Arauco & Constitution Pulp 20-F 2019 FY Annual report (foreign)

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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 _________________________

FORM 20‑F

 _________________________

ANNUAL REPORT PURSUANT TO SECTION 13 OR

15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

Commission File Number: 33‑99720

CELULOSA ARAUCO Y CONSTITUCIÓN S.A.

(Exact name of Registrant as specified in its charter)

Arauco and Constitution Pulp Inc.

(Translation of Registrant’s name into English)

Republic of Chile

(Jurisdiction of incorporation or organization)

Avenida El Golf 150

14^th Floor

Las Condes, Santiago

Chile

(Address of principal executive offices)

Gianfranco Truffello

Tel.: 56‑2‑2461‑7200

E‑mail:gianfranco.truffello@arauco.com

Avenida El Golf 150

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:

4.750% Notes due 2022

4.500% Notes due 2024

3.875% Notes due 2027

4.250% Notes due 2029

4.200% Notes due 2030

5.500% Notes due 2047

5.500% Notes due 2049

5.150% Notes due 2050

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

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

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

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

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

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

Large Accelerated Filer	o	Accelerated Filer	o
Non‑Accelerated Filer	☒	Emerging Growth Company	o

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

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

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

U.S. GAAP  o    International Financial Reporting Standards as issued by the International Accounting Standards Board  ☒       Other  o

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

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

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

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yeso Noo

TABLE OF CONTENTS

		Page
PART I
Item 1.	Identity of Directors, Senior Management and Advisers		1
Item 2.	Offer Statistics and Expected Timetable		1
Item 3.	Key Information		1
Item 4.	Information on our Company		19
Item 5.	Operating and Financial Review and Prospects		53
Item 6.	Directors, Senior Management and Employees		75
Item 7.	Major Shareholders and Related Party Transactions		82
Item 8.	Financial Information		84
Item 9.	The Offer and Listing		88
Item 10.	Additional Information		89
Item 11.	Quantitative and Qualitative Disclosures About Market Risk		97
Item 12.	Description of Securities Other than Equity Securities		99
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies		100
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		100
Item 15.	Controls and Procedures		100
Item 16A.	Audit Committee Financial Expert		101
Item 16B.	Code of Ethics		101
Item 16C.	Principal Accountant Fees and Services		101
Item 16D.	Exemptions from the Listing Standards for Audit Committees		102
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		102
Item 16F.	Change in Registrant’s Certifying Accountant		102
Item 16G.	Corporate Governance		102
Item 16H.	Mine Safety Disclosures		102
PART III
Item 17.	Financial Statements		103
Item 18.	Financial Statements		103
Item 19.	Exhibits		104

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,” “we,” “our” or “us” in this annual report, we mean Celulosa Arauco y Constitución S.A. and its consolidated subsidiaries. When we refer to “Chile,” we mean the Republic of Chile; when we refer to “Argentina,” we mean the Argentine Republic; when we refer to “Brazil,” we mean the Federative Republic of Brazil; when we refer to “the U.S.,” “U.S.A.,” or “the United States,” we mean the United States of America; when we refer to “Uruguay,” we mean the Oriental Republic of Uruguay; and when we refer to “Mexico,” we mean the United Mexican States. All references to “tonnes” are to metric tons (1,000 kilograms), which equal 2,204.7 pounds. One “hectare” equals 10,000 square meters or 2.471 acres. Discrepancies in any table between totals and the sums of the amounts listed may be due to rounding.

Unless otherwise specified, all references to “$,” “U.S.$,” “U.S. dollars” or “dollars” are to United States dollars; references to “Chilean pesos” or “Ch$” are to Chilean pesos; references to “Argentine pesos” or “AR$” are to Argentine pesos; references to “Brazilian reais” “Brazilian reals” or “R$” are to Brazilian reais; references to “Mexican pesos” or “MXN$” are to Mexican pesos; references to “€” or “euro” are to the euro, the single European currency established pursuant to the European Economic and Monetary Union; and references to “UF” are 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, 2019, one UF equaled U.S.$37.81 and Ch$28,309.94.

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

PRESENTATION OF FINANCIAL AND OTHER DATA

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

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

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

PART I

Item  1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

1

SELECTED CONSOLIDATED FINANCIAL DATA

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

	As of and for the year ended December 31,
	2019			2018			2017			2016			2015
INCOME STATEMENT DATA	(in thousands of U.S. dollars, except ratios and share data)
Revenue		5,329,214			5,954,833			5,238,341			4,761,385			5,146,740
Cost of sales		(3,910,378	)		(3,722,749	)		(3,574,532	)		(3,498,905	)		(3,511,425	)
Gross profit		1,418,836			2,232,084			1,663,809			1,262,480			1,635,315
Other income		232,393			124,304			111,513			257,863			273,026
Distribution costs		(586,873	)		(556,805	)		(523,300	)		(496,473	)		(528,470	)
Administrative expenses		(554,038	)		(561,284	)		(521,294	)		(474,469	)		(551,977	)
Other expenses		(203,698	)		(95,880	)		(240,165	)		(77,415	)		(83,388	)
Other income (loss)		21,674			14,213			0			0			0
Finance income		32,582			20,895			19,640			29,701			50,284
Finance costs		(273,639	)		(214,779	)		(287,958	)		(258,467	)		(262,962	)
Share of profit (loss) of associates and joint ventures accounted for using equity method		7,775			17,246			17,017			23,939			6,748
Exchange rate differences		(32,507	)		(26,470	)		98			(3,935	)		(41,171	)
Income before income tax		62,505			953,524			239,360			263,224			497,405
Income tax		(535	)		(226,765	)		30,992			(45,647	)		(129,694	)
Net income		61,970			726,759			270,352			217,577			367,711
BALANCE SHEET DATA
Current assets		3,931,381			3,441,160			2,770,363			2,722,360			2,686,412
Property, plant and equipment		7,932,562			7,174,693			7,034,299			6,919,495			6,896,396
Biological assets(1)		3,669,426			3,652,263			3,766,942			3,898,991			3,826,597
Total assets		15,860,030			14,593,748			13,994,600			14,006,181			13,670,391
Total current liabilities		1,261,522			1,579,764			1,399,394			1,346,064			1,034,251
Total non‑current liabilities		7,229,093			5,675,013			5,478,313			5,660,834			5,989,695
Issued capital		353,618			353,618			353,618			353,618			353,618
Total equity		7,369,415			7,338,971			7,116,893			6,999,283			6,646,445
CASH FLOW DATA
Net cash flow from operating activities		672,838			1,287,545			1,072,425			773,584			853,650
Net cash flow from investing activities		(1,317,741	)		(893,982	)		(633,348	)		(640,212	)		(477,780	)
Net cash flow from financing activities		1,147,432			123,247			(439,101	)		(38,484	)		(812,176	)
Net (decrease) increase in cash and equivalents before effect of exchange rate changes		502,528			516,810			(24	)		94,888			(436,306	)
OTHER FINANCIAL DATA
Capital expenditures(2)		1,198,906			937,934			844,082			556,633			564,795
Depreciation and amortization		519,380			407,422			421,551			409,387			400,145
Fair value cost of timber harvested(3)		323,271			319,448			334,100			340,199			306,673
EBIT(3)		303,562			1,147,408			507,678			491,990			710,083
Adjusted EBITDA(3)		1,147,368			1,850,537			1,353,159			1,067,121			1,290,486
Adjusted EBITDA(3)/finance costs		4.19			8.62			4.70			4.13			4.91
Adjusted EBITDA(3)/revenue		21.5	%		31.1	%		25.8	%		22.4	%		25.1	%
Average debt(4)/Adjusted EBITDA(3)		4.60			2.37			3.23			4.12			3.64
Total debt(5)		6,049,790			4,510,276			4,273,518			4,481,003			4,305,435
Total debt(5)/capitalization(6)		45.1	%		38.1	%		37.5	%		39.0	%		39.3	%
Total debt(5)/equity attributable to parent company		82.5	%		61.8	%		60.4	%		64.4	%		65.1	%
Working capital(7)		2,669,859			1,861,396			1,370,969			1,376,296			1,652,161
Number of shares		113,159,655			113,159,655			113,159,655			113,159,655			113,159,655
Net income per share (U.S.$ per share)		0.5			6.4			2.4			1.9			3.2
Dividends paid		182,109			257,421			121,586			130,624			143,003
Dividends per share (U.S.$ per share)		1.61			2.27			1.07			1.15			1.26

________________________

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

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

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

2

 

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

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

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

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

	As of and for the year ended December 31,
	2019			2018			2017			2016			2015
	(in thousands of U.S. dollars)
Net income		61,970			726,759			270,352			217,577			367,711
(+) Finance costs		273,639			214,779			287,958			258,467			262,962
(‑) Finance income		(32,582	)		(20,895	)		(19,640	)		(29,701	)		(50,284	)
(+) Income Tax		535			226,765			(30,992	)		45,647			129,694
EBIT		303,562			1,147,408			507,678			491,990			710,083
(+) Depreciation and amortization(*)		519,380			407,422			421,551			409,387			400,145
EBITDA		822,942			1,554,830			929,229			901,377			1,110,228
(+) Fair value cost of timber harvested		323,271			319,448			334,100			340,199			306,673
(‑) Gain from changes in fair value of biological assets....		(154,705	)		(84,476	)		(83,031	)		(208,562	)		(210,479	)
(+) Exchange rate differences		32,507			26,470			(98	)		3,935			41,171
(+) Others(**)		123,353			34,265			172,959			30,172			42,893
Adjusted EBITDA		1,147,368			1,850,537			1,353,159			1,067,121			1,290,486

 

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

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

________________

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

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

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

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

3

FORWARD‑LOOKING STATEMENTS

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

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

4

RISK FACTORS

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

Risks Relating to the Company

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

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

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

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

5

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

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

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

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

· world production capacity;

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

· the availability of substitutes.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

· unscheduled maintenance outages;

· prolonged power failures;

· an equipment failure;

· fires, floods, hurricanes or other adverse weather;

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

· a chemical spill or release;

· explosion of equipment;

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

· labor difficulties;

· terrorism or threats of terrorism;

· coronavirus or other global epidemic;

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

· other operating problems.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Risks Relating to Chile

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

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

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

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

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

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

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

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

Risks Relating to Argentina

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

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

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

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

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

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

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

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

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

Risks Relating to Brazil

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

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

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

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

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

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

Risks Relating to Uruguay

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

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

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

Risks Relating to the United States and Canada

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

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

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

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

Risks Relating to the México

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

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

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

Risks Relating to Other Markets

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

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

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

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

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Risks Relating to Our Securities

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

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

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

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

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

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

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

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

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

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

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

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

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

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Item 4. Information on our Company

DESCRIPTION OF BUSINESS

Overview

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

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

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

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

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

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

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

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

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

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

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

 History

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Corporate Structure

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

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

	Country of incorporation	Total stock held
Agenciamiento y Servicios Profesionales S.A. de C.V.	Mexico		99.9990	%
Arauco Argentina S.A.	Argentina		99.9801
Arauco Australia Pty Ltd	Australia		99.9990
Arauco Bioenergía S.A.	Chile		99.9999
Arauco Canada Ltd. (ex Flakeboard Company Limited)	Canada		99.9990
Arauco Colombia S.A.	Colombia		99.9982
Arauco do Brasil S.A.	Brazil		99.9990
Arauco Europe Cooperatief U.A.	The Netherlands		99.9990
Arauco Florestal Arapoti S.A.	Brazil		79.9992
Arauco Forest Brasil S.A.	Brazil		99.9991
Arauco Industria de México S.A. de C.V.	Mexico		99.9990
Arauco Indústria de Painéis Ltda.	Brazil		99.9990
Arauco Middle East DMCC	Dubai		99.9990
Arauco North America, Inc.	U.S.A.		99.9990
Arauco Nutrientes Naturales SpA	Chile		99.9484
Arauco Perú S.A.	Peru		99.9990
Arauco Química S.A. de C.V.	Mexico		99.9990
Arauco Serviquimex S.A. de C.V.	Mexico		99.9990
Arauco Wood (China) Company Limited	China		99.9990
Araucomex S.A. de C.V.	Mexico		99.9990
Araucomex Servicios S.A. de C.V.	Mexico		99.9990
Consorcio Protección Fitosanitaria Forestal S.A.	Chile		57.0831
Empreendimentos Florestais Santa Cruz Ltda	Brazil		99.9985
Forestal Arauco S.A.	Chile		99.9484
Forestal Cholguán S.A.	Chile		98.5676
Forestal Los Lagos S.A.	Chile		79.9587
Forestal Nuestra Señora del Carmen S.A.	Argentina		99.9805
Forestal Talavera S.A.	Argentina		99.9942
Greenagro S.A.	Argentina		97.9805
Inversiones Arauco Internacional Ltda	Chile		99.9990
Investigaciones Forestales Bioforest S.A.	Chile		99.9489
Leasing Forestal S.A.	Argentina		99.9801
Maderas Arauco S.A. (Ex Paneles Arauco S.A.)	Chile		99.9995
Maderas Arauco Costa Rica S.A.	Costa Rica		99.9990
Mahal Empreendimentos e Participacoes S.A.	Brazil		99.9990
Novo Oeste Gestão de Ativos Florestais S.A.	Brazil		99.9990
Prime-Line, Inc.	U.S.A.		99.9990
Savitar S.A.	Argentina		99.9841
Servicios Aéreos Forestales Ltda	Chile		99.9990
Servicios Logísticos Arauco S.A.	Chile		99.9997
Tablered Araucomex, S.A. de C.V.	Mexico		99.9990

 

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Business Strategy

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

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

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

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

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

Domestic and Export Sales

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

	Year ended December 31,
	2019		2018		2017
	(in millions of U.S. dollars)
Export Sales
Bleached pulp	$	1,857	$	2,402	$	1,935
Unbleached pulp		298		410		285
Sawn timber		380		421		400
Remanufactured wood products		231		230		231
Plywood		169		215		197
Fiberboard panels		347		340		325
Other		27		22		10
Total export revenue	$	3,308	$	4,040	$	3,383
Domestic Sales
Bleached pulp	$	124	$	135	$	127
Unbleached pulp		17		8		9
Sawn timber		48		67		76
Remanufactured wood products		19		23		28
Plywood		36		40		41
Fiberboard panels		1,512		1,385		1,318
Logs		72		72		73
Chips		30		31		25
Electric power		74		87		94
Other		87		67		64
Total domestic revenue	$	2,021	$	1,915	$	1,855
Revenue	$	5,329	$	5,955	$	5,238

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

	Year ended December 31
	2019		2018		2017
	(in millions of U.S. dollars)
Export Sales(1)
Asia	$	1,720	$	2,388	$	1,898
North America		705		664		671
Europe		431		479		361
Central and South America		232		289		256
Other		220		220		197
Total export revenues	$	3,308	$	4,040	$	3,383
Domestic Sales(2)
Asia		-		-		-
North America		1,003		812		796
Europe		-		-		-
Central and South America		1,018		1,103		1,060
Other		-		-		-
Total domestic revenues	$	2,021	$	1,915	$	1,856
Revenue	$	5,329	$	5,955	$	5,239

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

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

Forestry Activity

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

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

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

Forest Plantations

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

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

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

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

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

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

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

	As of December 31, 2019
	Total		Distribution
	(in hectares)		(percentage)
Pine plantations (1)
0‑5 years		198,335		11.3
6‑10 years		135,541		7.7
11‑15 years		144,128		8.2
16‑20 years		90,041		5.1
21+ years		99,024		5.6
Subtotal		667,070		37.9
Eucalyptus plantations (2)		348,880		19.8
Plantations of other species		22,156		1.3
Subtotal of Plantations		1,038,106		59.0
Land for plantations		97,240		5.5
Land for other uses (3)		622,840		35.4
Total (4)		1,758,186		100.0

________________

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

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

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

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

Land Acquisition and Afforestation

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

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

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

Forest Management

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

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

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

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

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

· the cost of planting is relatively low,

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

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

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

· when trees are five to seven years old,

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

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

Our eucalyptus plantations are neither thinned nor pruned.

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

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

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

	2019		2018		2017
	(in hectares)
Thinning		26,071		10,358		5,553
Pruning		30,075		36,172		32,869
Harvesting		28,340		36,267		38,932

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

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

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

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

Forest Production

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

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

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

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

Pulp

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

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

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

Pulp Mills

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

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

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

	Year ended December 31,
	2019		2018		2017		2016		2015
	(in thousands of tonnes)
Chile
Arauco Mill
Arauco I (bleached)		262		271		264		258		268
Arauco II (bleached)		496		451		456		475		474
Arauco II (unbleached)		-		32		21		-		-
Valdivia Mill (bleached)		491		548		550		550		549
Constitución Mill (unbleached)		311		318		270		278		303
Nueva Aldea Mill (bleached)		1,022		1,033		992		999		935
Licancel Mill (unbleached)		142		158		144		152		152
Subtotal		2,725		2,811		2,697		2,712		2,681
Argentina
Puerto Esperanza Mill (bleached)		304		326		310		341		314
Uruguay
Montes del Plata (bleached ‑ 50%)		693		654		688		643		608
Total		3,721		3,791		3,695		3,696		3,603

__________________

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

Chile

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

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

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

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

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

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

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

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

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Argentina

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

Uruguay

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

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

Production Costs

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

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

	Cash Production Costs of Bleached Softwood Kraft Pulp by Region
	Arauco(1)		British Columbia Coast		West Canada Interior		United States		Sweden		Finland
	(in U.S.$ per tonne)
Wood		199		280		234		189		271		295
Chemicals		57		64		64		69		53		61
Labor and other cash costs(2)		124		176		193		200		114		91
Operating costs		380		520		491		458		438		447
Transportation(3)		33		48		87		49		57		70
Marketing and sales		3		7		13		15		6		9
Total delivered cash cost		416		575		591		522		501		526

_______________

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

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

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

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

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Sales

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

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

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

	For the Year Ended December 31,
	2019		2018		2017
	(in tonnes)
Bleached Pulp
Asia and Oceania		2,302,046		2,289,694		2,311,090
Europe		653,459		597,116		547,012
North and South America		313,744		301,226		335,251
Other		1,634		532		134,422
Total		3,270,883		3,188,568		3,327,775
Unbleached Pulp
Asia and Oceania		391,011		407,659		338,648
North and South America		81,353		81,600		88,425
Europe		1,101		1,186		2,073
Other		2,067		3,729		15,948
Total		475,532		494,174		445,094

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

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

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

	2019		2018		2017
	(U.S.$ per tonne)
Bleached Pulp
1Q		682		784		565
2Q		663		804		620
3Q		562		808		633
4Q		529		773		730
Unbleached Pulp
1Q		733		847		596
2Q		702		873		664
3Q		577		876		660
4Q		536		864		768

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

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Wood Products

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

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

	Year ended December 31,
	2019		2018		2017		2016		2015
	(in thousands of cubic meters)
Panels		5,908		5,410		4,866		4,754		4,915
Sawn timber		1,811		1,825		1,893		2,022		2,079
Remanufactured wood products		443		438		445		442		422
Plywood		494		532		567		564		594
Total		8,656		8,205		7,771		7,782		8,010

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

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

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

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

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

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

Chile

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

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

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

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

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

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

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

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

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

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

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

Argentina

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

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

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

Brazil

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

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

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

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

México

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

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

United States

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

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

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

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

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

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

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

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

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

Canada

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

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

Sonae Arauco

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

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Forestry Products

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

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

	Year ended December 31,
	2019		2018		2017		2016		2015
	(in thousands of cubic meters)
Sawlogs		1,815		1,794		1,608		1,328		1,793
Pulplogs		762		746		616		459		591
Chips		361		546		443		366		278
Others		1,229		-		-		-		-

Energy and Sustainable Development

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

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

Country/Mill	Installed Capacity (MW)		Maximum Generation (MW)		Average Consumption (MW)		Surplus power delivered to Power Grid (MW)
Chile:
Arauco		127		105		81		24
Constitución		40		30		22		8
Cholguán		29		28		15		13
Licancel		29		20		14		6
Valdivia		140		115		54		61
Horcones (gas/diesel)		24		24		-		24
Nueva Aldea I		30		28		14		14
Nueva Aldea II (diesel)		10	N.A.			-		10
Nueva Aldea III		136		100		63		37
Bioenergía Viñales		41		31		9		22
Total Chile		606		481		272		219
Uruguay:
Montes del Plata (1)		91		90		39		50
Total Uruguay		91		90		39		50
Argentina:
Piray		40		36		28		8
Puerto Esperanza		42		35		35		-
Total Argentina		82		71		63		8
Total		779		642		374		277

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

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

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

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

	Year ended December 31
	2019		2018		2017		2016		2015		2014		2013‑2007
CERs issued (net of the commission paid to United Nations Framework Convention on Climate Change, or UNFCCC)		109,842		247,588		457,309		109,844		827,971		403,317	2.15 million
CERs sold or donated		-		658,512		1,095,780		561,619		1,375		42,567	1.04 million

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

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

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

Sustainability

Sustainability Strategy

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

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Persons of Excellence

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

Occupational Health and Safety

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

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

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

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

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

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

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

Community and Social Development

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

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

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

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

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

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

Responsible Management of our Forestry and Other Renewable Assets

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

Carbon Footprint

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

Preservation of Native Forests

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

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

Special Protected Areas

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

Monitoring Biodiversity and Protecting Ecosystems

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

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Management of Water Resources

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

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

Forest Fire Prevention

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

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

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

Environmental Management of our Industrial Operations

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

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

Solid Waste Disposal

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

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

Liquid Effluents

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

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

Energy Management

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

Air Emissions

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

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

Competition

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

Pulp

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

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

Wood Products

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

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

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

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

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

Transportation, Storage and Distribution

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

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

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

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

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

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

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

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

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

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

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

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

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Description of Property

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

Country	Forestry	Plants and Facilities
Chile	1,117,058 total hectares 697,251 hectares of plantations	5 Pulp Mills 1 PBO Mill 1 MDF-HB Mill(1) 2 Plywood Mills 7 Sawmills 4 Remanufacturing Facilities
Argentina	264,707 total hectares 132,517 hectares of plantations	1 Pulp Mill 1 MDF Mill 1 PBO Mill 1 Sawmill 1 Remanufacturing Facility 1 Resin Plant
Brazil	245,284 total hectares 129,561 hectares of plantations	2 MDF Mill 1 PBO Mill 1 MDF‑PBO Mill 1 Resin Plant
Uruguay(3)	131,138 total hectares 78,778 hectares of plantations	50% of 1 Pulp Mill
United States		3 PBO Mills 3 MDF Mills 1 MDF‑PBO Mill 1 MDF moulding Mill 1 Impregnation of melamine papers Plant
Canada		1 MDF Mill 1 HDF‑PBO Mill(4) 1 Resin Plant
México		1 PBO Mill 1 MDF-PBO Mill 1 Resin Plant
Portugal		50% of 1 MDF Mill (3) 50% of 1 PBO Mill (3) 50% of 1 Resin Plant (3)
Spain		50% of 1 MDF Mill (3) 50% of 1 PBO Mill (3) 50% of 1 Sawmill (3)
Germany		50% of 2 MDF Mills (3) 50% of 1 MDF‑PBO Mill (3) 50% of 1 PBO‑OSB Mill (3) 50% of 1 Impregnation of melamine papers Plant (3)
South Africa		50% of 1 PBO Mill (3)(5) 50% of 1 MDF-PBO Mill (3)

(1) The HB line has been recently shut down

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

(3) Corresponds to 50% of Sonae Arauco.

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

(5) This mill is currently shut down

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

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Insurance

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

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

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

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

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

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

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

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

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

Cybersecurity

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

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Capital Expenditures

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

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

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

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

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

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Government Regulation

Environmental Regulation

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

Chile

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

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

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

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

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

Argentina

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

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

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

Brazil

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

·  fines,

· partial or total suspension of activities,

· forfeiture or restriction of tax incentives or benefits, or

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

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

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

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

Uruguay

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

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

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

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

United States and Canada

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

· civil penalties;

· supplemental environmental projects;

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

· loss of operating permits;

· required installation of pollution control equipment; or

· remedial actions.

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

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

Forestry, Land‑Use and Land Ownership Regulations

Chile

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

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

Argentina

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

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

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

Brazil

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

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

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

Uruguay

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

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

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

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

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Item 5. Operating and Financial Review and Prospects

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

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

Overview

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

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

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

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

Chile

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

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Argentina

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

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

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

Brazil

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

Uruguay

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

United States

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

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Canada

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

Mexico

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

Exchange Rate Fluctuations

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

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

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

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

Fluctuations in Market Prices for our Products

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

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

	Year endedDecember��31,(1)
Product (2)	2019		2018		2017
	(U.S.$ per tonne) (3)
Pulp
Bleached pulp		605.8		795.6		619.7
Unbleached pulp		661.3		846.7		659.0
	(U.S.$ per cubic meter) (3)
Wood Products
Sawn timber		236.3		267.2		251.5
Remanufactured wood products		565.0		577.1		582.8
Plywood		415.5		480.7		420.5
Panels		314.6		318.9		337.7
Forestry Products
Logs		31.6		28.3		32.7

______________________

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

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

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

Pulp Prices

Overview

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

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

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

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

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

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

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

Prices of NBSK – Europe⁽¹⁾

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

List Price as of December 31,	U.S.$/tonne		Change YoY*
2016		808.83		0.7	%
2017		999.63		23.6	%
2018		1,200.02		20.0	%
2019		819.95		(31.7	)%

*YoY means year over year

Prices of NBSK – China⁽¹⁾

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

List Price as of December 31,	U.S.$/tonne		Change YoY*
2016		607.32		1.1	%
2017		886.35		45.9	%
2018		723.07		(18.4	)%
2019		557.57		(22.9	)%

*YoY means year over year

Prices of BHKP – Europe⁽¹⁾

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

List Price as of December 31,	U.S.$/tonne		Change YoY*
2016		652.58		(17.3	)%
2017		979.31		50.1	%
2018		1,025.73		4.7	%
2019		680.01		(33.7	)%

*YoY means year over year

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Prices of BHKP – China⁽¹⁾

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

List Price as of December 31,	U.S.$/tonne		Change YoY*
2016		528.06		(9.7	)%
2017		768.57		45.5	%
2018		652.51		(15.1	)%
2019		456.92		(30.0	)%

*YoY means year over year

(1) Source: RISI.

Prices of UKP

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

Price as of December 31,		Change YoY
2016	573.82		(4.6	)%
2017	768.03		33.8	%
2018	853.77		11.2	%
2019	515.79		(39.6	)%

Source: Arauco.

Forestry and Wood Products Prices

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

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

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

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

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

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

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

Costs and Expenses

Costs of Sale

Our major costs of sales are the following:

· timber,

· chemicals,

· forestry labor,

· depreciation and amortization,

· maintenance,

· other raw materials, and

· energy and fuel.

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

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

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

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

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

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

Distribution Costs

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

Administrative Expenses

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

Critical Accounting Policies

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

Biological Assets

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

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

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

Impairment of goodwill

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

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Litigation and Contingencies

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

Recently Issued Accounting Standards

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

Results of Operations

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

	For the year ended December 31,
	2019								2018								2017
	Sales			%			Volume		Sales			%			Volume		Sales			%			Volume
	(in millions of U.S. dollars, except percentages and volume)
Revenue
Pulp
Bleached pulp(1)		1,981.6			37.2			3,270.9		2,536.9			42.6			3,188.6		2,062.4			39.4			3,327.8
Unbleached pulp(1)		314.5			5.9			475.5		418.4			7.0			494.2		293.3			5.6			445.1
Total		2,296.1			43.1			3,746.4		2,955.3			49.6			3,682.7		2,355.7			45.0			3,772.9
Wood Products
Fiberboard panels(2)		1,858.6			34.9			5,908.0		1,725.1			29.0			5,410.0		1,643.3			31.4			4,866.2
Sawn timber(2)		428.0			8.0			1,811.3		487.7			8.2			1,825.0		476.1			9.1			1,893.0
Remanufactured wood products(2)		250.1			4.7			442.7		252.6			4.2			437.7		259.3			5.0			445.0
Plywood		205.2			3.8			493.8		255.5			4.3			531.6		238.2			4.5			566.5
Total		2,741.9			51.4			8,655.8		2,721.0			45.7			8,204.3		2,616.9			50.0			7,770.7
Forestry
Logs, net(2)		72.4			1.4			2,577.0		71.9			1.2			2,540.0		72.6			1.4			2,223.7
Chips		30.3			0.5			360.8		31.4			0.5			546.0		25.2			0.5			443.4
Other		26.0			0.5			1,229.5		4.1			0.1			0.1		8.2			0.1			5.2
Total		128.7			2.4			4,167.3		107.4			1.8			3,086.1		106.0			2.0			2,672.3
Energy		74.5			1.4					86.7			1.5					93.8			1.8
Other		88.0			1.7					84.4			1.4					65.9			1.2
Total revenue		5,329.2			100					5,954.8			100					5,238.3			100
Cost of sales
Timber		(879.6	)							(691.1	)							(725.1	)
Forestry labor costs		(547.7	)							(672.2	)							(631.3	)
Maintenance costs		(294.9	)							(280.7	)							(262.8	)
Chemical costs		(557.1	)							(560.2	)							(517.5	)
Depreciation and amortization.		(414.1	)							(377.6	)							(389.8	)
Other costs of sales		(1,217.0	)							(1,140.9	)							(1,048.0	)
Total cost of sales		(3,910.4	)							(3,722.7	)							(3,574.5	)
Gross profit		1,418.8			26.6	%				2,232.1			37.5	%				1,663.8			31.8	%
Other income		232.4								124.3								111.5
Distribution costs		(586.9	)							(556.8	)							(523.3	)
Administrative expenses		(554.0	)							(561.3	)							(521.3	)
Other expenses		(203.7	)							(95.9	)							(240.1	)
Other income (loss)		21.7								14.2								-
Financial income		32.6								20.9								19.6
Financial costs		(273.6	)							(214.8	)							(287.9	)
Share of profit (loss) of associates and joint ventures accounted for using equity method		7.9								17.2								17.0
Exchange rate differences		(32.5	)							(26.5	)							0.1
Income before income tax		62.5								953.5								239.4
Income tax		(0.5	)							(226.8	)							31.0
Net income		62.0								726.8								270.4

_____________ 

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

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

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

Revenue

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

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

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

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

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

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

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

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

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

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

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

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

Cost of sales

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

Gross Profit

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

Other income

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

Distribution costs

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

Administrative expenses

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

Other expenses

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

Other income (loss)

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

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Finance costs

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

Exchange rate differences

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

Income tax

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

Net income

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

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

Revenue

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

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

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

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

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

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

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

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

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

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

Cost of sales

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

Gross Profit

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

Other income

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

Distribution costs

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

Administrative expenses

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

Other expenses

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

Other income (loss)

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

Finance costs

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

Exchange rate differences

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

Income tax

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

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Net income

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

Liquidity and Capital Resources

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

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

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

Cash Flow from Operating Activities

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

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

Cash Flow Used in Investing Activities

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

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

Cash Flow from Financing Activities

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

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

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

Contractual Obligations

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

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

	Payments Due by Period
	Less than 1 year		1‑3 years		3‑5 years		More than 5 years		Total
	(in thousands of U.S. dollars)
Debt obligations (1)		635,651		839,491		1,487,340		6,265,315		9,227,797
Purchase obligations (2)		530,889		556,557		-		-		1,087,446
Lease obligations		83,204		139,179		63,510		128,874		414,767
Total		1,249,744		1,535,227		1,550,850		6,394,189		10,730,010

________________ 

(1)

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

(2)

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

Investing Activities

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

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

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

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

Financing Activities in 2019

During 2019, our principal financing activities were as follows:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Off-balance Sheet Arrangements

We do not have any off‑balance sheet arrangements.

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Treasury Management

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

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

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

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

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Hedging

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

Cross Currency Swap Agreements

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

	UF Notional Amount		U.S.$ Notional Amount		Hedging Start Date	Maturity
Deutsche – U.K.		909,091		39,653,006	10/30/2011	10/30/2021
JPMorgan – N.A.		909,091		39,653,006	10/30/2011	10/30/2021
Scotiabank – Chile		909,091		34,933,122	04/30/2014	04/30/2023
Scotiabank – Chile		909,091		34,889,491	04/30/2014	04/30/2023
Santander – Chile		909,091		34,524,604	04/30/2014	04/30/2023
BCI – Chile		909,091		34,201,420	04/30/2014	04/30/2023
Banco de Chile – Chile		909,091		34,524,605	10/30/2019	10/30/2029
Itaú Corpbanca – Chile		1,000,000		42,864,859	09/01/2010	09/01/2020
Scotiabank – Chile		1,000,000		42,864,859	09/01/2010	09/01/2020
Deutsche – U.K.		1,000,000		42,864,859	09/01/2010	09/01/2020
Santander – Spain		1,000,000		42,873,112	09/01/2010	09/01/2020
Scotiabank – Chile		1,000,000		42,864,257	09/01/2010	09/01/2020
Itaú Corpbanca – Chile		1,000,000		46,474,122	05/15/2012	11/15/2021
JPMorgan – N.A.		1,000,000		47,163,640	11/15/2012	11/15/2021
Scotiabank – Chile		1,000,000		42,412,852	11/15/2013	11/15/2023
Santander – Chile		1,000,000		41,752,718	11/15/2013	11/15/2023
Deutsche – U.K.		1,000,000		41,752,718	11/15/2013	11/15/2023
BCI - Chile		375,000		16,194,459	10/01/2014	04/01/2021
BCI - Chile		375,000		16,198,761	10/01/2014	04/01/2021
Santander – Chile		3,000,000		128,611,183	10/01/2014	04/01/2024
JPMorgan – U.K.		1,000,000		43,185,224	10/01/2014	04/01/2024
Itaú Corpbanca – Chile		1,000,000		43,277,070	10/01/2014	04/01/2024
Santander – Chile		5,000,000		201,340,031	11/15/2016	11/15/2026
Goldman Sachs – N.A.		1,000,000		40,521,750	10/10/2018	10/10/2028
Scotiabank – Chile		1,000,000		40,537,926	10/10/2018	10/10/2028
Goldman Sachs – N.A.		1,000,000		40,066,555	10/10/2018	10/10/2028
Santander – Chile		3,000,000		118,400,504	10/10/2018	10/10/2038
Santander – Chile		2,500,000		97,971,786	10/10/2018	10/10/2038
Total		35,613,636		1,472,572,499

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

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

	EUR Notional Amount		U.S.$ Notional Amount		Hedging Start Date	Maturity
Santander – Chile		100,000,000		118,670,000	06/15/2021	12/15/2029
Banco de Chile – Chile		50,000,000		59,335,000	06/15/2021	12/15/2029
MUFG Bank – Japan		100,000,000		118,670,000	06/15/2021	12/15/2029
JP Morgan – N.A.		200,000,000		237,340,000	06/15/2021	12/15/2029
HSBC – N.A.		50,000,000		59,335,000	06/15/2021	12/15/2029
Total		500,000,000		593,350,000

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

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

Interest Rate Swap Agreements

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

Bank	Currency	U.S.$ Notional Amount
DNB Bank ASA	USD	33,758,405(1)

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

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

Forward Agreements

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

Bank	Exchange Rate	U.S.$ Notional Amount			Hedging Start Date		Maturity
Banco de Chile – Chile	USD-CLP		47,198,102		10/11/2019		12/11/2020
Banco de Chile – Chile	USD-CLP		47,136,593		10/11/2019		12/11/2020
BCI – Chile	USD-CLP		47,061,633		10/11/2019		12/11/2020
Itaú Corpbanca – Chile	USD-CLP		47,102,491		10/11/2019		12/11/2020
Itaú Corpbanca – Chile	USD-CLP		46,838,174		10/11/2019		12/11/2020
Itaú Corpbanca – Chile	USD-CLP		49,519,410		10/11/2019		12/11/2020
BCI – Chile	USD-CLP		48,292,295		10/11/2019		12/11/2020
Itaú Corpbanca – Chile	USD-CLP		51,267,096		01/10/2020		12/11/2020
Scotiabank – Chile	USD-CLP		51,222,327		01/10/2020		12/11/2020
Corpbanca Colombia	USD-COP		2,000,000		11/07/2019		01/14/2020
Corpbanca Colombia	USD-COP		1,700,000		11/25/2019		02/11/2020
Banco Santander Uruguay	USD‑UYU		8,070,000	(1)	‑		‑
HSBC Uruguay	USD‑UYU		12,915,000	(1)	‑		‑
Citibank U.K.	USD‑UYU		1,500,000	(1)		-		-
Banco Itaú Uruguay	USD-UYU		3,710,000	(1)		-		-
Citibank U.K.	USD-EUR		833,000	(1)	‑		‑

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

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

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Commodity Swap Agreements

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

Bank	Exchange Rate	U.S.$ Notional Amount
JPMorgan Chase Bank, N.A.	Fuel Oil No. 6	6,924,720(1)
DNB Bank ASA	Fuel Oil No. 6	5,241,366(1)

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

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

Research and Development

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

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

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

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Trend Information

Pulp

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

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

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

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

Wood Products

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

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

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

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Item 6. Directors, Senior Management and Employees

DIRECTORS AND EXECUTIVE OFFICERS

Directors

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

Our current directors are listed below.

