,565,307		3,536,372		758,936			30		128,185			6,988,830			(2,955	)		6,985,875
Foreign countries		1,782,286		1,313,685		735,924			23,406		142,803			3,998,104			—			3,998,104
Non-current assets, Total		4,347,593		4,850,057		1,494,860			23,436		270,988			10,986,934			(2,955	)		10,983,979

F-109

Information required by geographic area:

Geographical area

2017

Local
country

Foreign country

Chile

Argentina

Brazil

USA/Canada

Uruguay

Total

Disclosure of geographical areas

ThU.S.$

Revenues at12-31-2017

3,103,568

494,479

395,416

801,092

443,786

5,238,341

Non-current Assets at12-31-2017 other than deferred tax

6,624,381

956,511

1,274,536

575,231

1,785,312

11,215,971

Geographical area

2016

Local
country

Foreign country

Chile

Argentina

Brazil

USA/Canada

Uruguay

Total

Disclosure of geographical areas

ThU.S.$

Revenues at12-31-2016

2,850,436

414,084

350,352

801,821

344,692

4,761,385

Non-current Assets at12-31-2016 other than deferred tax

6,931,755

960,596

1,186,538

397,924

1,800,911

11,277,724

Geographical area

2015

Local
country

Foreign country

Chile

Argentina

Brazil

USA/Canada

Uruguay

Total

Disclosure of geographical areas

ThU.S.$

Revenues at12-31-2015

3,074,273

546,409

358,562

809,293

358,203

5,146,740

Non-current Assets at12-31-2015 other than deferred tax

6,986,236

978,285

837,886

364,889

1,812,948

10,980,244

F-110

NOTE 25.

OTHERNON-FINANCIAL ASSETS ANDNON-FINANCIAL LIABILITIES


Currentnon-financial assets	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Roads to amortize current		43,301		41,812
Prepayment to amortize (insurance + others)		21,257		23,086
Recoverable taxes (Relating to purchases)		60,823		71,357
Other currentnon-financial assets		4,456		8,660
Total		129,837		144,915

Non-currentnon-financial assets	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Roads to amortize,non-current		112,937		121,894
Guarantee values		2,893		3,302
Recoverable taxes		1,835		1,493
Othernon-currentnon-financial assets		3,856		3,630
Total		121,521		130,319

Currentnon-financial liabilities	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
Provision of minimum dividend (1)		116,123		60,312
ICMS tax payable		12,593		14,856
Other tax payable		23,040		16,202
Other Currentnon-financial liablities		2,194		7,793
Total		153,950		99,163

(1)	Provision includes a minimum dividend of subsidiary minority.


Non-currentnon-financial liabilities	12-31-2017 ThU.S.$		12-31-2016 ThU.S.$
ICMS tax payable		110,532		58,606
Othernon-currentnon-financial liablities		1,808		2,027
Total		112,340		60,633

F-111

NOTE 26.

DISTRIBUTABLE NET PROFIT AND EARNINGS PER SHARE

Distributable net profit

As a general policy, the Board of Directors of Arauco agreed that the net profit to be distributed as dividend is determined based on realized net gains/(losses) of any relevant variations in the value of unrealized assets and liabilities, which are excluded from the calculation of net profit during the period such changes are made.

As a result of the foregoing, for purposes of determining the distributable net profit of the Company, which is the same considered for calculating the minimum dividend required and additional dividend, the following unrealized gains/losses are excluded from the net profit for the year:

1)	Unrealized gains/losses relating to the fair value recorded for forestry assets under IAS 41, adding them back to distributable net profit when they are realized through sale or disposed of by other means.

2)	Those generated through the acquisition of entities. These results will be added back to net profit when they are realized through sale.

The deferred taxes associated with the amounts described in 1) and 2) above are also excluded.

The following table details the adjustments made for the determination of distributable net profit as December 31, 2017, 2016 and 2015 in order to determine the provision of 40% of the distributable net profit for each year:


	Distributable Net Profit ThU.S.$
Net profit attributable to owners of parent at12-31-2017		269,724
Adjustments:
Biological Assets
Unrealized gains/losses		(82,782	)
Realized gains/losses		303,668
Deferred income taxes		(54,944	)
Total adjustments		165,942
Distributable Net Profit at12-31-2017		435,666


	Distributable Net Profit ThU.S.$
Net profit attributable to owners of parent at12-31-2016		213,801
Adjustments:
Biological Assets
Unrealized gains/losses		(204,671	)
Realized gains/losses		210,223
Deferred income taxes		2,089
Total adjustments		7,641
Distributable Net Profit at12-31-2016		221,442


	Distributable Net Profit ThU.S.$
Net profit attributable to owners of parent at12-31-2015		362,689
Adjustments:
Biological Assets
Unrealized gains/losses		(205,527	)
Realized gains/losses		203,730
Deferred income taxes		(3,889	)
Total adjustments		(5,686	)
Distributable Net Profit at12-31-2015		357,003

F-112

The Company expects to maintain its policy of distributing 40% of its net distributable profit as dividends for all future fiscal years, but will also consider the alternative of distributing a provisional dividend at year end.

As of December 31, 2017, in the Statements of Financial Position, under the line item Other currentnon-financial liabilities ThU.S.$113,773 correspond to a provision for the minimum dividend for the 2017 period, corresponding to the Parent Company, after discounting the provisional dividend distribution of ThU.S.$60,494, paid to the shareholders in December 2017.

Basic and diluted earnings per share

Basic and diluted earnings per share are calculated by dividing the profit or loss attributable to ordinary equity holders of parent by the weighted average number of ordinary shares outstanding. Arauco does not have any shares with potential dilutive effect.


	January-December
	2017		2016		2015
	ThU.S.$		ThU.S.$		ThU.S.$
Profit or loss attributable to ordinary equity holder of parent		269,724		213,801		362,689
Weighted average of number of shares		113,159,655		113,159,655		113,159,655
Basic and diluted earnings per share (in U.S.$ per share)		2,3836		1,8894		3,2051

F-113

NOTE 27.

SUBSEQUENT EVENTS

The authorization for the issuance and publication of these consolidated financial statements for the period ended December 31, 2017 was approved by the Board of Directors of Arauco on April 20, 2018.

Subsequent to December 31, 2017 and until the date of issuance of these consolidated financial statements, there have been no events, other than those discussed above, that could materially affect the presentation of these financial statements.

F-114

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Emerging Growth Company