Fitch Comments on Closure of Celulosa Arauco Pulp Mill.

CHICAGO -- Celulosa Arauco y Constitucion S.A.'s (Arauco) 'BBB+' foreign and local currency credit ratings should not be negatively affected by the decision of the Comision Regional del Medioambiente Regional Environmental Commission -- (COREMA) to temporarily close its Valdivia pulp mill despite the loss of operating cash flow that will occur, according to Fitch Ratings.

The decision by COREMA, which was announced on Jan. 18, 2005, was due to non-compliance with conditions established under the Resolucion de Calificacion Ambientel (RCA). Among the items of non-compliance were production of pulp in excess of established limits and the utilization of unauthorized sources of well water. Arauco has stated that the closure of this mill will cost the company close to US$1 million of sales per day and US$250,000 of net income per day.

The Valdivia pulp mill is one of five mills operated in Chile by Arauco. It began operations in the first quarter of 2004. Arauco also operates a pulp mill in Alto Parana, Argentina. The Valdivia mill represents about 25% of the company's consolidated pulp capacity. Due to the company's diverse investments in plywood, medium-density fiberboard (MDF), hardboard and sawmills plus pulp, it is estimated that the Valdivia pulp mill accounted for about 10% of Arauco's cash operating profits plus depreciation, depletion and amortization (EBITDA)in 2004. Therefore, a loss of production from this mill for a long period of time would negatively impact the company's financial results.

Arauco had US$1.941 billion of total debt and US$553 million of cash and marketable securities as of Sept. 30, 2004. Liquidity is not an issue for Arauco given its large cash position and light amortization schedule, which consists of a US$175 million Yankee bond that matures on Sept. 15, 2005 and a US$100 million Yankee bond due on Dec. 15, 2007.

Through the first nine months of 2004, the company generated US$737 million of operating income plus depreciation, depletion and amortization (EBITDA). These figures translate into a total debt-to-EBITDA ratio of 2.0 times (x) and a net debt-to-EBITDA of 1.4x. These credit ratios are considered strong for the rating category at this point in the pulp cycle, given the company's solid business position. Consequently, even if the Valdivia mill remains closed for an extended period of time in 2005, Arauco's credit protection measures would still likely remain consistent with the 'BBB+' rating.

Empresas Copec S.A. (COPEC) currently owns 99.9% of Arauco. COPEC, a leading conglomerate in Chile, is also involved in fuel distribution and fishing and retail. It is rated 'BBB+' by Fitch.