Name	Years as Director	Position	Age
Manuel Bezanilla	33	Chairman	75
Roberto Angelini	33	First Vice‑Chairman	71
Jorge Andueza	26	Second Vice‑Chairman	71
Alberto Etchegaray	26	Director	74
Eduardo Navarro	12	Director	54
Timothy C. Purcell	15	Director	60
Franco Mellafe	5	Director	44
Juan Ignacio Langlois	4	Director	52
Jorge Bunster(1)	19	Director	67

(1)     Jorge Bunster was Director from 1996‑2010. 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 Second Vice‑Chairman of the Board of Directors from May 4, 2007 to April 23, 2013. He is also a partner of the law firm Portaluppi, Guzmán y Bezanilla. He serves as Chairman of the board of Forestal Arauco and serves as a member of the boards of directors of Empresas Copec, COPEC, Pesquera Iquique‑Guanaye S.A., AntarChile, Inversiones Siemel S.A. and Inversiones Angelini y Compañía Limitada (“Inversiones Angelini”). Mr. Bezanilla holds a law degree from the Catholic University of Chile.

Roberto Angelinibecame a Director on April 30, 1986 and became First Vice‑Chairman of the Board of Directors on May 4, 2007. He served as Vice‑Chairman of the Board of Directors from April 18, 1991 to January 4, 2005, when he voluntarily resigned, and as Second Vice‑Chairman of the Board of Directors from January 27, 2005 to May 4, 2007. He serves as Chairman of the board of directors of Empresas Copec, COPEC, AntarChile, Corpesca S.A., Pesquera Iquique‑Guanaye S.A., Inversiones Alxar S.A., Inversiones Angelini, Inversiones Caleta Vitor 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., Cumbres Andinas S.A.C. 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 Second Vice‑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., Pesquera Iquique‑Guanaye S.A., Organización Terpel S.A., Inversiones Caleta Vitor 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., Vice Chairman of the Board of Directors of Salfacorp S.A., and serves as a member of the board of directors of Compañía de Seguros Confuturo S.A. and Compañía de Seguros Corpseguros 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.

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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 Pesquera Iquique‑Guanaye S.A., and serves as chairman of the board of Abastible S.A. and a member of the board of directors of COPEC, Solgas S.A., Duragas S.A., Corpesca S.A., Inversiones Caleta Vitor S.A., Orizon S.A., Inversiones Alxar S.A., Inversiones Laguna Blanca S.A., Cumbres Andinas S.A.C. and Nortesantandereana de Gas S.A.. Mr. Navarro holds degrees in commercial engineering and economics, and a master’s degree in economics, all from the Catholic University of Chile.

Timothy C. 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. 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 the Kenan‑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)	33	Chief Executive Officer	58
Cristián Infante	24	President & Chief Operating Officer	53
Gianfranco Truffello	25	Chief Financial Officer	51
Robinson Tajmuch	29	Senior Vice‑President Comptroller	63
Iván Chamorro	19	Senior Vice‑President Human Resources & EHS	46
Franco Bozzalla	30	Senior Vice‑President Wood Pulp & Energy	57
Charles Kimber	34	Senior Vice‑President Commercial & Corporate Affairs	58
Antonio Luque	27	Senior Vice‑President Wood Products	63
Camila Merino	9	Senior Vice‑President Forestry	52
Gonzalo Zegers	12	Senior Vice‑President International & Business Development	59
Felipe Guzmán	12	General Counsel	50

_______________ 

(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.

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

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

Antonio Luqueis the Senior Vice‑President Wood Products 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 Senior Vice‑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 Senior Vice‑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, 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.

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Compensation

For 2019, 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.$2.5 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 2019.

	2019
Manuel Bezanilla	U.S.$556,681
Roberto Angelini		301,976
Jorge Andueza		319,978
Cristián Infante		105,434
Matías Domeyko		109,805
Jorge Garnham M.		65,932
Alberto Etchegaray		119,277
Eduardo Navarro		119,277
Timothy C. Purcell		119,277
Franco Mellafe		176,701
Alvaro Saavedra		93,297
Jorge Serón		11,050
Robinson Tajmuch		11,961
Antonio Luque		10,000
Gonzalo Zegers		24,000
Pablo Ruival		18,304
Sergio Gantuz		18,304
Camila Merino		11,968
Jorge Bunster		119,277
Pablo Mainardi		27,535
Juan Ignacio Langlois		119,277
Total Compensation		2,459,311

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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 Senior Vice‑President Comptroller of Arauco and the General Counsel of Arauco. Our securities are not listed on any U.S. national securities exchange and, therefore, we are not subject to the rules relating to audit committees imposed by the Sarbanes‑Oxley Act of 2002, as amended. 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, and the Senior Vice‑President Comptroller of Arauco It was also agreed that it would report to the Board of Directors on a biannual basis.

In 2019, an Ethics and Compliance Committee was created by our Board of Directors. The members of such Ethics and Compliance Committee are Messrs. Manuel Bezanilla (Chairman of the Board of Directors), Jorge Andueza (second Vice-Chairman of the Board of Directors), Matías Domeyko (Chief Executive Officer), Cristián Infante (President & Chief Operating Officer), Robinson Tajmuch (Senior Vice‑President Comptroller) and Felipe Guzmán (General Counsel). The Committee replaced the previously existing ethics committee and is in charge of the supervision of the processes implemented by the Company in order to comply with the ethical standards and the regulations related to compliance.

Employees

The following table provides a breakdown of our employees by main category of activity as of the end of each year in the three‑year period ended December 31, 2019.

	2019		2018		2017
Executives		490		448		498
Professionals and Technicians		5,206		5,059		4,453
Workers		12,423		11,745		10,428
Total		18,119		17,252		15,379

Under Chilean, Brazilian and Mexican 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. By means of Decree No. 34/2019 (the “Decree”), the Argentine Federal Government declared a public emergency with regard to employment for a term of one hundred and eighty (180) days as of December 13, 2019 (the date the Decree was published in the Official Gazette). Within that scope, the Decree establishes that employees dismissed without cause are entitled to receive double severance. With the aim of generating new employment opportunities, employees hired after the Decree came into force will not be subject to the Decree.

Approximately 59% of our employees in Chile, 54% of our employees in Argentina, 29% of our employees in Uruguay, 9.5% of our employees in Brazil, 40% of our employees in Mexico and none of our employees in the United States or Canada were unionized as of December 31, 2019. 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, Mexico, the United States and Canada.

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

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

In August 2019, Arauco North America announced the closure of our St. Stephen particleboard operation. The main rationale behind this decision was the newly constructed Grayling, Michigan mill and the heavy cost structure of the St. Stephen operation.  On December 13, 2019, our St. Stephen particleboard operation officially ceased and approximately 60 people were laid off.

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

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

Our Brazilian operations have not experienced any work stoppages in the last nine years, other than a generalized trucker strike in 2018 that affected our operations. As a consequence of this event, the Company was prevented from receiving raw materials and dispatching products, and our employees could not easily access our Brazilian mills during such time, which resulted in a stoppage of ten days.

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

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

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

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

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Share Ownership

Our First Vice‑Chairman, Roberto Angelini, owns directly and indirectly 35.9% of 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 14.2% of our shares. Our Director Franco Mellafe owns indirectly a 5.2% of Inversiones Angelini. He also directly owns 0.059% of AntarChile, and 0.00006% of Empresas Copec. Through his direct and indirect interests in Inversiones Angelini, AntarChile and Empresas Copec, Franco Mellafe beneficially owns 2.06% of our shares.

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

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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 14, 2020, 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 and the Chilean Electronic Stock Exchange. It is a holding company, the principal interests of which are in Arauco, gasoline distribution, electricity, gas distribution, fishing and mining. Before October 1, 2003, Empresas Copec’s legal name was Compañía de Petróleos de Chile S.A. As of that date, Compañía de Petróleos de Chile S.A. transferred all its gasoline and fuel‑related business assets to a new subsidiary, Compañía de Petróleos de Chile COPEC S.A., and changed its legal name to Empresas Copec S.A. As of December 31, 2019, 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, 2019. As of April 14, 2020, 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 11.27% 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 Mr. Roberto Angelini Rossi directly and indirectly with 36.0% and Mrs. Patricia Angelini Rossi directly and indirectly with 29.0%.

As of December 31, 2019, and April 14, 2020, the Angelini Group controlled Arauco through the ownership structure described above.

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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, and articles 44 and 89 of the Chilean Companies Act. Title XVI requires that our transactions with related parties contribute to our Company’s interest and be on a market basis or on terms similar to those prevailing in the market. In addition, Title XVI provides that related party transactions must be approved by an informed majority of the disinterested members of the Board of Directors. If a majority of the disinterested directors abstains from voting on a particular transaction, the transaction must be approved by a unanimous vote of the non‑abstaining disinterested directors or by two‑thirds of the shares with voting rights. Resolutions approving any such transactions must be reported to our shareholders at the next annual shareholders’ meeting.  

Notwithstanding the above, in accordance with Article 147 of the Chilean Companies Act, 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 or www.arauco.com.

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 Law 18,045, or 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 Chilean Commission for the Financial Market, in accordance with certain parameters established by the above‑mentioned Article 100.

Our transactions with affiliates include the following:

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

· We hire port services from Puertos y Logística S.A. (formerly Puerto de Lirquén S.A.) and Puerto Lirquén S.A. (formerly Portuaria Sur de Chile S.A.), which companies were related parties until April 2019, when we sold our 20.2% interest in such companies to DP World Holding UK Limited;

· We hire port services from 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.

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

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Item 8. Financial Information

See “Item 18.—Financial Statements.”

EXPORT SALES

Export sales constituted 62.1% of our revenues for the year ended December 31, 2019. Our total export revenues for 2019 were U.S.$3,308.4 million. Our principal overseas markets are Asia, North America and Europe. See “Item 4. Information on our Company—Description of Business—Domestic and Export Sales.”

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LEGAL PROCEEDINGS

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

While Chilean law in general provides that only individuals can be convicted in criminal actions, there are several regulations that provide exceptions to this general rule, under which criminal responsibility of legal entities can be established for criminal offenses related to, among others, the financing of terrorism, asset laundering, receiving, disloyal administration or bribery. We do not have knowledge of any fact that could result in our criminal responsibility under such regulations.

Environmental Proceedings

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

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

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

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

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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.

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 the above‑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 Supreme Court, 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. The fees of the state's lawyers have been determined by the lower Court and the Court of Appeals and the Company has paid fees in installments, as permitted by the "Regularization Regime".

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 the above‑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. On June 29, 2018, the Santiago Court of Appeals confirmed the first instance ruling. On July 19, 2018, Arauco filed a “recurso de casación en el fondo y en la forma” (nullity recourse) before the Supreme Court.

On June 21, 2019, Arauco submitted a claim before the Constitutional Court ( “CC”) to obtain the declaration of unconstitutionality (“requerimiento de inaplicabililidad por inconstitucionalidad”) in respect of the third paragraph of article 53 of the Chilean Tax Code. On October 29, 2019, the abovementioned provision was declared unconstitutional by the CC with respect to Arauco’s case.

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The third paragraph of article 53 of the Chilean Tax Code establishes a penalty interest of 1.50% per month for each month or fraction of a month, in the event of delay in the payment (total or partial) of any kind of taxes. As a result of the ruling issued by the CC, the penalty interest could not be applied against the Company in this case. Instead, the applicable interest should be the average interest charged by Chilean banks for transactions at any given date as determined by the Central Bank (interés corriente), accruing from the date on which the capital became due until the final payment date. Notwithstanding the above, the Chilean Supreme Court shall finally determine which interest should apply to replace the special interests contemplated in the Chilean Tax Code.

As of the date of this annual report, the abovementioned “recurso de casación en el fondo y en la forma” (nullity recourse) is still under review by the Supreme Court.

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.$5.02 million), 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.

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. On September 27, 2018, Arauco do Brasil S.A. was notified of CARF’s decision, which determined the value of the alleged infraction in R$ 57.5 million (equivalent to U.S.$ 14.28 million, as per the R$/U.S.$ exchange rate as of December 31, 2019), plus interest and inflation adjustments until the end of the trial. Arauco do Brasil S.A.filed a motion for clarification (embargos de declaración), requesting the CARF to clarify certain aspects of the decision. On January 25, 2019, the CARF decided that there were no clarifications or omissions pending, and therefore, the company filed a special resource (recurso especial) with the Superior Chamber of Fiscal Appeals of the CARF (Cámara Superior de Recursos Fiscales, or CSRF) on February 2, 2019, reiterating the arguments of the company regarding the issues under discussion. On June 21, 2019, such special recourse was partially dismissed. Therefore, on July 22, 2019, we filed an appeal against the dismissed portion of the ruling. As of the date of this annual report, the decision with respect to such appeal is pending. In accordance with the decision regarding the motion for clarification, CARF calculated the amount under discussion at R$ 58,059,580.30 as of January 31, 2019 (equivalent to U.S.$ 14.40 million, as per the R$/U.S.$ exchange rate as of December 31, 2019), plus interest and inflation adjustments from January 31, 2019 until the end of the trial.

We consider that Arauco do Brasil S.A.’s objection to the Infraction Notice is supported by solid legal arguments and that there is a reasonable chance that this matter will result in a favorable outcome for Arauco do Brasil S.A.. If the special recourse and/or the appeal is rejected, the company will be able to discuss the Infraction Notice before the Brazilian courts of 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.

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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.

On October 28, 2019, the Extraordinary Shareholders’ Meeting of Arauco approved an amendment to article 36 of the Company’s bylaws, in order to establish that the Ordinary Shareholders’ Meeting will determine on an annual basis, the dividend distribution amount for the respective period, without being subject to the 30% distributable minimum indicated in the Chilean Companies Act.

On January 31, 2020, our Board of Directors, being aware of the abovementioned determination made by the Extraordinary Shareholders´ Meeting, agreed to modify the Company's dividend policy, in the sense that, notwithstanding the capacities of the Shareholders' Meeting to determine the part of the profits of the year to be distributed as dividends, with respect to the results of the years 2019 and 2020, it will be proposed not to distribute dividends, due to the financial requirements that the Company has in the coming months, especially those related to the MAPA Project.

As a result of the above, it is expected that in the next shareholders’ meeting of the Company, scheduled to be held on April 21, 2020, our shareholders will vote to approve not to distribute dividends with respect to the results of year 2019.

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 April 24, 2018, our shareholders approved a final dividend of U.S.$1.0054189337 per share for 2017, which was distributed on May 10, 2018. On November 27, 2018, our Board of Directors approved an interim dividend of U.S.$1.2571231207 per share, which was distributed on December 12, 2018. On March 26, 2019, our Board of Directors approved a final dividend of U.S.$1.6086974655 per share for 2018, to be distributed on May 8, 2019, all of which is subject to shareholders’ approval at the meeting to be held on April 23, 2019.

Although the Board of Directors has no other current plans to recommend further 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.

SIGNIFICANT CHANGES

Except as identified in this annual report, no significant change has occurred since the date of the financial statements contained in this annual report. See “Item 3. Key Information—Risk Factors—Risks Relating to the Company— The novel coronavirus could have a significant adverse effect on our business operations” and “Item 5. Operating and Financial Review and Prospects—Trend Information.”

Item 9. The Offer and Listing

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

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

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Item 10. Additional Information

ARTICLES OF INCORPORATION AND BY‑LAWS

When we refer to the “Company,” “Arauco” or “we,” in this description of the articles of incorporation and by‑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 resolution 300‑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, our by‑laws and the by-laws of several of our subsidiaries were amended in order to denominate our and their capital in U.S. dollars.

Directors

Pursuant to our by‑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. Our by‑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 any non‑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. The by‑laws also state that our Board of Directors has all the authorities of administration and disposal that Chilean law or the by‑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, the by‑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.

Our by‑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 common stock shares of a single series, without nominal (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.

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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 our by‑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 of two‑thirds of the voting shares issued:

· transformation, including division or merger with another company;

· advanced dissolution;

· change of corporate domicile;

· reduction in our equity capital;

· approval and appraisal of non‑cash capital contributions;

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

· 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

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

According to our by‑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 our by‑laws. Any reduction of the rights of our shares requires a two‑thirds majority vote of all holders of our shares under Chilean law. Any changes to the way in which corporate benefits are distributed must be approved by a two‑thirds majority of all holders of the corporation’s shares.

Shareholders’ Meetings

Our by‑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. The by‑laws provide that the following matters are to be considered at regular shareholders’ meetings:

· 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;

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

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

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

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

· dissolution;

· transformation, merger or division and the amendment of our by‑laws;

· the issue of bonds or debentures convertible into shares;

· the disposal of 50% or more of our assets, whether or not such disposal also includes any of our liabilities, and the formulation or modification of any business plan that contemplates the disposal of assets for an amount higher than such percentage; the disposal of 50% or more of the assets of one of 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

· 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 our by‑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

Our by‑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.

On October 28, 2019, the Extraordinary Shareholders’ Meeting of Arauco approved an amendment to article 36 of the Company’s bylaws, in order to establish that the Ordinary Shareholders’ Meeting will determine on an annual basis, the dividend distribution amount for the respective period, without being subject to the 30% distributable minimum indicated in the Chilean Companies Act.

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. Our by‑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 of non‑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 Commission for the Financial Market on a quarterly basis.

Rights of Shareholders

Our by‑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.

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MATERIAL CONTRACTS

Not applicable.

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, or the Compendium) 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:

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

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

· the mandatory return of foreign currencies to Chile; and

· the mandatory conversion of foreign currencies into Chilean pesos.

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

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

· 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.

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International Issue of Bonds

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, since the registration of the debt securities with the Central Bank does not grant us access to the Formal Exchange Market for the purchase of U.S. dollars necessary to make payments in respect of those 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.

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 the one‑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.

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.

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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 Form 20‑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:

· 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 remains in Chile, uninterruptedly or not, for a period or periods exceeding 183 days in total, within any lapse of twelve months; (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

· 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, 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% (the “Chilean Interest Withholding Tax”),only to the extent the requirements for applying a 4.0% rate are complied with.

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 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.

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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, certain short‑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, or nonresident alien individuals present in the United States for more than 182 days in a taxable year. 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. This summary addresses only U.S. federal income tax consequences and does not address consequences arising under state, local, foreign tax laws, U.S. federal estate or gift tax laws, the alternative minimum tax or the Medicare tax on net investment income.

United States holders that use an accrual method of accounting for tax purposes (“accrual method holders”) generally are required to include certain amounts in income no later than the time such amounts are reflected on certain financial statements (the “book/tax conformity rule”).  The application of the book/tax conformity rule thus may require the accrual of income earlier than would be the case under the general tax rules described below. It is not entirely clear to what types of income the book/tax conformity rule applies, or, in some cases, how the rule is to be applied if it is applicable. However, recently released proposed regulations generally would exclude, among other items, original issue discount and market discount (in either case, whether or not de minimis) from the applicability of the book/tax conformity rule. Although the proposed regulations generally will not be effective until taxable years beginning after the date on which they are issued in final form, taxpayers generally are permitted to elect to rely on their provisions currently. Accrual method holders should consult with their tax advisors regarding the potential applicability of the book/tax conformity rule 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 at the appropriate rate applicable to the United States Holder) as ordinary interest income in respect of our securities at the time that such payments are accrued or are actually or constructively received, in accordance with the United States Holder’s method of tax accounting.

Any Chilean Interest Withholding Tax paid at the appropriate rate applicable to the United States Holder 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 (provided that the United States Holder elects to deduct, rather than credit, all foreign income taxes paid or accrued for the relevant taxable year). 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 certain short‑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.

95

 

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 (less any accrued interest and Additional Amounts, which will be taxable as such) and the tax basis in the security. 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 be long‑term capital gain or loss if at the time of the disposition, the security has been held for more than one year. The net amount of long‑term capital gain recognized by a United States Holder that is an individual is generally taxed at a reduced rate. The deduction of capital losses is subject to limitations. 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.

Specified Foreign Financial Assets

Certain United States Holders that own “specified foreign financial assets” with an aggregate value in excess of USD 50,000 on the last day of the taxable year or USD 75,000 at any time during the taxable year 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 a non‑U.S. financial institution, as well as securities issued by a non‑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. A beneficial owner of our securities that is a nonresident individual or a foreign corporation, estate, or trust and is not a United States Holder (a “Non-U.S. Holder”) generally is 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. The amount of any backup withholding from a payment to a United States Holder or Non-U.S. Holder will be allowed as a credit against the holder’s U.S. federal income tax liability and may entitle the holder to a refund, provided that the required information is timely furnished to the IRS.

96

 

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 at 1‑800‑SEC‑0330.

Item 11. Quantitative and Qualitative Disclosures About Market Risk

The following discussion about our risk management activities includes forward‑looking statements that involve risk and uncertainties. Actual results could differ materially from those projected in such forward‑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 either non‑financial or non‑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, 2019, we had outstanding U.S.$6.0 billion of indebtedness, including accrued interest and discounts and costs of issuance, of which 89.0% bore interest at fixed interest rates and 11.0% bore interest at floating rates of interest. The fixed and floating rates do not reflect the effect of swap agreements. 72.9% 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, 2019, we were party to an interest rate swap agreement in our Uruguayan joint operation to hedge fluctuations in floating rates for long‑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, 2019. 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, 2019.

	Average Interest Rate			2020		2021		2022		2023		2024		Thereafter		Total Debt		Fair Value
	(U.S.$ in millions)
Interest
Bearing Debt
Fixed Rate
(U.S.$‑denominated)		4.52	%		89.8		59.2		181.1		31.9		501.9		2,884.6		3,748.5		3,812.6
(UF/CLP$‑denominated)		2.93	%		294.2		75.2		79.1		55.7		41.9		932.2		1,478.3		1,624.3
(R$‑denominated)		0.19	%		6.1		4.1		4.0		3.2		3.1		9.0		29.5		29.5
(CAD‑denominated)		-			0.1		0.1		0.1		-		-		-		0.3		0.3
(MXN‑denominated)		-			2.4		1.8		1.8		1.7		1.6		0.8		10.1		10.1
(EUR‑denominated)		1.05	%		0.1		7.4		14.8		14.8		14.8		64.3		116.2		170.3
Floating Rate
(U.S.$-denominated) LIBOR+		1.47	%		132.1		39.5		40.6		239.6		210.0		-		661.8		686.5
(R$‑denominated) TJLP +		3.68	%		4.4		0.4		0.3		-		-		-		5.1		5.1
Total					529.2		187.7		321.8		346.9		773.3		3,890.9		6,049.8		6,338.6

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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, 2019:

· 67.4% of our accounts receivable were denominated in U.S. dollars, 13.8% in Chilean pesos, 8.7% in Brazilian reais, 5.2% in Mexican pesos, 1.7% in Argentinean Pesos, and 3.2% in other currencies.

· 90.6% of our cash and short‑term investments were denominated in U.S. dollars, 4.0% were denominated in Chilean pesos, 3.3% in Brazilian reais, 0.9% in Mexican pesos, 0.7% in Argentinean pesos and 0.5% in other currencies.

· 72.9% 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 foreign currency‑denominated revenues, receivables and indebtedness are denominated in U.S. dollars and the majority of our costs and expenses are denominated in U.S. dollars. As of December 31, 2019, 72.9% of our debt was denominated in U.S. dollars before swaps. As of December 31, 2019, we were party to cross currency swap agreements in Chile to hedge our local bonds in UF and to hedge a bank loan in EUR, 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.

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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, 2019, 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.

99

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 Senior Vice‑President Comptroller, of the effectiveness of the design and operation of our disclosure controls and procedures, as of December 31, 2019. 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 Senior Vice‑President Comptroller concluded that the disclosure controls and procedures, as of December 31, 2019, 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 Senior Vice‑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 Rules 13a‑15(f) and 15d‑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 Senior Vice‑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, 2019.

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(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 2019 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 Form 20‑F and is independent as that term is defined in Rule 10A‑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 Form 20‑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 Senior Vice‑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. (562) 2461‑7200, fax (562) 2461‑7541. Our code of ethics is also published on our website at www.arauco.cl or www.arauco.com. If we amend the provisions of our code of ethics that apply to our Chief Executive Officer, Chief Financial Officer and Senior Vice‑President Comptroller, or if we grant any waiver of such provisions, we will disclose the amendment or waiver in our annual report on Form 20‑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). In October 2019, we amended our code of ethics in order to update its content and include the new functions of the recently established Compliance and Ethics Committee.

Item 16C. Principal Accountant Fees and Services

Audit and Non‑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, 2018 and 2019.

	Year ended December 31,
	2019		2018
	(U.S.$ in thousands)
Audit fees	$	2,182	$	2,109
Audit-related fees		204		146
Tax fees		862		1,181
Other fees		-		-
Total fees	$	3,248	$	3,436

Audit fees in the above table are the aggregate fees billed by PwC for the fiscal years ended December 31, 2019 and 2018, 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, 2019 and 2018, 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 2019 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.

101

 

Audit Committee Approval Policies and Procedures

Our Board of Directors has established pre‑approval policies and procedures for the engagement of our independent auditors. Pursuant to our pre‑approval policy, our Board of Directors has pre‑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 a case‑by‑case basis, any engagement of our independent auditors for audit and non‑audit services that are not included on the pre‑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 Rule 2‑01 of Regulation S‑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 our SEC‑registered securities are listed on any stock exchange or other regulated market.

Item 16H. Mine Safety Disclosures

Not applicable.

102

 

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 page F‑1.

103

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 13, 2020, including the amendment approved on October 28, 2019.
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 the Sarbanes‑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 the Sarbanes‑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 the Sarbanes‑Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Linkbase Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

Omitted from the exhibits filed with this annual report are certain instruments and agreements with respect to our long‑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.

104

Index of Exhibits

1.1	English translation of theestatutos (by‑laws) of Celulosa Arauco y Constitución S.A., as of April 13, 2020, including the amendment approved on October 28, 2019.
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 the Sarbanes‑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 the Sarbanes‑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 the Sarbanes‑Oxley Act of 2002.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Linkbase Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

The registrant hereby certifies that it meets all of the requirements for filing on Form 20‑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 16, 2020

 

CONSOLIDATED

FINANCIAL STATEMENTS

AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

INDEX

	Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM		F-2
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION	F-3
CONSOLIDATED STATEMENTS OF PROFIT OR LOSS	F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME	F-6
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY	F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS	F-8
NOTE 1. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS	F-9
NOTE 2. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES	F-32
NOTE 3. DISCLOSURE OF OTHER INFORMATION	F-35
NOTE 4. INVENTORIES	F-39
NOTE 5. CASH AND CASH EQUIVALENTS	F-40
NOTE 6. INCOME TAXES	F-41
NOTE 7. PROPERTY, PLANT AND EQUIPMENT	F-46
NOTE 8. LEASES	F-50
NOTE 9. REVENUE	F-50
NOTE 10. EMPLOYEE BENEFITS	F-51
NOTE 11. BALANCES IN FOREIGN CURRENCY AND FOREIGN CURRENCY EXCHANGE RATE IMPACT IN PROFIT OR LOSS.	F-52
NOTE 12. BORROWING COSTS	F-56
NOTE 13. RELATED PARTIES	F-57
NOTE 14. CONSOLIDATED FINANCIAL STATEMENTS	F-61
NOTE 15. INVESTMENTS IN ASSOCIATES	F-63
NOTE 16.  INTERESTS IN JOINT ARRANGEMENTS	F-66
NOTE 17. IMPAIRMENT OF ASSETS	F-69
NOTE 18. PROVISIONS, CONTINGENT ASSETS AND CONTINGENT LIABILITIES	F-71
NOTE 19. INTANGIBLE ASSETS	F-80
NOTE 20. BIOLOGICAL ASSETS	F-81
NOTE 21. ENVIRONMENTAL MATTERS	F-84
NOTE 22. NON-CURRENT ASSETS HELD FOR SALE	F-86
NOTE 23. FINANCIAL INSTRUMENTS	F-87
NOTE 24. REPORTABLE SEGMENTS	F-111
NOTE 25. OTHER NON-FINANCIAL ASSETS AND NON-FINANCIAL LIABILITIES	F-117
NOTE 26. DISTRIBUTABLE NET Profit AND EARNINGS PER SHARE	F-118
NOTE 27. SUBSEQUENT EVENTS	F-120

F-1

  

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 statements of financial position of Celulosa Arauco y Constitución S.A. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, 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, 2019, 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, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019 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

Santiago, Chile

April 15, 2020

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

F-2

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

		12-31-2019		12-31-2018
	Note	ThU.S.$		ThU.S.$
Assets
Current Assets
Cash and cash equivalents	5-23		1,560,012		1,075,942
Other current financial assets	23		3,370		497
Other current non-financial assets	25		174,110		129,854
Trade and other current receivables	23		642,315		839,184
Accounts receivable due from related companies	13		17,526		7,324
Current inventories	4		1,053,867		1,030,196
Current biological assets	20		275,792		315,924
Current tax assets	6		199,953		36,513
Total Current Assets other than assets or disposal groups classified as held for sale			3,926,945		3,435,434
Non-Current Assets or disposal groups classified as held for sale	22		4,436		5,726
Non-Current Assets or disposal groups classified as held for sale			4,436		5,726
Total Current Assets			3,931,381		3,441,160
Non-Current Assets
Other non-current financial assets	23		9,395		20,346
Other non-current non-financial assets	25		112,414		86,948
Trade and other non-current receivables	23		9,456		15,149
Accounts receivable due from related companies, non-current	13		-		481
Investments accounted for using equity method	15-16		293,118		358,053
Intangible assets other than goodwill	19		106,252		90,093
Goodwill	17		65,751		65,851
Property, plant and equipment	7		7,932,562		7,174,693
Non-current biological assets	20		3,393,634		3,336,339
Deferred tax assets	6		6,067		4,635
Total Non-Current Assets			11,928,649		11,152,588
Total Assets			15,860,030		14,593,748

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

F-3

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (continued)

		12-31-2019			12-31-2018
	Note	ThU.S.$			ThU.S.$
Equity and Liabilities
Liabilities
Current Liabilities
Other current financial liabilities	23		530,054			537,596
Trade and other current payables	23		673,057			659,618
Accounts payable to related companies	13		8,880			10,229
Other current provisions	18		1,259			413
Current tax liabilities	6		2,242			153,642
Current provisions for employee benefits	10		5,965			5,656
Other current non-financial liabilities	25		40,065			212,610
Total Current Liabilities other than assets included in disposal groups classified as held for sale			1,261,522			1,579,764
Total Current Liabilities			1,261,522			1,579,764
Non-Current Liabilities
Other non-current financial liabilities	23		5,654,011			4,044,279
Non-current payables			2,230			2,230
Other non-current provisions	18		31,765			33,884
Deferred tax liabilities	6		1,360,187			1,417,658
Non-current provisions for employee benefits	10		69,464			64,895
Other non-current non-financial liabilities	25		111,436			112,067
Total Non-Current Liabilities			7,229,093			5,675,013
Total Liabilities			8,490,615			7,254,777
Equity
Issued capital	3		353,618			353,618
Retained earnings			7,873,650			7,824,045
Other reserves			(892,864	)		(875,884	)
Equity attributable to parent company			7,334,404			7,301,779
Non-controlling interests			35,011			37,192
Total Equity			7,369,415			7,338,971
Total Equity and Liabilities			15,860,030			14,593,748

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

F-4

CONSOLIDATED STATEMENTS OF PROFIT OR LOSS

		For the years ended December 31,
		2019			2018			2017
	Note	ThU.S.$			ThU.S.$			ThU.S.$
Statements of profit or loss
Revenue	9		5,329,214			5,954,833			5,238,341
Cost of sales	3		(3,910,378	)		(3,722,749	)		(3,574,532	)
Gross profit			1,418,836			2,232,084			1,663,809
Other income	3		232,393			124,304			111,513
Distribution costs	3		(586,873	)		(556,805	)		(523,300	)
Administrative expenses	3		(554,038	)		(561,284	)		(521,294	)
Other expense	3		(203,698	)		(95,880	)		(240,165	)
Other gains (losses)			21,674			14,213			-
Profit from operating activities			328,294			1,156,632			490,563
Finance income	3		32,582			20,895			19,640
Finance costs	3		(273,639	)		(214,779	)		(287,958	)
Share of profit of associates and joint ventures accounted for using equity method	3-15		7,775			17,246			17,017
Exchange rate differences			(32,507	)		(26,470	)		98
Profit before income tax			62,505			953,524			239,360
Income Tax	6		(535	)		(226,765	)		30,992
Net Profit			61,970			726,759			270,352
Net profit attributable to
Net profit attributable to parent company			61,784			725,482			269,724
Net profit attributable to non-controlling interests			186			1,277			628
Net Profit			61,970			726,759			270,352
Basic and diluted earnings per share (in U.S.$ per share)
Basic and diluted earnings per share from continuing operations			0.5460			6.4111			2.3836
Basic and diluted earnings per share			0.5460			6.4111			2.3836

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

F-5

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

		For the years ended December 31,
		2019			2018			2017
	Note	ThU.S.$			ThU.S.$			ThU.S.$
Net profit			61,970			726,759			270,352
Components of other comprehensive income that will not be reclassified to profit or loss before tax:
Other comprehensive income before tax gains losses on remeasurements of defined benefit plans	10		(2,655	)		1,856			2,499
Other Comprehensive Income that will not be reclassified to profit or loss before tax			(2,655	)		1,856			2,499
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		(30,971	)		(184,876	)		11,873
Other Comprehensive Income before tax exchange differences on translation			(30,971	)		(184,876	)		11,873
Cash flow hedges
Gains (losses) on cash flow hedges, before tax	23		23,156			30,321			22,212
Recycle of cash flow hedges to profit or loss before tax	23		(29,227	)		(15,286	)		(16,965	)
Other Comprehensive Income before tax Cash flow hedges			(6,071	)		15,035			5,247
Share of other comprehensive income of associates and joint ventures accounted for using equity method that will be reclassified to profit or loss before tax
Share of other comprehensive income of associates and joint ventures accounted for using equity method that will be reclassified to profit or loss before tax			13,847			(1,657	)		8,754
Share of other comprehensive income of associates and joint ventures accounted for using equity method, before tax			13,847			(1,657	)		8,754
Other Comprehensive income that will be reclassified to profit or loss before tax			(23,195	)		(171,498	)		25,874
Income tax relating to components of other comprehensive income that will not be reclassified to profit or loss before tax
Income tax relating to remeasurements of defined benefit plans of other comprehensive income			717			(501	)		(673	)
Income tax relating to components of other comprehensive income that will not be reclassified to profit or loss before tax			717			(501	)		(673	)
Income tax relating to components of other comprehensive income that will be reclassified to profit or loss before tax
Income tax relating to cash flow hedges of other comprehensive income	6		1,686			(4,474	)		(5,917	)
Income tax relating to recycle of cash flow hedges			-			-			4,326
Income tax relating to share of other comprehensive income of associates and joint ventures accounted for using equity method that will be reclassified to profit or loss			(6,582	)		176			(2,086	)
Income tax relating to components of other comprehensive income that will be reclassified to profit or loss			(4,896	)		(4,298	)		(3,677	)
Other comprehensive (loss) income			(30,029	)		(174,441	)		24,023
Comprehensive (loss) income			31,941			552,318			294,375
Comprehensive Income attributable to
Comprehensive (loss) income, attributable to owners of parent company			32,732			555,294			293,988
Comprehensive (loss) income, attributable to non-controlling interests			(791	)		(2,976	)		387
Total comprehensive (loss) income			31,941			552,318			294,375

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

F-6

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

12-31-2019	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 at 01-01-2019		353,618		(872,395	)		13,395			(17,571	)		687		(875,884	)		7,824,045			7,301,779			37,192			7,338,971
Increase (decrease) for changes in accounting policies		-		-			-			-			-		-			(107	)		(107	)		-			(107	)
Restated opening balance		353,618		(872,395	)		13,395			(17,571	)		687		(875,884	)		7,823,938			7,301,672			37,192			7,338,864
Changes in Equity:
Comprehensive income
Net profit		-		-			-			-			-		-			61,784			61,784			186			61,970
Other comprehensive income, net of tax		-		(29,992	)		(4,385	)		(1,940	)		7,265		(29,052	)		-			(29,052	)		(977	)		(30,029	)
Comprehensive income		-		(29,992	)		(4,385	)		(1,940	)		7,265		(29,052	)		61,784			32,732			(791	)		31,941
Dividends		-		-			-			-			-		-			-			-			(1,390	)		(1,390	)
Increase (decrease) from transfers and other changes		-		-			-			-			12,072		12,072			(12,072	)		-			-			-
Changes in equity		-		(29,992	)		(4,385	)		(1,940	)		19,337		(16,980	)		49,712			32,732			(2,181	)		30,551
Closing balance at 12-31-2019		353,618		(902,387	)		9,010			(19,511	)		20,024		(892,864	)		7,873,650			7,334,404			35,011			7,369,415

12-31-2018	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 at 01-01-2018		353,618		(691,772	)		4,752			(18,926	)		2,168			(703,778	)		7,425,133			7,074,973			41,920			7,116,893
Increase (decrease) for changes in accounting policies		-		-			(1,918	)		-			-			(1,918	)		(1,957	)		(3,875	)		-			(3,875	)
Restated opening balance		353,618		(691,772	)		2,834			(18,926	)		2,168			(705,696	)		7,423,176			7,071,098			41,920			7,113,018
Changes in Equity:
Comprehensive income
Net profit		-		-			-			-			-			-			725,482			725,482			1,277			726,759
Other comprehensive income, net of tax		-		(180,623	)		10,561			1,355			(1,481	)		(170,188	)		-			(170,188	)		(4,253	)		(174,441	)
Comprehensive income		-		(180,623	)		10,561			1,355			(1,481	)		(170,188	)		725,482			555,294			(2,976	)		552,318
Dividends		-		-			-			-			-			-			(324,295	)		(324,295	)		(1,752	)		(326,047	)
Increase (decrease) from transfers and other changes		-		-			-			-			-			-			(318	)		(318	)		-			(318	)
Changes in equity		-		(180,623	)		10,561			1,355			(1,481	)		(170,188	)		400,869			230,681			(4,728	)		225,953
Closing balance at 12-31-2018		353,618		(872,395	)		13,395			(17,571	)		687			(875,884	)		7,824,045			7,301,779			37,192			7,338,971

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 at 01-01-2017		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 at 12-31-2017		353,618		(691,772	)		4,752		(18,926	)		2,168			(703,778	)		7,425,133			7,074,973			41,920			7,116,893

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

F-7

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the years ended December 31,
	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
STATEMENTS OF CASH FLOWS
Cash Flows from (used in) Operating Activities
Classes of cash receipts from operating activities
Receipts from sales of goods and rendering of services		5,913,495			6,129,806			5,508,705
Other cash receipts from operating activities		495,471			377,085			365,238
Classes of cash payments
Payments to suppliers for goods and services		(4,387,161	)		(4,198,750	)		(3,845,429	)
Payments to and on behalf of employees		(600,386	)		(558,230	)		(532,223	)
Other cash payments from operating activities		(176,128	)		(208,461	)		(128,314	)
Interest paid		(266,019	)		(172,280	)		(261,186	)
Interest received		29,655			11,738			18,966
Income taxes paid		(329,864	)		(90,556	)		(37,942	)
Other inflows (outflows) of cash, net		(6,225	)		(2,807	)		(10,452	)
Net Cash flows from Operating Activities		672,838			1,287,545			1,077,363
Cash flows (used in) investing activities
Cash flow from loss of control of subsidiaries and other businesses		102,080			-			-
Cash flow used in obtaining control of subsidiaries or other businesses		(171,261	)		(17,049	)		(15,918	)
Cash used for contributions and purchase of associates and joint ventures		(580	)		(3,023	)		-
Other cash receipts from sales of equity or debt instruments in other entities		2,320			2			1
Proceeds from sale of property, plant and equipment		10,354			9,392			6,308
Purchase of property, plant and equipment		(1,000,373	)		(675,958	)		(448,314	)
Purchase of intangible assets		(32,032	)		(2,682	)		(10,468	)
Proceeds from sales of other long-term assets		6,059			5,437			2,609
Purchase of other non-current assets		(247,802	)		(222,029	)		(179,184	)
Dividends received		13,007			10,880			7,287
Other inflows (outflows) of cash, net		487			1,048			4,331
Cash flows used Investing Activities		(1,320,305	)		(893,982	)		(633,348	)
Cash flows from (used in) Financing Activities
Total borrowings obtained		2,142,439			863,551			1,312,481
Debt obtained in long-term		2,125,332			485,077			1,025,096
Debt obtained in short-term		17,107			378,474			287,385
Repayments of borrowings		(721,952	)		(475,284	)		(1,627,711	)
Payments of lease liabilities		(80,323	)		(6,624	)		(4,938	)
Dividends paid		(182,109	)		(257,421	)		(121,586	)
Other outflows of cash, net		(10,623	)		(975	)		(2,285	)
Cash flows from (used in) Financing Activities		1,147,432			123,247			(444,039	)
Net increase (decrease) in Cash and Cash Equivalents before effect of exchange rate changes		502,529			516,810			(24	)
Effect of exchange rate changes on cash and cash equivalents		(18,459	)		(30,754	)		(2,343	)
Net increase (decrease) of Cash and Cash equivalents		484,070			486,056			(2,367	)
Cash and cash equivalents, at the beginning of the period		1,075,942			589,886			592,253
Cash and cash equivalents, at the end of the period		1,560,012			1,075,942			589,886

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

F-8

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2019 AND 2018

NOTE 1. PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS

Entity Information 

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

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. 

