Fitch Affirms Arauco at 'BBB+'; Revises Rating Outlook to Positive

CHICAGO--(BUSINESS WIRE)--April 1, 2005--Fitch Ratings has affirmed the 'BBB+' foreign and local currency credit ratings of Celulosa Arauco y Constitucion S.A. (Arauco). Fitch has revised the Rating Outlook of Arauco and all of its outstanding bonds to Positive from Stable.

The revision of the Rating Outlook to Positive from Stable reflects Arauco's emergence as a leading supplier of softwood market pulp and forest products worldwide, as the company recently completed the ramping-up of its Valdivia pulp mill and purchased the Brazilian and Argentine board plants of the Louis Dreyfus group. The revision of the Rating Outlook also reflects the long-term sustainability of the company's business position, as a result of its low cost structure vis-a-vis its Northern Hemisphere competitors, as well as annual improvement in its net leverage ratio since 2001, despite nearly $1.6 billion of capital expenditures. Arauco's Positive Rating Outlook also incorporates lower expected (relative) levels of capital expenditures once the construction of the Itata pulp mill is completed and the strengthening of its financial position; Arauco's net debt-to-EBITDA ratio should be consistently below 1.5 times (x).

Fitch will continue to monitor the ongoing disputes been Arauco and some Regional Environmental Commissions (Comision Regional del Medioambiente -- COREMA). These disputes recently resulted in a one month closure of the company's Valdivia mill and briefly delayed construction of the Itata pulp mill. Satisfactory long-term resolution of these disputes seems probable.

Arauco's 'BBB+' ratings are supported by its strong business position and financial profile. The company is among the lowest cost producers of bleached softwood kraft pulp (BSKP) in the world, and produced one ton of bleached radiata pine kraft market pulp for less than $200 in 2004. Arauco's cost advantage vis-a-vis large companies in the United States and Europe is primarily due to the fast growth rate of radiata and taeda pine trees in the Southern Cone of Latin America, which results in low fiber costs. Arauco also benefits from low labor and energy costs.

Arauco ended 2004 with $1.945 billion of debt and $386 million of cash and marketable securities. Operating income plus depreciation, depletion and amortization (EBITDA) grew during the year, as EBITDA was $980 million, an increase from $644 million in the prior year. As a result, Arauco's net debt-to-EBITDA ratio for 2004 was 1.6x and its total debt-to-EBITDA ratio was 2.0x. The strong performance of Arauco was driven by a variety of factors including the increase in the average price of bleached soft pulp to $518 per ton from $461 per ton and the increase in the company's sales of bleached pulp to 1.6 million tons from 1.2 million tons. The company's sales of sawn timber also increased to 2.0 million cubic meters from 1.6 million cubic meters.

In recent years, the company has diversified into sawn lumber, remanufactured wood products, plywood, medium-density fiberboard (MDF) and hardboard (HB). Last year, Arauco's non-pulp businesses accounted for 52% of the company's sales. In March 2005, the company bolstered its position in boards when it reached agreement to purchase two particleboard (PB) mills with a combined annual capacity of 550,000 cubic meters and a MDF mill with 250,000 cubic meters of annual capacity from the Louis Dreyfus group for $300 million. These mills are located in Argentina and Brazil. While the prices for these products are closely correlated with pulp prices, historically, they have been less volatile in relative terms.

Arauco recently completed construction of a plywood mill and a sawmill as part of Phase I of the Itata Project in Chile. At this site, the company is currently in the process of building a pulp mill that will have both hardwood and softwood pulp lines. The combined annual capacity of these lines will be about 850,000 tons of pulp. Construction costs are projected to be $850 million, and the mill is slated to startup during the second half of 2006. Once the Itata projects become fully operational, they should increase the company's annual EBITDA by an additional $150 million (at pulp prices of $400 per ton) to $320 million (at pulp prices of $600 per ton).

In 2005, Arauco should generate between $1.1 billion and $1.3 billion of EBITDA. The improvement versus 2004 should result from a full year's output from the Valdivia mill, plus additional sales of lumber and plywood due to the start-up of the Itata mills. Arauco should also add about $70 million of EBITDA from the board mills it purchased from the Louis Dreyfus group. The yearly capital expenditures for Arauco are projected to be about $550 million in 2005 and $300 million in 2006. In addition, the company will pay about $200 million of cash for the MDF and PB companies purchased in March 2005 and assume $100 million of debt. Consequently, Arauco's net debt is expected to plateau at about $1.80 billion in 2005, an increase from $1.56 billion in 2004. In 2007, once all aspects of the Itata project are complete, the company's EBITDA range should be about $950 billion (cash, insurance, freight, (CIF) price of BSKP at $400 per ton) to $1.6 billion (CIF price of BSKP at $650 per ton).