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Arauco's $4.6B Bet: Can it Maintain Investment Grade?
17 Mar
Summary
- Arauco is investing over $3 billion this year to complete Brazil's largest pulp mill.
- The company uses a "toolkit of contingency measures" to protect its investment grade.
- Falling pulp prices have pressured Arauco's profits and credit rating watch.
Celulosa Arauco y Constitucion SA is proceeding with its ambitious $4.6 billion Sucuriú project in Brazil, the world's largest pulp mill, despite an industry downturn. CFO Gianfranco Truffello stated the company has a "toolkit of contingency measures" to maintain its investment grade. This includes asset sales and support from its parent company, Empresas Copec SA.
The significant investment, budgeted at over $3 billion this year and $2 billion next, aims to complete the Sucuriú plant by 2028. This project is expected to boost Arauco's market share in hardwood pulp to approximately 10%. However, the increased borrowing has already led to a near doubling of net debt, prompting Standard & Poor's Global Ratings to place Arauco on negative watch in November.
Analysts express concern over Arauco's leverage, which reached 5.15 times Ebitda last year. Fitch has placed the company on negative review. To mitigate this, Arauco sold $840 million in hybrid bonds in 2025. Yet, subdued pulp prices, which dropped over 15% from their May 2024 peak, have led to a more than 90% plunge in Arauco's profit last year.
Truffello remains in contact with rating agencies, emphasizing that the project is on time and budget. He noted that leverage might increase this year due to construction spending, with free cash flow remaining negative. The company assumes an average pulp price of $600 per ton, acknowledging the cyclical nature of the market.