As of December 31, 2019, Arauco is controlled by Empresas Copec S.A., tax identification number 90,690,000-9, 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.

Moreover, Empresas Copec S.A. is controlled by the public corporation AntarChile S.A., tax identification number 96,556,310-5, which owns 60.8208% of Empresas Copec S.A. Furthermore, the ultimate shareholders of AntarChile S.A. and, consequently, of Empresas Copec S.A., are Mr. Roberto Angelini Rossi, tax identification number 5,625,652-0, and Mrs. Patricia Angelini Rossi, tax identification number 5,765,170-9.

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

F-9

Presentation of Consolidated Financial Statements  

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

-        Consolidated Statements of Financial Position as of December 31, 2019 and 2018.

- Consolidated Statements of Profit or Loss for the years ended December 31, 2019, 2018 and 2017.

- Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017.

- Consolidated Statements of Changes in Equity for the years ended December 31, 2019, 2018 and 2017.

- Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017.

- Explanatory disclosures (notes)

Period Covered by the Consolidated Financial Statements

As of December 31, 2019 and 2018 and for the periods between January 1 and December 31, 2019, 2018 and 2017.

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 15, 2020.

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-10

The currency used to finance operations is mainly the U.S. Dollar.

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

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-11

- 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

(c) the ability to use power over the investee to affect the amount of the investor’s returns.

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-12

 

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

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

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

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

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

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

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 personnel responsible for making such decisions are the Executive Vice-president and the Chief Executive Officer who are the highest authorities for making decisions and are 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.

F-13

e)          Functional currency

(i)           Functional currency

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

(ii)          Translation to the presentation currency of Arauco

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

(iii)         Foreign Currency Transactions

Transactions in currencies other than the functional currency are recognized at the exchange rates prevailing at the dates of the transactions. Profit or loss on transactions in currencies other than the functional currency resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognized in the 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 include cash-on-hand, deposits held on demand at financial entities 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

Initial classification

Arauco classifies its financial assets into the following categories: fair value through profit or loss and amortized cost.

Arauco does not have financial assets at fair value through other comprehensive income.

The classification is based on the business model used to manage the assets and the characteristics of their contractual cash flows. 

Management determines the classification of its financial assets at the time of their initial recognition.

F-14

(a) Financial assets at fair value through profit or loss: these instruments are initially measured at fair value. Net income and losses, including any income from interest or dividends, are registered in the profit or loss of the period. Financial assets are classified in the category of financial assets at fair value through profit or loss when they are maintained for negotiation or designated in their initial registration as assets at fair value through profit or loss. A financial asset can be classified in this category if it is acquired mainly for the purposes of being sold in the short-term. Gain or losses of assets held for negotiations are registered in the consolidated statements of Profit or Loss, and the related interest is registered independently as financial income. Derivatives are classified as acquired for negotiation also unless they are designated as hedging instruments.

(b) Assets measured at amortized cost: they are initially registered at the fair value of the transaction, adding or subtracting the transaction costs that are directly attributable to the issuance of the financial asset or financial liability. The financial asset is maintained within a business model, the objective of which is to maintain financial assets to obtain contractual cash flows and the contractual conditions of the asset give rise, on specified dates, to cash flows that are solely payments of principal and interests (“SPPI”) over the amount of the outstanding principal.

Subsequent measurement

Financial instruments are subsequently measured at fair value through profit or loss or amortized cost.

The classification is based on two criteria: i) the Company’s business model for the management of financial instruments, and ii) whether the contractual cash flows related to the financial instruments represent “Solely Payments of Principal and Interests”.

a) Financial assets at fair value through profit or loss: these instruments are subsequently measured at fair value. Net earnings and losses, including income from interests and dividends, are registered as profits or losses for the period. These instruments are held for negotiation and they are mainly acquired to be sold in the short term. Derivatives are also classified as held for negotiation, unless they are registered as hedging instruments. Financial instruments of this type are classified as Other Current and Non-Current Financial Assets. They are subsequently valuated by determining their fair value, registering changes in value in the consolidated statements of Profit or Loss, in the items of Financial Income or Financial Costs.

b) Financial assets measured at amortized cost: These instruments are subsequently measured at amortized cost minus accumulated amortizations, using the effective interest method and adjusted by loss allowance and volume discounts, in the case of financial assets. Financial income and expenses, foreign exchange income and losses, and impairment are registered in results. Any earnings or losses due to initial or subsequent reductions of the value of the asset are registered in the statement of profit or loss of the period. Loans and receivables are non-derivative financial instruments with fixed or determinable payments not traded in any active market. They are registered at amortized cost, registering accrued conditions directly in profit or loss.

Arauco measures accumulated losses in a quantity equivalent to expected credit losses during the lifelong commitment. Expected credit losses are based on contractual cash flow differences based on the allowance of each contract and the cash flows that Arauco expects. The difference is then discounted based on an approximation of the asset’s original effective interest rate. The asset’s carrying value is reduced as the allowance is used, and the loss is recognized in sales expenses in the financial statements. When an account receivable cannot be collected, it is regularized against the allowance account for receivables. Subsequent recoveries of previously impaired amounts are recognized as a debit in distribution costs.

F-15

Derivative financial instruments are explained in Note 1 h).

Financial liabilities

Arauco classifies its financial liabilities as follows: fair value through profit or loss, derivatives designated as effective hedging instruments and amortized costs.

Management determines the classification of its financial liabilities upon initial recognition. Financial liabilities are derecognized when the obligation is cancelled, settled or expired. When an existing financial liability is replaced with another of the same provider under substantially different terms, or where the terms of an existing liability are substantially amended, such exchange or modification is treated as a write-off of the original liability, with a new liability being recognized, and the difference between the respective carrying amounts is recognized in the consolidated statement of profit or loss.

Financial liabilities are initially recognized at fair value, and in the case of loans, they include the costs directly attributable to the transaction. The subsequent measurement of the financial liabilities depends on their classification:

Financial Liabilities at fair value through profit or loss

Financial liabilities are included in the category of financial liabilities at fair value through profit or loss when they are held for trading or originally designated at fair value through profit or loss. Income and losses from liabilities held for trading are recognized in profit or loss. This category includes non-designated derivatives for hedging accounting.

Financial Liabilities at amortized cost

Other financial liabilities are subsequently valued at their amortized cost based on the effective interest rate method. The amortized cost is calculated taking into account any premium or acquisition discount and includes the costs of transactions that are an integral part of the effective interest rate. This category includes Commercial Accounts Payable and Other Accounts Payable, lease liabilities, as well as the loans included in Other Current and Non-Current Financial Liabilities.

F-16

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 subsequently re-measured at fair value at the end of each reporting period. The resulting gain or loss is recognized in profit or loss unless the derivative is designated as a hedging instrument and complies with hedge accounting requirements, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

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

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

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

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

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

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

F-17

 

i)    Inventories

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

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

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

Biological assets are transferred to inventories when forests are harvested.

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

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

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

j)   Non-current assets held for sale

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

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

F-18

k)  Business Combinations

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

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

-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 5 Non-current Assets Held for Sale and Discontinued Operations are measured in accordance with such standard.

Acquisition-related costs are accounted for as expenses when they are incurred, except for costs to issue debt or equity securities which are recognized in accordance with IAS 32 and IFRS 9.

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

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

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

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.

F-19

 

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.

If the acquisition cost is lower than the fair value of the net assets of the associate acquired, the difference is recognized directly in statement of profit or loss in line Other gains (losses).

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.

F-20

 

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.

n)  Goodwill

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquired company, and the fair value of the acquirer's previously held equity interest in the acquired company (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If the total of consideration transferred, non-controlling interest recognized and previously held interest measured is less than the fair value of the net assets of the subsidiary acquired in the case of a bargain purchase, the difference is recognized directly in the 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 in subsidiaries Arauco Canada Ltd., Arauco do Brasil S.A. and Arauco Argentina S.A., generated on subsidiaries acquisitions whose functional currency is different from the functional currency of the parent company and presentation of these financial statements, are translated into U.S. Dollars at the closing exchange rate.

F-21

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 IFRS 16 for recognizing leases in a manner consistent with contracts with similar features and akin circumstances.

At the beginning of a contract, Arauco assesses whether the contract is, or if it contains, a lease. A contract is, or contains, a lease if it transfers the right to control the use of a given asset for a certain period of time, in exchange for consideration.

As of the initial date for recording a lease, Arauco, as lessee, recognizes an asset by the right of use at cost.

The cost of the asset for right of use comprises:

-        The amount of the initial measurement of the lease liability. This measurement is at present value of the payments for leases that have not been disbursed as of that date. Payments for leases are discounted using the incremental interest rate for financial loans;

- Payments for leases performed prior to or as of the initiation date, minus the lease incentives that have been received;

- The initial direct costs incurred by the lessee; and

- An estimation of the costs to be incurred by the lessee when dismantling and eliminating the underlying asset, restoring the location where the same is located, or restoring the underlying asset to the condition required under the terms and conditions of the lease, unless such costs are incurred in order to produce inventories. The lessee assumes obligations stemming from such costs either at the commencement date, or as a result of having used the underlying asset during a specific period.

After the initial recognition date (January 1, 2019), Arauco, as lessee, recognizes its asset for right of use by applying the cost model, minus the accumulated depreciation and impairment losses, and adjusted for remeasurement of the liability for lease.

F-22

 

At the beginning, Arauco in the capacity of lessee, recognizes the lease liability at present value of the lease payments that have not been disbursed as of that date. Lease payments are discounted using the incremental interest rate for financial loans.

After the initial recognition date (January 1, 2019), Arauco, as lessee, recognizes a liability for leases by increasing the book value, so as to reflect the interest over the liability for lease, reducing the amount in order to reflect the payments for leases that have been performed and once again recognizing the book value, so as to reflect the remeasurement and also to reflect the essential fixed payments for leases that have been revised.

Arauco presents the assets by right of use in the Consolidated Statement of Financial Position, within Properties, Plants and Equipment, and are further disclosed in Note 7. Likewise, lease liabilities are included in the Consolidated Statement of Financial Position within Other Current and Non-Current Financial Liabilities, and further disclosed as Lease liabilities in note 23.

IFRS 16 maintains substantially the accounting requirements of the lessor from IAS 17. Therefore, Arauco has continued to classify its leases as operational or financial, as the case may be.

Income from operating leases in which Arauco is the lessor are recognized on a straight-line basis during the term of the lease. Initial direct costs are added to the book value of the underlying asset and are recognized as expenses during the term of the lease on the same basis as the lease income. Leased assets are included within the statement of financial position, in property, plant and equipment. Arauco did not make adjustments with respect to assets that maintains as a lessor, as a result of IFRS 16 adoption.

Until December 31, 2018, Arauco applied IFRIC 4 to assess whether an arrangement was, or contained, a lease. Leases of assets in which Arauco substantially held all the risks and rewards of ownership were classified as financial leases. All other leases were classified as operating leases.

Financial leases were initially recognized at the beginning of the leases, 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 financial lease, the present value of lease payments are recognized as financial accounts receivable. The difference between the gross receivable and the present value of such amount, is recognized as financial return on capital.

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 its relative reasonable values, payments and considerations associated with the lease, from the rest of the elements incorporated into the contract.

F-23

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 statements of profit or loss.

r) Income taxes

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

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

Deferred taxes are recognized in accordance with the standards established in IAS 12 - Income Tax.

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. 

s) Provisions

Provisions are recognized when the Company has a present obligation, legal or constructive, as a result of past events, under which, it is probable that an outflow of resources will be required to settle the obligation; and when 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.

F-24

 t) Revenue recognition

Revenues are valued at fair value of the consideration received or to be received, derived from them.

Arauco analyses and takes under consideration all relevant facts and circumstances to apply the five-step model established under IFRS 15 to customer contracts: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price, and (v) recognise revenue. Additionally, Arauco evaluates the incremental costs of obtaining a contract and the costs incurred to comply with a contract.

Arauco recognizes revenues when the steps established in IFRS have been satisfactorily complied with.

Accounts receivable are recognized when control over goods or services has been transferred to the customer, because at this point of the time collection is unconditional and the passage of time is only needed to receive payment.

(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 committed 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. Revenue from the sale of goods are recognized when there is no obligation unsatisfied that could affect the customer’s acceptance of the product. The delivery is effective when the products are sent to the specific location, the risks of obsolescence and loss have been transferred to the customer and when Arauco has objective evidence that all acceptance criteria have been satisfied.

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. 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

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Revenue from the rendering of services is recognized as long as the performance obligation have been satisfied.

Revenue is recognized considering the stage of completion of the transaction at the date of the reporting period, when Arauco has the enforceable right of payment from the rendering of the services.

There is no significant financing component, given that sales are made with a reduced average collection period, which is in line with market practice.

Arauco mainly provides power supply services which are transacted principally in the spot market of the Sistema Eléctrico Nacional (SEN) (“National Electrical System”). According to current regulations, the prices on that market called “Marginal Costs” are calculated by the Coordinador Eléctrico Nacional (CEN) (“National Electrical Coordinator”) and are generally recognized in the period in which the services are rendered.

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

Arauco provides other non-core services such as port services and pest control whose revenues are derived from fixed price service contracts are recognized considering the stage of completion of the services rendered at the date of reporting, generally 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 the by-laws for preferred shares, if any, except where necessary to absorb accumulated losses from prior years.

On October 28, 2019, Arauco approved to amend the Company’s by-laws in order to establish that the Ordinary Shareholders’ Meeting will be determining, on an annually basis, the dividends to be distributed, without being subject to the 30% distributable minimum indicated by Chilean Corporations Law.

For the purposes of the annual distribution of the net profits on each period, it will be responsibility of the Ordinary Shareholders’ Meeting to determine the portion of such profits that will be distributed as dividend to the shareholders. Such determination will be made by the Shareholders’ meeting without being subject to the 30% minimum established in article 79 of Law No. 18,046 (regarding Corporations), who may agree on the distribution of a smaller percentage. In any case, the Board of Directors may, under the personal responsibility of the directors participating in the respective agreement, distribute interim dividends out of the profits of the corresponding year, provided there are no accumulated losses.

F-26

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.

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.

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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.

An allowance for doubtful accounts is established based on a measurement of expected losses using a simplified approach.

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

x) Employee Benefits

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

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

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

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

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

y) Employee Vacations

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

This obligation is presented in line item “Trade and Other current payables” in the consolidated statements of financial position.

F-28

z) Recent accounting pronouncements

a) Standards, interpretations and amendments that are mandatory for the first time for annual periods beginning on January 1, 2019:

Standards and interpretations	Content	Mandatory application for annual periods beginning on or after
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 23	Uncertain tax positions It clarifies the method for applying the acknowledgment and measurement requirements of IAS 12 when there is uncertainty regarding the fiscal treatments.	January 1, 2019

Amendments and improvements	Content	Mandatory application for annual periods beginning on or after
IAS 19	Employee Benefits Prescribe the accounting and disclosure for employee benefits, requiring an entity to recognise a liability where an employee has provided service and an expense when the entity consumes the economic benefits of employee service.	January 1, 20
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

The adoption of the standards, amendments and interpretations described above did not have a significant impact on Arauco Consolidated Financial Statements during its initial application period.

IFRS 16 - Leases

Arauco applied IFRS 16 for the first time, starting on January 1, 2019.

IFRS 16 introduces a single lessee accounting model.  The lessee is required to recognize an asset a right of use representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. There are recognition exceptions for short-term leases or low-value leases. Accounting for lessors remains similar to IAS 17, that means, lessors continue classifying the leases as financial or operational.

F-29

 

Entities can apply IFRS 16 using either a full retrospective or a modified retrospective approach for leases. If the company applies the modified retrospective approach it is not required to restate the comparative financial information and the cumulative effect of the initial application of IFRS 16 must be presented as an adjustment to the opening balances of retained earnings.

Arauco has adopted to recognize the cumulative effect of the initial application of the standard as an adjustment to the opening balance of retained earnings as of January 1, 2019. Given this alternative, it is not required to restate the comparative information.

In applying IFRS 16 for the first time, Arauco has used the following practical expedients permitted by the standard:

-       applying a single discount rate to a portfolio of leases with reasonably similar characteristics

- there were no onerous contracts as of January 1, 2019

- accounting for operating leases with a remaining lease term of less than 12 months as of January 1, 2019 as short-term leases

- excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and

- using hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

Arauco has also elected not to reassess whether a contract is or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date Arauco relied on its assessment made applying IAS 17 and Interpretation 4 “Determining whether an Arrangement contains a Lease”.

The following table shows the initial effects of the adoption of IFRS 16 as of January 1, 2019 on the Arauco Consolidated Financial Statements:

	January 1, 2019 ThU.S.$
Right of use assets		252,085
Advances granted		(4,308	)
Sublease		1,540
Lease liabilities		249,317

Advances granted are presented net in the line of other financial liabilities.

Sublease has a net impact on Accumulated earnings on January 1, 2019 of ThU.S.$ 107.

	2019 ThU.S.$
Operating leases as of December 31, 2018		111,927
Discounted using the lessee’s incremental borrowing rate as of January 1, 2019		89,605
Finance lease liabilities recognized as of December 31, 2018		68,187
Lease liabilities recognized due to IFRS 16 implementation		159,712
Total Lease liabilities as of January 1, 2019.		317,504

	January 1, 2019 ThU.S.$
Right of use assets - IFRS 16		252,085
Right of use assets - IAS 17		72,252
Increase (decrease) for changes in accounting policies		324,337

	January 1, 2019 ThU.S.$
Lease liabilities - IFRS 16		249,317
Lease liabilities - IAS 17		68,187
Increase (decrease) for changes in accounting policies		317,504

F-30

 

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

Standards andinterpretations	Content	Mandatory application for annual periods beginning on or after
IFRS 17	Insurance Contracts Supersedes IFRS 4. It changes mainly the accounting for insurance contracts and investments contracts.	January 1, 2021

Amendments andimprovements	Content	Mandatory application for annual periods beginning on or after
IFRS 10 y IAS 28-Amendments	Sale or Contribution of assets among an Investor and its Associates or Joint Ventures.	Indeterminate
IAS 1 y IAS 8	Presentation of Financial Statements and Accounting Policies, Changes in Accounting Estimates and Errors. Clarifies the definition of material and align the definition used in the Conceptual Framework and the standards themselves.	January 1, 2020
IFRS 3	Definition of a Business Narrows the definitions of a business	January 1, 2020
IFRS 9, IAS 39 and IFRS 7	Interest rate benchmark reform Provides certain reliefs in connection with interest rate benchmark reform.	January 1, 2020

 

Arauco estimates that the adoption of these standards, amendments and interpretations described above will not have a significant impact on Arauco’s Consolidated Financial Statements during its initial application period.

F-31

NOTE 2. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES

Changes to accounting policies

Arauco has decided to apply IFRS 16 Leases, in accordance with the transition options of this standard, retroactively with the accumulated effect of the initial application, recognized on January 1, 2019, without re-expressing its comparative financial statements as of December 31, 2018.

Arauco has adopted IFRS 16, recognizing liabilities in connection with leases that had been previously classified as operating leases under IAS 17 – Leases.

The lease liabilities under IFRS 16 were measured at the present value of the remaining payments for leases, discounted using the average incremental rate of 4.82%, applied as of January 1, 2019.

The assets by right of use were measured by an amount equivalent to the lease liability, adjusted by the amount of any lease payment that was prepaid or accumulated, in connection with the lease recognized in the balance sheet as of December 31, 2018.

As a consequence of the adoption of IFRS 16, Properties, Plants and Equipment increased by ThU.S.$252,085 and Other Financial Liabilities by ThU.S.$249,317 on January 1, 2019. The following table shows a reconciliation between both amounts.

	January 1, 2019 ThU.S.$
Right of use assets		252,085
Advances granted		(4,308	)
Sublease		1,540
Lease liabilities		249,317

Advances granted are presented net in the line of other financial liabilities.

Sublease has a net impact on Accumulated earnings on January 1, 2019 of ThU.S.$ 107.

Upon applying IFRS 16, Arauco chose not to apply the requirements for recognizing a liability and an asset for right of use for the leases which term expires within the 12 months following January 1, 2019 and for those where the underlying asset had insignificant value. The payments related to those leases are recognized on a straight-line basis as an expense in the consolidated statement of profit or loss.

IFRS 9 - Financial Instruments.

IFRS 9 came into force on January 1, 2018, replacing IAS 39, and its application has not given rise to significant impact on Arauco’s Consolidated Financial Statements. The Company carried out a detailed assessment of the three aspects of the standard and its impact on the consolidated financial statements, which can be summarized as follows:

F-32

 

i) Classification and measurement: as required by IFRS 9, Arauco changed its classification method for financial assets based on two concepts: the characteristics of the financial assets’ contractual cash flows and of Arauco’s business model, the purpose of which is achieved through the collection of contractual cash flows and the sale of financial assets. Under this new method the four classification categories of IFRS 39 were replaced with the following:

- Amortized cost, where the financial assets are kept in a business model the purpose of which is the generation of contractual cash flows;

- Fair value through other comprehensive income, where the financial assets are kept in a business model the purpose of which is achieved by generating contractual cash flows and selling financial assets;

- Fair value through profit or loss, a residual category which comprises financial instruments that are not kept under any of the business models referenced above, including those kept for negotiation and those designated at fair value in their initial recognition.

With regard to the measurement of financial liabilities, IFRS 9 retains to a great extent the prior accounting treatment of IAS 39, with limited amendments, under which the majority of these liabilities are measured at amortized cost, thereby enabling the designation of a financial liability at fair value with changes in results, provided that certain criteria are met. However, the standard introduced new provisions for liabilities designated at fair value through profit or loss, by virtue of which under certain circumstances the changes in the fair value related to the variation of the “own credit risk” are recognized in other comprehensive income.

Management reviewed and assessed Arauco’s financial assets as of January 1, 2018, based on the hitherto prevailing events and circumstances, and concluded that the new classification requirements do not have an impact on the accounting of its financial assets. The loans and the accounts receivable are maintained in order to obtain the contractual cash flows that only represent the payment of principal and interest; therefore, the criteria for them to be measured at amortized cost under IFRS 9, are fulfilled. Regarding the impairment of the financial assets, IFRS 9 requires an expected credit losses model, as opposed to the incurred loss model set forth by IAS 39. This means that, under IFRS 9, impairments are recorded, generally, earlier compared with the previous model. The new impairment model is applied to the financial assets measured at amortized cost or measured at their fair value through other comprehensive income, except for investments in equity instruments. Impairment provisions are measured based on:

• The expected credit losses for the upcoming 12 months; or

• The expected credit losses during the entire lifespan of the asset, if on the date of submission of the Consolidated Financial Statements, a significant increase in the credit risk of a financial instrument were to occur, as from the initial recognition thereof.

IFRS 9 also establishes a simplified approach to measure the correction of values for losses at a sum equal to the expected credit loss during the lifespan of the asset for commercial accounts receivable, contractual assets, or accounts receivable for leases. Arauco chose to apply this policy for the aforementioned financial assets.

ii) Hedging accounting: IFRS 9 also introduced a new model for hedging accounting, with the purpose of aligning accounting more closely with the risk management activities of the companies and of establishing an approach that would be more principle-based. The new approach allows for an improved reflection of the risk management activities in the financial statements, allowing for more elements to be eligible as hedged elements: risk component of non-financial items, net positions and aggregate exposures (in other words, a combination of a non-derivative exposure and a derivative). The most significant changes regarding the hedging instruments, when compared with the hedging accounting method employed under IAS 39, pertains to the possibility of deferring the temporary value of an option, the forward points of forward contracts, and the difference of the monetary base in other comprehensive income, until the time when the hedged element has an impact on results. IFRS eliminated the quantitative requirement from the effectiveness tests envisaged under IAS 39, whereby the results had to be within the 80%-125% range, thus allowing for the evaluation of the efficacy to be aligned with the management of the risk through the demonstration of the existence of an economic ratio between the hedging instrument and the hedged item, while also allowing the possibility of rebalancing the hedging ratio if the risk management objective remains unaltered. Nevertheless, retrospective inefficacy must still be valuated and recognized. Arauco applied the new requirements of IFRS 9 since the date of its adoption, as of January 1, 2018.

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As of January 1, 2018, the application of IFRS has had the following initial impacts on Arauco’s Consolidated Financial Statements:

Hedging assets net
	ThU.S.$
Closing balance at December 31, 2017 - calculated under IAS 39		52,057
Amounts restated through reserves		(2,627	)
Opening balance at January 1, 2018 - under IFRS 9		49,430
Loss allowance for trade receivables
	ThU.S.$
Closing loss allowance at December 31, 2017 - calculated under IAS 39		(17,785	)
Amounts restated through retained earnings		(2,875	)
Closing loss allowance at January 1, 2018 - under IFRS 9		(20,660	)

IFRS 9 adjustments net of deferred taxes
	ThU.S.$
Amounts restated through reserves		(2,627	)
Amounts restated through retained earnings		(2,875	)
Deferred taxes		1,627
Increase (decrease) due to changes to accounting policies		(3,875	)

IFRS 15 – Revenue from Contracts with Customers.

As from January 1, 2018, Arauco has decided to apply IFRS 15 using the modified retrospective method, recognizing the accumulated effect of the initial application as an adjustment to the opening balance of the retained earnings of year 2018. However, no significant effects impacting Arauco’s Consolidated Financial Statements were identified and there were no adjustment to the opening balance of retained earnings.

This standard requires more detailed disclosures than those required under the previous standards, with the purpose of supplying more complete information regarding the nature, amounts, schedule and certainty of the income and cash flows derived from the contracts with clients.

In addition to the submission of more extensive disclosures regarding Arauco’s income transactions, the application of IFRS 15 has not had any impact upon Arauco’s financial position or financial performance. During 2017, the Arauco Group carried out an implementation project, in order to identify and measure the potential impacts of applying IFRS 15 to its consolidated financial statements. This project identified all of the income flows from Arauco’s ordinary activities, the knowledge of the business’s traditional practices, a thorough evaluation of each type of contract with clients, and the determination of the registration methodology for this income under the current rules. A special evaluation was carried out regarding the contracts that contain key aspects of IFRS 15 and certain features that are of particular interest for Arauco, such as: identification of contractual obligations, contracts with multiple obligations and moment of the recognition, contracts with a variable consideration, significant financing components, principal versus agent analysis, existence of warranties for type of service, and capitalization of the costs of obtaining and performing a contract. As mentioned in this Note 1, Arauco’s main activity is the production and sale of products related to the forestry and timber industry. Considering the nature of the goods and services that are being offered as well as the aforementioned characteristics of the income flows, Arauco did not identify impacts over the consolidated financial statements at the moment of initially applying IFRS 15, that is, as of January 1, 2018. The type of revenue and acknowledgments are described in Notes 9 and 24.

Changes to accounting estimates

As of December 31, 2019, there have been no changes regarding the accounting estimates with respect to the 2018 and 2017 financial years.

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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

	12-31-2019	12-31-2018
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
	12-31-2019	12-31-2018
Number of Shares Issued and Fully Paid by Type of Capital in Ordinary Shares	113,159,655

b)          Dividends paid

In the 2019 period there was no interim dividend payment. The interim dividend paid in December 2018 was equivalent to 20% of the distributable net profit calculated as of the end of September 2018 and was considered a decrease in the consolidated statements of changes in equity.

As of December 31, 2019, in accordance with the current dividends policy, Arauco is not required to recognize a minimum dividend provision. The ThU.S. $324,295 as of December 31, 2018 (ThU.S.$ 174,266 as of December 31, 2017) presented in the consolidated statements of changes in equity correspond to the minimum dividend provision recorded for the 2018 period.

In the consolidated statements of cash flows, the Dividends Paid line shows an amount of ThU.S.$ 182,109 as of December 31, 2019 (ThU.S.$257,421 and ThU.S.$ 121,586 are presented for the years ended December 31, 2018 and 2017 respectively), of which ThU.S.$ 182,040 (ThU.S.$256,029 and ThU.S.$ 119,499 as of December 31, 2018 and 2017 respectively) correspond to the payment of dividends of the Parent Company.

The following are the dividends paid and the corresponding per share amounts during the periods 2019 and 2018:

Detail of Dividend Paid, Ordinary Shares
Dividend Paid	FinalDividend
Type of Shares for which there is a Dividend Paid	Ordinary Shares
Date of Dividend Paid	05-08-2019
Amount of Dividend	ThU.S.$ 182,040
Number of Shares for which Dividends are Paid	113,159,655
Dividend per Share	U.S.$ 1.60870

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Detail of Dividend Paid, Ordinary Shares
Dividend Paid	InterimDividend
Type of Shares for which there is a Dividend Paid	Ordinary Shares
Date of Dividend Paid	12-12-2018
Amount of Dividend	ThU.S.$ 142,256
Number of Shares for which Dividends are Paid	113,159,655
Dividend per Share	U.S.$ 1.25712

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	05-10-2018
Amount of Dividend	ThU.S.$113,773
Number of Shares for which Dividends are Paid	113,159,655
Dividend per Share	U.S.$ 1.00542

Detail of Dividend Paid, Ordinary Shares
Dividend Paid	InterimDividend
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

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

The hedging reserve includes the cash flow hedge reserve and the costs of hedging reserve. The cash flow hedge reserve is used to recognise the effective portion of gains or losses on derivatives that are designated and qualify as cash flow hedges.

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.

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Other reserves

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

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, 2019, 2018 and 2017 are as follows:

	January - December
	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
Classes of Other Income
Other Income, Total		232,393			124,304			111,513
Gain from changes in fair value of biological assets (See note 20)		154,705			84,476			83,031
Net income from insurance compensation		2,098			1,788			1,305
Revenue from export promotion		1,185			3,570			3,542
Lease income		1,995			2,156			3,061
Gain on sales of assets		15,685			13,164			13,444
Access easement		296			260			565
Compensations received		1,210			4,554			283
Gain on sales of associates		40,842			-			-
Other operating results (*)		14,377			14,336			6,282
Classes of Other Expenses by activity
Total of Other Expenses by activity		(203,698	)		(95,880	)		(240,165	)
Depreciation		-			(523	)		(466	)
Legal expenses		(5,465	)		(3,832	)		(3,882	)
Impairment provision for property, plant and equipment and others		(115,812	)		(31,680	)		(33,240	)
Operating expenses related to staff restructuring or from plants stoppage or closed		(20,301	)		(2,718	)		(7,275	)
Expenses related to projects		(13,407	)		(15,497	)		(2,139	)
Loss of asset sales		(11,783	)		(8,533	)		(4,691	)
Loss and repair of assets		(1,287	)		(430	)		(3,739	)
Loss of forest due to fires (**)		(7,541	)		(2,584	)		(138,139	)
Other Taxes		(15,835	)		(16,821	)		(17,463	)
Research and development expenses		(3,851	)		(1,888	)		(2,594	)
Fines, readjustments and interests		(1,513	)		(788	)		(3,675	)
Other expenses		(6,903	)		(10,586	)		(22,862	)
Classes of financing income
Financing income, total		32,582			20,895			19,640
Financial income from mutual funds - term deposits		21,841			13,177			11,023
Financial income resulting from swap - forward instruments		490			596			3,602
Other financial income		10,251			7,122			5,015
Classes of financing costs
Financing costs, Total		(273,639	)		(214,779	)		(287,958	)
Interest expense, Banks loans		(34,576	)		(29,320	)		(31,014	)
Interest expense, Bonds		(178,801	)		(142,846	)		(223,602	)
Interest expense, other financial instruments		(28,326	)		(18,716	)		(15,706	)
Interest expense for right of use		(11,436	)		-			-
Other financial costs		(20,500	)		(23,897	)		(17,636	)
Share of profit (loss) of associates and joint ventures accountedfor using equity method
Total		7,775			17,246			17,017
Investments in associates		6,786			3,043			4,855
Joint ventures		989			14,203			12,162

(*) Other operating results includes extraction of sand and gravel from wharfage and indemnities, income from contributed assets (Inv. Agrícola San Gerardo SpA), income from adjustments and interests related to fines, among others.

(**) Loss of forest due to fires are presented net of ThU.S.$35,000 from insurance compensation as of December 2017.

