Is Aracruz Worth the Gamble?

Dec. 9.08 | About: American Renal (ARA)

Aracruz Celulose S.A. (NYSE: ARA), the world's largest manufacturer of eucalyptus pulp, reported last month that it will be unwinding 97% of their currency bets, resulting in a US$2.13 billion loss. The company, which previously had a market cap above US$9 billion, has lost over 90% of its market value since the peak in June, currently priced at US$798.7 million.

On September 30, the company reported outstanding liabilities related to Derivatives instruments at US$1.047 billion. This number has since been upgraded, and seems to surpass US$2 billion, according to later statements. The future of the company now relies on the ability to meet its liquidity needs in the near future.

The company on December 1 reported that it had failed to reach agreements with banks to whom they owed money within the set deadline on November 30. Consequently a new deadline was set to December 11. The company has not identified the creditors, according to Bloomberg.

ARA's financial position on September 30 showed Current Assets at US$1.45 billion, with US$165 million in Cash & Cash Equivalents, and US$429 million in Short-Term Investments. Total debt amounted to US$1.99 billion, with an average maturity of 54 months.

Aracruz announced in the 3Q statement that they will postpone 50% of planned investments over the next 15 months in order to protect their cash position, reducing expenditures by US$868 million up to the end of 2009. Net cash flow for 2007 reached US$813 million. If business continues as usual, the company should be able to generate above US$1.5 billion during 2009. However, the global economic climate makes this an optimistic guess.

The company's Total Assets less Total Liabilities, as reported as of September 30, 2008, was US$1.836, or US$17.82 per ADR.

With among the lowest production costs in the world, the company is highly competitive in the long run. The question now is whether you are willing to put your savings in this bet. Will they come to an agreement with their creditors, and if not, do they fall into the too-big-to-fail category?

Either way, it's your money.

The company's latest interim statements can be found in our download section.