F-37

 

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

	January - December
	2019		2018		2017
Cost of sales (*)	ThU.S.$		ThU.S.$		ThU.S.$
Timber		879,583		691,129		725,114
Forestry labor costs		547,749		672,233		631,276
Depreciation and amortization		409,442		377,557		389,847
Depreciation for right of use		64,434		-		-
Maintenance costs		294,853		280,715		262,764
Chemical costs		557,074		560,241		517,478
Sawmill Services		140,220		140,106		109,776
Other Raw Materials		236,250		228,701		188,874
Other Indirect costs		149,853		185,424		178,447
Energy and fuel		212,655		207,712		186,041
Cost of electricity		34,871		34,301		42,008
Wage and salaries		383,394		344,630		342,907
Total		3,910,378		3,722,749		3,574,532

(*) Total amount is composed of the cost of inventory sales for ThU.S.$ 3,861,891 (ThU.S.$ 3,662,348 and ThU.S.$ 3,510,009 at December 31, 2018 and 2017, respectively) and the cost of rendering services for ThU.S.$ 48,487 (ThU.S.$ 60,401 as of December 31, 2018)

	January - December
	2019		2018		2017
Distribution costs	ThU.S.$		ThU.S.$		ThU.S.$
Selling costs		38,097		39,402		39,175
Commissions		13,573		14,629		14,880
Insurance		4,405		4,266		3,620
Provision for doubtful accounts		981		3,144		(245	)
Other selling costs		19,138		17,363		20,920
Shipping and freight costs		548,776		517,403		484,125
Port services		36,145		28,064		30,996
Freights		472,542		440,886		409,801
Depreciation for right of use		1,792		-		-
Other shipping and freight costs (internment, warehousing, stowage, customs and other costs)		38,297		48,453		43,328
Total		586,873		556,805		523,300

	January - December
	2019		2018		2017
Administrative expenses	ThU.S.$		ThU.S.$		ThU.S.$
Wages and salaries		229,224		247,927		218,720
Marketing, advertising, promotion and publications expenses		18,127		12,650		10,046
Insurances		19,825		15,538		17,122
Depreciation and amortization		29,412		27,879		28,210
Depreciation for right of use		10,775		-		-
Computer services		34,931		27,434		27,193
Lease rentals (offices, other property and vehicles)		7,038		14,249		14,195
Donations, contributions, scholarships		9,980		13,952		12,772
Fees (legal and technical advisors)		47,889		51,039		43,107
Property taxes, city permits and rights		16,371		17,645		17,281
Cleaning services, security services and transportation		22,959		24,089		25,153
Third-party variable services (maneuvers, logistics)		40,432		43,573		46,097
Basic services		9,537		9,467		8,423
Maintenance and repair		7,238		6,973		5,579
Seminars, courses, training materials		3,091		3,117		2,526
Other administration expenses (travels, clothing and safety equipment, environmental expenses, audits and others)		47,209		45,752		44,870
Total		554,038		561,284		521,294

F-38

 

NOTE 4. INVENTORIES

	12-31-2019		12-31-2018
Components of Inventory	ThU.S.$		ThU.S.$
Raw materials		129,004		111,483
Production supplies		128,229		122,794
Work in progress		69,760		66,432
Finished goods		532,200		554,933
Spare Parts		194,674		174,554
Total Inventories		1,053,867		1,030,196

Inventories recognized as cost of sales as of December 31, 2019 were ThU.S.$3,861,891 (ThU.S.$3,662,348 and ThU.S.$3,510,009 as of December 31, 2018 and 2017, respectively).                      

In order to have the inventories recorded at net realizable value as of December 31, 2019, a net decrease of inventories was recognized associated with a higher provision of obsolescence of ThU.S.$26,877 (ThU.S.$2,038 and ThU.S.$ 1,264 as of December 31, 2018 and 2017, respectively). As of December 31, 2019, the amount of obsolescence provision is ThU.S.$53,180 (ThU.S.$26,303 as of December 31, 2018).

As of December 31, 2019, there were inventory write-offs of ThU.S.$1,734 (ThU.S.$6,760 and ThU.S.$ 1,427 as of December 31, 2018 and 2017, 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.

F-39

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.

The investment 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.

	12-31-2019		12-31-2018
Components of Cash and Cash Equivalents	ThU.S.$		ThU.S.$
Cash on hand		177		126
Bank checking account balances		314,804		327,006
Time deposits		611,073		478,775
Mutual funds		633,958		270,035
Total		1,560,012		1,075,942

The risk classification of the mutual funds in effect as of December 31, 2019 and December 31, 2018 is shown below.

	12-31-2019 ThU.S.$		12-31-2018 ThU.S.$
AAAfm		624,534		268,237
No classification		9,424		1,798
Total Mutual Funds		633,958		270,035

Changes in Financial Liabilities

							Cash Flow
	Opening balance 01-01-2019		Increase (decrease) for changes in accounting policies		Re-expressed opening balance		Borrowings obtained		Borrowings paid			Commissions paid			Interest paid			Accrued interest		Inflation adjustment			Increase (decrease) due to business combination		Non-cash movements			Closing balance 12-31-2019
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Borrowings from banks		940,435		-		940,435		156,350		(143,998	)		(4,797	)		(36,902	)		31,480		(125	)		6,738		(2,159	)		947,022
Hedging liabilities		71,599		-		71,599		-		-			-			(29,464	)		29,464		-			-		62,676			134,275
Bonds and promissory notes		3,501,654		-		3,501,654		1,986,089		(577,954	)		(5,900	)		(188,748	)		190,765		(66,385	)		4,324		(12,102	)		4,831,743
Lease liabilities (IFRS 16)		68,187		249,317		317,504		-		(80,323	)		-			(10,905	)		10,601		(9,339	)		4,133		39,354			271,025
Total		4,581,875		249,317		4,831,192		2,142,439		(802,275	)		(10,697	)		(266,019	)		262,310		(75,849	)		15,195		87,769			6,184,065

			Cash Flow
	Opening balance 01-01-2018		Borrowings obtained		Borrowings paid			Interest paid			Accrued  interest		Inflation adjustment			Non-cash movements			Closing balance 12-31-2018
	ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$
Borrowings from banks		858,457		534,474		(453,789	)		(28,397	)		30,133		761			(1,204	)		940,435
Hedging liabilities		5,393		-		-			(803	)		-		(138	)		67,147			71,599
Bonds and promissory notes		3,302,685		329,077		(21,495	)		(143,080	)		144,116		(112,773	)		3,124			3,501,654
Lease liabilities (IFRS 16)		112,376		-		(6,624	)		-			-		(1,431	)		(36,134	)		68,187
Total		4,278,911		863,551		(481,908	)		(172,280	)		174,249		(113,581	)		32,933			4,581,875

F-40

NOTE 6. INCOME TAXES

The tax rates applicable in the countries in which Arauco operates are 27% in Chile, 30% in Argentina and Mexico, 34% in Brazil, 25% in Uruguay and 21% in the United States (federal tax).

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.

On March 25, 2019, the subsidiary Arauco Argentina S.A. chose to conduct the Tax Reappraisal set forth in Title X – Chapter 1 of Law No. 27,430. The option was exercised for all Properties, Plants and Equipment’s included in the category of amortizable movable assets, pursuant to the income tax law, which were adjusted to inflation using the coefficients published in such law for the purposes of calculating the aforementioned tax. The effect of the special tax in the presentation was $122,835,595 argentine pesos (equivalent to ThU.S.$2,053 as of December 31, 2019), which was paid in six instalments during year 2019. Additionally, the increase of the value of these tax assets, arising from this adjustment, generated a decrease of the liabilities for deferred taxes as of December 31, 2019 of approximately ThU.S.$12,629. Both the loss for the special tax as well as the profits for the decrease of the deferred tax, are shown in the Income tax line.

F-41

 

Deferred Tax Assets

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

	12-31-2019			12-31-2018
Deferred Tax Assets	ThU.S.$			ThU.S.$
Deferred tax Assets relating to Provisions		5,749			6,105
Deferred tax Assets relating to Accrued Liabilities		7,182			10,906
Deferred tax Assets relating to Post-Employment benefits		20,378			19,072
Deferred tax Assets relating to Property, Plant and equipment		16,609			10,125
Deferred tax Assets relating to Impairment provision		20,169			11,963
Deferred tax Assets relating to Financial Instruments		68,390			9,761
Deferred tax Assets relating to Tax Loss Carryforward		144,652			109,320
Deferred tax Assets relating to Inventories		12,460			5,532
Deferred tax Assets relating to Provisions for Income		6,631			7,443
Deferred tax Assets relating to Allowance for Doubtful Accounts		4,349			5,001
Deferred tax Assets relating to Intangible revaluation		6,044			7,651
Deferred tax Assets relating to tax credits		8,029			-
Deferred tax Assets relating to Other Deductible Temporary Differences		16,161			11,328
Total Deferred Tax Assets		336,803			214,207
Offsetting presentation		(330,736	)		(209,572	)
Net Effect		6,067			4,635

Certain subsidiaries of Arauco mainly in Chile, USA, 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.$550,551 (ThU.S.$ 368,938 at December 31, 2018), which are mainly originated by operational and financial losses.

In addition, as of the closing date of these consolidated financial statements there are ThU.S.$188,474 (ThU.S.$ 183,162 at December 31, 2018) of non-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:

	12-31-2019			12-31-2018
Deferred Tax Liabilities	ThU.S.$			ThU.S.$
Deferred tax Liabilities relating to Property, Plant and Equipment		900,415			831,471
Deferred tax Liabilities relating to Financial Instruments		25,630			14,225
Deferred tax Liabilities relating to Biological Assets		642,221			661,582
Deferred tax Liabilities relating to Inventory		38,251			39,025
Deferred tax Liabilities relating to Prepaid Expenses		41,338			37,897
Deferred tax Liabilities relating to Intangible		17,942			20,240
Deferred tax Liabilities relating to Other Taxable Temporary Differences		25,126			22,790
Total Deferred Tax Liabilities		1,690,923			1,627,230
Offsetting presentation		(330,736	)		(209,572	)
Net Effect		1,360,187			1,417,658

The effect of changes in current and deferred tax liabilities related to financial hedging instruments corresponds to a credit of ThU.S.$1,686 as of December 31, 2019 (ThU.S.$4,474 as of December 31, 2018), which is presented net in Reserves for Cash Flow Hedges in the Consolidated Statement of Changes in Equity.

F-42

Reconciliation of deferred tax assets and liabilities

						Deferred tax of items charged		Increase (decrease)		Increase (decrease)
	Opening Balance 01-01-2019		Deferred tax Income (Expenses)			to other  comprehensive  income		through business combinations		Net exchange differences			Closing balance 12-31-2019
Deferred Tax Assets	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$			ThU.S$
Deferred tax Assets relating to Provisions		6,105		(517	)		-		244		(83	)		5,749
Deferred tax Assets relating to Accrued Liabilities		10,906		(3,921	)		-		197		-			7,182
Deferred tax Assets relating to Post-Employment benefits		19,072		423			717		150		16			20,378
Deferred tax Assets relating to Property, Plant and equipment		10,125		6,484			-		-		-			16,609
Deferred tax Assets relating to Impairment provision		11,963		8,385			-		-		(179	)		20,169
Deferred tax Assets relating to Financial Instruments		9,761		55,087			3,609		-		(67	)		68,390
Deferred tax Assets relating to Tax Loss Carryforward		109,320		35,577			-		1,505		(1,750	)		144,652
Deferred tax Assets relating to Inventories		5,532		6,288			-		279		361			12,460
Deferred tax Assets relating to Provisions for Income		7,443		(657	)		-		112		(267	)		6,631
Deferred tax Assets relating to Allowance for Doubtful Accounts		5,001		(645	)		-		68		(75	)		4,349
Deferred tax Assets relating to Intangible revaluation		7,651		(1,345	)		-		-		(262	)		6,044
Deferred tax Assets relating to tax credits		-		8,029			-		-		-			8,029
Deferred tax Assets relating to Other Deductible Temporary Differences		11,328		4,470			-		731		(368	)		16,161
Total Deferred Tax Assets		214,207		117,658			4,326		3,286		(2,674	)		336,803
						Deferred tax of items charged		Increase (decrease)		Increase (decrease)
	Opening Balance 01-01-2019		Deferred tax Income (Expenses)			to other comprehensive income		through business combinations		Net exchange differences			Closing balance 12-31-2019
Deferred Tax Liabilities	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$			ThU.S$
Deferred tax Liabilities relating to Property, Plant and Equipment		831,471		66,656			-		4,234		(1,946	)		900,415
Deferred tax Liabilities relating to Financial Instruments		14,225		11,405			-		-		-			25,630
Deferred tax Liabilities relating to Biological Assets		661,582		(15,770	)		-		-		(3,591	)		642,221
Deferred tax Liabilities relating to Inventory		39,025		(774	)		-		-		-			38,251
Deferred tax Liabilities relating to Prepaid Expenses		37,897		3,487			-		69		(115	)		41,338
Deferred tax Liabilities relating to Intangible		20,240		(1,914	)		-		-		(384	)		17,942
Deferred tax Liabilities relating to Other Taxable Temporary Differences		22,790		2,905			-		182		(751	)		25,126
Total Deferred Tax Liabilities		1,627,230		65,995			-		4,485		(6,787	)		1,690,923

	Opening Balance				Opening Balance		Deferred tax			Deferred tax ofitems			Increase (decrease)			Closing
	01-01-2018 IAS 39		Amounts restated		01-01-2018 IFRS 9		Expenses (Income)			charged to othercomprehensive income			Net exchange differences			balance 12-31-2018
Deferred Tax Assets	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S$
Deferred tax Assets relating to Provisions		7,433		-		7,433		(1,015	)		-			(313	)		6,105
Deferred tax Assets relating to Accrued Liabilities		11,267		-		11,267		(361	)		-			-			10,906
Deferred tax Assets relating to Post-Employment benefits		19,276		-		19,276		297			(504	)		3			19,072
Deferred tax Assets relating to Property, Plant and equipment		11,657		-		11,657		(1,532	)		-			-			10,125
Deferred tax Assets relating to Impairment provision		13,640		-		13,640		-						(1,677	)		11,963
Deferred tax Assets relating to Financial Instruments		4,348		709		5,057		(507	)		5,211			-			9,761
Deferred tax Assets relating to Tax Loss Carryforward		62,706		-		62,706		53,103			-			(6,489	)		109,320
Deferred tax Assets relating to Inventories		5,941		-		5,941		(378	)		-			(31	)		5,532
Deferred tax Assets relating to Provisions for Income		21,354		-		21,354		(13,910	)		-			(1	)		7,443
Deferred tax Assets relating to Allowance for Doubtful Accounts		5,149		918		6,067		(843	)		-			(223	)		5,001
Deferred tax Assets relating to Intangible revaluation		10,389		-		10,389		(1,244	)		-			(1,494	)		7,651
Deferred tax Assets relating to Other Deductible Temporary Differences		15,907		-		15,907		(3,838	)		-			(741	)		11,328
Total Deferred Tax Assets		189,067		1,627		190,694		29,772			4,707			(10,966	)		214,207
	Opening Balance				Opening Balance		Deferred tax			Deferred taxof  itemscharged			Increase (decrease)			Closing
	01-01-2018 IAS 39		Amounts restated		01-01-2018 IFRS 9		Expenses (Income)			toothercomprehensiveIncome			Net exchange differences			balance 12-31-2018
Deferred Tax Liabilities	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S$
Deferred tax Liabilities relating to Property, Plant and Equipment		862,681		-		862,681		(23,428	)		-			(7,782	)		831,471
Deferred tax Liabilities relating to Financial Instruments		12,684		-		12,684		1,542			-			(1	)		14,225
Deferred tax Liabilities relating to Biological Assets		676,876		-		676,876		2,060			-			(17,354	)		661,582
Deferred tax Liabilities relating to Inventory		32,580		-		32,580		6,445			-			-			39,025
Deferred tax Liabilities relating to Prepaid Expenses		41,600		-		41,600		(3,703	)		-			-			37,897
Deferred tax Liabilities relating to Intangible		22,014		-		22,014		(562	)		-			(1,212	)		20,240
Deferred tax Liabilities relating to Other Taxable Temporary Differences		17,731		-		17,731		6,450			-			(1,391	)		22,790
Total Deferred Tax Liabilities		1,666,166		-		1,666,166		(11,196	)		-			(27,740	)		1,627,230

F-43

 

 Temporary Differences

The following tables summarize the deductible and taxable temporary differences:

Detail of classes of Deferred Tax Temporary Differences	12-31-2019				12-31-2018
	Deductible		Taxable		Deductible		Taxable
	Difference		Difference		Difference		Difference
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Deferred Tax Assets		192,151		-		104,887		-
Deferred Tax Assets - Tax loss carryforward		144,652		-		109,320		-
Deferred Tax Liabilities		-		1,690,923		-		1,627,230
Total		336,803		1,690,923		214,207		1,627,230

	January - December
Detail of Temporary Difference Income and Loss Amounts	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
Deferred Tax Assets		82,081			(23,331	)		6,079
Deferred Tax Assets - Tax loss carryforward		35,577			53,103			7,270
Deferred Tax Liabilities		(65,995	)		11,196			168,279
Total		51,663			40,968			181,628

 

Income Tax Expense

Income tax expense consists of the following:

	January - December
Income Tax composition	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
Current income tax expense		(54,194	)		(270,252	)		(155,292	)
Tax benefit arising from unrecognized tax assets previously used to reduce current tax expense		3,771			4,471			3,018
Prior period current income tax adjustments		(2,912	)		(1,732	)		(227	)
Other current benefit tax (expenses)		1,137			(220	)		1,865
Current Tax Expense, Net		(52,198	)		(267,733	)		(150,636	)
Deferred tax expense relating to origination and reversal of temporary differences		16,086			(12,135	)		174,358
Tax benefit arising from previously unrecognized tax loss carryforward		35,577			53,103			7,270
Total deferred Tax benefit (expense), Net		51,663			40,968			181,628
Income Tax benefit (expense), Total		(535	)		(226,765	)		30,992

F-44

 

The following table presents the current income tax expense detailed by foreign and domestic (Chile) companies at December 31, 2019, 2018 and 2017:

	January - December
	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
Foreign current income tax expense		(11,774	)		(35,442	)		(28,071	)
Domestic current income tax expense		(40,424	)		(232,291	)		(122,565	)
Total current income tax expense		(52,198	)		(267,733	)		(150,636	)
Foreign deferred tax benefit (expense)		32,243			19,940			94,228
Domestic deferred tax benefit (expense)		19,420			21,028			87,400
Total deferred taxbenefit (expense)		51,663			40,968			181,628
Total taxbenefit (expense)		(535	)		(226,765	)		30,992

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
	2019			2018			2017
Reconciliation of Income tax from Statutory Rate to Effective Tax Rate	ThU.S.$			ThU.S.$			ThU.S.$
Statutory domestic (Chile) income tax rate		27.0	%		27.0	%		25.5	%
Tax Expense at statutory tax rate		(16,876	)		(257,451	)		(61,037	)
Tax effect of foreign tax rates		1,120			3,464			(7,118	)
Tax effect of revenues exempt from taxation		42,376			82,521			40,133
Tax effect of not deductible expenses		(40,552	)		(53,510	)		(28,783	)
Tax rate effect of tax loss carry forwards		46			15			(44	)
Tax effect of Previously Unrecognized Tax Benefit in the Statements of Profit or Loss		884			(91	)		195
Tax effect of a new evaluation of assets for deferred not recognized taxes		12,865			-			5,311
Tax rate effect from change in tax rate (opening balances)		-			-			78,946
Tax rate effect of adjustments for current tax of prior periods		(2,912	)		(1,732	)		(227	)
Other tax rate effects		2,514			19			3,616
Total adjustments to tax expense at applicable tax rate		16,341			30,686			92,029
Taxbenefit (expense) at effective tax rate		(535	)		(226,765	)		30,992

Current tax assets and liabilities

The current tax assets and liabilities balances are as follow:

Current tax Assets	12-31-2019			12-31-2018
	ThU.S.$			ThU.S.$
Monthly Provisional Payments (MPP)		190,169			1,662
Income tax receivable		27,628			19,538
Fixed assets tax credits		57			-
Provision tax income		(39,490	)		(1,371	)
Other tax receivables		21,589			16,684
Total		199,953			36,513
Current tax Liabilities	12-31-2019			12-31-2018
	ThU.S.$			ThU.S.$
Provision tax income (First category)		10,626			260,538
Monthly Provisional Payments (MPP)		(9,309	)		(107,023	)
Article No. 21 tax		1			-
Other tax payables		924			127
Total		2,242			153,642

F-45

 

NOTE 7. PROPERTY, PLANT AND EQUIPMENT

	12-31-2019		12-31-2018
Property, Plant and Equipment	ThU.S.$		ThU.S.$
Property, Plant and Equipment		7,648,183		7,174,693
Property, Plant and Equipment by right of use		284,379		-
Total		7,932,562		7,174,693

Property, Plant and Equipment

	12-31-2019			12-31-2018
Property, Plant and Equipment, Net	ThU.S.$			ThU.S.$
Construction work in progress		1,128,431			1,030,730
Land		971,061			972,143
Buildings		2,247,996			2,062,887
Plant and equipment		3,139,761			2,921,462
Information technology equipment		20,906			23,292
Fixtures and fittings		13,421			15,906
Motor vehicles		14,922			14,916
Other property, plant and equipment		111,685			133,357
Total Net		7,648,183			7,174,693
Property, Plant and Equipment, Gross
Construction work in progress		1,128,431			1,030,730
Land		971,061			972,143
Buildings		4,268,590			3,959,186
Plant and equipment		7,004,549			6,388,843
Information technology equipment		91,585			86,558
Fixtures and fittings		45,703			44,694
Motor vehicles		56,771			53,507
Other property, plant and equipment		131,030			157,301
Total Gross		13,697,720			12,692,962
Accumulated depreciation and impairment
Buildings		(2,020,594	)		(1,896,299	)
Plant and equipment		(3,864,788	)		(3,467,381	)
Information technology equipment		(70,679	)		(63,266	)
Fixtures and fittings		(32,282	)		(28,788	)
Motor vehicles		(41,849	)		(38,591	)
Other property, plant and equipment		(19,345	)		(23,944	)
Total		(6,049,537	)		(5,518,269	)

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

As of December 31, 2019, there are no significant assets pledged as collateral to be disclosed in these consolidated financial statements.

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

	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Amount committed for the acquisition of property, plant and equipment		1,200,111		798,631

F-46

 

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, 2019 and 2018:

Reconciliation of Property, Plant and Equipment	Construction work in progress			Land			Buildings			Plant and equipment			IT Equipment			Fixtures and fittings			Motor vehicles			Other Property, Plant and Equipment			TOTAL
	ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance 01-01-2019		1,030,730			972,143			2,062,887			2,921,462			23,292			15,906			14,916			133,357			7,174,693
Increase (decrease) for changes in accounting policies		-			-			-			(55,015	)		-			-			-			(17,237	)		(72,252	)
Restated opening balance		1,030,730			972,143			2,062,887			2,866,447			23,292			15,906			14,916			116,120			7,102,441
Changes
Additions		889,882			6,722			13,561			44,800			1,637			960			3,808			10,779			972,149
Acquisitions through business combinations		12,839			3,915			24,118			110,701			238			156			313			6,272			158,552
Disposals		-			(2,241	)		(2,167	)		(2,821	)		(94	)		(1	)		(213	)		(29	)		(7,566	)
Withdrawals		(6,992	)		(3,442	)		(3,435	)		(23,231	)		(2	)		(1	)		(36	)		(13,202	)		(50,341	)
Depreciation		-			-			(130,454	)		(297,332	)		(6,426	)		(2,722	)		(4,111	)		(1,180	)		(442,225	)
Impairment loss recognized in profit or loss		-			-			(15,398	)		(60,219	)		(337	)		(14	)		(74	)		-			(76,042	)
Increase (decrease) through net exchange differences		(1,066	)		(7,530	)		(479	)		(1,347	)		(74	)		27			(31	)		(918	)		(11,418	)
Reclassification to assets held for sale		-			-			-			990			-			-			-			-			990
Increase (decrease) through transfers from construction in progress		(796,962	)		1,494			299,363			500,140			2,672			(890	)		340			(6,157	)		-
Reclassification from lease to Property, plant and equipment		-			-			-			1,633			-			-			10			-			1,643
Total changes		97,701			(1,082	)		185,109			273,314			(2,386	)		(2,485	)		6			(4,435	)		545,742
Closing balance 12-31-2019		1,128,431			971,061			2,247,996			3,139,761			20,906			13,421			14,922			111,685			7,648,183

Reconciliation of Property, Plant and Equipment	Construction work in progress			Land			Buildings			Plant and equipment			IT Equipment			Fixtures and fittings			Motor vehicles			Other Property, Plant and Equipment			TOTAL
	ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance 01-01-2018		597,351			1,008,310			2,135,201			3,112,755			22,665			12,297			15,959			129,761			7,034,299
Changes
Additions		660,918			3			6,949			42,467			1,125			1,146			2,352			15,516			730,476
Acquisitions through business combinations		-			3,900			-			4,887			-			-			-			-			8,787
Disposals		(1,994	)		(448	)		(770	)		(702	)		(42	)		-			(129	)		(528	)		(4,613	)
Withdrawals		(6,269	)		(4,466	)		(1,656	)		(17,680	)		(42	)		(28	)		(84	)		(5,599	)		(35,824	)
Depreciation		-			-			(125,407	)		(316,118	)		(5,791	)		(2,870	)		(3,920	)		(3,660	)		(457,766	)
Impairment loss recognized in profit or loss		-			-			(654	)		(356	)		(5	)		(20	)		-			-			(1,035	)
Increase (decrease) through net exchange differences		(4,115	)		(34,204	)		(15,444	)		(42,059	)		(175	)		(210	)		(217	)		(6,332	)		(102,756	)
Reclassification to assets held for sale		-			(2,193	)		(5	)		5,323			-			-			-			-			3,125
Increase (decrease) through transfers from construction in progress		(215,161	)		1,241			64,673			132,945			5,557			5,591			955			4,199			-
Total changes		433,379			(36,167	)		(72,314	)		(191,293	)		627			3,609			(1,043	)		3,596			140,394
Closing balance 12-31-2018		1,030,730			972,143			2,062,887			2,921,462			23,292			15,906			14,916			133,357			7,174,693

F-47

 

The depreciation expense for the period ending December 31, 2019, 2018 and 2017 is as follows:

	January-December
	2019		2018		2017
Depreciation for the year	ThU.S.$		ThU.S.$		ThU.S.$
Cost of sales		409,442		377,557		389,847
Administrative expenses		16,275		15,530		14,883
Other expenses		3,525		1,986		3,494
Total		429,242		395,073		408,224

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. 

Property, Plant and Equipment by Right of Use

	12-31-2019
	ThU.S.$
Property, Plant and Equipment by right of use, Net
Land		67,804
Buildings		25,940
Plant and equipment		44,753
Information technology equipment		574
Fixtures and fittings		1,138
Motor vehicles		126,587
Other property, plant and equipment		17,583
Total Net		284,379
Property, Plant and Equipment by right of use, Gross
Land		75,403
Buildings		32,266
Plant and equipment		71,394
Information technology equipment		757
Fixtures and fittings		1,595
Motor vehicles		164,683
Other property, plant and equipment		19,580
Total Gross		365,678
Accumulated depreciation and impairment by right of use
Land		(7,599	)
Buildings		(6,326	)
Plant and equipment		(26,641	)
Information technology equipment		(183	)
Fixtures and fittings		(457	)
Motor vehicles		(38,096	)
Other property, plant and equipment		(1,997	)
Total		(81,299	)

F-48

 

Reconciliation of Property, Plant and Equipment by Right of Use

The following tables set forth the reconciliation of the carrying amount of property, plant and equipment by right of use as of December 31, 2019:

Reconciliation of Property, Plant and Equipment by right of use	Land			Buildings			Plant and equipment			IT Equipment			Fixtures and fittings			Motor vehicles			Other Property, Plant and Equipment			TOTAL
	ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance 01-01-2019		-			-			-			-			-			-			-			-
Increase (decrease) for changes in accounting policies		65,363			20,865			76,258			310			-			144,304			17,237			324,337
Restated opening balance		65,363			20,865			76,258			310			-			144,304			17,237			324,337
Changes
Additions		8,668			10,580			5,817			449			1,595			20,531			4,745			52,385
Business combination		906			1,129			3,257			-			-			290			-			5,582
Withdrawals		-			-			(13,750	)		-			-			-			-			(13,750	)
Depreciation		(7,599	)		(6,326	)		(26,641	)		(183	)		(457	)		(38,096	)		(2,756	)		(82,058	)
Increase (decrease) through net exchange differences		466			(216	)		137			(2	)		-			(131	)		-			254
Increase (decrease) through others		-			(92	)		(325	)		-			-			(311	)		-			(728	)
Reclassification from lease to Property, plant and equipment		-			-			-			-			-			-			(1,643	)		(1,643	)
Total changes		2,441			5,075			(31,505	)		264			1,138			(17,717	)		346			(39,958	)
Closing balance 12-31-2019		67,804			25,940			44,753			574			1,138			126,587			17,583			284,379

The following table set forth the composition of the initial impact of the IFRS 16 adoption on Property, Plant and Equipment by right of use:

	January 01, 2019
	ThU.S.$
Right of use assets - IFRS 16		252,085
Assets from leasing - IAS 17		72,252
Increase (decrease) for changes in accounting policies		324,337

The depreciation expense for the period ending December 31, 2019 Property, Plant and Equipment by right of use is as follows:

	January – December
	2019
Depreciation for the period	ThU.S.$
Cost of sales		64,434
Distribution costs		1,792
Administrative expenses		10,775
Total		77,001

Additionally, Arauco has recognized directly in the consolidated statement of profit or loss, the following leases concepts excluded from the application of IFRS 16:

	January - December
	2019
Depreciation for the year	ThU.S.$
Expenses from payments of variable leases		182,943
Expenses from low value leases		6,787
Expenses from short-term leases		32,083
Total		221,813

F-49

 

NOTE 8. LEASES

Arauco acting as lessee

Arauco has adopted IFRS 16 - Leases, the effects of initial application of the standard have been disclosed in Note 2 - Changes in policies and accounting estimates. Assets by rights of use and lease liabilities have been included in Notes 7 and 23, respectively.

Lease liabilities maturity is presented in Notes 11 and 23.

Arauco acting as lessor

IFRS 16 substantially maintains the accounting requirements of the lessor of IAS 17. Consequently, Arauco has continued to classify its leases as operating or financial.

Reconciliation of Financial Lease Minimum Payments:

	12-31-2019
	Gross		Interest		Present Value
Periods	ThU.S.$		ThU.S.$		ThU.S.$
Less than one year		960		48		912
Between one and five years		200		-		200
More than five years		-		-		-
Total		1,160		48		1,112
	12-31-2018
	Gross		Interest		Present Value
Periods	ThU.S.$		ThU.S.$		ThU.S.$
Less than one year		1,180		49		1,131
Between one and five years		837		-		837
More than five years		-		-		-
Total		2,017		49		1,968

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

Arauco accounts for its lease contracts as financial 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	2019		2018		2017
	ThU.S.$		ThU.S.$		ThU.S.$
Revenue from sales of goods		5,245,489		5,857,584		5,133,339
Revenue from rendering of services		83,725		97,249		105,002
Total		5,329,214		5,954,833		5,238,341

The reportable segments revenues by business area and by geographical area are presented in Note 24.

F-50

NOTE 10. EMPLOYEE BENEFITS

Classes of Benefits and Expenses by Employee

	2019		2018		2017
	ThU.S.$		ThU.S.$		ThU.S.$
Employee expenses		647,280		627,614		563,117
Wages and salaries		628,093		602,936		542,981
Severance indemnities		19,187		24,678		20,136

	2019			2018			2017
Discount rate		1.81	%		2.82	%		2.28	%
Inflation		3.00	%		3.00	%		2.77	%
Annual rate of wage growth		5.22	%		5.22	%		5.22	%
Mortality rate (1)	RV-2014			RV-2014			RV-2014

(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 the RV-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	2019 ThU.S.$
Discount rate
Increase in 100 bps		(6,105	)
Decrease in 100 bps		6,506
Wage growth rates
Increase in 100 bps		6,028
Decrease in 100 bps		(5,190	)

The following tables set forth the balances and the reconciliation of the present value of severance indemnities obligations as of December 31, 2019 and 2018:

	12-31-2019			12-31-2018
	ThU.S.$			ThU.S.$
Current		5,965			5,656
Non-current		69,464			64,895
Total		75,429			70,551
Reconciliation of the present value of severance indemnities obligations	12-31-2019			12-31-2018
	ThU.S.$			ThU.S.$
Opening balance		70,551			71,763
Business combinations		462			-
Current service cost		5,884			5,201
Interest cost		3,855			3,723
(Gains) losses from changes in actuarial assumptions		6,095			(172	)
Actuarial gains and losses arising from experience		(3,440	)		(1,685	)
Benefits paid		(3,028	)		(4,773	)
Costs from past services		-			4,710
Increase (decrease) for foreign currency exchange rates changes		(4,950	)		(8,216	)
Closing balance		75,429			70,551

F-51

 

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

December 31, 2019	U.S Dollar		Euros		Brazilian Real		Argentine Pesos		Mexican Pesos		Other currencies		Chilean Pesos		U.F.		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Assets
Current Assets
Cash and Cash Equivalents		1,412,688		2,264		50,868		11,292		13,684		6,756		62,460		-		1,560,012
Other current financial assets		3,370		-		-		-		-		-		-		-		3,370
Other current non-financial assets		24,554		95		15,134		8,014		1,244		6,742		118,327		-		174,110
Trade and other current receivables		435,663		8,483		56,039		11,218		33,981		7,287		86,954		2,690		642,315
Accounts receivable due from related companies		1,319		-		197		-		-		-		15,512		498		17,526
Current Inventories		931,619		-		90,362		-		31,886		-		-		-		1,053,867
Current biological assets		209,844		-		65,948		-		-		-		-		-		275,792
Current tax assets		7,955		234		9,246		2,908		2,936		2,658		174,016		-		199,953
Non-current assets or disposal groups classified as held for sale		3,027,012		11,076		287,794		33,432		83,731		23,443		457,269		3,188		3,926,945
Non-current assets or disposal groups classified as held for sale		3,814		-		572		-		50		-		-		-		4,436
Total Current Assets		3,030,826		11,076		288,366		33,432		83,781		23,443		457,269		3,188		3,931,381
Non-Current Assets
Other non-current financial assets		9,395		-		-		-		-		-		-		-		9,395
Other non-current non-financial assets		1,889		-		10,962		1,054		884		90		97,535		-		112,414
Trade and other non-current receivables		3,691		-		351		-		-		-		2,983		2,431		9,456
Accounts receivable due from related companies, non-current		-		-		-		-		-		-		-		-		-
Investments accounted for using equity method		77,725		168,880		41,811		-		-		-		4,702		-		293,118
Intangible assets other than goodwill		104,165		-		1,992		-		95		-		-		-		106,252
Goodwill		43,373		-		22,378		-		-		-		-		-		65,751
Property, plant and equipment		7,281,043		-		499,474		-		151,692		-		353		-		7,932,562
Non-current biological assets		3,021,411		-		372,223		-		-		-		-		-		3,393,634
Deferred tax assets		5,897		-		-		-		170		-		-		-		6,067
Total Non-Current Assets		10,548,589		168,880		949,191		1,054		152,841		90		105,573		2,431		11,928,649
Total Assets		13,579,415		179,956		1,237,557		34,486		236,622		23,533		562,842		5,619		15,860,030
December 31, 2019	U.S Dollar		Euros		Brazilian Real		Argentine Pesos		Mexican Pesos		Other currencies		Chilean Pesos		U.F.		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Liabilities
Current Liabilities
Other current financial liabilities		222,810		93		10,499		-		2,361		117		33,575		260,599		530,054
Trade and other current payables		155,524		20,414		70,259		14,365		22,272		10,322		348,155		31,746		673,057
Accounts payable to related companies		454		-		-		-		-		-		8,426		-		8,880
Other current provisions		444		-		-		-		815		-		-		-		1,259
Current tax liabilities		1,784		-		-		-		246		-		212		-		2,242
Current provisions for employee benefits		-		-		-		-		-		-		5,965		-		5,965
Other current non-financial liabilities		7,353		59		20,022		3,128		2,711		2,335		4,457		-		40,065
Total Liabilities, current		388,369		20,566		100,780		17,493		28,405		12,774		400,790		292,345		1,261,522
Non-Current Liabilities
Other non-current financial liabilities		4,321,721		116,218		24,090		-		7,664	��	160		73,471		1,110,687		5,654,011
Other non-current payables		2,230		-		-		-		-		-		-		-		2,230
Other non-current provisions		12		-		5,226		26,527		-		-		-		-		31,765
Deferred tax liabilities		1,271,282		-		84,420		-		4,485		-		-		-		1,360,187
Non-current provisions for employee benefits		836		-		-		-		285		-		68,343		-		69,464
Other non-current non-financial liabilities		24		-		111,380		19		-		-		13		-		111,436
Total non-current liabilities		5,596,105		116,218		225,116		26,546		12,434		160		141,827		1,110,687		7,229,093
																		-
Total Liabilities		5,984,474		136,784		325,896		44,039		40,839		12,934		542,617		1,403,032		8,490,615

F-52

 

December 31, 2018	U.S Dollar		Euros		Brazilian Real		Argentine Pesos		Mexican Pesos		Other  currencies		Chilean  Pesos		U.F.		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Assets
Current Assets
Cash and Cash Equivalents		834,513		8,295		44,605		2,854		1,461		3,914		180,300		-		1,075,942
Other current financial assets		497		-		-		-		-		-		-		-		497
Other current non-financial assets		49,170		125		19,018		5,855		42		5,283		50,361		-		129,854
Trade and other current receivables		631,047		7,399		66,500		15,044		8,576		6,882		99,950		3,786		839,184
Accounts receivable due from related companies		591		-		83		-		-		-		6,169		481		7,324
Current Inventories		957,529		-		72,667		-		-		-		-		-		1,030,196
Current biological assets		253,672		-		62,252		-		-		-		-		-		315,924
Current tax assets		16,042		262		4,978		-		102		1,399		13,730		-		36,513
Non-current assets or disposal groups classified as held for sale		2,743,061		16,081		270,103		23,753		10,181		17,478		350,510		4,267		3,435,434
Non-current assets or disposal groups classified as held for sale		5,152		-		574		-		-		-		-		-		5,726
Total Current Assets		2,748,213		16,081		270,677		23,753		10,181		17,478		350,510		4,267		3,441,160
Non-Current Assets
Other non-current financial assets		20,346		-		-		-		-		-		-		-		20,346
Other non-current non-financial assets		79,615		-		4,946		1,427		640		90		230		-		86,948
Trade and other non-current receivables		7,733		-		1,040		-		-		27		3,267		3,082		15,149
Accounts receivable due from related companies, non-current		-		-		-		-		-		-		-		481		481
Investments accounted for using equity method		135,805		177,548		42,052		-		-		-		2,648		-		358,053
Intangible assets other than goodwill		87,729		-		2,364		-		-		-		-		-		90,093
Goodwill		42,573		-		23,278		-		-		-		-		-		65,851
Property, plant and equipment		6,675,290		-		498,993		-		-		-		410		-		7,174,693
Non-current biological assets		2,924,266		-		412,073		-		-		-		-		-		3,336,339
Deferred tax assets		4,558		-		36		-		41		-		-		-		4,635
Total Non-Current Assets		9,977,915		177,548		984,782		1,427		681		117		6,555		3,563		11,152,588
Total Assets		12,726,128		193,629		1,255,459		25,180		10,862		17,595		357,065		7,830		14,593,748
December 31, 2018	U.S Dollar		Euros		Brazilian  Real		Argentine  Pesos		Mexican  Pesos		Other currencies		Chilean  Pesos		U.F.		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Liabilities
Current Liabilities
Other current financial liabilities		445,076		-		6,828		-		-		-		5,017		80,675		537,596
Trade and other current payables		184,989		7,450		64,873		15,590		1,378		8,272		348,886		28,180		659,618
Accounts payable to related companies		1,777		-		-		-		-		-		8,452		-		10,229
Other current provisions		413		-		-		-		-		-		-		-		413
Current tax liabilities		88		7		-		16,730		102		0		136,715		-		153,642
Current provisions for employee benefits		-		-		51		-		-		-		5,605		-		5,656
Other current non-financial liabilities		188,346		49		12,340		3,037		2,761		1,343		4,734		-		212,610
Total Liabilities, current		820,689		7,506		84,092		35,357		4,240		9,615		509,409		108,855		1,579,764
Non-Current Liabilities
Other non-current financial liabilities		2,614,348		-		7,827		-		-		-		5,821		1,416,283		4,044,279
Other non-current payables		2,230		-		-		-		-		-		-		-		2,230
Other non-current provisions		9		-		5,839		28,035		-		-		1		-		33,884
Deferred tax liabilities		1,327,291		-		90,367		-		-		-		-		-		1,417,658
Non-current provisions for employee benefits		-		-		-		-		159		-		64,736		-		64,895
Other non-current non-financial liabilities		19		-		111,841		29		-		-		178		-		112,067
Total non-current liabilities		3,943,897		-		215,874		28,064		159		-		70,736		1,416,283		5,675,013
Total Liabilities		4,764,586		7,506		299,966		63,421		4,399		9,615		580,145		1,525,138		7,254,777

F-53

 

	12-31-2019						12-31-2018
	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		844,866		416,657		1,261,523		1,160,815		418,949		1,579,764
Other current financial liabilities		114,700		415,354		530,054		121,606		415,990		537,596
U.S Dollar		94,258		128,552		222,810		110,329		334,747		445,076
Euros		24		69		93		-		-		-
Brazilian Real		3,106		7,393		10,499		1,880		4,948		6,828
Mexican Pesos		1,235		1,126		2,361		-		-		-
Other currencies		26		91		117		-		-		-
Chilean Pesos		8,313		25,262		33,575		1,334		3,683		5,017
U.F.		7,738		252,861		260,599		8,063		72,612		80,675
Bank Loans		69,971		113,334		183,305		84,778		130,271		215,049
U.S Dollar		68,509		110,364		178,873		82,898		125,323		208,221
Euros		-		41		41		-		-		-
Brazilian Real		1,462		2,929		4,391		1,880		4,948		6,828
Financial Leases		21,518		47,690		69,208		7,265		23,651		30,916
U.S Dollar		4,570		2,787		7,357		-		-		-
Euros		24		28		52		-		-		-
Brazilian Real		1,644		4,464		6,108		-		-		-
Mexican Pesos		1,235		1,126		2,361		-		-		-
Other currencies		26		91		117		-		-		-
Chilean Pesos		8,313		25,262		33,575		1,334		3,683		5,017
U.F.		5,706		13,932		19,638		5,931		19,968		25,899
Other Loans		23,211		254,330		277,541		29,563		262,068		291,631
U.S Dollar		21,179		15,401		36,580		27,431		209,424		236,855
U.F.		2,032		238,929		240,961		2,132		52,644		54,776
Trade and other current payables		672,809		248		673,057		659,618		-		659,618
U.S Dollar		155,501		23		155,524		184,989		-		184,989
Euros		20,414		-		20,414		7,450		-		7,450
Brazilian Real		70,140		119		70,259		64,873		-		64,873
Argentine Pesos		14,365		-		14,365		15,590		-		15,590
Mexican Pesos		22,166		106		22,272		1,378		-		1,378
Other currencies		10,322		-		10,322		8,272		-		8,272
Chilean Pesos		348,155		-		348,155		348,886		-		348,886
U.F.		31,746		-		31,746		28,180		-		28,180
Accounts payable to related companies		8,880		-		8,880		10,229		-		10,229
U.S Dollar		454		-		454		1,777		-		1,777
Chilean Pesos		8,426		-		8,426		8,452		-		8,452
Other current provisions		444		815		1,259		413		-		413
U.S Dollar		444		-		444		413		-		413
Mexican Pesos		-		815		815		-		-		-
Current tax liabilities		2,031		211		2,242		152,994		648		153,642
U.S Dollar		1,784		-		1,784		88		-		88
Euros		-		-		-		7		-		7
Argentine Pesos		-		-		-		16,730		-		16,730
Mexican Pesos		246		-		246		102		-		102
Chilean Pesos		1		211		212		136,067		648		136,715
Current provisions for employee benefits		5,938		27		5,965		4,923		733		5,656
Brazilian Real		-		-		-		51		-		51
Chilean Pesos		5,938		27		5,965		4,872		733		5,605
Other current non-financial liabilities		40,063		2		40,065		211,032		1,578		212,610
U.S Dollar		7,353		-		7,353		187,740		606		188,346
Euros		59		-		59		49		-		49
Brazilian Real		20,022		-		20,022		12,340		-		12,340
Argentine Pesos		3,128		-		3,128		3,037		-		3,037
Mexican Pesos		2,711		-		2,711		2,761		-		2,761
Other currencies		2,335		-		2,335		1,343		-		1,343
Chilean Pesos		4,455		2		4,457		3,762		972		4,734

F-54

 

	12-31-2019								12-31-2018
	From 13 months to 3 years		From 3 years to 5 years		More than 5 years		Total		From 13 months to 3 years		From 3 years to 5 years		More than 5 years		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Total non-current liabilities		1,534,114		1,169,993		4,524,986		7,229,093		1,806,878		699,808		3,168,327		5,675,013
Other non-current financial liabilities		649,084		1,127,064		3,877,863		5,654,011		752,079		699,808		2,592,392		4,044,279
U.S Dollar		460,067		990,135		2,871,519		4,321,721		440,251		601,052		1,573,045		2,614,348
Euros		22,236		29,648		64,334		116,218		-		-		-		-
Brazilian Real		8,761		6,336		8,993		24,090		6,612		1,215		-		7,827
Mexican Pesos		3,546		3,296		822		7,664		-		-		-		-
Other currencies		160		-		-		160		-		-		-		-
Chilean Pesos		61,283		12,072		116		73,471		5,354		467		-		5,821
U.F.		93,031		85,577		932,079		1,110,687		299,862		97,074		1,019,347		1,416,283
Bank Loans		196,611		502,772		64,334		763,717		177,504		348,558		199,324		725,386
U.S Dollar		172,584		473,124		-		645,708		170,892		347,343		199,324		717,559
Euros		22,236		29,648		64,334		116,218		-		-		-		-
Brazilian Real		1,791		-		-		1,791		6,612		1,215		-		7,827
Financial Leases		117,608		46,408		37,801		201,817		26,296		10,975		-		37,271
U.S Dollar		27,570		21,621		27,037		76,228		-		-		-		-
Brazilian Real		6,970		6,336		8,993		22,299		-		-		-		-
Mexican Pesos		3,546		3,296		822		7,664		-		-		-		-
Other currencies		160		-		-		160		-		-		-		-
Chilean Pesos		61,283		12,072		116		73,471		5,354		467		-		5,821
U.F.		18,079		3,083		833		21,995		20,942		10,508		-		31,450
Other Loans		334,865		577,884		3,775,728		4,688,477		548,279		340,275		2,393,068		3,281,622
U.S Dollar		259,913		495,390		2,844,482		3,599,785		269,359		253,709		1,373,721		1,896,789
U.F.		74,952		82,494		931,246		1,088,692		278,920		86,566		1,019,347		1,384,833
Other non-current payables		2,230		-		-		2,230		2,230		-		-		2,230
U.S Dollar		2,230		-		-		2,230		2,230		-		-		2,230
Other non-current provisions		31,765		-		-		31,765		33,884		-		-		33,884
U.S Dollar		12		-		-		12		9		-		-		9
Brazilian Real		5,226		-		-		5,226		5,839		-		-		5,839
Argentine Pesos		26,527		-		-		26,527		28,035		-		-		28,035
Chilean Pesos		-		-		-		-		1		-		-		1
Deferred tax liabilities		741,164		7,254		611,769		1,360,187		841,723		-		575,935		1,417,658
U.S Dollar		659,513		-		611,769		1,271,282		751,356		-		575,935		1,327,291
Brazilian Real		77,166		7,254		-		84,420		90,367		-		-		90,367
Mexican Pesos		4,485		-		-		4,485		-		-		-		-
Non-current provisions for employee benefits		69,464		-		-		69,464		64,895		-		-		64,895
U.S Dollar		836		-		-		836		-		-		-		-
Mexican Pesos		285		-		-		285		159		-		-		159
Chilean Pesos		68,343		-		-		68,343		64,736		-		-		64,736
Other non-current non-financial liabilities		40,407		35,675		35,354		111,436		112,067		-		-		112,067
U.S Dollar		24		-		-		24		19		-		-		19
Brazilian Real		40,351		35,675		35,354		111,380		111,841		-		-		111,841
Argentine Pesos		19		-		-		19		29		-		-		29
Chilean Pesos		13		-		-		13		178		-		-		178

F-55

 

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
Novo Oeste Gestao de Ativos Florestais S.A.	Brazil	Brazilian Real
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
Greenagro S.A.	Argentina	Argentine pesos
Leasing Forestal S.A.	Argentina	Argentine pesos
Savitar S.A.	Argentina	U.S. Dollar
Arauco Industria de Mexico, S.A. de C.V. (ex Maderas y Sintéticos de México, S.A. de C.V.)	Mexico	Mexican pesos
Araucomex Servicios, S.A. de C.V. (ex Maderas y Sintéticos Servicios, S.A. de C.V.)	Mexico	Mexican pesos
Arauco Serviquimex, S.A. de C.V. (ex Masisa Manufactura, S.A. de C.V.)	Mexico	Mexican pesos
Arauco Quimica S.A. de C.V. (ex Masnova Química, S.A. de C.V.)	Mexico	Mexican pesos
Tablered Araucomex, S.A. de C.V. (ex Placacentro Masisa México S.A. de C.V.)	Mexico	Mexican pesos
Arauco Canada Ltd. (ex Flakeboard Company Ltd.)	Canada	Canadian Dollar

The table below shows a detail per company of the effect in the period of the Reserve of Exchange Differences on translation:

	January - December
	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
Arauco do Brasil S.A.		(15,961	)		(70,685	)		(6,537	)
Arauco Forest Brasil S.A.		(14,407	)		(65,196	)		(6,929	)
Arauco Florestal Arapoti S.A.		(3,543	)		(17,007	)		(1,051	)
Sonae Arauco S.A.		(3,759	)		(9,811	)		20,547
Arauco Argentina S.A.		(219	)		(7,584	)		(752	)
Arauco Canada Ltd.		5,842			(7,879	)		6,529
Arauco Industria México S.A. de C.V.		3,148			-			-
Others		(1,093	)		(2,461	)		307
Total reserve of exchange differences on translation		(29,992	)		(180,623	)		12,114

Effect of foreign exchange rates changes

	January-December
	2019			2018			2017
	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		(32,507	)		(26,470	)		98
Reserve of exchange differences on translation (with Non-controlling interests)		(30,971	)		(184,876	)		11,873

NOTE 12. BORROWING COSTS

Arauco capitalizes interest at effective rate on current investment projects.

At the date of issuance of these consolidated financial statements, Arauco has capitalized financial interest related to the modernization and extension of Planta Arauco (MAPA) project in Chile and to the Grayling project in the United States.

	January - December
	2019			2018
	ThU.S.$			ThU.S.$
Property, plant and equipment capitalized cost
Property, plant and equipment capitalized interest cost rate		4.46	%		3.74	%
Amount of the capitalized interest cost, property, plant and equipment		24,767			16,469

F-56

NOTE 13. RELATED PARTIES

Related Party Disclosures

Related parties are those entities defined in IAS 24 and under the rules of the 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 Mr. Roberto Angelini Rossi and Mrs. Patricia Angelini Rossi.

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

Empresas Copec S.A.

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

Transactions carried out with related parties are intended to contribute to the corporate interest, are adjusted in price, terms and conditions to those prevailing in the market at the time of approval, and meet the requirements and procedures set forth in the law.

F-57

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

				% Ownership interest				% Ownership interest
			Functional	12-31-2019				12-31-2018
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 Canada Ltd. (ex Flakeboard Company Ltd.)	Canada	Canadian Dollar	-	99.9990	99.9990	-		99.9990	99.9990
-	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	1.0681	98.9309	99.9990	1.0681		98.9309	99.9990
-	Arauco Europe Cooperatief U.A.	Netherlands	U.S. Dollar	0.5493	99.4497	99.9990	0.5689		99.4301	99.9990
-	Arauco Florestal Arapoti S.A.	Brazil	Brazilian Real	-	79.9992	79.9992	-		79.9992	79.9992
-	Arauco Forest Brasil S.A.	Brazil	Brazilian Real	10.0809	89.9182	99.9991	9.7714		90.2278	99.9992
-	Arauco Industria de Paineis Ltda.	Brazil	Brazilian Real	-	99.9990	99.9990	-		99.9990	99.9990
-	Arauco Middle East DMCC	Dubai	U.S. Dollar	-	99.9990	99.9990	-		99.9990	99.9990
-	Arauco North America, Inc. (ex Flakeboard America Ltd.)	USA	U.S. Dollar	0.0001	99.9989	99.9990	0.0001		99.9989	99.9990
76620842-8	Arauco Nutrientes Naturales SPA	Chile	U.S. Dollar	-	99.9484	99.9484	-		99.9484	99.9484
-	Arauco Perú S.A.	Peru	U.S. Dollar	0.0013	99.9977	99.9990	0.0013		99.9977	99.9990
-	Arauco Wood (China) Company Limited	China	U.S. Dollar	-	99.9990	99.9990	-		99.9990	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	-	57.0831	57.0831	-		57.0831	57.0831
-	Empreendimentos Florestais Santa Cruz Ltda.	Brazil	Brazilian Real	-	99.9985	99.9985	-		99.9985	99.9985
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	-	98.5676	98.5676	-		98.5479	98.5479
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.	Chile	U.S. Dollar	99.0000	0.9995	99.9995	99.0000		0.9995	99.9995
-	Maderas Arauco Costa Rica S.A.	Costa Rica	U.S. Dollar	-	99.9990	99.9990	-		99.9990	99.9990
-	Arauco Industria de México, S.A.de C.V. (ex Maderas y Sintéticos de México, S.A. de C.V.)	Mexico	Mexican pesos	-	99.9990	99.9990	-		-	-
-	Araucomex Servicios, S.A. de C.V. (ex Maderas y Sintéticos Servicios, S.A. de C.V.)	Mexico	Mexican pesos	-	99.9990	99.9990	-		-	-
-	Mahal Empreendimentos e Participacoes S.A.	Brazil	Brazilian Real	-	99.9990	99.9990	-		99.9991	99.9991
-	Arauco Serviquimex, S.A. de C.V. (ex Masisa Manufactura, S.A. de C.V.)	Mexico	Mexican pesos	-	99.9990	99.9990	-		-	-
-	Arauco Química S.A. de C.V. (ex Masnova Química, S.A. de C.V.)	Mexico	Mexican pesos	-	99.9990	99.9990	-		-	-
-	Novo Oeste Gestao de Ativos Florestais S.A.	Brazil	Brazilian Real	-	99.9990	99.9990	-		99.9991	99.9991
	Prime-Line, Inc.	USA	U.S. Dollar	-	99.9990	99.9990	-		-	-
-	Tablered Araucomex, S.A. de C.V. (ex Placacentro Masisa México, S.A. de C.V.)	Mexico	Mexican pesos	-	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

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
	2019		2018		2017
	ThU.S.$		ThU.S.$		ThU.S.$
Salaries and bonuses		63,969		78,340		64,977
Per diem compensation to members of the Board of Directors		2,451		2,560		2,566
Termination benefits		9,175		9,415		5,190
Total		75,595		90,315		72,733

F-58

Related Party Receivables, Current

		Nature of				12-31-2019	12-31-2018
Name of Related Party	Tax ID No.	Relationship	Country	Currency	Maturity	ThU.S.$	ThU.S.$
Forestal Mininco S.A.	91.440.000-7	Common Stockholder	Chile	Chilean pesos	30 days	14	14
Eka Chile S.A.	99.500.140-3	Joint Venture	Chile	Chilean pesos	30 days	1,834	2,362
Forestal del Sur S.A.	79.825.060-4	Associate of a subsidiary’s minority shareholder	Chile	Chilean pesos	30 days	10,519	3,740
Unilin Arauco Pisos Ltda.	-	Joint Venture	Brazil	Brazilian Real	30 days	197	83
Colbún S.A.	96.505.760-9	Common Stockholder	Chile	Chilean pesos	30 days	43	52
CMPC Pulp S.A.	96.532.330-9	Common Stockholder	Chile	Chilean pesos	30 days	834	1
Fundación Educacional Arauco	71.625.000-8	Parent company is​​founder and contributor	Chile	Chilean pesos	30 days	931	-
Fundación Acerca Redes	65.097.218-K	Parent company is​​founder and contributor	Chile	U.S. Dollar	30 days	1,319	221
Sonae Arauco Portugal S.A.	-	Subsidiary of a Joint Venture	Portugal	U.S. Dollar	-	-	370
Compañía Puerto de Coronel S.A.	79.895.330-3	Subsidiary of an Associate	Chile	U.F.	30 days	498	481
E2E S.A.	76.879.577-0	Associate	Chile	Chilean pesos	10-May-20	440	-
E2E S.A.	76.879.577-0	Associate	Chile	Chilean pesos	28-Oct-20	278	-
E2E S.A.	76.879.577-0	Associate	Chile	Chilean pesos	30 days	618	-
Colbún Transmisión S.A.	76.218.856-2	Common director	Chile	Chilean pesos	30 days	1	-
TOTAL						17,526	7,324

Related Party Receivables, Non-Current

		Nature of				12-31-2019	12-31-2018
Name of Related Party	Tax ID No.	Relationship	Country	Currency	Maturity	ThU.S.$	ThU.S.$
Compañía Puerto de Coronel S.A.	79.895.330-3	Subsidiary of an Associate	Chile	U.F.	-	-	481
TOTAL						-	481

Related Party Payables, Current

		Nature of				12-31-2019	12-31-2018
Name of Related Party	Tax ID No.	Relationship	Country	Currency	Maturity	ThU.S.$	ThU.S.$
Compañía de Petróleos de Chile S.A.	99.520.000-7	Common controlling parent	Chile	Chilean pesos	30 days	8,075	7,019
Abastible S.A.	91.806.000-6	Common controlling parent	Chile	Chilean pesos	30 days	156	601
Fundación Educacional Arauco	71.625.000-8	Parent company is​​founder and contributor	Chile	Chilean pesos	-	-	616
Red to Green S.A.	86.370.800-1	Common Stockholder	Chile	Chilean pesos	30 days	1	14
Portaluppi, Guzman y Bezanilla Asesorías Ltda.	78.096.080-9	Common director	Chile	Chilean pesos	30 days	68	-
Empresa Nacional de Telecomunicaciones S.A.	92.580.000-7	Common Stockholder	Chile	Chilean pesos	30 days	96	123
Servicios Corporativos Sercor S.A.	96.925.430-1	Associate	Chile	Chilean pesos	30 days	5	11
Puerto Lirquén S.A.	96.959.030-1	Subsidiary of an associate	Chile	U.S. Dollar	-	-	1,003
Compañía Puerto de Coronel S.A.	79.895.330-3	Subsidiary of an associate	Chile	U.S. Dollar	30 days	447	772
Depósitos Portuarios Lirquén S.A.	96.871.870-3	Subsidiary of an associate	Chile	U.S. Dollar	-	-	2
Adm. Estaciones de Servicio Serco Ltda.	79.689.550-0	Common controlling parent	Chile	Chilean pesos	-	-	1
Adm. de Ventas al Detalle Arco Prime Ltda.	77.215.640-5	Common controlling parent	Chile	Chilean pesos	-	-	1
Empresa Distrib. Papeles y Cartones S.A.	88.566.900-k	Common Stockholder	Chile	Chilean pesos	-	-	8
Elemental S.A.	76.659.730-0	Associate of controlling parent	Chile	Chilean pesos	30 days	4	1
Woodtech S.A.	76.724.000-7	Associate of controlling parent	Chile	Chilean pesos	-	-	28
Orizon S.A.	96.929.960-7	Common controlling parent	Chile	Chilean pesos	30 days	2	1
Vía Limpia SPA	79.874.200-0	Common controlling parent	Chile	Chilean pesos	30 days	11	9
Air BP Copec S.A.	96.942.120-8	Joint venture of controlling parent	Chile	Chilean pesos	30 days	8	19
Sonae Arauco Portugal S.A.	-	Subsidiary of a Joint Venture	Portugal	U.S. Dollar	30 days	7	-
TOTAL						8,880	10,229

F-59

Related Party Transactions

Purchases

Name of Related Party		Nature ofRelationship	Country		Transaction Descriptions	12-31-2019 ThU.S.$		12-31-2018 ThU.S.$		12-31-2017 ThU.S.$
Abastible S.A.	91.806.000-6	Common controlling parent	Chile	Chilean pesos	Fuel		2,864		3,668		3,115
Compañía de Petróleos de Chile S.A.	99.520.000-7	Common controlling parent	Chile	Chilean pesos	Fuel and other		64,271		75,328		66,789
Compañía Puerto de Coronel S.A.	79.895.330-3	Subsidiary of the Associate	Chile	U.S. Dollar	Transport and stowage		10,662		10,607		9,986
Puerto Lirquén S.A.	96.959.030-1	Subsidiary of the Associate	Chile	U.S. Dollar	Port services		2,206		8,488		6,956
EKA Chile S.A.	99.500.140-3	Joint Venture	Chile	Chilean pesos	Sodium chlorate		41,349		47,209		44,055
Forestal del Sur S.A.	79.825.060-4	Associate of a subsidiary’s minority shareholder	Chile	Chilean pesos	Wood and ships		4,547		1,675		1,310
Portaluppi, Guzman y Bezanilla Abogados	78.096.080-9	Common director	Chile	Chilean pesos	Legal services		828		897		1,496
Empresa Nacional de Telecomunicaciones S.A.	92.580.000-7	Common Stockholder	Chile	Chilean pesos	Telephone services		524		617		460
CMPC Maderas S.A.	95.304.000-K	Common Stockholder	Chile	Chilean pesos	Wood and logs		117		644		330
Forestal Mininco S.A.	91.440.000-7	Common Stockholder	Chile	Chilean pesos	Wood and logs		37		261		62
Colbún Transmisión S.A.	76.218.856-2	Common director	Chile	Chilean pesos	Electrical Power		240		453		389
Woodtech S.A.	76.724.000-7	Indirect associate of controlling parent	Chile	Chilean pesos	Wood volumen measurement services		1,988		2,449		2,239
Inversiones Siemel S.A.	94.082.000-6	Common Stockholder	Chile	Chilean pesos	Rentals		256		326		596
Vía Limpia	79.874.200-0	Common controlling parent	Chile	Chilean pesos	Other purchases		215		257		-
CMPC Celulosa S.A.	96.532.330-9	Common Stockholder	Chile	Chilean pesos	Others purchases		35		11		965

Sales

Name of Related Party			Nature ofRelationship	Country	Currency	Transaction Descriptions	12-31-2019 ThU.S.$		12-31-2018 ThU.S.$		12-31-2017 ThU.S.$
Compañía de Petróleos de Chile S.A.	99.520.000-7		Common controlling parent	Chile	Chilean pesos	Charter Services		-		75		202
Colbún S.A.	96.505.760-9		Common director	Chile	Chilean pesos	Electrical Power		543		277		1,128
EKA Chile S.A.	99.500.140-3		Joint venture	Chile	Chilean pesos	Electrical Power		18,764		24,857		19,182
Forestal del Sur S.A.	79.825.060-4		Common director	Chile	Chilean pesos	Harvesting services, Wood and chips		29,543		26,308		25,322
CMPC Pulp S.A.	96.532.330-9		Common Stockholder	Chile	Chilean pesos	Wood and chips		1,467		-		-
Unilin Arauco Pisos Ltda.		-	Joint venture	Brazil	Brazilian Real	Wood		3,350		1,474		2,966
E2E S.A.	76.879.577-0		Associate	Chile	Chilean pesos	Loan (capital + interests)		718		-		-
E2E S.A.	76.879.577-0		Associate	Chile	Chilean pesos	Wood, plywood and boards		787		-		-

F-60

NOTE 14. CONSOLIDATED FINANCIAL STATEMENTS 

On September 1, 2019, the corporation Prime-Line, Inc. was acquired through the subsidiary Arauco North America, Inc. The price paid was ThU.S.$12,626. This transaction generated a goodwill for ThU.S.$ 732.

On January 31, 2019, Arauco’s subsidiaries Inversiones Arauco Internacional Limitada and Araucomex, S.A. de C.V., closed the purchase of all of the shares of Masisa’s Mexican subsidiaries, namely Maderas y Sintéticos de México, S.A. de C.V. (currently Arauco Industria de Mexico, S.A. de C.V.), Maderas y Sintéticos Servicios, S.A. de C.V. (currently Araucomex Servicios, S.A. de C.V.), Masisa Manufactura, S.A. de C.V. (currently Arauco Serviquimex, S.A. de C.V.), Placacentro Masisa México, S.A. de C.V. (currently Tablered Araucomex, S.A. de C.V.) y Masnova Química, S.A. de C.V. (currently Arauco Química S.A. de C.V.).

The final price of the transaction was ThU.S.$168,680 and was paid in this period.

The main assets acquired, consist of two industrial complexes located in Durango and Zitácuaro, that jointly have three Particleboard (PB) lines with an annual installed capacity of 339,000 m3; a MDF line of with an annual installed capacity of 220,000 m3; melamine (or TFL) lines with an annual total installed capacity of 309,000 m3 ; a chemical plant with an installed capacity of 60,000 tons of resins and 60,600 tons of formaldehyde; and impregnation lines with an aggregate annual installed capacity of 28.9 million of m2.

Arauco carried out the initial recognition of the acquisition of these companies based on the information available as of that date, performing a preliminary determination about the allocation of the fair values during the acquisition of the same. The amounts of acquired assets and liabilities are deemed to be provisional amounts and could be adjusted during the measurement period of this acquisition, in order to reflect new information obtained based on facts and circumstances that existed as of the acquisition date and which, if known, would have affected the measurement of the amounts recognized as of that date. The measurement period will not exceed the term of one year as from the acquisition date.

During the year 2019, after finalizing the determination of fair values for the acquisition of these companies in Mexico, Arauco recognized a profit of ThU.S.$ 21,674 in Other Gains (Losses) in the Consolidated Statements of Profit or Loss.

F-61

The table below shows the fair values of assets and liabilities at the date of the transaction:

	01-31-2019
Masisa Mexico Group	ThU.S.$
Cash and cash equivalent		9,164
Other current non-financial		321
Trade and other current receivables (*)		23,163
Accounts receivable from related companies		27,702
Inventories		30,477
Current tax assets		8,769
Investments accounted for using equity method		278
Property, plant and equipment		155,722
Deferred tax assets		3,701
Non-Current Assets or disposal groups classified as held for sale		49
Total assets		259,346
Trade and other current payables		2,024
Accounts payable to related companies		27,100
Other current provisions		17,832
Current tax liabilities		3,243
Deferred tax liabilities		14,368
Non-current provisions for employee benefits		4,426
Total liabilities		68,993
Total equity		190,353

(*) Trade receivables and other current receivables have an insignificant risk of bad debt. At the acquisition date, the bad debt provision was near to 1%, which is in accordance with the Arauco policy.

The following table shows revenue and net profit recognized from the acquisition date through December 31, 2019:

	02-01-2019 to 12-31-2019
Masisa Mexico Group	ThU.S.$
Revenue		138,803
Net loss		995

If the acquisition had occurred on January 1, 2019, consolidated pro-forma revenue and profit for the year ended December 31, 2019 would have been:

CELULOSA ARAUCO Y CONSTITUCIÓN S.A. ANDSUBSIDIARIES	January-December 2019 (Pro-forma) ThU.S.$
Revenue		5,353,354
Net profit		58,472

During the year 2018, after finalizing the determination of fair values for the acquisition of Arauco Industria de Paineis Ltda. in December 2017, Arauco recognized a profit of ThU.S.$ 14,213 in Other Gains (Losses) in the Consolidated Statements of Profit or Loss.

On December 31, 2018, Arauco Wood Products Inc and Arauco Panels USA, LLC merged into Arauco North America, Inc (ex Flakeboard America Limited). This transaction had no effect on Arauco’s profit or loss.

On May 7, 2018, the company Maderas Arauco Costa Rica S.A. was created through the subsidiary Inversiones Arauco Internacional Ltda., with a capital of 10,000 colones (equivalent to U.S.$ 18). On December 24, 2018 Inversiones Arauco Internacional Ltda. made a capital contribution of ThU.S.$ 300 to the company Maderas Arauco Costa Rica S.A.

On August 3, 2018, the company Arauco Wood (China) Company Limited was created through the subsidiary Inversiones Arauco Internacional Ltda. with a capital of ThU.S.$ 500, out of which ThU.S.$150 have been paid to date.

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

F-62

NOTE 15. INVESTMENTS IN ASSOCIATES

As of December 31, 2019, there were no new investments in associates to report.

On April 5, 2019 Celulosa Arauco y Constitución S.A. sold its participation in Puertos y Logística S.A. to DP World Group for a total amount of ThU.S.$ 101,972. This operation generated a profit of ThU.S$ 18,875.

On May 2, 2018, the company E2E S.A. was incorporated through the subsidiary Maderas Arauco S.A., with a total capital of ThU.S.$ 6,000, under 50% ownership of Arauco. As of the date of these consolidated financial statements, ThU.S.$ 2,711 have been contributed.

On January 19, 2018, the company Parque Eólico Ovejera Sur SpA was incorporated through the subsidiary Arauco Bioenergía S.A., under 50% ownership of Arauco. The capital contributed by Arauco was ThU.S.$ 892.

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%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$ -	ThU.S.$ 62,511

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%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$55,030	ThU.S.$51,760

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%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$ 172	ThU.S.$ 193

F-63

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%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$(2)	ThU.S.$(1)

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%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$7	ThU.S.$7

Name	Vale do Corisco S.A.
Country	Brazil
Functional Currency	Brazilian Real
Corporate purpose	Management of forestry activities.
Ownership interest (%)	49.0000%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$38,370	ThU.S.$38,497

Name	E2E S.A.
Country	Chile
Functional Currency	Chilean pesos
Corporate purpose	Development of construction solutions
Ownership interest (%)	50.0000%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$1,739	ThU.S.$2,044

Name	Parque Eólico Ovejera Sur SpA
Country	Chile
Functional Currency	Chilean pesos
Corporate purpose	Electrical power projects
Ownership interest (%)	50.0000%
	12-31-2019	12-31-2018
Carrying amount accounted for using equity method	ThU.S.$796	ThU.S.$597

F-64

Summarized Financial Information of Associates

12-31-2019	Assets
	Puertos y Logística S.A.			Inversiones Puerto Coronel S.A.		Serv.Corporativos Sercor S.A.			E2E S.A.			Parque Eólico Ovejera del Sur SpA.			Vale do Corisco S.A.			Consorcio Tecnológico Bioenercel S.A.		Genómica Forestal S.A.			Total
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		-			29		9,974			3,045			95			4,992			2		25			18,162
Non-current		-			111,896		3,436			3,099			1,505			99,943			36		19			219,934
Total		-			111,925		13,410			6,144			1,600			104,935			38		44			238,096
	Liabilities
	Puertos y Logística S.A.			Inversiones Puerto Coronel S.A.		Serv.Corporativos Sercor S.A.			E2E S.A.			Parque Eólico Ovejera del Sur SpA.			Vale do Corisco S.A.			Consorcio Tecnológico Bioenercel S.A.		Genómica Forestal S.A.			Total
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		-			98		10,222			1,331			2			965			-		9			12,627
Non-current		-			-		2,325			1,336			5			25,664			5		42			29,377
Equity		-			111,827		863			3,477			1,593			78,306			33		(7	)		196,092
Total		-			111,925		13,410			6,144			1,600			104,935			38		44			238,096
12-31-2019
Revenues		42,362			-		4,769			1,714			-			7,220			-		-			56,065
Expenses		(42,350	)		6,602		(4,803	)		(2,877	)		(24	)		(3,700	)		-		(2	)		(47,154	)
Profit or loss (continuing operations)		12			6,602		(34	)		(1,163	)		(24	)		3,520			-		(2	)		8,911
Other comprehensive income		7,540			-		-			-			-			-			-		-			7,540
Comprehensive income		7,552			6,602		(34	)		(1,163	)		(24	)		3,520			-		(2	)		16,451
Dividends		6,060			-		-			-			-			410			-		-			6,470

12-31-2018	Assets
	Puertos y Logística S.A.			Inversiones Puerto Coronel S.A.		Serv.Corporativos Sercor S.A.		E2ES.A.		Parque Eólico Ovejera del Sur SpA.			Vale do Corisco S.A.			Consorcio Tecnológico Bioenercel S.A.			Genómica Forestal S.A.			Total
	ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Current		97,866			29		22,870		680		1,246			4,295			2			25			127,013
Non-current		566,484			105,354		907		3,600		703			105,836			36			19			782,939
Total		664,350			105,383		23,777		4,280		1,949			110,131			38			44			909,952
	Liabilities
	Puertos y Logística S.A.			Inversiones Puerto Coronel S.A.		Serv.Corporativos Sercor S.A.		E2ES.A.		Parque Eólico Ovejera del Sur SpA.			Vale do Corisco S.A.			Consorcio Tecnológico Bioenercel S.A.			Genómica Forestal S.A.			Total
	ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Current		28,938			82		22,192		192		754			81			-			7			52,246
Non-current		327,124			-		619		-		-			31,485			5			42			359,275
Equity		308,288			105,301		966		4,088		1,195			78,565			33			(5	)		498,431
Total		664,350			105,383		23,777		4,280		1,949			110,131			38			44			909,952
12-31-2018
Revenues		160,889			6,080		4,841		1		-			8,106			-			37			179,954
Expenses		(158,421	)		-		(4,855	)(370)			(295	)		(8,711	)		(2	)		(29	)		(172,683	)
Profit or loss (continuing operations)		2,468			6,080		(14	)(369)			(295	)		(605	)		(2	)		8			7,271
Other comprehensive income		(1,676	)		2,202		-		-		-			-			-			-			526
Total comprehensive income		792			8,282		(14	)(369)			(295	)		(605	)		(2	)		8			7,797
Dividends		-			-		-		-		-			3,277			-			-			3,277

F-65

Reconciliation of Investment in Associates and Joint Ventures

	12-31-2019			12-31-2018
	ThU.S.$			ThU.S.$
Opening balance as of January 1		358,053			368,772
Changes
Investment in joint ventures, Additions		2,741			3,028
Disposals, investment in associates and joint ventures (*)		(58,850	)		-
Share of profit (loss) in investment in associates		6,786			3,043
Share of profit (loss) in investment in joint ventures		989			14,203
Dividends Received, Investments in Associates		(13,601	)		(11,307	)
Increase (Decrease) in foreign exchange currency on translation of Associates and Joint Ventures		(5,440	)		(17,287	)
Other increase (decrease) in investment and associates and joint ventures		2,440			(2,399	)
Total changes		(64,935	)		(10,719	)
Closing balance		293,118			358,053

(*) Carrying amount of investment in Puertos y Logística S.A., which was sold on April 5, 2019 (ThU.S.$. 56,492)

	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Carrying amount of associates accounted for using equity method		96,114		155,609
Carrying amount of joint ventures accounted for using equity method		197,004		202,444
Total investment accounted for using equity method		293,118		358,053

NOTE 16.  INTERESTS IN JOINT ARRANGEMENTS

Investments and contributions made

On April 1, 2019 Arauco through its subsidiary Forestal Arauco S.A. entered into a shareholders agreement with respect to Agrícola San Gerado SpA, which was established with the special purpose of developing an agricultural project in Molina. The capital committed by Forestal Arauco S.A. was Th$1,570,000 chilean pesos (equivalent to ThU.S.$ 2,097 as of December 31, 2019). As of December 31, 2019 Arauco has contributed an equivalent of ThU.S.$ 796.

As of December 31, 2019 and 2018, Arauco has not made 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. 

Arauco holds a 50% interest in Sonae Arauco, which subsidiary produces and commercializes 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.

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-66

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

	12-31-2019					12-31-2018
Celulosa y Energía Punta Pereira S.A.	Assets			Liabilities		Assets			Liabilities
(Uruguay)	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		346,498			206,683		220,699			204,455
Non-current		2,158,586			444,181		2,044,534			441,010
Equity		-			1,854,220		-			1,619,768
Total Joint Arrangement		2,505,084			2,505,084		2,265,233			2,265,233
Investment		927,110					809,884
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		859,874					904,853
Expenses		(628,553	)				(611,444	)
Joint Arrangement Net Income (Loss)		231,321					293,409
Forestal Cono Sur S.A. (consolidated)	12-31-2019			12-31-2018
	Assets			Liabilities		Assets			Liabilities
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		37,625			2,180		23,528			1,668
Non-current		172,913			9,046		170,443			1,957
Equity		-			199,312		-			190,346
Total Joint Arrangement		210,538			210,538		193,971			193,971
Investment		99,656					95,173
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		14,041					25,642
Expenses		(5,074	)				(19,748	)
Joint Arrangement Net Income (Loss)		8,967					5,894
Eufores S.A.(consolidated)	12-31-2019			12-31-2018
	Assets			Liabilities		Assets			Liabilities
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		148,550			209,665		160,708			159,988
Non-current		808,647			117,443		638,832			8,282
Equity		-			630,089		-			631,270
Total Joint Arrangement		957,197			957,197		799,540			799,540
Investment		315,045					315,635
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		245,209					284,039
Expenses		(246,332	)				(261,683	)
Joint Arrangement Net Income (Loss)		(1,123	)				22,356
Zona Franca Punta Pereira S.A.	12-31-2019			12-31-2018
(Uruguay)	Assets			Liabilities		Assets			Liabilities
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		5,823			115,627		5,482			106,676
Non-current		464,151			19,740		472,539			27,863
Equity		-			334,607		-			343,482
Total Joint Arrangement		469,974			469,974		478,021			478,021
Investment		167,304					171,741
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		18,206					17,880
Expenses		(27,081	)				(23,975	)
Joint Arrangement Net Income (Loss)		(8,875	)				(6,095	)

F-67

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

	12-31-2019					12-31-2018
	Assets			Liabilities		Assets			Liabilities
Unilin Arauco Pisos Ltda.	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		6,674			3,761		6,165			3,591
Non-current		4,024			55		4,574			37
Equity		-			6,882		-			7,111
Total Joint Arrangement		10,698			10,698		10,739			10,739
Investment		3,441					3,556
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		13,591					16,984
Expenses		(13,549	)				(16,881	)
Joint Arrangement Net Income (Loss)		42					13
Other comprehensive income		-					-
Comprehensive income		42					13
Dividends		-					-
Eka Chile S.A.	12-31-2019			12-31-2018
	Assets			Liabilities		Assets			Liabilities
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		21,449			4,930		19,840			4,443
Non-current		33,442			4,917		32,363			5,078
Equity		-			45,044		-			42,682
Total Joint Arrangement		54,891			54,891		52,203			52,203
Investment		22,522					21,341
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		43,458					47,798
Expenses		(40,104	)				(44,490	)
Joint Arrangement Net Income (Loss)		3,354					3,308
Other comprehensive income		-					-
Comprehensive income		3,354					3,308
Dividends		496					550
Sonae Arauco S.A.	12-31-2019			12-31-2018
	Assets			Liabilities		Assets			Liabilities
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$
Current		216,342			215,632		272,030			221,393
Non-current		695,902			358,851		655,856			351,397
Equity		-			337,761		-			355,096
Total Joint Arrangement		912,244			912,244		927,886			927,886
Net assets		140,146					146,762
Net asset adjustment (Goodwill)		28,735					30,786
Investment		168,881					177,548
	12-31-2019					12-31-2018
	ThU.S.$					ThU.S.$
Income		885,812					1,057,535
Expenses		(887,230	)				(1,032,435	)
Joint Arrangement Net Income (Loss)		(1,418	)				25,100
Other comprehensive income		-					-
Comprehensive income		(1,418	)				25,100
Dividends		6,634					7,480

Agrícola San Gerardo SpA.	12-31-2019				12-31-2018
	Assets		Liabilities		Assets		Liabilities
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Current		-		-		-		-
Non-current		2,162		-		-		-
Equity		-		2,162		-		-
Total Joint Arrangement		2,162		2,162		-		-
Investment		1,081
	12-31-2019				12-31-2018
	ThU.S.$				ThU.S.$
Income		-				-
Expenses		-				-
Joint Arrangement Net Income (Loss)		-				-
Other comprehensive income		-				-
Comprehensive income		-				-
Dividends		-				-

F-68

NOTE 17. IMPAIRMENT OF ASSETS

As a result of current market conditions generated by the fall in prices, the impairment tests carried out at the CGU as of December 31, 2019 yielded a provision of ThU.S.$43,181 (ThU.S.$38,913 of Property, plant and equipment, and ThU.S.$4,268 of spare parts from Inventories) in connection with two plants of Wood products business area in USA. For these calculations a discount rate of 8% was used.

In addition, due to the modernization and expansion project of the Arauco Mill (Proyecto de Modernización y Ampliación de la Planta Arauco, or MAPA Project), as of December 31, 2019, an impairment provision due to a reduction in the useful lives for the CGU Line 1 of Arauco Mill (Pulp business) was recorded in an amount of ThU.S.$33,570. For this calculation a discount rate of 6.1% was used. The Line 1 of the Arauco mill will be permanently shut down when the MAPA project is completed.

Both impairment provision charges are presented in the consolidated statement of Profit or Loss in Other expenses line.

Provisions for impairment of property, plant and equipment due to technical obsolescence (does not include the CGU impairments discussed above) have been recorded as of December 31, 2019 and 2018, 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
	12-31-2019	12-31-2018	12-31-2017
Provisions for impairment of property, plant and equipment	ThU.S.$13,774	ThU.S.$11,395	ThU.S.$10,430

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.$65,751 (ThU.S.$ 65,851 at December 31, 2018), as shown below:

	12-31-2019		12-31-2018
Goodwill	ThU.S.$		ThU.S.$
Arauco Canada Ltd. (Flakeboard Company Ltd)		40,765		40,661
Arauco do Brasil S.A. (Pien mill)		22,378		23,278
Arauco North America, Inc. (Prime-Line, Inc.)		732		-
Arauco Argentina S.A. (Forestal Nuestra Señora del Carmen S.A.)		1,191		1,227
Forestal Arauco S.A. (Forestal Los Lagos S.A.)		685		685
Closing balance		65,751		65,851

	12-31-2019			12-31-2018
Goodwill	ThU.S.$			ThU.S.$
Opening balance at January 1		65,851			69,922
Increase (decrease) due to business combination		732			-
Increase (decrease) in foreign currency exchange		(832	)		(4,071	)
Closing balance		65,751			65,851

Of the total of goodwill, ThU.S.$40,765 (ThU.S.$ 40,661 as of December 31, 2018) are generated by the acquisition of “Flakeboard” (currently Arauco Canada Ltd.), 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.

F-69

The recoverable amount for Flakeboard’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections covering a 5-year term, applying a real discount rate of 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.$22,378 (ThU.S.$ 23,278 as of December 31, 2018).

The recoverable amount for the Pien plant’s cash generating unit was determined based on the calculations of its value in use, and this calculation was made using cash flow projections based on the operational plan approved by the Administration, covering a 5-year term, applying a 7% real discount rate that reflects current evaluations for the panel segment in Brazil. 

As of December 31, 2019 and 2018, the carrying value of the goodwill of the plants did not exceed their recoverable value, and therefore there was no need to recognize impairment losses. 

F-70

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 with 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 as of October 31, 2002 of $4,571,664,617 (equal to ThU.S.$6,106 as of December 31, 2019). 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.$1,615 as of December 31, 2019), resulting in a total disputed amount of $3,362,265,453 (equal to ThU.S.$4,491 as of December 31, 2019) plus fines and interests. On February 19, 2010, the Court acknowledged receipt of the Company’s request.

On September 26, 2014, Arauco requested the submission of this claim to the competent jurisdiction of the new Tax and Customs Courts. On October 10, 2014, Arauco’s request was granted. Currently the action is being considered by these new Courts under the Docket No. RUC 14-9-0002087-3. On 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. On June 29, 2018, the Court of Appeals of Santiago issued a ruling on appeal, confirming the first instance decision. On July 19, 2018, Arauco lodged a cassation appeal based on formal and substantial flaws before the Supreme Court. (case file 24,758-2018).

On June 21, 2019, Celulosa Arauco y Constitución S.A. filed a claim before the Constitutional Court to declare the legal provision contemplated under section 53, paragraph 3 of the Tax Code unconstitutional and, as a consequence, inapplicable.

On October 29, 2019 the Constitutional Court accepted the claim filed by Celulosa Arauco y Constitución S.A., finding unconstitutional and declaring the inapplicability of section 53, paragraph 3 of the Tax Code in the context of the proceeding “Celulosa Arauco y Constitución S.A. with SII Large taxpayers”, which is in the Supreme Court docket as a result of a cassation appeal (based on form and content) under case file 24,758-2018.

Currently, the case is related to the Supreme 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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

2. 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.

F-71

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.$ 6,185 as of December 31, 2019). 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). On March 23, 2018, the reconsideration appeal lodged by the company was rejected. On April 5, 2018, a judicial claim was submitted before the Third Environmental Court.

On February 11, 2020 the judgment of the Third Environmental Court was notified, which partially accepted the legal claim of the Company, only as to the inadequate severity qualification of one of the charges (charge No. 2, consisting of not deriving as last resource to the effluent treatment system, the green liquor spill occurred on January 17, 2014).

On February 28, 2020, both the Company and the SMA submitted cassation appeals based on form and content, to be heard and resolved by the Supreme Court. 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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

3. Through Exempted Resolution No. 1/File F-031-2016, dated September 15, 2016, the SMA formulated three charges against the company due to certain alleged breaches of certain Environmental Qualification Resolutions of the Constitución Plant, and an alleged contravention of Law 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.

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.

Finally, on July 29, 2019, the SMA issued its opinion regarding the satisfactory performance of the Compliance Program, concluding the proceeding.

F-72

Celulosa Arauco y Constitución S.A., Forestal Arauco S.A., Maderas Arauco S.A. y Servicios Logísticos Arauco S.A.

1. On August 13, 2018, Asociación Gremial de Dueños de Camiones de Constitución (ASODUCAM) filed a complaint seeking the performance of a contract and claiming compensation for damages against Forestal Arauco S.A., Servicios Logísticos Arauco S.A., Celulosa Arauco y Constitución S.A. and Maderas Arauco S.A. The complaint is based on alleged breaches of some agreements for the allocation, distribution and supply of cargo volumes for the years 2001 and 2005, initially executed by associates of ASODUCAM with Forestal Arauco S.A., and then, allegedly, with Servicios Logísticos Arauco S.A., in favor of the other two defendants, Celulosa Arauco and Constitución S.A. and Maderas Arauco S.A.

The complaint seeks to enforce the contract, plus $575,000,000 (equal to ThU.S.$ 768 as of December 31, 2019) in compensation for damages. In the alternative, it claims (a) $11,189,270,050 (equivalent to ThU.S.$ 14,944 as of December 31, 2019), for actual damages; (b) $ 11,189,270,050 monthly during the entire course of the trial, until the termination of the contract is declared in the final ruling, for loss of profits, and (c) $5,000,000,000 (equivalent to ThU.S.$ 6,678 as of December 31, 2019) for moral damages.

On August 28, 2018 the claim was served upon Celulosa Arauco y Constitución S.A., Forestal Arauco S.A. and Maderas Arauco S.A.; service is pending on Servicios Logísticos Arauco S.A. (Case file C-757-2018 with the Civil Court of Constitución).

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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

Forestal Arauco S.A.

1. 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. They base their claim in that Forestal Celco S.A., currently Forestal Arauco S.A., would be a supposed possessor and not owner of this estate.

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 Case File C-54-2015.

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.

On March 8, 2017, the claimant appealed against the first instance decision. On May 25, 2018, the first instance ruling was confirmed by the Court of Appeals, with litigation costs. (Court of Appeals of Talca Case File No. 949-2017).

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On June 12, 2018, the plaintiff challenged the decision of the Court of Appeals, filing a cassation appeal based on substantial flaws before the Supreme Court. (Case File 16,583-2018).

On October 14, 2019, the Supreme Court rejected the cassation appeal based on substantial flaws. On November 7, 2020, it was certified that the judgment was executory. The case has been closed.

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

On April 28, 2015, the company proceeded to answer the claim requesting that it be completely rejected, arguing that Forestal Celco S.A., currently Forestal Arauco S.A., is the sole and legitimate owner of the real property.

On January 8, 2016, the defendant requested a consolidation of the proceedings with Case file 334-2014. The Court ordered the requested consolidation.

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. On May 25, 2018, the Court of Appeals of Talca upheld the first instance final ruling with litigation costs. (Court of Appeals of Talca Case File No. 949-2017).

On June 12, 2018, the plaintiff challenged the decision of the Court of Appeals, filing a cassation appeal based on substantial flaws before the Supreme Court. Pending case to be heard. (Case File 16,583-2018).

On October 14, 2019, the Supreme Court rejected the cassation appeal based on substantial flaws. On November 7, 2019, it was certified that the judgment was executory. The case is ended.

3. On July 11, 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.

On July 30, 2019, the final ruling was issued down rejecting both the main and the reconventional lawsuits in all of its parts (Case File C-109-2017 First Instance and Guarantee Court of Lebu).

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On August 12, 2019, the plaintiff filed an appeal against the final ruling. On September 2, 2019, Forestal Arauco S.A. adhered to the appeal, which resolution is pending in the Court of Appeals of Concepción (Case file 1853-2019).

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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

4. Mrs. Estela Jaramillo, filed a lawsuit in a special indigenous procedure, before the First Civil Court of Osorno (Case C-2540-2018), requesting the absolute nullity of the contract of sale signed in 1999, by which Consorcio Forestal S.A. sold to Forestal Valdivia S.A., today Forestal Arauco S.A., 1,505.6 hectares under the name of Fundo San Nicolás Dos Lote Uno Norte. It also demands compensation for damages for the exploitation and use of indigenous lands against Forestal Arauco S.A.

On November 10, 2018, Forestal Arauco SA was notified of the lawsuit. On January 16, 2019, the Court dismissed the lawsuit regarding Consorcio Forestal S.A., who was not notified of the complaint.

On March 18, 2019, the answer and settlement hearing took place, and, during such hearing, the court decided to proceed to the production of evidence stage.

On November 11, 2019, the parties were summoned to hear the ruling, which 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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

5. Inversiones Forestales Los Alpes Limitada and Forestal Neltume-Carrasco S.A. filed a claim against Forestal Arauco S.A. before the Civil Court of Angol (C-502-2015), in which they request that Forestal Arauco S.A. restitute the material possession of 1,855.9 hectares, which would be part of their property "Resto del Fundo Los Alpes", which would have an area of approximately 2,700 hectares. Likewise, they requested that it be declared that the property is the exclusive domain of the actors, the restitution of the civil and natural fruits, in addition to the deteriorations that the property would have experienced, with litigation costs.

On May 29, 2019, the lawsuit was answered and the counterclaim of the acquisitive prescription was filed.

On March 3, 2020, a conciliation hearing was held; the resolution that opens the period to produce evidence is still 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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

6. On August 2, 2019, the company was notified of a lawsuit for termination of contract and compensation for damages filed by “Sociedad Recuperadora de Fibra S.A.” before the First Court of Valdivia (Role C-2215-2019). In the lawsuit, the plaintiff questions the anticipated termination of a contract by Forestal Arauco.

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It also claims that the company would have breached various contractual obligations regarding to 2 groups of contracts:

A. (i) Aggregates Transport Contract and (ii) Production, Cargo, Storage and Construction Management Contract for Platforms and flooring.

B. (i) Contract for the Production of Aggregates, (ii) Contract for Long Freight Services for Aggregates and (iii) Contract for Construction Services for Granular floor and Short Freight for Aggregates.

Based on the foregoing, it requests payment of compensation for an amount of $3,486,187,431 (equivalent to ThU.S.$ 4,656 as of December 31, 2019) plus interests, readjustments and litigation costs.

On September 17, 2019, Forestal Arauco S.A. answered the claim and filed a counterclaim for compensation of damages which is in the process of a conciliation hearing, requesting that the main claimant be ordered to pay $421,723,281 (equivalent to ThU.S$563 as of December 31, 2019).

Through the resolution dated as of January 9, 2020, the court received the case to commence the production of evidence; the notification of such resolution 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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

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Arauco Argentina S.A.

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 has filed yearly forestry plans between years 2007 and 2018 for its local operations in the provinces of Misiones and Buenos Aires.

On March 25, 2019, the Secretary of Agriculture, Livestock and Fishing approved the resolution No. 2019-55-APN-SECAGYP#MPYT, approving the annual forestry plan for 2007. In addition, said organism through the resolution No. 2019-114-APN-SECAGYP#MPYT approved the annual forestry plan for 2009 on June 12, 2019, and through the resolution No. 2019-228-APN-SECAGYP#MPYT approved the annual forestry plan for 2008 on November 29, 2019. For this reason, Arauco Argentina S.A. may compute the exemption in the income tax related to the forest appraisal on the plantations to be harvested from the lands included in those plans as from the 2019 period.

In March 2005, Note No. 145/05 of the Subsecretary of Agriculture, Livestock and Afforestation suspended the benefit that exempted Arauco Argentina S.A. from paying export duties under Law No. 25,080. This measure is currently under discussion by the Company. On November 8, 2006, the V Chamber of the National Appeals Court for Adversarial Administrative and Federal Matters issued a ruling ordering Arauco Argentina S.A. to continue to enjoy an exemption from paying the exportation duties, in the same manner and scope it had prior to the suspension ordered by Note No. 145/05, if the clearance of merchandise is performed pursuant to the guarantee regime established in article 453, subsection a) of the Customs Code, for the exempted tax obligation. The judicial measure became effective beginning on March of 2007 by collateralization through the granting of bond (caution) policies for each shipment permits exempted from payment of export duty. The company maintains an assignment of funds equivalent to $1,406,696,320 Argentine Pesos (ThU.S.$ 23,512 as of December 31, 2019) for guaranteed export duties between 2007-2015, 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. The Company’s claim is being heard under case file No. 21830/2006 before the Federal Contentious Administrative Court No. 4. On October 28, 2019, a judgment of first instance was issued in said case, rejecting the claim and imposing the litigation costs on Arauco. Against that judgment, the Company filed an appeal and expressed the corresponding arguments in December 2019.

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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 2019, 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 $384,317,563 Argentine Pesos (ThU.S.$6,423 as of December 31, 2019).

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.$40,891 as of December 31, 2019). 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 premium, but preserving other charges. On September 27, 2018, Arauco do Brasil was notified of the CARF’s decision, representing the final amount of this case R$57,556,262 (ThU.S.$ 14,337 as of December 31, 2019), and interests and readjustments will be added to that value until the discussion is over. Arauco do Brasil S.A. filed an appeal for declaration embargoes, to elicit clarifications from the CARF regarding certain points of the decision. On January 25, 2019, the CARF ruled that there were no clarifications or omissions to be made and, consequently, granted a term for filing the last remedy within the administrative realm. This Special Remedy was submitted before the Upper Chamber of Fiscal Remedies of the CARF (CSRF) on February 11, 2019, reiterating the Company’s defense allegations regarding the matters and charges that remained in such process; we are currently expecting the decision on such Special Remedy.

Based on the last decision of the declaratory liens, the CARF submitted that the current value under discussion would amount to R$58,059,580.30 (ThU.S.$ 14,462 as of December 31, 2019), with basis as of January 31, 2019. Interests and adjustments must be added to the aforesaid amount as from January 31, 2019 and until the discussion concludes.

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.

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, 2019, Arauco has not made any provision whatsoever in connection with this contingency.

At the closing date, there are no other contingencies in which the Companies act as obligor, that may significantly affect their financial, economic or operational conditions.

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Provisions recorded as of December 31, 2019 and 2018 are as follows:

Classes of Provisions	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Provisions, current		1,259		413
Provisions for litigations		1,259		413
Provisions, non-current		31,765		33,884
Provisions for litigations		8,265		10,384
Other provisions		23,500		23,500
Total Provisions		33,024		34,297

	12-31-2019
				Other
Movements in Provisions	Litigations (*)			Provisions		Total
	ThU.S.$			ThU.S.$		ThU.S.$
Opening balance		10,797			23,500		34,297
Changes in provisions
Increase in existing provisions		1,196			-		1,196
Increase through business combinations		815			-		815
Used provisions		(1,988	)		-		(1,988	)
Increase (decrease) in foreign currency exchange		(1,942	)		-		(1,942	)
Other Increases (Decreases)		646			-		646
Total Changes		(1,273	)		-		(1,273	)
Closing balance		9,524			23,500		33,024

(*) The increase in legal claims is composed mainly of ThU.S.$1,006 and ThU.S.$92 (Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsuits. There are ThU.S.$98 corresponding to EUFORES from Uruguay in connection with a lawsuit against suppliers.

Increase through business combinations is due to Maderas y Sintéticos de México S.A. for ThU.S.$ 815 where there is a resolution against the company for a lawsuit related to trademark.

	12-31-2018
				Other
Movements in Provisions	Litigations (*)			Provisions		Total
	ThU.S.$			ThU.S.$		ThU.S.$
Opening balance		15,278			23,458		38,736
Changes in provisions
Increase in existing provisions		1,660			2		1,662
Used provisions		(887	)		-		(887	)
Increase (decrease) in foreign currency exchange		(5,262	)		-		(5,262	)
Other Increases (Decreases)		8			40		48
Total Changes		(4,481	)		42		(4,439	)
Closing balance		10,797			23,500		34,297

(*) The increase in legal claims is composed mainly of ThU.S.$886 and ThU.S.$776 (Brazilian and Argentine subsidiaries respectively) in connection with civil and labor lawsuits.

	12-31-2017
				Other
Movements in Provisions	Litigations (*)			Provisions (**)			Total
	ThU.S.$			ThU.S.$			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)		(194	)		(415	)		(609	)
Total Changes		(1,951	)		1,707			(244	)
Closing balance		15,278			23,458			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 increase through business combination corresponds to the acquisition of Arauco Industrias de Paineis.

(**) The change in Other Increases (Decreases) in Other provisions is due to a reverse of the provision in Zona Franca Punta Pereira (Uruguay).

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, and the constitution of provision for the lawsuit of export duties (see Arauco Argentina's contingent liability set forth in this note).

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NOTE 19. INTANGIBLE ASSETS

	12-31-2019			12-31-2018
Classes of Intangible Assets, Net	ThU.S.$			ThU.S.$
Intangible assets, net		106,252			90,093
Computer software		39,065			26,545
Water rights		5,966			5,966
Customer		39,981			41,634
Other identifiable intangible assets		21,240			15,948
Classes of intangible Assets, Gross		220,222			185,895
Computer software		113,487			88,177
Water rights		5,966			5,966
Customer		74,723			71,443
Other identifiable intangible assets		26,046			20,309
Classes of accumulated amortization and impairment
Total accumulated amortization and impairment		(113,970	)		(95,802	)
Accumulated amortization and impairment, intangible assets		(113,970	)		(95,802	)
Computer software		(74,422	)		(61,632	)
Customer		(34,742	)		(29,809	)
Other identifiable intangible assets		(4,806	)		(4,361	)

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

	12-31-2019
Reconciliation of intangible assets	Computer Software			Water Rights		Customer			Others			TOTAL
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance		26,545			5,966		41,634			15,948			90,093
Changes
Additions		17,908			-		-			4,472			22,380
Additions through business combination		223			-		2,800			1,300			4,323
Disposals		(67	)		-		-			-			(67	)
Amortization		(8,008	)		-		(4,769	)		(360	)		(13,137	)
Increase (Decrease) related to foreign currency translation		177			-		316			(120	)		373
Other Increases (Decreases)		2,287			-		-			-			2,287
Changes Total		12,520			-		(1,653	)		5,292			16,159
Closing Balance		39,065			5,966		39,981			21,240			106,252
	12-31-2018
Reconciliation of intangible assets	Computer Software			Water Rights		Customer			Others			TOTAL
	ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance		26,747			5,697		47,144			9,027			88,615
Changes
Additions		6,369			269		-			7,424			14,062
Disposals		(1	)		-		-			-			(1	)
Amortization		(7,132	)		-		(4,808	)		(409	)		(12,349	)
Increase (Decrease) related to foreign currency translation		(287	)		-		(702	)		(31	)		(1,020	)
Other Increases (Decreases)		849			-		-			(63	)		786
Changes Total		(202	)		269		(5,510	)		6,921			1,478
Closing Balance		26,545			5,966		41,634			15,948			90,093

	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.

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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 1.8 million hectares as of December 31, 2019 out of which 1 million hectares are used for forestry planting, 515 thousand hectares are native forest, 108 thousand hectares are used for other purposes and 97 thousand hectares not yet planted.

For the period ended December 31, 2019, the production volume of logs totaled 20.3 million m3 (23 million m3 as of December 31, 2018).

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, 2019 amounted to ThU.S.$154,705 (ThU.S.$84,476 as of December 31, 2018). 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, 2019 amounted to ThU.S.$194,406 (ThU.S.$207,346 as of December 31, 2018). 

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

- The discount rates used are 6.4% in Chile, 7.9% Brazil, 10.5% in Argentina and 6.9% in Uruguay.

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-   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	(130,251)
	-0,5	138,065
Margins (%)	10	373,939
	-10	(373,939)

The significant unobservable input data used in the measurement of the fair value of biological assets are discount rates and sales margins of the different products that are harvested from the forest. Increases (decreases) in any of these input data considered in isolation would result in a smaller or greater fair value measurement. A change in the assumption used for the probability of a change in the discount rate is accompanied by a change in the opposite direction in the assumption used before a change in the sales margins.

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 plantations, which in conjunction with the Company’s resources, allow risks to be minimized.

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

Detail of Biological Assets Pledged as Security 

As of December 31, 2019, there are no forestry plantations pledged as security.

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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 and Non-Current Biological Assets

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

	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Current		275,792		315,924
Non-current		3,393,634		3,336,339
Total		3,669,426		3,652,263

Reconciliation of carrying amount of biological assets

	12-31-2019
Movement	Current			Non-current			Total
	ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance		315,924			3,336,339			3,652,263
Changes in real incurred cost		(22,719	)		90,999			68,280
Additions through acquisition and costs of new plantations		9,195			217,562			226,757
Sales		-			(2,722	)		(2,722	)
Harvest		(133,335	)		-			(133,335	)
Increases (decreases) in Foreign Currency Translation		4,699			(23,091	)		(18,392	)
Loss of forest due to fires		-			(3,823	)		(3,823	)
Transfers from non-current to current		96,875			(96,875	)		-
Other Increases (decreases)		(153	)		(52	)		(205	)
Changes in fair value		(17,413	)		(33,704	)		(51,117	)
Gain (losses) arising from changes in fair value minus sale costs		(6,588	)		161,294			154,706
Sales		-			(4,015	)		(4,015	)
Harvest		(198,089	)		-			(198,089	)
Loss of forest due to fires		-			(3,718	)		(3,718	)
Transfers from non-current to current		187,264			(187,264	)		-
Total Changes		(40,132	)		57,295			17,163
Closing balance		275,792			3,393,634			3,669,426

	12-31-2018
Movement	Current			Non-current			Total
	ThU.S.$			ThU.S.$			ThU.S.$
Opening Balance		307,796			3,459,146			3,766,942
Changes in real incurred cost		34,684			(27,174	)		7,510
Additions through acquisition and costs of new plantations		2,105			205,353			207,458
Sales		(52	)		(315	)		(367	)
Harvest		(117,729	)		-			(117,729	)
Increases (decreases) in Foreign Currency Translation		(5,424	)		(76,672	)		(82,096	)
Loss of forest due to fires		-			(8,702	)		(8,702	)
Transfers from non-current to current		155,789			(155,789	)		-
Other Increases (decreases)		(5	)		8,951			8,946
Changes in fair value		(26,556	)		(95,633	)		(122,189	)
Gain (losses) arising from changes in fair value minus sale costs		(8,684	)		93,160			84,476
Sales		-			(445	)		(445	)
Harvest		(203,164	)		-			(203,164	)
Loss of forest due to fires		-			(3,056	)		(3,056	)
Transfers from non-current to current		185,292			(185,292	)		-
Total Changes		8,128			(122,807	)		(114,679	)
Closing balance		315,924			3,336,339			3,652,263

F-83

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 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 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.

Detail information of disbursements related to the environment

As of December 31, 2019 and 2018 Arauco has made and / or has committed the following disbursements in major environmental projects:

F-84

12-31-2019		Disbursements undertaken 2019					Committed Disbursements
		State	Amount		Asset	Asset/expense	Amount		Estimated
Company	Name of project	of project	ThU.S.$		Expense	destination item	ThU.S.$		date
Celulosa Arauco y Constitución S.A.	Investment projects for the control and management of gas emissions from industrial process	In process		267	Assets	Property, plant and equipment		792	2020
Celulosa Arauco y Constitución S.A.	Environmental improvement studies	In process		21,927	Assets	Property, plant and equipment		53,111	2020
Celulosa Arauco y Constitución S.A.	Investment projects for the control and management of gas emissions from industrial process	Finished		375	Expense	Operating cost		-		-
Celulosa Arauco y Constitución S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		3,535	Assets	Property, plant and equipment		6,595	2020
Celulosa Arauco y Constitución S.A.	Environmental improvement studies	Finished		15,570	Expense	Operating cost		-		-
Celulosa Arauco y Constitución S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	Finished		348	Assets	Property, plant and equipment		-		-
Celulosa Arauco y Constitución S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	Finished		7,745	Expense	Operating cost		-		-
Arauco Argentina S.A.	Construction emissary	In process		40	Assets	Property, plant and equipment		697	2020
Arauco Argentina S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	In process		1,174	Assets	Property, plant and equipment		1,816	2020
Arauco Argentina S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		987	Assets	Property, plant and equipment		343	2020
Maderas Arauco S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	In process		208	Expense	Operating cost		-		-
Maderas Arauco S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		647	Expense	Operating cost		-		-
Maderas Arauco S.A.	Environmental improvement studies	Finished		305	Assets	Property, plant and equipment		-		-
Forestal Arauco S.A.	Environmental improvement studies	In process		626	Expense	Administration expenses		401	2020
Celulosa y Energía Punta Pereira S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		684	Assets	Property, plant and equipment		2,567	2020
Celulosa y Energía Punta Pereira S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	In process		400	Assets	Property, plant and equipment		100	2020
Celulosa y Energía Punta Pereira S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	Finished		448	Assets	Property, plant and equipment		-		-
Forestal Los Lagos S.A.	Environmental improvement studies	In process		210	Expense	Operating cost		63	2020
Arauco North America, Inc	Environmental improvement studies	In process		945	Assets	Property, plant and equipment		530	2020
		TOTAL		56,441				67,015

12-31-2018		Disbursements undertaken 2018					Committed Disbursements
		State	Amount		Asset	Asset/expense	Amount		Estimated
Company	Name of project	of project	ThU.S.$		Expense	destination item	ThU.S.$		date
Celulosa Arauco y Constitución S.A.	Investment projects for the control and management of gas emissions from industrial process	In process		6,467	Assets	Property, plant and equipment		8,271	2019
Celulosa Arauco y Constitución S.A.	Environmental improvement studies	In process		29,419	Assets	Property, plant and equipment		63,035	2019
Celulosa Arauco y Constitución S.A.	Investment projects for the control and management of gas emissions from industrial process	Finished		563	Expense	Operating cost		-		-
Celulosa Arauco y Constitución S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		21,978	Assets	Property, plant and equipment		9,233	2019
Celulosa Arauco y Constitución S.A.	Environmental improvement studies	Finished		25,684	Expense	Operating cost		-
Arauco Argentina S.A.	Construction emissary	In process		1,454	Assets	Property, plant and equipment		797	2019
Arauco Argentina S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	In process		-	Assets	Property, plant and equipment		-	2019
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		-	2019
Maderas Arauco S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		499	Expense	Operating cost		-		-
Maderas Arauco S.A.	Expansion of solid industrial waste dumpsite for management of these in the future	In process		1,471	Expense	Operating cost		-		-
Maderas Arauco S.A.	Environmental improvement studies	In process		-	Assets	Property, plant and equipment		291	2019
Forestal Arauco S.A.	Environmental improvement studies	In process		1,547	Expense	Administration expenses		1,957	2019
Celulosa y Energía Punta Pereira S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	In process		52	Assets	Property, plant and equipment		3,266	2019
Celulosa y Energía Punta Pereira S.A.	Investment projects for the control and management of hazardous liquids and water energy optimization of industrial plants	Finished		281	Assets	Property, plant and equipment		-		-
Forestal Los Lagos S.A.	Environmental improvement studies	In process		236	Expense	Operating cost		273	2019
Arauco North America, Inc	Environmental improvement studies	In process		969	Assets	Property, plant and equipment		882	2019
		TOTAL		90,620				88,005

F-85

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 of non-current assets held for sale:

	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Land		2,422		2,352
Buildings		1,256		1,284
Property, plant and equipment		758		2,090
Total		4,436		5,726

As of December 31, 2019, 2018 and 2017, there were no significant effects on results related to the sale of assets held for sale.

F-86

NOTE 23. FINANCIAL INSTRUMENTS

23.1 Classification

Arauco's financial instruments as of December 31, 2019 and 2018, are displayed in the table below. Regarding those instruments valued at an amortized cost, an estimation of their fair value is displayed for informational purposes.

Financial Instruments	December 2019				December 2018
Thousands of dollars	Carrying amount		Fair Value		Carrying amount		Fair Value
Financial assets at fair value through profit or loss (held for trading)		634,079		634,079		270,110		270,110
Derivatives (1)		121		121		75		75
Mutual funds (2)		633,958		633,958		270,035		270,035
Financial assets at amortized cost		1,597,356		1,597,356		1,669,587		1,669,587
Cash and cash equivalents (amortized cost)		926,054		926,054		805,907		805,907
Cash		314,981		314,981		327,132		327,132
Time deposits		611,073		611,073		478,775		478,775
Accounts Receivable (net)		651,771		651,771		854,333		854,333
Trade and other receivables		562,419		562,419		751,158		751,158
Lease receivable		1,112		1,112		1,968		1,968
Other receivables		88,240		88,240		101,207		101,207
Accounts receivable due from related parties		17,526		17,526		7,805		7,805
Other financial assets		2,005		2,005		1,542		1,542
Hedging assets		10,639		10,639		19,226		19,226
Financial liabilities at amortized cost (3)		6,733,957		7,001,457		5,182,353		5,206,334
Bonds issued denominated in U.S. Dollars		3,502,090		3,554,538		2,062,044		1,948,482
Bonds issued denominated in U.F. (4)		1,329,653		1,475,667		1,439,610		1,544,813
Bank Loans in U.S. Dollars		824,581		874,584		925,780		962,866
Bank borrowing denominated in U.S. Dollars		122,441		141,476		14,655		14,655
Lease liabilities		271,025		271,025		68,187		63,441
Trade and other payables		675,287		675,287		661,848		661,848
Accounts payable to related parties		8,880		8,880		10,229		10,229
Financial liabilities at fair value through profit or loss		33		33		289		289
Hedging Liabilities		134,242		134,242		71,310		71,310

(1)  The derivatives 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”, “Accounts payable to related parties” and derivatives are presented in the consolidated statements of financial position in the line item “Other financial liabilities” as current and non-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.

F-87

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, 2019, have been measured based on the valuation methodologies provided in IFRS 13. 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 2019		Level 1		Level 2		Level 3
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Financial assets at fair value
Derivatives		121				121
Mutual Funds		633,958		633,958
Hedging assets		10,639				10,639
Financial liabilities at fair value through profit or loss		33				33
Hedging liabilities		134,242				134,242

At the closing date of these consolidated financial statements, there have been no transfers between the different hierarchy levels.

23.3Explanation 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-88

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 and lease liabilities due to right of use assets, were determined based on discounted cash flow analysis, applying the corresponding discount yield curves to the remaining term to maturity.

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

The following table sets forth a reconciliation between the financial liabilities and the consolidated statements of financial position as of December 31, 2019 and 2018:

	December 2019
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Other current financial liabilities, Total		From 1 year to 3 years		From 3 years to 5 years		More than 5 years		Other non-current financial liabilities, Total			Total
Bonds obligations		22,374		254,330		276,704		201,427		577,884		3,775,728		4,555,039		4,831,743
Bank borrowing		69,971		113,334		183,305		196,611		502,772		64,334		763,717		947,022
Lease liabilities		21,518		47,690		69,208		117,608		46,408		37,801		201,817		271,025
Swap and Forward		837		-		837		133,438		-		-		133,438		134,275
Other Financial Liabilities, Total (a)		114,700		415,354		530,054		649,084		1,127,064		3,877,863		5,654,011		6,184,065
Thousands of dollars	December 2019
	Up to 90 days		From 91 days to 1 year		Total Current		From 1 year to 3 years		From 3 years to 5 years		More than 5 years		Total non-current		Total
Trades and other payables		672,809		248		673,057		2,230		-		-		2,230		675,287
Accounts payable to related companies		8,880		-		8,880		-		-		-		-		8,880
Accounts Payable, Total (b)		681,689		248		681,937		2,230		-		-		2,230		684,167
Financial Liabilities, Total (a) + (b)		796,389		415,602		1,211,991		651,314		1,127,064		3,877,863		5,656,241		6,868,232
	December 2018
Thousands of dollars	Up to 90 days		From 91 days to 1 year		Other current financial liabilities, Total		From 1 year to 3 years		From 3 years to 5 years		More than 5 years		Other non-current financial liabilities, Total			Total
Bonds obligations		27,803		262,068		289,871		478,441		340,275		2,393,067		3,211,783		3,501,654
Bank borrowings		84,778		130,271		215,049		177,504		348,558		199,324		725,386		940,435
Lease liabilities		7,265		23,651		30,916		26,296		10,975		-		37,271		68,187
Swap and Forward		1,760		-		1,760		69,839				-		69,839		71,599
Other Financial Liabilities, Total (a)		121,606		415,990		537,596		752,080		699,808		2,592,391		4,044,279		4,581,875
Thousands of dollars	December 2018
	Up to 90 days		From 91 days to 1 year		Total Current		From 1 year to 3 years		From 3 years to 5 years		More than 5 years		Total non-current			Total
Trades and other payables		659,618		-		659,618		2,230		-		-		2,230		661,848
Accounts payable to related companies		10,229		-		10,229		-		-		-		-		10,229
Accounts Payable, Total (b)		669,847		-		669,847		2,230		-		-		2,230		672,077
Financial Liabilities, Total (a) + (b)		791,453		415,990		1,207,443		754,310		699,808		2,592,391		4,046,509		5,253,952

F-89

23.4 Derivative Instruments

Hedging instruments recorded as of December 31, 2019 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 Other Non-Current Financial Assets or Other Non-current Financial Liabilities, respectively.  The effects for the period are presented under Equity as Other Comprehensive Income or the 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 consolidated statements of financial position as of December 31, 2019 and 2018, is presented below:

Financial Instruments	December 2019 Fair Value ThU.S.$			December 2018 Fair Value ThU.S.$
Assets at fair value through profit or loss (held for trading)		121			75
Derivatives (1)		121			75
Forward (2)		-			-
Hedging Assets		10,639			19,226
Derivatives (1)		5,827			1,357
Cross Currency Swaps		4,812			17,869
Financial liabilities at fair value through profit or loss		(33	)		(289	)
Derivatives (1)		(19	)		(287	)
Forward (2)		(14	)		(2	)
Hedging Liabilities		(134,242	)		(71,310	)
Cross Currency Swaps		(22,842	)		(2,224	)
Derivatives (1)		(111,400	)		(69,086	)

(1) Includes Swap and Forward from Uruguay tables and Forward from Chile. 

(2) Includes Forwards from Colombia and Chile.

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 different from the functional currency, which causes mismatches that could affect operating results.

F-90

Below are the cross currency swaps that Arauco has as of December 31, 2019 and 2018 to cover the exposure to the exchange rate risk generated from bonds denominated in U.F.:

Bond	Institution
Fair Value ThU.S.$	Fair Value ThU.S.$	Amount U.S.$		Amount U.F.		Starting date	Ending date	December 2019			December 2018
F	Deutsche - England		39,653,006		909,091	10-30-2011	10-30-2021		(4,435	)		(3,105	)
F	JP Morgan - N.A.		39,653,006		909,091	10-30-2011	10-30-2021		(4,392	)		(3,039	)
F	Deutsche - England		-		-	04-30-2014	04-30-2019		-			1,707
F	Scotiabank - Chile		34,933,122		909,091	10-30-2014	04-30-2023		615			2,041
F	Scotiabank - Chile		34,889,491		909,091	10-30-2014	04-30-2023		801			2,273
F	Santander - Chile		34,524,604		909,091	10-30-2014	04-30-2023		1,214			2,715
F	BCI - Chile		34,201,420		909,091	10-30-2014	04-30-2023		1,611			3,148
F	Banco de Chile - Chile		34,524,605		909,091	04-30-2019	10-30-2029		418			155
J	Itaú - Chile		42,864,859		1,000,000	09-01-2010	09-01-2020		(5,123	)		(3,289	)
J	Scotiabank - Chile		42,864,859		1,000,000	09-01-2010	09-01-2020		(5,123	)		(3,289	)
J	Deutsche - England		42,864,859		1,000,000	09-01-2010	09-01-2020		(5,132	)		(3,313	)
J	Santander - Spain		42,873,112		1,000,000	09-01-2010	09-01-2020		(5,118	)		(3,273	)
J	Scotiabank - Chile		42,864,257		1,000,000	09-01-2010	09-01-2020		(5,075	)		(3,197	)
P	Itaú - Chile		46,474,122		1,000,000	05-15-2012	11-15-2021		(7,100	)		(4,978	)
P	JP Morgan - N.A.		47,163,640		1,000,000	11-15-2012	11-15-2021		(7,420	)		(5,102	)
P	Scotiabank - Chile		42,412,852		1,000,000	11-15-2013	11-15-2023		(2,416	)		(882	)
P	Santander - Chile		41,752,718		1,000,000	11-15-2013	11-15-2023		(1,609	)		(89	)
P	Deutsche - England		41,752,718		1,000,000	11-15-2013	11-15-2023		(1,594	)		(92	)
Q	BCI - Chile		16,194,459		375,000	10-01-2014	04-01-2021		(1,755	)		(1,679	)
Q	BCI - Chile		16,198,761		375,000	10-01-2014	04-01-2021		(1,747	)		(1,655	)
R	Santander - Chile		128,611,183		3,000,000	10-01-2014	04-01-2024		(11,059	)		(7,016	)
R	JP Morgan - England		43,185,224		1,000,000	10-01-2014	04-01-2024		(3,461	)		(1,996	)
R	Itaú - Chile		43,277,070		1,000,000	10-01-2014	04-01-2024		(3,486	)		(2,015	)
S	Santander - Chile		201,340,031		5,000,000	11-15-2016	11-15-2026		153			5,830
W	Goldman Sachs		40,521,750		1,000,000	10-10-2018	10-10-2028		(3,360	)		(2,392	)
W	Scotiabank - Chile		40,537,926		1,000,000	10-10-2018	10-10-2028		(3,169	)		(2,294	)
W	Goldman Sachs		40,066,555		1,000,000	10-10-2018	10-10-2028		(2,766	)		(1,861	)
X	Santander - Chile		118,400,504		3,000,000	10-10-2018	10-10-2038		(1,036	)		(7,976	)
X	Santander - Chile		97,971,786		2,500,000	10-10-2018	10-10-2038		(614	)		(6,554	)
									(82,178	)		(51,217	)

Additionally, as of December 31, 2019, Arauco maintains cross currency swaps contracts to cover the exposure to the risk of the exchange rate for bank contracts in Euro, as shown in the following table:

							December 2019
Institution	Amount U.S.$		Amount EUR		Starting date	Ending date	Fair Value ThU.S.$			December 2018 Fair Value ThU.S.
Santander - Chile		118,670,000		100,000,000	06-15-2021	12-15-2029		(4,903	)		-
Banco de Chile		59,335,000		50,000,000	06-15-2021	12-15-2029		(2,428	)		-
MUFG - N.A.		118,670,000		100,000,000	06-15-2021	12-15-2029		(4,846	)		-
JP Morgan - N.A.		237,340,000		200,000,000	06-15-2021	12-15-2029		(9,740	)		-
HSBC - N.A.		59,335,000		50,000,000	06-15-2021	12-15-2029		(2,493	)		-
								(24,410	)

Arauco needs to minimize the risk of the exchange rate, as it holds debt in other currencies different from U.S. dollars. 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 other currencies of the liabilities 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.

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Forward

Arauco maintains, as of December 31, 2019, forward contracts to hedge the exchange rate risk exposure in connection with construction company contracts in local currency, as follows:

							December 2019			December 2018
Institution	Amount U.S.$		Amount CLP		Starting date	Ending date	Fair Value ThU.S.$			Fair Value ThU.S.$
Banco de Chile - Chile		47,198,102		32,552,531,231	10-11-2019	12-11-2020		(3,543	)		-
Banco de Chile - Chile		47,136,593		32,552,531,231	10-11-2019	12-11-2020		(3,482	)		-
BCI - Chile		47,061,633		32,552,531,231	10-11-2019	12-11-2020		(3,408	)		-
Itaú - Chile		47,102,491		32,552,531,231	10-11-2019	12-11-2020		(3,449	)		-
Itaú - Chile		46,838,174		32,552,531,231	10-11-2019	12-11-2020		(3,188	)		-
Itaú - Chile		49,519,410		34,649,721,677	10-11-2019	12-11-2020		(3,065	)		-
BCI - Chile		48,292,295		34,649,721,677	10-11-2019	12-11-2020		(1,855	)		-
Itaú - Chile		51,267,096		39,886,826,067	01-10-2020	12-11-2020		2,131
Scotiabank - Chile		51,222,327		39,886,826,067	01-10-2020	12-11-2020		2,175
								(17,684	)

Through an effectiveness test, and pursuant to IFRS 9, 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, 2019 and 2018, are detailed in the following table:

Exchange rate	Institution	Amount ThU.S.$		Starting date	Ending date	December 2019 Fair Value ThU.S.$
USDCOP	Corpbanca Colombia		2,100	11-07-2019	01-14-2020		(8	)
USDCOP	Corpbanca Colombia		1,700	11-25-2019	02-11-2020		(6	)
							(14	)

Exchange rate	Institution	Amount ThU.S.$		Starting date	Ending date	December 2018 Fair Value ThU.S.$
USDCOP	Corpbanca Colombia		1,500	10-31-2018	01-09-2019		(2	)
USDCOP	Corpbanca Colombia		1,700	11-26-2018	02-12-2019		-
USDCOP	Corpbanca Colombia		1,600	12-20-2018	03-12-2019		-
							(2	)

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23.4.3. Uruguay

Forward

As of December 31, 2019 and 2018, Arauco through its subsidiaries as a joint operation (50%) in 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 2019 Fair Value ThU.S.$
UYUUSD	Banco Santander Uruguay		8,070		(182	)
UYUUSD	HSBC Uruguay		12,915		(264	)
UYUUSD	Citibank U.K.		1,500		(101	)
UYUUSD	Banco Itaú Uruguay		3,710		(4	)
EURUSD	Citibank U.K.		833		(20	)
					(571	)

Exchange rate	Institution	Notional ThU.S.$		December 2018 Fair Value ThU.S.$
UYUUSD	Banco Santander Uruguay		14,880		(586	)
UYUUSD	HSBC Uruguay		11,610		(56	)
UYUUSD	Citibank U.K.		4,425		29
					(613	)

Arauco Uruguay's profits and through its subsidiaries as a joint operation (50%), also face exposure to the price variation of certain fuels, as occurs with Fuel Oil N°6, which is used during the pulp manufacturing process. In order to minimize this risk, the volatility of future flows associated to the purchase of Fuel Oil No. 6 for years 2020 and 2021 has been limited through forwards of this commodity. The agreements that are in force and effect as of December 31, 2019 and 2018, are detailed below:

Commodity	Institution	Notional ThU.S.$		December 2019 Fair Value ThU.S.$
Fuel Oil N°6	JPMorgan Chase Bank, N.A.		6,925		878
Fuel Oil N°6	DNB Bank ASA		5,241		472
					1,350

Commodity	Institution	Notional ThU.S.$		December 2018 Fair Value ThU.S.$
Fuel Oil N°6	JPMorgan Chase Bank, N.A.		6,189		(800	)
Fuel Oil N°6	Citibank U.K.		401		(34	)
Fuel Oil N°6	DNB Bank ASA		4,837		(568	)
					(1,402	)

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Interest Rate Swap

In addition, Arauco through its subsidiaries as a joint operation (50%) in Uruguay 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, 2019 and 2018 is shown below:

Exchange rate	Institution	Notional ThU.S.$		December 2019 Fair Value ThU.S.$
USD	DNB Bank ASA		33,758		(8	)

Exchange rate	Institution	Notional ThU.S.$		December 2018 Fair Value ThU.S.$
USD	DNB Bank ASA		42,198		936

23.5 Loans and Receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. In the consolidated statements of financial position, they are included in line items “Cash and cash equivalents” (certain components of cash and cash equivalents), “Trade and Other Current/Non-Current Receivables” and “Accounts receivable from related parties”.

Loans and receivables are measured at amortized cost using the effective interest method and are tested for impairment. Financial assets that are classified as loans and receivables are: cash and cash-equivalents, time deposits, repurchase agreements, trade and other current/non-current receivables, and accounts receivable from related parties

As of December 31, 2019 and 2018, there are provisions for impairment for ThU.S.$ 16,368 and ThU.S.$ 15,147, respectively.

	December 2019		December 2018
	ThU.S.$		ThU.S.$
Financial assets at amortized cost		1,597,356		1,669,587
Cash and cash equivalents (Mutual Funds not included)		926,054		805,907
Cash		314,981		327,132
Time Deposits		611,073		478,775
Trade and other receivables (net)		669,297		862,138
Trade and other receivables		562,419		751,158
Lease receivable		1,112		1,968
Other receivables		88,240		101,207
Accounts receivable from related parties		17,526		7,805
Other financial assets		2,005		1,542

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. 

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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, 2019 and 2018, classified by currency is as follows:

	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Cash and Cash Equivalents		1,560,012		1,075,942
U.S. Dollars		1,412,688		834,513
Euro		2,264		8,295
Mexican pesos		13,684		1,461
Other currencies		68,916		51,373
Chilean pesos		62,460		180,300

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:These represent enforceable rights for Arauco resulting from the normal course of the business.

23.5.4 Other Receivables: These correspond to receivables from sales, services or loans that are not considered within the normal course of the business.

The allowance for doubtful accounts is presented as a deduction of trade and other receivables. The provision for doubtful accounts is established based on an analysis of the age of the portfolio and considering the insurance coverage on accounts receivable. Other conditions are assessed for example when there is objective evidence that Arauco will not receive payments under the original sale terms and when the customer is a party to a bankruptcy court agreement or cessation of payments, and is written-off when Arauco has exhausted all levels of recovery of the receivable in a reasonable time.

23.5.5 Accounts receivable from related parties: Represent enforceable rights for Arauco resulting from the normal course of business, calling normal to the line of business, activity or purpose of exploitation and financing, and which Arauco owns a non-controlling ownership of the counterparty.

The following table sets forth trade and other current/non-current receivables classified by currencies as of December 31, 2019 and 2018:

	12-31-2019		12-31-2018
	ThU.S.$		ThU.S.$
Trades and other current receivables		642,315		839,184
U.S. Dollars		435,663		631,047
Euros		8,483		7,399
Mexican pesos		33,981		8,576
Other currencies		74,544		88,426
Chilean pesos		86,954		99,950
U.F.		2,690		3,786
Accounts receivable from related parties, current		17,526		7,324
U.S. Dollars		1,319		591
Other currencies		197		83
Chilean pesos		15,512		6,169
U.F.		498		481
Trade and other non-current receivables		9,456		15,149
U.S. Dollars		3,691		7,733
Other currencies		351		1,067
Chilean pesos		2,983		3,267
U.F.		2,431		3,082
Accounts receivable from related parties, non-current		-		481
U.F.		-		481

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23.6Financial Liabilities

Arauco's financial liabilities to the date of these consolidated financial statements are as follows:

Financial Liabilities	December 2019 ThU.S.$		December 2018 ThU.S.$
Total Financial Liabilities		6,868,232		5,253,952
Financial liabilities at fair value through profit or loss (held for trading)		33		289
Hedging Liabilities		134,242		71,310
Financial Liabilities Measured at Amortized Cost		6,733,957		5,182,353

The following table sets forth the current portion of the non-current bank borrowings and debt issued as of December 31, 2019 and 2018.

	December 2019 ThU.S.$		December 2018 ThU.S.$
Bank borrowings - current portion		62,220		99,397
Bonds issued - current portion		85,641		81,060
Total		147,861		180,457

23.7 Financial Liabilities Measured at Amortized Cost

Financial liabilities correspond to non-derivative financial instruments with contractual cash-flow payments that can be either fixed or variable.   

Also, this category includes those non-derivative financial liabilities for services or goods delivered to Arauco at the end of each reporting period that have not yet been paid. These amounts are not insured and are generally paid within thirty days after being recognized. 

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., lease liabilities, and trade and other payables.

		12-31-2019	12-31-2018
		ThU.S.$	ThU.S.$	12-31-2019	12-31-2018
	Currency	Amortized Cost	Fair Value	ThU.S.$	ThU.S.$
Total Financial Liabilities		6,733,957	5,182,353	7,001,457	5,206,334
Bonds Issued	U.S. Dollar	3,502,090	2,062,044	3,554,538	1,948,482
Bonds Issued	U.F.	1,329,653	1,439,610	1,475,667	1,544,813
Bank borrowings	U.S. Dollar	824,581	925,780	874,584	962,866
Bank borrowings	Euro	116,259	-	141,476	-
Bank borrowings	Other currencies	6,182	14,655	-	14,655
Lease liabilities	U.F.	41,633	57,349	41,633	53,594
Lease liabilities	Chilean pesos	107,046	10,838	107,046	9,847
Lease liabilities	Mexican pesos	10,025	-	10,025	-
Lease liabilities	U.S. Dollar	83,585	-	83,585	-
Lease liabilities	Euro	52	-	52	-
Lease liabilities	Other currencies	28,684	-	28,684	-
Trades and Other Payables	U.S. Dollar	157,754	187,219	157,754	187,219
Trades and Other Payables	Euro	20,414	7,450	20,414	7,450
Trades and Other Payables	Mexican pesos	22,272	-	22,272	-
Trades and Other Payables	Other currencies	94,946	90,113	94,946	90,113
Trades and Other Payables	Chilean pesos	348,155	348,886	348,155	348,886
Trades and Other Payables	U.F.	31,746	28,180	31,746	28,180
Accounts payable to related parties	U.S. Dollar	454	1,777	454	1,777
Accounts payable to related parties	Chilean pesos	8,426	8,452	8,426	8,452

F-96

The financial liabilities at amortized cost presented in the consolidated statements of financial positions as of December 31, 2019 and 2018 are as follows:

			December 2019
			ThU.S.$
	Current		Non-Current		Total
Other financial liabilities		529,217		5,520,573		6,049,790
Trade and other payables		673,057		2,230		675,287
Accounts payable to related parties		8,880		-		8,880
Total Financial Liabilities Measured at Amortized Cost		1,211,154		5,522,803		6,733,957
			December 2018
			ThU.S.$
	Current		Non-Current		Total
Other financial liabilities		535,836		3,974,440		4,510,276
Trade and other payables		659,618		2,230		661,848
Accounts payable to related parties		10,229		-		10,229
Total Financial Liabilities Measured at Amortized Cost		1,205,683		3,976,670		5,182,353

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
	2019			2018			2017
	ThU.S.$			ThU.S.$			ThU.S.$
Opening balan919226ce - under IAS 39 and IFRS 9, respectively		13,395			4,752		1,096
Amounts restated through reserve of cash flow hedges		-			(1,918	)	-
Opening balance - in accordance with IFRS 9		13,395			2,834		1,096
Gains (losses) on cash flow hedges		23,156			30,321		22,212
Recycle of cash flow hedges to profit or loss		(29,227	)		(15,286	)	(16,965	)
Income tax relating cash flow hedges		1,686			(4,474	)	(5,917	)
Recycle of income tax		-			-		4,326
Closing balance		9,010			13,395		4,752

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:

a) Ensuring business continuity and normal operations in the long term;

b) Ensuring funding for new investments to achieve sustainable growth over time;

c) Keeping adequate capital structure considering all economic cycles that impact the business and the nature of the industry; and

d) 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).

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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 2019 ThU.S.$		December 2018 ThU.S.$	Interest coverage >= 2,0x	Debt level (1) <= 1,2x
Domestic bonds (Chile)		1,329,653	1,439,610	N/R	✓
Syndicate Loan Scotiabank		200,703	200,563	✓	✓
Syndicate Loan Banco Estado - Grayling		301,452	287,565	✓	✓
Syndicate ECA Banco BNP Paribas		116,259	-	✓	✓

N/R: Not required for the financial obligation

(1) Debt to equity ratio (financial debt divided by equity plus non-controlling interests)

As of December 31, 2019 and 2018, Arauco has complied with all of its financial covenants.

The following table sets forth the credit ratings of our debt instruments as of December 31, 2019 and December 31, 2018, 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, 2019 and 2018 is as follows:

	December 2019		December 2018
	ThU.S.$		ThU.S.$
Equity		7,369,415		7,338,971
Bank borrowings		947,022		940,435
Lease liabilities		271,025		68,187
Bonds issued		4,831,743		3,501,654
Capitalization		13,419,205		11,849,247

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.

F-98

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.    

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 receivables, financial lease debtors and other debtors.

Arauco does not have a securitized portfolio.

	December 2019		December 2018
	ThU.S.$		ThU.S.$
Current Receivables
Trade receivables		559,164		747,258
Financial lease receivables		912		1,131
Other debtors		82,239		90,795
Net subtotal		642,315		839,184
Trade receivables		568,123		755,809
Financial lease receivables		912		1,131
Other debtors		85,848		93,370
Gross subtotal		654,883		850,310
Provision for doubtful trade receivables		8,959		8,551
Provision for doubtful lease receivables		-		-
Provision for doubtful other debtors		3,609		2,575
Subtotal Bad Debt		12,568		11,126
Non-Current Receivables
Trade receivables		3,255		3,900
Financial lease receivables		200		837
Other debtors		6,001		10,412
Net Subtotal		9,456		15,149
Trade receivables		7,055		7,921
Financial lease receivables		200		837
Other debtors		6,001		10,412
Gross subtotal		13,256		19,170
Provision for doubtful trade receivables		3,800		4,021
Provision for doubtful lease receivables		-		-
Provision for doubtful other debtors		-		-
Subtotal Bad Debt		3,800		4,021

Explanation of Risk Management Objectives, Policies and Processes, and Measurement Methods

The Credit and Collections Sub-Division, dependent from the Treasury Division, is the area entrusted with minimizing the credit risk of the accounts receivable, supervising the delinquency of the accounts. The regulations and procedures applicable for the control and administration of the Arauco Group can be found in the Corporate Credit Policy.

F-99

As of December 31, 2019, Arauco’s balance for commercial Debtors was ThU.S.$ 575,178 of which, according to the agreed sales conditions, 65.2% corresponded to sales on credit (open account), 34.1% to sales with letters of credit and 0.7% to other types of sales, distributed in 2,918 debtors. The client with the largest Open Account debt represented 1.8% of the total accounts receivable as of that date.

Below we provide detail regarding accounts receivable, classified in tranches:

December 31, 2019
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.$		531,881			28,469			899			309			18			846			22			34			389			12,311			575,178
%		92.47	%		4.95	%		0.16	%		0.05	%		0.00	%		0.15	%		0.00	%		0.01	%		0.07	%		2.14	%		100	%
December 31, 2018
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.$		688,024			59,844			854			36			111			43			141			127			69			14,481			763,730
%		90.09	%		7.84	%		0.11	%		0.00	%		0.01	%		0.01	%		0.02	%		0.02	%		0.01	%		1.89	%		100	%

Arauco applies the simplified approach regarding the expected losses from commercial debtors, which allows for the use of an estimate of expected credit losses over the instrument’s lifespan for all commercial accounts receivable. In order to establish this estimate, the commercial debtors have been grouped in relation to the corresponding risks for sales conditions as well as for tranches, including clients that are up-to-date or in default.

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
Letters of credit		193,381			3,339			-			-			-			-			-			-			2			106			196,828
Loss allowance provision		-			-			-			-			-			-			-			-			-			-			-
Expected loss rate		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Credit line		335,615			24,477			880			261			16			837			22			25			381			12,051			374,565
Loss allowance provision		-			-			9			26			2			84			2			25			381			12,051			12,580
Expected loss rate		0.00	%		0.00	%		1.02	%		9.96	%		12.50	%		10.04	%		9.09	%		100.00	%		100.00	%		100.00	%
Others		2,885			653			19			48			2			9			-			9			6			154			3,785
Loss allowance provision		-			-			-			5			1			4			-			9			6			154			179
Expected loss rate		0.00	%		0.00	%		0.00	%		10.42	%		50.00	%		44.44	%		0.00	%		100.00	%		100.00	%		100.00	%
Trade receivables, total (ThU.S.$)		531,881			28,469			899			309			18			846			22			34			389			12,311			575,178
Allowance for doubtful accounts, total (ThU.S.$)		-			-			9			31			3			88			2			34			387			12,205			12,759

Arauco does not conduct rescheduling or renegotiations with its clients that imply an amendment to the maturity of the invoices and, should it be necessary, any debt renegotiation with a client shall be analyzed on a case-by-case basis and subjected to the approval of the Corporate Finance Division. 

Regarding the loss allowance provision for trade receivables and others, below we provide detail for the movements as of December 31, 2019, 2018 and 2017:

	December 2019			December 2018			December 2017
	ThU.S.$			ThU.S.$			ThU.S.$
Opening balance at January 1 - under IAS 39		(15,147	)		(17,785	)		(16,644	)
Amounts restated through opening retained earnings		-			(2,875	)		-
Opening loss allowance as atJanuary 1 - under IFRS 9		(15,147	)		(20,660	)		(16,644	)
Increase in loan loss allowance recognised in profit or loss during the year		(2,506	)		(5,027	)		(3,423	)
Receivables written off during the year as uncollectible		163			8,620			1,806
Unused amount reversed		1,122			1,920			476
Closing balance		(16,368	)		(15,147	)		(17,785	)

Currently there is a policy for provisions for doubtful accounts receivable under IFRS 9 for all the Arauco group companies.

F-100

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.

Explanation of the Sales Risk with Credit Line

Sales on credit are subject to the credit limit for each customer. The approval or rejection of a credit limit for all term sales is conducted by the Corporate Credit Sub-Division, as well as by the Credit and Collections area for North America, Brazil and Argentina, which report to the Corporate Finance Division. The regulations and procedures applicable for the correct control and risk management over the sales on credit are ruled by the Credit Policy.

A procedure that must be applied by all the companies of the Arauco group has been established for the approval and/or modification of client credit lines. Credit line requests are entered to the SAP that analyzes all available information. Afterwards, the same are either approved or rejected in each one of the internal committees of each company belonging to the Arauco group, depending on the maximum amount authorized by the Credit Policy. Lines of credit are renewed during this internal process on a yearly basis.

All sales are automatically controlled by a credit verification system, which has been configured to block any orders from clients who are delinquent in a given percentage of a debt and/or from clients whose line of credit, as of the time of the product’s shipping, has been exceeded or is overdue.

In order to minimize the credit risk for term or Open Account sales, it is Arauco’s policy to take out insurance to cover the export sales of companies Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Forestal Arauco S.A., Arauco Argentina S.A., and Arauco do Brasil S.A., as well as the domestic sales of Arauco Europe Coöperatief U.A., Arauco Argentina S.A., Araucomex S.A. de C.V., Arauco Industria de México, S.A. de C.V., Arauco Colombia S.A., Arauco Perú S.A., Arauco North America, Inc., Arauco Canada Ltd., Celulosa Arauco y Constitución S.A., Maderas Arauco S.A., Arauco Florestal Arapoti, Arauco Forest Brasil S.A., Arauco do Brasil S.A., Arauco Industria de Paineis Ltda. and Arauco Nutrientes SPA. Arauco works with credit insurance company Euler Hermes World Agency (Aa3 rating, as per risk rating companies Moody’s and AA by S&P). The company grant a 90% coverage over the amount of each invoice, without deductibles, for registered clients and of 90% for non-registered clients (*).

(*) Non-registered clients are those whose lines are under ThU.S.$ 100 (equivalent currency of their invoicing) of the local sales of companies Arauco Perú S.A., Arauco Colombia S.A., ., Araucomex S.A. de C.V, Arauco Industria de 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.

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.$105,220, effective as of December 2019, 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.

F-101

Guarantees Arauco Group (ThU.S.$)
Guarantees Debtors (received from clients)
Certificate of deposits	7,107	6.8	%
Standby	12,667	12.0	%
Promissory notes	78,109	74.2	%
Finance	2,883	2.7	%
Mortgage	2,936	2.8	%
Pledge	118	0.1	%
Promissory notes	1,400	1.4	%
Total Guarantees	105,220	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 95.4% and, therefore, Arauco’s portfolio exposure amounts to 4.6%.

Secured Open Accounts Receivable	ThU.S.$		%
Total open accounts receivable		402,873		100.0	%
Secured receivables (*)		384,341		95.4	%
Unsecured receivables		18,532		4.6	%

(*) 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 apply to short and long-term debt, and will be for 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).  

Any necessary exceptions regarding investment limits in each particular instrument or entity must have the authorization from Arauco’s Chief Financial Officer.

F-102

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.   

The following tables detail Arauco’s liquidity analysis for its financial liabilities as of December 31, 2019 and 2018. The tables have been drawn up based on the contractual undiscounted cash outflows and their remaining contractual maturities:

F-103

December 31, 2019				Maturity							Total
				Up to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Current	Non Current
Tax ID	Name	Currency	Loans with banks	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	Effective rate	Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Scotiabank	3,179	3,014	5,979	5,979	205,979	-	-	6,193	217,937	3.14%	Libor 6M + 1.1%
93.458.000-1	Celulosa Arauco y Constitución S.A.	Euros	BNP Paribas / ECA	-	1,209	7,792	14,316	14,175	14,038	68,044	1,209	118,365	1.06%	1.06%
-	Zona Franca Punta Pereira	U.S. Dollars	Banco Interamericano de Desarrollo A	1,216	1,196	2,325	2,238	2,152	-	-	2,412	6,715	4.10%	Libor 6M + 2.05%
-	Zona Franca Punta Pereira	U.S. Dollars	Banco Interamericano de Desarrollo B	2,906	2,852	-	-	-	-	-	5,758	-	3.85%	Libor 6M + 1.80%
-	Celulosa y Energía Punta Pereira	U.S. Dollars	Banco Interamericano de Desarrollo A	4,919	4,838	9,403	9,052	8,702	-	-	9,757	27,157	4.10%	Libor 6M + 2.05%
-	Celulosa y Energía Punta Pereira	U.S. Dollars	Banco Interamericano de Desarrollo B	11,754	11,536	-	-	-	-	-	23,290	-	3.85%	Libor 6M + 1.80%
-	Celulosa y Energía Punta Pereira	U.S. Dollars	Finn Vera/Finnish Export Credit	26,366	26,008	50,823	49,286	24,065	-	-	52,374	124,174	3.20%	3.20%
-	Eufores S.A.	U.S. Dollars	BBVA	-	14,222	-	-	-	-	-	14,222	-	3.22%	Libor 6M + 1.30%
-	Eufores S.A.	U.S. Dollars	Banco República Oriental del Uruguay	-	27,328	-	-	-	-	-	27,328	-	3.22%	Libor 6M + 1.30%
-	Eufores S.A.	U.S. Dollars	Citibank	-	4,062	-	-	-	-	-	4,062	-	3.14%	Libor 6M + 1.25%
-	Eufores S.A.	U.S. Dollars	ITAU	-	12,695	-	-	-	-	-	12,695	-	3.20%	Libor 6M + 1.30%
-	Eufores S.A.	U.S. Dollars	Heritage	1,361	-	-	-	-	-	-	1,361	-	3.21%	Libor 3M + 1.30%
-	Eufores S.A.	U.S. Dollars	Santander	20,328	-	-	-	-	-	-	20,328	-	3.29%	Libor 6M + 1.30%
-	Eufores S.A.	U.S. Dollars	Santander	-	5,080	-	-	-	-	-	5,080	-	3.21%	Libor 6M + 1.30%
-	Eufores S.A.	U.S. Dollars	Scotiabank	-	2,541	-	-	-	-	-	2,541	-	3.22%	Libor 6M + 1.30%
-	Arauco Forest Brasil S.A.	Brazilian Real	Banco Votorantim	-	27	291	278	-	-	-	27	569	5.00%	5.00%
-	Arauco Forest Brasil S.A.	Brazilian Real	BNDES Subcrédito A	7	63	185	130	-	-	-	70	315	8.48%	TJLP + 2.91%
-	Arauco Forest Brasil S.A.	Brazilian Real	BNDES Subcrédito B	5	39	112	78	-	-	-	44	190	9.48%	TJLP + 3.91%
-	Arauco Forest Brasil S.A.	U.S. Dollars	BNDES Subcrédito C	5	43	159	124	-	-	-	48	283	7.22%	Cesta + 2.91%
-	Arauco Forest Brasil S.A.	Brazilian Real	BNDES Subcrédito D	6	45	127	87	-	-	-	51	214	10.68%	TJLP + 5.11%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Votorantim	-	30	328	313	-	-	-	30	641	5.00%	5.00%
-	Mahal Empreendimentos e Participações S.A.	Brazilian Real	BNDES Subcrédito E-I	658	1,279	-	-	-	-	-	1,937	-	8.48%	TJLP + 3.91%
-	Mahal Empreendimentos e Participações S.A.	Brazilian Real	BNDES Subcrédito F-J	397	769	-	-	-	-	-	1,166	-	9.48%	TJLP + 3.91%
-	Mahal Empreendimentos e Participações S.A.	Brazilian Real	BNDES Subcrédito H-L	444	858	-	-	-	-	-	1,302	-	10.68%	TJLP + 5.11%
-	Mahal Empreendimentos e Participações S.A.	U.S. Dollars	BNDES Subcrédito G-K	537	1,217	-	-	-	-	-	1,754	-	7.22%	Cesta + 2.91%
-	Arauco North America, Inc.	U.S. Dollars	Banco del Estado de Chile - NY Branch	-	10,895	40,563	39,480	38,396	213,803	-	10,895	332,242	3.56%	Libor 6M + 1.65%
			Total	74,088	131,846	118,087	121,361	293,469	227,841	68,044	205,934	828,802

December 31, 2019				Maturity							Total
				Up to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Current	Non Current
Tax ID	Name	Currency	Bonds	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	Effective rate	Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-F	-	33,928	32,916	31,904	30,892	29,880	134,219	33,928	259,811	4.25%	4.25%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-J	3,047	192,098	-	-	-	-	-	195,145	-	3.25%	3.25%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-P	-	7,488	7,488	24,504	23,823	23,143	160,636	7,488	239,594	4.00%	4.00%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-Q	-	19,609	9,593	-	-	-	-	19,609	9,593	3.00%	3.00%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-R	-	6,746	6,746	6,746	6,746	6,746	259,880	6,746	286,864	3.60%	3.60%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-S	-	4,510	4,510	4,510	4,510	4,510	198,071	4,510	216,111	2.40%	2.40%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-W	-	2,370	2,370	2,370	2,370	2,370	122,909	2,370	132,389	2.10%	2.10%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-X	-	5,577	5,577	5,577	5,577	5,577	313,926	5,577	336,234	2.70%	2.70%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2019	-	-	-	-	-	-	-	-	-	7.25%	7.25%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2021	-	-	-	-	-	-	-	-	-	5.00%	5.00%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2022	2,996	2,996	5,993	129,164	-	-	-	5,992	135,157	4.75%	4.75%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2024	11,250	11,250	22,500	22,500	22,500	522,500	-	22,500	590,000	4.50%	4.50%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2027	-	19,375	19,375	19,375	19,375	19,375	558,125	19,375	635,625	3.88%	3.88%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2047	-	22,000	22,000	22,000	22,000	22,000	906,000	22,000	994,000	5.50%	5.50%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2029	-	21,250	21,250	21,250	21,250	21,250	595,625	21,250	680,625	4.25%	4.25%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2049	-	27,500	27,500	27,500	27,500	27,500	1,173,750	27,500	1,283,750	5.50%	5.50%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2030	5,250	10,500	21,000	21,000	21,000	21,000	615,500	15,750	699,500	4.25%	4.25%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2050	6,438	12,875	25,750	25,750	25,750	25,750	1,156,625	19,313	1,259,625	5.50%	5.50%
-	Prime-Line, Inc.	U.S. Dollars	Bond ADFA 2014	128	384	512	512	512	512	2,005	512	4,053	4.84%	4.84%
-	Prime-Line, Inc.	U.S. Dollars	Bond ADFA 2013	38	114	152	149	112	-	-	152	413	4.00%	4.00%
				29,147	400,570	235,232	364,811	233,917	732,113	6,197,271	429,717	7,763,344

F-104

December 31, 2019				Maturity							Total
			Underlying asset class	Up to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Current	Non Current
Tax ID	Name	Currency		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.	Motor vehicles	465	1,462	1,932	1,459	977	528	649	1,927	5,545
85.805.200-9	Forestal Arauco S.A.	U.F.	Other property, plant and equipment	4,644	9,357	7,576	3,823	38	-	-	14,001	11,437
85.805.200-9	Forestal Arauco S.A.	Chilean pesos	Lands	-	16	16	16	16	16	190	16	254
85.805.200-9	Forestal Arauco S.A.	Chilean pesos	Other property, plant and equipment	860	2,431	885	259	74	-	-	3,291	1,218
-	Arauco Argentina	U.S. Dollars	Buildings and constructions	122	361	450	35	-	-	-	483	485
-	Arauco Argentina	U.S. Dollars	IT equipment	13	39	53	35	-	-	-	52	88
-	Arauco Argentina	U.S. Dollars	Other property, plant and equipment	347	1,040	1,386	1,386	1,002	668	-	1,387	4,442
-	Arauco Argentina	U.S. Dollars	Motor vehicles	382	1,145	1,162	809	684	297	-	1,527	2,952
-	Arauco Industria de Paineis S.A.	Brazilian Real	Other property, plant and equipment	192	577	722	288	-	-	-	769	1,010
-	Arauco Industria de Paineis S.A.	Brazilian Real	Motor vehicles	4	13	17	10	-	-	-	17	27
-	Arauco Forest Brasil S.A.	Brazilian Real	IT equipment	6	17	18	11	-	-	-	23	29
-	Arauco Forest Brasil S.A.	Brazilian Real	Lands	871	2,612	3,193	3,483	3,483	9,579	-	3,483	19,738
-	Novo Oeste Gestao de Ativos Florestais S.A.	Brazilian Real	Lands	595	1,389	-	-	-	-	-	1,984	-
-	Arauco Florestal Arapoti S.A.	Brazilian Real	IT equipment	6	17	18	-	-	-	-	23	18
-	Arauco do Brasil S.A.	Brazilian Real	Buildings and constructions	272	655	454	393	376	94	-	927	1,317
93.458.000-1	Celulosa Arauco y Constitucion S.A.	U.F.	Buildings and constructions	407	1,217	1,582	1,477	1,082	-	-	1,624	4,141
93.458.000-1	Celulosa Arauco y Constitucion S.A.	U.F.	Motor vehicles	201	593	670	558	288	131	106	794	1,753
93.458.000-1	Celulosa Arauco y Constitucion S.A.	Chilean pesos	Buildings and constructions	19	58	70	70	17	-	-	77	157
93.458.000-1	Celulosa Arauco y Constitucion S.A.	U.S. Dollars	Other property, plant and equipment	1,612	-	1,612	-	-	-	-	1,612	1,612
93.458.000-1	Celulosa Arauco y Constitucion S.A.	Chilean pesos	Motor vehicles	4,800	14,399	19,199	19,199	6,651	-	-	19,199	45,049
93.458.000-1	Celulosa Arauco y Constitucion S.A.	U.S. Dollars	Motor vehicles	45	136	181	30	-	-	-	181	211
-	Arauco North America, Inc.	U.S. Dollars	Lands	1	4	193	83	-	-	-	5	276
-	Arauco North America, Inc.	U.S. Dollars	Buildings and constructions	15	55	2,741	1,303	1,335	1,367	4,415	70	11,161
-	Arauco North America, Inc.	U.S. Dollars	Motor vehicles	-	2	80	52	40	-	-	2	172
-	Arauco Canada Limited	Canadian Dollars	Other property, plant and equipment	2	3	142	-	-	-	-	5	142
-	Arauco Canada Limited	Canadian Dollars	Motor vehicles	-	2	83	72	-	-	-	2	155
-	Celulosa y Energía Punta Pereira	U.S. Dollars	Buildings and constructions	1,477	4,432	5,909	5,909	5,909	5,909	76,821	5,909	100,457
-	Celulosa y Energía Punta Pereira	U.S. Dollars	Other property, plant and equipment	262	786	373	373	373	373	7,275	1,048	8,767
-	Eufores S.A.	U.S. Dollars	Lands	546	1,637	5,383	5,240	5,057	4,752	34,676	2,183	55,108
-	Eufores S.A.	U.S. Dollars	Other property, plant and equipment	306	917	1,222	1,222	1,222	1,222	3,667	1,223	8,555
-	Eufores S.A.	U.S. Dollars	Buildings and constructions	119	358	280	117	117	49	-	477	563
96.510.970-6	Maderas Arauco S.A.	Chilean pesos	Motor vehicles	3,804	11,411	13,487	12,093	5,545	-	-	15,215	31,125
96.510.970-6	Maderas Arauco S.A.	U.F.	Motor vehicles	126	359	413	319	97	26	7	485	862
96.510.970-6	Maderas Arauco S.A.	U.F.	Lands	-	5	5	5	5	5	55	5	75
-	Arauco Colombia S.A.	U.S. Dollars	Buildings and constructions	10	31	10	-	-	-	-	41	10
-	Arauco Colombia S.A.	U.S. Dollars	Fixed facilities and accessories	137	411	548	-	-	-	-	548	548
-	Arauco Europe Cooperatief U.A.	Euros	Motor vehicles	7	17	12	11	7	-	-	24	30
-	Araucomex S.A. de C.V.	Mexican pesos	Buildings and constructions	549	614	1,933	1,932	1,834	1,784	904	1,163	8,387
-	Araucomex S.A. de C.V.	U.S. Dollars	Buildings and constructions	125	125	80	-	-	-	-	250	80
-	Arauco Industria de México, S.A. de C.V.	Mexican pesos	Motor vehicles	-	772	578	-	-	-	-	772	578
-	Arauco Industria de México, S.A. de C.V.	U.S. Dollars	Motor vehicles	-	139	404	404	-	-	-	139	808
-	Arauco Industria de México, S.A. de C.V.	Mexican pesos	Buildings and constructions	-	-	8	8	8	3	-	-	27
-	Arauco Industria de México, S.A. de C.V.	Mexican pesos	Lands	-	-	5	-	-	-	-	-	5
-	Arauco Industria de México, S.A. de C.V.	U.S. Dollars	Lands	-	-	318	291	-	-	-	-	609
-	Araucomex Servicios S.A. de C.V.	U.S. Dollars	Buildings and constructions	-	-	277	277	277	93	-	-	924
-	Araucomex Servicios S.A. de C.V.	U.S. Dollars	Motor vehicles	-	25	110	58	16	-	-	25	184
96.637.330-K	Servicios Logisticos Arauco S.A.	U.F.	Motor vehicles	22	67	79	65	15	-	-	89	159
79.990.550-7	Investigaciones Forestales Bioforest S.A.	U.F.	Lands	-	22	22	22	22	22	109	22	197
79.990.550-7	Investigaciones Forestales Bioforest S.A.	U.F.	Motor vehicles	30	75	56	35	20	5	-	105	116
			Total	23,401	59,803	75,947	63,232	36,587	26,923	128,874	83,204	331,563

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-105

December 31, 2018				Maturity							Total
			Name - Country	Up to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Current	Non Current
Tax ID	Name	Currency	Loans with banks	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	Effective rate	Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Scotiabank- Chile	-	1,930	7,951	7,951	7,951	206,584	-	1,930	230,437	3.70%	Libor + 1.10%
-	Arauco Argentina S.A.	U.S. Dollars	Banco Bice	5,040	-	-	-	-	-	-	5,040	-	2.10%	2.10%
-	Arauco Argentina S.A.	U.S. Dollars	Banco Macro	10,054	-	-	-	-	-	-	10,054	-	6.00%	6.00%
-	Arauco Argentina S.A.	U.S. Dollars	BBVA	-	13,071	-	-	-	-	-	13,071	-	5.90%	5.90%
-	Zona Franca Punta Pereira S.A.	U.S. Dollars	Interamerican Development Bank	1,184	1,032	2,435	2,335	2,233	2,126	-	2,216	9,129	4.62%	Libor + 2.05%
-	Zona Franca Punta Pereira S.A.	U.S. Dollars	Interamerican Development Bank	2,940	2,786	5,701	-	-	-	-	5,726	5,701	4.37%	Libor + 1.80%
-	Zona Franca Punta Pereira S.A.	U.S. Dollars	BBVA	-	14,103	-	-	-	-	-	14,103	-	4.06%	Libor + 1.30%
-	Zona Franca Punta Pereira S.A.	U.S. Dollars	Citibank	-	4,517	-	-	-	-	-	4,517	-	4.19%	Libor + 1.25%
-	Zona Franca Punta Pereira S.A.	U.S. Dollars	Scotiabank	-	2,509	-	-	-	-	-	2,509	-	4.39%	Libor + 1.50%
-	Celulosa y Energía Punta Pereira S.A.	U.S. Dollars	Banco Interamericano de Desarrollo	4,770	4,179	9,826	9,411	9,008	8,605	-	8,949	36,850	4.62%	Libor + 2.05%
-	Celulosa y Energía Punta Pereira S.A.	U.S. Dollars	Banco Interamericano de Desarrollo	11,871	11,274	23,035	-	-	-	-	23,145	23,035	4.37%	Libor + 1.80%
-	Celulosa y Energía Punta Pereira S.A.	U.S. Dollars	Finnish Export Credit	24,850	21,578	49,484	47,930	47,207	23,562	-	46,428	168,183	3.20%	3.20%
-	Eufores S.A.	U.S. Dollars	Banco República Oriental de Uruguay	8	27,073	-	-	-	-	-	27,081	-	4.12%	Libor + 1.3%
-	Eufores S.A.	U.S. Dollars	Citibank	3	-	-	-	-	-	-	3	-	3.43%	Libor + 2%
-	Eufores S.A.	U.S. Dollars	Banco Itaú -Uruguay	24	12,511	-	-	-	-	-	12,535	-	4.17%	Libor + 1.75%
-	Eufores S.A.	U.S. Dollars	Heritage	1,352	-	-	-	-	-	-	1,352	-	4.30%	Libor + 1.75%
-	Eufores S.A.	U.S. Dollars	Banco Santander	20,235	5,021	-	-	-	-	-	25,256	-	3.86%	Libor + 1.3%
-	Arauco do Brasil S.A.	Brazilian Real	Banco Santander	21	64	48	6	-	-	-	85	54	9.50%	9.50%
-	Arauco do Brasil S.A.	Brazilian Real	Banco Alfa	17	48	64	64	5	-	-	65	133	10.35%	TJLP +2%+ spread 1.75%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Itaú	3	-	-	-	-	-	-	3	-	7.00%	3.50%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Bradesco	9	22	-	-	-	-	-	31	-	6.00%	6.00%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Votorantim	14	-	-	310	310	-	-	14	620	5.00%	5.00%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Safra	18	-	-	-	-	-	-	18	-	6.00%	6.00%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Safra	6	17	23	10	-	-	-	23	33	10.00%	10.00%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Santander	3	14	136	44	44	-	-	17	224	8.38%	8.38%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Santander	34	33	50	129	129	-	-	67	308	10.32%	10.32%
-	Arauco Florestal Arapoti S.A.	Brazilian Real	Banco Santander	4	11	14	11	2	-	-	15	27	10.47%	10.49%
-	Arauco Forest Brasil S.A.	Brazilian Real	Banco Bradesco	21	23	24	24	14	-	-	44	62	9.00%	9.00%
-	Arauco Forest Brasil S.A.	U.S. Dollars	Banco Alfa	2	7	9	5	-	-	-	9	14	17.00%	Cesta+2%+spread 1.8%
-	Arauco Forest Brasil S.A.	Brazilian Real	Banco Alfa	5	14	19	10	-	-	-	19	29	0.22%	TJLP +2%+Spread 1.8%
-	Arauco Forest Brasil S.A.	Brazilian Real	Banco Votorantim - Brazil	162	198	-	276	276	-	-	360	552	16.00%	TJLP +1.8%+Spread 2%
-	Arauco Forest Brasil S.A.	U.S. Dollars	Banco Votorantim - Brazil	34	45	-	-	-	-	-	79	-	10.40%	Cesta+1.3%+spread 2%
-	Arauco Forest Brasil S.A.	Brazilian Real	Banco Bndes Subcrédito A-B-D	3	-	98	394	295	-	-	3	787	21.78%	TJLP + 2.91%
-	Arauco Forest Brasil S.A.	U.S. Dollars	Banco Bndes Subcrédito C	5	-	24	145	120	-	-	5	289	15.22%	Cesta+2.91%
-	Arauco Forest Brasil S.A.	Brazilian Real	Banco Santander	43	58	181	173	138	-	-	101	492	8.67%	8.67%
-	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Bndes Subcrédito E-I	663	1,946	1,946	-	-	-	-	2,609	1,946	19.78%	TJLP + 2.91%
-	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Bndes Subcrédito F-J	399	1,167	1,167	-	-	-	-	1,566	1,167	21.78%	TJLP + 3.91%
-	Mahal Emprendimientos Pat. S.A.	U.S. Dollars	Bndes Subcrédito G-K	520	1,528	1,697	-	-	-	-	2,048	1,697	15.22%	Cesta + 2.91%
-	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Bndes Subcrédito H-L	444	1,297	1,297	-	-	-	-	1,741	1,297	24.18%	TJLP + 5.11%
-	Mahal Emprendimientos Pat. S.A.	Brazilian Real	Banco Santander	6	18	23	23	-	-	-	24	46	21.96%	TJLP +2%+Spread 2%
-	Mahal Emprendimientos Pat. S.A.	U.S. Dollars	Banco Santander	3	9	13	12	-	-	-	12	25	17.40%	Cesta+2%+Spread 2%
-	Novo Oeste Gestao de Ativos Florestais S.A.	Brazilian Real	Banco Santander	5	18	24	24	2	-	-	23	50	21.96%	TJLP +2%+Spread 2%
-	Novo Oeste Gestao de Ativos Florestais S.A.	U.S. Dollars	Banco Santander	3	9	13	13	2	-	-	12	28	17.40%	TJLP +2%+Spread 2%
-	Flakeboard Company Ltd.	U.S. Dollars	Banco del Estado de Chile	-	2,141	13,164	41,497	40,184	38,872	203,906	2,141	337,623	3.00%	Libor + 1.65%
			Total	84,778	130,271	118,466	110,797	107,920	279,749	203,906	215,049	820,838

December 31, 2018				Maturity							Total
			Name - Country	Up to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Current	Non Current
Tax ID	Name	Currency	Bonds	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	ThU.S.$	Effective rate	Nominal rate
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-F	-	19,425	25,413	24,656	23,899	23,143	116,673	19,425	213,784	4.24%	4.21%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-F	-	7,770	10,189	9,884	9,579	9,274	47,339	7,770	86,265	4.25%	4.21%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-J	2,132	-	204,731	-	-	-	-	2,132	204,731	3.23%	3.22%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-P	-	1,004	7,857	7,857	25,713	24,999	193,697	1,004	260,123	3.96%	3.96%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-Q	-	20,207	20,576	10,398	-	-	-	20,207	30,974	2.96%	2.98%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-R	-	1,770	7,079	7,079	7,079	7,079	278,892	1,770	307,208	3.57%	3.57%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-S	-	592	4,733	4,733	4,733	4,733	204,991	592	223,923	2.44%	2.40%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-W	-	559	2,487	2,487	2,487	2,487	127,578	559	137,526	2.12%	2.09%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.F.	Barau-X	-	1,317	5,853	5,853	5,853	5,853	326,508	1,317	349,920	2.70%	2.68%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee Bonds 2019	6,168	202,643	-	-	-	-	-	208,811	-	7.26%	7.25%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2021	4,422	-	10,013	204,527	-	-	-	4,422	214,540	5.02%	5.00%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2022	5,705	-	12,153	12,153	259,785	-	-	5,705	284,091	4.77%	4.75%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2024	9,375	-	22,500	22,500	22,500	22,500	527,024	9,375	617,024	4.52%	4.50%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2027	-	3,175	19,375	19,375	19,375	19,375	564,559	3,175	642,059	3.90%	3.88%
93.458.000-1	Celulosa Arauco y Constitución S.A.	U.S. Dollars	Yankee 2047	-	3,607	22,000	22,000	22,000	22,000	921,388	3,607	1,009,388	5.50%	5.50%
			Total	27,802	262,069	374,959	353,502	403,003	141,443	3,308,649	289,871	4,581,556

F-106

December 31, 2018				Maturity							Total
			Name - Country	Up to 3 months	3 to 12 months	1 to 2 years	2 to 3 years	3 to 4 years	4 to 5 years	More than 5 years	Current	Non Current
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	148	410	599	599	-	-	-	558	1,198
85.805.200-9	Forestal Arauco S.A.	U.F.	Banco Scotiabank	1,288	3,158	2,368	2,368	478	478	-	4,446	5,692
85.805.200-9	Forestal Arauco S.A.	U.F.	Banco Estado	639	1,885	989	989	-	-	-	2,524	1,978
85.805.200-9	Forestal Arauco S.A.	U.F.	Banco de Chile	1,998	8,891	3,618	3,618	1,556	1,556	-	10,889	10,348
85.805.200-9	Forestal Arauco S.A.	U.F.	Banco BBVA	545	273	-	-	-	-	-	818	-
85.805.200-9	Forestal Arauco S.A.	U.F.	Banco Credito e Inversiones	1,313	5,351	2,897	2,897	3,220	3,220	-	6,664	12,234
85.805.200-9	Forestal Arauco S.A.	Chilean pesos	Banco Chile	284	690	520	520	-	-	-	974	1,040
85.805.200-9	Forestal Arauco S.A.	Chilean pesos	Banco Credito e Inversiones	679	2,036	1,484	1,484	-	-	-	2,715	2,968
85.805.200-9	Forestal Arauco S.A.	Chilean pesos	Banco Scotiabank	371	957	673	673	233	234	-	1,328	1,813
			Total	7,265	23,651	13,148	13,148	5,487	5,488	-	30,916	37,271

  

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-107

Guarantees

As of the date of these consolidated financial statements, Arauco has financial assets of approximately MU.S.$40 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, 2019, the total assets pledged as an indirect guarantee were MU.S.$543. In contrast to direct guarantees, indirect guarantees are given to secure obligations assumed by a third party.

On September 29, 2011, Arauco entered into a Security Agreement under which it granted a non-joint guarantee limited to 50% of the obligations of the Uruguayan companies (joint ventures) Celulosa y Energía Punta Pereira S.A. and Zona Franca Punta Pereira S.A., under the IDB Facility Agreement in the amount of up to MU.S.$454 and the Finnevera Guaranteed Facility Agreement in the amount of up to MU.S.$900. Both loan agreements were signed with the International Development Bank. Such guarantee is included in the table below, under indirect guarantees.

Direct and indirect guarantees granted by Arauco:

DIRECT
Subsidiary	Guarantee	Assets Pledged	Currency	ThU.S.$	Guarantor
Celulosa Arauco y Constitución S.A.	Guarantee letter	-	Chilean Pesos	488	Directorate General of Maritime Territory and Merchant Marine
Celulosa Arauco y Constitución S.A.	Guarantee letter	-	Chilean Pesos	209	Directorate General of Maritime Territory and Merchant Marine
Arauco Forest Brasil S.A.	Mortgage Industrial Plant of Jaguariaíva of Arauco do Brasil	Property plant and equipment	Brazilian Real	38,036	BNDES
Arauco Forest Brasil S.A.	Endorsement of Arauco do Brasil	-	Brazilian Real	529	Bank Votorantim S.A.
Arauco Florestal Arapoti S.A.	Endorsement of Arauco do Brasil	-	Brazilian Real	597	Bank Votorantim S.A.
		Total		39,859
INDIRECT
Subsidiary	Guarantee	Assets Pledged	Currency	ThU.S.$	Guarantor
Celulosa Arauco y Constitución S.A.	Suretyship not supportive and cumulative	-	U.S. Dollar	236,117	Joint Ventures (Uruguay)
Celulosa Arauco y Constitución S.A.	Full Guarantee	-	U.S. Dollar	300,000	Arauco North America, Inc. (USA)
Celulosa Arauco y Constitución S.A.	Guarantee letter	-	U.S. Dollar	1,996	Arauco Forest Brasil y Mahal (Brasil)
Celulosa Arauco y Constitución S.A.	Guarantee letter	-	Brazilian Real	5,029	Arauco Forest Brasil y Mahal (Brasil)
		Total		543,142

23.10.3Type 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-108

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 +/- 2.97% (equivalent to ThU.S.$ -/+ 1,839), and +/- 0.01% of equity (equivalent to ThU.S.$ -/+ 1,103).

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 +/- 2.28% (equivalent to ThU.S.-/+$1,415) and a change on the equity of +/- 1.44% (equivalent to ThU.S. -/+$105,837).

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, 2019, 11% 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 +/- 2.04% (equivalent to ThU.S.$-/+ 1,263) and +/- 0.01% (equivalent to ThU.S.$-/+ 758) on equity.

F-109

Thousands of dollars	December 2019 ThU.S.$		Total
Fixed rate		5,382,970		89.0	%
Bonds issued	4.831,743
Bank borrowings (*)		280,202
Lease liabilities		271,025
Variable rate		666,820		11.0	%
Bonds issued		-
Loans with Banks		666.820
Total	6.049.790			100.0	%
Thousands of dollars	December 2018 ThU.S.$		Total
Fixed rate		3,807,932		84.4	%
Bonds issued		3,501,654
Bank borrowings (*)		238,091
Lease liabilities		68,187
Variable rate		702,344		15.6	%
Bonds issued		-
Loans with Banks		702,344
Total		4,510,276		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, 2019, revenue due to pulp sales accounted for 43.6% 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 +/- 269.4% (equivalent to ThU.S.$-/+ 166,951) on the income for the year after tax and +/- 1.36% (equivalent to ThU.S.$100,170) on equity.

F-110

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.

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 (50% property of Arauco) and they have a total production capacity of approximately 4 million tons per year. Pulp is sold in more than 46 countries, mainly in Asia and Europe. 

F-111

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 23 industrial plants: 5 in Chile, 2 in Argentina, 4 in Brazil, 2 in Mexico, and 10 plants around USA and Canada. The Company has a total annual production capacity of 8.9 million cubic meters of PBO, MDF, Hardboard, 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 1.5 million m3 of MDF, 2.3 million m3 of PB, 516,000 m3 of OSB and 50,000 m3 of sawn lumber.

Including Sonae Arauco at 50%, Arauco totalize a capacity of 4.8 million m3 of MDF, 4.9 million m3 of PB and 258,000 m3 of OSB in its plants.

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 3.1 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 1.8 million hectares as of December 31, 2019, of which 1 million hectares are used for plantations, 509 thousand hectares for native forests, 115 thousand hectares for other uses and 91 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.

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:

F-112

Period ended December 31, 2019	Pulp		Forestry		Wood products			Others			Corporate			Subtotal			Elimination			Total
	ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Revenues from goods sale		2,297,042		127,909		2,820,538			-			-			5,245,489						5,245,489
Revenues from rendering of services		75,428		7,782		73			442			-			83,725						83,725
Revenues from external customers		2,372,470		135,691		2,820,611			442			-			5,329,214						5,329,214
Revenues from transactions with other operating segments		40,187		1,133,510		24,728			36,290			-			1,234,715			(1,234,715	)		-
Finance income		-		-		-			-			32,582			32,582						32,582
Finance costs		-		-		-			-			(273,639	)		(273,639	)					(273,639	)
Net finance costs		-		-		-			-			(241,057	)		(241,057	)					(241,057	)
Depreciation and amortizations		272,181		46,265		190,040			1,396			9,498			519,380						519,380
Other income		10,773		168,651		32,943			84			41,616			254,067						254,067
Other expenses		82,615		25,550		81,784			493			13,256			203,698						203,698
Share of profit (loss) of associates and joint ventures accounted for using equity method
Associates		-		4,120		-			-			2,666			6,786						6,786
Joint ventures		-		-		(688	)		-			1,677			989						989
Income tax expense		-		-		-			-			(535	)		(535	)					(535	)
Profit (loss) of each reportable segment		328,793		24,393		67,334			(2,521	)		(356,029	)		61,970						61,970
Geographical information on revenues
Revenue – Chilean entities		1,714,234		56,307		1,124,941			442			-			2,895,924						2,895,924
Revenue – Foreign entities		658,236		79,384		1,695,670			-			-			2,433,290						2,433,290
Total Ordinary Income		2,372,470		135,691		2,820,611			442			-			5,329,214						5,329,214
Period ended December 31, 2019	Pulp		Forestry		Wood products			Others			Corporate			Subtotal			Elimination			Total
	ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Amounts of additions to non-current assets
Acquisition of property, plant and equipment and biological assets		817,995		295,683		162,731			1,096			2,769			1,280,207			-			1,280,207
Acquisition and contribution of investments in associates and joint venture		-		-		-			-			171,841			171,841			-			171,841

Period ended December 31, 2019	Pulp		Forestry		Wood products		Others		Corporate		Subtotal		Elimination			Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$
Segment assets		5,566,128		5,222,381		3,101,716		21,180		1,985,595		15,897,000		(36,970	)		15,860,030
Segments assets (excluding deferred tax assets)		5,566,128		5,222,381		3,101,716		21,180		1,979,528		15,890,933		(36,970	)		15,853,963
Deferred tax assets		-		-		-		-		6,067		6,067					6,067
Investments accounted through equity method
Associates		-		38,370		-		-		57,744		96,114					96,114
Joint Ventures		-		-		172,321		-		24,683		197,004					197,004
Segment liabilities		140,243		194,282		425,116		8,466		7,722,508		8,490,615					8,490,615
Segment liabilities (excluding deferred tax liabilities)		140,243		194,282		425,116		8,466		6,362,321		7,130,428					7,130,428
Deferred tax liabilities		-		-		-		-		1,360,187		1,360,187					1,360,187
Geographical information on non-current assets
Chile		3,260,990		3,300,806		660,059		745		265,930		7,488,530		(3,440	)		7,485,090
Foreign countries		1,596,633		1,350,467		1,408,923		-		87,536		4,443,559		-			4,443,559
Non-current assets, Total		4,857,623		4,651,273		2,068,982		745		353,466		11,932,089		(3,440	)		11,928,649

F-113

Period ended December 31, 2018	Pulp		Forestry			Wood products		Others			Corporate			Subtotal			Elimination			Total
	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Revenues from goods sale		2,956,863		105,170			2,795,551		-			-			5,857,584			-			5,857,584
Revenues from rendering of services		87,643		8,811			-		795			-			97,249			-			97,249
Revenues from external customers		3,044,506		113,981			2,795,551		795			-			5,954,833			-			5,954,833
Revenues from transactions with other operating segments		42,434		1,038,624			9,058		37,568			-			1,127,684			(1,127,684	)		-
Finance income		-		-			-		-			20,895			20,895			-			20,895
Finance costs		-		-			-		-			(214,779	)		(214,779	)		-			(214,779	)
Net finance costs		-		-			-		-			(193,884	)		(193,884	)		-			(193,884	)
Depreciation and amortizations		232,275		19,448			147,382		1,230			7,087			407,422			-			407,422
Other income		12,239		94,497			31,084		213			484			138,517			-			138,517
Other expenses		39,416		23,863			31,977		35			589			95,880			-			95,880
Share of profit (loss) of associates and joint ventures accounted for using equity method
Associates		-		(296	)		-		-			3,339			3,043			-			3,043
Joint ventures		-		-			12,549		-			1,654			14,203			-			14,203
Income tax expense		-		-			-		-			(226,765	)		(226,765	)		-			(226,765	)
Profit (loss) of each reportable segment		1,173,249		(128,160	)		250,246		(1,739	)		(566,837	)		726,759			-			726,759
Geographical information on revenues
Revenue – Chilean entities		2,303,086		55,579			1,319,767		795			-			3,679,227			-			3,679,227
Revenue – Foreign entities		741,420		58,402			1,475,784		-			-			2,275,606			-			2,275,606
Total Ordinary Income		3,044,506		113,981			2,795,551		795			-			5,954,833			-			5,954,833
Period ended December 31, 2018	Pulp		Forestry			Wood products		Others			Corporate			Subtotal			Elimination			Total
	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Amounts of additions to non-current assets
Acquisition of property, plant and equipment and biological assets		324,482		251,574			323,675		645			293			900,669			-			900,669
Acquisition and contribution of investments in associates and joint venture		-		-			-		-			20,072			20,072			-			20,072

Period ended December 31, 2018	Pulp		Forestry		Wood products		Others		Corporate		Subtotal		Elimination			Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$
Segment assets		5,252,765		5,114,163		2,934,213		21,045		1,317,041		14,639,227		(45,479	)		14,593,748
Segments assets (excluding deferred tax assets)		5,252,765		5,114,163		2,934,213		21,045		1,312,406		14,634,592		(45,479	)		14,589,113
Deferred tax assets		-		-		-		-		4,635		4,635		-			4,635
Investments accounted through equity method
Associates		-		38,497		-		-		117,112		155,609		-			155,609
Joint Ventures		-		-		181,103		-		21,341		202,444		-			202,444
Segment liabilities		396,332		180,259		411,427		7,851		6,258,908		7,254,777		-			7,254,777
Segment liabilities (excluding deferred tax liabilities)		396,332		180,259		411,427		7,851		4,841,250		5,837,119		-			5,837,119
Deferred tax liabilities		-		-		-		-		1,417,658		1,417,658		-			1,417,658
Geographical information on non-current assets
Chile		2,667,179		3,259,801		806,253		20,382		120,231		6,873,846		(3,842	)		6,870,004
Foreign countries		1,657,532		1,304,390		1,266,515		-		54,147		4,282,584		-			4,282,584
Non-current assets, Total		4,324,711		4,564,191		2,072,768		20,382		174,378		11,156,430		(3,842	)		11,152,588

F-114

Period ended December 31, 2017	Pulp		Forestry			Wood products		Others		Corporate			Subtotal			Elimination			Total
	ThU.S.$		ThU.S.$			ThU.S.$		ThU.S.$		ThU.S.$			ThU.S.$			ThU.S.$			ThU.S.$
Revenues from goods sale		2,356,782		104,392			2,633,773		38,392		-			5,133,339			-			5,133,339
Revenues from rendering of services		94,580		9,730			-		692		-			105,002			-			105,002
Revenues from external customers		2,451,362		114,122			2,633,773		39,084		-			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
Other income		5,581		94,025			8,062		2,903		942			111,513			-			111,513
Other expenses		40,716		126,752			36,474		1,848		375			240,165			-			240,165
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		1,781,768		55,946			1,265,161		692		-			3,103,567			-			3,103,567
Revenue – Foreign entities		669,594		58,176			1,368,612		38,392		-			2,134,774			-			2,134,774
Total Ordinary Income		2,451,362		114,122			2,633,773		39,084		-			5,238,341			-			5,238,341

Period ended December 31, 2017	Pulp		Forestry		Wood products		Others		Corporate		Subtotal		Elimination		Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Amounts of additions to non-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

Period ended December 31, 2017	Pulp		Forestry		Wood products		Others		Corporate		Subtotal		Elimination			Total
	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$			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 on non-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-115

 Information required by geographic area:

	Geographical area
2019	Local country		Foreign country
	Chile		Argentina		Brazil		USA/Canada		Uruguay		Mexico		Total
Disclosure of geographical areas	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Revenues from goods sale		2,841,003		395,689		542,676		928,617		410,834		126,670		5,245,489
Revenues from rendering of services		54,921		-		-		-		28,731		73		83,725
Revenues at 12-31-2019		2,895,924		395,689		542,676		928,617		439,565		126,743		5,329,214
Non-current Assets at 12-31-2019 other than deferred tax		7,480,456		781,693		947,265		832,570		1,724,698		155,900		11,922,582

	Geographical area
2018	Local country		Foreign country
	Chile		Argentina		Brazil		USA/Canada		Uruguay		Mexico		Total
Disclosure of geographical areas	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Revenues from goods sale		3,608,017		479,698		504,589		815,668		449,612		-		5,857,584
Revenues from rendering of services		71,210		-		-		-		26,039		-		97,249
Revenues at 12-31-2018		3,679,227		479,698		504,589		815,668		475,651		-		5,954,833
Non-current Assets at 12-31-2018 other than deferred tax		6,865,406		825,914		984,746		810,461		1,661,425		-		11,147,953

	Geographical area
2017	Local country		Foreign country
	Chile		Argentina		Brazil		USA/Canada		Uruguay		Mexico		Total
Disclosure of geographical areas	ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$		ThU.S.$
Revenues from sales of goods		3,028,025		494,479		395,416		801,092		414,326		-		5,133,338
Revenues from rendering of services		75,543		-		-				29,460		-		105,003
Revenues at 12-31-2017		3,103,568		494,479		395,416		801,092		443,786		-		5,238,341
Non-current Assets at 12-31-2017 other than deferred tax		6,624,381		956,511		1,274,536		575,231		1,785,312		-		11,215,971

F-116

NOTE 25. OTHER NON-FINANCIAL ASSETS AND NON-FINANCIAL LIABILITIES

	12-31-2019		12-31-2018
Current non-financial assets	ThU.S.$		ThU.S.$
Roads to amortize current		48,380		41,456
Prepayment to amortize (insurance and others)		17,965		14,020
Recoverable taxes (GST and others)		102,875		71,021
Other current non-financial assets		4,890		3,357
Total		174,110		129,854
	12-31-2019		12-31-2018
Non-current non-financial assets	ThU.S.$		ThU.S.$
Roads to amortize, non-current		96,530		78,418
Guarantee values		4,442		3,295
Recoverable taxes		4,568		1,519
Other non-current non-financial assets		6,874		3,716
Total		112,414		86,948
	12-31-2019		12-31-2018
Current non-financial liabilities	ThU.S.$		ThU.S.$
Provision of minimum dividend (1)		2,451		182,890
ICMS tax payable		18,195		9,109
Other tax payable		18,206		14,034
Other Current non-financial liabilities		1,213		6,577
Total		40,065		212,610
(1) Provision includes a minimum dividend of subsidiary minority.
	12-31-2019		12-31-2018
Non-current non-financial liabilities	ThU.S.$		ThU.S.$
ICMS tax payable		111,012		111,134
Other non-current non-financial liabilities		424		933
Total		111,436		112,067

F-117

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 Board of Directors agreed to modify the Company’s dividend policy established by the Board of Directors in Session No. 587 dated as of April 24, 2018, in the sense that, notwithstanding the powers of the Shareholders’ Meeting to determine the portion of the profits of the year to be distributed as dividend, it will be proposed, with respect to the results of the years 2019 and 2020, not to distribute dividends, due to the financial requirements that the Company has in the coming months, especially those related to the MAPA Project.

Therefore, as of December 31, 2019 there is no minimum dividend provision registered.

The following table details the adjustments made for the determination of distributable net profit as December 31, 2019, 2018 and 2017 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 at 12-31-2019		61,784
Adjustments:
Biological assets
Unrealized gains/losses		(153,497	)
Realized gains/losses		197,891
Deferred income taxes		(10,630	)
Total biological assets		33,764
Profit due bargain acquisition (net)		(21,674	)
Total adjustments		12,090
Distributable Net Profit at 12-31-2019		73,874

F-118

	Distributable Net Profit ThU.S.$
Net profit attributable to owners of parent at 12-31-2018		725,482
Adjustments:
Biological assets
Unrealized gains/losses		(83,243	)
Realized gains/losses		208,362
Deferred income taxes		(30,482	)
Total biological assets		94,637
Profit due bargain acquisition (net)		(9,381	)
Total adjustments		85,256
Distributable Net Profit at 12-31-2018		810,738

	Distributable Net Profit ThU.S.$
Net profit attributable to owners of parent at 12-31-2017		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 at 12-31-2017		435,666

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
	2019		2018		2017
	ThU.S.$		ThU.S.$		ThU.S.$
Profit or loss attributable to ordinary equity holder of parent		61,784		725,482		269,724
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)		0.5460		6.4111		2.3836

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NOTE 27. SUBSEQUENT EVENTS

1) On January 31, 2020, the Board of Directors of Celulosa Arauco y Constitución S.A., being aware of the determination made by the Extraordinary General Shareholders’ Meeting held on October 28, 2019 (in which the Company’s bylaws were amended) regarding distribution of profits, agreed to modify the Company’s dividend policy, in the sense that, notwithstanding the powers of the Shareholders’ Meeting to determine the portion of the profits of the year to be distributed as dividend, it will be proposed, with respect to the results of the years 2019 and 2020, not to distribute dividends, due to the financial requirements that the Company has in the coming months, especially those related to the MAPA Project.

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

3) The authorization for the issuance and publication of these consolidated financial statements for the period ended December 31, 2019 was approved by the Board of Directors of Arauco on April 15, 2020.

Subsequent to December 31, 2019 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.

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